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Year: 2017

37. Appellate Tribunal – Rectification of mistake – Section 254(2) – Mistake can be on part of litigants or his advisors

Binaguri Tea Co. Pvt. Ltd. vs. Dy. CIT; 389 ITR 648 (Cal):

While assessing the fringe benefit tax, the Assessing Officer
gave the assessee the benefit applicable under rule 8 of the Income-tax Rules
1962. However, invoking section 154, of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”) the Assessing
Officer withdrew the benefit. The Commissioner(Appeals) confirmed the
rectification order. The assessee filed an appeal before the Appellate Tribunal
contending that the Commissioner (Appeals) had erred in holding that Rule 8 had
no applicability while calculating the eligible expenses of a company engaged
in the business of cultivation, manufacture and sale of tea for the purpose of
fringe benefit tax. Based on the Tribunal decisions against the assessee, the
assessee was advised by the advisors not to press the appeal. Accordingly, the
assessee did not press the appeal and the Appellate Tribunal dismissed the
appeal. It was subsequently noticed that the said Tribunal decisions were
reversed by the Calcutta High Court and the issue was decided in favour of the
assessee even before the dismissal order of the Tribunal. Therefore, within two
months of the order of the Tribunal, the assessee applied for restoration of
the appeal u/s. 254(2) of the Act which was rejected by the Tribunal for the
following reasons.

“The learned counsel for
the assessee reiterated the stand of the assessee as contained in the
miscellaneous application. We are of the view that jurisdiction u/s. 254(2) of
the Act can be exercised only to rectify an error apparent on the face of the
record. The contention in the miscellaneous application, even if true, cannot
give rise to any mistake in the order of the Tribunal apparent on the face of
the record. The miscellaneous application, in our view, cannot therefore be entertained
and the same is hereby rejected.”

On appeal by the assessee, the Calcutta High Court allowed
the appeal and held as under:

“i)   Section 254(2) of the Act did not provide
that it had to be a mistake solely on the part of the Appellate Tribunal to
recall an order and that the statutory power could also be exercised in the
case of mistake apparent on the part of the litigants or his advisors.

ii)   Neither the Appellate Tribunal nor the
assessee was aware of the judgment of the jurisdictional High Court. Therefore,
the prayer for leave to withdraw the appeal and the order allowing the prayer
were both based on a mistake. The order of the Tribunal is set aside.

iii) The Tribunal shall hear the appeal on
merits.”

Interest Income of a Credit Society and Deductibility U/S. 80p

Issue for Consideration

Section 80P of the Income-tax Act grants a deduction to an
assessee, being a co-operative society, in respect of such sums that,
inter-alia, includes the whole of the amount of profits and gains of business
attributable to any one or more of such activities which are listed in clauses
(i) to (vii) of clause (a) of sub-section (2). One of the sub-clauses grants a
deduction for a co-operative society engaged in carrying on the business of
banking or providing credit facilities to its members.

The Courts, in the past, have time and again examined the
true meaning of the term ‘attributable’, and have found the same to be of wider
import in contrast to the term ‘derived from’. Based on such interpretation,
the courts have been inclined to include income from activities incidental to
the main business or activity of the assessee, and have held that such incidental
income too was eligible for deduction, inasmuch as such income was profits and
gains attributable to the business.

In the recent past, the Supreme Court, in the case of Totgars
Co-operative Sale Society Ltd., 322 ITR 283 held that income from interest
on deposits with the bank, earned by a credit society, was to be taxed u/s.56
of the Income-tax Act.

The above mentioned decision in Totgars Co-operative Sale
Society’s case has become a subject matter of controversy leading to
conflicting decisions of the High Courts, whereunder, the Gujarat High Court
followed the said decision, but the Karnataka High Court chose to distinguish
the same on facts, and the Andhra Pradesh High Court held the said decision to
be applicable only to Totgars Co-operative Sale Society Limited. In fact, the
ratio of the said decision and its applicability has also become debatable.

Tumkur Merchants Souharda Credit Cooperative Ltd.’s case

The issue arose in the case of Tumkur Merchants Souharda
Credit Cooperative Ltd. vs. Income-tax officer, 55 taxmann.com 447 (Karnataka).
The assessee, a Cooperative Society registered under the provisions of section
7 of the Karnataka Co-operative Societies Act, 1959, was engaged in the
activity of carrying on the business of providing credit facilities to its
members. It filed the return of income for the assessment year 2009-10,
declaring a total income of Rs. NIL, after claiming a deduction of
Rs.42,02,079/- under the provisions of section 80P of the Act in respect of its
business income, which, inter alia, included interest from short term
deposits and savings bank accounts aggregating to Rs. 1,77,305.

The assessing authority denied the deduction claimed u/s. 80P
and passed an order of assessment, determining a total income of
Rs.42,02,079/-, as against the declared income of Rs.NIL. Aggrieved by the said
order, the assessee preferred an appeal to the Commissioner of Income Tax
(Appeals) who held that assessee’s interest income earned from short-term
deposits with Allahabad Bank of Rs. 1,55,300/- and savings bank account with
Axis Bank of Rs.22,005/-, totalling to Rs. 1,77,305/- was liable to income tax,
in view of the judgment of the Apex Court in the case of Totgars Cooperative
Sale Society Ltd. vs. ITO, 322 ITR 283(SC).

Aggrieved by that part of the order, the assessee preferred
an appeal to the Tribunal, which dismissed the appeal, following the judgment
of the Apex Court in the aforesaid case. Aggrieved by the said order, the
assessee filed the appeal challenging the order passed by the Tribunal
raising the following substantial question of law: ‘”Whether the Tribunal
failed in law to appreciate that the interest earned on short-term deposits
were only investments in the course of activity of providing credit facilities
to members and that the same cannot be considered as investment made for the
purpose of earning interest income and consequently passed a perverse
order?”

The assessee, assailing the impugned order, contended before
the Karnataka High Court, that the interest accrued in a sum of Rs. 1,77,305/-
was from the deposits made by the assessee in a nationalised bank out of the
amounts which was used by the assessee for providing credit facilities to its
members, and therefore the said interest amount was attributable to the credit
facilities provided by the assessee, and formed part of profits and gains of
business. It therefore submitted that the appellate authorities were not
justified in denying the said benefit in terms of sub-section (2) of section
80P of the Act. In support of the contention that the interest income was
eligible for deduction u/s. 80P, it relied on several judgments, and pointed
out that the Apex Court in the aforesaid judgment had not laid down any law. In
reply, the Revenue strongly relied on the said judgment of the Supreme Court in
Totgars Co-operative Sale Society Ltd. (supra), and submitted that the
case before the court was covered by the judgment of the Apex Court and no case
for interference was called for.

The Karnataka High Court, on hearing the facts and the rival
contentions, noted the undisputed facts emerging that the assessee was a
co-operative society providing credit facilities to its members, was not
carrying on any other business and that the interest income earned by the
assessee by providing credit facilities to its members was deposited in the
banks for a short duration, which had earned interest in the sum of Rs.
1,77,305/- . 

Analysing the provisions of section 80P, the court found that
the word ‘attributable’ used in the said section was of great importance. It
took note of the fact that the Apex Court had considered the meaning of the
word ‘attributable’ as opposed to ‘derived from’ in the case of Cambay
Electric Supply Industrial Co. Ltd. vs. CIT ,113 ITR 84. The court found
from the above decision that the word “attributable to” was certainly
wider in import than the expression “derived from”, and whenever the
legislature wanted to give a restricted meaning, they had used the expression
“derived from”. The expression, “attributable to”, being of
wider import, was used by the legislature whenever they intended to gather
receipts from sources other than the actual conduct of the business. 

The court observed that a cooperative society, which was
carrying on the business of providing credit facilities to its members, earned
profits and gains of business by providing credit facilities to its members;
the interest income so derived and the capital, if not immediately required to
be lent to the members, could not be kept idle, and the interest income earned
on depositing such balance in hand was to be treated as attributable to the
profits and gains of the business of providing credit facilities to its members
only; the society was not carrying on any separate business for earning such
interest income; the income so derived was the amount of profits and gains of
business attributable to the activity of carrying on the business of banking or
providing credit facilities to its members by a co-operative society and was
liable to be deducted from the gross total income u/s. 80P of the Act.

The court further observed that the Apex Court in the case of
Totgars Co-operative Sale Society Ltd.(supra), on which reliance was
placed, was dealing with a case where the assessee – cooperative society, apart
from providing credit facilities to the members, was also in the business of
marketing of agricultural produce grown by its members and the sale
consideration received from marketing agricultural produce of its members was retained
in many cases, and the said retained amount which was payable to its members
from whom produce was bought, was invested in a short-term deposit/security;
such an amount which was retained by the assessee – society was a liability and
it was shown in the balance sheet on the liability side; therefore, to that
extent, such interest income could not be said to be attributable either to the
activity mentioned in section 80P(2)(a)(i) of the Act or u/s. 80P(2)(a)(iii) of
the Act; in the facts of the said case, the Apex Court held that the assessing
officer was right in taxing the interest income u/s. 56 of the Act after making
it clear that they were confining the said judgment to the facts of that case.
It was clear to the Karnataka high court that the Supreme Court in Totgars
Co-operative Sale Society Ltd.(supra) was not laying down any law.

In the instant case, the court noted that the amount which
was invested in banks to earn interest was not an amount due to any members; it
was not the liability; it was not shown as liability in the accounts and that
the amount which was in the nature of profits and gains, was not immediately
required by the assessee for lending money to the members, as there were no
takers. Therefore, they had deposited the money in a bank so as to earn
interest. The court accordingly held that the said interest income was
attributable to carrying on the business of banking and was liable to be
deducted in terms of section 80P(1) of the Act. The court cited with approval
the decision of the Andhra Pradesh High Court in the case of CIT vs. Andhra
Pradesh State co-operative Bank Ltd.,200 Taxman 220.               

State Bank Of India (SBI)’s case

The issue again arose in the case of State Bank of India
vs. CIT , 74 taxmann.com 64 before the Gujarat high court. The assessee, a
co-operative society, namely State Bank of India Employees Co-op Credit and
Supply Society Ltd. was registered under the Gujarat Co-operative Societies
Act, 1961 with the object of accepting deposits from salaried persons of the
State Bank of India, Gujarat region, with a view to encourage thrift and
providing credit facility to them. It had launched various deposit schemes such
as Term Deposit, Recurring Deposit, Aid to Your Family Scheme, Members Retiring
Benefit Fund etc., and at the same time, was advancing loans to the
members, such as consumer goods loan, car-vehicle loan, food grain loan and
general purposes loan, etc. It had filed its return of income for
assessment year 2009-10 and 2010-11, declaring total income at Rs. Nil, after
claiming deduction u/s. 80P of the Income-tax Act, 1961 of Rs.29,69,444/- and
Rs.43,64,828/-.respectively.

The matter was taken up in
scrutiny by the Assessing Officer who called for various details, including
justification regarding claim of deduction u/s. 80P of the Act vide notice
u/s. 142(1). The society submitted its replies, narrating the nature of
activities carried out by it, and details of claim of deduction u/s. 80P with
copy of bye-laws, and the Assessing Officer framed assessment u/s. 143(3) of
the Act accepting the claim.

Subsequently, the Commissioner of Income Tax invoked powers
u/s. 263 of the Act, proposing to revise the above order on the ground that
interest income of Rs.16,14,579/- for assessment year 2009-10 and of
Rs.32,83,410/- from the State Bank of India for assessment year 2010-11 was not
exempt u/s. 80P(2)(d) of the Act. In response, the assessee contended that the
interest income was business income, and was exempt u/s. 80P(2)(a)(i) of the
Act. The Commissioner of Income Tax did not find the explanation satisfactory,
on the ground that interest income was not business income, so as to be exempt
u/s. 80P(2)(a)(i) of the Act. Hence, the assessment order was held to be
erroneous and prejudicial to the revenue.

Being aggrieved, the appellant carried the matter in appeal
before the Income Tax Appellate Tribunal, which held that interest income
earned from members on grant of credit did not have nexus with the interest
earned on deposits made with SBI, and could not be said to be the one arising
from business of providing credit facility to its members, by drawing support
from the decision of the Supreme Court in Totgars Co-operative Sales Society
Ltd. vs. ITO 322 ITR 283(SC) .

The assessee being aggrieved, raised substantial questions of
law in appeal for consideration of the Gujarat High Court, which included ;

‘(1)     Whether on the facts and in the
circumstances of the case, ………… ?

(2)      Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal was justified in
holding that interest income of Rs……………. on deposits placed with State Bank of
India was not exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961?

On behalf of the society, it was submitted that the assessee
was a co-operative society formed by the employees of the State Bank of India,
Gujarat Circle, under the Gujarat Co-operative Societies Act, 1961 in the
category of Employees’ Co-operative Credit Society for the purpose of
encouragement of savings and providing credit facilities to the members of the
Society; it was not engaged in any other activity except giving credit
facilities to its members, who were employees of State Bank of India, and that
the income generated by the assessee was mainly on account of differential rate
of amount of deposits received from the members and the amount of loans given
to the members; the income generated was only from the contributions received
from the members and it did not deal in any way with any person other than the
members; the employer deducted the contribution from the salary of the
employees and the collective contribution received was remitted to the assessee
society, generally on the first of every month, while the loans were given to
the employees on a fixed day of the month (around 15th of the month)
and not every day, and during the intervening period, the idle money collected
by the assessee was deposited with the State Bank of India for the purpose of
earning interest; as and when the amount was required, the deposits with the
State Bank of India are liquidated and utilised for the purposes of the
assessee.

In the above stated facts, it was pleaded that the deposit of
amount with State Bank of India was during the course of business and was part
of the activities of the assessee society and could not be seen in isolation.
It was submitted that the decision of the Supreme Court in the case of Totgars
Co-operative Sales Society Limited (supra) would not be applicable to the
facts of the present case, inasmuch as to apply the said decision, the
necessary facts had to be on record, and that there was no strait-jacket
formula that the above decision would be applicable. Reliance was placed upon
the decision of the Karnataka High Court in Tumkur Merchants Souharda Credit
Cooperative Ltd. vs. ITO, 55 taxmann.com 447, wherein the court had held
that the word “attributable to” was certainly wider in import than
the expression “derived from” and whenever the legislature used the
expression ‘attributable ‘ they intended to gather receipts from sources other
than the actual conduct of business. Reliance was also placed upon the decision
of the Karnataka High Court in the case of Guttigedarara Credit Co-operative
Society Ltd. vs. ITO, 377 ITR 464 wherein the above view has been
reiterated. Reliance was also placed upon the decision of the Patna High Court
in the case of Bihar State Housing Co operative Federation Ltd. vs. CIT, 315
ITR 286 wherein the court was dealing with the question as to whether on
the facts and in the circumstances of that case, the Tribunal was correct in
holding that the sum of Rs.15,98,590/- received by way of interest on bank
deposit was not ancillary and incidental to carrying on the business of
providing credit facilities to its members and as such, exempt u/s.
80P(2)(a)(i) of the Income-tax Act, 1961. It was submitted that the above
decisions would be squarely applicable to the facts of the present case, as the
factual background in which the said decisions were rendered were similar to
the present case.

It was contended that insofar as the interest earned from
deposits was concerned, section 80P(2)(a)(i) did not make any difference nor
was it possible to read any limitation having regard to the language of the
said provision and every income “attributable to any one or more of such
activities” should be deducted from the gross total income. It was
highlighted that one had to bear in mind the object with which the provision
was introduced, viz. to encourage and promote growth of co-operative sector in
the economic life of the country and in pursuance of the declared policy of the
Government. Reference was made to bye-law 7 of the Bye-laws of the appellant
society to point out that the interest income was a part of the corpus of the
society, and when the corpus was invested, the decision of the Supreme Court in
the case of Totgars Co-operative Sales Society Ltd. (supra) would not be
applicable. It was submitted that the interest income was incidental to the
main activity of the appellant of providing credit facility and that in the
above decision of the Supreme Court, the word ‘incidental’ had not come up for
consideration. In conclusion, it was submitted that the appeals deserved to be
allowed by answering the questions in favour of the assessee and against the
revenue.

Opposing the appeals, it was contended by the Revenue that it
was only the interest received from members towards credit facilities extended
to them that would fall within the ambit of the expression profits and gains of
business attributable to the activities of the appellant; interest from bank on
surplus did not have any direct or proximate connection with the activities of
the society , and hence, it would not be entitled to the benefit of section
80P(2) of the Act in respect of such income.

It was submitted that in case of a credit co-operative
society, it was the income derived from such activity that was exempt.
Adverting to the facts of the present case, it was submitted that the decision
of the Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra)
was squarely applicable. It was submitted that section 80P of the Act was based
upon the concept of mutuality, and accordingly exempted any income derived by
the society from its members. As the interest earned from the funds deposited
with the banks lacked the degree of proximity between the appellant and its
members, it could not be categorised as an activity in the pursuit of its
objectives, so as to fall within the ambit of section 80P(2)(a)(i) of the Act.

Reference was made to the decision of the Karnataka High
Court in the case of Totgars Co-operative Sale Society Ltd. (supra), to
point out the nature of the dispute involved in that case. It was submitted
that, in that case, the court was concerned with two activities of the assessee
society: (i) to provide credit facility to its members, and (ii) to market the
agricultural produce of its members. It was submitted that the findings
recorded by the Supreme Court were also in connection with the two activities
and, therefore, to say that the Supreme Court was only concerned with the
surplus of marketing produce was not correct. It was submitted that the
observation regarding the judgment being confined to the facts of that case was
because the assessee was not in the banking business, and all the earlier
decisions in this regard were relating to banking business. It was submitted
that the decision of the Karnataka High Court in the case of Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) was based upon an
incorrect reading of the above decision of the Supreme Court.

The Gujarat High Court, on hearing the parties to the appeal,
noted that the short question that arose for consideration in these appeals was
as to whether the appellant was entitled to claim deduction u/s. 80P(2)(a)(i)
of the Act in respect of the interest earned on the deposits placed with the
State Bank of India. For the purpose of appreciating the controversy in issue,
it extensively referred to the records of the case and appreciated the
contesting views of the parties before the lower authorities. The court also
examined the ratio of the decision of the Supreme Court in Totgars
Co-operative Sale Society Ltd. (supra), and supplied emphasis where
felt necessary.

Expressing its opinion, the court stated that in case of a
society engaged in providing credit facilities to its members, income from
investments made in banks did not fall in any of the categories mentioned u/s.
80P(2)(a) of the Act; in the case of Totgars Co-operative Sale Society
(supra), the court was dealing with two kinds of activities: interest
income earned from the amount retained from the amount payable to the members
from whom produce was bought and which was invested in short-term
deposits/securities, and the interest derived from the surplus funds that the
assessee therein invested in short-term deposits with the Government
securities. The Gujarat High Court opined that the above decision was not
restricted only to the investments made out of the retained amount which was
payable to its members, but was also in respect of funds not immediately
required for business purposes. For the above reasons, the Gujarat High Court
did not agree with the view taken by the Karnataka High Court in Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) to the effect
that the decision of the Supreme Court in Totgars Co-operative Sale Society
(supra) was restricted to the sale consideration received from marketing
agricultural produce of its members, which was retained in many cases and
invested in short term deposit/security, and that the said decision was
confined to the facts of the said case and did not lay down any law.

Relying on the principles enunciated by the Supreme Court in Totgars
Co-operative Sale Society (supra), the Gujarat High court held that
in case of a society engaged in providing credit facilities to its members,
income from investments made in banks did not fall within any of the categories
mentioned in section 80P(2)(a) of the Act. In the end, the court did not find
any infirmity in the order passed by the Tribunal warranting interference, and
accordingly held that the Income Tax Appellate Tribunal was justified in
holding that interest income of Rs.16,14,579/- and Rs.32,83,410/-respectively
on deposits placed with State Bank of India was not exempt u/s. 80P(2)(a)(i) of
the Income-tax Act, 1961.

Observations

An assessee, a co-operative society engaged in providing
credit facilities to its members, is entitled to deduction for the whole of the
amount of profits and gains of business attributable to such activity. As per
section 80P(2), in the case of a co-operative society engaged in carrying on
the business of providing credit facilities to its members, what is deductible
is the whole of the amount of profits and gains of business attributable to any
one or more such activities.

A co-operative society which is carrying on the business of
providing credit facilities to its members, earns profits and gains from
business by providing such facilities to its members. The interest income so
earned from members, if not immediately required to be lent to the members,
cannot be kept idle. On deposit of such income in a bank so as to earn
interest, such interest income enhances the capital available for the credit to
its members, besides reducing the cost of interest to members. Such interest so
received from bank has the business nexus, in as much as the source thereof is
the business income, and should be treated as attributable to the profits or
gains of the business of providing credit facilities to its members only, more
so where such deposit with the bank is for short period and further so where
the bye-laws or the enactment require the society to employ funds. The income
so derived is the profits or gains of business that is attributable to the
activity of carrying on the business of providing credit facilities to its
members by a co-operative society and should be eligible for being deducted
from the gross total income u/s. 80P of the Act.

Money is stock-in-trade or circulating capital for a credit
society and its normal business is to deal in money and credit. It cannot be
said that the business of such a society consists only in receiving
contribution from its members. Depositing money with banks or such other societies,
as are mentioned in the objects, in a manner that it may be readily available
to meet the demand of its members, if and when it arises, is a legitimate mode
of carrying on of its business.

The interest received by a credit society on bank deposits,
in any case, is ancillary and incidental to carrying on the business of
providing credit facilities to its members, and as such, is deductible under
the provisions of section 80P(2)(a)(i) of the Act. The nature of credit
business, conducted out of the funds of the employees, clearly creates a
situation where surplus funds are available, which are deposited in a bank,
interest is earned thereon. The placement of such funds, being incidental and
ancillary to carrying on business of providing credit facilities to its
members, and  by reason of section
80P(2)(a)(i) of the Act, the same should be eligible for deduction. 

The business of a credit society essentially consists of
dealing with money and credit. Members put their money in the society at a
small rate of interest. In order to meet their demands, as and when they arise,
the society has always to keep sufficient cash or easily realisable securities.
That is a normal step in the carrying on of the business; in other words, that
is an act done in what is truly the carrying on or carrying out of a business.

It is a normal mode of carrying on credit business to invest
moneys in a manner that they are readily available and that is just as much a
part of the mode of conducting a business as receiving contributions or lending
moneys; that is how the circulating capital is employed and that is the normal
course of business of a credit society. The moneys laid out in the form of
deposits with the bank would not cease to be a part of the circulating capital
of the credit society nor would the deposits cease to form part of its
business. The returns flowing from the deposits would form part of its profits
from its business. In a commercial sense, the managers of the society owe it to
the society to make investments which earn them interest, instead of letting
moneys lie idle. It cannot be said that the funds which were not lent to
borrowers but were laid out in the form of deposits in another bank, to add to
the profit instead of lying idle, necessarily ceased to be a part of the
stock-in-trade of the society, or that the interest arising therefrom did not
form part of its business profits. 

As regards the decision of the Supreme Court in the case of Totgars
Co-operative Sales Society Ltd. (supra), the court, in the facts of that
case, had observed that it was dealing with a case where the assessee –
co-operative society, apart from providing credit facilities to the members,
was also in the business of marketing of agricultural produce grown by its
members; the sale consideration received from marketing agricultural produce of
its members was retained in many cases; the said retained amount which was
payable to its members from whom produce was bought, was invested in a
short-term deposit/security; such an amount which was retained by the assessee
– society was a liability and it was shown in the Balance Sheet on the
liability side. In the above facts, the Supreme Court held that therefore, to
that extent, such interest income could not be said to be attributable either
to the activity mentioned in section 80P(2)(a)(i) of the Act or u/s.
80P(2)(a)(iii) of the Act. In the facts of the said case, the Supreme Court
held that the Assessing Officer was right in taxing the interest income u/s. 56
of the Act. The court further made it clear that it was confining the said
judgment to the facts of the said case and, therefore, was not laying down any
law.

The Supreme Court in that Totgars’ case has held that
interest on such investments, could not fall within the meaning of the expression
“profits and gains of business” and that such interest income could
not be said to be attributable to the activities of the society, namely,
carrying on the business of providing credit facilities to its members or
marketing of agricultural produce of its members. The court held that when the
assessee society provides credit facilities to its members, it earns interest
income and the interest which accrued on funds not immediately required by the
assessee for its business purposes and which had been invested in specified
securities as “investment” were ineligible for deduction u/s.
80P(2)(a)(i) of the Act.

It is true that the apex court, in the case of Totgars
Co-operative Sale Society Ltd.(supra), dealt with a case where the
assessee – co-operative society was also providing credit facilities to the
members besides marketing of agricultural produce grown by its members. On the
available facts, it appears that, in that case, the interest income from bank
was received from the sale consideration received from marketing agricultural
produce of its members, which was retained by the society in many cases before
the same was finally handed over to the members. The said retained amount which
was payable to its members from whom produce was bought, was invested in a
short-term deposit/security. Such an amount which was retained by the assessee
– society was a liability and it was shown in the balance sheet on the
liability side. Relying on such facts found by the Supreme Court, the Karnataka
High Court sought to distinguish the said decision and held that it was not
applicable to the facts of the case before it. Significantly, the Apex court
itself qualified its decision by observing that the decision was confined to
the facts of the said case . In the circumstances, it may be fair to not apply
the ratio of the said decision to the facts of any other case, unless the facts
therein are found to be identical, and are established  to have been considered by the Apex court.

It is most relevant to note that the Apex court in Totgars’
case had no occasion to consider the decisions delivered by the highest
court regularly on the subject, holding that the interest income of a
co-operative bank from its investments with banks or government securities was
eligible for deduction u/s. 80P of the Act. We are of the opinion that had they
been brought to the notice of the court, the decision could have been
different. Another factor that requires that the application of the decision of
the court shall be restricted to Totgars’ case only, is that the court, at no
place, was required to consider whether the income in question could be
considered to be attributable to profits and gains of business or not. The
court was rather concerned about whether the income would be treated as
“profits and gains of business” or from other sources. Again, had the court
been persuaded to consider the language of section 80P and the meaning of the
term “attributable”, we are sure the decision could have been different.

It is also true that this culling of the fact by the
Karnataka High court, from the Supreme court’s decision in Totgar’s
case, has been later on found to be not representing the full facts by the
Gujarat high court by examining the order of the high court passed in Totgars’
case. While that may be the case, it is at the same time important to take into
consideration the fact that the Andhra Pradesh High Court, like the Karnataka
High Court, has also held that the interest income is attributable to carrying
on the main business of banking, and therefore it was eligible for deduction
u/s. 80P(1) of the Act. [Andhra Pradesh State Co-operative Bank Ltd.,200
Taxman 220]. The Andhra Pradesh High Court, while deciding the issue in
favour of the assessee society, did consider the decision of the Apex court in
Totgars’ case. In the circumstances, it may be that the Karnataka High Court
erred in deciding the issue on hand by distinguishing the facts of its case
with that of the facts in Totgar’s case. However the decision could not have
been different once it was appreciated that the income in question was
attributable to the profits and gains of business.

There appears to be merit in the conclusion of the Karnataka
and Andhra Pradesh High Courts, which have based their decisions by following
the ratio of the oft followed decision of the Apex court in Cambay’s case,
dealing with the true meaning of the word ‘attributable’ used in chapter VI-A.
The Apex Court had an occasion to consider the meaning of the word
‘attributable’ in the case of Cambay Electric Supply Industrial Co. Ltd. vs.
CIT 113 ITR 84 as under:

‘As regards the aspect
emerging from the expression “attributable to” occurring in the
phrase “profits and gains attributable to the business of the specified
industry (here generation and distribution of electricity) on which the learned
Solicitor-General relied, it will be pertinent to observe that the legislature,
has deliberately used the expression “attributable to” and not the
expression “derived from”. It cannot be disputed that the expression
“attributable to” is certainly wider in import than the expression
“derived from”. Had the expression “derived from” been
used, it could have with some force been contended that a balancing charge
arising from the sale of old machinery and buildings cannot be regarded as
profits and gains derived from the conduct of the business of generation and
distribution of electricity. In this connection, it may be pointed out that
whenever the legislature wanted to give a restricted meaning in the manner
suggested by the learned Solicitor-General, it has used the expression
”derived from”, as, for instance, in section-80J. In our view, since the
expression of wider import, namely, “attributable to”, has been used, the
legislature intended to cover receipts from sources other than the actual
conduct of the business of generation and distribution of electricity.’

The word “attributable to” is certainly wider in
import than the expression “derived from”. Whenever the legislature
wanted to give a restricted meaning, they have used the expression
“derived from”. The expression “attributable to” being of
wider import, the said expression is used by the legislature whenever they
intended to gather receipts from sources other than the actual conduct of the
business.

The Apex Court, in various decisions, has consistently held
the view that interest income on investments made by the banks was attributable
to the profits and gains of business and was eligible for deduction u/s. 80P of
the Act. [Karnataka State Co-operative Apex Bank, 252 ITR 194 (SC),
Mehsana District, Central Co-operative Bank Ltd., 251 ITR 522 (SC), Nawanshahar
Central Co-operative Bank Ltd.289 ITR 6 (SC), Bombay State Co-operative
Bank Ltd. 70 ITR 86 (SC) (para 16), Bangalore Distt. Co-op. Central Bank
Ltd. 233 ITR 282 (SC), Ponni Sugars & Chemicals Ltd. 306 ITR 392
(SC), Ramanathapuram District Co-operative Central Bank Ltd. 255 ITR 423
(SC), Nawanshahar Central Co-operative Bank Ltd.,349 ITR 689 (SC)].
These decisions are an authority for the proposition that, even though the
investment made does not form part of its main activity, stock in trade or working
capital, still the interest income therefrom would qualify for exemption u/s.
80P of the Income-tax Act.

The Apex court in Nawanshahar Central Cooperative Bank
Ltd.’s case (supra), observed as under. “this Court has consistently held
that investments made by a banking concern are part of the business of banking.
The income arising from such investments would, therefore, be attributable to
the business of bank falling under the head “Profits and gains of
business” and thus deductible under section 80-P(2)(a)( i) of the
Income-tax Act, 1961. This has been so held in Bihar State Coop. Bank Ltd. 39
ITR 114 (SC). Karnataka State Coop. Apex Bank, 259 ITR 144 and Ramanathapuram
Distt. Coop. Central Bank Ltd.255 ITR 423(SC).The principle in these cases
would also cover a situation where a cooperative bank carrying on the business
of banking is statutorily required to place a part of its funds in approved
securities.”

Attention is also invited to clause (b) of sub-section 2 of
section 80P, which clause while providing for deduction for certain primary
societies provides for a deduction in respect of “the whole of the amount of
profits and gains of such business” as against “the whole of the amount of
profits and gains of business attributable to any one or more of such
activities” covered by clause (a) of sub-section 2 of section 80P. A
bare reading of the contrasting provisions clearly shows that scope of clause
(a) is wider than clause (b), plainly on account of the insertion of the terms
‘attributable and activities’. These terms cannot be treated as redundant and
should be given the appropriate meaning.

It is well-settled that a provision for
deduction or tax relief should be interpreted liberally in favour of the
assessee. Such a provision should be construed as to fully achieve the object
of the legislature and not to defeat it. [South Arcot District Cooperative
Marketing Society Ltd.116 ITR 117 (SC), Bajaj Tempo Ltd.196 ITR 188 (SC) and
N.C. Budharaja & Co., 70 Taxman 312(SC).] Liberally interpreting sub-section
2(a)( i) of section 80P of the Act, the conclusion in favour of the assessee
appears to be a better conclusion.

Stable Vs. Dynamic Tax Laws – Strike The Right Balance!

8th November 2016 could be a day to remember in India’s
history. On that day, the Prime Minister announced demonetisation of 86% of the
national currency, the stated objectives being the drive against terrorism,
corruption, fake currency and tax evasion. How many of these objectives will be
achieved time alone will tell. I had in my earlier editorial pointed out that
demonetisation was a bold decision and for the sheer enormity thereof the Prime
Minister deserved to be lauded. At that time, many had felt that as far as the
drive against tax evasion was concerned demonetisation was only one small step,
and had to be followed up by other actions.

Tax evasion is a malady from which most developing nations
suffer and India is no exception. An insignificant number of citizens
(approximately 2 %) pay taxes, the reason for the same being evasion and not
avoidance. These actions have been taken by the government. We have now,
Chapter X-A, in regard to general anti-avoidance rules (GAAR), the amendment to
section 6 in regard to the tax residence of foreign companies by the invoking
of the Place of Effective Management (POEM) Rules, a strong legislation like
the recently amended being Prohibition of Benami Property Transactions Act, and
the recent amendments to sections 115BBE and 271AAB and the insertion of
section 271AAC in the Income-tax Act 1961. These will be effective from assessment
year 2017-18, except the GAAR the provisions of which will take effect for
assessment year 2018-19.

While the object of the government in using the Prohibition
of Benami Property Transactions Act as well as the provisions of the Income-tax
Act to which I have made a reference, cannot be faulted one really wonders as
to whether the government has the wherewithal to administer all these changes
fairly and effectively. This is because, the ability as well as the mindset of
those on the ground have not undergone much change in the last few decades.
Once these provisions start being implemented, the result would be a
substantial increase in litigation. All economists are unanimous in their view
that for a developing economy to continue on its progress path, stability and
fair implementation of tax laws play a very important role. In the past, there
have been a number of instances where interpretation placed on tax laws by the
Apex Court has been overturned by legislative amendments, in many cases
retrospectively. The Vodafone case is an example of the same. While no one can
challenge the right of the State to make all the amendments to laws that it
desires, it owes to both its own citizens as well as those who invest in the
country, a reasonably stable tax regime on the basis of which their affairs can
be planned.

Coming to using these changes in law to punish those who have
already evaded law and prevent evasion in future, it is necessary to have an
administration, which is competent, fair and humane. Lack of it is the cause
for concern. For example, let us consider the Prohibition of Benami Property
Transactions Act, which has become effective from November, 2016. Undoubtedly,
in principle it is appropriate that the administration of this law has been
entrusted to the Income Tax Department, since tax evasion is one of the prime
purposes of keeping a property Benami. However, the consequence of a property
being treated as the benami in terms of the Act is confiscation. As the law
stands today, the `Initiating Officer’, the ‘Approving Authority’ for this purpose is below
the rank of Commissioner. Once an approval to the initiation process is given,
the property can be attached. While this is certainly a step anterior to actual
confiscation, it can have very serious consequences as far as the person
against whom the action is initiated is concerned. Those of us, who practice on
the ground, are conscious of how such approvals are granted in a casual and
routine manner. Thereafter once a panel (Adjudicating Authority) constituted
under the statute accepts that the property is benami, it is liable for
confiscation, such confiscation being subject to an appeal before the Tribunal.
While one wholeheartedly agrees that the law had to have the requisite teeth,
what needs to be guarded against is that they should bite the person for whom
they are meant and not maul an innocent person.

Let us then consider the amendment to 115BBE. This was
possibly a reaction to opinions reported in various media that if, demonetised
currency was deposited in the bank account and declared as income in the return
of income for the assessment year 2017-18, one would get away with paying 30%
tax. Therefore the provision was amended to take effect from assessment year
2017-18, providing a much higher rate of tax. The amendment however ought to
have been made effective only for either a specific period or the intent could
have been more specifically provided for. Now with the provision as it stands
it, is likely to be used in situations and against persons for whom it was not
intended.

This government in the past has been accused of tax
terrorism. One would still believe that the intentions of the government are
laudable but those in power must apprise themselves of the realities and
difficulties on the ground. What one certainly wants is not inertia in tax laws
but stability and fair implementation. Laws must necessarily change to ensure
that the war against corruption and tax evasion is won. They must therefore be
stable yet dynamic; the challenge is to strike the right balance. The
government must appreciate that all things cannot be changed overnight and the
situation on the ground will require patient acceptance for some time. I would
therefore like to end with the popular four lines

O
Lord, give me the courage –

To
change the things that I can change

The
willingness to accept those that I cannot –

And
the wisdom to understand the difference
between the two.

I only
hope that the Lord grant the powers that
be this wisdom.

Spiritual Pursuit, Professional Growth And Material Prosperity – Can They Co-Exist?

One often gets confused about professional growth and material
prosperity. Professional growth and material prosperity are not the same.
Professional growth comes from values, reputation and satisfaction of
meaningful contribution to clients’ lives and nation building; whereas,
material prosperity could be achieved dehors of professional growth,
e.g. even an uneducated person can be a multi-millionaire. A good professional
is one who lives a value based life and is spiritually inclined. So what is the
connection between a profession and spirituality?

People think that in order for one to be materially prosperous, one
needs to compromise on values. However, the fact is that for being materially
well off, one need not be spiritually bankrupt. Spiritual pursuit, professional
growth and material prosperity can co-exist. In fact it is often found that the
growth of professional practice is in direct proportion to one’s growth in
spirituality. And material prosperity is in direct proportion of professional
growth.

Let me share with you my understanding of spirituality in a different
perspective and its relevance to professional growth and material prosperity:

(i)   Living in ‘Now’

      Spirituality is not something different
from our day to day living. Doing our daily chores with utmost concentration or
awareness is nothing but a state of being spiritual.

      It reminds me of a story. A young disciple
comes for knowledge to a Zen Master. Days and months pass without any sermon or
teachings from the Master. Finally one day the youngster asks his Master, when
will his teaching start? Master turned to him and smiled, it already started
the day you entered this monastery. Haven’t you observed how I live? At that
time, the disciple realised that every act of the Master was meticulous. He was
hundred per cent present in that moment. He was actually living in “Now”.

      When one decides to bring this awareness
in the profession, the speed of one’s professional growth increases.

(ii)  Work is Worship

      Work’s reward is in work itself. I have
observed that whenever I get satisfaction of my preparations for any seminar to
be addressed by me, the same is well received by the participants. My reward is
earned when I derive joy on completion of preparation and successful delivery
of the lecture. Spirituality is nothing but doing one’s work diligently, as an
offering to Lord. When one does one’s work with good emotions at heart, the
work becomes worship.

      I am reminded of a beautiful story.

      Once upon a time, three masons were
working on a site. A passerby asked the first one, hey what are you doing? He
said “don’t you see, I am laying bricks”; He asked the same question to the
second mason, he replied, “I am constructing a wall”. When he asked the third
person, he said “I am building a temple”. All three were right in their
answers, but the third person was working with divine emotions and therefore
can be termed as spiritual.

(iii) Sharing is Divine

      One of the insecurities people have in
professional life is that of competition. However, we all know that knowledge
when shared gets doubled, one with the giver and the second with the receiver.
Knowledge, unlike products remains with the giver and enriches the receiver
also. In fact, the more we share, more we enrich ourselves. The same thing
applies to our clients as well. The more we educate them; more they respect and
love us. 

(iv) Trust and Integrity are supreme

      For any professional, trust and integrity
are of paramount importance. People entrust work only if they believe in the
integrity of the professional and have a trust in his abilities and intentions
to deliver. Both these qualities come naturally to a professional who pursues a
spiritual path. Whenever a client comes to know about your spiritual pursuits,
his trust and belief in your integrity increases.

      Non-indulgence in corrupt practices and
other core values are highly appreciated and respected by clients.

(v)  Discipline is Divine

      One of the most appreciated traits of a
professional is discipline. Delivering on time and as promised is well
appreciated. We must always strive to produce more than what we consume and
give more than what we take. When we give more than what we take, we often land
up receiving more than what we expected. This would certainly happen, may not
always be in material terms, but invariably in terms of love, respect and
appreciation. 

(vi) We are all connected

      We are not human beings having a spiritual
experience; we are spiritual beings having a human experience. In that sense we
are all connected. When we connect with our customers or clients from this
perspective, we strike a bond of love, trust and friendship which leads to
professional growth.

From the above it is clear that spirituality always helps you in your
professional growth.

Does that mean that spirituality never hinders professional growth?

The answer to the above question is both “yes” and “no”. It all depends
on how one defines professional growth. If one equates the professional growth
with material prosperity alone, then in the short term it may be possible that
you earn less or have to pay more taxes if you walk on the path of
spirituality. However, in the long run, one who follows spirituality,
experiences faster professional growth as he would be at peace with himself and
therefore can express himself or shine in his profession.

It may happen that as one progresses on the path of spirituality, one
finds the futility of this material world and professional achievements. At
that time one may consciously decide to go slow in the professional dimension
as one would not like to trade one’s permanent happiness with the temporal one.

Epilogue

Treading on the path of spirituality along with professional goals is
not easy. There are many temptations on the way. At times the system may force
you for indulgence in wrong practices, at times client wants you to do so and
at times you may simply be lured with the quantum of benefit. Here I am
reminded of one beautiful Gujarati bhajan, whose first line is as follows:

“Hari no marag che surano, nahi kayar nu kaam..”

Meaning – the path to God is for the brave and courageous and not for
cowards.

Once we decide to walk on the path of spirituality, “we must be ever
ready to fight against all low tendencies and false values within and without
us and to live honestly the noble sacrifice and service.”

At the end of the day you will find that spirituality leads to
professional growth, which in turn would bring you prosperity – both material
and spiritual.

Entry Tax on Goods Vis-à-Vis Import of Goods

Introduction

One of the fiscal statutes operative in Maharashtra is
Maharashtra Tax on the Entry of the Goods into Local Areas Act, 2002. The Act
contemplates a levy of Entry Tax when the goods come into Maharashtra from
outside Maharashtra. The tax is leviable only on the goods which are specified
in the Schedule. 

One of the items covered by the schedule is low sulphur fuel
oil. The assessee M/s.Tata Power Company Limited imported above item
from foreign country and used the same in its electricity manufacturing activity.
The department levied Entry tax on the same.    

While the assessee had many contentions, the main argument of
the assessee was that Entry Tax cannot apply to goods imported from outside
India. Its contention was that the tax can apply only if the goods are imported
from outside Maharashtra but from any place within India.

The Tribunal confirmed the levy. Therefore, the matter was
taken to the Hon. Bombay High Court. The Hon. Bombay High Court has decided the
issue vide judgment reported in Tata Power Company Ltd. and
another vs. State of Maharashtra and ors. 95 VST 147 (Bom).  

The relevant statutory provisions as referred to in the
judgment are reproduced below for quick reference:

“2. Definitions:- (1) In this Act, unless the context
otherwise requires,–

(a) …..

(b) “entry of goods”, with all its grammatical
variations and cognate expressions means entry of goods into a local area from
any place outside the State, for consumption, use or sale therein;

(c) “General Sales Tax Act” means any Sales Tax Law
in force in any State which provides for the levy of taxes on the sale or
purchase of goods generally or on any specified goods expressly mentioned in
that behalf or any class of transactions expressly specified in that behalf;

(d) …..

(e) …..

(f) “import”, with all its grammatical variations
and cognate expressions means bringing or causing to be brought or receiving
any goods into a local area from a place outside the State;” 

“3. Levy of tax:– (1) There shall be levied and collected
a tax on the entry of the goods specified in column (2) of the Schedule, into
any local area for consumption, use or

sale therein, at the rates respectively specified against
each of them in column (3) thereof and different rates may be specified in respect
of different goods or different classes of goods or different categories of
persons in the local area. The tax shall be levied on the value of the goods as
defined in clause (n) of sub-section (1) of section 2. The State Government
may, by notification in the Official Gazette, from time to time, add, modify or
delete the entries in the said Schedule and on such notification being issued,
the Schedule shall stand amended accordingly:”

Important observations about arguments of the Petitioner
as noted by Hon. High Court are as under:

“30. In the additional written submissions, it is urged that
a tax on entry of goods into a local area is patently in violation of Article
301 and no further burden is required to be discharged by the petitioners. When
a tax falls within the inhibition of Article 301 and is not compensatory or
regulatory, then it can be saved only by taking recourse to Article 304. The
requirement thereof is not admittedly satisfied. Further, the impugned levy is
discriminatory. The Act cannot be saved by reading the impugned provisions
thereof together with the MVAT Act. That would not enable this Court to hold
that the same is Constitutional. Additionally it is submitted that if a levy is
held to be non-discriminatory and thus meets Article 304(a), still it must
satisfy the requirements of Article 304(b) as well. For all these reasons, it
is submitted that the impugned levy must be declared as unconstitutional and
ultra vires the above noted provisions or Articles of the Constitution of
India.

31. In support of his contentions, Mr. Dada has placed
reliance on a number of judgments and which can be taken in the order of his
submissions as follows:

1) Father William Fernandez vs. State of Kerala. 115 STC
591(Ker)

2) Primus Imaging Pvt. Ltd. vs. State of Assam. 9 VST 528
(Gauhati)

3) Batliboi & Co. vs. State of Maharashtra. 47 STC 321
(Bom).”

Similarly about arguments of State Government, the Hon. High
Court observed as under:

“36. Mr. Sonpal then relied upon the language of the
Maharashtra Entry Tax Act to submit that the legal challenge also has no basis.
He would submit that what this Court is dealing with in the present matter is
an entry tax. That is a subject dealt with by Entry 52 of List II of the VIIth
Schedule to the Constitution of India. Emphasising the language of this entry
Mr. Sonpal would submit that it provides for a tax on the entry of goods into a
local area for consumption, use or sale therein. Mr. Sonpal submits that mere
entry of the goods into a local area is not the taxable event. The taxable
event is entry of the goods into a local area for consumption, use or sale
therein. It is only in that event that liability to pay the tax arises and not
otherwise. The import of goods into the local area is not prohibited. It is their
consumption, use or sale therein which attracts the tax. Mr. Sonpal submits
that the petitioners do not dispute that import simpliciter does not attract
the levy. Accepting Mr. Dada’s contentions would be doing violence to the plain
language of the statute. Once the levy is on the entry of goods specified in
Column (II) of the Schedule to the Maharashtra Entry Tax Act into any local
area for consumption, use or sale therein, then, it is not permissible to
dilute the rigour of the provisions in that behalf. Mr. Sonpal submits that the
three provisos to sub-section (1) of section 3 would clarify that the
rate of tax to be specified by the Government in respect of any commodity shall
not exceed the rate specified for that commodity under the MVAT Act and the tax
payable by the importer under the Maharashtra Entry Tax Act shall be reduced by
the amount of tax paid, if any, under the law relating to general sales tax in
force in the Union Territory or the State in which the goods are purchased by
the importer. Therefore, if the goods attract the above tax in the State in
which they are purchased and thereafter they are imported into a local area,
then, and to that extent, the liability to pay the entry tax is reduced.
Lastly, Mr. Sonpal would submit that no tax is leviable or can be collected on
specified goods entering into a local area for the purpose of such process as
may be prescribed, if after such processing these goods are sent out of the
State. Mr. Sonpal relies upon the explanation to this sub-section and
thereafter sub-sections (2), (3), (4) and (5) of section 3 to submit that there
is no liability to pay entry tax in the event the goods are brought for the
purpose set out in sub-section (5) of section 3. He also relies upon the provisos
to sub-section (5) of section 3 in that regard.”

After noting the arguments as above, the Hon. High Court came
to a conclusion that no distinction can be made for the goods coming from out
of India or from any place within India. In other words, so far as goods are coming
from outside the State of Maharashtra, the entry tax would apply. The Hon. High
Court observed as under about validity of levy on the imported goods. 

“85. Following it and applying it even to cases of octroi or
entry tax, the Hon’ble Supreme Court held conclusively that entry tax is a tax
on the entry of goods into any local area for consumption, use or sale therein.
So long as the levy is of this nature, it is wholly irrelevant as to from where
the goods have been brought. The statute’s provisions must be given their plain
and clear meaning. In other words, if the act of bringing in the goods is
termed as an import and this is also defined, and if the particular act
complained of falls within the definition, then there is no escape from the
levy. It is in this context that we must look at section 3 of the Act which
also has been reproduced by us above. We are not in agreement with Mr. Dada
that only those goods which have been brought within the local area from a
place outside the State of Maharashtra but within the territory of India will
attract the levy and not those goods which enter the local area after being
imported from abroad. The argument of Mr. Dada is that the expression
“outside the State” cannot mean outside the territory of India. We do
not find any support for such an argument. The reported decisions seem to hold
otherwise. Even otherwise, it is difficult to appreciate the implications of
this argument. It would lead to needless complexity and incongruous and
inconsistent results. For instance, if goods are imported into the port of
Mumbai, and used in Mumbai, then, according to Mr. Dada’s formulation, such
goods are not covered by the levy and entry tax is not attracted. But what
might happen if the goods were imported into Kandla, Vishakapatnam or Kolkata,
for instance, and transshipped from there, across other states, and then
brought into Mumbai? Such an entry or bringing in would be, even on Mr. Dada’s
formulation, subject to the levy, for the goods would be brought in from within
the territory of India though from outside the State of Maharashtra. It surely
cannot be suggested that all foreign imports are, by definition, exempt from
the levy of all local entry taxes. What, therefore, Mr. Dada’s argument amounts
to is saying that the local entry tax levy is not attracted where the port of
entry from abroad is within the state itself; but if the port of foreign import
is outside the state, then the entry tax levy is attracted. If this be so, then
it is a self-defeating argument and clearly shows that the mere importation
from abroad is not a reason to deny the levy of the local entry tax. We find
nothing in any judgment or the statute to support the proposition that the
situs of the port of foreign importation within the state furnishes any point
of exemption or escape from the local levy of entry tax.”

Conclusion

There are contrary judgments on the above
subject. Some of the High Courts have held that the entry tax, being
compensatory, can apply if the goods are coming in the State from any place
outside the State but within India and not imported from a foreign country.
However, the above judgment has settled the position so far as Maharashtra is
concerned and the liability will be attracted even for imported goods.

17. [2016] 161 ITD 546 (Chennai Trib.) DCIT vs. Suthanther Assumtha A.Y.: 2010-11 Date of Order: 9th September, 2016.

Section 32, Appendix I to Rule 5 and
Circular No. 652, dated 14-6-1993: An assessee is entitled for higher
depreciation on pay loaders, dozers and water tankers used by it in its
business of transportation of goods on hire.

FACTS

The assessee was engaged in the business of
transportation and had claimed higher rate of depreciation @ 30% on pay
loaders, dozers and water tankers.

During the relevant assessment year, the
main part of assessee’s transportation business was done for M/s Anand
Transport.

The Assessing Officer (AO) studied the
agreement entered by the assessee with 
Anand Transport and found that assessee had to supply pay loaders for
hatch work, loading material into trucks from wharf, transporting to designated
stock yard by trucks, stacking at stock yard, loading from stock yard into
trucks, carting from stock yard to railway siding and loading of goods into
railway wagon.

According to AO, vehicles which were used in
the business of running them on hire were entitled for higher depreciation.

As per the AO, the cranes and pay loaders
were used by the assessee for his own business of transportation and there was
no hiring of vehicles. Hence AO disallowed higher rate of depreciation.

According to the CIT(A), there was an
element of ‘hiring’ in the business activities of the assessee and hence
directed the AO to allow depreciation @ 30%.

On appeal by the revenue before the
Tribunal:

HELD

There is no dispute that the assessee was
engaged in the business of transportation of coal and iron ore.

Part III(3)(ii) of Appendix I to the Income
Tax Rules allows higher rate of depreciation @ 30% to following category of
Machinery and Plant –

‘Motor buses, motor lorries and motor taxis
used in a business of running them on hire’.

By virtue of Circular No. 652, dated
14-6-1993, higher rate of depreciation @ 30% mentioned in Part III(3)(ii) of
Appendix to the Income Tax Rules would get an extended meaning than what
literally follows on their reading.

As per Circular No. 652 (supra), an
assessee shall be entitled to higher rate of depreciation @ 30% on motor
vehicles used by it in its business of transporting of goods on hire.

In our opinion, the agreement entered by the
assessee with M/s Anand Transport clearly shows that its duty was to transport
the goods provided by Anand Transport from one place to another. We cannot say
that element of ‘hiring’ was absent.

Hence, we do not find any reason to
interfere with the order of the CIT(A) and the assessee would be eligible for
higher rate of depreciation on the vehicles used by it in its business of
transportation of goods on hire.

Note – Reliance
had been placed on Bombay High Court in the case of SC Thakur & Bros.
[2010] 322 ITR 463 and JCIT vs. Avinash Transport in ITA No. 1909/Kol/2012
dated 13.8.2015

15. Tribunal jurisdiction u/s. 254(2) of the Act – Once a matter is disposed off by the Tribunal it would be functus officio – It can only exercise limited jurisdiction to rectify its order – No clarification can be sought

CIT vs. Shri Suresh G. Wadhwa. [
Income tax Appeal no. 904 of 2014 dt : 05/12/2016 (Bombay High Court)].

[Shri Suresh G. Wadhwa vs. JCIT,. [ MA
NO. 387/MUM/2013 Arising out of ITA No 6395/MUM/2010; Bench : I ; dated
04/12/2013 ; A Y: 2009-10. Mum. ITAT ]

The Tribunal passed an order dated 2nd
August, 2013 u/s. 254(1) of the Act relating to the AY : 2009-10. The AO was
not interpreting/understanding the said order correctly. In the above view, the
assessee filed an application u/s. 254(2) of the Act seeking clarification of
the order dated 2nd August, 2013, so as to explain its correct
meaning. By the impugned order, the Tribunal allowed the assessee’s
miscellaneous application seeking a clarification of its order dated 2nd
August, 2013. The Tribunal in the impugned order dated 4th December,
2013 records that under the garb of clarification of an order, a party’s right
to interpret the Tribunal’s order cannot be pre-empted. If the parties are
aggrieved by the interpretation of the Tribunal’s order by the lower
authorities, it would only be fair to challenge the same in an appropriate
proceedings. Notwithstanding the above, the Tribunal allowed the application by
the impugned order clarifying its earlier order dated 2nd August,
2013. This the Tribunal did by holding that though such an application for
clarification may not strictly fall u/s. 254(2) of the Act, yet such an
application would be entertained in exercise of its inherent powers and in
support relied upon the Apex Court order in Honda Siel Power
Products Ltd. vs. Commissioner of Income Tax, 295 ITR 466.

The Revenue preferred appeal before
the High Court against the order of the Tribunal passed u/s. 254(2) of the Act.
The Court observed that the Tribunal after passing an order u/s. 254(1) of the
Act has became functus officio in respect of the proceedings which led
to the final order dated 2nd August, 2013 passed in respect of AY :
2009-10. The Tribunal’s powers are for rectification are specifically set out
in section 254(2) of the Act. There is no provision in the Act enabling the
Tribunal to clarify its order after it has became functus officio particularly
when the clarification is not in respect of clerical/typographical errors which
have crept into the order. The Tribunal has no powers of Review. It cannot in
the garb of clarifying its order already passed u/s. 254(1) of the Act, seek to
review the same. The issue is of jurisdiction of the Tribunal to entertain such
an application for clarification. Undoubtedly, an inherent power of procedural
review is available with every Tribunal but not of substantive review. Procedural
review would be cases where the procedure/process of adjudicating the dispute
is not followed, to illustrate an order passed ex parte or when no
notice of hearing is received by party, etc. i.e. the process of
arriving at justice is vitiated. (Grindlays Bank Ltd. vs.
Central Govt. Industrial Tribunal, 1980 (suppl.) SCC 420). Seeking clarification and/or amplification of an order
already passed without it falling within the parameters of an rectification
application, would lead to chaos and uncertainty. No order of the Tribunal
would then be final, as it would always be subject to clarification. Once the
Tribunal has passed an order u/s. 254(1) of the Act, it becomes functus
officio and loses jurisdiction over the lis. It is axiomatic that
once a matter is disposed of by the Tribunal/Court, it would be functus
officio. The Tribunal can only exercise limited jurisdiction as provided in
section 254(2) of the Act, to rectify its order in view of apparent error on
record or in case of procedural issues leading to an order passed u/s. 254(1)
of the Act. Thus, the Tribunal ought not to have entertained such an application on the part of the assessee.

The reliance placed upon
the decision of the Apex Court in Honda Siel Power Products Ltd. (supra)
is inappropriate. In the facts of that case, a binding decision of a coordinate
bench was cited before the Tribunal during the hearing of the appeal and the
same was not considered in the order of the Tribunal. It was in the above
context, that the Tribunal had allowed the application for rectification made
by the party. However, it was reversed by the High Court. On further appeal,
the Apex Court restored the order of the Tribunal. It held that the Tribunal
allowed the application applied u/s. 254(2) of the Act for rectification as a
binding order cited during the hearing before the Tribunal was not considered
in the impugned order of the Tribunal. In fact, this would be a case of
procedural review as held by the Apex Court in Grindlays Bank (supra)
and also fall within the scope of section 254(2) of the Act. It must be noted
that the Apex Court in Honda Siel Power Product Ltd. (supra) did not
exercise inherent powers in the facts before it, but allowed the application
u/s. 254(2) of the Act. Therefore, the reliance of Honda Siel Power Product
Ltd. (supra) is misplaced.

The impugned order dated 4th
December, 2013 was quashed and set aside.

14. Reopening of assessment – No reason to believe that the income chargeable to tax has escaped assessment – reopening notice was bad in law. Section 148

CIT vs. Devkumar Haresh
Vaidya. [ Income tax Appeal no 750 of 2014, dt : 05/12/2016 (Bombay High
Court)].

[Devkumar Haresh Vaidya
(IT) vs. ACIT . [ITA No. 7325/MUM/2012; Bench : J ; AY 2007-08 dt: d 31/07/2013
; Mum. ITAT ]

The Assessee filed its ROI
for  AY 2007-08 declaring a total income
of Rs. 24.69 lakh. The same was accepted u/s. 143(1) of the Act. Thereafter,
the AO received information from the Deputy Director of Income Tax
(Investigation), Surat that property situated at New Delhi (said property) was
sold on 23rd August, 2006 for a total consideration of Rs.148.93
crore by the 12 family members, including the assessee and the assessees’s
share in the said amount was Rs.6.21 crore. Consequently, a notice u/s. 148 of
the Act was issued seeking to reopen the assessment for AY: 2007-08. The reason
for reopening the assessment was that said property had been sold to one
Mineral Management Services (I) Ltd. Thus, the sale was assessable to tax in
the A.Y. 2007-08 as it was so assessed in the hands of Mineral Management
Services (I) Ltd. in that year.

The assessee challenged
the notice pointing out that he had offered to tax the entire consideration of
Rs.6.21 crore (Rs. 4 crore in his hands and Rs.2.21 crore as a part of his late
father’s income was offered to tax) in the earlier A.Y. 2006-07. Moreover, he
had also claimed the benefit of section 54EC of the Act in A.Y. 2006-07. This
was accepted by the AO in scrutiny proceedings u/s. 143(3) of the Act. It was
pointed out that the said property was a family property in which his mother
(Devhuti Vaidya) had undivided and indeterminate rights/share in the said
property. Therefore, though the assessee and his family members did not have
possession of the said property, they had filed caveat objecting the
grant of probate to the Will of the assessee’s maternal grand father Mr.
Anantrai Pattani in favour of his maternal uncle Mr. Kumar Pattani. In the
above view, as a part of the settlement arrived at between the assessee and his
family members with his uncle Mr. Kumar Pattani, an Agreement for Sale dated 25th
October, 2005 by which the assessee sold his rights in the said property to one
M/s. Duce Property and Services Pvt. Ltd. and withdrew his objections to grant
of probate to Mr. Kumar Pattani. All this in consideration of  Rs.12 crore (as a
family) and Rs.4 crore as a part thereof being for the transfer of his interest
/ right in the immovable property was also received in A.Y. 2006-07.

All the above facts were
examined by the AO while passing the assessment order for the A.Y. 2006-07 and
held that the assessee had sold his rights/share in the immovable property and
sought benefit of the investment made of the sales proceeds u/s. 54EC of the
Act. It was also pointed out that as is evident from the reasons for reopening
the assessment that the amendment made in section 54EC of the Act effective
from A.Y. 2007-08 which would restrict the benefit of that provision to Rs.50
lakh had triggered the reopening notice.

This was evident from the
following observations recorded in the reasons, which reads as under :“ In
view of above amendment, if the assessee would have shown the capital gain
correctly in the A.Y. 2007-08, then she would not have been eligible for
deduction of more than Rs.50 lakhs even if she would have complied with the
time limit provision of the section 54EC.”

However, the AO by order
passed u/s. 143(3) r/w section 147 of the Act, did not accept the assessee’s
objections. Consequently, the AO brought to tax an amount of Rs.6.21 crore on
the above account. (Rs.4 crore being the assessee’s share and Rs.2.21 crore
being his share in his late father Mr. Haresh Vaidya’s interest, who had
expired in the meantime.).

On appeal, the CIT(A) also
dismissed the assessee’s appeal.

On further appeal, the
Tribunal held that the AO could not have any reason to believe that income
chargeable to tax has escaped assessment. In particular, it held that the
assessee had offered capital gains to tax in the AY 2006-07 and the same was
accepted after examination / consideration while passing an order u/s. 143(3)
of the Act. Thus, the AO having already assessed the income arising on sale of
rights in the said property as evidenced by the Agreement for Sale dated 25th
August, 2005 and letter dated 17th October, 2005 evidencing the
family arrangement coupled with having received the consideration in the
Assessment Year 2005-06 which was also offered to tax in that year could not
have had any reason to believe that income chargeable to tax has escaped
assessment. The impugned order also records the fact that there were disputes
amongst the legal heirs of late Mr. Anantrai Pattani including pending probate
proceedings before the High Court. The dispute between the assessee and his
uncle Mr. Kumar Pattani stood settled on the basis of offer made by the uncle
in his letter dated 17th October, 2005 to the assessee and his
family members to give up their rights in respect of the said property
(including not contesting the probate petition) on his uncle paying a sum of
Rs.12 crore in the aggregate. 

Further, the fact that the
communication received from the Deputy Director of Income Tax (Investigation),
Surat which was the material for issuing the impugned notice, also seems to
indicate that the entire exercise was only for denying the benefit of section
54EC of the Act in view of the amendment thereto with effect from AY 2007-08.
The Tribunal held that reopening notice was bad in law.

The Hon. High Court held
that once the assessee has offered the capital gains to tax on the basis of the
Agreement for Sale dated 25th October, 2005 read with the letter
dated 17th October, 2005 and the receipt of consideration for sale
of his interest in said property and accepted on due examination u/s. 143(3) of
the Act, the AO could not have had any reason to believe that income chargeable
to tax has escaped assessment. In fact, this is a case of change of opinion,
inasmuch as for the A.Y. 2006-07, the AO in scrutiny proceedings accepted that
the transaction qua the respondent is taxable in A.Y. 2006-07 and now
seeks to tax it in A.Y. 2007-08.

The report received from
the DDIT (Inv), Surat essentially seeks to deny the exemption u/s. 54EC of the
Act in view of the amendment thereto. When the capital gains has been offered
to tax in earlier assessment year and accepted by the Revenue in scrutiny
proceedings, then a mere change in law in the subject assessment year with
regard to extent of exemption will not give any reason to believe that income
chargeable to tax in the subject assessment year had escaped assessment.
Therefore, the appeal was dismissed.

13. Rectification – Retrospective Amendment u/s. 115JB – Rectification made by the A.O on the issue in the order passed u/s. 143(3) r.w.s. 254 of the Act- Such mistake, if any, was in the order originally passed by the A.O. u/s. 143(3) of the Act – Not permissible: u/s. 154 of the Act

CIT vs. Weizmann Ltd. [
Income tax Appeal no 1020 of 2014 dt : 09/12/2016 (Bombay High Court)].

[M/s Weizmann Ltd.,vs.
ACIT. [ITA No. 768 /MUM/2012; Bench : G ; date:31/10/2013 ; A Y: 2001- 2002.
(MUM) ITAT ]

On 27th February,
2004, the assessment order was passed u/s. 143(3) for the subject assessment
year. The assessing officer accepted the assessee’s claim of book profits u/s.
115JB. The book profits as claimed was after allowing of amounts set aside as
provisions for diminution in the value of assets. The assessee being aggrieved
by the assessment order on certain other issues had preferred an appeal to the
appellate authority and carried its grievance up to the Tribunal. On 29th August,
2007, the Tribunal restored some of the issues by which the assessee was
aggrieved to the Assessing Officer. It is relevant to note that the issue of
allowing of amounts set aside as provision for diminution of the value of
assets was not an issue which was restored to the Assessing Officer for
readjudication.

Consequent to the above,
the Assessing Officer passed an order dated 30th December, 2008 u/s.
143(3) r.w.s 254 of the Act giving effect to the order dated 29th
August, 2007 of the Tribunal.

The Finance (No.2) Act of
2009 amended section 115JB of the Act with retrospective effect from 1st April,
2001. The amendment inter alia added to Explanation I to section 115JB
of the Act, clause (i) providing that for purposes of computing that the book
profits thereunder, the profit shown in the profit and loss account is to be
increased by the amounts set aside as provision for diminution in the value of
assets.

In view of the above amendment the A.O. by
order dated 19th August, 2010 u/s. 154 rectified its order dated 30th
December, 2008 and made addition of Rs. 1,28,60,000/- to the book profit
of the assessee on account of provision for diminution in the value of
investment relying on the amendment made in the provisions of section 115JB
that with retrospective effect on 1-4-2001.

The assessee challenged
the order passed by the A.O. u/s. 154 of the Act by preferring an appeal before
the CIT(A) disputing the addition of Rs. 1,28,60,000/- made by the A.O. to the
book profit on account of provision for diminution in the value of investment.
The ld. CIT(A) did not find merit in the said appeal of the assessee and
dismissed the same.

The assessee preferred an
appeal before the Tribunal. The assessee submitted that the order u/s. 143(3)
r.w.s. 254 of the Act, was passed by the A.O. as per the specific directions
given by the Tribunal while restoring only the limited issues to the file of
the A.O. He submitted that the issue relating to the allowability of provision
for diminution in the value of investment was not before the Tribunal and since
the same was not restored by the Tribunal to the file of the A.O., the
consideration of the same was beyond the scope of order passed by the A.O. u/s
143(3) r.w.s. 254 of the Act. He relied on the decision of Hon’ble Bombay
High Court in the case of CIT vs. Sakseria Cotton Mills Ltd. (1980) 124 ITR 570.

The Tribunal held that it
cannot be said that there was any mistake in the order of the A.O. passed u/s
143(3) r.w.s. 254 of the Act on 30-12-2008 in allowing the deduction on account
of provision for diminution in the value of investment calling for any
rectification u/s. 154 of the Act. Such mistake, if any, was in the order originally
passed by the A.O. u/s. 143(3) of the Act on 27-2-2004 and not in the order
passed on 30-12-2008. The rectification made by the A.O. on this issue to the
order passed u/s. 143(3) r.w.s. 254 of the Act by an order dated 19-8-2010
passed u/s. 154 of the Act thus was not permissible. The Tribunal, therefore,
directed the A.O. to delete the addition made by way of rectification order
u/s. 154 of the Act.

The Revenue preferred an
appeal before the High Court. The High Court held that the issue stands concluded
by the decision of this Court in Sakseria Cotton Mills Ltd. (supra) in
favour of the assessee. The distinction sought to be made by the Revenue on the
basis of the amendment to section 115JB of the Act in 2009 with retrospective
effect from 2001 does not address the fundamental issue of non merger of the
order dated 27th February, 2004 with the order dated 30th December,
2008. Therefore, any rectification of the order dated 27th February,
2004 is required to be done within 4 years from 27th February, 2004
as provided u/s. 154 of the Act. It is not disputed before us that issue of the
provisions made for diminution in value of assets which is sought to be
rectified is an issue which was never the subject matter of consideration in
the order dated 30th December, 2008 passed u/s. 143(3) r/w section
254 of the Act. Therefore, in these circumstances, it could not be rectified
u/s. 154 of the Act. In the above view, the revenue appeal was dismissed.

45. Speculative transaction – Business loss – A. Y. 2009-10 – Hedging transactions entered into to cover variation in foreign exchange rate – Impact on business of import and export of diamond – Transactions entered only in regular course of business activity – Not speculative transactions

CIT vs. D. Chetan and Co.; 390 ITR 36 (Bom):

The Assessee was engaged in the business of import and export
of diamonds. For the A. Y. 2009-10, the assessee explained that the amount of
Rs. 78.10 lakhs claimed as loss was on account of hedging transactions entered
into to safeguard variation in exchange rates affecting its transact5ions of
import and export. The Assessing Officer disallowed the claim on the ground
that it was a notional loss of a contingent liability debited to the profit and
loss account. The Commissioner (Appeals) and the Tribunal allowed the
assessee’s claim.

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

“i)   The Tribunal concluded that the transaction
entered into by the assessee was not in the nature of speculative activities.
Further, the hedging transactions were entered into so as to cover variation in
foreign exchange rate which would impact its business of import and export of
diamonds. These concurrent findings of fact were not shown to be perverse in
any manner.

ii)   The Assessing Officer in the assessment order
did not find that the transaction entered into by the assessee was speculative
in nature. At no point of time did the department challenge the assertion of
the assessee that the activity of entering into forward contract was in the
regular course of its business only to safeguard against the loss on account of
foreign exchange variation. The Department never contended that the transaction
was speculative but only disallowed on the ground that it was notional.

iii)   Thus, it was to be concluded that the
transactions entered were only in regular course of business and not speculative.
Therefore, no substantial question of law arose.”

44. Salary – Perquisite – Fringe Benefit Tax – Sections 17 and 115WA of the Act – Once the employer is taxed on the fringe benefits same cannot be taxed as perquisite in hands of employee

Kamlesh K. Singhal vs. CIT; 389 ITR 247 (Guj):

The assessee was employed in ONGC. For the A. Y. 2007-08, the
Assessing Officer issued notice u/s. 148 of the Act, on the ground that his
employer had reimbursed the conveyance maintenance and repair expenditure and
uniform allowance to the assessee but the employer had neither reflected it in
the salary certificate issued nor had deducted the tax at source on those
amounts. Pursuant to the notice, he passed an order u/s. 143(3) r.w.s. 147
levying 20% and 100% tax respectively, on the fringe benefits and made
additions to the assessee’s income accordingly. The assessee filed a revision
petition contending that it would amount to double taxation as his employer had
paid fringe benefits tax u/s. 115WA. The Commissioner rejected the petition.

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

“i)   Once a certain benefit was held to be a
fringe benefit and the employer was taxed accordingly under Chapter XII-H of
the Act, the same benefit could not be included in the income of the
assessee-employee treating it as a perquisite.

ii)   The disallowance of 20% of the reimbursed
conveyance and repair expenses and 100% of the uniform allowance made by the
assessing Officer was reversed. The Assessing Officer was to pass a
consequential order accordingly. The order passed by the Commissioner was
unsustainable.”

43. Income – Accrual – A. Ys. 2005-06 to 2007-08 – Assessee obtaining contract – Work shared by assessee with another person – Amount received for work shared proportionate to work – Amount received by assessee and such other person shown separately – No evidence of sub-contract – Amount received by other person cannot be added to assessee’s income

CIT vs. G. Balraj; 390 ITR 50 (Karn):

The assessee was a PWD contractor and according to the
assessee, he had entered into an agreement with B Construction, whereby a
particular percentage of the income of the contract was to be shared in a
particular proportion. The assessee had shown his income to the extent of the
amount received by it. However, in the assessment proceedings, the Assessing
Officer finding that as tax was deducted at source from the total amount of the
contract(received by the assessee as well as by B Construction), brought the
entire amount under the contract to tax in the assessee’s hands. The Tribunal
deleted the addition.

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

“i)   There was enough material to show that the
amount received from the contract was directly shared by the assessee and B
Construction in accordance with their proportionate share and that it was not a
case where the money/the amount realised from the contract was apportioned as
the income of the assessee and thereafter, a portion of it or a major portion
was paid by the assessee to B Construction. When after receipt of the contract
amount, the shares were identified and taken by both the parties of the joint
venture, it could not be treated as sub-contract.

ii)  There
was no material brought by the Revenue to show that there was any contract
entered into by the assessee to assign the work to B Construction as
sub-contractor. Further, when the respective share was received by the
assessee, it had been shown as the income by the assessee in the return of
income. Similarly, for the respective share of B Construction it had shown its
income of the amount received by it. Under these circumstances, the findings of
the Tribunal that it was a joint venture between the assessee and B
Construction was not contrary to the material or based on conjectures or
surmises.”

42. Educational institution – Exemption u/s. 10(23C)(vi) of the Act – A. Y. 2014-15 – Application for approval can be filed before end of financial year and further information if needed can be sought from assessee – Application filed in the financial year rejected on the ground that it was filed prematurely – Not justified

Shri Guru Ram Dass Ji Education Trust vs. CCIT; 389 ITR
423 (P&H):

The assessee-trust was running educational institutions.
Since its receipts exceeded Rs. 1 crore in the F. Y. 2013-14, it made an
application for approval u/s. 10(23C)(vi) of the Act for the A. Y. 2014-15 onwards. The application was rejected on the
ground that the assessee had prematurely filed the application and that it
could only have been filed after the expiry of the F. Y. 2013-14 and before
September 30, 2014.

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

“i)   The fourteenth proviso to section
10(23C) of the Income-tax Act, 1961 states that an application under the
section can be filed on or before 30th September of the relevant assessment
year, from which the exemption is sought. The proviso simply gives an outer
date for making an application and does not say that the application is to be
made between 1st April and 30th September of the
assessment year. If an application is filed prior to 1st April of
the relevant assessment year and after filing thereof, any further information
is still needed by the Department, before taking a final decision thereon, that
information can be sought from the applicant.

ii)   A trust might know or have reason to believe
prior to 1st April that its receipts were likely to exceed Rs. 1
crore. There was no reason why such an institution ought not to be permitted to
make the application even before the 1st day April of the relevant
year.

iii)   All the accounts for the year ending March
31, 2014, when asked for, were duly provided by the assessee much before the
passing of the order. Further, note 1(a) and note 3 to Form 56D clearly
indicated that the application could be filed even prior to 1st
April of the relevant assessment year, from which the exemption was sought.

iv)   The
Chief Commissioner was directed to consider the application filed by the
assessee for the grant of exemption u/s. 10(23C) of the Act, on the merits.”

41. Charitable purpose – Charitable trust – Exemption u/s. 11 of the Act – A. Y. 2008-09 – Expenditure incurred in excess of income from accumulated funds – Trust entitled to exemption

CIT vs. Krishi Upaj Mandi Samiti; 390 ITR 59 (Raj):

The assessee, a charitable trust, incurred expenditure for
charitable purposes during the previous year relevant to the A. Y. 2008-09 in
excess of the income derived during the relevant period. The excess expenditure
was incurred by transferring the fund from interest bearing public deposit
account to non-interest bearing public deposit account. The Assessing Officer
held that the excess expenditure having been incurred from charity
fund/accumulated fund of earlier years, the assessee was nor entitled to
exemption u/s. 11(1)(a) of the Act – and accordingly, assessed the income as
the taxable income. The Tribunal held that the assessee was entitled to
exemption u/s. 11 of the Act.

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

“i)   When the income of a trust is used or put to
use to meet the expenses incurred for religious or charitable purposes, it is
applied for charitable or religious purposes. The application of the income for
charitable or religious purposes takes place in the year in which the income is
adjusted to meet the expense incurred for charitable or religious purposes.

ii)   In other words, even if the expenses for
charitable or religious purposes have been incurred in an earlier year and the
expenses are adjusted against the income of a subsequent year, the income of
that year can be said to have been applied for charitable or religious purposes
in the year in which the expenses were incurred for charitable and religious
purposes had been adjusted.

iii)   The Tribunal holding the assessee entitled to
claim exemption u/s. 11(1)(a) of the Act during the relevant assessment year
was justified.”

40. Capital gain – Exemption u/s. 54EC of the Act – A. Y. 2008 -09 – Investment in specified bonds from the amounts received as an advance is eligible for section 54EC deduction – The fact that the investment is made prior to the transfer of the asset is irrelevant

CIT vs. Subhash Vinayak Supnekar (Bom); ITA No. 1009 of
2014 dated 14/12/2016; (www.itatonline.org)

An Agreement to Sale for the subject property was entered
into on 21st February, 2006. The final sale took place under a Sale
Deed dated 5th April, 2007. The assessee invested an amount of Rs.50
lakh from the advance received under the Agreement to Sale in the Rural Electrification
Corporation Ltd. bonds on 2nd February, 2007. The Assessing Officer
as well as the Commissioner of Income Tax (Appeals) held that the assessee is
not entitled to the benefit of section 54EC of the Act, as the amounts were
invested in the bonds prior to the sale of the subject property on 5th
April, 2007. The Tribunal allowed the claim of the assessee by following the
decision of its coordinate bench in Bhikulal Chandak HUF vs. Income Tax
Officer 126 TTJ 545 wherein it has been held that where an assessee makes
investment in bonds as required u/s. 54EC of the Act on receipt of advance as
per the Agreement to Sale, then the assessee is entitled to claim the benefit
of Section 54EC of the Act.

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

“i)   The short question is whether an amount
received on sale of a capital asset as an advance on the basis of Agreement to
Sale and the same being invested in specified bonds before the final sale,
would entitle the assessee to the benefit of Section 54EC of the Act.

ii)   The Sale Deed dated 5th April, 2007
records in clause (d) thereof the fact that the Agreement to Sale had been
entered into on 21st February, 2006 in respect of the subject
property and the amounts being received by the vendor (respondent assessee)
under that Agreement to Sale. Thus, these amounts when received as advance
under an Agreement to Sale of a capital asset are invested in specified bonds
the benefit of Section 54EC of the Act is available. In the above view, the
Tribunal holds that the facts of the present case are similar to the facts
before the Tribunal in Bhikulal Chandak HUF (supra). The Revenue does
not dispute the same before us. Moreover, on almost identical facts, this Court
in Parveen P. Bharucha vs. DCIT, 348 ITR 325, held that the earnest
money received on sale of asset, when invested in specified bonds u/s. 54EC, is
entitled to the benefit of section 54EC. This was in the context of reopening
of an assessment and reliance was placed upon CBDT Circular No. 359 dated 10th
May, 1983 in the context of section 54E.

iii)   The Revenue had preferred an appeal against
the order of the Tribunal in Bhikulal Chandak HUF (supra) to this Court
(Nagpur Bench) being Income Tax Appeal No.68 of 2009. This Court by an order
dated 22nd August, 2010 refused to entertain the Revenue’s above
appeal from the decision of the Tribunal in Bhikulal Chandak HUF (supra).
In the above view, the question as proposed for our consideration in the
present facts does not give rise to any substantial question of law.”

39. Capital gain – Exemption u/s. 54 of the Act – A.Y. 2003-04 – Sale of residential property on 04/02/2003 – Agreement to purchase another residential property on 08/09/2003 and invested the capital gain within specified time – Assessee entitled to exemption u/s. 54 even if there is delay in completing the transaction

CIT vs. Mrs. Shakuntala Devi; 389 ITR 366 (Karn):

The assessee sold a flat
in Mumbai for a total consideration of Rs. 1,71,00,000/- on 04/02/2003 and the
consequent capital gain was Rs. 1,44,68,032/-. The assessee entered into an
agreement for purchase of the another residential property on 08/09/2003 for a
consideration of Rs. 3,25,00,000/- and invested the capital gain for the same.
The assessee’s claim for exemption u/s. 54 for the A. Y. 2003-04 was rejected
by the Assessing Officer on the ground that the transaction has not been
concluded, no registration of the sale deed has taken place and the balance
consideration was yet to be paid. The Tribunal held that the assessee is
entitled to exemption u/s. 54 of the Act.  

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

“i)   The Tribunal had rightly held that the date
of purchase was to be taken as the basis for reconing the period of two years
prescribed u/s. 54 of the Act extending the benefit following therefrom.

ii)   In the instant case the consideration paid by
the assessee under the memorandum of understanding dated 08/09/2003 would fully
cover the consideration of capital gains portion for being eligible to claim
exemption u/s. 54 of the Act.”

38. Business expenditure – Interest on borrowed capital – Section 36(1)(iii) of the Act – A. Y. 1989-90 – Advance of loans at lower rate of interest to subsidiary concerns in financial difficulty for business purposes – Commercial expediency- Assessee entitled to deduction

Hindalco Co. vs. CIT; 389 ITR 430 (All):

The assessee paid interest at the rate of 16% on its
borrowings from the bank. The Assessing Officer found that the assessee had
advanced loans to its subsidiary companies at a lower rate of interest, 6% or
12%. He determined the rate of interest at 12%, as the rate at which loans were
advanced to the sister concerns and disallowed the difference between the
interest at market rate and the rate at which loans were advanced to sister
companies u/s. 36(1)(iii) of the Act. The Tribunal upheld the disallowance.

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

“i)   The financial condition of the assessee’s
sister concerns was not good and to help them run smoothly, the assessee
advanced them loans at a lower rate of interest. Both sister concerns were
subsidiaries of the assessee and there was nothing per se adverse.

ii)   For the welfare and proper functioning of the
sister concerns, the assessee had decided to advance loans so that ultimately
they could function properly, and the assessee being the holding company would
also benefit. Therefore, the loans advanced to its sister concerns were for
commercial expediency and the assessee was entitled to the deduction of
interest u/s. 36(1)(iii) of the Act.”

Article 10 of India US DTAA – Foreign Tax credit (FTC) allowable upto lower of tax withheld or the limit prescribed in DTAA; FTC should be computed separately in respect of each item of income.

7.  TS-130-ITAT-2017
(Ahd)

Bhavin A. Shah vs. ACIT

A.Y. 2009-10, Date of Order: 29th March, 2017

Facts

The Taxpayer was an individual resident in India. He had
invested in shares of US companies and earned dividend therefrom during the relevant
year. Tax was withheld in US from the dividend received by the Taxpayer. The
Taxpayer offered such dividend for tax in India and claimed foreign tax credit
(FTC) aggregating to roughly 30% of the gross dividend in respect of tax
withheld in USA.

The AO rejected the claim of the Taxpayer on the ground that
FTC is available only in respect of actual payment made while filing return of
income (i.e., tax paid directly by the Taxpayer) and not on tax withheld in
USA.

While upholding the order of the AO, the CIT(A) observed that
the documents/ evidence furnished by the Taxpayer in support of the FTC claim
did not mention the name of the Taxpayer and/ or were not signed by the
relevant authorities and further that the taxes withheld were almost 30% of the
gross receipt.

Held

–  In accordance with Article 25 of India-USA
DTAA, if tax is withheld from dividend earned by the Taxpayer from USA, and if
he has offered such dividend to tax in India, FTC may be granted in respect of
tax withheld in the US.

–  Article 10(2) of India-USA DTAA stipulates the
maximum rate of tax chargeable in USA on dividend earned by the Taxpayer from
USA.

–  Thus, the following conditions should be
satisfied for claiming FTC in India in respect of dividend:

–  The Taxpayer should be a resident in India, in
terms of Article 4 of India-USA DTAA and not merely a resident under the Act.

–  Income received by the Taxpayer should be
“dividend” as defined in Article 10(3) of India-USA DTAA.

–  Dividend should have been taxed in USA in accordance
with Article 10(2) of India-USA DTAA.

–  Tax may be either by way of direct payment or
withholding.

–  FTC allowable should be restricted to lower of
tax withheld in USA or tax liability in India respect of such dividend.

– The particulars furnished by the Taxpayer
showed that while aggregate withholding tax rate in USA was higher than 25%, in
some cases tax was withheld at rates higher than 25% and in some cases at rates
lower than 25%. Hence, the contention of the Taxpayer for grant of FTC at blanket
rate of 25% was incorrect.

– Computation of FTC cannot be by way of
generalization. AO should ascertain the withholding tax rate in respect of each
dividend income. In cases where tax was withheld at rate lower than that
stipulated in India-USA DTAA, FTC should be granted at actual. In cases where
tax was paid/withheld at rate higher than that stipulated in India-USA DTAA,
FTC should be restricted to the amount corresponding to that rate.

–  The matter was remanded to the AO
to accordingly compute the eligible amount of FTC.

Section 2(22) of the Act, Article 13 of India Mauritius DTAA – Buyback at artificially inflated price would qualify as a colorable device for avoiding tax; consideration in excess of fair market price of the shares could be deemed as dividend

6. 
TS-110-ITAT-2017(Bang)

Fidelity Business Services India Pvt. Ltd. v. ACIT

A.Y. 2011-12, Date of Order: 22nd February, 2017

Facts

The Taxpayer was an Indian company and a wholly-owned
subsidiary of a Mauritius company (FCo). While FCo held 99.99% of shares in the
Taxpayer, a nominee held the balance shares on behalf of FCo.

During the relevant year, the Taxpayer undertook buyback of
its shares from FCo at price which was substantially higher than the face value
of the shares. FCo treated the income from such buyback as capital gains. In
terms of Article 13(4) of India-Mauritius DTAA, FCo claimed that capital gains
were not chargeable to tax in India.

The AO noted that FCo held 99.99% of shares of the Taxpayer.
Hence, the entire reserves and surplus were distributable only to FCo. The AO
concluded that FCo and the Taxpayer adopted buyback route to distribute
reserves and surplus to FCo as distribution of dividend would have entailed
dividend distribution tax. Accordingly, the AO held buyback as a colorable
device and reclassified the difference between the face value of the shares and
the amount distributed to FCo as deemed dividend u/s. 2(22)(d) of the Act.

The Taxpayer contended that:

– “buyback” is specifically excluded from the
definition of “dividend” under the Act;

–  prior to amendment of section 115QA with
effect from 1st June 2013 distribution by way of buyback was not
subject to tax;

–  Circular No. 3 of 2016 dated 26 February 2016
(2016 Circular) has clarified that buyback consideration between the period 1st
April 2000 and 1st June 2013 would be treated as capital gains
and not as deemed dividend; and

–   even if the transaction was undertaken with
the objective of avoiding taxes, the same cannot be disregarded, unless the Act
vests such power in the tax authority1.

The DRP
upheld the draft order of the AO. 

Held

– Section 2(22)(iv) specifically excludes
buyback consideration from the ambit of “dividend”. Further, tax on buyback is
applicable only from 1st June 2013. The 2016 Circular also clarifies
that buyback consideration between 1st April 2000 and 1st June
2013 should be taxed as capital gains.

–  To the extent of buyback undertaken at fair
market price (FMP), consideration would be treated as capital gains u/s. 46A.
Hence, in terms of India-Mauritius DTAA, it would not have been chargeable to
tax in India. However, a buyback undertaken at artificially inflated and
unrealistic price which does not represent FMP, would be considered as
colourable device particularly where the shareholder holds 99.99% of the share
capital.

–  Since neither the AO nor the DRP
had examined whether buyback price was artificially inflated and unrealistic
vis-à-vis the FMP, the matter was remanded to the AO to ascertain the same.

Allowability of Expenditure towards Corporate Social Responsibility

Issue for Consideration

Explanation 2 to Section
37(1) declares that, for the removal of doubts, any expenditure incurred by an
assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred by the assessee for the purposes of business or
profession.

Companies Act, 2013 has made it mandatory for certain
companies to spend at least 2% of the average net profits towards Corporate
Social Responsibility (‘CSR’) as per the policy formulated by the CSR committee
of the company in this regard. While this is the first time a statutory
obligation has been cast upon companies to incur expenditure in the social or
charitable sphere, it is not uncommon for corporate as well as non-corporate
assessees to voluntarily incur charitable expenditure, which may or may not
have a direct nexus to their business operations.

Where such expenditure is expected to benefit the business in
some manner, either by benefitting its employees or by creating goodwill within
the community at large, it is usually claimed as business expenditure under
section 37(1). The issue has arisen on the allowability of such expenditure, on
account of conflicting decisions of the Tribunal. While the Raipur Tribunal has
upheld the claim in the specific facts of the case, the Bengaluru Tribunal has
taken a contrary view, disallowing the claim in respect of charitable expenses.

Jindal Power Limited’s case

The issue came up before
the Raipur Tribunal in the case of ACIT vs. Jindal Power Ltd. 179 TTJ 736.

In the said case, during
assessment year 2008-09, the company had claimed deduction in respect of
expenditure incurred on construction of school building, devasthan/temple,
drainage, barbed wire fencing, educational schemes and distributions of clothes
etc. voluntarily. Without much of a discussion on the factual aspects, the AO
observed that no material had been placed to substantiate the claim or in
support of existence of the facts of development activities. The AO also placed
reliance on the decision of the Patna Tribunal in the case of Central
Coalfields Ltd. for assessment years 1983-84 to 1986-87, wherein it was held
that the expenses were in the nature of charity and though laudable, they could
not be said to have been incurred for the purpose of business.

The CIT(A) made detailed observations on CSR stating that
“CSR policy functions as a built-in, self-regulating mechanism whereby a
business monitors and ensures its active compliance with the spirit of the law,
ethical standards, and international norms. The goal of CSR is to embrace
responsibility for the company’s actions and encourage a positive impact
through its activities on the environment, consumers, employees, communities,
stakeholders and all other members of the public sphere who may also be
considered as stakeholders. CSR is titled to aid an organization’s mission as
well as a guide to what the company stands for and will uphold to its
consumers.” Further, the CIT(A) noted the CSR policy of the assessee company
and that the expenses incurred on water supply for perennial availability of
portable water, roads and culverts, toilets and others, water tanks, other
community works, temple renovation, school building renovation etc. in the
villages for up-gradation as well as expenses for the welfare of the employees
were a part of implementation of CSR policies of the company. The assessee
relied upon various decisions including the decisions in the case of SECL 85
ITD 608 (Nag.) and Madras Refineries Ltd. 266 ITR 170 (Mad.).
Applying the ratio of the said decisions, the CIT(A) held that the expenditure
under the above heads incurred by the appellant company as a good corporate
citizen and as measure of gaining goodwill of the people living in and around
its industries through the aforesaid activities were admissible expenditures.
Only those expenses, which were neither substantiated with proper evidences nor
had any nexus with the CSR policies of the appellant company, were disallowed.

In the appeal before the Tribunal, the fundamental objection
of the AO was that the expenses were voluntary, not mandatory and not for
business purposes. In respect of the contention that expenses, which were
voluntary in nature and not mandatory, were not admissible as deduction, the
Tribunal referred to the judgment of House of Lords in the case of Atherton
v. British Insulated & Helsbey Cables Ltd. 10 Tax Cases 155 (HL), which
has been approved by the Supreme Court in the case of Chandulal Keshavlal &
Co. 38 ITR 601, wherein it was held that a sum of money expended not with a
necessity and with a view to direct immediate benefit to the trade, but
voluntarily and on the grounds of commercial expediency and in order to
indirectly facilitate carrying on of business, may yet be expended wholly and
exclusively for the purpose of the trade and hence be admissible. The Tribunal
also considered the decision of the Supreme Court in the case of Sassoon J
David & Co. (P) Ltd. 118 ITR 261, which laid down the principle that
the fact that somebody other than the assessee also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction if it otherwise satisfied the tests laid down by law.

Further, on the contention of whether such expenses were for
the purpose of business or not, the Tribunal referred to the decision in the
case of Hindustan Petroleum Corporation Ltd 96 ITD 186 (Mum.) which held
that there could be certain amounts, though in the nature of donations, which may
be deductible under section 37(1) as well and merely because an expenditure was
in the nature of donation, or ‘promoted by altruistic motives’, it did not
cease to be an expenditure deductible under section 37(1). It also took into
consideration the decision in the case of Madras Refineries Ltd. (supra),
wherein it was observed that monies spent by the assessee as a good corporate
citizen and to earn the goodwill of the society help creating an atmosphere in
which the business can succeed in a greater measure with the help of such
goodwill, and therefore, were required to be treated as business expenditure
eligible for deduction under section 37(1) of the Act.

The Tribunal noted that Explanation 2 to Section 37(1) was
introduced with effect from 1st April 2015 and observed that it
could not be construed to the disadvantage of the assessee in the period prior
to this amendment. It further noted that this disabling provision referred only
to such CSR expenses incurred under Section 135 of the Companies Act, 2013,
and, as such, it could not have any application for the period not covered by
this statutory provision, which itself came into existence in 2013. It also
placed reliance on the principle of lex prospicit non respicit (law looks
forward not backward) laid down in the Supreme Court’s five judge
constitutional bench’s landmark judgment, in the case of Vatika Townships
Pvt Ltd 367 ITR 466 (SC), that unless a contrary intention appeared,
legislation was presumed not to be intended to have a retrospective operation
and that law passed today could not apply to the events of the past. The
Tribunal also reiterated the well settled legal position that when a
legislation conferred a benefit on the taxpayer by relaxing the rigour of
pre-amendment law, and when such a benefit appeared to have been the objective
pursued by the legislature, it would be a purposive interpretation giving it a
retrospective effect, but when a tax legislation imposed a liability or a
burden, the effect of such a legislative provision could only be prospective.

Interestingly, the
Tribunal observed that the disallowance was restricted to the expenses incurred
by the assessee under a statutory obligation under section 135 of Companies Act
2013, and thus, there was now a line of demarcation between the expenses
incurred by the assessee on discharging CSR under such a statutory obligation
and under a voluntary assumption of responsibility. The Tribunal further held
that for the former, the disallowance under Explanation 2 to Section 37(1) came
into play, but, as for the latter, there was no such disabling provision as
long as the expenses, even in discharge of corporate social responsibility on
voluntary basis, could be said to be “wholly and exclusively for the
purposes of business”.

Thus, based on all the
aforesaid arguments, since the expenses in question were not incurred under the
statutory obligation, as also for the basic reason that Explanation 2 to
Section 37(1) came into play with effect from 1st April 2015, the Tribunal
concluded that the disabling provision of the said Explanation did not apply to
the facts of this case.

Kanhaiyalal Dudheria’s case

The issue once again came
up for consideration before the Bengaluru Tribunal in the case of Kanhaiyalal
Dudheria v. JCIT 165 ITD 14 

In this case, during assessment year 2011-12, the assessee
firm claimed deduction in respect of expenditure incurred on construction of
houses under an MOU with the Government of Karnataka, that were later handed
over to the Government for helping the people affected by floods. The assessee
claimed that the said expenditure was incurred to yield benefit in the form of
goodwill and therefore, the same was allowable as business expenditure. The AO,
after referring to the MOU, came to the conclusion that the said expenditure
was not incurred wholly and exclusively for the purpose of business and
therefore held that the same was not allowable as deduction u/s 37(1) of the
Act. The CIT(A) upheld the order of the AO.

In the appeal before the Tribunal, the assessee firm relied
on the decisions in the case of Jindal Power Ltd. (supra) and Infosys
Technologies Ltd. 360 ITR 714 (Kar.) stating that on account of incurrence
of expenditure, goodwill was created in the people in the surrounding villages,
which would help in carrying out business and thus,
the expenditure should be allowed as a deduction. On behalf of the revenue, it
was argued that the said expenditure was towards charity and it was nothing but
application of income. The revenue drew support from the decision in the case
of Badrinarayan Shrinarayan Akodiya 101 ITR 817 (MP).

The Tribunal, relying on the decision in the case of Sassoon
J. David & Co. (P.) Ltd. (supra), emphasized that although for claiming
deduction u/s 37(1), it was not required to establish the necessity of
incurring of such expenditure, the onus lay on the assessee to prove that the
expenditure was incurred for the purpose of business. Since in the facts of the
case, the assessee did not establish that the expenditure was incurred for business
purpose, the Tribunal held that the expenditure amounted to application of
income voluntarily towards charity which could not be allowed as a deduction.

The Tribunal also noted that it cannot be said that the
appellant had incurred this expenditure wholly and exclusively for the purpose
of business since there was no nexus between the expenditure incurred and the
benefit derived by the business of the assessee.

Observations

Prior to insertion of
Explanation 2, section 37(1) along with Explanation 1 laid down a four-fold
test for any expenditure to be allowable in computing the income under the head
“Profits and gains of business or profession” –

–    it must
not be of the nature described in sections 30 to 36;

–    it must
not be capital or personal in nature;

–    it must
be laid out or expended wholly and exclusively for the purposes of business or
profession; and

–    it must
not be incurred for a purpose which is an offence or which is prohibited by
law.

There was no requirement,
however, to prove the necessity of incurring such expenditure. In other words,
whether the expenditure was incurred on account of a statutory obligation or
otherwise, did not have a bearing on the allowability of the expenditure.
Expenses in the nature of CSR were considered to be allowable or not allowable
as a deduction in light of the above tests.

It is common for many
taxpayers to contribute to the betterment of their employees and their
families, or the community or society, or the locality where their business
operations are based, etc. in a variety of ways. In most of the cases, there is
some perceived benefit to the business operations, either in the form of better
morale and productivity of employees or through generation of goodwill and
reputation for the business. As a result, in all such cases, the expenditure is
considered to have been spent for the purposes of the business and claimed as
deduction against the business profits. However, in cases where the spending is
not connected with the business of the assessee in any manner whatsoever, it
partakes the character of donation or charity and is not an allowable
expenditure under section 37(1).

At the same time, the mere
fact that a particular expenditure is in the form of donation, more
particularly eligible for deduction under section 80G, would not by itself
imply that it is not deductible under section 37(1). In the case of Mysore
Kirloskar Ltd. v. CIT 166 ITR 836 (Kar.), which was referred to in the case
of Infosys Technologies Ltd. (supra), it was held that if the contribution
by an assessee was in the form of donations of the category specified under
section 80G, but if it could also be termed as an expenditure of the category
falling under section 37(1), then the right of the assessee to claim the whole
of it as allowance under section 37(1) could not be denied if it was “laid
out or expended wholly and exclusively for the purpose of business”.

The debate on the
voluntary nature of the expenses and the necessity of incurring such
expenditure has been definitively settled in the case of Sassoon J. David
and Co. (P.) Ltd. (supra), where the issue arose on deductibility
under section 10(2)(xv) of the Income-tax Act, 1922 (corresponding to section
37(1) of the Income-tax Act, 1961) of expenditure on retrenchment compensation
incurred voluntarily. The Apex Court in the said case has observed as under –

“It has to be observed here that the expression “wholly and
exclusively” used in section 10(2)(xv) of the Act does not mean
“necessarily”. Ordinarily it is for the assessee to decide whether
any expenditure should be incurred in the course of his or its business. Such
expenditure may be incurred voluntarily and without any necessity and if it is
incurred for promoting the business and to earn profits, the assessee can claim
deduction under section 10(2)(xv) of the Act even though there was no
compelling necessity to incur such expenditure. It is relevant to refer at this
stage to the legislative history of section 37 of the Income-tax Act, 1961
which corresponds to section 10(2)(xv) of the Act. An attempt was made in the
Income-tax Bill of 1961 to lay down the “necessity” of the
expenditure as a condition for claiming deduction under section 37. Section
37(1) in the Bill read “any expenditure. . . . laid out or expended wholly,
necessarily and exclusively for the purposes of the business or profession
shall be allowed” The introduction of the word “necessarily” in
the above section resulted in public protest. Consequently when section 37 was
finally enacted into law, the word “necessarily” came to be dropped.
The fact that somebody other than the assessee is also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the
tests laid down by law.”

Although the facts in the
above case were different and the issue under examination was in respect of
retrenchment compensation, the ratio laid down by the Supreme Court in respect
of allowability of voluntary expenditure under section 10(2)(xv) of the 1922
Act and section 37(1) of the 1961 Act would be applicable even in case of CSR
expenditure incurred by taxpayers without any statutory requirement or any
other compulsion.

The issue that remains
disputed then is, in which cases or under what circumstances, will the
expenditure be considered to be “wholly and exclusively for the purposes of the
business or profession”? Here again, the courts have agreed that the words
“for the purpose of business” used in section 37(1) should not be
limited to the meaning of “earning profit alone” and that business
expediency or commercial expediency may require providing facilities like
school, hospital, etc., for the employees or their families. It has also been
held that any expenditure laid out or expended for their benefit, if it
satisfied the other requirements, must be allowed as deduction under section
37(1) of the Act. However, the onus of establishing the nexus between the
expenditure incurred and the business and proving that the expenditure
“satisfies the other requirements” must be discharged by the assessee. The
Supreme Court in the case of Chandulal Keshavlal & Co. (supra) has laid
down certain tests in this regard as under –

“Another fact that
emerges from these cases is that if the expense is incurred for fostering the
business of another only or was made by way of distribution of profits or was
wholly gratuitous or for some improper or oblique purpose outside the course of
business then the expense is not deductible. In deciding whether a payment of
money is a deductible expenditure one has to take into consideration questions
of commercial expediency and the principles of ordinary commercial trading. If
the payment or expenditure is incurred for the purpose of the trade of the
assessee it does not matter that the payment may inure to the benefit of a
third party—Usher’s Wiltshire Brewery v. Bruce 6 TC 399 (HL). Another test is
whether the transaction is properly entered into as a part of the assessee’s
legitimate commercial undertaking in order to facilitate the carrying on of its
business ; and it is immaterial that a third party also benefits thereby —
[Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is
a question of fact whether the expenditure was expended wholly and exclusively
for the purpose of trade or business of the assessee.”

[Emphasis supplied]

The above principle
emerges in both the cases discussed in this article. In the case of Jindal
Power Limited (supra), even though CSR expenses were allowed based on an
understanding of the need for CSR by businesses and that these expenses were a
part of the implementation of the CSR policy of the company, the Tribunal
disallowed those expenses which were not substantiated with evidence and were not
in line with the company’s CSR policy. Similarly, in the case of Kanhaiyalal
Dudheria (supra), deduction of expenses was not allowed on account of failure
on part of the assessee to establish that the expenditure was incurred for
business purpose.

The introduction of
statutory provisions for CSR in Companies Act, 2013 and a corresponding
amendment in the Income-tax Act, 1961 has added another dimension to the
existing controversy.

Section 135 of the
Companies Act, 2013 mandates that every company having –

–    net
worth of Rs. 500 crores or more, or

–    turnover
of Rs. 1,000 crores or more, or

–    net
profit of Rs. 5 crores or more

during any financial year,
shall spend, in every financial year, at least 2% of its average net profits
towards CSR activities as per the CSR policy of the company. It further states
that the company shall give preference to the local area and areas around where
it operates for the CSR spending.

On the one hand, the above
provisions make it mandatory for certain Companies to undertake charitable
spending, while, on the other hand, Finance (No. 2) Act, 2014 introduced
Explanation 2 to section 37(1) with effect from 1st April 2015, to read as
under –

“For the removal of doubts, it is hereby declared that for the purposes
of sub-section (1), any expenditure incurred by an assessee on the activities
relating to corporate social responsibility referred to in section 135 of the
Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or profession.”

The above explanation
states that CSR expenditure shall not be deemed to have been incurred for the
purposes of business. Consequently, such expenditure is not allowable as a
deduction. The Explanatory Memorandum to the Finance Bill states that the
objective of CSR is to share the burden of the Government in providing social
services by companies having net worth/turnover/profit above a threshold and if
such expenses are allowed as tax deduction, this would result in subsidising of
around one-third of such expenses by the Government by way of tax expenditure.
However, it also states that the CSR expenditure which is of the nature
described in section 30 to section 36 of the Act shall be allowed as a
deduction under those sections subject to fulfillment of conditions, if any,
specified therein.

By declaring that
statutory CSR expenditure is not deemed to have been incurred for the purpose
of business, rather than clarifying that such expenditure is not an allowable
expense, Explanation 2 to section 37(1) may end up adding another angle to the
issue. It may be possible to take a view that Explanation 2 to section 37(1)
merely clarifies that the statutory CSR expenditure is not automatically deemed
to have been incurred for the purpose of business on account of the legislative
obligation (as was the presupposition in the arguments against allowability of
voluntary CSR expenses). In other words, statutory CSR expenditure would also
be considered to be incurred for the purposes of business and therefore be
deductible, so long as it satisfies the other tests and requirements discussed
earlier. The fact that the legislature intends to allow CSR expenditure of the
nature described in sections 30 to 36 would imply that the expenditure ought to
be allowed as a deduction if it is otherwise deductible.

Nevertheless, it is
pertinent to note that the explanation only makes a reference to the
expenditure incurred on CSR activities referred to in section 135 of the
Companies Act, 2013 and not to all expenditure in the nature of CSR. Further,
the explanation has been prospectively inserted with effect from 1st April
2015. Interestingly, the case of Jindal Power Limited (supra) pertains
to the period prior to the amendment. The Raipur Tribunal had rightly held that
since Explanation 2 was inserted prospectively and as it was a disabling
provision, it did not apply in that case to the expenditure incurred prior to
the amendment. This clearly implies that CSR expenditure, whether statutory or
voluntary, incurred prior to assessment year 2015-16 would be allowable,
provided it meets the other requirements of section 37(1). Additionally, the
Tribunal observed that there was now a clear distinction between statutory and
voluntary CSR expenditure and that the restriction placed in Explanation 2 to
section 37(1) would at best apply to the CSR expenditure incurred under the
statutory requirements. In other words, if any assessee – company or other than
company – voluntarily spends on CSR activities, whether prior to or after the
Companies Act, 2013 became applicable, the said expenditure would be allowable,
as long as it can be demonstrated to be incurred “wholly and exclusively for
the purposes of business or profession”.

Also noteworthy is the
fact that the CSR expenditure is mandated in the Companies Act, 2013 only for
companies and any expenditure of similar nature by non-corporates will always
be of a voluntary character, as in the case of Kanhaiyalal Dudheria (supra). As
the explanation makes a specific reference to section 135 of the Companies Act,
2013, the question of invoking the same for CSR expenditure incurred by
non-corporate entities does not arise. Quite aptly, therefore, Explanation 2
has not been considered in Kanhaiyalal Dudheria’s case and the allowability of
the CSR expenditure has been decided on the basis of settled principles in
respect of section 37(1) prior to the amendment.

Last but not the least, a
question may arise regarding the validity of the restriction imposed by
Explanation 2 to section 37(1). Where an expenditure is required to be
statutorily incurred and failure to comply with such statutory requirements
could attract penalties, it has a direct nexus to the business of the taxpayer.
In our view, deeming such an expenditure to not be for the purpose of business
or profession is inappropriate. In fact, if similar expenses incurred before
the imposition of the statutory obligation have been held to be deductible, the
deeming fiction was not desired in view of the existing safeguards in place in
section 37(1). Ironically, even after the amendment, the following category of
expenditures will still be allowable as a deduction –

–    CSR
expenses incurred by non-corporate entities, which are demonstrated to be laid
out for the purposes of business or profession;

–    CSR
expenses incurred voluntarily by companies; and

–    CSR expenses incurred by companies in
discharge of the obligation under section 135 of the Companies Act, 2013, which
are covered under section 30 to 36 of the Income-Tax Act, 1961.

This disparity between the deductibility of the
CSR expenses is uncalled for. It is therefore a possibility that the
restriction of Explanation 2 to Section 37(1) may be read down by the Courts.

TDS U/s. 194-Ib on Payment of Rent by Certain Individuals or Hindu Undivided Family

Background

Section 194-I of the
Income-tax Act, 1961 (“the Act”) interalia requires an individual or a
Hindu Undivided Family (HUF) carrying on business or profession of which
turnover or gross receipts in the immediately preceding previous year exceed
the monetary limits mentioned in section 44AB of the Act to deduct tax at source
while making payment of rent, to a resident. Under section 194-I, liability to
deduct tax arises if the amount of rent exceeds Rs. 1,80,000 in a year. Under
section 194-I tax is required to be deducted @ 10%.  

Therefore, an individual or a Hindu undivided family not
carrying on a business or a profession or carrying on a business or profession
the turnover or gross receipts of which did not exceed the monetary limit
mentioned in section 44AB of the Act in the immediately preceding previous year
is not required to deduct tax at source from payment by way of rent.

With a view to widen the scope of tax deduction at source,
the Finance Act, 2017 has, with effect from 1.6.2017, inserted section 194-IB
in the Act. This article attempts to analyse the provisions of section 194-IB
of the Act.

Provision of section 194-IB in brief 

An individual or an HUF (other than those covered by s.
194-I) responsible for paying to a resident, any income by way of rent
exceeding Rs. 50,000 for a month or part of a month during the previous year,
shall deduct an amount equal to five per cent of such income as income-tax
thereon.  The deduction is required to be
made at the time of credit of rent for the last month of the previous year or
the last month of tenancy if the property is vacated during the year, to the
account of the payee or at the time of payment thereof whichever is
earlier.  The deductor is not required to
obtain TAN.  In case the payee does not
have PAN and the provisions of section 206AA apply, the amount of deduction
shall not exceed the amount of rent payable for the last month of the previous
year or the last month of tenancy, as the case may be.

Cumulative Conditions for application of Section 194-IB

i)   the payer is an individual or a Hindu
undivided family;

ii)  in the immediately preceding previous year the
turnover or gross receipts of the business / profession carried on by such
individual or HUF, if any, did not exceed the monetary limits mentioned in
section 44AB;

iii)  the payer is responsible for paying income by
way of rent for use of any land or building or both.  For the purpose of this section, rent is
defined in an Explanation to section 194-IB;

iv) the amount of rent exceeds Rs. 50,000 for a
month or part of a month during the previous year;

v)  the payee is a resident. 

Consequences

If the above mentioned
conditions are cumulatively satisfied, the payer is required to deduct tax @ 5%
of such income as income-tax.

time of deduction 

Tax is required to be deducted on earlier of the following two
dates –

i)   credit to the account of the payee of rent
for the last month of the previous year or the last month of tenancy, if the
property is vacated during the year;  OR

ii)  at
the time of payment thereof in cash or by issue of a cheque or draft of by any
other mode.  It needs to be noted that
the word `thereof’ signifies the payment of rent for last month of the
previous year or the last month of tenancy, if the property is vacated during
the year.

Other points 

i)   The payer is not required to obtain TAN;

ii)  In case the provisions of section 206AA apply
(i.e. the payee does not have PAN) the amount of deduction shall not exceed the
amount of rent payable for last month of the previous year or the last month of
the tenancy, as the case may be. 

Who should be the payer / To whom is the section applicable?

Section 194-IB applies to a payer of rent who is an
individual or an HUF (other than those referred to in the second proviso to
section 194-I). The amount of rent should be in excess of the amount mentioned
in the section (given in subsequent paragraphs).

Therefore, the section will apply to a salaried employee, a
farmer, a retired person, an individual or an HUF carrying on business or
profession whose total turnover or gross receipts in the immediately preceding
previous year does not exceed the monetary limits mentioned in section 44AB of
the Act, an individual not carrying on business and whose total income is less
than the maximum amount not chargeable to tax.

Since the term `individual’ has been held to also include
group of individuals, the section may apply to trustees of a trust [DIT vs.
Sharadaben Bhagubhai Mafatlal Public Charitable Trust (2001) 247 ITR 1 (Bom)].
It may also apply to Executors of the estate of a deceased person [see CIT
vs. G B J Seth 6 Taxman 318 (MP)].

Who should be the payee?

The payee of rent should be a
resident.  If the payee is a
non-resident, then tax may be deductible u/s.195 of the Act but not under this
section.  The legal status of the payee is
not relevant. The payee could be a listed company, a private limited company, a
firm, a trust, LLP, individual, HUF, etc.

Threshold for deduction of tax

Tax is required to be
deducted only if the amount of rent exceeds Rs. 50,000 for a month or a part of
a month during the previous year. Once the rent for a month or part of a month
exceeds Rs. 50,000, tax is deductible on the entire amount of rent. Unlike the
other provisions of TDS, the payments made during the previous year are not
required to be aggregated for deduction of tax at source.  To illustrate, if the amount of rent paid in
first 3 months is at the rate of  Rs.
45,000 per month and for next 6 months @ Rs. 55,000 per month and for last 3
months at Rs. 40,000 per month, tax is required to be deducted only from
rent of those months where the amount of rent exceeds Rs. 50,000 for a month or
part of a month.  Therefore, amount
of tax to be deducted at source will be Rs. 16,500 [5% of Rs. 3,30,000 (55,000
x 6)].

It needs to be noted that
in case of rent for part of a month, the monthly rate of rent is not relevant
but what is relevant is that the amount paid / payable for a part of the month
should be in excess of Rs. 50,000.  To
illustrate, if amount of rent paid for 15 days is Rs. 40,000 tax will not be
required to be deducted (though rent per month is Rs. 80,000) but if the amount
of rent paid for 3 weeks is Rs. 60,000 then tax is required to be deducted
under this section.

Is the limit of Rs. 50,000 per month or part of a month qua each property or qua the payee?

A
question arises as to whether the limit of Rs. 50,000 per month or part of a
month is qua each property or qua each payee. To illustrate if Mr. T has
taken on rent from Mr. L a residential house on a monthly rent of Rs. 15,000
and also a factory for a monthly rent of Rs. 40,000, if the limit of Rs. 50,000
is qua each property, Mr. T is not required to deduct tax at source u/s.
194-IB whereas if the limit of Rs. 50,000 is qua the payee, Mr. T is
required to deduct tax in accordance with the provisions of section
194-IB.  It appears that the limit of Rs.
50,000 per month or part of a month is not qua the property, but qua
the aggregate of all the rents which an individual or a HUF may pay to a payee.
The threshold of Rs. 50,000 per month or part of a month will have to be
examined qua each payee and not qua each property. Therefore, Mr.
T will be required to deduct tax in accordance with the provisions of section
194-IB.

Meaning of `rent’

The section requires deduction of tax from payment of “rent”.  The word “rent” is defined in Explanation to
section 194-IB as follows –

     “Rent means any payment, by whatever
name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any land or building or both.”

The definition of ‘rent’ is
similar to the definition in section 194-I. Considering the definition of rent,
it is clear that payment for use of any land or building or both constitutes
rent. However, payment for use of furniture will not be covered by this section. 

Whether payment for use of a part of a building is covered?

A  question arises as to whether payment for use
of a part of the building is covered by the tax deduction obligation imposed by
this section?  It is relevant to note
that the legislature has in sections 27, 194IA, 194LA, 194LAA, 269AB
specifically mentioned part of a building. 
However, in the context of section 194-I, CBDT has in Circular number
718, dated 22.08.1995 (for section 194-I) clarified as under:

     “Query No. 5 : Whether section 194-I
is applicable to rent paid for the use of only a part or a portion of any land
or building?

     Answer : Yes, the definition of the
term “any land” or “any building” would include a part or a
portion of such land or building.”

Further, in view of the legal maxim OmneMajuscontinet in
se minus which means “the greater contains the less” Atma Ram
vs. State of Punjab, AIR 1959 SC 519; ICI India Ltd. vs DCIT, (2004) 90 ITD 258
(Kol)] ], it is possible to argue that rent for part of a building would
also be covered by the provisions of this section.

Therefore, it appears that the
payment for use of a part of a building, say a flat or an office in a building
or an industrial gala in an industrial estate would constitute rent and would
be subject to TDS if other conditions of this section are satisfied.

Composite rent

Where rent is a composite amount
comprising of payment for use of land or building or both as also for other
facilities and amenities and the amount for use of land or building is known
separately then tax is required to be deducted only on the payment for use of
land or building or both.  However, if
the amount of payment for use of land or building or both is not known
separately, can one contend that the section will not apply and no deduction need
be made? One really needs to look at the substance of the arrangement – if it
is primarily for use of land or building, then provisions of section 194-IB
would apply. It is relevant to note that in the context of section 194-I, CBDT,
vide Circular No. 715 dated 8.8.1995, has clarified that tax would be
deductible on the entire amount.  The
relevant portion of the said Circular reads as follows -.

     “Question 24: Whether in a case
of a composite arrangement for user of premises and provision of manpower for
which consideration is paid as a specified percentage of turnover, section
194-I of the Act would be attracted ?

     Answer If the composite arrangement
is in essence the agreement for taking premises on rent, the tax will be
deducted u/s. 194-I from payments thereof.”

Payment to hotel 

A question arises as to
whether payment to a hotel for rooms hired would be covered by the provisions
of this section.  In the context of
section 194-I, the CBDT vide Circular No. 715, dated, 8-8-1995 clarified
that payments made by persons for hotel accommodation taken on regular basis
will be in the nature of rent subject to TDS u/s.194-I (see question 20 of the
Circular).The CBDT further clarified the above, vide Circular No. 5,
dated 30-7-2002 which reads as under:

     “Furthermore,
for purposes of section 194-I, the meaning of ‘rent’ has also been considered.
“‘Rent’ means any payment, by whatever name called, under any lease . . .
or any other agreement or arrangement for the use of any land. . .”
[Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its
ambit and scope. For this reason, payment made to hotels for hotel
accommodation, whether in the nature of lease or licence agreements are
covered, so long as such accommodation has been taken on ‘regular basis’. Where
earmarked rooms are let out for a specified rate and specified period, they
would be construed to be accommodation made available on ‘regular basis’.
Similar would be the case, where a room or set of rooms are not earmarked, but
the hotel has a legal obligation to provide such types of rooms during the
currency of the agreement.”

Further, Andhra Pradesh High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709] held that amount paid to the hotels
for use and occupation of hotel rooms squarely falls within the meaning of
rent.

In view of the above, it appears
that if payment is made to the hotels on a regular basis, it will constitute
rent.  However, for payment to hotels for
occasional use see the discussion hereafter.

Lease premium  

For the following reasons, payment of lease premium would not
require deduction of tax at source under this section –

i)   Lease premium is a capital receipt;

ii)  In the context of section. 194-I, courts have,
considering the facts of the case, held that payment of lease premium does not
require deduction of tax at source. Reference may be made to the following
decisions –

(a) Rajesh Projects (India) (P.) Ltd. vs. CIT
[2017] 78 taxmann.com 263 (Delhi)

(b) ITO vs. Navi Mumbai SEZ Pvt. Ltd. [2013]
38 taxmann.com 218 (Mum. – Trib.)

(c) Earnest Towers (P.) Ltd. [2015] 155 ITD
372 (Kol. – Trib.)

(d) ITO vs. Wadhwa& Associates Realtors (P.)
Ltd. [2013] 36 taxmann.com 526 (Mum. – Trib.)

iii)  The CBDT vide Circular No. 35, dated
13-10-2016 has also clarified that TDS under section 194-I is not
required in case of lump sum lease payment or one time upfront lease payment.

License fee paid under a leave and license agreement for use
of a flat/office/industrial gala

 A question arises as
to whether the payment for use of land or building or both made under a leave
and license agreement will qualify as `rent’. 
The definition of rent interaliacovers payment by whatever name called
under “any other agreement or arrangement for the use of land or building or
both”. 

The expression “any other agreement or arrangement” is not
defined in the section. Considering the context in which the expression has been
used, it appears that income-tax would require to be deducted on payment of
rent made under a leave and license agreement.

In
the context of section 194-I, the meaning of the expression “any other
agreement or arrangement” is explained by High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709 (AP)] as under :

     “9. The expressions ‘any payment, by
whatever name called’, and ‘any other agreement or arrangement’ occurring in
the definition of the term ‘rent’ in Explanation to section 194-I have
widest import. According to Black’s Law Dictionary, the word ‘any’ is
often synonymous with either ‘every’ or ‘all’. Its generality may be restricted
by the context in which that word occurs in a statute. The Supreme Court in Lucknow
Development Authority vs. M.K. Gupta AIR 1984 SC 787 dealing with the use
of the word ‘service’, in the context it has been used in the definition of the
term in Clause (o) of section 2 of the Consumer Protection Act, has opined that
the word ‘any’ indicates that it has been used in wider sense extending from
‘one to all’. In G. Narsingh Das Agarwal vs. Union of India [1967] 1 MLJ
197, the Court opined that the word ‘any’ means ‘all’ except where such a wide
construction is limited by the subject-matter and context of the statute. The
Patna High Court in Ashiq Hassan Khan vs. Sub-Divisional Officer, AIR
1965 Pat.446 (DB) and Chandi Prasad vs. Rameshwar Prasad Agarwal AIR
1967 Pat. 41 has held that the word ‘any’ excludes ‘limitation or
qualification’. In State of Kerala vs. Shaju[1985] Ker. LJ 33, the Court
held that the word ‘any’ is expressive. It indicates in the context ‘one or
another’ or ‘one or more’, ‘all or every’, ‘in the given category’; it has no
reference to any particular or definite individual, but to a positive but
undetermined number in that category without restriction or limitation of
choice. Thus, having regard to the context in which the expressions ‘any
payment’ and “any other agreement or arrangement” occurring in the
definition of the term “rent” (have been used) it only means each and
every payment (that has been) made to the petitioner-hotel under each and every
agreement or arrangement with the customers for the use and occupation of the hotel rooms.”

Warehousing charges  

In the context of section 194-I, the CBDT vide
Circular No. 718, dated 22-8-1995 clarified that TDS is required to be deducted
on warehousing charges. The relevant para of the said Circular reads as under:

    ” Query No. 3 : Whether the tax
is to be deducted at source from warehousing charges ?

     Answer : The term ‘rent’ as defined
in Explanation (i) below section 194-I means any payment by whatever name
called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any building or land. Therefore, the warehousing
charges will be subject to deduction of tax u/s.194-I.”

Is the section applicable to occasional renting?

 A question arises as to whether tax deduction
obligation under this section arises even in a case where an individual takes
on rent say a land or building occasionally for a period of one day/few days,
say for a wedding in the family and the amount of rent exceeds Rs. 50,000 for a
day, or where a person stays in a hotel for a few days and the aggregate room
rent exceeds Rs. 50,000.  Considering the
language of the section, it appears that the section envisages letting for a
continuous period, e.g., s/s.(2) requires deduction at the time of credit of
rent for the last month of the previous year or last month of tenancy. Similar
is the language in s/s.(4) which deals with the amount of tax to be deducted in
a case where provisions of s. 206AA are applicable. Also, if one looks at the
particulars to be filled in Statement-cum-Challan in Form No. 26QC through
which tax deducted has to be paid to the credit of Central Government one finds
that it requires details of “Period of tenancy” and the notes in the said Form
26QC state that Period of tenancy will be the period (i.e. months) for which
tenant is paying the rent.  Also, “Total
value of rent payable” is required to be mentioned. It is stated that Total
value of rent payable is equal to number of months for which rent is payable
multiplied by value of rent per month. These particulars and notes could be
indicative of the position that the section does not contemplate deduction of
rent in respect of occasional letting. 
However, the matter is not free from doubt and it can also be argued
that a day is also a part of a month and if the amount of rent for the period
the land or building is taken on rent is more than Rs. 50,000 the tax deduction
obligation under this section is triggered if the payer is covered by this
section.  In view of the penal
consequences which arise due to non-deduction, a safer view would be to deduct
tax even in such cases.  Though, in a
case where one has for some reason failed to deduct tax in some genuine case
one may be able to contend that the section requires letting for some
continuous period.

Rate at which tax is required to be deducted

Tax is required to be deducted @
5%. 

Rate at which tax is required to be deducted where payee does
not have PAN

In
a case where payee does not have PAN, section 206AA requires the deductor to
deduct tax at highest of the three rates mentioned in section 206AA. Therefore,
in a case where the payee does not have PAN, by virtue of provisions of section
206AA, deduction of tax could be @ 20%. However, sub-section (4) of section
194-IB clearly states that in a case where provisions of section 206AA apply,
deduction shall not exceed the amount of rent payable for the last month of the
previous year or the last month  of the
tenancy, as the case may be. To illustrate, if rent has been paid @ Rs.60,000
per month from 1.6.2017 to a person who does not have PAN, the amount of tax
required to be deducted at source would be Rs. 1,20,000  [20% of rent paid i.e. 20% (Rs. 60,000 x
10)].  However, by virtue of s/s. (4),
the deduction shall not exceed the amount of rent payable for last month of the
previous year. Therefore, deduction in this case will be restricted to Rs.
60,000.

Payment of rent by deducting tax at a rate lower than 5% or
without deduction of tax at source 

Section
197 which enables an assessee to obtain from the AO a certificate authorising
the payer to deduct tax at a lower rate has not been amended to incorporate a
reference to this section.  Therefore, an
assessee will not be able to obtain a certificate from the AO authorising the
payer to deduct tax at a rate lower than the one mentioned in section 194-IB
i.e. 5%.  Also, the payee may be having
brought forward losses or may not be liable to pay tax on the income by way of
rent being received by him since his total income may be likely to be less than
the maximum amount chargeable to tax. 
However, since the provisions of section 197A have not been amended, the
payee will not be able to issue a declaration in Form No. 15G / 15H authorising
the payer to deduct tax at a lower rate.

Does section require deduction of tax only once during the
previous year?

While it appears that the section requires deduction of tax only once
during the previous year, it may not necessarily be so in all cases. As has
been mentioned above, deduction is at the time of credit of rent of the last
month of the previous year or rent of the last month of tenancy, as the case
may be, to the account of the payee or at the time of payment thereof whichever
is earlier.  To illustrate, in a case
where an individual, living throughout the financial year 2017-18 in a rented
flat changes the flat rented by him (assuming rent is more than Rs. 50,000 per
month) say on September 30, 2017 and also on December 31, 2017, he will be
required to deduct tax thrice during the financial year 2017-18 on September
30, 2017 and December 31, 2017 (being last month of tenancy) and on March 31,
2018 (being last month of the previous year) assuming of course, that he has
credited rent to the account of the payee or has paid the rent on these dates
or thereafter.

If the rent for last month
of the previous year or last month of tenancy is not credited by the payer to
the account of the payee, the tax deduction obligation will arise at the time
of payment of such rent. In such a case, if the two dates fall in different
financial years, there will be difficulty on account of mismatch of TDS as
well.  To illustrate if assuming that in
the illustration referred to in the above para, if the individual assessee did
not credit rent to the account of any of the 3 landlords but paid rent to all 3
landlords on June 30, 2018, he will be required to deduct tax at the time of
payment i.e. on June 30, 2018 and therefore the credit for TDS will be
reflected in Form 26AS of the landlords in the AY 2019-20 whereas they may be
required to offer rental income for taxation in AY 2018-19.

Is the deductor required to obtain TAN?

Sub-section
(3) of section 194-IB clearly provides that the provisions of section 203A
shall not apply to a person required to deduct tax in accordance with
provisions of section194-IB. Therefore, an individual or a HUF deducting tax in
accordance with section194-IB is not required to obtain TAN. 

Time of payment of tax deducted to the credit of Central
Government

Rule 30(2B) requires that the tax
deducted shall be paid within 30 days from the end of the month in which
deduction is made.  The payment shall be
accompanied by a Challan-cum-statement in Form 26QC. This procedure is similar
to the procedure as that for tax deducted at source on payments for purchase of
an immovable property  u/s. 194-IA.

Certificate of deduction 

The payer of rent is
required to furnish to the payee a certificate of deduction of tax at source in
Form No. 16C within a period of 15 days form the due date for furnishing the
challan-cum-statement in Form 26QC.  The
certificate is to be generated and downloaded from the web portal specified by
the Principal Director General of Income-tax (Systems) or the Director General
of Income-tax (Systems) or the person authorised by him.

Payer to have PAN

Payment of tax at source
can be made only if the payer has PAN. Therefore, persons deducting tax at
source under this section, will have to obtain PAN, though they may otherwise
not be required to do so.

Rent for the period prior
to 1.6.2017 

Section 194-IB has been
inserted with effect from 1.6.2017. Therefore, in a case where the time of
deduction was before 1.6.2017, the provisions of this section will not apply.
However, if the time of deduction is on or after 1.6.2017, then the provisions
of this section will apply, and tax will have to be deducted at source even
though the rent pertains to a period prior to 1.6.2017. To illustrate, if rent
for April 2017 and May 2017 was paid prior to 1.6.2017, then tax is not required
to be deducted at source under this section, but if the rent for the month of
May 2017 is paid on 10th June, 2017, then tax will be required to be
deducted at source under this section (ofcourse, if all the other conditions
are satisfied).  Also, if an individual
has not paid rent for financial year 2016-17 but pays it after 1.6.2017, then
tax will be required to be deducted at source in accordance with the provisions
of this section.

Consequences of non-deduction

In a case where an individual of a HUF, required to deduct
tax in accordance with the provisions of s. 194-IB fails to do so or having
deducted the amount fails to pay the whole or part of the tax, such individual
or HUF will be deemed to be an assessee-in-default u/s. 201 of the Act.  This shall be in addition to his obligation
to pay interest/penalty under other provisions of the Act.

Conclusion

Salaried employees paying
rent whether or not claiming exemption u/s.10(13A); individuals/HUFs paying
rent on occasional basis such as individuals going for a vacation and paying
rent for a bungalow/group of bungalows, rent for ground taken on occasion of
marriage in the family, etc.; small businessmen who are not covered by
tax audit, etc. would be required to consider the applicability of the
provisions of this section.

Tax Issues in Computation of Taxable Income for Companies Adopting Ind-AS

The Challenge:

Tax Practioners would need to have knowledge of both
standards i.e. Indian Accounting Standards (Ind-AS) and Income Computation and
Disclosure Standards (ICDS) to assist the companies adopting Ind-AS in
finalising their tax returns

One
of the challenges that tax practitioners will face while finalising tax returns
for assessment year (AY) 2017-18, is in computation of the taxable income of
companies, which have adopted Ind-AS for the first time in the financial year
(FY) 2016-17.  It is normally the profits
as per the profit and loss account which is the starting point for computation
of taxable income. So far, only adjustments required to be made under the
Income-tax Act (the Act) were being made to the computation of taxable income.
However, with the advent of Ind-AS and the corresponding introduction of ICDS,
which is also applicable for the first time from AY 2017-18, a significant
number of adjustments would have to be made to the profit as per the profit and
loss account, to arrive at the taxable income. This requires a proper
understanding not only of ICDS, but also of the differences between accounts
prepared under Ind-AS and those prepared under the earlier accounting standards
(existing AS).

In this article, an attempt has
been made to analyse and list out some significant adjustments which are likely
to be made to the profit and loss account, to arrive at the taxable income of
the companies’ whose accounts are prepared adopting Ind-AS.

Indian Accounting Standards (Ind-AS)

The MCA had notified
IFRS-converged Ind-AS as Companies (Indian Accounting Standards) Rules, 2015
vide Notification dated 16th February 2015. The said Notification
also laid down the roadmap for the applicability of Ind-AS for certain class of
companies as under:

Roadmap for implementation of Ind-AS

Sr. No.

Companies covered

Voluntary
phase

Under Phase I, any company had the
option to adopt Ind-AS on voluntary basis for FY 2015-16.

Mandatory
phase 1

Adoption
of Ind-AS is mandatory for the FY 2016-17 for:

(a) Companies
listed/in process of listing on Stock Exchanges in India or Outside India
having net worth > INR 500 crores,

(b) Unlisted
Companies having net worth > INR 500 crore, and

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

Mandatory
phase 2

Ind-AS
from FY 2017-18 would be mandatory for:

(a) Companies
which are listed/or in process of listing inside or outside India on Stock
Exchanges not covered in Phase I (other than companies listed on SME
Exchanges),

(b) Unlisted
companies having net worth INR 500 crore> INR 250 crore, and

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

Mandatory
phase 3

Banks
and NBFCs would be required to adopt Ind-AS from FY 2018-19. Insurance
companies would be required to adopt
Ind-AS from FY 2020-21.

All companies adopting
Ind-AS are required to present comparative information for earlier FY, as per Ind-AS. Accordingly, they will have to apply Ind-AS for preparation of
standalone as well as consolidated Balance sheet and consolidated Statement of
Profit and Loss for FY 2015-16. Once Ind-AS is applicable to the entity for one
year, it has to be mandatorily followed for all subsequent FYs.

Companies listed on SME exchange are not required to apply
Ind-AS. Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards notified in Companies (Accounting Standards)
Rules, 2006 issued by the ICAI as revised vide notification dated 30th March
2016 (“existing AS”).

Income Computation and Disclosure Standards (ICDS)

The Central Government vide Notification No. SO 892(E) dated
31st March 2015 notified 10 ICDS. These ICDS were applicable from FY
2015-16 (AY 2016-17). Subsequent to notification of the ICDS, a number of
representations were received for postponement/cancellation of ICDS. The
implementation of ICDS was kept on hold by the CBDT in July 2016.

In September 2016, the CBDT rescinded the earlier notified
ICDS, and notified revised ICDS (I to X) applicable from FY 2016-17 (AY
2017-18).

Adjustments required to the Profit as per Statement of Profit
& Loss for Companies adopting Ind-AS

1. Revenue recognition from sale
of goods on deferred payment basis

Revenue recognition as 
per Ind-As

As per Ind-AS 18 which deals with Revenue recognition,
revenue shall be measured at the fair value of
the consideration received or receivable. Paragraph 11 of Ind-AS 18 provides as
under:

“11. In most cases, the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents
received or receivable. However, when the inflow of cash or cash equivalents is
deferred, the fair value of the consideration may be less than the nominal
amount of cash received or receivable. For example, an entity may provide
interest-free credit to the buyer or accept a note receivable bearing a
below-market interest rate from the buyer as consideration for the sale of
goods. When the arrangement effectively constitutes a financing transaction,
the fair value of the consideration is determined by discounting all future
receipts using an imputed rate of interest. The imputed rate of interest is the
more clearly determinable of either:

(a)    the prevailing rate
for a similar instrument of an issuer with a similar credit rating; or

(b)    a rate of
interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.”

In such arrangements of deferred receipt of consideration,
the fair value of the consideration is measured by discounting all future
receivables using an imputed rate of interest i.e. a rate of interest that
discounts the nominal amount of the instrument to the current cash sales price
of the goods or services.

The difference between the
fair value and the nominal amount of the consideration would be considered as
interest. Such interest would be recognised as revenue using the effective
interest rate (EIR) method as per Ind-AS 109. EIR is a method of calculating
the amortised cost of a financial asset or a financial liability and allocating the interest income or interest expense
over the relevant period.

Revenue
recognition as per ICDS

As per ICDS IV which deals with basis
of revenue recognition, the revenue from sale of goods is to be recognised when
the seller of goods has transferred to the buyer the property in the goods for
a price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership.

As per ICDS IV, the term “Revenue” has been defined to mean
gross inflow of cash, receivables or other consideration arising in the course
of the ordinary activities of a person from the sale of goods.

Difference
between Ind-AS and ICDS

There is a significant difference in the basis of revenue
recognition as per Ind-AS 18 and ICDS IV in respect of sale of goods on
deferred payment basis. As per Ind-AS 18, the seller has to bifurcate the total
sales into fair value of consideration and interest. Fair value of
consideration would be recognised as revenue straightaway in the year of sale,
whereas interest income would have to be recognised as revenue over the
relevant credit period.

The concept of bifurcation of sale consideration in respect
of sale of goods on deferred payment basis is not present in ICDS. As per ICDS,
entire income from sale of goods will be recognised as revenue in the year of
sale, without any bifurcation of total sales consideration into fair value of
consideration and interest.

An Example

An example would explain the above
difference between the treatment under Ind-AS 18 and ICDS IV. A company which
has adopted Ind-AS has sold goods for Rs. 22 lakh on 1st March 2017
to a customer with 10 months credit period. The same goods are sold to other
customers on cash basis at Rs. 20 lakh. Accordingly, as per Ind-AS 18, the
company would have to recognise revenue from sale of goods at Rs. 20 lakh. Rs.
2 lakh would be considered as interest, which would be recognised as revenue in
terms of Ind-AS 109.

Accordingly, a credit
period of 10 months starts from 1 March 2017, Rs. 20,000, being 1/10th of interest
of Rs. 2,00,000, would be recognised as revenue in the FY 2016-17. Balance
interest of Rs. 1,80,000 would be recognized as revenue in the FY 2017-18.
Hence, what would be recognized as revenue in the FY 2016-17 would be Rs. 20
lakh of sales and Rs. 20,000 of interest. Rs. 1,80,000 of interest would be
recognized as revenue in the FY 2017-18. However, as per ICDS IV, entire sale
consideration of Rs. 22 lakh would be recognised as revenue in FY 2016-17.

Impact of
the above differences

CBDT vide Notification No. 10/2017
dated 23 March 2017, in response to question no. 5 has clarified that “ICDS
shall apply for computation of taxable income under the head ” Profit and gains
of business or profession” or “Income from other sources” under the Income Tax Act.
This is irrespective of the accounting
standards adopted by companies i.e. either Accounting Standards or Ind-AS.”

In view of the above
clarification of the CBDT, the company would have to recognise entire sale
consideration of Rs. 22 lakh as revenue in its computation of income for AY
2017-18, even though what has been recognized as revenue in Ind-AS compliant
financials is only Rs. 20.02 lakh.

The company, while preparing computation of taxable income
would have to give effect to such differences which arise as per Ind-AS as well
as the Act/ ICDS. The company would also have to maintain details of such
income streams which gets recognised as revenue in different FYs on account of
different basis of revenue recognition as per Ind-AS and ICDS.

2.    Revenue recognition from composite/bundles transactions

Impact
Revenue Recognition as per Ind-AS

As per paragraph 13 of
Ind-AS 18, the revenue recognition criteria are usually required to be applied
separately for each transaction. However, where the transaction is a composite/
bundled transaction, the revenue recognition criteria has to be applied
separately for each identifiable component of a single transaction, in order to
reflect the substance of the transaction. As per the example given in Ind-AS
18, when the selling price of a product includes an identifiable amount for
subsequent servicing, that amount relatable to subsequent servicing is deferred
and recognised as revenue over the period during which the service would be
performed.

As per paragraph 19 of
Ind-AS 18, “revenue and expenses that relate to the same transaction or
other event are to be recognised simultaneously, as the matching concept of
revenues and expenses. As per the example given in Ind-AS 18, all expenses
including future warranties and other costs to be incurred after the shipment
of the goods, can normally be measured reliably. Such expenses which are to be
incurred in future, directly relatable to sale of goods should be recognised as
expenses in the year of sale, when the other conditions for the recognition of
revenue are satisfied. However, when the expenses to be incurred in future
cannot be measured reliably, any consideration already received for the sale of
the goods should be recognised as a liability”.

Accordingly, where sale of goods comprises of composite/
bundled transaction, the company would have to identify each individual
transaction forming part of composite/ bundled transaction. The company would
have to apply revenue recognition criteria to each transaction. Any expenses to
be incurred on such composite/ bundled transaction have to be measured reliably
and provided for as a liability. Where such expenses to be incurred cannot be
measured reliably, any consideration already received for the sale of the goods
has to be recognised as a liability.

Revenue recognition as per ICDS

As per ICDS IV, there is no provision for splitting up of the
sale consideration in respect of a composite/bundled transaction. The revenue
would be the gross inflow arising from sale of goods, and shall be recognised
when the seller of goods has transferred to the buyer, the property in the
goods for a price or all significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control over the
goods transferred. Therefore, where no separate charge is levied for the
servicing, the entire sales proceeds would be treated as revenue from the sale
of goods.

As per ICDS X, a present obligation arising from past events,
the settlement of which is expected to result in an outflow from the person of
resources embodying economic benefits should be provided for as a liability.
Therefore, a provision for warranty expenses to be incurred on sales effected,
made on a scientific or actuarial basis, would be allowable as a deduction
[which is also in accordance with the Supreme Court decision in the case of Rotork
Controls India (P) Ltd vs. CIT (2009) 314 ITR 62(SC)].

Difference between  Ind-AS and ICDS

Ind-AS, in respect of transaction involving composite/
bundled transactions requires the revenue recognition criteria to be applied
separately for each identifiable component of a single transaction. Revenue and
expenses relating to the same transaction or other event should be recognised simultaneously.
Where such expenses to be incurred in future cannot be measured reliably, any
consideration already received for the sale of the goods should be recognised
as a liability.

ICDS IV however does not give any
guiding principles on bifurcation of consideration for each identifiable
component of a single transaction, forming part of composite/ bundled
transaction. ICDS IV does not allow treatment of consideration already received
for the sale of goods as a liability, where expenses to be incurred cannot be
measured reliably.

An example

An
example on the above would explain the difference between the Ind-AS 18 and
ICDS IV. A company which has adopted Ind-AS, is in the business of
manufacturing and sale of cars. It sold a car to a customer at Rs. 5 lakh on 1st
January 2017. The sale of car also includes free after sale service for a
period of 2 years and free warranty for 1 year. The standard price of after
sale service for 2 years, included in sale price of Rs. 5 lakh, would be Rs.
50,000.

As per Ind-AS 18, the company would have to separately
identify each component of single transaction of sale of car i.e. it has to
bifurcate composite/ bundled transaction of sale of car into separate
identifiable transaction viz. sale of car, rendering of after sale services and
providing warranty.

Accordingly, Rs. 4,50,000 (i.e. sale consideration of Rs. 5
lakh less Rs. 50,000 towards 2 years after sale services) would be recognised
as revenue in the FY 2016-17. Revenue recognition in respect of after sales services
of Rs. 50,000 has to be spread over the 2 years period. Rs. 6,250 for January
to March 2017 has to be recognized as revenue in the FY 2016-17 and balance Rs.
43,750 would be recognised as revenue in the FY 2017-18 and FY 2018-19.

The company would have to estimate the expenditure it would
incur in future over the free warranty, which can be recognised as expenses,
based on principle of matching concept in the year of sale of car. If it is not
in a position to estimate expenses to be incurred as per Ind-AS 18, sale
consideration relatable to free warranty should be recognised as liability in
FY 2016-17 and should be recognised as revenue in subsequent years.

ICDS IV, however is silent on bifurcation of consideration
for each identifiable component of a single transaction, forming part of
composite/ bundled transaction. Further, ICDS does not allow treatment of
consideration already received for the sale of goods as liability, where
expenses to be incurred in future cannot be measured reliably.

Impact of the above differences

Taxation of after-sales
services

In view of the fact that ICDS
does not give any guiding principles on bifurcation of each identifiable
component of composite/bundled transaction, the company may not be able to
bifurcate the consideration of Rs. 50,000 for after sale services of 2 years from
the sales price of cars. Therefore, the gross sales price may have to be
considered as revenue in the year of sale. The question arises whether the
company can claim deduction for the estimated future expenditure that it may
incur on after sales service.

Based on the provisions of
paragraph 5 of ICDS X, if such expenditure is estimated on a scientific basis,
such future liability may be recognised as a provision under the ICDS, which is
a liability. This is on account of the fact that there is a present obligation
as a result of a past event, it is reasonably certain that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of obligation.
Therefore, one can take a view that the estimated liability for after sales
service is an allowable deduction u/s. 37 read with ICDS X.

Warranty expenses

It is a common practice for car manufacturers to make
provision for warranty expenses in the books, based on past experience,
historical data of actual warranty expenses incurred or some ad-hoc estimate
and claim deduction thereof u/s. 37 of the Act.

The issue on allowability
of warranty provision has been settled by the Supreme Court. The Supreme Court
in the case of Rotork Controls vs. CIT (314 ITR 62) (SC) has allowed the
assessee’s claim for deduction of warranty provision as expense on the ground
that “warranty became integral part of the sale price of the product and a
reliable estimate of the expenditure towards such warranty was allowable.”
In this case, the Supreme Court held that all the conditions for recognising a
liability were fulfilled – arising out of obligating events, involving outflow
of resources and involving reliable estimation of obligation.

However, in the tax return, where the company is not in a
position to estimate expenditure to be incurred on warranty on some
scientific/reliable basis, it would not be in a position to postpone revenue
recognition from the sale consideration of car. Such treatment is permitted as
per Ind-AS, but has no specific permission in ICDS. However, where such
warranty provision is made on a scientific basis, under paragraph 5 of ICDS X,
the liability for warranty would be regarded as a provision, which is defined
as a liability which can be measured only by using a substantial degree of
estimation, and would therefore be an allowable deduction.

The company would have to maintain details of such different
basis of revenue recognition as per Ind-AS and ICDS i.e. after sales services
in the above example, to arrive at correct taxable income.

3.    Revenue
recognition in case of rendering of services

Revenue recognition as per Ind-AS

As per Ind-AS 18, the recognition of revenue from rendering
of services is measured by reference to the stage of completion of a
transaction i.e. the percentage of completion method. Under this method,
revenue is recognised in the accounting periods in which the services are
rendered. As per paragraph 20 of Ind-AS 18, “percentage of completion method has
to be followed where the outcome of a transaction can be measured reliably.
Such reliable measurement of outcome requires fulfilment of the following
conditions:

(a) the amount of revenue can be measured reliably;

(b) it is
probable that the economic benefits associated with the transaction will flow
to the entity;

(c) the
stage of completion of the transaction at the end of the reporting period can
be measured reliably; and

(d) the
costs incurred for the transaction and the costs to complete the transaction
can be measured reliably”.

As per paragraph 26 of Ind-AS 18, “when the outcome of the
transaction involving the rendering of services cannot be estimated reliably,
revenue shall be recognised only to the extent of the expenses incurred and are
recoverable”.

As per paragraph 27 of this Ind-AS, “where execution of
the transaction has just started or has only reached preliminary stage
(referred to as early stage of a transaction), it may not be possible to
estimate outcome of the transaction involving the rendering of services. In
such situation, it is permissible for the entity to recognise revenue only to
the extent of costs incurred that are expected to be recoverable”.

Paragraph 28 states “when the outcome of a transaction
cannot be estimated reliably and it is not probable that the costs incurred
will be recovered, revenue is not recognised and the costs incurred are
recognised as an expense”.

Revenue recognition as per ICDS

As per ICDS IV dealing with
Revenue Recognition, revenue from service transactions shall be recognised by
the percentage of completion method. It is expressly provided that ICDS III on
Construction contracts shall apply to the recognition of revenue and associated
expenses, for a service transaction. In view of the express applicability of
ICDS III to a service transaction, where service transactions are at an early
stage, it would be possible for the entity to recognise revenue only to the
extent of the expenses incurred (as under Ind AS). However, ICDS IV provides
that the early stage of a contract cannot extend beyond 25% of the stage of
completion. Therefore, under ICDS IV, recognition of revenue by percentage of
completion method is compulsory beyond 25% of the stage of completion.

When services are provided by an indeterminate number of acts
over a specific period of time, revenue may be recognised on a straight line
basis over the specific period.

ICDS, however provides a
concession to certain service contracts with duration of less than 90 days. In
respect of such service contracts with duration less than 90 days, the assessee
has an option to treat revenue from such contracts to be recognised when the
rendering of services under that contract is completed or substantially
completed.

Difference between the Ind-AS
and ICDS

Ind-AS as well as ICDS requires recognition of revenue from
rendering of services as per the percentage of completion method for all
services. Under Ind-AS, percentage of completion method is to be adopted only
once reliable measurement of outcome is possible, which is possible only when
revenues and expenses can be measured reliably, and stage of percentage of
completion can also be measured reliably. There is no specific stage specified
in the Ind-AS from when the percentage of completion method becomes applicable,
but it would depend upon the conditions being satisfied in each case. However,
under ICDS IV, percentage of completion method would have to be followed once
the 25% stage of completion is reached, irrespective of whether the outcome can
be measured reliably.

Similarly, under Ind-AS, it is possible that when the outcome
of a transaction cannot be estimated reliably and it is not probable that the
costs incurred will be recovered, revenue is not recognised and the costs
incurred are recognised as an expense, resulting in a loss. However, under ICDS
IV read with ICDS III, if 25% threshold has been crossed, only the
proportionate loss based on the percentage of completion can be recognised.
ICDS is silent as to what happens in the early stages when outcome cannot be
reliably measures and the costs will not be recovered.

Further, ICDS additionally
grants an option to the assessee to recognize revenue from the contract with
project duration less than 90 days only on completion of contract or when it is
substantially completed. There is no such provision in Ind-AS 18.

An example

An example on the above would explain the difference between
Ind-AS 18 and ICDS IV. The company is engaged in the logistic business, whereby
it arranges inbound/ outbound transportation of goods. The company has huge
volume of transactions. In all cases of inbound/outbound transportation of
goods, the completion of transport of goods does not take more than 90 days period.

As on the last day of reporting period, the said company has
various pending logistic contracts, which have not reached 100% completion. The
company accordingly has to measure contract revenue from such contracts in
progress, only to the extent of percentage of logistics work complete. The said
estimation requires information of percentage of logistics work completed for
all contracts in progress, and the shipments in many of the contracts may be
mid-road/mid-sea/mid-air on the last day of the reporting period.

For Ind-AS purposes, the
company has to work out revenue from rendering of services by following
percentage of completion method, where the outcome of the contract (including
the stage of completion) can be reliably measured. Accordingly, it would have
to work out the percentage of contract completed for each contract in progress,
and the proportionate revenue and expenditure of each contract in progress, as
on the last day of the reporting period, where the outcome (including stage of
completion) can be reliably measured. However, as per ICDS, while filing the
tax return, the company can opt to offer the entire income from logistics
contracts only on completion of the entire work.

In many cases of logistics contracts, it may not be possible to
reasonably estimate the stage of completion. In that situation, under Ind AS,
the revenue from the contract would be recognised only to the extent of costs
incurred, and the profit would effectively be accounted for on completion of
the contract, as is the case under ICDS.

Impact of the above differences

The company, for commercial
reasons, may want to offer income from logistics contracts, with duration less
than 90 days, to income tax by following ICDS, only on completion of the
contract, where completion of services falls in a different FY. Such a company
would have the option to recognise revenue from contracts with duration of less
than 90 days, only on completion of the
contract. This would be irrespective of the fact that as per Ind-AS, it has recognised contract revenue by reference to the stage of
completion of the contract activity, at the reporting date. In normal
circumstances, where any contract commences as well as is completed in the same
year, revenue recognition as per Ind-AS 18 and ICDS IV would be the same.
However, where any contract with duration of less than 90 days commences and is
completed in a different FY, the company would have to maintain detailed
records, both for Ind-AS purposes as well as ICDS, where it opts for
recognising income on completion basis.

4.    Revenue recognition
in case of Construction contracts

Revenue recognition as per Ind-AS

As per Ind-AS 11
‘Construction Contracts’, the recognition of revenue and expenses is required
to be made by reference to the stage of completion of a contract i.e.
percentage of completion method. Under this method, contract revenue is matched
with the contract costs incurred in reaching the stage of completion, resulting
in the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed.

As per paragraph 32 of Ind-AS 11, when the outcome of a
construction contract cannot be estimated reliably (a) revenue shall be
recognised only to the extent of contract costs incurred that probably will be
recoverable, and (b) contract costs shall be recognised as an expense in the
period in which they are incurred.

Paragraph 33 of Ind-AS 11 explains a situation, where it
would be necessary for the entity to recognise contract revenue only to the
extent of contract costs. As per the said paragraph, “where the Construction
contract is at the early stages of a contract, it is often the case that the
outcome of the contract cannot be estimated reliably. In such a situation,
contract revenue can be recognized only to the extent of contract costs
incurred that are expected to be recoverable”. Ind-AS 11 also requires
recognition of expected loss, when it is probable that total contract costs
will exceed total contract revenue. This amount of expected loss is allowed to
be recognised as an expense immediately, irrespective of whether work has
commenced on the contract and the stage of completion of contract activity.

Revenue recognition as per ICDS

As per ICDS III dealing with Construction contracts, contract
revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity, at the reporting date.

The said ICDS however gives concessional treatment to
contracts in the early stage of execution i.e. contracts which have not
completed a percentage of up to 25% of the total construction. During the early
stages of a contract, where the outcome of the contract cannot be estimated
reliably, contract revenue can be recognized only to the extent of costs incurred.

Difference between the Ind-AS
and ICDS

Ind-AS 11 as well as ICDS III, both permit recognition of
revenue only to the extent of expenses incurred, where the project is at an
early stage of execution and outcome cannot be estimated reliably. Ind-AS
however does not give any specific percentage of the construction activity to
be completed for the construction project to be categorised as ‘early stage of
execution’. Accordingly, for the construction activity where even 30% of the
total construction has been completed, revenue may be recognized only to the
extent of cost incurred, if based on the facts of the particular construction
contract it is established that the outcome cannot be estimated reliably.

The Institute of Chartered Accountants of India (ICAI) has
issued ‘The Guidance Note on Accounting of Real Estate Transactions (revised
2016)’ (GN) which is applicable to entities to which Ind-AS is applicable. As
per the said GN, a reasonable level of development is not achieved if the
expenditure incurred on construction and development costs is less than 25% of
the construction and development costs. As per the GN, a reasonable level of
development is measured with reference to ‘construction and development cost’
and excludes ‘Cost of land and cost of development rights’ as well as
‘Borrowing cost’. Though the GN applies only to real estate transactions and
not to construction contracts, it may be possible to apply this level of 25%
for construction contracts.

ICDS III, however expressly provides that the early stage of
a contract shall not extend beyond 25% of the stage of completion.

Further, Ind-AS requires a company to recognize the entire
expected loss, when total contract costs is likely to exceed total contract
revenue. However, ICDS does not specifically provide for recognition of
expected loss. The expected loss can be recognised only on percentage of
completion method, i.e. proportionately.

Impact of the above differences

 The stage of profit
recognition by following percentage of completion method under Ind-AS and ICDS
may differ on account of the differing concepts of early stage of contract
where outcome cannot be reasonably estimated. While, as per accounts, profits
may not be recognized, it is possible that, under ICDS, profits have to be
recognised.

Where such company has recognised the entire loss on the
contract in the profit and loss account on the ground that total contract costs
is likely to exceed total contract revenue, it would not have the benefit of
the entire expected loss as per ICDS. In the tax return, irrespective of that
fact that there would be a loss at the end of the project, it would have to
recogniswe contract revenue (and therefore estimated total loss) by following
the percentage of completion method, at the year-end.

5.    Purchases of goods
on deferred payment terms

Cost of purchase as per Ind-AS
2

As per Ind-AS 2, the cost of inventories shall comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Further, where the inventory
is purchased on deferred payment terms, and the purchase price is higher than
the purchase price for such inventory on normal credit terms basis, the
arrangement effectively contains a financing element. In such a situation, the
difference between the actual purchase price and the purchase price of goods
with normal credit terms, is recognized as financing cost.. The said financing
cost has to be charged to the statement of profit and loss, over the period of
the financing.

Cost of purchase as per ICDS
II As per ICDS II which deals with valuation of inventories, the costs of
purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition.
However, interest and other borrowing costs shall not be included in the cost
of inventories.

Difference between the Ind-AS
and ICDS

There is a difference in the cost of purchase as per Ind-AS 2
and ICDS II. As per Ind-AS 2, where goods are purchased on deferred payment
terms, the difference between the purchase price with normal credit terms and
the amount paid with deferred payment term, is considered as interest expense
and would have to be excluded from the purchase price of goods. However, as per
ICDS II, entire purchase price paid, irrespective of outright purchase price or
purchase on deferred payment terms, is considered as cost of purchase. This
would result in difference in the valuation of stock, as well as timing
difference on account of charge of the financing cost to the Profit & Loss
Account over the finance period in accordance with Ind AS, as against treatment
as purchase as per ICDS.

An example

An example on the above would explain the difference between
the Ind-AS 2 and ICDS II. The company has purchased goods from the seller at
Rs. 75,000 on 1st January 2017 with 12 months credit period. The
same goods could be purchased at Rs. 65,000 with normal credit period of 3
months generally allowed in the Industry. As per Ind-AS 2, difference of Rs.
10,000 would be considered as interest expense, which can be charged to profit
and loss account over the period of financing. Accordingly, interest expense of
Rs. 10,000 beyond normal credit period of up to 31st March 2017,
would be considered as interest expense only in FY 2017-18. Where the company
has purchased such inventory out of borrowed funds, any interest paid would
have to be expensed out to the profit and loss account and would not be
considered as ‘cost of inventory’.

However, as per ICDS II, entire purchase cost of Rs. 75,000,
irrespective of deferred payment terms, would be treated as cost of purchases,
and would be included in the cost of inventory, if the said goods are lying in
stock as on 31st March 2017.

Impact of the above differences

Accordingly, there would be
difference between the cost of purchases as per Ind-AS and ICDS. The company
would have to maintain records of such interest expense arising because of
deferred payment basis and which has been charged to profit and loss account in
subsequent FY. Such interest which has been charged to the profit and loss
account both in current FY as well as in subsequent FY would, under ICDS, have
to be treated as part of purchase cost/ inventory valuation in the current FY.

The company would also have to maintain details of all such
differences which arise because of difference in Ind-AS and ICDS.

6.    Initial cost of
fixed assets purchased on deferred settlement terms

Initial cost of fixed assets as per Ind-AS 16

As per Ind-AS 16, an item of Property, Plant and Equipment
(PPE) that qualifies for recognition as an asset shall be measured at its cost.
The cost of such asset is the cash price
equivalent at the recognition date. If payment is deferred beyond normal
credit terms, difference between the cash price equivalent and the total
payment towards purchase of assets, is recognized as interest over the period
of credit, unless such interest is capitalised in accordance with Ind-AS 23
which deals with borrowing cost. Ind-AS 23 lays down conditions as to when
borrowing cost can be added to the cost of
assets purchased.

Actual cost as per ICDS V

As per ICDS V dealing with tangible fixed assets, the actual
cost of an acquired tangible fixed asset shall comprise of its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and
any directly attributable expenditure on making the asset ready for its
intended use.

Difference between the Ind-AS
and ICDS

There is a material difference in the cost of fixed assets as
per Ind-AS 16 and ICDS V. As per Ind-AS 16, cash price equivalent at the
recognition date would be regarded as initial cost of fixed assets. However, as
per ICDS V, entire purchase price of the fixed assets, irrespective of deferred
payment terms, would be considered as actual cost of fixed assets. Accordingly,
any financing cost arising because of bifurcation of payment towards purchase
of assets into cash price equivalent and the financing element, would have to
be added to written down value of the respective ‘block of assets’ in the year
of purchase, irrespective of its treatment as per Ind-AS.

An example

An example on the above would explain the difference between
the Ind-AS 16 and ICDS V. The company has purchased a machine for Rs. 5,00,000
on 31st March 2017 with 12 months credit period. The said machine
had cash price of Rs. 4,50,000. As per Ind-AS 16, difference of Rs. 50,000
would be considered as finance cost over the period of financing. Accordingly,
Rs. 50,000 would be considered as finance cost in FY 2017-18, as the same
pertains to period after 31st March 2017.

Impact of the above differences

Accordingly, there would be difference between the cost of
PPE as per Ind-AS and ICDS. The company would have to maintain records of such
finance cost arising because of difference between the cash price equivalent
and the total payment towards purchase of PPE. Such cost, which would be
charged to the statement of profit and loss in subsequent FYs, would have to be
added to the cost of the respective ‘block of assets’, in order to comply with
ICDS provisions. The company would be entitled to depreciation on such cost in
the current year itself and would increase its block of assets by the said
amount, even though the same would be charged to the statement of profit and
loss in the next FY.

7.    Interest free loan
to subsidiary or to employee (for long term)

Recognition of
interest free loan given as  per Ind-As 109

Ind-AS 109 requires that financial assets and liabilities
should be recognised on initial recognition at fair value, as adjusted for the
transaction cost. In accordance with Ind-AS 109 ‘Financial Instruments’, in
case the loan is for a period exceeding one year (i.e. long term) the lender
would recognise the loan at its fair value as per the EIR method. Accordingly, interest
free loan exceeding one year given by the parent company to its subsidiary or
by an employer to its employee would be recorded at fair value, which would be
less than the amount of loan given. In spite of the fact that the said loan was
interest free, notional interest on fair value of the loan would be credited as
interest income in the profit and loss.

Recognition of interest free loan given to subsidiary/employee
as per ICDS

Under ICDS, there is no concept of recognition of financial
assets at fair value. There is also no concept of recognition of notional
interest as income in the statement of profit and loss. For income tax
purposes, the said interest free loan given would be recorded at the nominal
amount of the loan. No interest would be regarded as accruing on the loan,
since it is contractually an interest-free loan.

Difference between the Ind-AS
and ICDS

As per Ind-AS, every year the imputed interest income will be
provided in the statement of profit and loss for the year, with the corresponding
debit to the value of loan reflected as an asset. Over the years, loan amount
will finally be reinstated to what would be the repayable amount (the amount
that was received originally). Simultaneously, an appropriate amount will be
transferred from equity to the statement of profit and loss account, which will
have the effect of negating the interest income in the statement of profit and
loss. .

Impact of the above differences

Such notional interest which has been credited to the
statement of profit and loss of the parent company/employer would not be
“income” as per the Act. Accordingly, the same would have to be reduced from
the total income of the parent company/employer to arrive at taxable income.

8.    Borrowing cost

Borrowing cost as per Ind-AS
23

As per Ind-AS 23 dealing with borrowing costs, the borrowing
costs includes interest expense calculated using the effective interest method,
finance charges in respect of finance leases recognised in accordance with
leases and exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Ind AS 23 defines a qualifying asset as an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale. As per paragraph 7 of Ind-AS 23, the following types of assets may
be qualifying assets: (a) inventories, (b) manufacturing plants, (c) power
generation facilities, (d) intangible assets, (e) investment properties and (f)
bearer plants. Financial assets and inventories that are manufactured or
otherwise produced, over a short period of time are not qualifying assets.
Further, assets that are ready for their intended use or sale when acquired are
not qualifying assets.

As per paragraph 12 of Ind-AS 23, “the amount of borrowing
costs eligible for capitalization is the actual borrowing costs incurred during
the period less any investment income on the
temporary investment of those borrowings.”

Further, as per paragraph 14 of Ind-AS 23, “where the
entity has borrowed funds generally (and not for specific purpose of acquiring
qualifying assets) but used such borrowed funds for acquisition of a qualifying
asset, borrowing costs eligible for capitalisation are to be determined, by
applying a capitalisation rate to the expenditures on that asset”.

As per paragraph 22 of Ind-AS 23, “an entity shall cease
capitalising borrowing costs, when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete”.

Borrowing costs as per ICDS IX read with section 36(1)(iii)

Section 36(1)(iii) provides for deduction of interest in
respect of capital borrowed for the purposes of business. The proviso to
section 36(1)(iii) requires that interest in respect of capital borrowed for
acquisition of an asset from the date of borrowing till the date the asset is
put to use, is not allowable as a deduction.

As per ICDS IX, borrowing costs are interest and other costs
incurred by a person in connection with the borrowing of funds and include (i)
commitment charges on borrowings, (ii) amortised amount of discounts or
premiums relating to borrowings, (iii) amortised  amount 
of  ancillary  costs 
incurred  in  connection 
with  the arrangement of
borrowings and (iv) finance charges in respect of assets acquired under finance
leases or under other similar arrangements.

As per ICDS IX, the term
“Qualifying asset” for the purposes of capitalisation of specific borrowing
costs means: (i) land, building, machinery, plant or furniture, being tangible
assets, (ii) know-how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature, being intangible
assets and (iii) inventories that require a period of twelve months or more to
bring them to a saleable condition.

As per ICDS IX, general borrowing costs are capitalized to
the qualifying assets based on a particular formula. For the purpose of
capitalisation of general borrowing costs, the term “Qualifying Asset” means
any asset which necessarily requires a period of 12 months or more for its
acquisition, construction or production. Further, an entity shall cease
capitalizing borrowing costs, when such asset is first put to use or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Difference between the Ind-AS
and ICDS

A major difference between Ind AS 23 and ICDS IX is in
respect of capitalisation of costs of borrowings taken specifically for
acquisition of an asset. Under ICDS IX read with the proviso to section
36(1)(iii), cost of borrowings taken for acquisition of all fixed assets, up to
the date of put to use, is to be capitalised. However, under Ind AS 23, qualifying
assets, where such borrowing costs are to be capitalised, are only those assets
which necessarily take a substantial period of time to get ready for their
intended use or sale, and not all fixed assets. This requires judgement to be
applied and can be subjective – the period for qualifying assets under Ind-AS
23 can be even 6 months or even 24 months.

There is also a material difference in the concept of
borrowing costs as per Ind-AS 23 and ICDS IX.As per Ind-AS 23, borrowing cost
is calculated using the effective interest method, whereas as per ICDS, it is
calculated at actual interest and other costs incurred.

Exchange differences arising in respect of foreign currency
borrowing, forms part of borrowing costs as per Ind-AS, whereas the same does
not form part of borrowing cost as per ICDS.

As per Ind-AS, any income from temporary investment of
borrowed funds is to be reduced from the borrowing cost required to be
capitalised, whereas such reduction is not permissible in ICDS.

There is also a material difference in the formula for
capitalising general borrowing cost, in that under ICDS, the cost of general
borrowing is apportioned in the ratio of the qualifying assets to the total
assets based on the opening and closing values of such assets, without
considering the amount of or movement in borrowings during the year Under Ind
AS, the weighted average cost of general borrowing is applied to the value of
qualifying assets for the relevant period.

As per Ind-AS 23, inventories that do not necessarily take a
substantial period of time for getting ready for sale will not qualify as
qualifying assets. The term “substantial period of time” is not defined, and
hence could be even less than 12 months. However, as per ICDS, the period of
time is defined as 12 months, and hence inventories that require less than 12
months to bring them to a saleable condition are not qualifying assets.

As per Ind-AS, an entity shall cease capitalizing borrowing
costs to assets, when substantially all the activities necessary to prepare
such asset for its intended use or sale are complete. However, as per ICDS, the
capitalization would cease where fixed assets are put to use, or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Impact of the above differences.

There are various differences between Ind-AS and ICDS on
definition of borrowing cost and qualifying assets, treatment of income arising
from temporary investment of borrowed fund, formula for capitalising borrowing
cost in case of general borrowings and finally, on the time of cessation of
capitalisation. These would result in different capitalisation of borrowing
costs as per accounts, and in computation of income as per ICDS. Accordingly,
the interest debited to Statement of Profit and Loss and that allowable as a
deduction would also differ. These differences would also impact the
depreciation.

9.    Financial assets

Financial assets as per Ind-AS
109

As per Ind-AS 109, all financial asset are required to be
subsequently measured at fair value through profit & loss (FVTPL), fair
value through other comprehensive income (FVOCI) or at amortised cost (normally
for debt instruments), at each balance sheet date, depending upon their initial
classification by the entity.

Investments

Investments are not covered by ICDS, but any gain or loss is
to be considered as capital gains on transfer of such investments. Therefore,
any item in statement of profit or loss or other comprehensive income, on
account of remeasurement of financial assets, is to be ignored for computation
of taxable income.

Any security on acquisition as stock in trade shall be
recognised at actual cost. At the end of any previous year, securities held as
stock-in-trade shall be valued at actual cost initially recognised or net
realizable value at the end of that previous year, whichever is lower.
Securities not listed on a recognized stock exchange or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be
valued at actual cost initially recognized.

For the purpose of applying the above principles, the
comparison of actual cost initially recognised and net realisable value shall
be done category-wise and not for each individual security. For this purpose,
securities shall be classified into the following categories, namely:-

(a) shares,

(b) debt securities,

(c) convertible securities, and

(d) any other securities, not covered above.

The value of securities held as stock-in-trade of a business
as on the beginning of the previous year shall be:

(a) the cost
of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and

(b) the
value of the securities of the business as on the close of the immediately
preceding previous year, in any other case.

Difference between the Ind-AS
and ICDS

There is material difference in the valuation of securities
held as stock in trade as per Ind-AS 109 and ICDS IX. As per Ind-AS, the
valuation of securities are required to be made at fair value. However, as per
ICDS, the listed securities, held for trading shall be valued at actual cost
initially recognised or net realisable value at the end of that previous year,
whichever is lower, Further, ICDS requires valuation on securities to be made
category-wise., and not on individual investment basis as per Ind-AS.

Impact of the above differences

In view of the above difference, there would be differences
in gain or loss recognised by the company in its profit and loss account vis-à-vis
as per tax return. The company would have to maintain detailed records of
transactions of securities traded as well as held as inventory, by applying
principles laid down in Ind-AS as well as ICDS.

10.  Actual cost of assets
– Cost of Dismantling and restoration

Cost of an asset as per Ind-AS
16

As per Ind-AS 16, an item of property, plant and equipment
that qualifies for recognition as an asset shall be measured at its cost. Cost
for this purpose also includes “the initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.”

Actual cost of asset as per ICDS IV

As per ICDS IV, the actual cost of an acquired tangible fixed
asset shall comprise its purchase price, import duties and other taxes,
excluding those subsequently recoverable, and any directly attributable
expenditure on making the asset ready for its intended use. Any initial
estimate of the costs of dismantling, removing the item and restoring the site
on which it is located, is not treated as actual cost.

Difference between the Ind-AS
and ICDS

Actual cost of assets as per Ind-AS includes cost of the
initial estimate of the costs of dismantling, removing the item and restoring
the site on which it is located. However, the same has to be ignored as per the
ICDS.

Impact of the above differences

Accordingly, any increase in actual cost of the assets
because of cost of dismantling being included as per Ind-AS has to be ignored
while computing actual cost of assets as per ICDS V.

Impact on Book Profits under Minimum Alternative Tax

In the above article, the impact on book profits under
section 115JB has not been considered, since the starting point for that
purpose is the profit as per statement of profit and loss account, and the
further adjustments required to be made are listed out in sub-sections (2A),
(2B) and (2C) of section 115JB.

Conclusion

These are only some of the significant differences which one
may come across, while computing the income chargeable to tax under the
Income-tax Act, 1961, where the accounts have been prepared by adopting Ind AS.

There are many more differences which one may
come across during the course of review of the accounts. Being aware of such
differences is essential for a tax auditor or tax advisor, and hence it is
essential to understand the differing accounting treatment being necessitated
on account of adoption of Ind AS.

Satyamev Jayate @15.August.2017

15th August is an
extraordinary day for India as a culture and as a civilization. We became a
nation with a constitution. 15th August is also the day we
collectively took a pledge to unite, to rediscover ourselves and take a
‘pledge to the service of India’1. We will complete seventy
years this month. Shall we take a minute and look at how far we have come in
meeting that commitment to ourselves?

Freedom

Life derives meaning from freedom. Freedom is coveted by every human. All that we do, all that we seek is
for freedom, to feel and enhance the sense of freedom. We seek joy to feel free
from pain, we work to get free from emptiness and find meaning, we acquire
wealth to free ourselves from a sense of lack and insecurity; we serve and give
to free ourselves from petty self centeredness. At the core of all human
values is Freedom, whatever be its shade.

Political
freedom finally brought our people that opportunity to actualise these freedoms
at their individual level. Today we are blessed to live in a country that is
not under a feudal ruler, that is not run by war lords or bigots, that is not
steered by outsiders with vested interests. As we complete 70 years, there is
nothing more important than recognising the value of freedom by recommitting to
its preservation and proliferation in every dimension of our lives.

Substratum of Freedom

Our freedom struggle was steered
by Truth in the form of non violence, and like our timeless culture was made
the substratum of modern Indian State. “Satyameva Jayate” is our national motto
and adorns our national emblem.

Truth alone triumphs;
not falsehood;

Through truth the divine path is spread out;

the wise, whose desires have been completely fulfilled,

reach where that supreme treasure of Truth resides.

Manifestation of Satya

Rule of Law and Freedom are
intertwined bedrocks of our constitution. Legislations are meant to enhance
individual and collective freedoms and guarantee rule of law for all people. In
the context of our culture, Satya shapes laws:

While
Satya sounds abstract, it is the substratum of all virtues and lasting
peace, be it collective or individual. It takes shape as Dharma, which
stands for principles of goodness, virtue, and ethics and allows people to
connect and live in harmony. Niti (Policy) should stem from Dharma and
it stands for a stance or approach on how people will live together to achieve
their respective individual and collective goals. However, Niti is
influenced by Niyat (political will) of those governing and finally
results in formulation and administration of Niyam (laws).

The High and Low of Law making

Supremacy
of Rule of Law is what we got along with independence. Plato wrote: “If law
is the master of the government and the government is its slave, then the
situation is full of promise”. However, over the seventy years, the
divergence from the essential spirit of law making has drifted in so many
cases, that it ‘seems’ like a new normal. The 13th President had
this gentle yet alarming comment in his farewell speech to the parliament: “It
is unfortunate that the parliamentary time devoted to legislation has been
declining. With the heightened complexity of administration, legislation must
be preceded by scrutiny and adequate discussion. Scrutiny in committees is no
substitute to open discussion on the floor of the House. When the Parliament
fails to discharge its law-making role or enacts laws without discussion, I
feel it breaches the trust reposed in it by the people of this great country.”3

Laws are meant to serve people
by being fair, clear, stable, and enabling. People must get confidence that
legislation is for them and not only to be used against them by an
administrator. Functionally, laws should be necessary, clear, coherent,
effective, and accessible.

However, over the seventy years
we know that laws are often twisted, coloured by outrageous complexity that
they are out of reach of the common man, rolled back and amended way too often,
arbitrarily applied in disregard to people’s rights, crafted for ease of use by
the administrator, and often have conflict of interest/vested interest in their
very design. While there are severe legal barriers when there is conflict of
interest for business transactions, I wonder about a much stronger application
against ‘conflict of interest’ in law making. If the law makers turn a blind
eye, look the other way or wink selectively, then rule of law gets diminished.
Trust in administering of laws whether it will be fair, fast enough, and
effective remains doubtful.

Do Niyam
affect Niyat
of citizens?

India
was recently labelled as a ‘largely tax non compliant society.’ Even if one
were to accept that, we cannot change that situation till we find out why did
it become so? During the freedom struggle, millions made extraordinary
sacrifices. Each of us knows someone who made sacrifices in achieving azadi.
Has the texture of that society drifted so far from that pledge to ‘serve the
nation’ to serving themselves in disregard to the nation? If so, then why?

Could it be that many of those
entrusted with lawmaking and administering, who took that same oath to serve
the nation and guarantee liberty, equality and justice did not pay sufficient
heed to that promise? Could it be that the framework of law is not
comprehensive to address the current reality? Can there be an effect without a
cause? Where does this circle start and where will it end?

Niti and Niyam
affect the Niyat (intention) of the people. In other words, Niyat of
people is only a reflection
–  (as the rulers, so are the people).
The formulation and administration of Niyam does shape the Niyat
of people. At the same time, laws get formed to deal with breaches. And the
circle goes on.

Till
the spirit of rule of law is active and not selective, enabling and not
disproportionately bothersome, till laws exists for people and not to dissipate
their spirit in coping with them, and till laws make people feel optimistic and
not hopeless; the rule of law is yet to ripen4. Till we reach a
point when rule of law is working in spirit and in its splendour for the vast
majority, the Triumph of Truth remains in abeyance.

Many professionals feel helpless
to deal with something that is beyond control. However, we are trained to think,
ask questions and are capable to understand laws. As professionals we can look
through the fine line between form and substance. Can we undertake to refine
our law making and administration within our circle of influence? Can we be
proponents of adherence to laws in ‘spirit’? As we build our nation, we can
once again question and clear our own Niyat, and steer the Niyat
of taxpayer and the administrator towards the essential spirit of law5.
In our professional endeavours, can we ask ourselves – Will this action/advice
be coherent with the essential spirit of the law? Will my action/advice be
right for India that I wish to see? Because, India does not belong only to the
few who speak from high pedestals, but to YOU! Freedom is not only a
personal right, but also our individual obligation!

BCA Journal

A galaxy of contributors, editors, members and wise men and
women have shaped the BCA Journal in the last fifty years. I grew up reading
the fine features and well researched, thought provoking and useful articles of
this Journal. BCAJ has and will continue to present its content in an
objective, bold, and circumspect manner. I feel humbled to write to you as its
editor from this month onwards. I will strive to keep the balance between
continuity and change, and present the content that reflects those virtues in
light of our current reality. I request your observations and counsel freely
and frequently.

Raman
Jokhakar

Editor

Friend / Friendship

‘Love demands infinitely less than friendship’

George Jean Nathan

Agreeing with the quote, I
believe it is a relationship sandwiched between `man – woman relationship’ and
`man – God relationship’. However, there is a good old saying ‘a friend in
need in a friend indeed’. I don’t subscribe to this thought because I believe
friendship is not barter – it is a relationship devoid of expectations. We know
and have experienced that expectations spoil relationships. Friendship is a
relationship to be enjoyed and cherished. In friendship one accepts
differences. This doesn’t mean that one can’t criticise a friend – the answer
is : as a friend one can and should criticise to one’s face but never at one’s
back. Francis Bacon rightly advises ?to keep the mind in good health accept
the admonition of a friend – this is because  there is no personal gain that a friend seeks
– it is based on the desire to correct a wrong. I believe that if a friend
seeks an opinion, give it unbiased and unaffected whether accepted or not.

The recent loss of a friend
kindled in me the urge to pen my thoughts on friendship. I believe it is
relationship in which :

–   one accepts each other’s foibles and faults

–   one senses each other’s ease and unease

–   one shares each other’s pain and pleasure

–   one sees the other through in bad times

–   one shares oneself

The precept is : ‘be a
friend to have a friend‘.

Henry Adam says ?one friend in lifetime is much, two are many, three
are hardly possible’. Whilst I agree with him that friends are rare and are
a gift from God – I must admit that He has been benevolent to me – I
have been blessed with more than three – I have had my uncle as a friend, I
have and had my peers in profession as friends; I have and had the boon of
having some clients as friends and above all, I have enjoyed friends from school days.

However, as most of them are with the Lord – I at times feel lonely but
have memories to cherish. It is said : ?that marriage is a contract and in
contract there can be no friendship’ – I was blessed to have my spouse as a
friend – it took time to develop this relationship, where we were not afraid of
being judged and were never shy of accepting, appreciating and bridging
differences.

To have a happy and
rewarding life one needs friends or a friend and above all to develop
friendship with God – let us talk to Him and hear Him for He
is a friend who will never leave us.

I would conclude by quoting Lord Halifax :

‘It is a misfortune for a
man not to have a friend’

GST – A Huge Area of Practice Opportunities

Background

The total indirect tax revenue in 2016-17 was Rs.17 lakh
crore. It has been guesstimated that about 30% of traders, small manufacturers
and service providers who are liable to be registered and pay duty/ tax have
not registered in the past. They were part of the “grey/ parallel economy”.
There is a business of fake bills without sale or service provision presently.
This sector is expected to close down substantially due to the matching concept
under which GST needs to be paid for credit to be available. Some part of this
segment may be forced to join the mainstream tax payers over a period. Some
sectors who still have the highest rate of 28% with or without additional
cesses could try and keep the entire transaction outside the recording and may
risk the seizure of their goods and demands.   

The total number of registered assessees in about 6 months of
its implementation is expected to cross 1 Crore!!. This could be the result of
demonetisation as well as withdrawal of exemption and broad basing objective of
GST. The need for the receiver of the services to pay under reverse charge for
all unregistered supplies including raising of invoice, classification, payment
may lead to all businesses to avoid any unregistered supplies whether for goods
or services. Dealers and Service providers who do not wish to stop their services
to the trade, industry or businesses would now voluntarily register to ensure
clients do not have to comply on their behalf. This maybe even if they are
eligible for the exemption upto Rs. 20 lakh.

The CA Advantage

The knowledge of accounts, costing, direct/ indirect tax
laws, company Law and commercial laws makes a CA’s quite complete from legal/
tax side. This coupled with the experience from understanding businesses
through conduct or audit, providing opinions, preparation/ certifying of financial
statements, representing before many financial and tax authorities provides a
CA with a deep understanding of business.

The total number of CAs who have attended at least a 20 hour
GST awareness as on date who are in industry and practice maybe around
1,00,000. As on date around 5000 CAs are learning every week in seminars,
workshops, certificate courses conducted by the ICAI, study circles, BCAS and
other associations across the country.

The non-qualified consultants who outnumber us today
operating in indirect tax area may find that the scope of being an intermediary
between the client and the officers is restricted. Those in advisory who have
learnt GST well and have some accounting knowledge may continue to support
clients in the GST regime. They would of course need to take the services of
CAs for the mandatory audit which would be started to be conducted post May
2018. 

The CAs already practicing in VAT, Service Tax and Excise /
Customs would find it easier to understand the GST which is a mixed bag of all
these laws. In the present GST Act and Rules 2017, we observe that most of the
provisions have been borrowed from VAT and to some extent service tax and
excise. The GST law was supposed to be simple and clear, but as it stands today
is very cumbersome and it may not be possible for SMEs to comply without
professional assistance. 

The total number of CAs (delegates) who have attended various
type of GST related CPE awareness / training sessions as on date is in excess
of 1,20,000 with 6,000 additionally being trained every week either through the
indirect tax committee initiatives or the various regional councils, branches
and associations. Even if some have gone for multiple programs, the minimum
number of CAs who are aware maybe in excess of 50,000.

Therefore, in the view of the paper writer, the CA would be
the first option for all enterprises of turnover above Rs. 2 crore. If they are
unable to accept, only then other professionals would be considered as an
option.

Opportunity for Image Makeover

It is indeed sad but true that a small proportion of CAs are
able to create a negative perception of the profession at large. However, the
fact that in many wrongdoings by trade/industry, the CAs are being implicated/
targeted indicates that the view of the public/ media needs to be reversed. The
common perception of the “black sheep” of our profession is normally not
discussed, much less penned. The paper writer has attempted to list a few areas
where we could improve and avoid such allegations:  

1.  Do not suggest/ manipulate the accounts.
Always give accurate certificates based on evidence (copies to be in working
papers) especially on the claim of credit on stocks, credit admissibility etc.
This would compel the tax authorities do place weight on all certificates
issued by us.

2.  To avoid assisting / helping clients in tax
evasion. It maybe far better to provide a true picture to client and stress on
the advantages of compliance. The “trust” factor which is very important to be
enhanced in the GST regime.

3.  When he gives opinions especially on issues of
continuation of business rates and credit, see that there is a clear
communication of what the client wishes in writing. If not there, communicate
what is expected from us to client and then do a professional job clearly
stating the assumptions if any and not trying to reduce the tax impact. This
would build respect of the client over time as well as the GST officers.  

4.  CAs can and need to be more communicative. We
also most times have not been trained in drafting. Complete communication,
clear case law reference, differentiating the adverse judgment, attaching
expert opinions/ books (especially in classification) and concluding logically
could stand us in good stead.  

5.  CAs would do well to escalate to higher level
officers when lower level are not helpful to resolve issues of the clients.
This should always be done in writing. The results of this practice has been
found to be favourable in the present regime and in GST would be far more
successful.

6.  We can improve in many more areas including
professionalism in dealing with the client viz., keeping commitment for
delivery of requisite quality in time, keeping the service motive etc.

These negative perceptions over time are to be overcome with
honest, ethical work, demonstrated over and over. The law is moving towards
transparency and the days of the intermediaries seem to be getting over. When
the VAT law came, the pure intermediary population came down by about 30% from
2005 onwards.   

Humongous Opportunity under
GST

The distinction can be made between the pre / post GST period
openings / service streams.

Role – Pre-GST period

This is a one-time opportunity focused on GST preparedness of
clients. Specific contribution by the professional could be:

a.  Assist in classification and arriving at the
rates applicable using the Harmonised System of Nomenclature (HSN) as well as
the interpretative rules set out in the notification. Similarly, carefully
advising on availability of any exemption based on the notification ensuring
that the conditions if any are complied;

b.  Analyse the industry impact considering the
global and Indian situation of the product / service. This study may also have
to include the major vendors and customers;

c.  In case of unintended hardship to some
sectors- representation to the drafter would be in order as the level of
listening presently is very high. This could be done upto a period of 6 months after
the implementation date;

d.  For the walk in clients who have not done an
impact study, the clarity on the major impact on the client under GST due to
indepth understanding of the business could be a value add;

e.  CA could be part of the core team of client
for transiting into GST smoothly without business disruption and safeguarding
of the margins as a knowledge advisor;

f.   Understanding legacy tax systems at client
workplaces so as to provide appropriate advise on migrating to better systems/
ERP or suggest modification to make the existing systems GST compliant;

g.  Assisting in preparation of a strategic plan
for procurement and marketing systems of clients needed under GST. For example,
supporting in decisions on: Closure/ reduction in godowns and branches; direct
sale through e-commerce; evaluation of the working with C&F agents; in
house/ outsourcing the distribution function to logistic companies; sourcing
inputs at lowest cost within shorter time; linking to the ERP of the customer etc.;

h.  Suggesting the changes in accounting software
and internal control systems to suit GST. Test and confirm the robustness;

i.   GST awareness at initial stages and training
for management, staff, customers, vendors of clients on ongoing basis
especially the operational team consisting of the marketing and purchase;

j.   Vetting and suggestion to modify agreements/
contracts/ major purchase orders overlapping or supplies to be made in GST
regime;

k.  Ensuring that the credits in the past are
examined for their eligibility and those missed are availed. The reconciliation
of the credit as per books to the returns before GST is implemented can be a
value added activity. This would include validating the last return. The time
window for this is limited to a couple of months after implementation;

l.   The verification to ensure that the credits
carried forward are eligible and complete. The deduction for the unreconciled
forms as provided is made and if negative, the decision not to claim the carry
forward; 

m. Ensuring that the claim of credit on stock in
hand is maximised by ensuring purchasing with excise duty paying documents as
well as proper stock recording especially with job workers and agents and
ensuring well thought of stocking policy;.

n.  Reviewing the various business transactions to
examine whether closing out the transaction in the pre GST or post GST period
is advantageous;

0.  The students of CA- the future CAs and staff
in the CA office would also require to be taught the new law to enable them
also to actually do the verification. Review and audit in GST and confirm that
the transition mistakes are not material;

o.  Many CAs have specialisation in information
technology and some even hand on consulting skills in ERP environment. These
skills could ensure that the client would get his IT integrated and able to
comply with the complex needs of GST compliance.

Role – Post-GST

The implementation of GST would bring many challenges for
trade / industry and for us, opportunities to serve:

i.   In the initial stages of GST implementation,
there would be many doubts which are not covered in the new law. There may also
be gaps in knowledge of GST at various levels in the organisation. These are
likely to unintendedly result in denial of registration, interruption to do
business, loss of eligible credit, old law risks and exposures carried forward,
inadvertent non-compliance in GST. There would a period of uncertainty and need
for someone to confirm the myriad issues arising. The internet (Google) at such
times may not be effective as too much of inaccurate/ incorrect suggestions in
the initial stages are expected. The proactive professional handholding and
quick response may not only ensure continuation of the clients’ business, but
enable them to take advantage of the changes in the business structures;

ii.  Regular online documented service to the
functional head of clients’ business;

iii.  Assisting in the filing of the 1st
return, claim of tax credit on stocks in hand accurately;

iv. Review the compliances in transition. It maybe
noted that the disputes in GST would come normally after 3-4 years and at that
time, rectifying past errors would well nigh not be possible;

v.  A one time comprehensive review after 3 months
of implementation to ensure GST compliance;

vi. Regular review and reconciliation on credit
matching and recovering credits lost from the vendors in case of payment made
on gross would also be required;

vii. Once GST stabilises over a year or so, the
focus would be more on compliance which means a regular internal audit of GST;

viii.  The GST audit by CAs in the year 2018 would be
a watershed year for the profession to demonstrate that we as CAs are competent
and knowledgeable; Also to assure the revenue department that there is no need
of invasive investigation or audit by tax officers;

ix. Routine tax assignments for payment and filing
of returns would see a spike at least in the initial stages of uncertainty;

x.  It is true that if one can avoid a dispute in
tax it is better. Therefore, a preventive exercise of early correction/
disclosure could avoid or mitigating the disputes allowing clients to
concentrate on their core activities;

xi. In case of dispute, look at the possibility of
passing on the impact where credit is available as an option. If not possible,
then support in making replies based on fact as well as legal principles.

xii. Support in resolving disputes where it cannot
be mitigated due to interpretation differences or due to demand raised by
revenue.

Conclusion

This new levy is bound to come up with many obvious
challenges due to the law being in the process of being drafted. It is expected
that the rough edges of the law would be ironed out in the period of 6 month to
a year post implementation of GST. This was our experience in Company Law in
the past few years. 

The extent of making use of the opportunities would largely
depend on understanding the law and preparedness for what is not covered in the
law. In the words of Abraham Lincoln – “Give me six hours to chop down a
tree and I will spend the first four sharpening the axe”.

The implementation of GST by July 2017 is not
clear as on date. We the CAs can be ready to serve now in this period of
uncertainty and later when the law is passed. We can, by getting the axe forged
and keep sharpening it, to deliver beyond the expectation. Wish readers to have
an empowered service to the employer/client in GST era.

Impact of GST on Practising Chartered Accountants

Preamble

The most talked about change in the indirect tax laws i.e.
Goods & Services Tax (“GST”) is expected to be effective from 1st
July 2017. We, chartered accountants, being service providers are also covered
under the ambit of GST. Currently, we are liable for payment of service tax
under the provisions of the Finance Act, 1994 (“Service Tax legislation”). This
legislation will be subsumed under the GST. 
We will be governed by the provisions of the GST Acts.

An effort has been made in this article to highlight
important provisions that would be applicable to practising chartered
accountants, its impact and the challenges we might face as GST assessees.

Migration

All practising chartered accountants registered under the
Service Tax legislation are required to compulsorily get themselves migrated to
GST. [Section 22(2) of Central Goods and Services Tax Act (CGST Act)] If they
do not expect the value of their aggregate turnover during the financial year
2017-18 to exceed Rs. 20 lakh (or Rs. 10 lakh in special category states), they
can surrender their GST registration [Rule 17(4) of Registration Rules].  Aggregate turnover includes exempt supplies
and zero rated supplies also. Usually, for a practising chartered accountant
most of his services would be taxable only. However, export of services,
services provided to SEZ units and also to SEZ developers will have to be
included while computing aggregate turnover even though they are zero rated
supplies.

Registration

Under Service Tax legislation, a practising chartered
accountant has the option of not getting himself registered if his aggregate
taxable turnover in a financial year does not cross Rs. 10 lakh.  If the aggregate turnover on pan India basis
exceeds Rs. 20 lakh (Rs. 10 lakh for special category states), one has to get
himself registered under GST. The aggregate turnover would include all taxable
supplies as well as exempt and zero rated supplies also. All chartered
accountants registered under the Service Tax legislation and having turnover
between Rs.10 lakh and Rs. 20 lakh (not from the special category states), have
the option of not getting themselves registered under the GST Laws. This may
save them from the hassles of the compliances under the GST Laws. However,
negative fallout would be that they would lose credit of all the GST paid on
their inputs, capital goods and input services. It would be a cost to them.

The chartered accountant making any inter-state supply has to
get himself registered irrespective of his turnover [Section 24(i) of CGST
Act]. Similarly, if the chartered accountant is liable to pay tax under reverse
charge, then also he has to get himself registered irrespective of his turnover
[Section 24(iii) of CGST Act].

The Certificate of Registration is required to be displayed
in a prominent location at all places of business. [Rule 11 of the Registration
Rules]

Branches

In service tax, service provider was having the option to go
either for centralised registration or standalone registration for its branch
offices. Unlike Service Tax legislation, there is no concept of centralised
registration under GST. A chartered accountant having offices in more than one
state will have to obtain separate registration under the GST Laws for offices
in each state.

Further when any service is provided by one branch to another
branch without any consideration, the same will be treated as a supply liable
to GST and invoice for the same will have to be raised. [Entry 2 Schedule I
read with section 7(1)(c) of the Central Goods & Services Act]. This was
not a case in service tax as self-service was not liable to service tax.

Place of Supply

This is one of the most important provisions of the GST Laws.
This determines the tax to be charged i.e. Central GST & State GST or
Integrated GST. The Service Tax legislation was a central law and a single tax
was charged irrespective of the Place of Supply of such services.

GST is a dual tax and hence a chartered accountant needs to
find out place of supply and raise invoice accordingly on client. Section 12(2)
of IGST Act determines the place of supply of services by a chartered
accountant where the location of the chartered accountant and the location of
the recipient of services are both in India. Place of supply in such case will
be the location of the service recipient where the address on record exists
otherwise the location of the supplier of services will be the place of supply.
Mostly in all cases, the address of the client (the service recipient) as well
as his GST number will be available with the chartered accountant. Hence such
address would be the place of supply.

The location of supplier (in the given case a chartered
accountancy firm) is a crucial factor for determining whether the provision of
service is intra-state supply or inter-state supply. It will be a challenge to
determine the location of the supplier in case of multi locational firm having
presence in various states providing services to same client from different
locations. 

Services Accounting Code

All invoices raised need to mention the Services Accounting
Code (SAC). This was not a requirement under the Service Tax legislation and
also there was only one category of service i.e. Chartered Accountancy
Services. At the time of making the invoice, one will have to keep in mind the
nature of services provided and its corresponding service classification. The
most common classification of services which would cover the regular services
provided by practising chartered accountants is listed hereunder:

Sr. No.

Service Code

Service Description

1.

997156

Financial
Consultancy Services

2.

998221

Financial
Auditing Services

3.

998222

Accounting
and Bookkeeping Services

4.

998231

Corporate
Tax Consulting and Preparation Services

5.

998232

Individual
Tax Preparation and Planning services

GSTIN of Clients

One of the mandatory requirements for preparing an invoice
under the GST Laws is that if the service recipient is registered, the invoice
has to contain his GST registration number i.e. GSTIN. All chartered
accountants need to collect their clients’ GSTIN. It should be readily
available in their database and they need to ensure that the same is printed on
the invoice issued to client.

Issue of Invoice

Section 31(2) of the CGST Act read with Rule 2 of GST Invoice
Rules makes it mandatory for service provider (including Chartered Accountants)
to issue invoice within 30 days from the date of supply of service. In case of
statutory audit, the chartered accountant will have to raise invoice within 30
days of attesting financial statements. For other services, one may determine
the date of supply of services on the basis of contractual arrangement with the
client.

Invoices are required to be prepared in duplicate the
original copy being marked “Original for Recipient” and the duplicate copy
being marked “Duplicate for Supplier” [Rule 3(2) of the Tax Invoice, Credit
& Debit Note Rules].

For all advances received, a Receipt Voucher will have to be
issued containing the prescribed particulars [Section 31(3)(d) of the CGST
Act].

Time of Supply of Service

Under the service tax provisions, the chartered accountant
had the option of paying tax on receipt basis where the value of taxable
services provided in a financial year was less than Rs. 50 lakh. Most of the
chartered accountants maintain their books of account on cash method. It was
very convenient for them to compute their tax liability on cash basis of
accounting. However, under the GST there is no such option. Everyone has to
discharge their tax liability as per the time of supply which is earlier of
date of invoice or date of receipt of payment or the date of provision of
service, where the invoice is not raised within 30 days of provision of
service. This would now involve regular reconciliation and may require
maintaining additional set of records.

Applicability of Reverse Charge

Any taxable goods or services procured by a registered person
from an unregistered supplier, the registered person procuring such supply will
have to pay tax under reverse charge [Section 9(4) of the CGST Act]. A
practising chartered accountant would be incurring many expenses such as
purchase of stationery, tea & snacks for office staff, repairs &
maintenance, etc. which are mostly supplied by unregistered persons.
Registered chartered accountants will have to pay tax under reverse charge on
all such procurements and also generate an invoice and a payment voucher
[Section 31(3)(f) of the CGST Act] for the same. However, vide Notification No.
8/2017 dated 28th June, 2017, the Government has exempted intra
state supplies of goods or services received from an unregistered supplier from
the applicability of the provisions of reverse charge where the aggregate of
such supplies from any or all the suppliers do not exceed Rs. 5,000/- in a day.
This would bring a major relief to all the tax payers. In addition to this,
section 9(3) of CGST Act prescribes for payment of tax under RCM on notified
services even if it is procured from registered vendor.

Relevant Transitional Provisions

Section 142(11)(b) of CGST Act provides that GST is not
payable on those services where service tax was leviable under the Finance Act,
1994. In other words, GST will not be payable on advances received or invoices
raised before the effective date.

What happens in case where chartered accountant (liable to
discharge service tax liability on realisation basis) has provided services and
issued the invoice in pre GST regime and realises the consideration in post GST
regime? It seems such chartered accountant will be liable to pay service tax
and not GST on such consideration as the point of taxation in respect of such
services has already arisen in pre-GST regime.

Section 140(1) of the CGST Act entitles a registered person
(chartered accountant) to carry forward the Cenvat credit balance reflected in
the service tax return filed for the period immediately preceding the effective
date of GST.  He has to file form GST
TRAN-1 within 90 days of the appointed day specifying the amount of Cenvat
credit to be carried forward [Rule 1(1) of Transitional Rules].

Valuation

Section 15 of the CGST Act provides that the value of supply
shall be the transaction value which shall include all incidental expenses
charged by the service provider to the service recipient. Hence, all
reimbursement of expenses (other than incurred as pure agent) will be liable to
GST. Moreover, any expenses which the supplier is liable to pay in relation to
such supply but which is paid by the recipient will have to be included in
value of supply. Even interest or late fees received by chartered accountants
for delayed payment will also be liable to GST.

GST Rate

There is no specific entry for the services provided by
chartered accountants in the schedule of GST Rates released by the GST Council.
It falls in the residual entry No. 36 wherein the rate of GST is 18 %. So all
services provided by practising chartered accountants will be liable to GST @
18 %. If the supply is intra-state, then 9 % CGST and 9% SGST will have to be
charged and if the supply is inter-state, then 18% IGST.

Input Tax Credit

Under the Service Tax legislation, a service provider was
entitled to credit of service tax paid on input services and also excise duty
paid on inputs and capital goods. He was not entitled to credit of VAT paid on
inputs and capital goods. It was a cost to the service provider.

Under the GST, a registered chartered accountant will be
entitled to input tax credit of both i.e. GST paid on goods as well as
services. To this extent, there would be a reduction in the cost.

However, the credit would be available only if the goods and
services are received; invoice for the same is received and contains the
recipient’s GSTIN and the supplier has paid the applicable GST on the same and
also filed his GST return. Unless all the above is not done input tax credit
would not be available [Section 16(2) of the CGST Act].

Where payment to the vendor is not made within 180 days from
the date of issue of the invoice, the corresponding input tax credit will have
to be reversed. The same shall be available on making payment for the same
[Section 16(2) of the CGST Act]. Under the Service Tax legislation, this period
is 3 months.

Section 16(4) of the CGST Act provides for the time limit to
avail input tax credit. It can be claimed on the basis of invoice or tax paid
document before earlier of:

–   Due date of filing of return for the month of
September following the end of the financial year to which such invoice or tax
paid document pertains; or

–   Date of filing of annual return .

Tax deducted at Source

GST law provides for
deducting tax at source from the payment made to vendor by persons or such
category of persons as notified by government where total value of such supply
under a contract exceeds Rs. 2,50,000. Rate of TDS is 2% [1% CGST and 1% SGST
or 2% IGST].

There are chances that chartered accountant firms having
turnover above a certain limit might be covered under TDS. If covered, the
chartered accountancy firm will be obliged to deduct TDS on payments made to
its vendors, issue TDS certificate and file TDS returns [Section 51(1) of the
CGST Act].

The Chartered Accountancy firm would also be tax deductee.
This will add to the administrative burden of reconciling GST TDS and the
revenue declared in the GST returns.

Return Filings and Tax Payments

Currently, service tax is required to be paid on quarterly
basis and the returns are required to be filed every half year. Under the GST Laws, the payment of tax has to be made on monthly
basis on or before 20th of succeeding month.

All registered persons need to file returns as under:

Type of statement

Due Date

Details
of outward supplies

10th
of succeeding month

Details
of inward supplies

15th
of succeeding month

Monthly
Return

20th
of succeeding month

TDS
Return

10th
of succeeding month

Annual
return

31st
December following the end of the financial year

This will increase the compliance burden substantially.

Similar to Service Tax provisions, Nil returns are also
required to be filed under the GST Laws [Section 39(8) of the CGST Act].

Under the Service Tax regime, only the consolidated value of
services rendered in a quarter was required to be filed. In the GST returns,
details of each individual invoices (unless issued in favour of an unregistered
person) has to be uploaded. This again will increase compliance.

Any Return filed without payment of self-assessed tax, will
be treated as an invalid return. Returns for any tax period will not be allowed
to be furnished, if the return for any of the previous tax period has not been
filed [Section 39(10) of the CGST Act].

Audit

There is no provision under service tax legislation for
compulsory audit of accounts by a chartered accountant or a cost
accountant.  However, under the GST
regime, all assessees having turnover exceeding Rs. 200 lakh will be required
to get their accounts audited by a chartered accountant or a cost accountant
[Section 35(5) of the CGST Act read with Rule 21(3) of the Returns Rules].

Electronic Back-Up of Records

Proper electronic back-up of records will have to be
maintained so that in the event of destruction of such records due to accident
or natural causes, the information can be restored within a reasonable period
of time [Rule 2 of Accounts & Records Rules].

Conclusion

The chartered accountants are facing dual
challenge of gearing up their clients for GST as well as gearing up their own
organisation to cope up with this major indirect tax reform. It is very
interesting and challenging time and as usual chartered accountants will
definitely sail through it successfully.

GST and its Impact on Accounting

Accounting for GST is yet
another challenge the businesses will have to accept so as to be ready for
compliance in GST Regime.

The present article is
divided into various segments to understand the impact of GST on the accounting
aspects of businesses. Provisions under GST Acts require maintenance of
records, uploading information and/or periodic reporting and producing the same
on demand.

Chapter VIII of the CGST
Act contains provisions in respect of maintenance of accounting records. The
draft Rules also provides for certain additional compliances and maintenance of
documents.

Basic records by all
registered persons

In view of section 35(1),
every registered person shall maintain books of accounts and other records
relating to each place of business at the respective place of businesses. This
section requires maintenance of a true and correct account of the following
records:

a.  Production
or manufacture of goods

b.  Inward
and outward supply of goods or services or both

c.  stock of
goods

d.  Input tax
credit availed

e.  Output
tax payable and paid and

f.   Such
other particulars as may be prescribed.

Registered person may keep
and maintain accounts and other particulars in electronic form.

Warehouse keeper/
transporter

The owner or operator of
warehouse or godown, used for storage of goods, and the transporter is also
required to maintain records of the container, consignee and other relevant
details of goods.

Section 35(6) provides
that if the records are not maintained properly or the amount of tax payable on
goods or services are not accounted for then the Proper Officer will determine
the amount of tax payable on the goods or services as if the said goods or
services were supplied as such by the person.

Additional requirements

The draft rules in respect
of accounts and records also require the registered person to keep account and
other relevant documents including invoices, bills of supply, delivery challan,
Credit and Debit notes, receipt vouchers, payment vouchers, refund vouchers and
E- way bills. Besides this, he has to maintain records in respect of imports
and exports of supplies and the cases where tax is payable on Reverse Charge
Basis.

The rule also requires to
maintain the record separately for each activity including
manufacturing, trading and provision of services. For persons other than those
who have opted for composition scheme u/s. 10, the stock records are also to be
maintained. This includes data/documents in respect of the stock which is lost,
stolen issued as gift or free samples. In case of manufacturer the records of
raw material, finished goods, generation of scrap and wastage should also be
maintained. Under the GST law, besides information and records to be
maintained, as discussed hereinabove, these persons shall be required to
maintain accounts in respect of advances received and adjusted, liability under
the reverse charge mechanism, ITC claimed, name and addresses of vendors and customers,
places where the goods are stored including for transit storage etc. The record
should maintain audit trail in case of records maintained in electronic
format.

Service provider

Service provider should
also maintain records in respect of goods used in rendering of services, input
service utilised and services supplied. In case of a works contractor
the records need to be maintained for each contract separately.

Records to be
retained/preserved

These records including
the records in respect of invoices, bills of supply etc. have to be retained
for a period of 72 months from the due date of furnishing of Annual return for
the year pertaining to such accounts and records. Thus, the records are to be
maintained for a period of six years from the year end plus for the period of
time available for filing annual return that is till the 31st
December of the subsequent year. Therefore, effectively, records are to be
maintained for six years and nine months from the end of the year.

In case of matters which
are pending in appeal or other proceedings including enforcement actions,
records are to be kept till the matters are settled plus a period of 1 year
from the date of orders in such appeals/other proceedings.

Agent & Principal

Every agent shall also maintain
records; from authorisation received by him from each principal to receive or
supply of goods/ services on behalf of such principal, the particulars of the
value and quantity of goods or services received, value and quantity of Goods
or services supplied, details of accounts furnished and the taxes paid on
receipt or on supply of goods or services on behalf of every principal.

Similarly, carrier of
goods, consignment sales Agent, clearing forwarding agent should also maintain
records in respect of delivery/ dispatch of goods, records in respect of the
goods handled by him on behalf of the registered person.

Owner or operator of godown
or warehouse and transporters

Every owner or operator of
godown or warehouse and a transporter should maintain accounts and submit
details regarding his business electronically on common portal in form GST
ENR -01. On submission of such information, a unique enrolment number
shall be generated and communicated to the said person that is the owner/
operator of godown or a transporter. Such enrolment once granted in one State
or Union Territory would be deemed as registration by such person in all the
States or Union territory. Moreover, the operator of the godown should store
the goods in such a manner that they can be identified item wise and owner wise
and should facilitate physical verification for inspection by the proper
officer on demand.

It is clear from the above
that the GST Act and the Rules provide for elaborate guidelines for
maintenance, retention and production of accounts and records to facilitate
determination of correct liability under the GST law. The other objective is to
maintain records in such manner that it facilitates cross matching of
information when processed on the Common Portal. The data to be uploaded on the
common portal requires transaction wise, HSN/SAC code wise, State wise data to
be uploaded of inward as well as outward supplies. Thus, for maintaining
accounting records a registered person will be required to reorganise its
accounting department, the information technologies software and also
appropriate training to its staff.

In view of the above legal
requirements to maintain accounts and records, the businesses are expected to
re-energise and rearrange its entire system of accounting.

Chart of accounts to be
maintained

Traditionally the accounts
include accounts in respect of excise duty payable, State VAT and CST account
Payable as also accounts in respect of CENVAT available and input tax credit
available. However, in view of the change, the following ‘Charts of Account’
will have to be created and maintained in the accounting system.

Chart of Accounts:

Under GST all these taxes
(excise, VAT, service tax) will get subsumed into one account, and following
new accounts have to be created.

–   Input CGST a/c

–   Output CGST a/c

–   Input SGST a/c

–   Output SGST a/c

–   Input UTGST a/c

–   Output UTGST a/c

–   Input IGST a/c

–   Output IGST a/c

–   Electronic Cash Ledger (to be maintained on
Government GST portal to pay GST)

–   Electronic Credit Ledger (to be maintained on
Government GST portal to pay GST)

–   Electronic Liability Ledger (to be maintained
on Government GST portal to pay GST)

It may be noted all these
records are to be maintained state wise, hence if a person is having
registration under the GST Act, say in five states, the above chart of accounts
need to be multiplied by five times.

Accounts to be maintained
under GST Regime

To summarise, every
registered taxable person shall keep and maintain, at his principal place of
business, a true and correct account of production, inward and outward supply
and such other records as specified under Goods and Services Tax Act.

Accounts / Records

Information required

By whom?

 

 

 

Register
of Goods Produced

Account
should contain detail of goods manufactured in a factory or production house

Every
assessee carrying out manufacturing activity

 

 

 

Purchase/Inward
Register

All
supplies received during each tax period for manufacturing/sale/supply of
goods and/or services

All
Assessees

 

 

 

Sales/Outward
Register

Account
of all the supplies made whether of goods or services during each tax period

All
Assessees

 

 

 

Stock
Register

This
register should contain a correct record of inventory available at any given
point of time.

All
Assessees

 

 

 

Input
Tax Credit Availed

This
register should contain the details of Input Tax Credit availed in each tax
period

All
Assessees

 

 

 

Output
Tax Liability

This
register should contain the details of GST liability in respect of al taxable
supplies with reference to rate of tax

All
Assessees

 

 

 

Output
Tax Paid

This
register should contain the details of amount paid as CGST, SGST and IGST,
each tax period wise

All
Assessees

 

 

 

Other
Records as may be specified

Government
can further specify, by way of a notification, additional records and
accounts to be maintained

Specific
Business as may be notified by the government

Having discussed the basic
records to be maintained and chart of account required, let’s discuss other
challenges, some of them in respect of transition to the GST, in the book
keeping.

Reconciliation statements
to be maintained

A. Reconciliation of financial records
maintained at GSTN portal:

Since the concept of
supply is so wide that practically speaking, everything debited to Profit &
Loss A/c & credited to Profit & Loss A/c barring exceptions like
salaries & wages, interest and depreciation / amortisation of expenses,
etc., are all either inward supply or outward supply. Moreover, despatches to /
from branches, addition and disposal of assets etc are also added to the
aggregate supply. In the circumstances, there would be differences between
financial books of account and the ‘aggregate turnover’ reported in GSTR-1.
Even currently, such reconciliation is required to be made. However, the type of
transactions which will get reflected in the reconciliation statement would
increase substantially. To highlight one,in case of where the Head office
placing order on the vendor asking the vendor to directly despatch the goods to
the branch outside the state, would require generating an additional document
between Head office and the respective branch and treat that transaction as
‘supply’ in view of section 10(1)(b) of the IGST Act. Obviously, the financial
accounting system do not recognise this type of peculiar transaction.
Similarly, the reconciliation exercise should also involve the amount lying in
the tax credit ledger maintained at the Govt portal. Typically, the credit
reversed on account of mismatches, orphaned entry or non-payment to vendor will
get reflected only on the GSTN portal; however, in the financial books these
items will continue as claimable credits. Therefore, reconciliation of these
numerous entries and taking appropriate decisions in each of these cases is
very important.

B. Reconciliation of GSTR with the financial / MIS
reports

The GSTR requires
reporting of the transaction wise and HSN wise and SAC wise information. Thus,
aggregate of the turnover of sales as per particular HSN code – say bulk drug
should tally with the sales reflected of bulk drug in the financial accounts.
The disposal of assets in the financial books and its valuation and/or
taxability under the GST act will be quite different. This may also require
reconciliation.

In view of the above
background certain accounting challenges which requires attention and IT
support are discussed herein below in brief.

Listed below are some of
the transactions or documents that requires cross references, tracking, taking
corrective actions and/ or review at regular intervals. The accounting team and
the persons in the organisation who created those records, will have to get
involved in the process so that these transactions get attended at the
earliest. Help from the accounting software and other MIS reports generated in
this respect will certainly help in the process. Needless to say, allowance of
ITC, credit notes/debit notes, credits for TDS and TCS etc is dependent on the
actions from the vendor/customer of the company. Early resolution of these
entries goes a long way in proper accounting and determination of liability of
payment of taxes, profitability as also drawing of state of affairs on the
Balance Sheet day.

As mentioned herein above,
IT support would facilitate to a great extent in compiling the information
required and its reporting need while filing the GSTR. Some of these challenges
are enumerated/ highlighted hereunder:

1.   Linkages
of debit note/ credit note with original invoices.

2.   Adjustment
of advance received against a supply and tracking of receipt voucher and
payment voucher. Returns requires reference of the transaction no/id to be
mentioned to enable to correlate each of these transactions of adjustments of
‘advances’.

3.   Generation
of electronic way bill and mention thereof on the supply invoice.

4.   Tracking
and monitoring of mismatches / unmatched orphaned entries for claim of ITC.

5.   Monitoring
and verification of ITC reversal.

6.   Statistical
information in respect of number of invoices raised during the period.

7.   Claim of
ITC in case of proportionate allowance on a provisional basis while filing the
returns and the review therefore to carry out adjustments, if any, at the year
end.

8.   Tracking
transactions / information normally not part of the financial books of account
but are required as ‘supply’ to be reported in GSTR-1 e.g. barter and exchange,
free issues do not get captured in the financial records. However, these are
now required to be reported in GSTR-1. Further, valuation of the barter and
exchanges etc. requires framing of company policy in this respect.

9.   Creating
and updating product master and service master with the respective HSN / SAC
codes.

10. Discipline
in maintaining records. Traditional book keeping wherein generally, the rate
difference / quantity difference is in purchase / service inward invoices is
over written on the invoice and recomputed. This practice will have to be given
a good bye and system of issuing debit notes/ credit notes has to be introduced
and followed strictly. Similarly, the overall discipline in accounting,
classifying and reporting HSN and SAC codes will have to adhered to.

11. The IT
software should prompt an alert or determine the ‘place of supply’ [POS] and
‘location of supplier’ [LOS] so that errors in determining intra-state or
inter-state supplies is eliminated / minimised. Similarly, the software should
select the invoice type like ‘tax invoice’ or ‘bill of supply’ in appropriate
cases.

12. The
delivery challan should have cross reference of invoice number. Even in case of
stock transfer advices attracting IGST, similar references of tax invoice be
given.

13. Cancellation
of invoices: ERP packages normally do not allow cancellation of invoice once
generated. To nullify the wrong issuance of invoices, credit note is required
to be issued. Care should be taken that such wrong issuance of invoices and
rectifying credit notes, do not get reported in the GSTR.

14. The
invoicing / accounting software should have built in rule / concept to
determine the following:

a.  Interstate
and intra state

i.   Location
of supplier

ii.  and
place of supply

for different types of supplies

b.  Rate of
tax

i.   HSN or
SAC code classification

ii.  Composite
supply

iii.  Mixed
supply

c.  RCM –
inward supply

i.   LOS and
POS thereof

ii.  Rate of
tax

iii.  Claim
of ITC

iv. Creation
of payment voucher

v.  Reporting

d.  Bill to
ship to type of transaction

i.   POS and
LOS thereof

ii.  HO
placing order on behalf of branch factory etc. – generation of document and
recognising of the tax liability

15. The
concept under the GST Act in respect of supply, intra-state, inter-state,
composite supply, mixed supply, etc. are totally new and requires them to be
made understood to the accounting, commercial, logistics and other staff in the
organisation.

16. Mechanism
to rectify errors in intra state vis-a-vis inter-state supplies – Such wrong
classification of transaction needs to be attended to as this would result into
claim of refund of wrong deposit and/or paying incorrect taxes. Appropriate
accounting entries need to be passed in books.

17. Claims on
account of goods return / deficiency in services, etc.

18. Revision
in pricing etc. Issue of D/N or C/N. passing of the tax credit or recognising
the additional tax liability.

19. Fixation
of responsibility in the organisation in tracking and monitoring of the items
of reconciliation statements

20. Maintenance
and distribution of ISD – input service credit.

a.  transfer
of credit to the state wise electronic credit ledger in the financial books

21. Inter
branch reconciliation.

22. Policy
determination in respect of inter-branch service billing and its valuation.

23. State
wise Trial Balance: It is observed that majority of the ERP software in the
present configuration of accounts do not facilitate drawing of state-wise Trial
Balance. Currently the assessment under state VAT Acts poses practical
difficulties in the assessment proceedings as the officers at times, demand
either state-wise Trial Balance and/or a certificate from a chartered
accountant certifying the sales and purchase turnover in the State. Now that
the software is either amended or configured for GST compliances, the software
should be able to generate state wise Trial Balances.

24. Transition
– TRAN-1. In the transition to GST, Form TRAN 1 is required to be submitted
declaring the carry forward of tax credit from CENVAT or State VAT returns into
ST, claiming of duty/ tax credit in respect of stock etc. This Form also
requires to generate certain information and supporting documents such as:

a.  data /
documents / statement required for submission of TRAN-1

b.  back up
documents and reconciliation statements in support of TRAN-1

25. Accounting
challenge in case of goods return in GST period where the sale was effected in the
pre-GST period. As per provisions contained in section 142(1), if the goods
return effected by the registered dealer, it would be treated as independent
supply under the GST and the customer would charge the applicable GST say SGST
and CGST. This will get reflected in the GSTR-1 of the customer as also
supplier. However, in the financial books; the entry would be to reversal of
the original sales / service income. On GSTN portal this would be tracked as
ITC claimable and appropriate adjustment would happen in the electronic credit
ledger. In the financial books, actually speaking, the original VAT or the
service tax payable will have to be reversed. As against this the GSTR – 1
would show fresh purchases / inward in the hands of supplier and fresh outward
supply in hands of the customer. Surely, the financial books will not recognise
this and would result into reconciliation item with financial books. Please
note, hundreds of such types of transactions will be required to be tracked and
this would have to be tracked state-wise based on the original sales offered
under the respective State VAT / service tax returns. It is quite possible that
the return could be intra state whereas the original sale was inter state sales
and was booked in the CST return. All such situations are likely to complicate
the tracking mechanism.

26. Physical
stock vs. book stock as on 30th June 2017: In the transition to GST,
stock held as on 30th June is required to be uploaded and credit, if
any, in respect of CED or VAT is to be carried forward to GST regime.
Reconciliation / rectification entries in respect of the physical vs. book
stock may have to be passed in the pre-GST period so as to avoid disallowance
of ITC etc in the GST Regime.

27. Credit
note in respect of scheme discount pertaining to Pre-GST period be passed in
the pre-GST period so that the reduction in the VAT liability, if any, can be
claimed in the pre-GST period. Similarly, the issue of free goods in respect of
supplies effected during the pre-GST period be issued in the pre -GST period.

From the above discussion, it is obvious that the
accounts team will have to be trained and made aware about appropriate
book-keeping, documentation, as also transitional compliances under the GST
Act. It is observed that many organisations have initiated review of the
present accounting and MIS software to evaluate the need for amendments into it
so that it is made GST compliant. Since a denovo approach has to be taken,
attempt should be made to ensure that the software helps in timely compliances
and the manual intervention is minimised.

Provisions of E-Way Bills in GST Law

Introduction

Both Central and State
Governments have decided to implement GST from 1st July, 2017 in
place of excise, service, VAT, etc. The GST is said to be ‘One Nation One Tax’.
It is presumed under GST that there will be a free flow of inter-State trade
and commerce. One of the hurdles of levy of CST on inter-State transaction is
subsumed in GST to levy IGST with a benefit of ITC in receiving State. It was
also expected, that since IGST will be levied on each and every inter-state
supply, the check post and e-way bill provisions contained in various State VAT
Laws would be abolished. However, to the surprise of trade and industry, the
GST Act provides for “way bills” and detention, seizure and release of goods
and conveyance in transit and confiscation thereof, etc. The draft e-way
rules are also available in public domain. Although, it is not yet clear that
from which date the provisions of E-Way Bills will be effective and whether in
the same form or in a modified manner, in this article an attempt is made to
discuss provisions of draft e-way bills rules made available as on this day.

Information to be furnished prior to Movement of Goods (Rule
1)

Rule 1 provides for
furnishing of information prior to commencement of movement of goods and
generation of e-way bill. Accordingly, every registered person who causes
movement of goods of consignment value exceeding fifty thousand rupees;-

i)  in relation to a supply:;or

ii) for
reasons other than supply; or

iii) due to
inward supply from an unregistered person, shall,
before commencement of movement of 
goods, furnish information in Part A of Form GST INS-01.

The form is to be
furnished electronically, on the common GSTN portal.

Generation of E-way Bill by Registered Supplier/ Recipient

The e-way bill is
required to be generated for 
transporting goods whether in his own conveyance or hired one and
registered supplier or recipient may generate e-way bill in form GST INS-1
after furnishing information in Part B of Form GST INS-01.

Generation of E-way Bill by Transporter

Where the e-way bill is
not generated as above and goods are handed over to a transporter, the
registered person has to furnish information relating to the transporter in Part
B of FORM GST INS-01. Then transporter shall generate e-way bill on the
basis of information furnished by registered person in Part A of FORM GST
INS-01.

Generation of E-way
Bill for consignment less than Rs. 50000/

It is mandatory to
generate e-way bill for transporting goods valuing more than Rs.50,000/-.
However, it is provided that the registered person or transporter may at his
option generate and carry the e-way bill even where the value of consignment is
less than Rs. 50,000/-.

Supply by unregistered person

Even an unregistered
person or transporter can generate e-way bill. However, under Explanation to
sub–rule 1, it is provided that where the goods are supplied by an unregistered
person to a registered recipient, the movement is deemed to be caused by such
recipient , if it is known at the time of commencement of movement of goods. As
a result of this explanation, in such cases the registered recipient has to
furnish the information and generate the e-way bill.

Unique E-Way bill
Number (EBN)

Upon generation of the
e-way bill on the common portal, a unique e-way bill number ( EBN) shall be
made available to the supplier, the recipient and the transporter on the common
portal.

Transfer of Goods
during Transit

Sub-rule (3) of rule 1
provides that when a transporter transfers goods from one conveyance to another
in the course of transit, he shall generate new e-way bill before such transfer
and further movement of goods specifying the mode of transport.

Multiple Consignments

In case of multiple
consignments in one conveyance, the transporter shall indicate the serial
number of e-way bills generated in respect of each such consignment and a consolidated
e-way bill in Form GST INS-2 shall be generated by him. Where the
consignor has not generated e-way bill and the value of consignment exceeds Rs.
50,000/-, then the transporter shall generate Form GST INS-01 on the basis of
invoice, bill or delivery challan, as the case may be, and also generate
consolidated e-way bill in Form GST INS-02.

Furnishing of Information

The information furnished
in Part A of Form GST INS-01 shall be made available to the registered
supplier on the common portal who may utilise the same for furnishing details
in return Form GSTR-1. In case of unregistered supplier the information
shall be furnished to him through his mobile number or e-mail, if available.

Cancellation of E-way
Bill

Sub-rule (6) to rule 1 provides for cancellation of e-way
bill when goods are either not transported or not transported as per details
given in e-way bill. The e-way bill can be cancelled either directly on GSTN or
through a Facilitation Centre notified by the Commissioner. However, the e-way
bill should be cancelled within 24 hours of its generation. But, it cannot be
cancelled once it is verified by the proper officer.

Validity of E Way-Bill

Sub rule (7) to rule 1
provides validity of e-way bills and form the relevant date as under;-

Sr. No.

Distance

Validity Period

1.

Less
than 100 km.

One
day

2.

100
km. or more but less than 300 km.

Three
Days

3.

300
km. or more but less than 500 km.

Five
Days

4.

500
km. or more but less than 1000 km.

Ten
Days

5.

100
km. or more but less than 300 km.

Fifteen
Days

The commissioner has the
power to extend the validity of e-way bill by notification for certain
categories of goods as may be specified therein.

The relevant date is
defined by way of explanation to the said sub-rule to mean that the date on
which the e-way bill is generated and the period of validity shall be counted
from the time at which it is generated.

Acceptance or
Rejection of Details of E-Way Bill by Recipient

The details of e-way bill
generated shall be made available to registered recipient of goods on common
GSTN portal. The recipient has to communicate acceptance or rejection of
consignment covered by the e-way bill. When he does not communicate his
acceptance or rejection within 72 hours of the communication to him on the
common portal, it is deemed that he has accepted the details. The facility of
generation and rejection of e-way bill may also be made available through SMS.

Documents and Devices to be carried by the Person In-charge

Rule 2 provides for
carrying of following documents and devices by the person in charge of a
conveyance;-

a) The
invoice or bill of supply or delivery challan, as the case may be,

b) A copy
of e-way bill or e-way bill number either physically or mapped to a Radio
Frequency Identification Device (RFID) embedded on to the conveyance in such
manner as may be notified by the Commissioner. The Commissioner may by
notification require the transporter to get the said device embedded on to the
conveyance and map the e-way bill to the RFID before movement of goods.

A registered person may
obtain an Invoice Reference Number by uploading a tax invoice issued by him in Form
GST-INV-1 and produce the same for verification by the proper officer in lieu
of the tax invoice. Such number shall be valid for a period of thirty days
from the date of uploading. When registered person uploads the invoice, the
information in Part A of Form GST INS-01 shall be auto populated on the
basis of the information furnished in Form GST INV-1.

The Commissioner may, by
notification, require the person in charge of conveyance to carry the following
documents instead of e-way bill;-

a) tax
invoice, or bill of supply or bill of entry; or

b)  a delivery
challan, where the goods are transported other than by way of supply.

Verification of Documents and Con-veyance

Under rule 3, the
Commissioner or an authorised proper officer may intercept any conveyance to
verify the e-way bill or the e-way bill number in physical form for all intra
or inter-state movement of goods. The Commissioner shall get RFID readers
installed at a place where the verification of movement of goods is carried out
and it shall be verified through such RFID readers where the e-way bills are
mapped with RFID. However, where any information is received for tax evasion
then the authorised proper officer, after obtaining prior approval, physical verification
of conveyance can be carried.

Inspection and Verification of Goods

The proper officer shall
prepare summary report of every inspection of goods in transit and it shall be
recorded on line in Part A of Form GST INS-03 within twenty four hours of
inspection and final report in Part B of Form GST INS-03 shall be
recorded within three days of the inspection. It is also provided that where
the physical verification of goods being transported is done at one place
within the State or any other State, no further verification of the said
conveyance shall be carried out again in the State unless specific information
relating to evasion of tax is made available subsequently.

Facility of Uploading of Information of Detention of Vehicle

It is the policy of the
Government not to detain any vehicle for more than 30 minutes. Therefore, a
provision is made in sub-rule (5) for uploading details by transporter of
information of detention of vehicle for more than 30 minutes in Form GST
INS-04.

Other Miscellaneous

The provision for e-way
bill is applicable to all goods whether taxable or not. Even for transportation
of NIL rated goods also e–way bill is required.

The e-way is applicable
for transportation of goods by unregistered person including agriculturist. However,
in that case the recipient shall have to generate e-way bill if the
unregistered person has not generated it.

E-way bill is required
for each and every movement of goods whether in same city or in a State or
interstate. Also, it is required for movement of goods between the branch of
same person within or outside the State.

The term ‘conveyance’
defined in section 2 (34) of the Act to include a Vessel, an aircraft or
vehicle. Hence the e-way bill is required only when the goods are transported
through defined conveyance.

The term value is not
defined in the draft rule. So it should be transaction value of the goods
supplied by way of sale. In any other case, valuation rule may apply to
determine the value of goods. However, when the goods are supplied for
provision of services that is by way of hire then, no clarity is required to
take value of supply of service and not the value of goods itself.

In case of contravention
of provisions of e-way bill, the goods and vehicle carrying the goods can be
detained and confiscated u/s. 129 of the act. The goods can be released upon
payment of applicable tax and penalty equal to 100% of tax if owner comes
forward for release of goods. In case the owner does not come forward for
release of goods, the payment of tax and penalty equal to 50 % of value of goods is required for release of goods.

In case of exempt goods
for owner, the payment of two percent of value of goods or twenty five thousand
rupees whichever is lower is required to be paid for release of goods. If owner
does not come forward for release of exempted goods, the amount five percent of
goods is required to be paid for release of goods.The goods can be released
upon furnishing a security of the amount payable as provided herein above.

Conclusion

The rules for e-way bills
are not yet finalised. The discussion herein above is based upon draft rules
and it is subject to final rules made in this respect. It seems that an attempt
is being made to check evasion of tax and at the same time minimum interception
is proposed. In most cases, the checking will be made through electronic basis.
In GST, the thrust of the government is to have e-process and e-checking which
may serve the purpose in a better manner than human intervention, and, it may
also ensure free flow of movement of goods. It would have been desirable that
at initial stage the e-way bill provisions are made applicable to tax evasion
prone goods and thereafter made applicable to other goods. The trade,
transporters and industry must be given sufficient time to adjust and adapt the
new provisions of GST law and the e-environment.

Export, Deemed Export, SEZ, Operations in Territorial Waters and High Seas Including Refund Provisions

Introduction

Across the globe, value added tax by whatever name called,
applies to international trade on destination principle, exports are free of
VAT and imports are taxed on the same basis and at the same rate as local
production. This destination principle is sanctioned by World Trade
Organization (WTO) Rules.What is free of VAT is termed as zero-rated where tax
on costs and overheads can be recovered.The principle of neutrality takes
centre stage in the context of international trade. GST thus being based on destination
principle, exports from a country of origin go out at zero-rated tax, after
exempting or refunding the input taxes that may be given to the resources used
in its manufacturing. Zero-rating of exports ensures neutrality of VAT in
international trade through unequivocal application of the destination
principle. The OECD guidelines on neutrality of VAT in international trade lay
this down as the first guideline. Thus, exports must leave the country
completely free of tax whereas tax on imported goods should be the same as the
tax levied on domestically produced goods.

Exports: Goods

Following the above principle and as also under the laws
relating to central excise, VAT laws of States and service tax, exports
continue to remain zero-rated and a similar benefit continues to be given to
Special Economic Zones (SEZs) under GST law effective from July 01, 2017. While
this benefit is extended to processing zones of the SEZ, sales from SEZ to
Domestic Tariff Area (DTA) continue to remain taxed under GST system.

As per section 2(5) of IGST Act, 2017 IGST Act) “Export of
goods” with its grammatical variations and cognate expressions, means taking
goods out of India to a place outside India”.

As per section 2(52) of CGST Act, ‘goods’ means every kind
of movable property other than money and securities but includes actionable
claim, growing crops, grass and things attached to or forming part of the land
which are agreed to be severed before supply or under a contract of supply”.

Thus, it appears that both tangible as well as intangible
goods are covered by the above expression. Now as per section 7(1)(d) of the
CGST Act, certain activities are treated as supply of services as listed in
Schedule II. This list inter alia includes the following transactions as
service transactions at para 5:

“(c) Temporary transfer or permitting the use
or enjoyment of any intellectual property.

 

(d)Development, design, programming,
customization, adaptation,upgradation,enhancement, implementation ofinformation
technology software”.

Thus, these activities have to be considered as services
under the GST law. Currently, when software is exported on a tangible medium,
it is considered as export of goods. The Karnataka High Court in Sasken
Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes,
Bangalore 2011-TIOL-707-HC-KAR-ST held “Intellect is not property by itself.
Through intellect you can create intellectual property.” It is that
intellectual property that will become goods “once put on a medium for sale”.
Intellectual property does not exist in the mind of the technician. What exists
in his mind is the intellect. Using that Intellect, a technician creates or
develops ‘goods’. It is that goods which is called intellectual property when
put on a medium for sale.” In view of this, no service tax was chargeable
on the said transaction of sale. Further, the above service description
appearing in respect of software service and intellectual property in Schedule
II is the same as under service tax law in section 66E. Therefore, software
when provided on a tangible medium and if also capable of replicating should be
considered sale of goods. From the description above viz. “temporary transfer”
of intellectual property or permitting use thereof only is to be treated as ‘service’.
It implies thus that permanent transfers of IPR or providing software on a
tangible medium would be treated as ‘goods’. However, considering the given
law, the issue of classification may remain open. In case of an export
transaction, there may not be direct tax implication as whether goods or
service, it will be a zero-rated supply. Nevertheless, there may be implication
when the Government announces/notifies any incentive either for export of goods
or services.

Export: Services

As per Rule 2(6) of IGST Act, “Export of services” means the
supply of any service when,––

(i)  the supplier of service is located in
India;

(ii)  the recipient of service is located outside
India;

(iii) the place of supply of service is outside
India;

(iv) the
payment for such service has been received by the supplier of service in
convertible foreign exchange; and

(v)  the supplier of service and the recipient
of service are not merely establishments of a distinct person in accordance
with Explanation 1 in section 8”.

In order that a supply of any service is considered exported,
conditions provided in section 2(6) of IGST Act are to be complied with as
discussed below. Further, as against export of goods, where only physical
movement is relevant, in case of services, the location of the supplier and
that of the recipient are relevant. For this, the provisions to determine the
place of supply are required to be looked at.

–   Location of supplier in India

     When a supply is made by a service provider
from his business place or an establishment located in India, the first
condition of the above Rule 2(6) stands fulfilled i.e. the supplier of service
is located in India. The expression “location of the supplier of services” is
defined in section 2(15) of IGST Act. This is for determination of the exact
location i.e. place of business or a fixed establishment or any other
establishment, from where the supply of a service is made.

–   Location of recipient outside India:

     The service supplied by a person in India
should be received outside India. For this purpose, ‘recipient’ is defined in
section 2(93) of CGST Act and “location of recipient of services” is defined in
section 2(14) of IGST Act. The meaning of recipient is provided based on
whether consideration is payable or otherwise and would include an agent on
behalf of the recipient to mean that the supply is made to the principal even
when the agent has received a service.

–   The place of supply of service

     When a service is supplied by a person
located in India to a recipient located outside India, the place of supply
should be determined as “outside India”. This is to be determined in accordance
with section 13 of the IGST Act. (This is discussed and analysed in detail in
this July 2017 issue of BCAJ in the article “Place of supply of services“ and
hence not touched upon here). Under the service tax law, Place of Provision of
Service Rules, 2012 and prior to July 2012, Export of Services Rules 2005 were
prescribed for the purpose.

–   Receipt of payment in convertible foreign
exchange

     On the lines of service tax provisions, GST
law also contains the condition of receipt of consideration or the payment for
the service to be in convertible foreign exchange to consider a service as
exported. This condition does not exist for export of goods. The service
supplier is required to produce evidence of such receipts in convertible
foreign exchange such as Foreign Inward Remittance Certificate (FIRC) issued by
banks in this regard. In the case of Sun-Area Real Estate Pvt. Ltd. 2015
(39) STR 897 (Tri.-MUM) “foreign exchange” was interpreted in detail.
Referring to Notification No. FEMA 9/2000-RB of 03/05/2000, the rupee payment
appearing in FIRC was held as receipt in “convertible foreign exchange”.
Further, referring to the Supreme Court’s judgement in J B. Boda And Company
Private Limited vs. CBDT (SC) 223 ITR 271 (SC), it was observed as follows:

     “The Hon’ble Supreme Court has held that
the said amount of brokerage retained by the Indian insurance broker from the
total amount due to the foreign insurer shall be treated as foreign exchange.
In view of the above judgments, I am of the view that when a foreign bank is
maintaining Indian rupees in their account obviously such Indian rupees were
obtained in lieu of foreign exchange. For example, if any payment is made from
India to any foreign country it is to be made in foreign exchange and thus
there is an outflow of foreign exchange but if the payment is made in Indian
rupees, there is a saving of foreign exchange and if the said Indian rupees is
received in India, the same is in lieu of foreign exchange which was saved at
the time of repatriation of Indian rupees to foreign country. On this logic
under the Foreign Exchange Management Act also it provided that if the payment
in Indian rupees is received in India through banking channel it is deemed to
be convertible foreign exchange.”

–   Supplier and recipient of service are not
merely establishments of distinct person:

Under GST law, two establishments of a person in two
different States or a Union territory and establishment of a person in India
and an establishment outside India are treated as establishments of distinct
persons in terms of Explanation-I to section 8 of GST Act. Thus a service
provided by a company located in Mumbai, India to their branch office in
Mauritius is not considered as an export of service as they are establishments
of distinct persons or they are not two separate legal entities.

Export of goods and services are zero-rated under GST law and
therefore exports can be made without payment of any tax. However, for all
zero-rated supplies, input tax credit is available even when exempt supplies
are exported.

Deemed Exports

“Deemed Exports” is a unique concept operating as a part of
Foreign Trade Policy (FTP) of India. Essentially, deemed exports mean those
transactions in which the goods supplied do not leave the country and the
supplier in India receives the payment for goods either in Indian rupees or in
free foreign exchange. The purpose for ‘deeming’ is to extend certain benefits
and relaxations in so categorised transactions even though they are not export
in nature but are viewed crucial and therefore deemed as exports. Section 2(39)
of CGST Act defines deemed export as such supplies of goods as may be notified u/s.
147. Thus, the notification in this regard is yet to be issued when this is
written. Under FTP, supply of goods under advance authorisation, supply of
goods to Export Oriented Units (EOU) software technology Park (STP), Electronic
Hardware Technology Park (EHTP), Bio-Technology Park Scheme (BTP) etc.,
supply of capital goods to EPCA authorisation holders, supply of maritime
freight containers by 100% EOU when these containers are exported out of India
within 6 months or such further period as permitted by Customs, supply to
projects funded by U. N. agencies etc. are considered eligible supplies
to be ‘deemed’ as exports. The said concept may continue on the onset of GST
with or without modification.

SPECIAL ECONOMiC ZONE (SEZ)

Both, Special Economic Zone (SEZ) and Special Economic Zone
Developer (SEZ developer) are defined in the IGST Act in sub-sections (19) and
(20) respectively in section 2. These terms derive their meanings as per
definitionsunder the Special Economic Act, 2005 (SEZ Act). The SEZ Act 2005
contains special provision regarding procurement of goods and service without
payment of taxes. In line with existing laws of central excise, service tax etc.,
GST law also provides for refund of taxes paid by the supplier supplying goods
or services to a developer or a unit holder. There has been a significant
amount of litigation on the interpretation of provisions of SEZ Act, a few of
which cited here may help under GST as well although these have been ruled in
the context of service tax or customs duty. In case of Essar Steel Ltd. vs.
UOI 2010 (249) ELT 3 (Guj), Essar located in SEZ at Hazira, Surat received
iron ore pellet from their non Vizage Pellet unit in SEZ. Customs department
demanded export duty considering that SEZ is outside the territory of India.
The High Court set-aside the demand observing that section 53 of the SEZ Act
provides that the Zone would be deemed a territory outside the customs
territory of India for the purpose of authorised operations. However, the
customs territory cannot be equated with the territory of India and such
interpretation would render SEZ Act redundant. The Zone cannot be considered
outside Indian Territory under service tax law. Notification No.9/2009-ST
provided exemption from payment of service tax for services provided to
developer or units in SEZ. In Reliance Ports and Terminals Ltd. 2015 (40)
STR 200 (Tri.-Ahmd.), the revenue’s case was that during the relevant
period March 2005 and 20/05/2009, the exemption did not exist. Therefore,
service tax should be paid by service provider and appellant would claim refund
thereof. The Tribunal interalia observed that section 51 of SEZ Act had
overriding effect if there is anything inconsistent with the provisions in any
other law and therefore exemption was available to SEZ unit under section
26(1)(e) of SEZ Act. In Norsia Container Lines 2011 (23) STR (Tri.-Del),
containers were used by unit for authorised operations in SEZ and also
sometimes outside SEZ. The Tribunal observed that as long as the containers
were used for export of goods, the exemption was available.

As per section 7(5)(b)of IGST Act, supply of goods and
services or both to or by a SEZ developer or SEZ unit would be treated to be
supply in the course of interstate trade or commerce. In accordance therewith,
for example, even if a person in Mumbai provides any service to a unit in SEZ
in Maharashtra, it will be treated as interstate supply and IGST is chargeable
primarily, notwithstanding that refund would be available since the supply is
zero-rated as in the case of exports, however subject to conditions and
safeguards and procedure prescribed for granting refund as briefly discussed
below.

Operation in territorial waters

Section 9 of IGST Act, a non-obstante clause provides that
notwithstanding anything contained in this Act, where location of the supplier
is in territorial waters, the location of such supplier or where the place of
supply is in the territorial waters, the place of supply would be considered to
be in the coastal state or union territory where the nearest point of the
appropriate baseline is located. This provision primarily seems to be aimed at
avoiding litigation in relation to supply to or from any location in
territorial waters.

However, there requires better clarity as discussed hereafter.
The limit of territorial waters is of 12 nautical miles from the nearest point
of the appropriate baseline as per section 3(2) of the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976.
The continental shelf of India comprises the seabed and sub-soil of the
submarine areas that extend beyond the limit of its territorial waters
throughout the natural prolongation of its land territory to the outer edge of
continental margin or to a distance of 200 nautical miles from the baseline
referred above. India has and always had full and exclusive sovereign rights in
respect of its continental shelf (sections 6CD(1) and (2) of the said Act of
1976).

The exclusive economic zone of India is an area beyond and adjacent
to the territorial waters and the limit of such zone is 200 nautical miles from
the baseline referred above. ‘India’ as per section 2(56) is defined to
includethe land mass of the country, its territorial waters, seabed and sub
soil underlying such waters, continental shelf, exclusive economic zone or
other maritime zone and the airspace above its territory and territorial
waters. Therefore the issue that requires examination is for example, when a
supply of repairs and maintenance services including supply of spare parts is
made to offshore oil and gas industry operation at Mumbai High by a Mumbai
vendor on offshore oilfield located in Arabian Sea around 160 km. West of the
Mumbai Coast, whether it would be considered supplies made in the State of Maharashtra
only as the power to levy GST is delegated to States as the said section 9 has
an overriding effect. The question is whether the expression “territorial
waters” used in section 9 would be construed as area upto 12 nautical miles
only. In any case, supplies in the area beyond 12 nautical miles and upto 200
nautical miles can neither beconsideredexport nor an interstate movement as
this area does not form part of any State of the country. Therefore by default
also, whether the supply would be construed as made in Maharashtra is an issue.
Conversely, if oil recovered at Bombay High is transferred to a refinery in
Mangalore, Karnataka, the supply would be considered interstate supply and IGST
would be recoverable.

The issue whether materials supplied on the vessel located in
the territorials waters was a sale within the state of Maharashtra in the
context of Maharashtra VAT provisions was considered by the Bombay High Court
in the case of Raj Shipping vs. State of Maharashtra [2015] 62 taxmann.com
309 (Bombay), wherein the Bombay High Court noted that since the agreement
to sell was entered in the state of Maharashtra, the refinery was very much
within the state of Maharashtra and the assessee’s place of business was in
Mumbai and the contract was carried out from Mumbai the sale was held to be
within the State of Maharashtra (The matter lies in the Supreme Court for
finality). Another interesting decision of the Apex Court is also relevant here
i.e. In UOI vs.Rajendra Dyeing and Printing Mills Ltd. (2004) 10 SCC 187,
it was held that when there is movement of goods outside territorial waters of
India, it is then an export may be said to have taken place. In the instant
case, the cargo was destroyed when the vessel sank within territorial waters of
India. Therefore, there was no export of cargo and no duty drawback was
available in respect of the cargo. Considering theserulings, litigation as
regards supply to or from territorial waters cannot be ruled out.

High Sea sale

What is known in common parlance as High Sea sale is a sale
taking place by transfer of documents of title to goods before the goods have
crossed the customs frontiers of India, thus is a sale in the course of import.
Such transactions are known as deemed imports. There is no bar on the same
goods being sold more than once while the goods are on high sea. The delivery
from customs is therefore on account of last high sea sale purchaser. Bill of
Entry is also filed in the name of the last purchaser. These transactions are
exempt under Central Sales Tax Act, 1956.

As per section 7(2) of the IGST Act, supply of goods imported
into the territory of India till they cross the customs frontiers of India
shall be treated to be a supply of goods in the course of interstate trade or
commerce. Whereas as per proviso to section 5(1) of the IGST Act, IGST shall be
levied on goods imported into India and will be collected as per section 3 of
the Customs Tariff Act, 1975 on the value determined under the said Act at the
point when duties of customs are levied on the said goods u/s. 12 of the
Customs Act, 1962. Thus, reading of section 7(2) indicates that sale in the
course of import before crossing the customs frontier would be chargeable to
IGST. However, harmonious reading of both section 7(2) and charging section
5(1) indicates that the supply made prior to the goods reaching customs
frontiers should not be liable for IGST. Thus, whether the provision of section
7(2) leading to charging IGST on a high sea sale is unintended or otherwise,
cannot be concluded with certainty. The question that still remains is whether
jurisdiction of the GST law as per the definition of India discussed above
remains upto 200 nautical miles from the baseline and therefore, whether
“international transfer or supply of goods” made beyond 200 nautical miles
would be outside the scope of GST law. However, to prove that ‘supply’ was made
prior to the vessel or aircraft entering the ‘limit’ of jurisdiction of the law
also appears a challenging task. In view hereof, the route of high sea sale
would lose its relevance if in terms of section 7(2), the sale made prior to
goods reaching customs is subject to IGST.

Refund provisions: Zero-rated supplier

Section 16 of IGST Act defines zero-rated supply as follows:

16. (1)
“zero rated supply” means any of the following     supplies
of goods or servicesor both, namely:––

(a) export of goods or services or both; or

(b)
supply of goods or services or both to a Special Economic Zone developeror a
Special Economic Zone unit.

Sub-section (3) of the said section 16 reads as follows:

(3) A registered person making zero rated supply shall be
eligible to claim refund under either of the following options, namely:––

(a) he may supply goods or services or both under
bond or Letter of Undertaking, subject to such conditions, safeguards and
procedure as may be prescribed, without payment of integrated tax and claim
refund of unutilised input tax credit; or 

(b) he may supply goods or services or both,
subject to such conditions, safeguards and procedure as may be prescribed, on
payment of integrated tax and claim refund of such tax paid on goods or
services or both supplied,

     in accordance with the provisions of
section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

Thus the export of goods and services and supply of goods and
services to SEZ developer or units in SEZ are zero-rated supplies. As
distinguished from service tax law, supply of services/or the goods can be made
without payment of IGST only under bond or letter of undertaking or else the
payment of integrated tax to be made (from input tax credit account) and then
claim refund thereof.In turn, the refund in respect of all zero-rated supplies
is governed by section 54 of the CGST Act along with refund in other cases. In
terms of these provisions as well as the already prescribed Refund Rules,
important requirement or conditions are listed below:

–   Only registered persons would be eligible to
claim refund. Thus in order to be eligible for claiming refund, registration is
a prerequisite.

–   An application is required to be made in the
prescribed form from the relevant date within 2 years. Relevant date for
exported goods would be the date of vessel or aircraft leaving India or the
date of dispatch by the post office as the case may be. In case of deemed
exports, the date of furnishing the relevant returns. In case of exported
services, the relevant date is the date of receipt of foreign exchange when
services are completed prior to the receipt of such payment and when advance is
received prior to supply of services, the date of issue of invoice.

–   Refund can be claimed by a registered person
at the end of any tax period for unutilised input tax credit.

–   No refund of unutilised input tax credit is
available where exported goods are subject to export duty.

–   Also when drawback is availed in respect of
central tax or integrated tax by supplier of goods or services, refund would
not be allowed.

–   All applications would have to be accompanied
by adequate documentary evidence as prescribed to establish that refund is due
to the applicant.

–   90% of the total amount claimed (excluding
the amount of input credit provisionally accepted) will be refunded within 7
days and thereafter within 60 days a final order will be made in respect of
applications complete in all respects after due verification of documents in
terms of prescribed procedure subject to the conditions that the claimant of
refund is not prosecuted during the preceding 5 year period or under the
existing law where the amount evaded was above Rs.2.5 crore.

–   No refund can be withheld or deducted in
certain circumstances such as non-filing of any return or in case of pendency
of any tax interest or penalty dues.

–   When the goods or services are exported
without payment of tax under bond or letter of undertaking, refund will be
granted as per the following formula:

     Refund amount = (turnover of zero-rated
supply of goods + turnover of zero rated supply of services x net ITC +
adjusted turnover.

     In the above, refund means the maximum
admissible fund, net ITC means credit availed on inputs and input services
during relevant period. Turnover means the turnover in a State or Union
Territory excluding the value of exempt supplies other than zero-rated supplies
during the relevant period

Conclusion

When GST era begins, given various limitations
in the law, it is least likely that litigations for interpretational issues
even reduces in comparison with those under the existing statutes governing
central excise, service tax, VAT etc. Further and importantly it also
remains to be seen how ‘seamless’ would be the flow of input tax credit and how
simplified would be the refund procedure for the zero-rated suppliers.

Contract Manufacturing And Job Work Operations

Job-work industry constitutes a significant sector in the
Indian economy. It is an indispensable arm of our industrial sector. “Job work”
includes outsourced activities which may or may not result into manufacture.
The person undertaking the job work is called job worker. The job worker works
under the instructions of the principal manufacturer and exercises his labour
over the inputs or material belonging to his principal. Where exercise of
labour results in manufacture of goods, excise duty becomes applicable and in
other cases, service tax comes into play. Some job works involve transfer of
material from job-worker to principal manufacturer in the course of execution
of the work in which case VAT/CST may get attracted. In some cases, a job
worker provides pure labour and entire inputs/ raw materials are provided by
the principal manufacturer.

Job-Work and Existing Law

The context of Central Excise Act, the Hon’ble Supreme Court
in the case of Ujagar Prints, etc. vs UOI 1988 (38) ELT 535 had held
that, the assessable value of the goods in the hands of job-worker, would
include value of the goods supplied to the job-worker for processing plus the
value of the job-work done plus manufacturing profits and manufacturing
expenses whatever would be included in the price at the factory gate but not
any other subsequent profit or expenses. Subsequently, Rule 10A was inserted in
the Central Excise Valuation whereby, transaction value of the goods processed
by the job-worker was amended to also include profits of the principal
manufacturers (i.e. transaction value of the goods sold by the principal
manufacturer at the time of removal of goods from the factory). The job work
operations not amounting to manufacture would be regarded as service. The
job-work processing charges charged by the job-worker to principal manufacturer
would attract service tax. This would include price of the raw material, labour
and processing charges. The raw material supplied by the Principal manufacturer
free of charge may not form the part of value of taxable services.

Job-Work and GST

Under the GST regime, the term “job work” is defined in
section 2(68) to mean any treatment or process undertaken by a person on
goods belonging to another registered person and the expression “job
worker” shall be construed accordingly. Contract manufacturing is not strictly
same as job-work as in that case, contract manufacturer uses his own material.
The principal manufacturer only affixes his label and sells the product.
Therefore, ‘contract manufacturing’ would not be considered as job-work.
Distinction between contract manufacturer and job-worker would be relevant in
GST since transaction between principal manufacturer and job-worker has been
given special treatment in GST Law.Various provisions concerning job-work
transactions are discussed in this Article.

Whether supply of goods from Principal to Job-work would
attract GST if provisions of section 143 are ignored?

Section 143 of the GST Act, makes special provisions for
transactions between manufacturer and job worker. It provides that, a
registered person (say principal manufacturer) may send any inputs or capital
goods to a job-worker, without payment of tax on the basis of intimation
given to the proper officer and subject to certain conditions. The levy under
the GST law is on “supply” of goods and services.

The term supply is wide enough to cover any form of supply
such as sale, service, transfer, barter, exchange, licence, rental, lease,
disposal etc. However, supply made by one person to another person
without consideration would not attract GST [unless the supplier and receiver
are related persons]. Hence, author is of the view that, even in the absence of
section 143(1), a supply of any goods (inputs, capital goods, consumables,
tools, jigs etc.) by a manufacturer to unrelated job-worker would not
require payment of tax.

Why scheme under section 143 is required?

Then a question may arise as to whether principal is required
to reverse Input Tax Credit (ITC) availed by the manufacturer in respect of
such goods supplied to job-worker on the ground that outward movement of such
goods to job-worker does not suffer GST. Besides, when the job-worker returns
the ‘processed goods’ back to manufacturer and charges job-work processing
charges, the question may arise as to whether value of ‘such goods’ for the
purpose of GST would include only ‘job work charges’ or ‘transaction value’ of
the processed goods.

As regards entitlement of ITC, section 19 provides that the
principal (manufacturer sending the raw material etc.) shall, subject to
certain conditions and restrictions as may be prescribed, be allowed input tax
credit on inputs/ capital goods sent to a job worker for job work. Such
conditions and restrictions are contained in Rule 10 of the ITC Rules approved
on 17.05.2017 (discussed later). The ITC is allowed, even if the inputs/
capital goods are directly sent to a job worker for job work without being
first brought to his place of business. However certain additional
conditions are contained in section 19, which makes it necessary for principal
and job-worker to avail the benefit of scheme contained in section 143. In
other words, benefit of section 19 is available to manufacturer only if he
avails the benefit of scheme u/s. 143.

It appears that, intention of section 19(3) and 19(6) is
to require the principal to reverse the ITC, if benefit of scheme contained in
section 143 requiring the principal to give intimation is not obtained or in
case the goods are not received back within stipulated period as per section
143, but that intention is not coming out from the wordings of section 19(3)
and 19(6). Section 19 provides that, where the inputs (or capital goods)
sent for job work are not received back by the principal after completion of
job work or otherwise or are not supplied from the place of business of the job
worker in accordance with clause (a) or clause (b) of sub-section (1) of
section 143 within one year of inputs (and within three years in case of
capital goods) being sent out, it shall be deemed that such inputs/ capital
goods had been supplied by the principal to the job worker on the day when the
said inputs were sent out. The exception is provided only in respect of moulds
and dies, jigs and fixtures, or tools.The use of the expression “it shall be
deemed that such inputs had been supplied by the principal to the job worker on
the day when the said inputs were sent out” in section 19(3) is a misfit
and appears to be a drafting error – copy pasting from provisions of 143(3) and
143(4) of the Act. The suggested correct wordings would be, “the principal
shall be liable to pay Input Tax Credit availed on such inputs or capital goods
on the date of supply of such goods to job-worker in accordance with provisions
contained in section 143(3) and 143(4).”

Thus, going by the spirit of section 19, if the Principal has
given/obtained benefit of scheme u/s. 143, he would not be required to reverse
the ITC in respect moulds and dies, jigs and fixtures, or tools sent out to a
job worker for job work at all, even if he had paid no GST at the time of their
supply to the job-worker. As regards inputs and other capital goods, the
reversal of ITC is not required at the time of sending such goods to job
worker, only if goods are brought back or otherwise dealt with by the principal
and job-worker, within time limit specified in the provisions of section 143.

Time Limit contained in section 143

Under section 143, if the principal supplies goods to
manufacturer under intimation, then he shall be required to bring back to
any of his place of business, the inputs after completion of job work or
otherwise within one year or capital goods within three years of their being
sent out. The restriction is not applicable to moulds and dies, jigs and
fixtures, or tools. Alternatively, such processed goods or capital goods can,
within the aforesaid period, also be supplied from the place of business of a
job worker on payment of tax within India, or with or without payment of tax
for export. However, in order to supply such goods directly from the place of
job-worker, principal shall either be required to declare the job-worker’s
place as his place of business or the job worker should be a registered dealer.
In other words, if the place of job-work is not registered with the department,
the processed goods shall be first required to be brought to any registered
place and it can be supplied only from such place.

In this context, another question may arise that, if the
job-worker has his own registration with the department and the principal
decided to supply the goods directly from the place of business of such
job-worker on payment of duty, then who shall pay the tax on such supply,
principal or job-worker? In this regard, Explanation below section 21 provides
that, the supply of goods, after completion of job work, by a registered job
worker shall be treated as the supply of goods by the principal
referred to in section 143, and the value of such goods shall not be included
in the aggregate turnover of the registered job worker. Besides section 143(2)
also provides that, the responsibility for keeping proper accounts for the
inputs or capital goods shall lie with the principal. If legislative intention
is to make the principal liable to pay tax in respect of such supply, then this
explanation was more suitable u/s. 143 instead of section 21. It would also
mean that, principal would be required to register job-worker’s premises as his
place of business (notwithstanding the job-worker has his own registration) as
only in that case principal would be in a position to declare and pay tax on
such outward supplies in his GSTR-1.

In short, it appears that, section 143 requires the
job-workers to pay GST only in respect of their processing/ job working charges
and not on the transaction value of the processed goods. In addition to job
work charges, if any waste and scrap is generated during the job work, the job
worker shall be required to pay tax on supply of such scrap if he is registered
and only in cases where such job-worker is not registered, payment is required
to be made by the principal.

Whether section 143 is applicable, if Job-worker’s Premise is
registered as additional place of business of Principal, where both are located
in the same State

The aforesaid discussion will be applicable, if principal and
job-worker are located in different States. However, if they are located in the
same State, then the question may arise as to what would happen, if the
job-worker’s place of business is registered by the principal as its additional
place of business? In that case, whether it would be necessary to take recourse
to provisions of section 143.

Author is of the view that, in such case, provisions of
section 143 will be of no consequence. The concept of supply presupposes
existence of more than one person. Under GST, the transaction between two units
of the same entity without consideration is regarded as supply only if said
units have obtained separate registration. Therefore, if both the units are
covered in the same registration certificate, the movement of goods between
such units would not be regarded as supply for the purpose of GST. The movement
of goods within places of businesses covered under same registration also does
not contemplate any reversal of ITC. Hence, if job-worker’s place in the same
State is registered as additional place of business of the principal, supply of
goods made by principal to job-worker as his additional place of business would
not attract GST, the question of reversal of ITC would not arise and the supply
of processed goods from the said premises of job-worker to any other premise of
the principal in the same State (covered under same registration) would also
not attract GST. Besides, the principal would be in a position to supply the
processed goods to his customers directly from place of such job worker in a
routine manner, that being his own registered place of business. The job-worker
will only be required to pay GST on his job-working charges and if the
job-worker is unregistered, principal would be liable to pay it under reverse
charge mechanism and claim ITC thereof.

Author is therefore of the view that, if the job-worker  is located in the  same State as that of Principal, it is
advisable to register job-worker’s premises as his additional place of
business.

Rule 10 – Conditions and restrictions in respect of inputs and
capital goods sent to the job worker

As per Rule 10, the inputs, semi-finished goods or capital
goods shall be sent to the job worker under the cover of a delivery challan
issued by the principal, including where such goods are sent directly to a
job-worker. The delivery challan shall be issued at the time of removal of
goods for transportation, by the principal to the job worker and shall contain
the following details:

–   delivery challan should be serially numbered
not exceeding sixteen characters, in one or multiple series, and shall contain
a date.

–   name, address and GSTIN of the consignor, if
registered,

–   name, address and GSTIN or UIN of the
consignee, if registered,

–   HSN code and description of goods,

–   quantity

–   taxable value,

–   place of supply, in case of inter-State
movement, and

–   signature.

The details of challans in respect of goods dispatched to a
job worker or received from a job worker during a tax period shall be included
in FORM GSTR-1 [ Table -13] furnished for that period.

Where the inputs or capital goods are not returned to the principal
within the time stipulated in section 143, the challan issued under sub-rule
(1) shall be deemed to be an invoice for the purposes of the Act.

Transitional Provisions concerning Job-Worker

As per section 141 where any inputs/ semi-finished goods
received at a place of business had been removed as such or removed after being
partially processed to a job worker in accordance with the provisions of
existing law prior to the appointed day and they are returned to the said place
on or after the appointed day, no tax shall be payable if such inputs/
semi-finished goods, after completion of the job work or otherwise, are
returned to the said place within six months from the appointed day. If however,
such inputs / semi-finished goods are not returned within a period of 6 months
as specified in section 141, then CENVAT Credit taken by the principal
manufacturer on such inputs / semi-finished goods is liable to be recovered
from the manufacturer in accordance with provisions of section 142(8)(a).
Similar provisions are also contained in respect of excisable goods sent for
job work for further processing not amounting to manufacture, carrying out
tests etc. As regards semi-finished goods/excisable goods sent for
further processing, carrying out tests etc., section 141 allows transfer
the said goods to the premises of any registered person for the purpose of
supplying therefrom on payment of tax in India or without payment of tax for
exports within the period specified in this sub-section. Section 141 also
requires the manufacturer and the job worker to declare the details of the
inputs or goods held in stock by the job worker on behalf of the manufacturer
on the appointed day in such form and manner and within such time as may be
prescribed. As per Rule 3 of Transition Rules approved by Council of
04.06.2017, principal and job-worker shall submit declaration in Form TRAN-1
specifying therein, the stock of the inputs, semi-finished goods or finished
goods, as applicable, held by him on the appointed day. The relevant Format is
contained in Table-9 (a) and (b) of TRAN-1 and such form is also required to be
furnished by the job-worker whether or not he is registered in GST.

As regards contract
manufacturing, since it is not a job-work and generally there is no supply of
goods from principal to contract manufacturer, job-work provisions would not be
applicable. In that case, contract manufacturers would be required to take
registration and would be required to pay GST on the manufactured goods
supplied by him to the principal as if it is a supply of goods and not as supply of service. 

Impact of GST on Small & Medium Businesses (Including Composition Scheme)

1.  Small & Medium Business Enterprises / Tax
Payers including Non – Profit bodies, Co-operative Societies etc [SME]

SME Sector comprises a
significant component of the Indian Economy. Under the prevailing business
scenario in the country, there are small & tiny business units scattered
across the country in large numbers extensively in the Unorganised Sector. Though,
SME Sector contributes very small portion in terms of taxes, it is very
important to our Economy inasmuch as, it significantly contributes to India’s
GDP, provides employment (directly/indirectly) to a large number of people
& also contributes substantially to the Exports of our Country. Accurate
statistics in this regard are not formally available. However, the following be
noted:

–   According to Annual Report (2015-16) of the
Ministry of Micro, Small & Medium Enterprises, there are estimated to be
about 51 Million MSME businesses, employing more than 117 Million people and
have a combined Fixed Asset value of 15 lakh crore (app).

–   According to other press reports, if the
entire unorganised sector is considered comprehensively on a pan India basis,
the SME businesses in India estimated to be around 51 Million, could be
contributing to 45% of India’s GDP and employing 450 million people (app).

–   It is also estimated that SME Sector could be
contributing around 30% to 40% of India’s Total Exports. 

SME Sector is likely to be severely impacted by the GST
Regime. Hence, the implications on this Sector are discussed hereafter, for the
awareness & understanding of SME tax payers. All references in the write up
to Central GST would cover corresponding provisions under State GST as
well. 

2   Threshold Limits

Threshold Limits are usually provided for imposition of any
tax, so that SME are kept out of the tax net. This is also administratively
expedient as it is difficult to exercise control over large number of SME,
where revenue generated is less compared to administrative costs involved.

2.1 Existing
Position

The present threshold limits for SME under different indirect
tax laws are as under:

a)  Central Excise Act, 1944 (CEA)

•    SSI Exemption Scheme upto Value of Taxable
Clearances of 150 lakh in a year subject to terms & conditions.

•    Concessional Excise Duty (2%) without CENVAT
Credit on Specified Products of mass consumption.

b)  Finance Act, 1994 (Act)

     (Service Tax)

•    SSI Exemption Scheme upto Value of Taxable
Services of 10 lakh in a year subject to terms & conditions.

c)  Maharashtra VAT, 2002

•    Turnover upto 5 lakh in a year subject to
conditions.

•    Composition Scheme for specific businesses
subject to terms & conditions.

2.2  Threshold Limits under GST

a)  The threshold limits under Central Goods &
Services Tax Act, 2017 (CGST) & State Goods & Services Tax Act 2017
(SGST) are as under :

•    turnover upto 10 lakh in a year
(Registration Limit 9 lakh)

•    turnover upto 5 lakh in a year (Registration
Limit 4 lakh) for Specified States.

b)  There is no threshold limit under the
Integrated Goods & Services Tax Act, 2017 (“IGST”) in regard to inter–state
transactions of goods & services

c)  For computing the threshold limit, “aggregate
turnover” is defined u/s. 2(6) of CGST as under:

“aggregate turnover” means the aggregate value of all taxable
supplies (excluding the value of inward supplies on which tax is payable by a
person on reverse charge basis), exempt supplies, exports of goods or services
or both and inter–State supplies of persons having the same Permanent Account
Number, to be computed on all India basis but excludes Central tax, State tax,
Union territory tax, integrated tax and cess;

d)  Under Section 2 (47) of CGST, “exempt supply”
is defined as under :

“exempt supply” means 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 Services Tax Act, and includes
non–taxable supply;

e)  Notwithstanding the threshold limits stated in
Para (a) above, the following category of persons shall be required to be
compulsorily registered in terms of ection 24 of CGST:

i)   Persons making any inter–State taxable supply

ii)  Casual taxable persons

iii)  Persons who are required to pay tax under
Reverse Charge

iv) Persons who are required to pay tax under
section 9(5) of CGST

v)  Non – Resident taxable persons

vi) Persons who are required to deduct tax u/s. 51
of CGST whether or not separately registered

vii) Persons who supply goods and/or services on
behalf of other registered taxable persons whether as an agent or otherwise

viii)Input
Service Distributor, whether or not separately registered

ix) Persons who supply goods and/or services, other
than supplies specified in Section 9(5) of CGST, through electronic commerce
operator who is required to collect tax at source u/s. 52 of CGST

x)  Every electronic commerce operator

xi) Every person supplying online services from a
place outside India to a person in India, other than a registered person.

xii) Such other person or class of persons as may be
notified by the Central Government or a State Government on the recommendations
of the Council.

3   Composition Scheme – Section 10 of CGST
(Scheme)

a)  The Salient Features of the Scheme are as
under:

i)   Scheme is available to those SMEs whose
aggregate turnover in a financial year does not exceed Rs. 75 lakh (increased
from earlier limit of 50 lakh as per press reports) on an optional basis if the
registered person :

•    is not engaged in supply of services other
than supply of food & services for human consumption [as referred in clause
(b) of para 6 of Schedule II – CGST]

•    is not engaged in making any supply of goods
which are not leviable to tax under CGST

•    is not engaged in making an interstate
outward supplies of goods

•    is not engaged in supply of goods through
electronic commerce Operator (covered by section 52 of CGST)

•    is not a manufacturer of such goods as may
be notified by the govt. 

ii)  All registered taxable persons having the same
PAN number can opt for the Scheme if all such persons also opt for the Scheme:

iii)  The taxable persons opting for the Scheme will
have to pay a fixed percentage of gross turnover as tax. The rates of tax for
Composition Scheme are as under :

Category
of persons

Rate
of tax as %

of
Turnover

 

Aggregate
rate of tax (Centre & State) as % of Turnover

Manufacturers
(other than notified goods)

1%

2%

Service
Providers [viz Suppliers of food / beverages 
as referred in clause (b) – Para 6, Schedule II of CGST]

2½

5%

Any
other eligible supplier u/s. 10 of CGST

½ %

1%

iv) SME opting for Scheme would not be entitled to
any ITC.

v)  Taxable persons who opt for the Scheme will
not be allowed to charge GST in their invoice and cannot recover tax from
customer

vi) Scheme is subject to reverse charge provisions
contained in section 9(3) & (4) of CGST

vii) The option availed of by a registered person
under the Scheme shall lapse from the day on which his aggregate turnover
during a financial year exceeds the specified limit of 75 lakh (increased from
50 lakh as per press reports)

viii)Registered
Person opting for the Scheme shall have to comply with conditions &
restrictions stipulated under the Composition Rules notified under CGST / SGST. 

4       Concerns of SME Sector

4.1    Fixation to Effective lower threshold would
expand SME Coverage under GST

a)  The threshold limits under GST regime, as
stated in para 2, above, is likely
to bring a large chunk of SME Sector under GST inasmuch as :

•    Present exemption limit of 150 lakh under
central excise is reduced to 20 lakh under GST;

•    Presently, a tax payer having business
across different states in India, is entitled to the benefit of threshold limit
in each State. Under GST, in such cases, the threshold limit would be available
on an all India
basis; and

•    Compulsory Registration irrespective of
threshold limit for large number of specified tax payers as stated in para 2.2(e)
above, would result in substantially higher registrations.

b)  Compared to the threshold exemption scheme
presently prevalent which is applicable to taxable turnover (Central Excise
& Service tax,) effective threshold limits under GST would be very low
inasmuch as :

•    for computing, aggregate turnover, taxable
and exempt supplies of goods & services & export turnover is to be
considered

•    “exempt supply” would cover non taxable
supplies.

     These factors would make the effective
threshold limit for Registration under GST very low & increase
registrations in SME Sector substantially:

     It has been provided in section 23(1)(a) of
CGST that a person engaged exclusively in the business of supplying not taxable
/exempt goods & services shall not be required to be registered. However,
even with a nominal taxable supply of goods /services, registration may become
necessary if the aggregate turnover exceeds Rs. 20 lakh.

     A significant fall out of the above, is
that such persons would be hit by provisions of section 9(4) of CGST discussed
in para 4.2 hereafter.

c)  Even in cases covered by section 23(1)(a) of
CGST, Registration would become necessary, in regard to cases covered under
Reverse Charge Provisions [viz section 9(3) of CGST.]

d)  Since the threshold limit of 75 lakh
(increased from 50 lakh as per press reports) for Composition Scheme would
cover exempt / non–taxable Supplies, the effective exemption limit would be
very low. In this regard, it is pertinent to note that, in the Union Budget for
2016-17 the turnover limit for presumptive taxation (for Specified Business)
has been increased from 1 crore to 2 crore.

4.2    Tax on purchases by registered persons from
unregistered persons 

The relevant
extract of section 9(4) of CGST is reproduced hereafter :

The Central tax in respect of the supply of taxable goods or
services or both by a supplier, who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of this Act shall apply to such recipient as if he is the person
liable for paying the tax in relation to the supply of such goods or services
or both.

It is very likely that a large number of SME businesses
(traders, service providers etc.) could be within threshold limit of Rs.
20 lakh and hence strictly not required to be registered under GST. However, as
stated above, a most unprecedented provision has been made under GST law, to
the effect that if a registered person purchases goods/services from an
unregistered person, he is  required to
discharge tax liability under reverse charge basis on such purchases without
any threshold limit.

This provision is most
absurd and defies any rationale inasmuch as the govt. on the one hand has given
threshold exemption and at the same time, has indirectly taken it away on the
other hand. It would increase compliances (preparation of invoices for each
procurement) for the registered SME and also increase costs of doing business.
Another implication is, due to increased compliances, registered persons may
avoid dealing with unregistered SME. This could drive away lakhs of SMEs out of
business & affect their basic survival & livelihood.

4.3    Hardship Provisions relating to Input Tax
Credit (ITC)

a)  No ITC in cases where tax is not paid by the
supplier

     Section 16(2)(c) of CGST provides that no
ITC can be claimed, by a taxable person who receives the goods/services, in
cases where the GST is not paid by the supplier of goods & services.

     This is a highly draconian provision in GST
without any sound justification & rationale inasmuch as a taxpayer
receiving goods / services and making valid payment (with tax) to the supplier
would be penalised for default committed by the supplier (non – payment of
tax). Instead, in such cases, the supplier should face stiff penal actions.
Instead, a compliant tax payer is being penalised, for no fault of his. 

     It has
been a very well settled practice, under MODVAT (CENVAT) Credit Mechanism which
is prevalent under Central Excise / Service Tax for the past 30 years, to the
effect that, if the manufacturer / service provider availing credit has
properly and validly received goods / services supported by duty / tax paid
document and has taken reasonable steps to ensure that there is no malafide
evidence from the duty / tax paid document issued by the supplier, such
manufacturer / Service provider is entitled to Credit and Credits cannot be
reversed even in cases where it is subsequently found that the supplier has not
paid the duty / tax to the govt. There is no convincing reasoning / justification
provided as to why this settled practice is being done away with under GST.

    This provision would create unprecedented
hardships to Trade & Industry particularly in the SME Sector which is
always short of working capital and is contrary to the cause of “ease of doing
business” in India. 

b)  Matching, Reversal & Reclaim of ITC

     Under the GST regime, all GST registered
businesses are required to uplift all supply information through the GSTN
portal by the 15th day following the close of a month. In order to
claim an ITC, the purchaser must upload all purchase information by the 15th
day following the close of that month. A credit will only be available where
the purchaser’s invoice matches the sales invoice uploaded by the supplier and
the GST has been paid.

     Under this approach, it will be almost
impossible for a business to claim its credit entitlement on a timely basis.
The delay in claiming credits and the costs associated with managing this
system alone will unnecessarily increase the working capital of SME businesses,
eroding one of the benefits of moving to a GST system.

c)  Reversal of ITC in case of non – payment to
supplier

     In cases where a registered person avails
ITC but payment is not made to supplier within 180 days from the date of issue
of invoice, such registered person is required to reverse such ITC and also
liable to pay interest from the date of availment of ITC till the date of
payment. It is further provided that, such registered person shall be entitled
to claim ITC upon payment.

     This would adversely impact the SME Sector
who usually operate with low margins and under severe working capital
constraints.

d)  Denial of ITC in case of non –
compliances 

Some
examples are as under :

i)   No ITC would be available during the period
for which a tax payer is not registered.

ii)  Non – filing of GST returns for a consecutive
period of six months (3 Returns in case of Composition Scheme), would result in
cancellation of the GST registration. The fallout of this provision is onerous,
inasmuch as a cancellation of registration under GST shall be deemed to be a
cancellation of registration under GST. Further, once registration is
cancelled, ITC would be denied to the customers of such taxpayer.

iii)  Section 16(2)(d) of CGST provides that
registered taxable person shall not be entitled to ITC unless he has furnished
Return u/s. 39.

     The above provisions are too harsh inasmuch
non – compliances could happen due to variety of reasons and would adversely
impact SME Sector who operate with limited infrastructure.

4.4   Working Capital Blockages & Constraints 

     In addition to the hardship provisions
relating to ITC stated in Para 4.3 above,
the following provisions under GST, would also result in working capital
blockages & impact cash flows of SME Sector :

a)  Unlike the practice prevalent under current
indirect tax regime, under GST regime, stock transfers to own branches would be
taxable. With GST being paid on the date of transfer but Credit becoming
available only when stocks are liquidated by the receiving branch, cash flows
would be severely impacted.

b)  Merchant Exporters’ Business Model is widely
prevalent in the SME Sector. Under the existing indirect tax regime, Merchant
Exporters procure goods from exempted SSI units without excise duty and without
payment of State VAT in terms of declaration filed for export. However, under
the GST regime, suppliers’ would charge GST/SGST/IGST to the Merchant
Exporters. Upon payment, Merchant Exporters would have to claim refund. Though
it has been provided that 90% of the refund claims would be granted
provisionally within 7 days, delays are very much likely. This is likely to
create huge cash flow constraints for SME Merchant Exporters’ and cause
hardships.

4.5    Substantial Increase in Compliances 

It is widely known that the SME Sector operates with a very
limited skilled infrastructure. The level of statutory compliances, at the present
itself, is very high. Since GST would work on total automation, compliance
level is likely to increase substantially. Under GST, 3 Returns would be
required to be filed every month and 1 Annual Return. In case TDS provisions
are applicable, there would be additional compliance. The compliance costs are
likely to increase substantially for the SME Sector (including non–profit
bodies, Co-operative Societies etc.).

4.6    Recommendation

Considering the peculiar business scenario in the country and
the circumstances under which SME Sector operates, their significance in the
Indian Economy and practices prevalent worldwide, the following is recommended: 

–   Threshold
limits (including composition) should be rationalised. In this regard,
Threshold for presumptive taxation under income tax, be considered.

–   Scope of
Composition Scheme should be enlarged to cover specific businesses (as
successfully prevalent under present State VAT regime).

–    Comprehensive Code should be put
in place for SME Sector, which should in particular include, provisions for
quarterly compliances, removal of hardship provisions under ITC and summary
assessments.

GST Returns

INTRODUCTION

Most of the indirect tax statutes in India are based on selfassessment
procedure. Filing of returns is an important
part of implementing the tax and the self-assessment
scheme. In simple words, a return is a declaration that
a tax payer gives to the tax administration which would
broadly comprise of furnishing details of his outward
supplies (and the tax collected thereon), inward supplies
(and tax charged thereon) and the net tax payable or
refundable.

Due to the multiplicity of indirect taxes, a tax payer, at
present, may be required to file more than one return
under more than one of the applicable tax legislations.
Each of the applicable legislations would have its own form
of return requiring various details. This makes compliance
under existing indirect tax structure time-consuming and
cumbersome.

RETURN FILING PROCESS UNDER GST
REGIME

A return is defined u/s. 2(97) to mean any return prescribed
or required to be filed under the Act or any rules made
thereunder. While the procedure of self-assessment would
continue under the GST regime, the process of return
filing would witness a radical change. Broadly, the filing
process envisages furnishing information through three
statements/returns, which are required to be furnished by
three different dates as prescribed under the law. In view
of complete electronic compliance and matching concept,
the sensitivity of furnishing accurate data would assume
immense importance in the GST regime.

SALIENT FEATURES OF RETURN
COMPLIANCE UNDER GST

TYPES OF RETURNS UNDER GST

The types of returns, nature of compliance, periodicity
and references to statutory provisions and return rules
are tabulated hereunder:

Form GSTR Nature of Compliance/ Category of tax payer Periodicity Due Date in the succeeding month Section/ Return Rule
1 Furnishing details of outward supplies Monthly 10th S. 37 Rule-1(1)
2A Auto drafted details of supplies to the Recipient [paying tax u/s. 9] Monthly After 10th S. 37 Rule-1(3)
2 Filing of monthly details of inward supplies Monthly 15th S. 38(2)

R. Ret-2(1)
1A Communication of auto drafted details of supplies to the Supplier Monthly After 15th S. 38(3)/(4)

R. Ret-1(4)
3 Monthly Return Monthly 20th S. 39(1)

R. Ret-3
4 Composition Taxable person Quarterly 18th S. 39(2)

R. Ret-4
4A Auto drafted details to recipient being a

Composition Tax payer

 Quarterly After 10th S. 37 Rule-1(3)
5 Return for Non- Resident Taxable persons Monthly 20th S. 39(5)

R. Ret-5
5A Details of supplies of OIDAR services provided by person

located outside India to a non-taxable in India

 Monthly 20th R. Ret-5A
6 Return for Input Service Distributors Monthly 13th S. 39(4) R.Ret-6
6A Auto drafted details to recipient being an ISD Monthly After 10th S. 37 Rule-1(3)
7 TDS return Monthly 10th S. 39(3) R.Ret-7
8 Statement of TCS Monthly 20th S. 52(4

R. Ret-8)
11 Inward Supply statement by UIN holders Monthly R.Ret-23

FORM GSTR1: DETAILS OF OUTWARD
SUPPLIES

The process of return filing under GST shall commence
with Form GSTR-1. A registered taxable person [‘RTP’]
shall furnish details of his outward supplies [including
deemed supplies under Schedule-1]. The various tables
in the form are summarised hereunder:

Table CONTENTS OF GSTR -1
 

 

4

 Details of B2B Taxable Outward Supplies [Inter and Intra State] to registered taxable persons holding GSTIN]:

◆ Taxable under forward charge

◆ Taxable under RCM

◆ Through E-Comm attracting TCS [E-Comm wise]

 Broad    details    to    be furnished are as under: Recipient’s GSTIN/ UIN, Invoice details [Rate wise], taxable value, tax amount and place of supply (where it is different from the recipient) have to be furnished
 

 

5

 Details of Taxable Inter-State outward supplies to unregistered person [B2C] where invoice value is

> Rs.2.5 Lakhs:

◆ Supplies other than through E-Comm

◆ Supplies through E-Comm attracting TCS [E-Comm wise]

 Details to be furnished include:

◆ Details similar to Table 4 to be furnished [except GSTIN]

◆ Place of supply field is

mandatory
 

 

 

6

 Details of Zero Rated supplies and deemed exports:

◆ Direct Exports out of India

◆ Supplies made to SEZ Developer or unit

◆ Deemed Exports

 Details to be furnished include:

◆ GSTIN of the recipient [of the supplier in case of exports]

◆ Details of Invoice, Shipping Bill or Bill of Export

◆ Rate-wise details of taxable value and amount of IGST/Cess
 

 

 

7

 Details of B2C inter and intra- states taxable outward supplies not covered in Table 6 shall be covered in this table [Net of Debit/ Credit Notes]:

◆ Inter and Intra State supplies [Including made through E-Comm]

◆ Separate summary of supplies made through E-Comm [included above] to be given separately

 Details to be furnished include:

◆ Rate wise consolidated values and tax there on

◆ Identify State for Inter- State supplies

◆ Summary of supplies through E-Comm
8 Details of value of NIL rated, exempted and Non-GST supplies to be furnished, classified as B2B Inter and Intra State and B2C Inter and Intra State
 

 

 

9

 Details of amendments to taxable outward supplies for earlier periods furnished in Table 4, 5 and 6 Details to be furnished include:

◆ Requires tagging amendments to original document

◆ Revised details of above documents like rate, taxable value, tax & State name
10 Allows amendments relating to B2C supplies covered in Table 7 of earlier periods. Month wise revised details to be furnished where correction is required
Table CONTENTS OF GSTR -1
 

 

 

 

11

 Details of advances received and adjustment of advances against outward supplies:

◆ Advances received in the current month

◆ Adjustments of advances against invoices issued during the current month

◆ Amendment to information furnished in Table 11 during earlier months

 Details to be furnished include:

◆ Rate wise details of advances received or adjusted in the current month against taxable outward inter and intra state supplies

◆ Identify place of supply

◆ Also provides separate table for amendment tod details furnished earlier
 

 

 

12

 HSN wise value of outward supplies made during the period. HSN codes would be mandatory as under:
 

13

 The GST Law and the rules made thereunder require a tax payer to issue number of documents for various purposes [E.g. Invoices, Credit note, debit note, receipt voucher]. This table requires the tax payer to provide a document summary.

AUTO DRAFTED DETAILS OF SUPPLIES
– GSTR-2A/ 4A/ 6A

Auto drafted details of outward supplies furnished
by n-number of suppliers shall be communicated to
respective RTP’s in Form GSTR 2A [regular RTP’s],
GSTR-4A [Composition RTP’s] and GSTR-6A [ISD’s].
These shall be made available to the recipients after 10th
of the month following the tax period on the common
portal based on details furnished in GSTR 1, 5, 6, 7 and 8. The auto drafted details shall comprise of the following:

Table Contents Source return
TABLE A
3 Inward Supplies received from RTP [other than RCM supplies] GSTR-1/5
4 Inward Supplies from RTP on which tax is to be paid under RCM GSTR-1/5
5 Debit/ Credit Notes including amendments thereof GSTR-1
PART B
6 ISD Credit [Including amendments thereof] GSTR-6
PART-C
7 TDS/ TCS Credit (Including amendments thereof) GSTR-7/8

FORM GSTR2: FURNISHING DETAILS OF
INWARD SUPPLIES

Section 38 of the CGST Act states that every RTP shall
furnish details of inward supplies received during a month.

This process would require the RTP to first go through
the herculean task of reconciling the auto drafted details
made available in GSTR-2A with the actual supplies as
per his books of accounts. Supplies that are not auto
populated shall be entered by the RTP and he shall selfclaim
the credit thereon. Table-wise details to be furnished
in GSTR-2 are summarised hereunder:

Table CONTENTS OF GSTR -2
 

 

 

 

3

 Furnish details of taxable inward supplies [Inter and Intra State] from RTP [other than RCM supplies. Details to be furnished shall include:

◆ Rate-wise invoice level of supplies from RTP after verifying details contained in GSTR-2A. If invoice carries supplies attracting different rates separate disclosure shall be made for each such supply

◆ Entries in GSTR-2A may be kept pending for action [E.g. Supplies not received]

◆ At invoice level the RTP needs to identify the following in respect of each entry

•    Nature of supply – Input, Input Services or Capital Goods

•    Identify invoices where ITC is ineligible

•    Identify amount of ITC available in the current period
 

 

 

4

 Details of following taxable inward RCM supplies to be furnished in this table:

◆ Received from RTP

◆ Received from unregistered person

◆ Import of services

 

[To the extent time of supply arises]

 RTP shall furnish following details

◆ GSTIN of supplier and rate wise invoice details

◆ Name of the State [where different from the recipient]

◆ Nature of supply – Inputs, Input services or capital goods

◆ Identify whether ITC eligible

◆ Amount of ITC available
 

 

5

 Details relating to supplies of inputs or capital goods received on a Bill of Entry from:

◆ Outside India [Direct Imports]

◆ Received from SEZ unit

 Details to be furnished are as under:

◆ GSTIN [Where supply from SEZ unit]

◆ Bill of entry details

◆ Rate-wise invoice details

◆ Nature of supply, ITC eligibility and amount available
 

 

 

6

 Details of amendments to details in Table 3,4,5 furnished earlier to be provided in this table relating to:

◆ Details in Table 3 or 4

◆ Import details in Table 5

◆ Original Debit and Credit Notes

◆ Debit or Credit Notes – amendments

 Details to be furnished are as under:

◆ Tag revised details to original document and the GSTIN

◆ For whichever sub-table correction is required furnish revised details by selecting the appropriate sub-table and month
 

7

 Values of following Inter/ Intra State supplies to be furnished in this table supplies from

◆   From Composition Tax payer  ◆  Exempt Supplies

◆   NIL rated supplies                    ◆  Non-GST supplies
 

8

 Details of ISD Credit received:

◆ Document and levy-wise ISD credit received [and reversal on account of Credit Note]

◆ Identification of eligible ITC
 

9

 Details of TDS and TCS:

◆ TDS – Gross amount and TDS amount [Levy-wise]

◆ TCS – Gross amount less sales return and TCS amount [Levy- wise]
Table CONTENTS OF GSTR -2
 

 

 

 

10

 This table requires furnishing following details:

◆ Advances paid for RCM supplies and tax thereon

◆ Adjustments of invoices against advance paid

◆ Correction to Information provided in this table in earlier months

 Details to be furnished: Advances liable for RCM Tax Rate, Advance paid, State

name and tax amount [Levy-wise] Adjustments of [For current month]

Same details as specified above Amendments to details furnished earlier

Furnish details for entire month against the sub-table that requires correction
 

 

 

 

 

 

11

 ITC reversal and reclaim shall be furnished [To be added to output liability]

Reversal to ITC would broadly include following situations:

◆ Non Payment to supplier within 180 days [S. 2nd proviso16(2)(d), Rule ITC-2]

◆ ISD Credit distributed is in the negative [Rule ITC 4(1)(j)(ii)]

◆ Pro-rata reversal of ITC on inputs or input services put to other than business use or used for exempted outward supplies [S. 17(1)/(2), Rule ITC-7(1)(m)]

◆ Pro-rata reversal of ITC on capital goods put to other than business use or used for exempted outward supplies [S. 17(1)/(2), Rule ITC- 8(1)(h)]

◆ Short reversal on account of final determination of amount to be

reversed under section 17(1) and (2) [Rule ITC 7(2)(a)]

Reclaim of ITC reversed would broadly include following situations:

◆ On account of final determination as above where excess amount

has been reversed [Rule ITC-7(2)(b)]

◆ On account of amount paid subsequent to reversal of ITC
Amendment in respect of information in information submitted in earlier period in Table 11 can be made by furnishing revised information on selecting the relevant month in Table 11
 

 

 

 

12

 Levy-wise addition or reduction in output tax for mismatch and other reasons to be furnished in this table

Output Tax to be increased for following reasons:

◆ ITC claimed on mismatched or duplication of Invoices/ Debit notes

◆  Tax liability on account of mismatched credit notes Output Tax to be reduced for following reasons:

◆ Reclaim on account of rectification of mismatched invoice/ debit

notes

◆ Reclaim on account of rectification of mismatched credit note

◆ Negative Tax liability from previous tax period

◆ Tax paid on advance in earlier tax period and adjusted with tax on supplies made in current tax period
13 Reporting criteria for HSN shall be same as required in GSTR-1wise value of outward supplies made during the period. .

FORM GSTR-1A: AUTO DRAFTED DETAILS
OF SUPPLIES TO SUPPLIER

Details of inward supplies as added, corrected or deleted
by the recipients shall be communicated to the supplier
in Form GSTR-1A [Section 38(3)/ (4) r/w Rule Ret-1(4)].
This implies that supplier shall be provided only details
of unmatched transactions in GSTR-1A.The source of
details appearing in GSTR-1A shall be counter party
GSTR 2, GSTR-4 or GSTR-6. The supplier is required to
accept or reject the details contained in GSTR-1A on or
after 15th but before the 17th of the month succeeding the
tax period. Consequently, details furnished in GSTR-1 by
such supplier shall be updated. If the supplier does not accept the change made by the recipient, it shall qualify
as an unmatched transaction in the hands of the recipient.
GSTR-1A shall contain details of mismatch in respect of:

 Taxable supplies to RTP other than those attracting
RCM

 Taxable supplies to RTP attracting RCM

 Zero rated supplies made to SEZ units or developer
and deemed exports

 Debit/ Credit notes including amendments there of
issued during the period.

FORM GSTR-3: MONTHLY RETURN

Subsequent to filing GSTR-1 and 2, a monthly return in
Form GSTR-3 has to be furnished which can be filed only
after GSTR-1 and 2 are uploaded. It consists of two parts.
Part-A shall be auto generated based on details furnished
in GSTR-1 and 2. It comprises of details of turnover,
output taxes, RCM liability, ITC, reversal and reclaims
relating to ITC and reduction in output liability, TDS, TCS
and liability to pay interest and late fees. In Part-B, the tax
payer needs to furnish details of tax, interest and late fee
payments and details of refund claims.

PART-A: Elements relating to ITC and other credits

Part-A would also provide details of various credits that
flow from the claims made in GSTR-2. The structure of
details relating to credits is explained with the help of a
diagram hereunder:

PART A: Details of Interest and Late Fees

Table 10 shall auto populate levy-wise details of interest
payable on account of various reasons. Extract of the
table is reproduced hereunder. Table 11 shall also furnish
details of late fees payable.

PART-A: Elements for computing total tax liability in Table 9

Part B of the return is to be filled by the tax payer. Various
tables in which details have to be furnished in Part B are
enumerated hereunder:

FORM GSTR-4: QUARTERLY RETURNS BY
COMPOSITION TAX PAYER

Section 10 of the CGST Act provides for composition
levy for small businesses.The threshold for opting for
composition levy has been capped at Rs. 75 Lakhs.
Under composition levy the RTP is not allowed to claim
ITC. However, he has to verify details of inward supplies
received in Form GSTR-4A and prepare details of inward supplies. GSTR-4 is a consolidated return which would
contain details of outward and inward supplies and
computation of tax and other dues and details of payment
thereof.

Where RTP opts for paying tax under composition at the
beginning of the financial year, the RTP shall continue to
furnish GSTR 1, 2 and 3, wherever required, relating to
supplies for the prior period. He shall continue doing so till
the due date for filing return for the month of September
in the succeeding financial year or date of furnishing of
annual return for the previous year, whichever is earlier.
However, in such cases he shall not be entitled to claim
any ITC in respect of invoices pertaining to period
prior to opting for composition levy [Rule Return-4(4)].
Conversely on the same lines where RTP opts to withdraw
from composition he shall continue filing GSTR-4, where
required up to the dates referred above [Rule Return-4(5)].
Broad contents of GSTR-4 are tabulated hereunder:

FORM GSTR-5: RETURN FOR NON-RESIDENT
TAXABLE PERSON

Non-Resident taxpayers are required to furnish details of
all taxable supplies in GSTR-5.Details to be furnished in
GSTR-5 are tabulated hereunder:

FORM GSTR-5A: DETAILS OF SUPPLIES OF
OIDAR SERVICES BY A PERSON LOCATED
OUTSIDE INDIA TO A NON-TAXABLE PERSON
IN INDIA

The above person shall be required to furnish return in
Form GSTR-5A. Details to be furnished in the return
broadly include the following:

1 State wise and rate wise details of supplies made to
consumers in India and IGST/ Cess thereon
Amendments to above details may be made in Table
5A

2 Interest, penalty or any other amount payable

3 Tax, Interest, late fee or any other amount payable
and paid.

FORM GSTR-6: RETURN FOR INPUT SERVICE
DISTRIBUTOR [‘ISD’]

An ISD is shall furnish details of receipt ITC for distribution
and distribution of ITC in GSTR-6. The auto populated
details of inward supplies shall be made available to ISD
in GSTR-6A. The ISD shall verify, modify, accept or reject
the contents and prepare details in GSTR-6. Since, the
ISD only receives tax invoices it shall not be liable for any
payment under RCM. At its level it has to identify invoices
with respect to eligibility of ITC at invoice level in GSTR-6.
However, it shall distribute the eligible as well as ineligible
ITC [Table-5]. Further, Tax effect of amendments, credit
and debit notes as well as mismatches of ITC shall also
be distributed amongst the units by issuing credit note
[Table-8]. Any excess or short distribution amongst units
shall be re-distributed [Table-9]

FORM GSTR-7: RETURN FOR TAX DEDUCTION
AT SOURCE [‘TDS’]

Under the GST regime, certain persons are required to
deduct tax at source on specified inward supplies. Details
to be furnished in GSTR-7 include the following:

 Deductee-wise details of amount paid and TDS
deductee quoting the GSTIN of the deductee.

 Amendments to above details furnished can be made
in Table 4.

 Amount of TDS and amount paid.

 Interest, late fees payable and paid.

 Refund claimed from Electronic cash ledger

 Details of entries in Electronic cash ledger for payment
of TDS/ Interest shall be populated after payment of
tax and submission of returns

 Certificate of TDS is to be issued in GSTR-7A

FORM GSTR-8: STATEMENT OF TAX
COLLECTION AT SOURCE [‘TCS’]

An E-Comm is required to collect tax at source from net
value of taxable supplies made through it. It has to furnish
details of supplies made through it and the TCS in GSTR-
8. Broad details furnished in GSTR-8 are as under:

MISCELLANEOUS RETURN COMPLIANCES

Every RTP [Other than ISD, NR Taxable person, casual
taxable person and persons liable for TDS/ TCS] shall file
an annual return for every financial year on or before 31st
December of following the end of the said financial year:

LATE FEE [SECTION 47]

Section 47 provides for levy of late fee for default in
furnishing of returns on or before the due date. The same
are tabulated hereunder:

MATCHING CONCEPT

The GST regime has introduced the concept of matching
claims of ITC and claims relating to reduction of output
taxes by a RTP. This concept forms an important basis for
claiming of ITC under GST regime. Currently, many states
in India match input set-off claimed with corresponding
sales disclosed by suppliers. However, this is not a
practice followed under Central Excise and Service Tax.
Under GST regime the matching is envisaged on two
broad fronts:

 Matching of ITC claims

 Matching of claims relating to reduction in output tax
[e.g. Credit notes].

MATCHING, REVERSAL AND RECLAIM OF
ITC [SECTION 42]

Section 41 states that a RTP shall be allowed to self-claim
ITC in respect of his inward supplies on provisional basis
for 2 month [As per the FAQ released by the CBEC on
31-03-2017]. This provisional acceptance shall be subject
to the matching of claims in terms of section 42. In terms
of section 42, all claims of ITC by a RTP being a recipient
of supply shall be matched by the GSTN portal after the
due date of filing GSTR-3. The claims shall be matched –

 With corresponding details of outward supply
furnished by the concerned supplier in the same or
earlier month. Following details shall be matched:

• GSTIN of Supplier

• GSTIN of the Recipient

• Invoice or Debit note no.

• Invoice or Debit note date

• Tax Amount

 With the IGST paid on Import of goods by him

 For duplications of claims of ITC

Claims shall be accepted in following cases

 In respect of invoices and debit notes that were
accepted by the recipient without amendments on the
basis of GSTR-2A shall be accepted subject to the
supplier filing a valid return;

 Where the amount of ITC claimed by the recipient is
equal to or less than the amount of output tax paid by
the supplier on such invoice or debit note.

Explanation 1 & 2 to Rule ITC-10]

Details of claims that have matched shall be communicated
to the recipient in Form MIS-1 [Rule ITC-11]

Discrepancy in ITC Claim

The matching process may lead to discrepancy on
following broad grounds:

 Recipient has claimed ITC in excess of the tax
declared by the supplier

 There is no matching declaration by the supplier

 Duplication of claim of ITC by recipient.

Consequences in Case of Discrepency

The discrepancy in ITC claim shall be communicated on
GSTN portal to the recipient in [Form MIS-1] and supplier
[Form MIS-2] on or before the end of the month in which
matching is done. This process may lead to the following
situations:

MATCHING, REVERSAL AND RECLAIM OF
REDUCTION IN OUTPUT TAX [SECTION 43]

The matching process envisaged by section 43 is in respect
of credit notes issued by a RTP. Any reduction in output
tax on account of credit note requires a corresponding
reversal of ITC claim by the recipient. Section 43 states
that the details of every credit note issued by a supplier
shall be matched –

 With the corresponding reduction in claim of ITC by
the recipient, in the same or subsequent month, and;

 For duplication in claim of reduction of output tax

The matching of reduction in output tax shall be done in
respect of following details:

 GSTIN of the supplier and the recipient

 Credit note no. and date

 Tax amount

The other procedure relating to matching, reversal and
reclaim of reduction in output tax contained are similar to
provisions relating to matching, reversal and reclaim of
ITC discussed above.

CONCLUSION

It is evident that compliance under GST is going to be a
month-long activity and not a monthly activity. Accuracy
of data punching would be of utmost importance. Further,
the technology driven matching concept would surely
make GST a self-monitoring system. However, in times
to come small businesses would face great challenge in
coping up with high compliance requirements coupled
with increased cost of compliances.

GLOSSARY/NOTE

 E-Comm: Electronic Commerce Operator

 RTP: Registered Taxable person

 ITC – Input Tax Credit

 All references to section should be read as reference
to CGST Act.

Registration under GST

Registration of an assessee or a ‘taxable person’ is the
starting point in any tax law. It is the most fundamental requirement of
identification of the business for tax purposes and monitoring compliance
requirements.

CGST Act provides for registration of every supplier
effecting the taxable supplies. Every supplier having aggregate turnover
exceeding Rs. 20 lakh in the financial year is required to be registered. This
threshold limit of Rs.20 lakh is reduced to Rs.10 lakh in cases of supplies
effected in the States of Himachal Pradesh, Uttarakhand, Manipur, Arunachal
Pradesh, Assam, Jammu & Kashmir, Meghalaya, Mizoram, Nagaland, Sikkim, and
Tripura. For calculating the Threshold limit, supply of goods by a registered
Job-worker after completing job work, shall be treated as the supply of goods
by the “principal” and shall not be included in the aggregate
turnover of the registered job worker.

Registration, under GST, is a State-wise requirement which
means a person making supplies in every State is required to be separately
registered in that State once the threshold limit is crossed taking to account
supplies from all States. Such a person making taxable supplies from different
places in the State will be required to take one registration in the State,
except in case of business verticals in which case multiple registrations are
permitted. If a tax payer supplies from different places in the State, he has
to opt for one place as “principal place of business” and mention all other
places in the State as “additional place of business” at the time of obtaining
registration. The application for registration will have to be made within 30
days from the date the liability of registration arises.

A business vertical means a distinguishable component of an
enterprise that is engaged in the supply of individual goods or services or a
group of related goods or services which is subject to risks and returns that
are different from those of the other business verticals and for this purpose
the following factors shall be considered:

–   the nature of the goods or services;

–   the nature of the production processes;

–   the type or class of customers for the goods
or services;

–   the methods used for distribution of goods or
supply of services; and

–   the nature of regulatory environment
(wherever applicable), including banking, insurance, or public utilities.

Aggregate turnover is defined to mean the aggregate value of
all taxable supplies, exempt supplies, export of goods or services or both and
inter-State supplies made by the person having same Permanent Account Number to
be computed on the all India basis. However, Central tax (CGST), State tax
(SGST), Union Territory tax (UTGST), Integrated tax (IGST) and Cess are not to
be included in such supplies. Further, value of inward supplies on which tax is
payable on reverse charge basis is also to be excluded.

A Special Economic Zone unit or developer shall make a
separate application for registration as a business vertical distinct from its
other units located outside the Special Economic Zone.

All the existing tax payers (under Excise, VAT or Service
Tax) are not eligible for threshold limit exemptions. They have to compulsorily
migrate and obtain provisional registration from GSTN before the appointed day,
irrespective of the fact that their turnover is less than threshold limit
specified in the GST Law. However, such tax payers can opt out from the
provisional registration if their supplies are not covered under GST or they
are within the threshold limit.

A casual taxable person or a non-resident taxable person
shall have to apply for the registration at least 5 days prior to the
commencement of business. A casual taxable person is one who occasionally
undertakes transaction involving supply of goods for services or both in the
course or furtherance of business in a State or Union Territory where he does
not have fixed place of business. A non-resident taxable person is one who
occasionally undertakes transaction involving supply of goods for services or
both in the course or furtherance of business but not having fixed place of
business or residence in India.

Categories of persons who are required to be registered
irrespective of the threshold

–   person making any inter-State taxable supply;

–   casual taxable person making taxable supply;

–   persons who are required to pay tax under
reverse charge;

–   electronic commerce operator undertaking
supplies on behalf of other suppliers (liable to discharge tax liability for
supply of services as may be notified)

–   non-resident taxable person making taxable supply;

–   persons who are required to deduct tax at
Source under GST;

–   persons who supply goods or services or both
on behalf of other registered taxable person whether as an agent or otherwise;

–   input service distributor;

–   every electronic commerce operator;

–   every person supplying online information and
database access or retrieval services from a place outside India to a person in
India, other than a registered taxable person;

–   such other person or class of persons as may
be notified by the Central Government or a State Government on the
recommendations of the Council.

Following persons are not liable for registration

–   Any person engaged exclusively in the
business of supplying goods or services or both that are not liable to tax or
wholly exempt from tax under CGST or under the Integrated Goods and Services
Tax Act

–   An agriculturist, to the extent of supply of
produce out of cultivation of land.

–   Government may, on the recommendations of the
Council, by notification, specify the category of persons who may be exempted
from obtaining registration under this Act.

Voluntary registration

Provisions are made for a person, though not required to be
registered, may get himself registered voluntarily.

Deemed registration or rejection of application for
registration and cancellation or revocation of registration certificate

Any grant of registration or Unique Identity Number under any
SGST or UTGST shall be construed as grant of registration under CGST.
Similarly, any grant of registration or Unique Identity Number under CGST shall
be construed as grant of registration under SGST or UTGST, as a case may be.
Any rejection of application for registration or cancellation or revocation of
registration shall be treated likewise.

Transfer of Business and Registration

A transferee, or the successor of a business on going concern
basis shall be liable to be registered with effect from the date of such
transfer or succession. In a case of transfer pursuant to sanction of a scheme
or an arrangement for amalgamation or, de-merger of two or more companies by an
order of a High Court, the transferee shall be liable to be registered with
effect from the date on which the Registrar of Companies issues a certificate
of incorporation giving effect to such order of the High Court. This means that
the Registration Certificate issued to a person is not transferable to any
other person.

Special Provisions relating to casual taxable person and
non-resident taxable person

The Certificate of Registration issued to a casual taxable
person and non-resident taxable person shall be valid for 90 days from the
effective date of registration or any earlier period as specified in the
application. An extension of period not exceeding 90 days may also be granted
on sufficient cause being shown. An advance deposit of tax shall be credited to the electronic cash ledger equivalent to the estimated
tax liability for the registration period sought.

Suo Moto Registration by the department

During the course of any survey, inspection, search, enquiry
or any other proceeding under the Act, it is found that a person liable to
register has failed to apply for the same, proper officer may register such
person on temporary basis and issue order in FORM GST REG-12. Registration will
be effective from the date of order. Such person is required to apply for
registration within 30 days from the date of such temporary order, unless he
files an appeal against such order.

Amendment to registration

There are various situations in which the Registration issued
by the competent authority requires amendment in line with real time
situations. In such a case, every registered taxable person shall inform any
changes in the information furnished at the time of registration within 15 days
of such changes.

The proper officer cannot reject the request for amendment
without affording a reasonable opportunity of being heard by following the
principles of natural justice.

Cancellation of registration

A registration granted can be cancelled by the proper officer
either on his own or on application of the registered person when —

–   the business is discontinued, transferred
fully for any reason including death of proprietor, amalgamation with other
legal entity, demerged or otherwise disposed of; or

–   there is any change in the constitution of
the business; or

–   the taxable person is no longer liable to be
registered.

     Registration may be cancelled
retrospectively if the proper officer so deems fit any of the following
situations after giving the person an opportunity of being heard:

(a)
Registered person has contravened such provisions of the Act or Rules;

(b) Person
paying tax under Composition Scheme has not furnished returns for 3 consecutive
tax periods;

(c) any
taxable person has not furnished returns for a continuous period of 6 months;

(d) person
who has taken voluntary registration has not commenced business within 6 months
from the date of registration;

(e)
Registration has been obtained by means of fraud, willful misstatement or
suppression of facts.

As such, cancellation of registration shall not affect the
liability of the taxable person to pay tax and other dues under the Act for any
period prior to the date of cancellation whether or not such tax and other dues
are determined before or after the date of cancellation.

Where the registration is cancelled, the registered taxable
person shall pay an amount 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 on the day immediately preceding the date of such cancellation or
the output tax payable on such goods, whichever is higher. The payment can be
made by way of debit in the electronic credit or electronic cash ledger.

In case of capital goods, the taxable person shall pay an
amount equal to the input tax credit taken on the said capital goods reduced by
the percentage points (to be prescribed) or the tax on the transaction value of
such capital goods whichever is higher.

Revocation of cancellation of registration

Any registered taxable person, whose registration is
cancelled, may apply to proper officer for revocation of cancellation of the
registration within thirty days from the date of service of the cancellation
order.

The proper officer shall not reject the application for
revocation of cancellation of registration without giving a show cause notice
and without giving the person a reasonable opportunity of being heard.

Procedure for registration

–   Online application to be made in FORM GST
REG-01 by declaring PAN, mobile number, email address, State or UT, along with
other documents duly signed and electronically verified. Persons who are liable
to deduct TDS or collect TCS shall apply in FORM GST REG-07. Non-resident
taxable person shall apply in FORM GST REG-09. A non-resident taxable person
shall be allotted a Temporary Reference Number for making an advance deposit of
estimated tax liability.

–   Acknowledgement will be generated in FORM GST
REG-02.

–   Proper officer shall either grant
registration or issue a notice in FORM GST REG-03 for any additional
information and clarification within 3 working days. Applicant should reply in
FORM GST REG-04 within 7 working days from date of receipt of notice. If
applicant fails to reply, proper officer may reject the application in FORM GST
REG-05 or if he is satisfied with the information furnished then he may grant
registration within 7 working days

–    Registration Certificate will be issued in
FORM GST REG-06.

Goods and Services Tax Network – Concept and Challenges in Implementation

Background

Introduction of The Goods and Services Tax (‘GST’) is being
touted as a paradigm shift in the field of indirect tax reforms in India and
rightly so because it is expected to change the manner in which taxes are
administered and at the same time it will change the way business is conducted
in India. Two key outcomes expected after the introduction of GST is the
reduction of the cascading effect of multiple taxes and the creation of a
common national market. These outcomes are sought to be achieved by merging
several Central and State taxes into a single tax namely GST, parallelly, the
introduction of GST will also make tax administration transparent and easier to
administer.

By the time this article is published, GST will have come
into effect and India will have embarked on its journey to an integrated goods
and services tax regime.

Islands of data

With the introduction of GST there was a need for a mega
infrastructural support and IT infrastructure is a key component in this.
Before GST, the Centre and State indirect tax administrations have been working
under different laws, regulations, procedures and formats and consequently they
had independent IT systems. Needless to say, independent IT systems are small
islands of data – isolated from others and dis-integrated. Integrating them for
GST implementation and bringing them under an entirely new indirect tax system
and administration need fresh institutional arrangement. For this task, the
government has created Goods and Services Tax Network (GSTN).

Concept

The GST System Project is a unique and complex IT initiative.
It is unique as it seeks, for the first time to establish a uniform interface
for the tax payer and a common and shared IT infrastructure between the Centre
and States. Integrating them for GST implementation is a complex exercise given
that it entails the consolidation of all the tax administrations (Centre, State
and Union Territories) to the same level of IT maturity with uniform formats
and interfaces for taxpayers and other external stakeholders, only then an
indirect tax ecosystem will be created.

Besides the above, given that GST is a destination based tax,
the settlement mechanism amongst the States and the Centre for settlement of
taxes accruing from inter-State trade of goods and services (IGST) needs to be
robust. This will be possible only when there is a strong IT Infrastructure and
Service back bone which enables capture, processing and exchange of information
amongst the stakeholders (including tax payers, States and Central Governments,
Accounting Offices, Banks and RBI).

The Goods and Services Tax Network (‘GSTN’)

GSTN is a section 25, not for profit organisation owned by
government and private players jointly. GSTN has been entrusted with the
responsibility of building Indirect Taxation platform for GST to help tax
payers prepare, file, rectify returns and make payments of their indirect tax
liabilities. It is expected to be a one stop solution for all indirect tax
requirements, business will be able to manage tax easily. Unlike current
indirect tax, where there are multiple sites backed by provisions and
compliances, it is expected to become lot easier for the assesse and government
to track the status of returns and payments with the help of GSTN.

What are the functions of GSTN?

The GSTN as a back end infrastructural support mechanism has
the main responsibility of providing a robust IT infrastructure and related
services to the Central and State Governments, taxpayers and other
stakeholders, by integrating the common GST portal and connecting it to the
existing tax administration IT systems.

Administrative functions of GSTN

GSTN as a tax
administration platform will be inter-connected with the existing
administrative mechanisms. The common GST Portal developed by GSTN will
function as the front-end of the overall GST IT eco-system. The common GST
portal by GSTN will process applications for registration, payment, return and
prepare MIS/ reports.

Similarly, the IT systems
of CBEC (Central Board of Excise and Customs) and State Tax Departments (except
Model I states) will function as back-ends. The work of back-end operation is
to handle tax administration functions such as registration approval,
assessment, audit, adjudication etc.

Functions of GSTN

Following are the main functions
of GSTN:(i)      facilitating
registration;

(ii)    filing
and forwarding the returns to Central and State tax authorities;

(iii)   computation
and settlement of IGST;

(iv)   matching
of tax payment details with banking network;

(v)    providing
various Management Information System reports to Governments.

(vi)   analysis
of tax payers’ profile; and

(vii) running
the matching engine for input tax credit.

Relationship of GSTN with Tax Administrations

The common GST Portal developed by GSTN will function as the
front-end of the overall GST IT eco-system. The IT systems of CBEC and State
Tax Departments will function as back-ends that would handle tax administration
functions such as registration approval, assessment, audit, adjudication etc.
Various States and CBEC are developing their backend systems themselves. GSTN
is doing the backend for 20 States and 5 UTs. GSTN is interacting with CBEC and
States for ensuring mutual interaction between the front-end that would be
operated by GSTN and the back-ends of the tax administrations. During the
operation phase, as well GSTN will continue the interaction with CBEC and
states and extend help wherever necessary.

GST IT Strategy

The GSTN has been assigned the role of facing taxpayers and
these among other things include filing of registration application, filing of
return, creation of challan for tax payment, settlement of IGST payment (like a
clearing house), generation of business intelligence and analytics. All
statutory functions to be performed by tax officials under GST like approval of
registration, assessment, audit, appeal, enforcement etc. will remain
with the respective tax departments. The diagram below shows the work
distribution.

Role of GSTN with respect to Filing of Returns

Under GST, there will be common return for CGST, SGST and
IGST, eliminating the need to file separate tax returns with Central and state
GST authorities. Checking of claim of Input Tax Credit (ITC) is one of the
fundamental pillars of GST, for which data of Business to Business (B2B)
invoices have to be uploaded and matched. The Common GST Portal created and
managed by GSTN will do this matching on the basis of invoice level data filed
as part of return by all taxpayers. Similar exercise will be done for inter-state
supplies where goods or services will move from the state of origin to the
state of consumption and so will the taxes. The claim of IGST and its
utilisation will be settled based on returns filed at the Common GST portal.

Role of GSTN with respect to Registration Application

Under GST, the registration of taxpayers will be common under
Central and State GST and hence one place of filing application for the same
i.e. the Common GST portal. The application so received will be checked for its
completeness by the GST portal, which will also carry out validation of data
like PAN from CBDT, CIN/DIN from MCA and Aadhaar of promoters, if provided,
from UIDAI. After completion of validation, the registration application will
be shared with respective central and state tax authorities. Query of tax
authorities, if any and their final decision will be communicated to GST portal
which in turn will communicate the same to the taxpayer.

The Common GST Portal, as explained in brief above, will be
the single interface for all taxpayers from any part of the country. Only in
case where a taxpayer is picked up for scrutiny or audit, and such cases are
expected to be small in number, he will interface with the respective tax
authority issuing the notice under the Act. For all other cases, which is
expected to be around 95%, the Common GST Portal will be the only taxpayer
interface.

Access to Data

The design of GST systems is based on role based access. The
taxpayer can access his own data through identified applications like
registration, return, view ledger etc. The tax official having
jurisdiction, as per GST law, can access the data. Data can be accessed by
audit authorities as per law. No other entity can have any access to data.

Challenges

The challenges before the GSTN are daunting but not
unsurmountable. Challenges inter alia include:

–   Integrating multiple databases

–   Creating the IT environment and enabling all
the checks and balances/validation with a moving goal post (frequent changes in
law)

–   Collating data for more than 60 million tax
payers (existing and fresh) and issue registration numbers to all

–   Creating a single window for accepting
returns for all tax payers

–   Creating a facility for accepting invoice
level data on a month to month basis, storing and archiving the same for later
retrieval.

–   Creating and maintaining online credit
ledgers to receive and disseminate data to all stakeholders

–   Enable the online matching of credits and
reconciliation of mis-matches

–   Maintaining data integrity, confidentiality
and security.

The aforesaid challenges and many other will be
dealt with on the go as and when we encounter them. Until then, let us welcome
GST.

Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble

Usually a supplier of goods or service is a taxable person
liable to discharge tax liability under Goods and Service Tax Act (‘GST Act’).
However, in exceptional cases, GST legislation stipulates that the liability
under the GST Act shall be discharged by recipient instead of supplier of goods
or services. This is popularly known as reverse charge mechanism (‘RCM’).

While the RCM is not entirely a new concept under the Indian
indirect tax landscape, given the fact that it was quite common under the
erstwhile Sales tax regime.  However, the
tax considerations were quite different back then, considering that Sales tax
was a single point levy (i.e. levied at the first point of sale) with limited
input tax credits, leading to value shifting and leakage of tax revenue. In
contrast, the current Value Added Tax regime is a multi-point levy whereby the
full value is captured under the tax net. Similarly, under the Central Excise
legislation, full value is sought to be covered by levying tax on the Maximum
Retail Price (‘MRP’). Due to this reason, perhaps, neither the Central Excise
nor VAT legislation (barring the States of Punjab, Assam and Madhya Pradesh)
presently provides for RCM. Given its successful implementation under service
tax legislation, the Government has decided to continue the same in GST also.

Administrative convenience and ease of tax collection are
primary motivations for using RCM. The tax authorities prefer to collect tax
from small number of assessees from organised sector instead of chasing large
number of small and unorganised tax payers. Broadening tax base could be
another purpose of RCM.

Basics of RCM

Reverse charge applies only when there is a charge on supply.
If supply is exempted, nil rated or non-taxable, RCM does not apply in such a
case.

Recipient of goods or services discharges GST under RCM as if
he is the person liable for paying the tax on supply procured by him. All
provisions of the Act including the collection, recoveries and penal provisions
apply to the recipient and he is required to pay applicable tax i.e. CGST and
SGST/ UTGST, or IGST depending on location of supplier and place of supply. The
tax liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account under the
recipient’s GSTIN number and is declared in his GST Returns as taxable supplies
on which tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source
(‘TDS’) paid by recipient on behalf of supplier and hence, the supplier does
not get credit of tax paid under RCM by the recipient.

Once the tax is paid under RCM by the recipient, it becomes
an input tax and the recipient (payer of tax under RCM) is entitled to avail
Input Tax Credit (‘ITC’) thereof, subject to other provisions contained in
Chapter V of CGST Act and Input Tax Credit Rules.

Relevant Legal Provisions

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST
Act’) provides for levy and collection of Central Goods and Service Tax
(‘CGST’). The power to collect tax under RCM from recipient is derived by
government u/s. 9(3) and 9(4) of CGST Act which read as under:

“Section 9(3) – the Government, on recommendation of the
Council, by notification, specify categories of supply of goods or services or
both, tax on which shall be paid on reverse charge basis by recipient of such
goods or services or both and all the provision of this Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both.

Section 9(4) – the central tax in respect of the supply of
taxable goods or services or both by a supplier who is not registered, to a
registered person shall be paid by such person on reverse charge basis as the
recipient and all the provisions of GST legislation Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the supply
of such goods or services or both.”

Similarly, section 5 of the Integrated Goods and Services Tax
Act, 2017 (‘IGST Act’), section 7 of the Union Territories Goods and Services
Tax Act, 2017 (‘UGST Act’) and respective section of the State Goods and Services
Tax Act, 2017 (‘SGST Act’) also provide for RCM on a similar pattern to that of
the CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief


Based on the above, it can be said that reverse charge
applies in case of notified supplies of goods and services or in case of
supplies by a specified category of suppliers.

RCM on notified goods or services

Recipient of notified goods or services or both is liable to
pay CGST under RCM on supply of notified goods or services u/s. 9(3) of CGST
Act.

Recipient is liable to discharge GST liability under RCM
irrespective of:

–   Recipient being registered person or
unregistered person; or

–   Supplier of notified goods or services is
registered person or unregistered person.

Notified
goods under RCM

Presently, the GST Council has recommended very few goods,
i.e., tobacco leaves, cashewnuts in shell, etc. are notified
goods for the purpose of RCM. Any person buying tobacco leaves will be liable
to discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in
future expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on
which tax will be payable on RCM:

Nature of Service

Service Provider (‘SP’)

Service Recipient (‘SR’)

% of GST payable by SR

Import
of Services

Any
person who is located in non-taxable territory

Any
person located in taxable territory other than non-assessee online recipient
(Business Recipient)

100%

Goods
Transport Agency Services in respect of transportation of goods by road

Goods
Transport Agency

a. Factory

b. Society

c. Co-operative
society

d. Person
registered under GST Act

e. Body
corporate

f.  Partnership
Firm

g. Casual
taxable person

.

100%

Legal
Services

Individual
advocate or firm of advocate

Any
business entity

100%

Arbitration
Services

Arbitral
Tribunal

Any
business entity

100%

Sponsorship
Services

Any
person

Body
corporate or partnership firm

100%

Services
by Government or local authority excluding:

– Renting of immovable property

– Services by department of posts

– Services in relation to aircraft or vessel
inside or outside precincts of port / airport

– Transport of goods or passengers

Government
or local authority

Any
business entity

100%

Director’s
service

Director
of company or body corporate

Company
or body corporate

100%

Insurance
agency service

Insurance
agent

Any
person carrying on insurance business

100%

Recovery
agency service

Recovery
agent

Banking
company, financial institution,  NBFC

100%

Transportation
of goods by a vessel from a place outside India up to customs station of
clearance in India

Person
located in non-taxable territory to a person located in non-taxable territory

Importer
as defined under Customs Act, 1962

100%

Transfer
or permitting use or enjoyment of Copyright relating to original literary,
dramatic, musical or artistic works

Author
or music composer, photographer, artist, etc.

Publisher,
Music Company, Producer

100%

Rent-a-cab
service through e-commerce operator

Taxi
driver or rent-a-cab operator

Any
person

100% by e-commerce operator

While the aforesaid list of services covered under reverse
charge is by and large on the same lines as the current list of services
(specified in Notification no 30/2012-ST read with Rule 2(1)(d) of Service tax
Rules, 1994, it is pertinent to note that (a) services by Online Information
Data Access providers, (b) services related to distribution and marketing of
lottery tickets, (c) supply of manpower for any purpose or security, and (d)
references to representational services by senior advocates have been excluded
and certain changes / additions have been made such as: (a) in case of GTA
services – casual taxable persons have also been obligated to pay on a reverse
charge basis, (b) Transfer or permitting the use or enjoyment of a copyright
covered under clause (a) of sub-section (1) of section 13 of the Copyright Act,
1957 relating to original literary, dramatic, musical or artistic works and (c)
in case of radio taxis or passenger transport services provided through
ecommerce operators – the obligation has been cast upon the ecommerce operator.

Partial reverse charge: Under service tax, partial
reverse charge is prescribed on few services wherein certain portion of tax
liability is to be discharged by service provider and balance to be discharged
by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons

Registered (taxable) person is liable to pay tax under RCM on
any goods or services or both procured by him from an unregistered
person. Following are likely to be the unregistered persons under the GST
regime:

–   Person not carrying on any business or
profession; or

–   Person whose aggregate turnover is below the
threshold limit; or

–   Supplying exempt goods or services

–   Supplying goods or services which are taxed
at NIL rate of tax

–   Supplying services which are covered under
reverse charge

–   Person located in Jammu & Kashmir; or

–   Person located outside India; or

–   In simple terms, he is not registered though obliged
to get registered.

Followings are a few illustrations to demonstrate the
circumstances in which RCM triggers:

–   An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

–   An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

–   Date of receipt of goods; or

–   Date of payment entered in books of accounts or
date of debit in bank, whichever is earlier; or

–   Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice

Receipt of goods

Date of payment

31st day from date of invoice

Time of Supply

30/09/17

30/09/17

15/10/17

31/10/17

30/09/17

30/09/17

15/11/17

30/11/17

31/10/17

31/10/17

30/09/17

15/11/17

16/08/17

31/10/17

16/08/17

Time of Supply for
services:

It shall be earliest of
following:

–   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

–   Date immediately after 60 days from date of
invoice

Where it is not possible
to determine time of supply as above, time of supply shall be date of entry in
books of accounts of recipient of supply.

Illustration:

Date of Invoice

Date of payment

61st day from date of invoice

Time of Supply

30/09/17

15/10/17

30/11/17

15/10/17

30/09/17

10/12/17

30/11/17

30/11/17

Mandatory registration for
person liable to pay GST under RCM

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than Rs. 20 lakh turnover
or supplier of exclusively exempt or non-taxable goods /services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently, liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Obligation on Service
providers (providing services covered by reverse charge) to obtain registration
under GST legislation

Service providers supplying the aforementioned services if
they are not already registered under some other category or those not given
the benefit of migration will have to obtain registration under GST
legislation, as and when the portal is enabled for the same.

In this regard, there is an ongoing controversy whether or
not persons covered under reverse charge are required to obtain registration.
In this connection, attention is invited to section 22(1) of the CGST Act which
provides that ‘Every supplier shall be liable to be registered under this
Act in the State or Union territory, other than special category States, from
where he makes a taxable supply of goods or services or both,
if his aggregate turnover in a financial year exceeds twenty lakh rupees’.
It is highlighted that unlike Service tax legislation wherein the obligation to
register was cast upon the person liable to pay tax, under the GST legislation,
the obligation has been linked to making a taxable supply (irrespective of
whether the said service is covered by forward or reverse charge). While the
GST Council in its 16th meeting has resolved that lawyers /
advocates would be exempted from obtaining registration as per a notification
(proposed to be issued) u/s. 23(2) of the CGST Act, the fate of various other
service providers such as insurance agents, GTAs, independent directors, etc.,
remains undecided.

Documentation

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from unregistered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further, registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Unintended casualties,
unanswered question and challenges posed by reverse charge provisions
pertaining to unregistered persons

While the Government may claim that there are laudable
objectives in casting obligation to pay tax on URD purchases, there are certain
unintended casualties and unanswered question and challenges which will have to
be faced going forward. Some of these are briefly described below:

Freshly qualified Chartered Accountants: One of
the outcomes expected post implementation of GST legislation is that most
businesses will shy away from dealing with an unregistered person. This would
be primarily on account of the additional compliance burden attached to the
consumption of such supplies. One direct and unintended casualty to these
provisions will be a freshly qualified Chartered Accountant and small
practitioners. It is quite likely that their turnover will be below the
threshold limit on account of which they have not obtained registration. Notwithstanding
this fact, reverse charge would apply and business will cringe at the time of
availing their services. Such small practitioners will be forced to obtain
registration, maintain records and file no less than 37 returns annually, thus
casting a huge financial and administrative burden on the fledgling
practitioner.

Requirement for a minimum threshold limit: The
obligation pay tax on procurements from unregistered persons has been cast
without reference to any monetary limit and without prescribing any exceptions.
As a result, even the smallest of purchases – i.e. purchase of a cutting chai
or basic refreshments, photocopying charges or the like will have to be mapped
and reported. In this connection, entry no. 81 of the Service exemption list released
on 18th of May suggests that an omnibus exemption may be granted
from payment of GST u/s. 9 (4) of CGST/SGST Act in respect of supplies upto Rs
10,000/-. We will have to wait and watch out for relevant notifications to this
effect. Key factors would be whether the exemption will be qua the
suppliers or qua the transaction, etc.

Obligation to issue an invoice, classification of
supply and maintain records

Every recipient procuring supplies from unregistered persons
is obligated to issue an invoice at the time of procuring the services (refer
section 31 of CGST Act). Does this mean that the Government intends all
businessmen and their employee should carry an invoice book with them wherever
they go and make an invoice every time they procure basic items or that they
should only work with the organised (registered) players and cut out the small
and medium (mom & pop stores) enterprises. Painful and yet pertinent
question which remains unanswered.

Value addition is already taxed

Considering that GST is a tax on the value added, it is a
fact taken for granted that all supplies from unregistered would form part of
the value added and ultimately form part of the price charged at the time of
making outward supply. In such cases, there would be no loss of revenue to the
Government. Despite this glaring fact, the Government seems to have fallen a
prey to its greed to garner revenue.

Inter-State transactions

Legally speaking inter-State suppliers are required to obtain
registration from Rupee 1 (i.e. without a threshold limit), nonetheless, the
Government machinery maintains a stoic silence when asked a direct question as
to whether reverse charge would apply in case of inter-State supplies. The
silence becomes even more apparent when they are asked what happens if the
inter-State supplier is later made to pay tax on the same transaction, won’t it
result in double taxation – what are the safeguards? Questions like these speak
volumes of the challenges that are likely to be faced by business and the
administration when dealing with such transactions.

Transactions with non-residents

In the earlier paras, we have described the obligation
cast by sections 22 and 24 of the CGST Act to register, that too
notwithstanding the fact that supplies procured from non- residents would be
taxed in the hands of the importer. One is at a loss to understand, how the
Government proposes to administer these transactions.

Transactions with persons located in Jammu and Kashmir

CGST Act does not extend to the State of Jammu and Kashmir (J
& K) and recent reports in the public domain suggest that J & K is not
likely to implement GST on 1st of July along with the rest of the
country. All trade with businesses / suppliers / customers are likely to face
uncertainty. Questions raised to the Government have remained unanswered.

Conclusion

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax was having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to the Government), and therefore, in
most of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being an obstacle in the
free flow of tax credits across the businesses and  the nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for a majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
an assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.

RCM provisions, as stated in the CGST Act as on
today, may be described as totally against the concept of ease of doing
business. One may feel that Government should not have brought the concept of
RCM (in this manner) under GST. The GST legislation, without RCM, would be much
more taxpayer-friendly law.

Transitional Provisions

GST is a reality

Touted as a landmark reform, GST, which is an amalgam of
around 14 indirect taxes is a reality and is all set to be effective from 1st
July 2017. The transition to GST from a plethora of existing indirect
taxes (“existing laws”) would necessarily entail challenges since not only the
legislations are different but even many of the fundamental concepts of
taxation are different.

In order to ensure a smooth transition and to keep such
challenges at the bare minimum, the GST Laws provide for various provisions
relating to transition. Such provisions are enshrined in Chapter XX of the CGST
Act. More or less similar provisions are contained in the SGST Laws as well. In
view of section 20 of the IGST Act, the transitional provisions of CGST Act
would apply to IGST Act as well.

Summary of the Transitional Provisions

The following table provides a
bird’s eye view of the statutory provisions dealing with transition from
existing laws to the GST Laws.

Section

Situation

Provisions

139

Registrations

Existing registrations will be automatically migrated provisionally.

140(1)

CENVAT Balance

Existing CENVAT Balance to be carried forward subject to conditions.

State VAT Balance to be carried forward only subject to production of
pending documents

140(2)

Capital Goods

Unavailed CENVAT Credit can be availed

140(3)

Stock in hand

Excise Duty Credit embedded in stock to be allowed (only for last one
year)

40% / 60% notional CGST Credit if duty paying document not available

140(5)

Goods/Services in transit

Credit can be claimed within a period of 30 days from the transition
date

140(6)

Stock in hand for composition dealer

Excise Duty Credit embedded in stock to be allowed (only for last one
year)

140(7)

Input Service Distributor

Input Services eligible for distribution after the transition date
also

140(8)

Centralised Registration

Carry forward of credit in case of centralised registration of service
providers

140(9)

Recredit

Credit already reversed on account of non payment to vendors will be
available for recredit if paid within 3 months

142(1)

Goods Returns

From registered dealers – independent supply

From unregistered dealers – claim refund under earlier law

142(2)

Debit Note

Credit Note

Discharge GST

Claim GST Adjustment subject to ITC Reversal by the customer

142(3)

Pending Refund Claims

To be adjudicated under the earlier law

142(4)

Refund Claims to be filed

Under the earlier law, subject to the condition of non carry forward
of credit to that extent

142(5)

Refund Claims

On account of non provision of service to be claimed under earlier law

142 (6&7)

Pending Appeals

Under the earlier law

142(8)

Pending Adjudication

Under the earlier law

142(9)

Revised Return

If results in additional tax, recoverable under the
current law

If results in excess credit, refund to be claimed under earlier law

142(10)

Ongoing Contracts

Supplies after appointed date taxable under current law

142(11)

Advances

If tax paid under earlier law, no tax payable under current law

142(12)

Goods on Approval

No tax if returned within 6 months

142(13)

TDS on works contract under existing laws.

Not liable if payment made after appointed date

Scope of this Article

As can be seen from the
above table, there are multiple provisions dealing with issues surrounding
transition. Further, many situations have not been envisaged. Broadly, the
provisions relating to transition can be divided into provisions dealing with
output taxes, provisions dealing with input credits and procedural matters.

In view of the size
constraints, this article deals with transitional provisions in relation to
output taxes and input credits. For transition provisions related to procedural
matters like registration, refunds, etc., the readers may look up to the
relevant sections.

Repeal and Savings

Section 174 of the CGST
Act repeals various existing laws from the date of commencement of the Act. At
the same time, it is also provided that the repeal of the said laws shall not
impact certain proceedings, rights and obligations already accrued under the
existing laws. Further, it is also stated that the general application of
section 6 of the General Clauses Act, 1897 is not impacted due to section 174.

The proviso to
section 174(2)(c) specifies that any tax exemption granted as an incentive
against investment shall not be treated as a privilege and accordingly, the
savings clause shall not apply. In the case of Shrijee Sales Corporation vs.
Union of India 1997 (89) E.L.T. 452 (S.C.), the Supreme Court held that
though the principle of promissory estoppel is applicable against
Government, in case of supervening public equity, the Government is allowed to
change its stand and can withdraw a time-bound exemption notification prior to
its expiry.

The above proviso
and the decision may become very relevant in understanding situations where
long term exemptions provided for investment in backward areas have already
been granted under the existing laws and not continued under the GST Law.

Taxable Event and
Collection of Duty/Tax

Section 3(1) of the
Central Excise Act, 1944 levies an excise duty on all goods manufactured in
India. Rule 9 requires the payment of duty at the time of removal of the said
goods. In this context, the Supreme Court in the case of CCE vs. Vazir
Sultan Tobacco Co. Limited 1996 (83) E.L.T. 3 (S.C.) has observed that
section 3 cannot be read as shifting the levy from the stage of manufacture or
production of goods to the stage of removal, that the levy is and remains upon
the manufacture or production alone and only the collection part of it is
shifted to the stage of removal

Accordingly, in the
context of special excise duty, the Court held that

The goods produced prior
to the date of the levy were not subject to such levy. If that is so, the levy
cannot attach nor can it be realised because such goods are removed on or after
the date of the levy

Goods manufactured during
the impost of levy but cleared after the lapse of levy would be liable for duty
at the rate and valuation in force as on the last date of levy.

Similar principles would
apply in the context of service tax where the taxable event u/s. 66B is on the
provision of service whereas the time of collection is defined through the
Point of Taxation Rules, 2011. However, in the context of VAT, generally the
taxable event as well as the collection is aligned to be at the time of
transfer of ownership in the goods.

While the GST Law provides
for repeal of the existing laws, it does not explicitly contain any provision
for extinguishing the liability already created under the existing laws. This
would imply that in cases where the taxable event is under the existing law,
the liability to pay tax continues under the existing law and is not exhausted
by payment of tax under the GST Law.

Services provided before
the appointed date but POT arises under the GST Regime

Rule 3 of the Point of
Taxation Rules, 2011 defines the point of taxation to be the date of issuance
of invoice if the same is issued within 30 days from the date of completion of
service. A testing agency issues a certificate of quality on 26th
June 2017 and issues an invoice on 2nd July 2017. In view of the
principles illustrated above, the testing agency will be required to discharge
service tax on the said transaction since the taxable event of rendition of
service is completed when the levy of service tax was in force. Section 142(10)
of the CGST Act will not come to the rescue of the agency since the said
provision applies only for supplies after the appointed date. Of course,
section 140(5) of the CGST Act will permit the credit of the service tax to the
recipient if the transaction is recorded in his books of accounts before 30th
July 2017. For the said purpose, the phrase “services received on or after the
appointed date” will have to be read as “invoices received on or after the
appointed date” to make the provision operational.

A construction contractor
provides a continuous service to his clients. In view of the proviso to
Rule 3 of the Point of Taxation Rules, 2011, each event which requires the
receiver of service to make any payment to service provider (‘payment
milestone’) is deemed to be completion of the service to that extent. In a
particular instance, the construction contractor may have performed partial
work but the milestone may not be triggered on 30th June 2017. In
such situations, since the deemed completion of service is not triggered at
all, the levy does not crystallise in the service tax regime and the
construction contractor may bill under the GST law with applicable GST. This
would also be in alignment with the provisions of section 142(10) of the CGST
Act.

A manufacturing company
avails the services of an advocate on 2nd June 2017. The said
services are covered under reverse charge mechanism under the service tax law.
The payment to the advocate is made on 12th August 2017. Rule 7 of
the Point of Taxation Rules, 2011 defines the point of taxation in case of
reverse charge mechanism to be the date of payment if the payment is made
within three months from the date of invoice. In this case, since the services
were rendered in June, the liability to pay service tax arises. The said
liability is payable for the month of August 2017 and needs to be discharged by
6th September 2017. Unluckily, there is no provision
permitting the credit of such service tax paid.

In case of import of
services, section 21 of the IGST Act becomes relevant. The said provision
requires the payment of GST for import of services made after the appointed
date regardless of whether the transaction had been initiated before the
appointed date. However, the term ‘import of services made’ has not been
defined and therefore the interpretation of the said term may result in
litigation.

POT exhausted under the
existing laws, but supplies made after the appointed date

A converse situation can
arise in the context of goods and services where advances are received or
invoices are raised prior to 30th June 2017 but the actual supply
happens under the GST Regime. In such situations, the correct trigger point of
taxation would be GST and not the existing tax requiring the assesse to file a
refund claim for the existing tax and further liability towards payment of GST
under the GST Law. However, in order to ease the process, Section 142(11)
provides for a transitional benefit under the GST Law.

Section 142(11)(a) states
that no tax shall be payable on goods under the GST Act to the extent that the
tax was leviable under the VAT Act of that State. Similarly, Section 142(11)(b)
states that no tax shall be payable on services under the GST Act to the extent
that the tax was leviable under the service tax law.

Section 142(11)(c) further
states that where tax was paid on any supply both under the Value Added Tax Act
and under the service tax law, GST shall be payable to the extent of supplies
made after the appointed day and the taxable personshall be entitled to take
credit of value added tax or service tax paid earlier

Subsequent Adjustments

It is likely that for a
supply effected in the pre-GST regime, there could be some variation in the
value of taxable service or value of goods on account of discount, etc. In such
cases, since the taxable event was under the existing law, the differential tax
should be payable under the existing law. However, as a transition provision,
Section 142(2) permits the issuance of a debit/credit note under the GST Regime
and such debit/credit note is deemed to have been issued in respect of an
outward supply under the GST Regime. This provision permits an adjustment on
account of GST for supplies which initially attracted VAT/Excise Duty/Service
Tax. Though no corresponding amendment is carried out under the existing laws
to insulate against the liability for the said debit notes, it can be said that
section 142(2) will have an overriding effect over the provisions of the
existing laws.

A downward adjustment of
tax consequent to the issuance of a credit note is permitted u/s.142(2)(b) only
subject to a corresponding reduction of input tax credit by the recipient. In
cases where the recipient was not eligible for input tax credit under the
existing laws, it is very likely that he will not agree for such a reduction in
his input tax credit. In such situations, will it be open for the supplier to
disregard the provisions of section 142(2)(b) of the CGST Act and invoke the
provisions of Rule 6(3) of the Service Tax Rules, 1994 and file a consequent
refund claim? In view of the legal principles enunciated, it is felt that such
an approach may be feasible.

Most of the current VAT
Regimes permit an adjustment on account of goods rejection if the rejection
happens within a period of six months. Section 142(1) reiterates the
eligibility of refunds under the existing law in case of goods rejection from
unregistered buyers. In fact, the said provision would also permit entitlement
of refund for excise duty. To that extent, the said provision is in alignment
with the legal principles. However, through a proviso in the said
section, it is stated that if the goods are returned by a registered person,
the return of such goods shall be deemed to be a supply. Can this proviso create
a tax liability on the person who is returning the goods? Further, can it override
the express provisions under the existing laws permitting the adjustment on
account of goods rejection in all cases?

Transitional Arrangements
in respect of input tax credit

Section 140 deals with
various situations where transitional arrangements are made for claim of
credit. The essence of the said provisions is covered in subsequent paragraphs.

Section 140(1) permits a
registered person to claim the CENVAT Credit carried forward in the last return
under the existing law. The Credit can be carried forward subject to certain
conditions. Similarly, the unutilised input tax credit disclosed in the VAT
Returns can be carried forward subject to certain conditions, one of which
pertains to receipt of all pending declarations.

Section 142(9)
specifically deals with situations of revised returns and states that any
increase in CENVAT Credit consequent to a revised return will not be carried
forward under GST, but be eligible for cash refund under the existing law. Will
this beneficial provision permit a back door entitlement for entities
accumulating substantial CENVAT Credits and unable to utilise the same?

Section 140(2) permits the
claim of unavailed credit on capital goods in cases where the credit under the
existing laws is available in instalments.

Section 140(3) is an
important provision permitting the claim of credit of eligible duties in
respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the appointed day subject to various conditions
mentioned therein. The credit is available to a registered person, who was not
liable to be registered under the existing law, or who was engaged in the
manufacture of exempted goods or provision of exempted services, or who was
providing works contract service or a first stage dealer or a second stage
dealer or a registered importer or a depot of a manufacturer.

It may be noted that one
of the important conditions for the claim of credit is that the said registered
person is in possession of invoice evidencing payment of duty under the
existing law in respect of such and that such invoice is issued not earlier
than twelve months immediately preceding the appointed day.

In cases where the person
is not in possession of a duty paying document, a proportionate credit linked
to the output tax liability under the CGST Act has been prescribed through the
Transitional Rules. Similarly, in certain cases, the manufacturer is permitted
to issue a Credit Transfer Document to enable the person possessing the goods
to claim the credit on the basis of such document.

Section 140(9) permits
recredit of service tax credit already reversed under the existing law on
account of non-payment to vendors. The said re-credit will be available if the
value and the tax is paid to the vendor within 3 months from the appointed
date.

Section 140(5) permits a
credit of eligible duties and taxes in respect of inputs or input services
received after the appointed date if the said transactions are recorded in books of
accounts within 30 days from the appointed date.

Conclusion

Each reform or a revolution
comes with its’ own set of challenges and GST can be no exception. The
transition would present both opportunities as well as difficulties. While the
Legislature has provided for many situations to deal with transition, it will
be upto the implementers to either look at the spirit of the provisions to
avoid double taxation or non taxation and also for the judiciary to balance
between the legal principles of strict interpretation and need for minimal
business disruption.

Input Tax Credit (ITC)

Preface

Input Tax Credit or to say ITC mechanism is the backbone of
any system of Value Added Taxation (Vat). Goods and Services Tax (GST) being
based upon the principles of Vat, it has to provide for an appropriate
mechanism by which the basic concept of Vat remains intact. As we are well
aware, GST is a destination based tax, the burden of tax has to be borne by the
ultimate consumer of goods or services as the case may be. Neither there should
be any cascading of taxes nor any burden of such tax should fall on businesses.
Governments have to collect taxes from their subjects and the people have to
pay. While direct taxes are collected directly by the Government from all those
who are liable to pay such tax, in case of indirect taxes it may not be
possible for the Government to collect directly from the consumers. It is in
these circumstances, that responsibility is cast upon the businesses to collect
tax from consumers and deposit it into the Government Treasury. The businesses
as such are performing the role of a mediator. It is necessary therefore, that
such a mediator should not be burdened to pay any amount of such tax from his
own pocket. While the businesses will collect tax from consumers and deposit
into Government Treasury, it is necessary to ensure that Government gets
correct amount of taxes, as being paid by the consumers, and there is no
leakage of revenue.

Businesses, in any country, operate through a chain of people
performing different activities, and, sometimes it is a very long chain between
origin of goods and its consumption in the hands of ultimate consumer. An
importer or manufacturer may be the first person in the chain of production and
distribution of goods. Thereafter, there may be a distributor, a stockist, a
whole seller or a trader and the retailer, etc. Thus, before the goods reach in
the hands of ultimate consumer, they pass through various hands, and, each such
person may be adding some value to such goods whether by way of enhancing its
utility or otherwise whereby the price of such goods gets increased at each
stage in that chain of production and distribution. To take a simple example
suppose a manufacturer sells his goods at 100 rupees, the distributor adds his
expenses of transportation, etc. and after adding his margin sells at 110,
whole sellers sells at 120 and the retailer sells the same goods to the
consumer at 150 rupees. And if the rate of tax applicable is 10%, the consumer
is required to pay 15 rupees by way of tax (10% of 150), the Government should
get this 15 rupees in its treasury neither less nor more. One method of
collection of tax may be that Government collects 15 rupees directly from the
retailer and all other persons i.e. manufacturer, distributor, whole seller,
etc. need not  collect or pay any tax.
Such a system is called last stage taxation, which was prevailing long back but
discontinued due to large scale of revenue leakages. The system of first stage
taxation (i.e. collecting the intended amount of tax from the manufacturer
himself), which was there under the earlier sales tax laws, had to be
discontinued because of low tax base, and the MRP based system of collecting
taxes from the first stage dealer also does not find favour under a fair and
equitable system of taxation. However the system of Vat provides all such
benefits which we can expect from a fair and transparent system of taxation.
Under this system taxes are collected at each stage of production and
distribution at a predetermined rate of tax. Thus, in the above example: the
manufacturer has to collect a sum of Rs. 10 (10% of 100) from his purchaser
(the distributor). He has to deposit the same amount into Government treasury.
The distributor will collect Rs. 11 (10% of 110) from the whole seller. As he
has already paid Rs. 10 to the manufacturer, he will deposit Rs. 1 into the
treasury (11-10). Here Rs. 11 is the amount of output tax and Rs. 10 is the
input tax credit. Similarly whole seller will collect Rs. 12 (10% of 120) and
will pay into the treasury Rs. 1 (i.e. 12-11) and the retailer will collect Rs.
15 from the consumer (10% of 150) and he will deposit a net sum of Rs. 3
(15-12) into the treasury. Thus, Government will get a total sum of Rs. 15
(10+1+1+3) through all these persons involved in the production and
distribution chain. The consumer has paid Rs. 15 as tax for consuming the
product, the Government is getting the exact amount into its treasury, and,
none of the businesses have paid any amount out of their own pocket. They have
deposited the entire amount of tax that they have collected from their customer
after deducting there from the amount of tax which they have already paid
through their supplier/s. Neither any gain nor any loss to the businesses.
Thus, the amount of tax paid on supplies received in the business may be
considered as advance payment of tax, which in Vat terminologies is called as
Input Tax Credit. (Credit of taxes paid on inputs).

This concept of ITC is not new to all those who have been
dealing with Excise Duty, Service Tax and State Vat laws, wherein it already
exits either partially or fully in the form of Cenvat (earlier called Modvat)
and setoff, etc. But, as these taxes are being levied at different stages and
by different Government/s, there is no inter connectivity of these taxes and
therefore taxes paid under one or more enactments are not cenvatable against
the other. It is fragmented Vat, which is in practice in our country at
present. To overcome this difficulty the concept of GST was suggested long back
and now the stage has come that our country is ready to implement GST, although
it is dual GST, to begin with, due to federal structure, but in this form also
it will overcome several disadvantages and in future we may hope for a single
GST across the country. Thus, let all of us together ‘Welcome GST’.

The Indian GST law i.e. The Central Goods and Services Act
(CGST Act), IGST Act, UTGST Act as well as State GST Acts contain elaborate
provisions regarding input tax credit and claim thereof by eligible taxable
persons. The Rules made there under provide conditions for such claim. As the
provisions and the conditions are on the same line in all such enactments, the
provisions contained in CGST Act and the Rules may be discussed in brief as
follows: 

Input, Input Tax and Input
Tax Credit

Section 2 of the Central Goods & Services Act defines
various terminologies. Relevant definitions for the purposes of our discussion
are reproduced herein as follows:-

(59) “input” means any goods other than capital goods
used or intended to be used by a supplier in the course or furtherance of
business;

(60) “input service” means any service used or
intended to be used by a supplier in the course or furtherance of business;

(62) “input tax” in relation to a registered person,
means the central tax, State tax, integrated tax or Union territory tax charged
on any supply of goods or services or both made to him and includes—

(a)
the integrated goods and services tax charged on import of goods; (b) the tax
payable under the provisions of sub-sections (3) and (4) of section 9;

(c)
the tax payable under the provisions of sub-sections (3) and (4) of section 5
of the Integrated Goods and Services Tax Act;

(d)
the tax payable under the provisions of sub-sections (3) and (4) of section 9
of the respective State Goods and Services Tax Act; or

(e)
the tax payable under the provisions of sub-sections (3) and (4) of section 7
of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

(63) “input tax credit” means the credit of input tax;

(67) “inward supply” in relation to a person, shall
mean receipt of goods or services or both whether by purchase, acquisition or
any other means with or without consideration;

(19) “capital goods” means goods, the value of which
is capitalised in the books of account of the person claiming the input tax
credit and which are used or intended to be used in the course or furtherance
of business;

(94) “registered person” means a person who is
registered u/s. 25 but does not include a person having a Unique Identity
Number;

(105) “supplier” in relation to any goods or services
or both, shall mean the person supplying the said goods or services or both and
shall include an agent acting as such on behalf of such supplier in relation to
the goods or services or both supplied;

(106) “tax period” means the period for which the
return is required to be furnished;

(107) “taxable person” means a person who is
registered or liable to be registered u/s. 22 or section 24;

(108) “taxable supply” means a supply of goods or
services or both which is leviable to tax under this Act;

(47) “exempt supply” means 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 Services Tax Act, and includes
non-taxable supply;

(78) “non-taxable supply” means a supply of goods or
services or both which is not leviable to tax under this Act or under the
Integrated Goods and Services Tax Act;

Eligibility to claim Input
Tax credit

Section 16(1) of the CGST act provides that: Every registered
person is entitled to take credit of input tax charged on any supply of goods
or services or both to him which are used or intended to be used in the course
or furtherance of his business.

Thus, to claim Input Tax Credit (ITC) it is necessary that
the claimant is a ‘registered person’. All such persons who are registered
under the Act (other than persons holding UIN) are eligible to claim ITC in
respect of taxes paid (i.e. CGST, SGST or UTGST and IGST) on all inward
supplies of goods and services received, which are used or intended to be used
in the course of his business or for furtherance of business. 

Such inward supplies may be of inputs, input services or
capital goods. All such supplies are eligible for claim of ITC. Thus, whether
it is raw material, packing material, trading goods, consumables, capital goods
or items of expenditure (debited to profit & loss a/c under various heads)
all such items are eligible provided the same are used or intended to be used
in the course or furtherance of business (subject to such conditions and
restrictions as may be prescribed).

Conditions & Restrictions

Apart from the basic condition i.e. used or intended to be
used in the course or furtherance of business, section 16(2) provides for
certain conditions, which may be summarised as follows:

(a) Goods
and/or services (as the case may be) must have been received.

(b) He must
have in possession a Tax Invoice (issued by the supplier) in respect of such supply

(c) Tax
charged on such inward supply must have been paid to the Government (whether in
cash or by way of utilisation of ITC).

(d) A return
(in accordance with section 39) has been furnished

(e) In
respect of capital goods, if the registered person has claimed depreciation
(under the Income Tax Act) on tax component of such assets (capital goods), ITC
shall not be admissible. That would mean that if tax component has been added
to the cost of such capital goods, ITC to that extent is not eligible.   

It has further been provided that if the recipient fails to
make payment to the supplier in respect of supplies so received (on which ITC
has been claimed) within a period of 180 days from the date of issuance of Tax
Invoice, the ITC so claimed has to be reversed. And such amount can be
reclaimed after making due payment to the supplier.

Reduction in ITC

Section 17 provides for certain conditions in which the claim
of ITC may get reduced to certain extent or proportionate reduction may have to
be worked out in following circumstances:-

(1)  If the taxable
supplies received are used partly for the purposes of business and partly for
any other purposes (may be for personal use). ITC will be admissible to the
extent of business uses only. If the exact amount is not ascertainable then
proportionate reduction method will be applicable.

(2) If the taxable supplies received are used partly for the
purposes of outward supply of taxable goods and/or services (including zero
rated supplies) and partly for exempt supplies. ITC will be admissible to the
extent of use in taxable supplies including zero rated supplies). If the exact
amount is not ascertainable then proportionate reduction method will be
applicable.

Note: ‘Zero Rated supplies’ are defined u/s. 16 of IGST Act
as follows:-

“16. (1) “zero rated supply” means any of the following
supplies of goods or services or both, namely:–  

(a) export
of goods or services or both; or

(b) supply of goods or services or both to a
Special Economic Zone developer or a Special Economic Zone unit.”

Thus, although there is no tax payable on outward supplies,
which are zero rated, input tax credit is available in full (without any
reduction).

(3) 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) (i.e. bifurcation of taxable and
exempt supplies), or avail of, every month, an amount equal to fifty per cent.
of the eligible input tax credit on inputs, capital goods and input services in
that month and the rest shall lapse.

No ITC

Section 17(5) of the CGST Act provides that; Notwithstanding
anything contained in sub-section (1) of section 16 and sub-section (1) of
section 18, input tax credit shall not be available in respect of the
following, namely:-

(a) motor vehicles and other conveyances except when they are
used––

(i) for making the following taxable supplies,
namely:—

(A) further
supply of such vehicles or conveyances; or

(B)
transportation of passengers; or

(C) imparting
training on driving, flying, navigating such vehicles or conveyances;

(ii) for
transportation of goods;

(b) the following supply of goods or services or both—      

(i) 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 category of goods
or services or both or as an element of a taxable composite or mixed  supply;

(ii) membership
of a club, health and fitness centre;

(iii)
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

(iv) travel benefits extended to employees on
vacation such as leave or home travel concession;

(c) 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;

(d) 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.

Explanation.––For the purposes of clauses (c) and (d),
the expression “construction” includes re-construction, renovation, additions
or alterations or repairs, to the extent of capitalisation, to the said immovable
property;

(e) goods or services or both on which tax has been paid u/s.
10 (composition schemes);

(f) goods or services or both received by a non-resident
taxable person except on goods imported by him; 

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of
by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of
sections 74, 129 and 130 (specific cases).

Explanation.––For the purposes of Chapter V (Input Tax
credit) and Chapter VI (registration), the expression “plant and machinery”
means apparatus, equipment, and machinery fixed to earth by foundation or
structural support that are used for making outward supply of goods or services
or both and includes such foundation and structural supports but excludes-

(i) land,
building or any other civil structures;

(ii)
telecommunication towers; and

(iii)
pipelines laid outside the factory premises.

It may further be noted that following persons are not entitled
to claim input tax credit in respect of any of the items of inward supply of
goods or services:

1. An un-registered person

2.
Registered persons who have opted for Composition Scheme/s

3. Persons holding Unique Identification Number
(UIN)

4. A registered person whose registration is
cancelled (in respect of inward supplies on or after the date of cancellation).

Documentation requirements and conditions for claiming ITC

The input tax credit shall be availed by a registered person,
including the Input Service Distributor, on the basis of any of the following
documents, namely:-

(a) Tax invoice issued by the supplier of goods or
services or both in accordance with the provisions of section 31;

(b) An invoice issued in accordance with the provisions
of clause (f) of sub-section (3) of section 31, subject to payment of tax (i.e.
in respect of purchases from un-registered dealers, where tax is payable under
reverse charge scheme); 

(c) A debit note issued by a supplier in accordance
with the provisions of section 34 (in respect
of goods return, rate difference, etc.);

(d) A bill of entry or any similar document
prescribed under the Customs Act, 1962 or rules made there under for assessment
of integrated tax on imports;

(e) An ISD invoice or ISD credit note or any
document issued by an Input Service.

     Distributor in accordance with the
provisions of sub-rule (1) of rule invoice 7.

Time Limit for claim of ITC

The procedure to claim ITC
by a registered person is that the same can be claimed immediately in
respective month (Tax Period) to which the Tax Invoice relates (subject to
actual receipt of such goods/services). Each such claim of ITC is credited to
the Electronic Credit Register of such registered person. He may utilise the
credit as and when he would like to adjust the same against his output tax
liability.

However, if a person has not claimed ITC in the respective
month, for any reason, he may claim the same any time (i.e. in any tax period)
within 6 months from the end of financial year or before the time limit for
submitting Annual Return for the said financial year, whichever is earlier.
(The time limit prescribed for submitting annual return, at present is 31st
December of next financial year. Thus, practically a person can claim the
unclaimed amount of ITC till he submits his return for the month of September
of next financial year). 

It may be noted that credit of CGST, SGST or
UTGST and IGST has to be maintained separately and the same can be utilsed in a
prescribed manner only. The credit of CGST can be utilised for discharge of
output tax liability of CGST and if balance remains it can be utilised for IGST
also. But credit of CGST cannot be utilsed for payment (discharge of output tax
liability) of SGST. Similarly credit of SGST cannot be utilsed for output tax
liability of CGST. In short, cross utilisation of CGST and SGST is not permitted.
However, the credit of IGST can be utilsed first for discharge of output tax
liability of IGST, then against CGST, and if still balance remains, against
SGST.

Valuation of Supplies in GST

1.  Background

     Provisions for valuation of supplies in GST
are common for both goods and services. Section 15 of CGST Act read with nine
rules contained in Draft Valuation Rules (DVR) as approved by the GST Council
in May 2017 lay down the principles of valuation.

    Essentially, these principles of valuation
are to be applied in three buckets, depending on the nature of supply:

S. No.

Nature of supply

Applicable Section of CGST Act

1

Supply:

a)
to a recipient who is not related to the supplier; and

b)
where price is the sole consideration

15(1)

2

Supply:

a)
to a recipient who is related to the supplier; or

where
price is not the sole consideration

15(4)

3

Supplies
notified by Government on the recommendations of GST Council

15(5)

For each of the above buckets, different (and in some cases,
alternate) methods of valuation have been prescribed in the law, depending on
existence of specified circumstances in different situations under each
buckets. These methods are discussed in subsequent paras separately.

However, for each of the above buckets, while
determining the value of supply:

a)   Section 15(2) lists specific amounts which
are required to be included; and

b)   Section 15(3) and Rule 7 of DVR lists
specific amounts which are required to be excluded

2.  Mandatory inclusions in value of supply

     Irrespective of the nature of supply, as
per section 15(2), following amounts shall be included in the value of a supply
(some practical examples of these are given in brackets):

i.   any taxes, duties, cesses, fees and charges
levied under laws other than GST related Acts, if charged separately by the
supplier (e.g. basic customs duty, property tax, etc. separately charged by
supplier to recipient);

ii.  any amount that supplier is liable to pay for
the supply but is incurred by the recipient and is not included in the price
actually paid/payable for the supply (e.g. salaries of suppliers’ employees,
electricity bill of supplier etc. paid by recipient);

iii.  incidental expenses, including commission and
packing, charged by supplier to recipient (e.g. outward freight, fumigation
charges etc.);

iv. any amount charged for anything done by
supplier for supply at the time of, or before delivery of goods / supply of
services (e.g. warehousing charges);

v.  interest/late fee/penalty for delayed payment
of consideration for supply; and

vi. subsidies directly linked to price of supply
excluding Government subsidies (e.g. subsidy received by canteen contractor
from recipient for subsidised meals given to recipient’s employees).

3.  Mandatory exclusions from value of supply

     Irrespective of the nature of supply, as
per section 15(3), following amounts shall not be included in the value of a supply,
if the conditions specified there against are satisfied (some practical
examples of these are given in brackets):

i.   any discount given before/at the time of
supply, if it has been recorded in the invoice issued for such supply (e.g.
discount on stock clearance sale);

ii.  any
discount given after supply, if such discount is:

–   established in terms of agreement entered
into at/before time of supply;

–   specifically linked to relevant invoices; and

–   input tax credit (ITC) attributable to it on
the basis of document issued by supplier has been reversed by recipient.

     (e.g. volume/target discount given as
per milestones)

     It needs to be noted that the above
exclusions are specific and conditional. Hence, neither any other type of
discount nor any of the aforesaid two types of discounts where the specified
conditions are not fulfilled, will be allowed to be deducted by the supplier
from the value of supply for computing GST liability of supplier.

    However, net effect of the above is that if
in practice,in respect of post-supply discount:

–   supplier does not want to seek reduction in
its GST liability (already discharged for the supply); and

–   recipient does not want to reverse ITC
attributable to such discount (already claimed earlier based on original invoice
of supplier),

     they can very well do so, with the supplier
issuing credit note to recipient u/s. 34 of CGST Act, only to the extent of the
amount of post supply discount, without giving any credit to the recipient for
the GST already charged in the original invoice for the supply, ITC for which
was already taken earlier by the recipient.

     As per Rule 7 of DVR, expenditure/costs
incurred by a supplier as a pure agent of recipient shall be excluded
from value of supply if all the following seven conditions (as against
twelve conditions specified in present Valuation Rules under Service Tax Law)
are satisfied:

(i)   supplier acts as pure agent of recipient when
he makes payment to third party on authorisation of recipient;

(ii)  payment made by pure agent on behalf of
recipient is separately indicated in invoice issued to recipient;

(iii)  supplies procured by pure agent from third
party are in addition to services (and possibly goods or both2 )
supplied on his own account;

(iv) supplier acts as pure agent to incur
expenditure/costs in the course of his supply as per contractual arrangement
with recipient;

(v)  supplier neither intends to hold nor holds any
title to goods/services procured/supplied as such agent;

(vi) supplier does not use goods/services so
procured for his own interest; and

(vii) supplier receives only actual amount incurred
to procure such goods/services, in addition to amount received for supply made
on his own account.

4.  Value of supply to non-related persons

     Supply to a non-related person could be
such where:

(a) price is the sole consideration
for supply; or

(b) price is not the sole consideration
for supply.

     In situation (a), as per section 15(1),
value of such supply shall be ‘transaction value’, which is the price
actually paid/payable for the supply.

     In situation (b), as per section 15(4),
value shall be determined as per Rule 1 of DVR.

     The term ‘consideration’ is defined very
widely in section 2(31) of CGST Act in an inclusive manner. Therefore, in
addition to the specific inclusions stated in that definition, whatever
qualifies as consideration ordinarily and in terms of the Indian Contract Act,
will also be regarded as consideration. Following essential features of such
specific inclusions in the definition of ‘consideration’ need to be noted
carefully:

(a) any payment made or to be made, whether in
money or otherwise (i.e. in kind) in respect of, in response to, or for the
inducement of, the supply of goods/services;

(b) such payment may be made by the recipient or by
any other person (other than subsidy given by Government);

(c) monetary value of any act or forbearance, in
respect of, in response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person (other than
subsidy given by Government);

(d) deposit given in respect of the supply of
goods/services, if the supplier applies such deposit as consideration for such
supply.

Treatment of Free Issue/Free of Charge Material

It appears that Free Issue Material (FIM)/Free of Charge
(FOC) material made available by the recipient to the supplier in terms of
a condition precedent stated in the contract with the supplier, clearly
defining the scope and nature of the supplies of the supplier, can be argued to
be not includible in the value of the supply in terms of specific inclusions
stated in (a) and (c) above. To avoid possible disputes in this regard that
could be raised by Departmental Officers on account of the use of phrases like
‘in respect of’ and ‘for the inducement of’ having wide meanings in the
definition of ‘consideration’ as explained above, it would be desirable that
Government appropriately clarifies whether in aforesaid and/or other
circumstances, FIM/FOC material made available by recipient to the supplier is
or is not, required to be added to the value of supply by the supplier. 

Treatment of consideration in kind

Where supply is to a non-related person but price is not
the sole consideration, i.e. where price is partly in money and partly in kind,
or it is wholly in kind, Rule 1 of DVR provides for the following methods of
arriving at valuation in the sequence stated below i.e. if the first method
fails, value has to be determined as per next method and if the next one fails,
the third method and so on, where the last method is prescribed in Rule 5:

(a) Open Market Value (OMV) of the supply;

(b) sum total of consideration in money and such
further amount in money that is equivalent to the consideration not in money
(if such amount is known at the time of supply);

(c) value of supply of goods/services of like kind
and quality;

(d) sum total of consideration in money and such
further amount in money that is equivalent to the consideration not in money as
determined by application of Rule 4 or Rule 5 in that order (these Rules are
briefly narrated at S. Nos. 3 & 4 respectively in the table in Para 6
below).

5.  Meaning of ‘related persons’

     Curiously, the definition of ‘related
persons’ is not given in the definition section 2 of CGST Act, but it is given
in the Explanation to section 15 by clearly stating, ‘For the purposes of
this Act, – ”.

     As per this Explanation, in eight specified
types of relationships, persons will be deemed to be ‘related persons’, and
‘person’ for this purpose will include legal persons. Instances of these
specified types of relationships are – employer and employee; members of the
same family; one person directly/indirectly controls the other; persons who are
legally recognised partners in business; persons who are officers/directors of
one another’s businesses; a person who is associated with another person as its
sole agent/sole distributor/sole concessionaire.

6.  Value of supply to agents, related persons or
between distinct persons3

     Valuation for supply between a person
(being a principal) and his agent (other than sole agent), is prescribed in
Rule 3 of DVR, while valuation of supply between related persons (including
sole agent) or between distinct persons is prescribed in Rule 2 of DVR – both
of which Rules require determination of value as per Rule 4 or Rule 5 in
specified situations.

     Rules 2 to 5 also provide for sequential
method of arriving at valuation summarised in the table below:

S. No.

Method of valuation (in sequential order)

Supply between principal and agent

(other than sole agent)

Supply between distinct persons and related persons
(including

sole agent)*

1

Open
Market Value (OMV) of supply

3

[Rule 3
clause (a)]

3

[Rule 2
clause (a)]

2

Value
of supply of goods/services of like kind and quality

N.A.

3

[Rule 2 clause (b)]

3

110%
of cost of production/manufacture/acquisition of goods or cost of provision
of services

3

[Rule 4]

 

3

[Rule 4]

 

4

Value
using reasonable means consistent with the principles and general provisions
of section 15 and DVR

3

[Rule 5]

 

3

[Rule 5]

 

 

Option available to supplier – 90% of price charged for goods of like kind and quality by
recipient to his unrelated customer

3

(this option is in place of OMV method only)

3

(this option is in place of all above methods)

*Most importantly, as per second proviso to Rule 2 of DVR,
in all these situations, value declared in invoice of supplier shall be deemed
to be OMV, where the recipient is eligible for full input tax credit.This is
a great relief to businesses, as it will avoid possible valuation disputes with
Department in these situations.

The expressions ‘Open Market Value’ (OMV) and ‘supply
of goods or services or both of like kind and quality’ are defined in the
Explanation at the end of Rule 9 of DVR as under:

a)  ““open market value” of a supply of goods or
services or both means the full value in money, excluding the integrated tax,
central tax, State tax, Union territory tax and the cess payable by a person in
a transaction, where the supplier and the recipient of the supply are not
related and price is the sole consideration, to obtain such supply at the same
time when the supply being valued is made.”

(emphasis supplied) 

     In essence, OMV is arm’s length price.

b)  ““supply of goods or services or both of
like kind and quality” means any other supply of goods or services or both made
under similar circumstances that, in respect of the characteristics, quality,
quantity, functional components, materials, and reputation of the goods or
services or both first mentioned, is the same as, or closely or
substantially resembles, that supply of goods or services or both.”

(emphasis supplied) 

In practice, several challenges could arise in determining
what are ‘similar circumstances’ in light of the above specified
characteristics of a supply and therefore, due caution will have to be
exercised in this regard by drawing support from publicly available
information, opinions of experts, etc. which should be well documented – as is
done in case of transfer pricing regulations under Income Tax Act.

7.  Option to determine value of notified supplies

     As per section 15(5) read with Rule 6 of
DVR, in case of following notified supplies, where the recipient may or may not
be related or price may or may not be the sole consideration, supplier has
the option to determine the value as per method prescribed in Rule 6 of DVR
for each such notified supply (subject to satisfaction of specified
conditions), instead of determining value as per the principles discussed
in Paras 4 to 6 above:

S. No.

Nature/type of supply

Relevant criteria / optional deemed valuation method
prescribed in Rule 6 – depending on specified situations

1

Exchange
of foreign currency

a)  Difference
between RBI buying and selling rates of specified currency

b)  1%
of gross amount of INR

c)  1%
of specified amount of INR derived/assumed to be received

2

Supply
of foreign currency, including money changing

a)  Upto
Rs.1 lakh – 1% of gross amount of currency exchanged (subject to minimum
of Rs.250)

b)  >
Rs.1 lakh but < Rs.10 lakh – Rs.1,000 plus 0.5% of gross amount of
currency exchanged

c)  >
Rs.10 lakh – Rs.5,500 plus 0.01% of gross amount of currency exchanged (subject
to maximum of Rs.60,000)

3

Booking
of air travel tickets by air travel agent

a)  Domestic
– 5% of basic fare

b)  International
– 10% of basic fare

4

Life
insurance (other than pure risk cover policies)

a)  Gross
premium less amount allocated for investment/savings

b)  Single
premium annuity policy (other than (a) above) – 10% of premium

c)  Any
other policy – 25% of premium in first year and 12.5% of premium in
subsequent years

 

5

Supply
of second hand goods by person dealing in buying and selling such goods where
no ITC is availed on purchase of such second hand goods

Positive
difference, if any, between selling and purchase price

(In
case of goods purchased from defaulting unregistered borrower for recovery of
loan/debt, purchase price of person making repossession shall be deemed to be
the purchase price of such borrower reduced by 5% for every quarter/part
thereof between date of purchase and date of disposal by such person making
repossession)

6

Token,
voucher, coupon or stamp (other than postage stamp) redeemable against supply
of goods/services

Money
value of goods/services redeemable

7

Taxable
services provided by notified class of service providers from out of persons
having more than one registrations under different GST Acts but treated as
distinct persons (referred to in Para 2 of Schedule I of CGST Act),where ITC
is available

Nil

8.  Rate of exchange and value inclusive of GST

     As per Rule 8 of DVR, for determining rupee
value of supplies involving foreign currency, the rate of exchange to be
applied shall be the applicable RBI reference rate on the date and time of
relevant supply in terms of section 12 (time of supply for goods) and section
13 (time of supply for services) of CGST Act.

     As per Rule 9 of DVR, where value of supply
is inclusive of GST, tax fraction shall be applied to determine the GST amount
included in such value i.e.

     GST = Value of supply inclusive of GST X Applicable GST rate for the supply /

               100 + Applicable GST
rate for the supply 

     This method would particularly become relevant
in cases of supplies of taxable goods/services obtained from unregistered
persons, where the registered person (i.e. recipient) is liable to pay GST
under reverse charge as per section 9(4) of CGST Act.

9.  Conclusion

     Given the complexities in real life
situations of supply of goods/services and related matters like conditions
precedent, nature of payments, need for outsourcing, nature of
concessions/incentives given, actual conduct of parties, technological
advancements etc., area of valuation of supplies liable to GST will pose
several challenges as well as opportunities for small, medium and large
businesses.

     All decision makers will have to be
cautious, methodical and process oriented for being fully GST compliant on one
hand and simultaneously achieving tax optimisation, for not only sustaining in
the increasingly competitive and disruptive business environment but also
increasing one’s market share in the world’s fastest growing economy.

Revisiting
existing arrangements, contracts, processes and technology and re-imagining the
entire eco system with proper involvement of all stakeholders is the best way
to successfully navigate the transition into GST, which will completely
transform the socio, political and economic environment of India.

Classification of Goods and Services

Introduction

In any taxation matter, the classification of any items plays
an important role in determining the quantum of tax payable by the taxable
person. The GST Council has also approved four slabs of rates which are 5%,
12%, 18% and 28%. The different rates have been approved for different products
by the GST Council in their meeting held on 19/05/2017 and 20/05/2017. The
appropriate classification of goods or services will determine the rate of GST
payable.

The Tribunal and Courts have laid down different principles
of classification of goods or services. These principles are very helpful in
classifying the goods and services and accordingly determining the rate of tax.

Principles of Classification

The various principles are summarised below:

(a)
Commercial/Trade Parlance

(b)
Definition given in statute or chapter note/section note etc.

(c)
Description in HSN has persuasive value

(d)
Most specific description to be preferred over general description

(e)
Functional use of the product

(f)
Essential characteristics of goods or service

(g)
Importance of expert opinion and other evidentiary value

(h)
Importance of ISI specification

(i)
Importance of Finance Ministers speech

(j)
Importance of trade notice, circulars etc.

(k)
Chemical examination only provides content and not classification

(l)
Provision of relevant time

(m)
Burden to prove classification on department

(n)
Exemption notification cannot interpret tariff heading or sub heading

(o)
Beneficial classification

(p)
Jurisdiction to decide classification

Each of the above principles are discussed as follows:

a)  Commercial/Trade Parlance

    If meaning of goods/service is not defined
in relevant places in GST Act, then, meaning of the goods/service has to be
judged in the manner understood by the people dealing with it, i.e., the
goods/service should be understood in the commercial sense. This rule has been
consistently applied by various courts to decide the classification of the
product. For example, whether the product should be classified as cosmetic or
medicament shall be judged by the manner in which the people dealing the
product understand.

     The observation of the Supreme Court in
paras 29 & 34 in the case of Dunlop India vs. UOI 1983 (13) ELT 1566
(SC) substantiate this principle. The Supreme Court has observed as follows:

     “29. It is well
established that in interpreting the meaning of words in a taxing statute, the
acceptation of a particular word by the trade and its popular meaning should
commend itself to the authority.”

     “34. We are, however,
unable to accept the submission. It is clear that meanings given to articles in
a fiscal statute must be as people in trade and commerce, conversant with the
subject, generally treat and understand them in the usual course. But once an
article is classified and put under a distinct entry, the basis of the
classification is not open to question. Technical and scientific tests offer
guidance only within limits. Once the articles are in circulation and come to
be described and known in common parlance, we then see no difficulty for statutory
classification under a particular entry.”

     The above Principle of classification has
been followed consistently by the Supreme Court in the following cases:

          
Indian Aluminium Cables Ltd. vs. UOI 1985 (37)

           E.L.T (S.C)

           Collector of Central Excise,
Kanpur vs. Krishna

           Carbon Paper Co.1988 (37) E.L.T
480 (S.C)

     Commissioner vs. Pio Food Pack 1980
(6) ELT 353 (SC)

     Reliance Cellulose Products Ltd.,
Hyderabad vs. Collector of Central Excise, Hyderabad 1997 (93) E.L.T 646
(S.C)

This is the basic principle to determine the classification
of goods or service. Affidavits from persons like customers, distributors,
dealers along with purchase orders from customer, description of product in
invoice raised by supplier, normally substantiate the manner in which the
product is understood in the commercial parlance.

b)  Definition given in statute or chapter
note/section note etc.

     The principle of classification of product
as per trade parlance is not absolute principle. The statute making authority
has the power to define the product in a particular manner. The Hon. Supreme
Court in the case of Akbar Baharuddin vs. Collector of Central Excise, 1990
(47)ELT 161 (SC) has held that tariff entry shall not only be based on trade
parlance and understanding between the person in the trade. The said doctrine
of commercial understanding should be departed where the statute either in the
act or chapter note or in schedule or anywhere else defines the product in a
particular manner. The definition in the statute will take precedence over the
commercial understanding of the product in the trade.

c)  Description in HSN has persuasive value

     Under the General Agreement for Trade and
Tariff, commonly known as GATT agreement, World Trade Organization (WTO) has
been formed.The Customs Coordination Council (CCCN) working under WTO has
published Harmonized System Nomenclature (HSN) which is normally adopted by all
countries who have signed the GATT Agreement for the purpose of classification of
the products for Customs. In India, classification under Central Excise and in
various state VAT is also basedon HSN. The classification made in GST is also
based on HSN. Harmonized System Nomenclature published by CCCN gives a detailed
description of various products which are covered under a particular heading or
sub-heading. The description in HSN is very helpful in deciding the
classification of the product. The Hon. Supreme Court in the case of Wood
Crafts Products Ltd., 1995 (77) ELT 23 (SC) has held that the description
in HSN Explanatory Note has persuasive value.The Supreme Court has observed in
paras 12 and 18 as follows:

     “12. It is significant, as
expressly stated, in the Statement of Objects and Reasons, that the Central
Excise Tariffs are based on the HSN and the internationally accepted
nomenclature was taken into account to “reduce disputes on account of tariff
classification”. Accordingly, for resolving any dispute relating to tariff
classification, a safe guide is the internationally accepted nomenclature
emerging from the HSN. This being the expressly acknowledged basis of the
structure of Central Excise Tariff in the Act and the tariff classification
made therein, in case of any doubt the HSN is a safe guide for ascertaining the
true meaning of any expression used in the Act. The ISI Glossary of Terms has a
different purpose and, therefore, the specific purpose of tariff classification
for which the internationally accepted nomenclature in HSN has been adopted,
for enacting the Central Excise Tariff Act, 1985, must be preferred, in case of
any difference between the meaning of the expression given in the HSN and the
meaning of that term given in the Glossary of Terms of the ISI.

     18. We are of the view that the
Tribunal as well as the High Court fell into the error of overlooking the fact
that the structure of the Central ExciseTariff is based on the internationally
accepted nomenclature found in the HSN and, therefore, any dispute relating to
tariff classification must, as far as possible, be resolved with reference to
the nomenclature indicated by the HSN unless there be an express different
intention indicated by the Central Excise Tariff Act, 1985 itself. The
definition of a term in the ISI Glossary, which has a different purpose, cannot,
in case of a conflict, override the clear indication of the meaning of an
identical expression in the same context in the HSN. In the HSN, block board is
included within the meaning of the expression “similar laminated wood” in the
same context of classification of block board. Since the Central Excise Tariff
Act, 1985 is enacted on the basis and pattern of the HSN, the same expression
used in the Act must, as far as practicable, be construed to have the meaning
which is expressly given to it in the HSN when there is no indication in the
Indian Tariff of a different intention.

The same principle is repeated in the case of Business
Forms Ltd., 2002-142-ELT-18 (SC). Thus, description given in HSN is
very useful indetermining classification of the product.

d)  Most specific description to be preferred over
general description

     It is a general principle of classification
that most specific description shall be preferred over a more general
description. The judgements laying down the principle that most specific shall
be preferred to general in the matter of classification are discussed below:

     In
the case of Dunlop India Ltd. vs. Union of India 1983 (13) ELT1566 in
para 37, the Supreme Court has observed ‘when an article has by all standard
a reasonable claim to be classified under an enumerated item in the Tariff
Schedule, it will be against the very principle of classification to deny it
the parentage and consign it to the orphanage of the residuary clause.’

      In the case of Moorco (India) Ltd. vs. CCE
(supra), the Supreme Court has observed ‘in either situation, the
classification which is most specific has to be preferred over the one which is
not specific or is general in nature. In other words, between the two competing
entries one nearer to the description should be preferred. Where the class of
goods manufactured by the assessee falls, say, in more than one heading, of
which one may be specific, other more specific, 3rd most specific
and 4th general, the rule requires the authorities to classify the
goods in the heading which gives most specific description.’

e)  Functional use of the product

     Functional use of the product can certainly
be one of the factors in determining the classification, but cannot be the sole
criteria for determining the classification. Normally use of the product is not
relevant as the product is required to be classified in the condition in which
it is supplied. However, sometimes, tariff heading itself provides the use of
the product. In such a case, the ultimate use of the product is very important
for classifying the product. For example, entry No. 2309 in Central Excise
Tariff Act is “preparation of a kind used in animal feeding”. It is evident
from the description itself that preparation shall be used in animal feeding.
Where the description itself specifies the use of the product, classification
will be based on the ultimate use of the product. The Hon. Supreme Court in the
case of Atul Glass Industries vs. Collector of Central Excise, 1986 (25)
ELT 473 has held that in such a case, the goods are to be classified on the
basis of their primary function.

f)   Essential characteristics

     The product is purchased and sold due to
its essential characteristics. The principles for determining the essential
characteristics are –

     (a) Cost of components of the
product.

     (b) Functionality of the product.

     These are discussed below:

     (i) 
Cost of components of the product—

     The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. Cenvat Credit 2010 (260) ELT 161 has determined the
classification of multifunctional printing machines on this basis. The assessee
claimed classification under Chapter heading 8479.89 whereas the revenue
claimed classification under Chapter heading 8471.60. The machine performs
various functions of printer, fax, copier and scanner. The court observed that
printing function emerges as principal function and gives the machine its
essential character. In arriving at the principal function, the court held
that, in case of product Xerox Regal 5799, 85% of its total parts and
components and manufacturing cost is allocated to printing. Similarly, in case
of product Xerox XD 155df model, 74% of the parts and components along with
cost are allocated to printing. Similar principle of determining the essential
characteristic based on cost has been laid down in various other judgments.
Therefore, this is one of the criteria which can be applied for the purpose of
determining the essential characteristic.

     (ii) 
Functionality of the product—

     In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
the product. Therefore, the product merits classification as plastic.

     “25. Rule 1 does not help to
classify the goods in the present case because Note 1(f) in Chapter 48 is not
applicable to these goods. The other relevant rule of interpretation is Rule
3(b) which provides that mixtures or composite goods consisting of different
materials which cannot be classified with reference to Rule 3(a) as in the
present case, are to be classified as if they consisted of the material or
component which gives them their essential character. In the present case, the
essential character of a decorative laminated sheet is its rigidity or strength
and its resistance to heat and moisture. These are essentially characteristics
which are imparted by resins. Paper does not possess any of these
characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristicsof such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

     Thus, in determining the essential
characteristics,   the above two factors
can be considered as guidelines. 

g)  Importance of expert opinion and other
evidentiary value

     Very often, when there is dispute regarding
nature of goods, it will be advisable for the authorities as well as the
taxable person to obtain opinion from technical experts or person dealing in
the goods to know the true character of the goods. It has been consistently
held that expert opinion is to be taken to understand the nature of product but
cannot decide the classification of the goods. It has no binding effect, but
only guiding effect on the authorities because ultimately, decision of proper
classification of the product is to be decided by the jurisdictional authority.
The Delhi Tribunal in case of Guest Keen William 1987 (29)ELT 68 has
observed in para 23 as follows:

     23. ……………………We have also
examined Shri Gujral’s argument that the opinion of the expert should be considered.
He cited the case of ‘K. Mohan & Co., Bombay vs. Collector of Customs,
Madras’ reported in ‘1984(15) E.L.T. 430’, and also cited ‘1984 E.C.R. 1086’
and ‘1986 (6) E.C.R. 334’. While we agree that expert opinion should be
considered, we observe that it is the language of the notification and the
facts of the matter whichshould be examined. An expert’s opinion has to be
given due respect but it cannot be the deciding, or binding factor.

     The above judgement has been maintained by
the Supreme Court in case of Guest Keen Williams Ltd. vs. Collector – 1997
(95) E.L.T. A144(S.C)

     It is also held that expert opinion
expressed by specialised institution has to be preferred over the opinion of
individual experts obtained at the instance of the assessee. These expert
opinions are not ignorable particularly if they are given by public
authorities. Opinion of any other persons who have knowledge in the field
regarding the product shall be given due importance for deciding the
classification of the product. The opinion of authorities like Textile
Commissioner, Law Ministry, etc. are to be given due importance for
classification of the product.

h)  Importance of ISI specification

     In many cases, the product is manufactured
as per ISI specification. Sometimes, the taxable person also affixes ISI mark
on the product.The ISI specification certifies the quality of the product and
not the name or character. View of the ISI shall be looked at some amount of
credibility for deciding the classification. It can be used as specialised
material in expert opinion, but other tangible consideration should also weigh
while determining the classification. Therefore, description of product in ISI
has limited value in determining the classification of goods.

i)   Finance Minister’s speech

     In some case, Finance Minister in the
Finance Bill may make certain reference while introducing the changes. Speech
of the Finance Minister represents the manner in which the authorities have
understood the change. Therefore, the speech of the Finance Minister can be
helpful in deciding the classification as held by the Hon. Gujarat High Court
in the case of ECHJAY Industries vs. UOI 1988 (34) ELT 42 (Guj)

j)   Importance of Trade Notice/Circulars, etc.

     Section
168 of GST Act empowers the Board or the Competent Authority of the State
wherever it considers necessary for the purpose of uniformity in implementation
of the Act to issue such orders, instructions or directions to GST Officers as
may deem fit. Similar provisions are contained in section 37B of Central Excise
Act. It has been consistently held that trade notices, tariff advices,
circulars, press notes etc. issued by the authorities are hardly
relevant for the purpose of classification of the product under Central Excise
Act as it cannot override the true meaning or interpretation underlined
statutory provisions. The classification has to be decided by the authorities
based on the description of relevant tariff entry and not on the basis of
tariff advice or instructions or circulars etc.

k)  Report by Chemical Examiner

     Very often, the authorities insist upon
testing of the product in order to determine the true composition of product
and nature of the product. Section 154 of GST Act also provides taking of
samples. It has been consistently held that the role of Chemical Examiner is
only to provide the content of the product or the nature of the product, but
not to decide classification of the product. Mention of classification in the
test report shall be ignored.The Hon. Gujarat High Court in the case of Stadfast
Paper Mills vs. Dr.Kohli, Former Collector of Central Excise, Baroda and
others 1983 (12)ELT 744 (Guj) has held that Chemical Examiner is required to
provide the constituent of different material contained in the article to
substantiate the nature of product. If the report mentions the classification
of product, the same shall be ignored. The relevant Extract of the above
judgment is as follows:

     12………………… Here it should
be recalled that the evidentiary value of the report of the Chemist lies only
in so far as it supplies the data obtained by him through the Chemical
analysis. It is none of the functions of the Chemists to give an opinion as to
whether the goods in question would be covered by a particular item of the
Tariff Schedule.

l)   Provision at the relevant time

     Sometime, the tariff description of the
entry may be amended over a period of time. While classifying the product, the
tariff description of relevant period should only be used for classification.
For example, say, goods are supplied in the month of August 2017. Further
assume there is amendment in the tariff entry in April 2018. The classification
of the product based on tariff description in August 2017 should only be
considered while classification for supplies made in August 2017. Subsequent
amendment will not be relevant for the purpose of deciding the classification.

m) Burden to prove classification is on department

     It has been held under Central Excise Act
that burden to prove is primarily on the excise authorities to establish
whether particular products falls under one tariff heading or another when the
manufacturer has classified the product in a particular tariff heading and the
department intends to classify it in a different heading. The department  must produce enough evidence to substantiate
that the product must classify differently. In other words, the burden of proof
of particular classification is on the department. This burden can be shifted
to the assessee when the classification adopted by him is not totally correct.

n)  Exemption notification cannot interpret the
tariff entry

     Sometimes, the department provides
exemption to a particular product and specifies the tariff entry for that
product. In such cases, the department has been taking plea that the product
should be classified under the heading mentioned in the exemption notification.
It has been consistently held that exemption notification cannot interpret the
tariff entry nor it can provide norms for the purpose of classification. The
classification of product must be decided based on description of tariff entry.
The Hon. Bombay High court in case of Mechanical Packing Industries vs.UOI
1987 (32) ELT 35 (Bom) has observed in para 11 as follows:

11.Secondly,
this is exactly what the Government cannot do by virtue of an exemption
notification. If there has to be any exemption, or classification that
necessarily must be done by the legislature and not by virtue of any power to
issue exemption notification under Rule 8(1) or (2) of the Central Excise
Rules.

o)  Beneficial classification

     It is a well established principle that when
the goods are classified under two different items or said items or ambiguous
sentences leave reasonable doubt about its meaning, then benefit of doubt is
given to the manufacturer and the classification should be adopted which is
beneficial to the manufacturer. This is based on the principle that when the
legislature has not clearly laid down the provisions of law benefit of doubt is
given to the manufacturer. The Hon. Bombay High Court in the case of Garware
Nylons Ltd. vs. UOI 1980 (6) ELT 249 (Guj) has held that the classification
beneficial to the assessee should be adopted.

p)  Jurisdiction to decide classification

     The jurisdiction to decide the
classification is on the jurisdictional officers of the supplier of
goods/service. The classification cannot be decided by the jurisdictional
officer of recipient of goods/service. They have no authority to change the
classification adopted by supplier of goods/service. The Hon. Supreme Court in
the case of Sarvesh Refractories, 2007 (218) ELT 488 (SC) has held that
classification cannot be changed by jurisdictional officer of recipient. The
relevant extract of the above mentioned judgment is as follows:

     6. The finding recorded by the
Tribunal is unexceptionable. We agree with the view taken by the Tribunal that
the appellant could not get the classification of ‘Loadall’ changed to Heading
84.27 from 84.29, as declared by the manufacturer. Insofar as the penalty
imposed by the authority-in-original is concerned, we are of the view that a
case for imposition of penalty is not made out and accordingly the same is set
aside and deleted. Rest of the order of the Tribunal restoring the order of the
authority-in-original is confirmed.

     The taxable person shall apply the above
principles for the purpose of classifying the goods or services.

    Classification of composite supply

     In trade parlance when both the goods or
services are supplied, it is considered as a ‘works contract’.  However, under GST the ‘works contract’ has
been defined in Section 2(119) as follows:

     “119.            “works contract” means a contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commissioning of any immovable property wherein transfer of property in goods
(whether as goods or in some other form) is involved in the execution of such
contract.”

     The definition of ‘works contract’ can be
divided into following two parts:

a)  It should be contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commission;

b)  It should result in an immovable property
wherein transfer of goods is also involved.

     Thus, as a result of provision of supply,
the contract shall result in immovable property. If it does not result in
immovable property, the supply cannot be considered as a supply of ‘works
contract’.

     If the contract of supply involves both
supply of goods or services and does not result in immovable property, the
supply can be considered either as a mixed supply or composite supply. The
‘mixed supply’ and ‘composite supply’ has been defined in section 2(30) and
2(74) of the GST Act which reads as follows:

     30.   “composite
supply” means a supply made by a taxable person to a recipient  consisting of two or more taxable supplies of
goods or services or both, or any combination thereof, which are naturally
bundled and supplied in conjunction with each other in the ordinary course of
business, one of which is a principal supply.”

     Illustration: Where goods are packed, and
transported with insurance, the supply of goods, packing materials, transport
and insurance is a composite supply and supply of goods is a principal supply.”

     74.   “mixed supply” means two or more individual supplies of goods
or services, or any combination thereof, made in conjunction with each other by
a taxable person for a single price where such supply does not constitute a
composite supply.

     Thus, the composite supply will be
classified as a supply of goods or service based on principal supply. Hence in
any composite supply, the principal supply is required to be determined. For
example, a person books a ticket from Mumbai to Delhi in Rajdhani Express. The
railways provide the service of transportation of passengers which is a
principal supply. However, in a train the food is also served and bed rolls are
also provided. These two supplies of food and bed rolls are to make the supply
of transportation of passengers more convenient and comfortable. Therefore, as
per section 2(30) of the GST Act, all the three supplies will be classified as
‘transportation of passengers’ and the tax rate applicable to transportation of
passengers will be payable by the railways.

     However, in many cases, it becomes very
difficult to determine the principal supply in composite supply. The Honourable
Supreme Court has laid down certain principles for determining the essential
character of the product. These principles can be helpful in determining the
principal supply of a product. These principles are:

     a. Cost of components of
the product—

     The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. CC 2010 (260) ELT 161 has determined the classification of
multi-functional printing machines. The assessee claimed classification under
Chapter heading 8479.89, whereas the revenue claimed classification under
Chapter heading 847160. The machine performs various functions of printer, fax,
copier and scanner. The court observed that printing function emerges as
principal function and gives the machine its essential character.In arriving at
the principal function, the court held that, in case of product XeroxRegal
5799, 85% of its total parts and components and manufacturing cost is allocated
to printing. Similarly, in case of product Xerox XD 155df model, 74% of the
parts and components along with cost are allocated to printing. Similar
principle of determining the essential characteristic based on cost has been
laid down in various other judgements. Therefore, this is one of the criteria
which can be applied for the purpose of determining the essential
characteristic.

     b. Functionality of the product
–

     In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
product. Therefore, the product merits classification as plastic.

     “25. Rule 1 does not help
to classify the goods in the present case because Note 1(f) in Chapter 48 is
not applicable to these goods. The other relevant rule of interpretation is
Rule 3(b) which provides that mixtures or composite goods consisting of
different materials which cannot be classified with reference to Rule 3(a) as
in the present case, are to be classified as if they consisted of the material
or component which gives them their essential character. In the present case,
the essential character of a decorative laminated sheet is itsrigidity or
strength and its resistance to heat and moisture. These are essentially
characteristics which are imparted by resins. Paper does not possess any of
these characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristics of such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

    Thus, in determining the essential
characteristic, the above two factors can be considered as guidelines.

    Thus, the functionality test or the test of
cost of product can be applied for the purpose of determining the principle of
supply.

     This principle can be applied to
comprehensive AMC. In case of comprehensive AMC, the intention of the recipient
is to ensure that the equipments run in a smooth condition, so that the maximum
benefit of the equipment can be derived by the recipient. Therefore, the
supplier of service regularly visits and inspects the equipments. He carries
out the function of cleaning, washing and greasing wherever required for the
equipments. However, wherever requbired, the service provider will also carry
out the replacement of the part which is covered in the contract. There may or
may not be any replacement of any part. Therefore, in this case, applying the
principle of functionality test, the service appears to be predominant and
accordingly the entire contract shall be classified as a service contract
levied to tax rate of 18%. It is quite possible that the part if any which is
replaced in the performance of the contract may attract 28% tax. However, since
it is a composite supply, where service is a principal supply, therefore, the
rate of tax would be 18%.

Conclusion

The classification of goods or services has
always been a matter of dispute. One will observe from the various rates
approved by the GST Council that the tax rate may be 18% or 28%. The difference
of 10% in tax rate can always result in area of dispute where the taxable
person proposes to classify the product under the head which attracts 18% and
the department classifies the product which attracts 28%. The certainty in tax
rate in such a case is very difficult. In such circumstances, more particularly
when the recipient is unable to get any of the credit of taxes paid, the
dispute will be very long drawn.

Place of Supply of Services – Critical Analysis

Introduction

The Goods and Services Tax [“GST”] is a landmark piece of
legislation to be introduced in India. It is a destination based tax on
consumption of goods and services i.e., the tax should accrue to the taxing
authority which has jurisdiction over the place of consumption. For this
purpose, one needs to determine what is popularly known as Place of Supply
[“POS”] i.e. the place where goods or services have been supplied so as to
decide the taxing jurisdiction. ‘Place of Supply of Services’ [“POSoS”]1
alongwith the ‘Location of Supplier of Service’ [“LS”] would
determine whether the supply is intra-state or inter-state, that are the two
types of supplies in GST but having different GST implications.

_________________________________________________________________________________________________

1   The author while
dealing with the concept of Place of Supply of Service has assumed that the
basic concepts such as supply, dual levy and input tax credit mechanism has
already been explained in other articles. All those concepts are relevant for
study of POS

Types of Supply

Intra-state supply will be the case where the LS and POS
are in the same State. Inter-state Supply would be a case where LS is in
one state and POS is in another state. Since there are other kinds of
Inter-state supply as well, for ease of reference we refer to this Inter-state
supply as Domestic Inter-state supply.

There are four types of Inter-state supplies as envisaged by
section 7 of the Integrated Goods and Services Tax Act, 2017 [“IGST Act”]:

(i)  Domestic Inter-state supply i.e. supply
between two states.

(ii) Cross border supply.

(iii) Supply to or by a

a. SEZ Developer; or

b. SEZ Unit.

(iv) Non Intra-state supply not covered above.

Domestic Inter-state supply is a case where the LS and
POS are:

(i)   in two different States; or

(ii)  in two different Union Territories; or

(iii)  one in a State and another in a Union
Territory.

N.B.: For ease of
reference, while referring to Domestic POSoS in this article, the elucidation
of the provisions will be in respect of (i) above though it would be the same
for (ii) and (iii).

Cross Border supply of service will cover the following
supply of services:

(i)  Import of Services.

(ii) Export of Services.

N.B.: (i) Import of
services and export of services is separately
explained in Annexure 1 attached.

(ii) On a perusal of the said
Annexure 1, it will be noted that in respect of export of services under GST
scenario, the condition of receipt of foreign currency is a must as against the
current Place of Provision of Services Rules, 2012, where the said condition of
receipt of foreign currency is relevant only to the extent of allowance of
input credit in respect of services used for exports but service tax would not
be payable.

Place of Supply of Services [“POSOS”]

The POSoS is the Heart of GST which is very likely
to be subjected to “Attacks” post GST implementation. A proper study of
POSoS may ensure “Bypass” ensuring no need of a “Stent” or a “Stunt”.

As explained in the earlier paragraphs, two factors are
relevant to determine whether the supply is inter-state or intra-state viz. LS
and POSoS. Further, as per the POSoS provisions, the basic
principle is that the place of supply of service shall be the ‘Location of
Recipient of service’ [“LR”]. However, exceptions have been provided in
case of performance based services, immovable property based services, certain
specified services and transportation service etc. where other criteria
such as location of supplier of service, location of performance of service,
location of immovable property etc. are relevant. Thus in effect, there
would be three factors which are relevant in determining whether the
supply is intra-state or inter-state viz. i) LS; ii) LR; and iii)
POSoS. The ‘Location of Supplier of Service’ and ‘Location of
Recipient of Service’ are defined separately in GST based on certain tests.
Of course, these tests will really test the legal acumen of assessee,
department and the judiciary in the years to come. In fact, to locate the LS
or LR would be in many cases a Big Challenge. It is separately being
dealt in Annexure 2 attached so as not to disturb the flow of the article on
the subject under consideration viz. POSoS. However the readers are
advised to carefully read the said Annexure 2 before proceeding further. In
fact. it is MOST IMPORTANT!

Once the LS and LR both are determined, it
would be necessary to determine the POSoS in order to determine whether
the supply is inter-state or intra-state.

Determining the POSoS has always been a challenging
task world over. However, internationally, the POSoS is generally
determined in a cross border transaction i.e. where either the Service provider
or the Service recipient is abroad and the other is in home country. However,
Indian Curry and Indian Laws are always spicy!!! The GST in India has
complicated the entire issue of POSoS by its dual structure [i.e.
Central Tax (“CT”) & State Tax (“ST”)]. Thus, the study of POSoS would
involve:

(i)   Study of Domestic POSoS i.e. where LS
and LR both are in India. [Section 12 of IGST Act]

(ii)  Study of Cross Border POSoS i.e. where
either LS or LR is outside India. [Section 13 of IGST Act]

Keeping in mind the constraints of space in this article [Of
course also the reader’s tolerance level – otherwise there would be a taxable
supply of tolerating an act – Consideration???], I would deal with the Domestic
POSoS which is unique and has raised various challenges and issues. As
regards the Cross border POSoS; they are similar to the existing Place
of Provision of Service Rules, 2012 under the Service tax law, and hence I
shall deal with it very briefly.

Domestic Place of supply of Service [Section 12 of the IGST
Act]

While the catchword is “One nation, One Tax”, The Central
Goods and Services Tax Act, 2017 [“CGST Act”] and The State Goods and Services
Tax Act, 2017 [“SGST Act”] have been so designed that each state is an
independent taxing jurisdiction. Each state has been ring fenced i.e. a
tax paid in one state cannot be adjusted against tax liability of another
state. Further, Inter – unit supply between an unit in one State to an unit in
another State though belonging to the same entity is considered as
supply. The LS and POS will also have far reaching impact on
ultimate cost of goods and services based on the credit availability. Thus, the
study of Domestic POSoS is most crucial to the business.

Section 12(1) of the IGST Act provides for determination of
the Domestic POSoS i.e. where the LS and LR both are in
India. The provisions dealing with Domestic POSoS for different
situations are explained below.

General principle – POSoS is Location of
service recipient [Section 12(2)]

The general or default principle is that the POSoS is
the –

(i)  ‘LR’ if the supply is made to a
recipient registered for GST (i.e. B2B transactions); 

However in case of supply to an unregistered person (i.e. B2C
transactions), the POSoS will be –

(a) ‘LR’ where the recipient’s address is
available in the records of the supplier; and

(b) ‘LS’ in other cases. 

The above general principle would apply unless the
transaction falls within any of the other sub-sections of  Section 12.

POSoS relating to immovable property would be the
location of immoveable property [Section 12(3)].

The POSoS of the following services shall be the place
where the immovable property is located or intended to be located [i.e.
property to come into existence]:

(i)   Services provided directly in relation to
an immovable property e.g. construction, repair, renovation of a building, etc.
Services remotely connected to immovable property would not be covered u/s.
12(3) e.g. real estate feasibility studies or advice on capital gains, etc;

(ii)  services provided by experts e.g. architects,
interior decorators, surveyors, engineers, and other related experts or estate
agents;

(iii)  grant of rights to use immovable property.

(iv) carrying out or co-ordination of construction
work;

(v)  Provision of accommodation in immovable
property for organising marriage or reception or matters related thereto,
official, social, cultural, religious or business function including services
in relation to such function at such property;

(vi) Ancillary services to above 5 services.

POSoS relating to lodging accommodation in immovable
property or boat or vessel would be the location of immovable property or boat
or vessel [Section 12(3)].

The POSoS by way of lodging accommodation in a hotel,
inn, guest house, home stay, club or campsite, by whatever name called, and
including a house boat or any other vessel and ancillary services thereto shall
be the place where the immovable property or boat or vessel is located
or intended to be located [i.e. property to come into existence].

Comments: When a company’s employee based in
Mumbai goes to Delhi for office work, the supply for hotel accommodation would
be an intra-state supply [LS and POSoS fall in Delhi] but the Delhi CT+ST
charged by hotel may not be available as credit to the Mumbai-based company due
to the ring fencing.

N.B. (i) Where
the location of immovable property or boat or vessel is located or intended to
be located outside India the POSoS shall be the ‘LR’ in India. [Proviso to Section
12(3)]

Comments: This is
akin to the existing rule 8 read with rule 5 of the Place of Provision of
Services Rules, 2012 where the place of provision of service is where the ‘LR’
is situated and not where the immovable property is situated.

(ii) Where the
immovable property or house boat or vessel is in more than one State/Union
Territory [“UT”], the supply would be considered to be made in each of
respective State or UT in proportion to value for service separately collected
or determined as per contract / agreement and if there is no contract /
agreement then on such other basis in the manner prescribed.

Comments: It would
involve a laborious exercise to determine the POSoS when the boat wherein the
accommodation services are provided, moves from one state to another state.
Perhaps it would have been better to provide that the POSoS be the place of
commencement of journey by the house boat or vessel.

Performance based services [Sections 12(4) and 12(5)]

Supply of

POSoS

u   Restaurant
& catering services

u   Personal
grooming, fitness, beauty treatment; &

u   Health
services including cosmetic / plastic surgery

Location
where services are actually performed

u   Training and performance appraisal services
to –

• Registered person (B2B)

• Unregistered person (B2C)

 

 

 

•    Location
of such registered person

•    Location
where services are actually performed

Event Based services
[Sections 12(6) and 12(7)]

Supply of services by way of

POSoS

1.    Admission
to specified events* and services ancillary to such admission

Location
of event

2.    Admission
to amusement park or any other place including ancillary services

Location
of such park / place

3. (i)
Organisation of specified event including conference, fair, exhibiton,
celebration or similar event

(ii)   services
ancillary to organisation of above events; &

(iii) assigning
of sponsorship to above events provided :

•   To
registered person (B2B)

•   To
unregistered person (B2C) –

(a)  For
event held in India

(b)  For
event held outside India

 

 

 

 

 

 

 

 

 

•     Location
of such person

 

(a)   Location
where event is held

(b)   Location
of recipient of service

N.B.

Events
held in more than 1 state for a consolidated amount

Supply
in each state/UT in proportion to value of service separately collected or
determined from terms of contract / agreement or on other basis prescribed

*Specified Events are
cultural, artistic, sporting, scientific, educational and entertainment event.

Goods Transportation
services [Sections 12(8)]

Supply of

POSoS

Goods
transportation service (including by mail / courier) to –

•     Registered
person (B2B)

•     Unregistered
person (B2C)

 

 

• 
Location of such person

• 
Location where goods are handed

  
over for their transportation

Comments: This rule would apply to transport by road, rail, air and sea
whether locally or outside India provided the supplier and recipient both are
in India. An important change is that ocean freight for cargo exported for a
shipper in India would be subject to GST though presently ocean freight for
export cargo undertaken for a shipper in India is not liable to service tax in
view of Rule 10 of the Place of Provision of Service Rules, 2012.

Passenger transportation service [Sections
12(9)]

Supply of

POSoS

Passenger
Transportation Service to

•    Registered person
(i.e. B2B)

•    Unregistered person
(point of embarkation known)

•    Point
of embarkation unknown in respect of right to passage for future use

 

•      Location of such
person

•     Place where
passenger embarks on conveyance for continuous journey*

•    Refer Para 4.3
[i.e. General Rule]

*Return journey to be treated as separate journey

Services provided on board a conveyance [Section 12(10)]

The POSoS on board a conveyance including a vessel, an
aircraft, a train or a motor vehicle, shall be the first scheduled point of departure
of the conveyance on that journey.

Comments: Issues – Can it be said that
supply of packaged Drinking water/packed Biscuit is ‘Supply of goods’ and
Supply of Sandwich/Samosa is ‘Supply of Service’. While POS of Service is first
scheduled point of departure irrespective of where the food/eatables is taken
on the board, the POS of goods is the location at which the goods are taken on
board. Thus it is imperative to decide whether the said supply is supply of
goods or supply of services.

Telecommunication / data
transfer / broadcasting / cable / DTH services [Sections 12(11)]

Supply of service by way of

POSoS

u   Telecom line, leased circuits, internet
circuit, cable / dish antenna

Location
of installation for receipt of such services

 u Lease circuit installed in more than 1
state / UT and consolidated amount charged

Supply
in each state/UT in proportion to value of service collected or determined
from contract and in absence, on other basis as may be prescribed

u     Post paid mobile connection for telecommunication / internet
services

Location
of billing address of service receiver in supplier’s records and if such
address not available location of supplier

u     Prepaid mobile connection for telecommunication / internet
services / DTH services on
pre-payment –

 

•    Through sale of SIM
card or voucher by selling agent, Distributor, reseller

Address of selling agent, distributor, reseller as per
supplier’s record at time of supply

•    Provided to final
subscriber

Location
where prepayment received / voucher sold

•    Through internet
banking/ electronic mode

Location
of service receiver as available in record of supplier

u    Mobile connection for tele-communication /
internet services other than postpaid / pre-payment basis

Address
of recipient as per supplier’s record & if such address not available
location of supplier

Banking & Other Financial services (including stock
broking services) [Section 12(12)]

Supply of

POSoS

Banking
and Other Financial Services:

•    Where Location of
recipient available in supplier’s record

•    Where Location of
recipient not available in supplier’s record

 

 

•    Location of
recipient of service.

 

•    Location of
supplier of service

 

N.B.: The CGST law does not define what is Banking
and Other Financial Services. Does it cover only services provided by banks or
NBFC? What about merchant banking services, asset management services etc.,
which under the existing definition are covered under Banking and Other
Financial Services. The only saving grace is whether it is rule 12(2) [Para
4.3] or 12(12) [Para 4.12] it may not make a significant difference.

Insurance services [Section 12(13)]

Supply of

POSoS

Insurance
Services to:

•    registered person
(B2B)

•    Unregistered person
(B2C)

 

•    Location of such
person

•    Location of
recipient as per records of supplier of service

N.B.: The policy holder’s address will be
there in Insurance company’s records

Advertisement services to Central / State
Government/Statutory Body/Local Authority/UT for identifiable States [Section
12(14)]

The POSoS for the above services shall be each state
and the value of supply would be proportionate to the amount attributable for
dissemination in each State determined as per contract/agreement or in absence
of contract/agreement on any other basis as maybe prescribed

Cross –border place of supply of services [Section 13 of IGST
Act]

Section 13 of IGST Act provides for determination of the
Cross border POSoS i.e. where the ‘LS’ or ‘LR’ are outside
India [section 13 of IGST Act]. The Cross border POSoS for different
situations envisaged by section 13 are given below:

Sl. No

Description of service

Place of supply of services

1.

Basic principle (All services except if
specifically covered below)

Location of service recipient. If
location of recipient is not available in the ordinary course of business,
then location of supplier

2.

Performance based Service [See note (i)
below]

Location of performance of service

3.

Service relating to Immovable Property

Location of the immovable property

4.

Service relating to Events [See Note
(ii)]

Location of event

5.

Services (2, 3, 4 above) supplied at
more than one location [including location in Taxable Territory (‘TT’)]

Location in the Taxable Territory

6.

Services (2, 3, 4 above) supplied in
more than one state or union territory. [See Note (iii)]

Respective State/ Union Territory. Value
of supply – in proportion to value of service separately collected or based
on contract/ agreement; and in case no contract – on prescribed basis.

7.

Specified Services [See note (iv)]

Location of service provider

8.

Goods Transportation services (other
than mail or courier)

Place of destination of goods

9.

Passenger transportation service

Place of embarkation for continuous
journey

10.

Service on board a conveyance during the
course of passenger transportation

First scheduled point of departure of
conveyance on the journey

11.

Online Information Database Access or
Retrieval (OIDAR) services

Location of recipient of service [See
note (v)]

Notes:

(i)  Performance based services are of two types:

A.  Work upon goods: services supplied
in respect of goods made physically available by service recipient to
the supplier or to any person acting on behalf of the supplier in order to
provide the service e.g. Repairs, Storage and cargo handling. There are two
exceptions.

(a) Remote access – POSoS is Location of
goods at the time of supply of service;

(b) Goods temporarily imported into India for
repair and re-exported subject to the condition that goods not put to use in
India (except for such repair). POSoS under sl. no. 2 would not apply.
Basic principle (sl. No. 1) would apply.

B.  Work upon individuals: Services
supplied to individuals physically present in their personal capacity or on
service recipient’s behalf e.g. beauty treatment, plastic surgery, etc.

(ii) In this case, it would cover supply of
admission to an event as well as organisation of event and services ancillary
thereto. Thus, in case of cross-border supply of event based services, POSoS
is location of event but in case of Domestic POSoS the location of event
is relevant for the services of admission but for organisation of the event,
the POSoS is different as explained in para 4.7.

(iii) Thus, on a reading of sl. No. 5 & 6 above
it appears that if an architect in India provides services for his client’s
immovable property abroad, the POSoS would be outside India. But
however, if he supplies services to the same person for 3 properties – one in
UK, one in Karnataka, and one in Kerala, the POSoS for the entire
consideration would be Kerala and Karnataka.

(iv)
Specified services are:

(a) Services supplied to Account holders by banks,
Financial Institutions, NBFCs ;

(b) Intermediaries

(c) Hiring means of transport [including yachts but
excluding aircrafts & vessels] upto a month.

(v) Person receiving OIDAR services is deemed to be
located in Taxable Territory (TT) –

if any 2 of the following non-contradictory conditions are
satisfied viz.:-

–  location of address presented by service
recipient (SR) via internet is in TT;

–  credit card /debit card/ store value card/
charge card/ smart card/ any other card by which SR settles payment has been
issued in TT;

–  SR’s billing address is in TT;

–  Internet Protocol [IP] address of device used
by SR is in TT;

–  SR’s bank account used for payment maintained
in TT;

–  country code of SIM card used by SR is of TT;

–  location of SR’s fixed land line through
which service is received by person, is in TT.

Challenges

I have dealt with some of the challenges in the
implementation of GST qua POS provisions while elucidating the provisions
to determine Location of supplier of service and Location of recipient of
service in Annexure 2. I have also given my comments on some of the significant
Domestic POSoS provisions.

However as explained in Annexure 2, the Biggest Challenge is
WHO is providing service to WHOM and from WHERE? This will be the most crucial
question to be answered. This will also involve examining whether LS and
LR be – the contracting office or actual performing / receiving office.
There are several situations that may arise when the determination of three
factors viz. LS, LR and POSoS may pose a challenge. Due to
restrictions of space, I take up only 2 case studies.

CASE STUDY 1

In a typical case of contract for renting of offices, say, a
landlord based in Mumbai owns several properties at different places in India
which he has given on rent to various corporates across India. The landlord’s
Principal Place of Business [“PPoB”] is in Mumbai and accordingly, all the
license/rental agreements are entered into by the landlord from his PPoB in Mumbai.
This may be given by way of table.

Sl. No

Location of property

Location of licensee’s office signing the license agreement

1.

Delhi Office premises – P1

Mumbai – L1

2.

Delhi Office premises – P2

Delhi – L2

3.

Delhi Office premises – P3

Chennai – L3

4.

Mumbai office premises – P4

Mumbai – L4

5.

Mumbai office premises – P5

Hyderabad – L5

In the above case, the issue arises whether the landlord has
Place of Business [“PoB”] at all places [i.e. where the properties are
located], since that would decide LS which is one of the important
factors to determine whether the supply is intra-state or inter-state. A view
that could be taken is that the landlord is located only in Mumbai since the
registered PoB is Mumbai and the other locations cannot be considered as Fixed
Establishment [“FE”] since he has no people working in those locations so as to
constitute a FE. The result would be as under;

Sl. No

Location
of property

Location
of licensee’s office signing the license agreement

Location
of Supplier

Place
of Supply [Section 12(3) Para 4.4]

Nature
of supply

1.

Delhi Office premises – P1

Mumbai – L1

Mumbai

Delhi

Inter
– state

2.

Delhi Office premises – P2

Delhi – L2

Mumbai

Delhi

Inter
– state

3.

Delhi Office premises – P3

Chennai – L3

Mumbai

Delhi

Inter
– state

4.

Mumbai office premises – P4

Mumbai – L4

Mumbai

Mumbai

Intra
– state

5.

Mumbai office premises – P5

Hyderabad – L5

Mumbai

Mumbai

Intra
– state

N.B.: In the last case, the licensee in Hyderabad
may not get the credit of Maharashtra CT + ST due to ring fencing as explained
in Para 4.1 above

CASE STUDY 2

A Partnership firm of 8 CAs specialising in internal audit
based in Mumbai [Head Office (“H.O”)] having branches in the cities of Delhi,
Bangalore and Chennai gets an internal audit assignment from a leading
Mumbai-based IT company who also have branches in the cities of Delhi,
Bangalore and Chennai. The letter of engagement for the assignment comes from
the registered office of the client based in Mumbai addressed to the CA Firm’s
Head Office in Mumbai. But the CA firm does the internal audit of Delhi,
Bangalore and Chennai using its resources at the relevant locations viz.,
Delhi, Bangalore and Chennai. Thus, an issue may arise as to which unit of
CA firm should bill to which unit of client and how much.

The issue in such cases that arises is to determine the LS
or LR, the contracting unit is relevant or performing unit is
relevant.

(i)  Firstly the letter of engagement is given to
the Mumbai CA H.O. from the Mumbai based office of client

(ii) The planning of audit, maintaining client
interface, signing, responsibility and accounta-bility are all from H.O. at
Mumbai.

It is not possible to slice the value attributable to each
location of the supplier or the recipient so as to say that supply comes from
one LS to a specific LR. The best course of action would be to
consider location of contracting party [i.e. Head office of the CA firm] as ‘location
of supplier’ and accordingly the Head Office should bill to the client and
the concerned branches should bill to the Head Office at the appropriate rate
as may be prescribed. Of course this would have to be backed by a Policy
Document / Framework so as to provide –

i)   Only H.O would interact with client.

ii)  The branches provide service to H.O and not to
client – Accountability, service level expectation etc.

iii)  Branches bill H.O at cost plus.

Conclusion

The analysis and the views given above have to be taken by
the reader with a pinch of salt considering that GST is a very new law. GST law
has evolved over the last 6 months with at least 3 versions. It is also still
evolving and almost every day a rule or a clarification is coming out and many
issues are still unfolding. By the time this article reaches you, there could
be some more changes in the rules / notifications. Please note the author is
also evolving and revolving with the GST law. In time both the law and the
author will mature. Till then HAPPY GST (Great Super Time) with GST!!!

Annexure 1

Relevant extract of section 2 of IGST Act:

“2(11)
“import of service” means the supply of any service, where

          (a) the supplier of service is
located outside India,

          (b) the recipient of service is
located in India, and

          (c) the place of supply of service is
in India,

“2(6)
“export of service” means the supply of any service when

          (a) the supplier of service is
located in India,

          (b) the recipient of service is
located outside India,

          (c) the place of supply of service is
outside India,

          (d) the payment for such service has
been received by the supplier of service in convertible foreign exchange, and

          (e) the supplier of service and
recipient of service are not merely establishments of a distinct person in
accordance with explanation 1 of section 8;

N.B.:
In respect of export of services under GST scenario, the condition of
receipt of foreign currency is a must as against the current Place of Provision
of Services Rules, 2012, where the said condition of receipt of foreign
currency is relevant only to the extent of allowance of input credit in respect
of services used for exports, but service tax would not be payable.

Annexure 2

Location of supplier of service and Location of recipient of
services [sections 2(15) and s. 2(14) of the IGST Act]

A2.     Provisions to determine Location of
supplier of service and Location of recipient of service

A2.1   The ‘location of supplier of services’ and
‘location of recipient of services’ are most relevant to determine the
nature of supply – whether intra-state or inter-state. The provisions to
determine the LS and LR are explained below.

A2.2   The ‘location of the supplier of services’
[Section 2(15) of IGST Act] is to be determined by applying the following 4
rules in seriatum

s.2(15)

Supply made from

LS

(i)

Registered
Place of Business (“PoB”)

Registered
PoB (see note 1)

(ii)

Fixed
Establishment (“FE”) other than Registered PoB

FE
(See note 2)

(iii)

More than one establishment, whether PoB or FE

Location of establishment most directly concerned with the
provision of supply

(iv)

In
absence of PoB or FE

Usual
Place of Residence [see note 3]

Notes:

1.  Place of business includes –

–   Place from where business ordinarily carried
on and includes warehouse, godown, any other place where goods are stored or
goods/services are provided / received

–   Place where Account books are maintained

–   Place where taxable person engaged in
business through agent

           [Section 2(85) of CGST Act]

2.  “Fixed establishment” means a place (other
than the registered place of a business) which is characterised by a sufficient
degree of permanence and suitable structure in terms of human and technical
resources to supply services or to receive and use services for own needs.
[Section 2(50) of CGST Act]. In a nutshell, three factors are determinative
of a ‘fixed establishment’: (i) a place; (ii) people, (iii) with
a degree of ‘permanence’ [the three PPPs like a three piece suit!].
The definition has almost all the attributes of a PoB. In fact, all FEs would
be a PoB.

3.  ‘usual place of residence’, means –

(a) in case of an individual, the place where he
ordinarily resides;

(b) in other cases, the place where the person is
incorporated or otherwise legally constituted. [Section 2(113) of CGST Act].

A2.3   The ‘location of the recipient of
services’ [Section 2(14) of IGST Act] is to be determined by applying the
following 4 rules in seriatum

s.2(14)

Supply is received at

LR

(i)

Registered
Place of Business

Registered
PoB [Refer Note 1 to Para A2.2]

(ii)

Fixed
Establishment (“FE”) other than Registered PoB

FE
[Refer Note 2 to Para A2.2]

(iii)

More than one establishment, whether PoB or FE

Location of establishment most directly concerned with the
receipt of supply

(iv)

In
absence of PoB or FE

Usual
Place of Residence [Refer Note 3 to Para A2.2]

A2.4   The following rules apply as to
establishments:

(i)  Establishment outside India and Establishment
in India are treated as separate persons [Clause (i) of Explanation 1 to
Section 8 of IGST Act].

(ii) Establishment in a State/UT2 and
Establishment outside that State/UT are treated as separate persons [Clause
(ii) of Explanation 1 to Section 8 of IGST Act]

_______________________________

2  UT
= Union Territory

(iii) A person carrying on business though a
branch, agency or representational office in a territory shall be treated as
having establishment in the territory [Explanation 2 to section 8 of IGST Act].

(iv) Where LS/PoS is in the territorial
waters (12 nautical miles from Indian shores), the LS / PoS would be in
the coastal State/UT where the nearest point of appropriate baseline is located
[Section 9 of IGST Act].

Establishment most directly
concerned in providing/ receiving a supply

A2.5   The rules provide that where services are
supplied / received from more than one establishment, whether Place of Business
or fixed establishment, the PoB/establishment most directly concerned with
the supply / receipt of the service would be relevant. This provision is going
to pose a Big Challenge. There will be several instances where the contract
with the client will be with the Head Office but the Services maybe provided
from the several branches in different states. The client also may have several
offices in different states, which are being serviced by the Service provider. The
issue is what would the LS and LR qua the transaction – the
contracting office or actual performing / receiving office. WHO is providing
service to WHOM and from WHERE? This will be the most crucial question to
be answered. What will be the factors to be taken into account to arrive at a
conclusion. This is an issue which is being pondered world over by all the
nations having GST. But generally, it concerns cross border transactions.
However, in India, it would be relevant for Domestic Inter-State supply also.
Each State may say that the supply is from their state. If it goes into
litigation, the assessee cannot ask the two States to settle between
themselves, but may have to pay the GST in one State and claim refund in
another State if matter goes against him in an adjudicating forum – thus
perhaps leaving the poor assessee in a SORRY STATE.

A2.6   In order to ascertain the ‘establishment
more directly concerned in provision of supply’, the test adopted is to
consider the significance of the activities performed by the establishments in
question and the part they play in their contribution to the service supplied.
[Chinese Channel (Hongkong) Ltd. vs. Commissioners of Customs and Excise
(1998) Simon’s Tax Cases 347 (High Court of Justice – Queens Bench Division,
UK)]. In this context when the present Place of Provision of Services Rules,
2012 was introduced, the CBEC’s Education Guide has given guidance as follows:

        “This will depend on the facts and
supporting documentation, specific to each case. The documentation will include
the following:-

–   the contract(s) between the service
provider and receiver;

–   where there are no written contracts, any
written account (documents, e-mail etc.) between parties which sets out
in detail their understanding of the oral contract;

–   details of how the business fits into any
larger corporate structure;

–   the establishment whose staff is actually
involved in the execution of the job;

–   performance agreements (which may sbe
indicative both of the substance and actual nature of work performed at a
particular establishment).”

However, we are still left with the issue
whether establishment in Contracting State or the establishment in the
Performing State is more important to determine where is the LS or LR.
In the author’s view, unless the context otherwise requires, the establishment
contracting with the client may be more relevant.

Insertion of Explanation in Entry Vis-à-Vis Effective Date

Introduction

Under the scheme of
Indirect Taxation, tax is attracted if the concerned goods are classified under
the taxable entry. There are instances when the entry is interpreted in a
particular manner. Subsequently the Government adds Explanation in the entry
for making its intentions clear. The dispute arises when such Explanation/s
have retrospective or prospective effect.

Taxation of Unmanufactured
Tobacco

Under Maharashtra Value
Added Tax Act, 2002 (MVAT Act), Entry A-45A exempts sale of unmanufactured
tobacco from levy of tax. However, an Explanation was added in said entry from
1.4.2002 stating that unmanufactured tobacco will not include the tobacco sold
in packages under a brand name. A dispute arose between assessees and Sales Tax
Department as to effective date of the Explanation. The view of Sales Tax
Department was that Explanation is clarificatory and it is effective
retrospectively from 1.4.2007 itself (since when the entry was existing) and
hence, liability arises retrospectively. The assessees were insisting that the
Explanation is substantive, hence effective from 1.4.2012 (i.e. from date of
insertion of such explanation) and hence no liability till 31.3.2012. In other
words, the issue was whether the given Explanation is clarificatory or
substantive.

The matter went to the
Bombay High Court, Aurangabad Bench in case of Amar Agencies (W.P. No.4944
of 2013) and others which was decided on 5.5.2017    

Relevant Entry

The Hon. High Court has
reproduced the controversial entry and also given verdict on dispute as under:

“7. Upon consideration of
the arguments canvassed by learned counsel for respective parties, it is
manifest that we will have to deal with Entry 45A, it’s explanation, so also
entry 2401. For the sake of convenience, the same are reproduced below.

MAHARASHTRA VALUE ADDED TAX
ACT 2002

SCHEDULE A

1. ………

Before amendment

45A (a)       unmanufactured tobacco covered 
   Nil       1.4.2007

under tariff heading No.
2401                                                     
to

of the Central Excise Tariff Act,
1985.                            31.3.2012

After amendment

45A (a)       unmanufactured tobacco covered     Nil
      1.4.2012

                   under
tariff heading No. 2401                              to date

                   of
the Central Excise Tariff Act, 1985.

Explanation. For the removal of the doubts, it is hereby
declared that, the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the Brand name.

8. The moot question would
be reading the explanation, as a substantive amendment or clarificatory.

9. Entry 45A of the Act of
2002 was amended by notification dated 31.03.2012 by the Government exercising
its powers u/s. 09 of the Act of 2002. Entry 45A as it stood prior to amendment
of 31.03.2002, it contained Clause B with no explanation. Vide notification
dated 31.03.2012 Clause B which dealt with biris is deleted and an explanation
is added. The bone of contention between the parties is the date of
applicability of amendment.

By the explanation, it is
declared that the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the brand name. Prior to 31.03.2012, the
legislature did not make any distinction between unmanufactured tobacco sold in
brand name or otherwise. The Entry 45A is part of Schedule A, which details the
list of goods for which the rate of tax is nil. The unmanufactured tobacco
covered under tariff heading No. 2401 of the Central Excise Tariff Act, 1985 is
not taxable i. e. it’s tax is nil as per Entry 45A(a).

10. The Trade Circular,
under challenge, lays down that the said explanation is clarificatory in
nature. If the explanation is interpreted as a mere clarificatory, then the
question of its applicability prospectively or retrospectively may not arise.
When the explanation serves the purpose of clarification of the existing law,
there is no question of its prospective or retrospective operation, as the said
explanation would only explain and clear any mental cobwebs surrounding meaning
of statutory provision and to prevent controversial interpretation.
Explanations generally are intended more as a legislative exposition or
clarification of the existing law than as a change in it. If we go to the
literal words employed in the explanation, then the said explanation is
introduced for the removal of the doubts. The language of the explanation
depicts such intention. If the explanation is interpreted as merely clarificatory,
then the trade circular cannot be held to be erroneous.

11. Yet, we will have to
bear in mind that, the taxing statutes have to be interpreted strictly. We will
have to consider whether the incorporation of explanation to Entry 45A of the
Act of 2002 has altered the law as existing prior to the amendment dated
31.03.2012. While adding the said explanation, the entry 12 to Schedule D is
also amended.

12.  As per section 9(1A) of the Act, the State
Government has the powers to amend the Schedule by adding or modifying any
entry in the Schedule. The notification dated 29.03.2007 was in force upto 31st
March, 2012. Item B in the entry 45A is deleted with effect from 01.04.2012,
that would be interpretation of the fact that, notification dated 31.03.2012
operates prospectively. The trade circular dated 30th March, 2007
clarifies that the unmanufactured tobacco cleared under Chapter Head 2401 of
the Central Excise and Tariff Act will be exempted from tax. The trade circular
dated 6th August, 2009 also clarifies the same. Incorporation of
explanation has amendatory implication with effect from 1st April,
2012. The explanation in the notification dated 31st March, 2012
will have to be held as amendatory and not clarificatory. We are only concerned
with the position prior to 31.03.2012. As from 1st April, 2012, the
unmanufactured tobacco sold in brand name is taxable. We are only concerned
with unmanufactured tobacco covered under heading 2401 of CETA.

13. Considering the trade
circular dated 30th March, 2007 and 6th August, 2009, it
would be clear that the Department considered the unmanufactured tobacco
covered under Chapter Head 2401 of the Central Excise and Tariffs Act exempted
from tax. The said position subsisted till 31.03.2012. It would appear that, no
distinction was made between sale of unmanufactured tobacco in packet or in
retail or whether branded or not branded. For the first time, the said
distinction is made by virtue of explanation to Entry No. 45A of the
Maharashtra Value Added Tax Act 2002.

14. The explanation no
doubt begins with the expression “for removal of doubts”. However,
the same does not appear to be plain and conclusive in nature. The operative
implication of the expression “for removal of doubts” in the explanation
does not show nexus to legislative intent of taxing liability. By virtue of
explanation, a particular class is created. By inserting explanation to Entry
No. 45A,  new class is created i. e.
‘unmanufactured tobacco sold in packets under a brand name’. A distinction is
made for the first time by insertion of said explanation between the
unmanufactured tobacco sold in retail, loose and those unmanufactured tobacco
sold in packets under a brand name. The said distinction has been introduced by
way of an explanation. By reason of explanation a substantive law is introduced
and if a substantive law is introduced, wherein a class is created thereby
making it liable for tax, the explanation will have to be held amendatory to
operate prospectively and not retrospectively.

15. In the light of the
above, it will have to be held that the addition of explanation to Entry No.
45A under notification dated 31.03.2012 is substantive provision and it is not
merely clarificatory, as such would operate prospectively. It will have to be
held that, unmanufactured tobacco sold in packets under a brand name would not
be taxable from 01.04.2007 to 31.03.2012. The impugned trade circular 9T dated
30.06.2012 stating that explanation is merely clarificatory is held to be
erroneous to that extent.”

Conclusion

The judgment clears the
legal position. It is expected that the government will appreciate substance of
the judgment.

It is expected that there
should not be retrospective burden on tax payers by way of inserting an
explanation/s which when earlier it was understood that the goods / commodities
concerned were understood to be under an exempt category. We hope that under
GST era, there will be much better clarity of law and no ambiguous situations
will arise.

Privatisation Of Airports: Whether A Franchise Service By Airport Authority?

Introduction:

Under selective approach of service tax litigation often
centered around whether a given transaction was one of service apart from the
issue of appropriate classification entry. When the said issue requires
determination based on terms of contract, the importance of reading the terms
of contract as a whole hardly requires any debate. A recent decision covering
this aspect is analysed below:

Facts in brief

In a recently decided set of writ petitions, a division bench
of Hon. Delhi High Court in the case of Delhi International Airport P. Ltd.
vs. UOI 2017 (50) STR 275 (Del) had to examine whether privatisation of
airports done by Airports Authority of India (AAI) under long term Operations,
Management and Development Agreements (OMDA for short) entered into with
consortium led by GMR group and GVK group for Delhi and Mumbai airports
respectively was an arrangement of franchise service. In this case, the dispute
arose when the revenue claimed that upfront fee and an annual fee received by
AAI from the petitioners, Delhi International Airport P. Ltd. (DIAL) and Mumbai
International Airport P. Ltd. (MIAL) was liable for service tax as franchise
service. Under OMDA, DIAL and MIAL undertook the task to design, construct,
operate, upgrade, modernize, finance, manage and develop the respective
airports and in lieu of which AAI granted them various rights interalia,
long term rights to provide aeronautical and non-aeronautical services to
various consumers for a charge. As per the said OMDA, DIAL and MIAL had to pay
an upfront fee as well as revenue share termed as annual fee to AAI. Consequent
upon OMDA, AAI simultaneously leased out all the land along with buildings,
constructions or immovable assets to the petitioners under separate lease deeds
with each petitioner. AAI informed the petitioners post Finance Act, 2007 that
annual fee payable under OMDA was liable for service tax under the
classification entry renting of immovable property service, the annual fee
being consideration for the leasing of immovable property. However, according
to DIAL and MIAL, they had entered into OMDA primarily for grant of various
rights for better operation and management of airports whereas the lease deeds
were separately entered into and only consequent upon OMDA and therefore no
service tax could be paid by them to AAI over and above the amount paid as annual
fee. AAI therefore instructed escrow bankers of the petitioners to block an
amount equivalent to service tax chargeable on the said annual fee. According
to the petitioners, AAI did not render any service to them and annual fee
payable was under OMDA towards grant of rights to develop, finance, operate,
manage and modernize airports. If at all service tax was chargeable on the
annual fee, it would be the liability of AAI from their own revenue share.
Though no notice was issued to DIAL and MIAL, aggrieved by the order of
adjudication passed against AAI wherein liability of service tax was confirmed
under franchise service, DIAL and MIAL filed writ petitions in the High Court
of Delhi.

Case of petitioners, DIAL and MIAL

As per petitioners, upfront fee and annual fees were paid to
AAI as revenue share and not as consideration for any service. OMDA was not a
franchise agreement but a statutory divestation of right in favour of DIAL and
MIAL respectively to build, operate and maintain the airports. Further, both
DIAL and MIAL are joint venture companies wherein AAI itself holds 26% shares.
Also, since there was complete divestation of rights, it could never be a
considered franchise. Both the petitioner companies had to invest their own
funds to build, operate and maintain the airports and consequently get right to
charge various customers for availability of services liable under service tax
as “airport service” and they paid service tax on this service. They ran their
own operation and did not act as franchisee of AAI. They had to pay AAI
specified percentage of gross revenue termed as “annual fee” in addition to an
upfront fee of Rs.150 crore by each DIAL and MIAL. Thus annual fee was not a
consideration for any service but an appropriation of revenue by AAI before
petitioners received any part of the revenue. In order to be attracted under
service tax, the franchisee should be granted representational right and they
did not perform the activity on behalf of AAI. Alternatively if at all service
tax was payable, it would have to be paid by AAI.

Case of AAI

AAI also contended that there was no franchise agreement in
place and factually DIAL and/or MIAL never claimed that they represented AAI.
The arrangement only allowed private parties to do an activity of profit under
the rights granted by the State. Since the revenue’s case was to bring OMDA
under franchise service, there was no question of examining whether the
arrangement could be construed renting of immovable property as defined u/s.
65(90)(a) of the Finance Act, 1994 (the Act). In response to petitioner’s
contention that if any service tax liability was to be fastened, it would be
that of AAI, they contended that it was a contractual dispute and writ petition
in respect thereof would not be maintainable and more so when there was an
arbitration clause formed part of the contract.

Case of Revenue

Revenue in turn had a case that writ was primarily not
maintainable since alternate remedy was available by filing an appeal with
CESTAT. Further, on merits OMDA reflected relationship between the parties
which squarely falls within the term ‘franchise’ as used in service tax law and
since the term “representational right“ is not given specific meaning in the
Finance Act, 1994 it should be understood in common parlance meaning. OMDA had
various elements of franchise agreement wherein although responsibility of
operating, maintenance and development was with the petitioners, strict
standards were prescribed for performance and the control was retained by the
franchisor. The functions of AAI are so unique that even without any use of
logo or trademark, the function of airport operation remains identifiable with
AAI. Further, on assuming that the transaction between the parties is of lease
of immovable property for carrying out specific purpose, it actually led to
value addition. In such a case, it would be exigible to service tax. The term
‘service’ therefore must be construed in broad sense. In the case where AAI
entered into a franchise agreement for operation, development and maintenance
of airports, there is a significant amount of value addition to the overall
services offered at the airports. Therefore also service tax was attracted on
the annual fees.

Analysis

The Hon. High Court limited its examination to whether or not
upfront fee and annual fee were exigible to service tax under the
classification of franchise service and not renting of immovable property
service since the revenue so contended. Thus, for OMDA to be construed a
franchise, it would have to satisfy requirement of section 65(47) of the Act as
reproduced below:

“Franchise means an agreement by which the franchisee is
granted representational right to sell or manufacture goods or to provide
service or undertake any process identified with franchisor, whether or not a
trade mark, service mark trade name or logo or any such symbol as the case may
be, is involved.”

The above interalia requires that ‘DIAL’ and ‘MIAL’
should have been granted representational right by AAI. The said right would
envisage the franchisee to represent as franchisor and the franchisee could
lose its individual identify. For this, the Court perused in detail certain
relevant clauses of OMDA to ascertain as to what kind of operational rights
were granted by AAI and whether AAI provided any service to DIAL and MIAL.
Reading OMDA as a whole, the Court essentially found as follows:

At the end of the transition phase, the petitioners had to
operate and maintain airports independently and to employ in a phased manner,
increasing number of senior management personnel during transition period so
that at the end of the said period, no employees would continue at the airport.
Joint Ventures were in fact entered into so that functions of AAI under
Airports Authority of India Act could be effectively carried out with AAI to
have 26% stake in the said joint ventures. Petitioners had to prepare a master
plan of development for over 20 year time frame. Petitioners were also given
right to sub-lease or license any part of the airport site to third parties for
the purpose of fulfillment of their obligation under the OMDA. Petitioners
spent their own money for the design, development, construction and
modernisation etc. of the airports. Operation, maintenance and
development is carried out by them in their own right. They have “exclusive
right and authority” to undertake various listed functions and to provide
aeronautical and non-aeronautical services at the airports. Thus it is clear
that the petitioners did not undertake any process identified with AAI. The
sole responsibility is theirs and they perform their operation using their own
policies, techniques and processes. Once the functions of AAI are completely
divested and assigned to petitioners, there does not remain any representation
of AAI by the petitioners. There is no representation right assigned to the
petitioners under OMDA. Annual fee was paid to AAI not because any service was
provided by AAI to petitioners. For the transaction to be taxable there should
be a service provided by AAI to the petitioners. What AAI has done is
entrusting petitioners with some of its functions under the Airports Authority
of India Act. Therefore OMDA does not constitute franchise service.

The Court however left open the issue raised by DIAL and MIAL that
the annual fee was inclusive of service tax or whether the said issue was a
contractual dispute. However, the action of AAI to block the escrow account was
found unsustainable as the categorical stand of revenue was to treat the
transaction as exigible to service tax under franchise service alone.

Conclusion

The
judgment provides guiding principles to interpret a contract for determining
both taxability and classification and when not correctly applied, it indicates
how the revenue missed to collect a large amount of revenue for most of the
relevant period of time.

Welcome GST Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble:

Usually a supplier of goods or service is a taxable person liable to
discharge tax liability under Goods and Service Tax Act (‘GST Act’). However in
exceptional cases, GST legislation stipulates discharge of tax liability by
recipient instead of supplier of goods or services. This is popularly known as
reverse charge mechanism (‘RCM’).

Neither excise nor VAT legislation presently provides for RCM. It is a
well- founded concept in service tax legislation and same is adopted in GST
also.

Administrative convenience and ease of tax collection are prime
objectives of RCM. The tax authorities prefer to collect tax from small number
of assessees from organised sector instead of chasing large number of small and
unorganised tax payers. Broadening tax base could be another purpose of RCM.

Basics of RCM:

Reverse charge applies only when there is a charge on supply. If supply
is exempted, nil rated or non-taxable, RCM does not apply in such a case.

Recipient of goods or services discharges GST under RCM as if he is the
person liable for paying the tax on supply procured by him. All provisions of
the Act including the collection, recoveries and penal provisions apply to the
recipient.

Recipient is required to pay applicable tax i.e. CGST and SGST, CGST and
UGST or IGST depending on location of supplier and place of supply. The tax
liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account. It is paid under recipient’s
GSTIN number and is declared in his GST Returns as taxable supplies on which
tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source (‘TDS’) paid by
recipient on behalf of supplier. The supplier does not get credit of tax paid
under RCM by the recipient.

Tax paid under RCM by the recipient is an input tax and not output tax.
The recipient (payer of tax under RCM) is entitled to avail Input Tax Credit
(‘ITC’) thereof subject to other provisions contained in Chapter V of CGST Act
and Input Tax Credit Rules.

Relevant Legal Provisions:

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST Act’)
provides for levy and collection of Central Goods and Service Tax (‘CGST’). The
power to collect tax under RCM from recipient is derived by government u/s.
9(3) and 9(4) of CGST Act which reads as under:

“Section 9(3) – the Government, on recommendation of the Council, by
notification, specify categories of supply of goods or services or both, tax on
which shall be paid on reverse charge basis by recipient of such goods or
services or both and all the provision of this Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both.

Section 9(4) – the central tax in respect of the supply of taxable goods
or services or both by a supplier who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of GST legislation Act shall apply to such recipient as if he is
the person liable for paying the tax in relation to the supply of such goods or
services or both.”

Section 5 of Integrated Goods and Services Tax Act, 2017 (‘IGST Act’),
section 7 of Union Territories Goods and Services Tax Act, 2017 (‘UGST Act’)
and respective section of State Goods and Services Tax Act, 2017 (‘SGST Act’)
also provide for RCM on a similar pattern to that of CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief:

RCM on notified goods or services:

Recipient of notified goods or services or both is liable to pay CGST
under RCM on supply of notified goods or services u/s. 9(3) of CGST Act.

Recipient is liable to discharge GST liability under RCM irrespective
of:

–   Recipient being registered person or
unregistered person; or

–   Supplier of notified goods or services is
registered person or unregistered person.

Notified goods under RCM

GST Council has recommended only tobacco leaves as notified goods
for the purpose of RCM. Any person buying tobacco leaves will be liable to
discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in future
expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on which tax will be
payable on RCM:

Nature of Service

Service Provider (‘SP’)

Service Recipient (‘SR’)

% of GST payable by SR

Import
of Services

Any
person who is located in non-taxable territory

Any
person located in taxable territory other than non-assessee online recipient
(Business Recipient)

100%

Goods Transport
Agency Services in respect of transportation of goods by road

Goods
Transport Agency

a.     Factory

b.     Society

c.     Co-operative society

d.     Person registered under GST Act

e.     Body corporate

f.      Partnership Firm

g.     Casual taxable person

100%

Legal Services

Individual
advocate or firm of advocate

Any
business entity

100%

Arbitration
Services

Arbitral
Tribunal

Any
business entity

100%

Sponsorship
Services

Any
person

Body
corporate or partnership firm

100%

Services
by Government or local authority excluding:

u   Renting of immovable property

u   Services by department of posts

u   Services in relation to aircraft or vessel
inside or outside precincts of port / airport

u   Transport of goods or passengers

Government
or local authority

Any
business entity

100%

Director’s
service

Director
of company or body corporate

Company
or body corporate

100%

Insurance
agency service

Insurance
agent

Any
person carrying on insurance business

100%

Recovery
agency service

Recovery
agent

Banking
company,
financial institution , NBFC

100%

Transportation
of goods by a vessel  from a place
outside India up to customs station of clearance in India

Person
located in non-taxable
territory to a person located in non-taxable territory

Importer
as defined under Customs Act, 1962

100%

Transfer
or permitting use or enjoyment of Copyright relating to original literary,
dramatic, musical or artistic works

Author
or music composer, photographer, artist, etc.

Publisher,
Music Company, Producer

100%

Rent-a-cab
service through e-commerce operator

Taxi
driver or
rent-a-cab operator

Any
person

100% by e-commerce operator

Under service tax, partial reverse charge is prescribed on
few services wherein certain portion of tax liability is to be discharged by
service provider and balance to be discharged by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons:

Registered person is liable to pay tax under RCM on any goods
or services or both procured by him from an unregistered person. Following may
be the unregistered person:

–  Person not carrying on any business or
profession; or

–   His aggregate turnover is below the threshold
limit; or

–  He is located in Jammu & Kashmir; or

–   He is located outside India; or

–   He is not registered though obliged to get
registered

Following are a few illustrations to demonstrate the
circumstances in which RCM triggers:

–   An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

–    An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM:

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

–   Date of receipt of goods; or

–   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

–  Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice

Receipt of goods

Date of

payment

31st day
from date of invoice

Time of Supply

30/09/17

30/09/17

15/10/17

31/10/17

30/09/17

30/09/17

15/11/17

30/11/17

31/10/17

31/10/17

30/09/17

15/11/17

16/08/17

31/10/17

16/08/17

Time of supply for services:

It shall be earliest of following:

–   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

–  Date immediately after 60 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice

Date of payment

61st day
from date of invoice

Time of Supply

30/09/17

15/10/17

30/11/17

15/10/17

30/09/17

10/12/17

30/11/17

30/11/17

Mandatory registration for person liable to pay GST under RCM:

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than 20 lakh turnover or
supplier of exclusively exempt or non-taxable goods / services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Documentation:

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from un-registered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Conclusion:

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax were having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to Government), and therefore, in most
of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being obstacle in free flow
of tax credits across the businesses and nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.

RCM provisions, as stated in the CGST Act as on
today, may be described as totally against the concept of ease of doing
business. One may feel that Government should not have brought the concept of
RCM (in this manner) under GST. The GST legislation, without RCM, would be much
more tax-payer friendly law.

Sections 2(42A), 54 – Date of letter of allotment can be considered to compute the period of holding to assess the entitlement of exemption u/s. 54.

12. Nandita Patodia vs. ITO (Mumbai)

Members : G. S. Pannu (AM) and Amarjit Singh (JM)

ITA No.: 5982/Mum/2013

A.Y.: 2010-11.     
Date of Order: 31st March, 2017

Counsel for assessee / revenue: Anuj Kishnadwala / Pradeep
Kumar Singh

FACTS 

The assessee, an individual, filed return of income declaring
total income of Rs. 11,16,013. In the return of income, the assessee claimed
exemption u/s. 54 in respect of long term capital gain of Rs. 45,58,478 arising
on sale of two flats being flat nos. 801 and 802 in Neelkanth Palm Realty. The
exemption was claimed on the ground that the assessee has purchased a new
residential house for Rs. 68,26,400 being Flat No. 701 in Neelkanth Palm Thane.

In the course of assessment proceedings, the Assessing
Officer (AO) found that the agreements for purchase of the flats sold were
dated 26.3.2009 and 27.3.2009. Considering the holding period by adopting these
dates, the gain would be short term capital gain. The assessee had adopted
30.3.2005, being the date of letter of allotment, to be the date of acquisition
of these flats. The AO finalised the assessment by regarding the date of the
agreement as the date of acquisition of flats sold and charged to tax the
capital gain as short term capital gain. He denied exemption claimed u/s. 54 of
the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that the Mumbai Tribunal in the case of Anupama
Agarwal vs. DCIT [ITA No. 472/Mum/2015 dated 23.9.2016], the assessee’s
sister has considered the holding period from 30.03.2005 being the date of
letter of allotment.

HELD

The Tribunal observed that from the order passed by the
Tribunal in the case of Anupama Agarwal (supra) it is quite clear that
in the case of the sister of the assessee the date of allotment and payment of
first installment was considered by ITAT for assessing whether the gain arising
on sale was short term gain or a long term gain. It held that –

(i)   the case of the assessee is squarely covered
by the case of Anupama Agarwal (supra); and

(ii)  the ratio given in the case of Madhu Kaul
vs. CIT and another [363 ITR 54 (Punj. & Har.)] and CIT vs. S. R.
Jeyshankar [373 ITR 120 (Mad)] are also quite applicable to the facts of
the present case in which the date of allotment letter was considered to assess
the holding period to ascertain the entitlement of exemption u/s. 54 of the
Act.

The Tribunal set aside the finding of the CIT(A) and directed
the AO to consider the allotment letter dated 30.3.205 to determine the long
term / short term capital gain and accordingly the entitlement of exemption
u/s. 54 of the Act.

The appeal filed by
the assessee was allowed.

Section 271(1)(c) – Taxability of compensation received by the assessee on account of hardship faced due to delay in delivery of flat is a debatable issue and therefore penalty cannot be levied.

11. Shri Laxmankumar R. Daga vs. ITO (Mumbai)

Members : Mahavir Singh (JM) and N. K. Pradhan (AM)

ITA No.: 3326/Mum/2014

A.Y.: 2004-05.     Date
of Order: 15th March, 2017

Counsel for assessee / revenue: Ms. Nikita Agarwal / Maurya
Pratap

FACTS  

In the course of assessment proceedings, the Assessing
Officer (AO) noticed that the assessee had received compensation of Rs.
16,50,000 on account of hardship faced due to delay in delivery of flat at
Suraj Apartments from the developer.  He
taxed this amount as compensation received on surrender of tenancy rights and
charged it to tax as long term capital gains. He levied a penalty of Rs.
4,80,725 u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where it contended that he had disclosed the receipt on account of compensation
on the face of the balance sheet and the said balance sheet was a part of
return of income and the auditor in Form 3CD had specifically mentioned this
amount as a capital receipt. Reliance was also placed on the decision of Mumbai
Tribunal in the case of Kushal K. Bangia vs. ITO [ITA No. 2349/Mum/2011
dated 31.1.2012 for AY 2007-08], wherein the Tribunal has held that `receipts
during redevelopment are capital receipts and not revenue and such receipts
reduce the cost of assessee and should be taken into account when such
redeveloped properties are sold’. However, the CIT(A) upheld the action of the
AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the amount of compensation was duly
reflected in the balance sheet filed along with the return of income as
compensation / damage received from M/s MR & DR Thacker and was added to
the proprietor’s capital. Having noted the decision of the Tribunal in the case
of Kushal K. Bangia (supra), it held that the taxability of compensation
of Rs. 16,50,000 received by the assessee as long term capital gain by the AO
is a debatable issue. It held that an analogy may be drawn here from the decision
of the Delhi High Court in CIT vs. Mushashi Autoparts India Pvt. Ltd. [330
ITR 545 (Del)] where the court held that penalty cannot be levied in a case
where the assessee, prior to commencement of business had received interest,
which was capitalised as pre-operative expenses. In the assessment, the amount
was regarded as taxable. The Court held that treating the amount as taxable
income cannot by itself justify levy of penalty. The Tribunal deleted the
penalty levied by the AO u/s. 271(1)(c) of the Act.

The appeal filed by the assessee was allowed.

Section 251 – An order enhancing the assessment made, passed by CIT(A), without giving an opportunity of being heard to the assessee, violates the principles of natural justice and is bad in law and cannot be sustained.

10. Jagat P. Shah (HUF) v.
ACIT (Mum)

Members : Mahavir Singh
(JM) and Rajesh Kumar (AM)

ITA No.: 2584/Mum/2015

A.Y.: 2009-10.  Date of Order: 21st March, 2017

Counsel for assessee /
revenue: Rahul Hakani / M. C. Om Ningshen

FACTS  

The assessee disclosed net income in F & O transactions
amounting to Rs. 90,017. According to the assessee, the unexpired future &
option contract as on 1.4.2008 was Rs. 50,93,939 which was added to the
business loss of Rs. 5,82,655 thereby reducing the said loss to be carried forward. 

The AO in the remand report changed the valuation of
unexpired contract and came to the conclusion that the net profit should be
calculated at Rs. 6,48,780 by way of enhancement or net profit should be
sustained at Rs. 40,89,667 instead of Rs. 50,93,939 as made by the AO while
framing the original assessment.

The CIT(A), without giving any notice of enhancement u/s. 251
of the Act passed an order enhancing the net profit to Rs. 66,48,780.

Aggrieved, the assessee preferred an appeal to the Tribunal
where as an additional ground it was contended that the action of CIT(A) in
enhancing the assessment without giving an opportunity to the assessee violated
the principles of natural justice.

HELD  

The Tribunal noted that the CIT(A) has passed the order on
the basis of remand report of the AO enhancing the assessment by taking net
profit to Rs. 66,48,780 without issuing any show cause notice u/s. 251 of the
Act. The Tribunal held that CIT(A) should have given opportunity to the
assessee to present his case which was not given and therefore violated the
principles of natural justice. It held that, the order passed by CIT(A) without
giving opportunity to the assessee is bad in law and cannot be sustained. The
Tribunal set aside the order passed by CIT(A) and restored the matter back to
the file of the AO to decide the same as per law after providing fair and
reasonable opportunity to the assessee.

Compiler’s note: The amounts stated under the caption “Facts”
are not reconciling / clear but the same are as mentioned in the order of the
Tribunal.

Sections 10(38), 28(i), 45 and CBDT Circular No. 6 of 2016 – If the assessee so desires, the Assessing Officer has to treat the capital gain earned on listed shares and securities held for a period of more than 12 months, as income from capital gains. However, once such a stand is taken by the assessee it shall remain applicable in subsequent assessment years also.

11. [2017] 81 taxmann.com
220 (Chandigarh – Trib.)

Emm Bee Fincap (P.) Ltd.
vs. DCIT

A.Ys.: 2005-06, 2006-07
and 2008-09                           Date of Order: 17th April, 2017

FACTS

In the return of income, the assessee had declared Long Term
Capital Gain of Rs. 1,14,77,193 as exempt u/s 10(38) of the Act. In the course
of assessment proceedings, the Assessing Officer (AO) found that the assessee
was involved in no other business activities other than transactions in shares.
He further observed that this was its primary business since its inception. The
AO noted that the transaction of shares were being continuously and
systematically undertaken year from year since inception, involving tremendous
volume which pointed out to a profit motive. The AO held that the entire share
transactions were business activity. While coming to this conclusion, the AO
mentioned that neither the details of purchase and sale of shares nor proof of
the same being in the nature of investment or stock-in-trade (referred to CBDT
Circular No. 4 of 2007, dated 15.6.2007) as also the manner and mode of the
transactions were provided nor were books of account for any of the years under
assessment were produced for verification. The AO held the entire share
transactions as business activity and treated the gains earned thereon as the
business income of the assessee and added back the same to the taxable income
of the assessee making an addition of Rs. 1,14,77,193/- in the process.

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 attention of the Tribunal was drawn to Circular No. 6 of 2016 issued by
CBDT and pointed out that CBDT in the said circular had given instructions that
in respect of listed shares and securities held for a period of more than 12
months immediately preceding the date of its transfer, the assessee, at its
option can treat the income derived therefrom as capital gain which shall not
be disputed by the AO.

HELD

The Tribunal found that
CBDT in the said circular, has laid down further guidelines to be followed by
AO while deciding the issue, the objective being reducing litigation on an
issue where there is lot of uncertainty and hence tremendous litigation. The
Tribunal held that it is evident from the said circular that the CBDT has given
instruction to the AO to treat the capital gain earned on listed shares and
securities held for a period of more than 12 months, as income from capital
gains if the assessee so desires. It noted that the said instructions states
that once such a stand is taken by the assessee, it shall remain applicable in
subsequent assessment years also.

In the light of the said
circular, the Tribunal restored the issue of determining the nature of the
gains earned by the assessee on the transactions of purchase and sales of
shares, back to the file of the AO and directed the AO to decide the issue
afresh in the light of the aforesaid circular of the CBDT after taking into
consideration the facts of the case in hand.

Don’t demonize, the US President Donald Trump, analyse Trump. He represents a thought process. Its not a momentary expression – Shri S. Jaishankar, Foreign Secretary.

11. HC dubs tree felling for Metro a tsunami

The Bombay high court on Friday said it will not immediately
vacate the interim stay on cutting of trees for Metro III unless shown that
there is nothing illegal or improper in the procedure adopted.

A bench of Chief Justice Manjula Chellur and Justice Girish
Kulkarni were categorical while granting time to Mumbai Metro Rail Corporation
Ltd (MMRCL) to place on record information regarding the survey done before the
firm proceeded with the cutting of over 5,000 trees for the Colaba
Andheri-Seepz corridor. Justice Chellur said, “Even then I will not immediately
vacate the stay. You can’t cut trees like that.“

The judges said that “maybe, if required“ they will ask
another committee to oversee the removal of trees. The stay will be vacated “if
nothing is (found) illegal or improper (in the procedure adopted)“, said
Justice Chellur. The bench said MMRCL must state what assessment was done for
tree cutting, including a list of trees, their kind and age, and whether there
is any plan for replantation.

The court questioned the BMC and told it “to justify how all
permissions are granted“.“Look at the photographs. Like a tsunami… tsunami as
far as trees are concerned,“ said Justice Chellur.

(Source: The Times of India, February 11, 2017)

12. Looking the Part

Say you had the choice between two surgeons of similar rank
in the same department in some hospital. The first is highly refined in
appearance; he wears silver-rimmed glasses, has a thin built, delicate hands, a
measured speech, and elegant gestures. His hair is silver and well combed. He
is the person you would put in a movie if you needed to impersonate a surgeon.
His office prominently boasts an Ivy League diploma, both for his undergraduate
and medical schools.

The second one looks like a butcher; he is overweight, with
large hands, uncouth speech and an unkempt appearance. His shirt is dangling
from the back. No known tailor in the East Coast of the U.S. is capable of
making his shirt button at the neck. He speaks unapologetically with a strong
New Yawk accent, as if he wasn’t aware of it. He even has a gold tooth showing
when he opens his mouth. The absence of diploma on the wall hints at the lack
of pride in his education: he perhaps went to some local college. In a movie,
you would expect him to impersonate a retired bodyguard for a junior
congressman, or a third-generation cook in a New Jersey cafeteria.

Now if I had to pick, I
would overcome my suckerproneness and take the butcher any minute. Even more: I
would seek the butcher as a third option if my choice was between two doctors
who looked like doctors. Why? Simply the one who doesn’t look the part,
conditional of having made a (sort of) successful career in his profession, had
to have much to overcome in terms of perception. And if we are lucky enough to
have people who do not look the part, it is thanks to the presence of some skin
in the game, the contact with reality that filters out incompetence, as reality
is blind to looks.

When the results come from
dealing directly with reality rather than through the agency of commentators,
image matters less, even if it correlates to skills. But image matters quite a
bit when there is hierarchy and standardized “job evaluation”. Consider the
chief executive officers of corporations: they not just look the part, but they
even look the same. And, worse, when you listen to them talk, they will sound
the same, down to the same vocabulary and metaphors. But that’s their jobs: as
I keep reminding the reader, counter to the common belief, executives are
different from entrepreneurs and are supposed to look like actors.

Now there may be some correlation between looks and skills;
but conditional on having had some success in spite of not looking the part is
potent, even crucial, information.

(Source: Nassim Nicolas Taleb, February 24th, 2017, from
INCERTO)

13. Checks and balances: Permitting tax authorities to
conduct raids without due process will be disastrous

Having elections to decide who is to govern us meets only the
most basic definition of a democracy. But at a deeper level, democracies
require checks and balances in governance. Otherwise, no matter how free and
fair the elections, they would be autocracies with periodic changes of
leadership.

The proposal in this year’s budget to amend Section 132 of
the Income Tax (IT) Act is an example. The amendment would do away with the
requirement for IT officials to demonstrate they had “reason to believe” that
violations existed, or that the assessee would not comply, before conducting a
search and seizure “raid”.

The danger in this is obvious. Without having to show they
had good reasons for raids, there is nothing to prevent IT officials from
conducting them arbitrarily. Harassment and rent seeking – the term economists
use for corruption – are sure to follow.

Nevertheless, it is worth taking stock of the opposite
arguments as well. Checks and balances are meant to prevent the autocratic,
mindless, or subjective exercise of authority, but not to block its legitimate,
justifiable application.

So where does the Indian government’s crackdown on IT evaders
stand? The statistics clearly show that the pace has been considerably stepped
up in the past two years. For instance, the number of raids in the first half
of 2016, at 148, was nearly triple of the 55 in the first half of 2015.

Similarly, cash, jewellery and other assets seized during
raids in the first seven months of 2016, at Rs 330 crore, was more than 300% of
the same period in 2015. And unpaid taxes surrendered by assessees in 2016 were
Rs 3,360 crore, a more than 50% increase over 2015.

However, it was never going to be easy to rapidly scale up
such scrutiny or, indeed, conduct raids. It is not simply a matter of
allocating more resources for it, but also having to deal with judicial
hurdles. As the Finance Bill explains, “certain judicial pronouncements have
created ambiguity in respect of the disclosure of ‘reason to believe’ or
‘reason to suspect’ recorded by the income tax authority to conduct a search
under Section 132.”

But therein lies the rub. If judges have imposed constraints
on raids because of unconvincing reasons to believe they were justified, then
it is almost inevitable they will find fault with altogether doing away with
all justification! Though the executive and legislative branches may decide to
abjure cumbersome procedural requirements in the interest of efficiency, that
must pass the test of natural justice and constitutional guarantees in order to
deter the judicial branch from overturning it.

Using the principles of checklist management, IT officials
could be given an objective list of items to be ticked off that would serve as
a record of due process having been followed prior to a raid. And surely the
finance ministry has the expertise to craft such a checklist that would pass
judicial muster.

(Source: Article by Shri Baijyant ‘Jay’ Panda, BJD Lok
Sabha MP, in The Times of India dated 15.02.2017)

14. Vyapam scam: Supreme Court cancels degrees of 634 doctors

Coming down hard on corruption in MBBS admissions in Madhya
Pradesh between 2008 and 2012, the Supreme Court cancelled the degrees of 634
doctors on Monday and said admissions obtained through a mass fraud called
“Vyapam scam”+ could not be condoned.

“The actions of the appellants are founded on
unacceptable behaviour and in complete breach of rule of law. Their actions
constitute acts of deceit… National character, in our considered view, cannot
be sacrificed for benefits – individual or societal,” a bench of Chief
Justice J S Khehar and Justices Kurian Joseph and Arun Mishra said in an
83-page judgment.

“If we desire to build a nation on the touchstone of
ethics and character, and if our determined goal is to build a nation where
only rule of law prevails, then we cannot accept the claim of the appellants
(students) for suggested societal gains (by allowing them to keep the degrees
on the condition of doing social service free of cost for some years),”
the bench said.

Writing the unanimous judgment, Justice Khehar said, “We
have no difficulty in concluding in favour of rule of law… Fraud cannot be
allowed to trounce, on the stratagem of public good.”

All these admissions to MBBS courses between 2008 and 2012
were cancelled by the MP Professional Examination Board. A bench of Justices J.
Chelameswar and A. M. Sapre had found them to be illegal on May 12, 2016.

While Justice Sapre had ordered cancellation of the
admissions and annulling of the degrees, Justice Chelameswar had said since the
students had completed their courses, it would be a national waste to annul the
degrees.

Instead, Justice Chelameswar allowed them to keep their
degrees provided they did social service for a certain period. Given the split
verdict, the matter was placed before a three-judge bench of Chief Justice J S
Khehar and Justices Joseph and Mishra. Writing the unanimous judgment, Justice
Khehar agreed with the view taken by Justice Sapre and annulled the degrees
obtained by these 634 students, who had got admission into medical colleges on
the back of influence peddling.

(Source: The Times of India dated 14.02.2017)

15. ‘Cashless economy an invitation to online fraudsters’

The international standards body for the payments industry
has called for a cybersecurity breach notification law to raise awareness of
online criminals. According to the Payment Card Industry (PCI) Security
Standards Council, the move towards a cashless economy post-demonetisation has
also sent an invitation to online fraudsters of a new market opening up. In
information security circles, any unauthorised access to an individual’s data
is called a breach.

Jeremy King, international director, PCI Security Standards
Council, said that while the migration to a cashless society will be beneficial
to a wider population in India and provide greater opportunity to merchants and
banks, the biggest challenge is that online criminals have become very
organised and global.

Without a breach notification, we pretend we have never been
breached, and banks and organisations accept the loss. That means that people
think there is no fraud happening when there is a lot of fraud happening,”
he said.

The risk to banks were not just in the payments business but
wherever personal data was stored. There have been instances when telecom data
was hacked to access bank details. While the demand for auditing payments
infrastructure has gone up, India is facing a shortage of IT security auditors.
The RBI wants more approved assessors in India to support the large base of
merchants and banks. We are working on that. We need more security
professionals and we need more organizations.

Criminals are also learning to work around security features.
For instance, with card analytics now identifying unusual patterns based on
transactions being done in different pin codes, fraudsters are now selling
cards on the Dark Net — an underground network with restricted access used to
sell stolen content — based on pin code of the issuer so that the frauds do not
ring alarm bells.

Another challenge for the council is that countries are
moving away from cards to newer form factors like account-to-account transfers.
While people were looking at ways of making new form factors work in a
frictionless and secure manner, there were trade-offs. The balance between risk
and security is where we live. You can make something very, very secure, but
it’s of no use. So you know that there is a level of risk that you are willing
to accept in order to make the process work smooth enough so that people will
use it.

(Source: The Times of India dated 21.02.2017)

16. India Inc is better
off avoiding the flawed US practice of unrealistically high CEO compensation.

The debate between Infosys’ founders and the current
management and board about senior management compensation can be an important
signpost for corporate governance in the country.

The key question is, should shareholders, corporate
governance activists and policymakers allow India Inc to transplant some of the
ugly corporate governance practices from Corporate America? While the moral
aspects to mimicking such ugly features in a country significantly poorer than
the US remain open to debate, I will focus on economic aspects.

Between 1992 and 2000, following the Bull Run in US stock
markets, the average real (inflation-adjusted) pay of chief executive officers
(CEOs) of S&P 500 firms more than quadrupled, climbing from $3.5 million to
$14.7 million. This growth of executive compensation far outstripped
compensation for other employees. In 1991, the average large-company CEO in the
US received about 140 times the pay of an average worker; in 2003, this ratio
was about 500:1.

When compared to the value added by an average employee, did
the value add by the CEO of an S&P 500 firm quadruple in just eight years?
What super-diet did the CEOs of S&P 500 firms consume from 1992 to 2000 to
quadruple their relative contribution? Did such a super-diet quadruple a CEO’s
strategic thinking abilities?

Since none of us has heard about any such super-diet hitting
retail outlets, it is safe to conclude that such quadrupling represented the
outcome of a game that gets fixed between the CEO and pliant board. Academic
research, summarised in Bebchuk (2004), has provided robust evidence of such
match-fixing. “In judging whether Corporate America is serious about reforming
itself, CEO pay remains the acid test. To date, the results aren’t encouraging,
Warren Buffett said.

In an ideal world, a CEO would get paid commensurate to the
value he or she adds to the firm. The board would design the compensation to
provide strong incentive to the CEO to contribute to shareholder value. But
this represents a Utopian concept. First, for various reasons, directors in a
firm support arrangements favourable to the company’s top executives. Social
and psychological factors contribute to this phenomenon.

Second, limited time and resources often make it difficult
for even well intentioned directors to do their pay setting job properly. When
not well prepared for the ensuing battle, directors can often choose peace within
the boardroom.

Finally, CEOs exert considerable power in shaping their pay
packages and those directly reporting to them.

Research shows that CEOs’ influence over directors enables
them to obtain “rents” — benefits greater than those commensurate to the true
estimate of the value they add to the company.

These findings followed research on CEO pay in the US after
the spate of corporate scandals that began in late 2001and shook confidence in
the performance of public company boards.

Research now recognises that many boards have employed
compensation arrangements that do not serve shareholders’ interests. Flawed
compensation arrangements have been widespread, and systemic, stemming from
defects in the underlying governance structure.

For instance, oil company
CEOs get paid significantly more when the crude oil price increases — an
outcome in which the oil company CEO had no role. Most CEOs get paid more when
the average stock market performs well; again, the CEO had no role to play in
the stock market’s performance.

A large portion of CEO pay comes in forms other than equity,
such as generous severance packages, salary and bonus, which correlate weakly
with firms’ industry-adjusted performance.

Thus, academic research underlines the fact that CEO pay is
the outcome of a game that gets fixed between the CEO and pliant boards. Given
this evidence in the US, Sebi and corporate governance activists must watch the
developments at Infosys carefully and ensure that some rotten governance
practices in the US do not develop root in India.

(Source: Extracts from Article by Krishnamurthy
Subramaniam, Associate Professor of Finance, at Indian School of Business,
Hyderabad, in the Economic Times dated 17.02.2017)

One Republic

When you call yourself an Indian, Muslim, Christian, European
or anything else, you are being violent. Because you are separating yourself –
by belief, by nationality, by tradition – from the rest of mankind. This breeds
violence.

 – J.
Krishnamurti
(From Sacred Space)

New Requirements for Profit Sharing Arrangements by Promoters, Directors & Others

Introduction

SEBI has finally issued amendments requiring that profit
sharing/compensation agreements by certain persons shall require board as well
as public shareholders approval of the listed company. These provisions
effectively have retrospective effect
of three years. The agreements covered are those that are entered into by
specified persons such as promoters, directors, key managerial personnel with
shareholders or even third parties. Such agreements would provide for
compensation/profit sharing in relation to dealings in securities. Vide
amendments made by notification dated 4th January 2017, such
agreements would require prior approval of Board and shareholders. Agreements
entered into in preceding three years, whether subsisting or expired, would
also require approvals and/or disclosures.

Background

Readers may recall that SEBI had, on 4th October
2016, issued a consultation paper on such agreements and invited public
comments. This was discussed in an earlier column of this Journal.

SEBI had expressed concerns about certain agreements in as
much as though the listed company itself may not be a party to or directly
affected by such agreements, they resulted in certain concerns about good
corporate governance. SEBI gave an example of the Promoters of a listed company
having entered into an agreement with a private equity investor. This agreement
provided for sharing of profits on appreciation earned by such investor in the
shares of the company. SEBI observed:-

“It has come to the notice of
SEBI that certain Private Equity (PE) firms have entered into side agreements
with top personnel and key managerial personnel (KMPs) of a listed entity by
which such PE firms (who were allotted shares on a preferential basis) would
share a certain portion of the gains above a certain threshold limit made by
them at the time of selling the shares and also subject to the conditions that
the company achieves certain performance criteria and the employee continues
with the company for a certain period.” ?

It was felt that such practice may be quite common. The
beneficiary of such agreement could be a promoter, director, key managerial
personnel etc of the company. The private equity investor would have invested
in the shares of the company. The agreement would provide that if the investor
earns profit on sale of the shares beyond a specified amount/rate of return, a
part of such excess would be shared with such persons. Such persons would thus
benefit by way of gains beyond what they would otherwise earn as shareholders,
key managerial personnel, directors, etc.

It was obvious that the company concerned was not directly
affected by such agreement. The company does not bear any of such costs. It is
the investor who, for  motivating such
persons, bears the cost out of his gains. Hence, such agreements would not come
before the board or shareholders of the company for approval. Indeed, it is
possible that the company and the public shareholders may not be even aware of
such agreements.

However, the concerns over such agreements are easy to see.
The directors or key managerial personnel may have at least a perceived
conflict of interest in view of such agreements. Such persons also have
restrictions over their remuneration under the Companies Act, 2013 but yet they
may get further remuneration under such agreements. The tying of the Promoters
with such investors is also an area of concern.

Hence, SEBI, after due consultation, has provided for certain
requirements by introducing certain provisions in the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015.

To summarise, these provisions require that any new
agreement should receive prior approval from the Board of the
listed entity and from its public shareholders by way of a
resolution. In case of agreements entered into in the preceding three
years and still subsisting, approval of the board and the public shareholders
needs to be obtained at their respective forthcoming meetings. Further,
such agreements and also agreements that have expired should be disclosed to
stock exchange for public knowledge.

The following agreements analyse the new requirements in more
detail.

Regulations amended

The SEBI LODR Regulations 2015 have been amended by inserting
sub-regulation (6) in Regulation 26. These amendments have been made vide
notification dated 4th January 2017 and will also apply to
agreements entered into the preceding three years from the date when the
amendments came into effect.

To whom do they apply

The provisions apply to agreements between two sets of
parties.

On one side are employees including key managerial personnel,
directors or promoters of a listed entity. They may be acting on their own
behalf or on behalf of any other person.

On the other side are shareholders or even any other third
party.

The scope thus has been made quite wide, and it is wider even
than the proposed amendments as per the consultation paper. The party on one
side can be any employee and not merely a key managerial personnel. An apparent
ambiguity/loophole in wording the consultative paper was corrected and hence
the party can be any director and not merely directors who are employees.
Further, the promoter may be a director or employee or otherwise and can even
be a limited company.

On the other side would be any shareholders or even
non-shareholders. 

The nature of the agreement

The agreement should be “with regard to compensation or
profit sharing in connection with dealings in the securities of such listed
entity”.

Prior approvals required of Board/public shareholders

Such agreements require prior approval of the
Board of Directors of the listed company.

Further, prior approval is also required of the public
shareholders of the listed company by way of an ordinary resolution. The
term “public shareholders” has been defined in Regulation 2(1)(y) of the
Regulations as ”public shareholding” means public shareholding as
defined under clause (e) of rule 2 of the Securities Contracts (Regulation)
Rules, 1957. Effectively, subject to certain further adjustments where
required, it means shareholders who are other than the promoters or promoter
group of the company or the subsidiaries/associates of the Company. However,
non-public shareholders by this definition could include directors, employees,
etc. who are not part of promoters, etc. To ensure that the voting
remains unbiased, apart from the promoters, etc. even “interested parties” are
not allowed to vote, as explained later herein.

Interested parties not to vote

It is seen earlier that the agreement would require the
approval of the public shareholders and thus promoter shareholders would not be
eligible to vote. However, there are certain other persons who also are
debarred from voting. These are “interested persons involved in the
transaction”. This term has been defined as “any person holding voting rights
in the listed entity and who is in any manner, whether directly or indirectly,
interested in an agreement or proposed agreement”.

Thus, it is not merely the parties to the agreement but
persons even otherwise interested in such agreement would be debarred from
voting.

Agreements entered into preceding three years

The new provisions also cover agreements entered into
preceding three years. For this purpose, such agreements are categorized into
those that are subsisting and those that have expired.

If such an agreement has expired, then it shall be disclosed
to the stock exchanges for public dissemination.

If such an agreement is subsisting then the following needs
to be done:-

(i)  It shall be disclosed to the stock exchanges
for public dissemination.

(ii) It
shall be placed before the forthcoming Board meeting for approval.

(iii) If the
Board approves, it shall be placed before the forthcoming general meeting for
approval by the public shareholders. 

Consequences of non-compliance

SEBI has wide powers to take action in case there is
non-compliance. There can be penalties, debarment, disgorgement, prosecution,
etc.

A critique

The concerns as regards such agreements are obvious – the
conflict of interest that it creates that may place self-interest over company
interest and even a special relation with certain shareholders over relation
with all shareholders generally. On other hand, considering that the profit
that is shared arises from sale of shares and not from the company or paid by
it or even the shareholders, it seems harsh that such agreements are so restricted.
Arguably, a disclosure ought to be enough. Of course, if such agreements are
entered into by Independent Directors, then the concerns may be justified.

Comparison with approval for related party transactions

The SEBI LODR Regulations also require approval under certain
circumstances of related party transactions by the shareholders. For such
approval too, there is restriction on voting by persons who have interest or
concern in the transactions. It is worth contrasting the requirements of shareholder
approval in case of related party transactions with such profit sharing
agreements.

As seen above, in case of such agreements, (i) resolution is
placed before public shareholders only (ii) approval is by way of an ordinary
resolution and (iii) persons interested in such agreements are also debarred
from voting.

In case of specified related party transactions, (i)
resolution is placed before all shareholders and not just public shareholders
(ii) approval is by way of special resolution (iii) all related parties are
debarred from voting.

Conclusion

The requirements will introduce a level of
transparency in dealings by Promoters and other persons connected with the
Company. The public shareholders and even the Board of Directors generally will
have a say in such matters and can veto it. Considering the retrospective
applicability, there are likely to be many such arrangements that would not
only require public disclosure but in case of subsisting agreements would
require the two level approval.

Deficient Stamp Duty – Cause for Imprisonment?

Introduction

Stamp Duty is the 2nd largest
source of revenue for the Maharashtra Government. The fact that the Government
is becoming very vigilant to check stamp duty evasion is a good move so as to
ensure that there is no revenue leakage. However, having said that, does every
case of deficient stamp duty justify an imprisonment on the ground that there
was a fraudulent act or a forgery or a case of corruption between the assessee
and the Sub-Registrar? Shooting from the hip and arresting people at a drop of
the hat is something which should be avoided by the authorities at all costs!
There exist enough safeguards in all revenue statutes to tackle cases of tax
evasion. Let us consider one such case which travelled all the way up to the
Supreme Court – State of Maharashtra vs. Ravindra Babulal Jain, SLP (Cr.)
No. 1881/2016.

Facts of the case

Ravindra Jain and others,
respondents in the case, purchased a piece of land admeasuring 8 acres 4
gunthas situated at Aurangabad by way of a public auction and by following a
tender process. The consideration paid by them of Rs. 3.60 crore was the
highest of several bidders. Since the property fell within the green zone, the
price paid by them was optimum. They got a sale deed registered in respect of
the land by showing a market value of the said property as Rs.3,500/- per
square meter at a time when the market value of the said property was
Rs.4,100/- per square meter. Based on this fact, the Anti Corruption Bureau,
acting on a private complaint, lodged a case against them as well as the
concerned Sub-Registrar alleging that all of them in connivance caused a
revenue loss to the tune of Rs.12,76,000/- to the State Government. It was also
alleged that they completed the aforesaid transaction by preparing false
documents, false records and fraudulently and dishonestly used the said records
as genuine ones. The cases were registered under the Indian Penal Code read
with section13(2) of the Prevention of Corruption Act as well as sections 59
and 62 of the Maharashtra Stamps Act, 1958. Accordingly, all the accused in
this case as well as the Sub-registrar and his assistant were arrested and
later released on bail. Subsequently, the accused moved the Bombay High Court
for quashing the FIR lodged against them by filing Cri. Appln. No.
4614/2012. 

Allegations against the Accused

The Prosecution argued before the
Bombay High Court that the accused purchased the land for a consideration of
Rs. 3.60 crore. While presenting the sale deed for its registration in December
2008, they did not disclose the true market value of the aforesaid land which,
according to the prosecution, was Rs.4100/- per square meter as per the Ready
Reckoner rates declared by the Government in the year 2008. It was alleged that
the applicants showed the market value of the said property as Rs.3,500/- per
square meter which was the Ready Reckoner rate of the earlier year, i.e., of
2007.

According to the Prosecution, as
per Ready Reckoner rates of the year 2008, the market value of the subject
property was Rs.7.05 crore and the stamp duty payable on the same was Rs.35.26
lakh. The accused, declared the market value of the subject property as Rs.4.50
crore based on the Ready Reckoner rates of 2007 and accordingly paid stamp duty
of Rs.22.50 lakh only. Hence, it was alleged that the purchasers of the said
land paid less stamp duty to the extent of Rs.12.76 lakh and caused a revenue
loss to the Government to that extent.It was also alleged that while
registering the subject instrument, the accused used false and forged documents
as genuine one and conniving with the then in charge Assistant Sub Registrar,
cheated the Government by causing loss of Rs.12.76 lakh. It was further alleged
that not mentioning the zone number within which the property fell clearly
indicated the malafide intention of cheating the Revenue. Consequently, the
Prosecution invoked various provisions of the Indian Penal Code, 1860,
viz, section 119 (Public Servant concealing design to commit offence which
it is duty to prevent), section167 (Public Servant framing an incorrect
document with an intent to cause injury), section 418 (Cheating with
knowledge that wrongful loss may ensue to person whose interest offender is
bound to protect), section  468
(Forgery for purposes of Cheating), section 471 (Using as genuine a
forged document); section 13(2) of the Prevention of Corruption Act,
1988 (criminal misconduct by public servant) as well as section 59 (Penalty
for executing instrument not duly stamped) and section 62 (Penalty for
failure to set forth facts affecting duty in the instrument) of the Maharashtra
Stamp Act, 1958.

High Court’s Verdict

The Bombay High Court considered
the facts of the case. At the outset it noted that section 119 and section 167
of the Indian Penal Code (IPC), as well as section 13(2) of the
Prevention of Corruption Act can only be attracted against public servants. The
accused in the present case were private individuals (separate proceedings were
launched against the sub-registrar) and hence, these sections automatically
failed. Thus, the Court was only concerned whether a fit case against the
accused under sections 418, 471 and 468 of the Indian Penal Code survived?

It held that section 418 of the
IPC dealt with Cheating with knowledge that wrongful loss may ensue to person
whose interest offender is bound to protectand no such case was apparent from
the material on record. Hence, even that section did not survive.

It next considered the offences of
section 468 (Forgery for purposes of Cheating) and section 471 (Using as
genuine a forged document). In this respect, it observed that the Prosecution
had made the following specific accusations:

(i)   The applicants submitted the
in-put form which was not correctly filled.

(ii)  The applicants intentionally
did not mention the zone number within which the subject property was situated.

(iii) The ready reckoner rate and
zone number were not mentioned at the top of the document of sale deed.

(iv) The market value of the
subject property was deliberately shown less.

(v) The market value of the
property was fraudulently assessed as per the ready reckonerrates prevailing in
2007 when the same ought to have been assessed at the ready reckoner rates of the
year 2008. This was done with a view to confer pecuniary advantage to the
accused which resulted in wrongful loss to the Government.

(vi) The accused and the other two
accused officials had a common intention to cheat the Government.

The High Court observed that no
offence could be made under the IPC in the present case. Even if the in-put
form was incorrectly filed or the zone number was not mentioned or the market
value was incorrect it was not a case of using a false document or one of
forgery! Merely making a false claim in a document does not make the
document a false one. Further, making a false statement cannot amount to
forgery. It gave a precise definition of a forged document as meaning only one
which purports to be signed or sealed by a person who in fact never did so.
Thus, it quashed the allegations u/ss. 468 and 471 of the IPC also.

Lastly, the High Court analysed
the correctness and the legality of the allegation that the accused
deliberately, showed the market value of the property less with a view to make
a wrongful gain for them and cause wrongful loss to the Government. It stated
that there was a specific allegation against the accused that, they with a
fraudulent and dishonest intention did not disclose the true market value of the
subject property while presenting the deed of sale of the said property for its
registration before the Sub Registrar and thereby cheated the Government by
causing revenue loss. It considered the definition of market value u/s.2(na) of
the Stamp Act Market Value to mean in relation to any properly which is the
subject matter of any instrument means the price which such property would have
fetched if sold in open market on the date of execution of such instrument or
the consideration stated in the instrument whichever is higher.

Accordingly, the High Court held
that the whole approach adopted as by the Prosecution in determining the market
value of the subject property appeared erroneous. It relied on Jawajee
Nagnatham vs. Revenue Divisional Officer, Adilabad, A.P. (1994) 4 S.C.C. 595,
which held that the Ready Reckoner prepared and maintained for the purpose of
collecting stamp duty had no statutory base or force and it could not form a
foundation to determine the market value mentioned thereunder in instrument
brought for registration.

It further considered R.
SaiBharathi vs. J. Jayalalitha, 2003 AIR S.C.W. 6349 where the Supreme
Court held that, “… the guideline value will only afford a
prima-facie base to ascertain the true or correct market value. Guideline value
is not sacrosanct, but only a factor to be taken note of if at all available in
respect of an area in which the property transferred lies. In any event, for
the purpose of Stamp Act guideline value alone is not a factor to determine the
value of the property and the authorities cannot regard the guideline valuation
as the last word on the subject of market value.”

Similar Supreme Court decisions
not considered by the Bombay High Court but which are on the same lines
include, Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991
P&H 26.

Hence, the High Court concluded
that the very foundation of the charges that the market value was deliberately
shown less got uprooted. It went on to state that even if the market value was
shown less, the Sub-registrar could have referred the instrument for
adjudication to the Collector u/s. 32A(2) of the Stamp Act. Since this was not
done, it was implied that the Sub-registrar accepted the value. Considering
that the said property was bought under a public auction and tender process and
by paying the highest price, the Sub-registrar may have considered all these
facts in accepting the stated value.

The Court held that prima facie
it found no fault with the Sub-registrar’s approach. It noted that in any event
the Collector had suo moto powers of revision u/s. 32A(5) of the Stamp Act.
Further, this section empowered the Collector to levy a penalty of 2% per
month. This power was already exercised by the Collector in the present case.
The Court wondered that when this action was already availed, where was the
propriety in launching criminal proceedings under the IPC and more so when
there did not seem any cogent, concrete and sufficient material against the
accused. A similar case of alleged cheating was considered by the Bombay High
Court in Sanjay Shivaji Dhapse vs. State of Maharashtra (2014 All M.R.
(Cri.) 3617). There the Division Bench of the Court held that not
affixing stamp of adequate amount would amount to irregularity and it is always
subject to verification / check by the concerned Government Officer. However,
it held that a criminal complaint could not lie against such an irregularity.

Hence, on a holistic view, the
Court in Ravindra’s case concluded that there was no offence under any section
of the IPC. The only guilt if at all which could be attributed would be that of
applying the reckoner rates of 2007 instead of 2008. However, the correct
sections to penalise that offence would be sections 59 and 62 of the Stamp Act
and not the IPC. Section 59 provides a fine and an imprisonment for any person
who with the intention to evade duty executes any instrument. Further, section
62 levies a fine for not setting forth all facts and circumstances in the
instrument which affect the chargeability of stamp duty. It was pleaded by the
accused that even those offences might not be attracted in the instant case in
light of section 59A of the Stamp Act which provided that no person could be
prosecuted u/s. 59 for an instrument which was admitted in Court. In Ravindra’s
case, the instrument was admitted before the Civil Judge. However, the Bombay
High Court did not go into merits of the case and instead only focused on the
fact that there was no offence under the IPC.

Hence, the High Court dropped all
criminal complaints in the instant case.

SLP to Supreme Court

Aggrieved by the above order, the
State preferred an SLP before the Supreme Court. The Supreme Court dismissed
the SLP by stating that it did not find any legal and valid ground for
interference with the Bombay High Court’s Order.

Conclusion

The Stamp Duty Reckoner is fast
becoming a single point linkage for several revenue statutes. The 1% VAT
composition Scheme, the Fungible FSI Premium, the deemed sales consideration
u/s. 50C and section 43CA of the Income-tax Act, the buyer’s Income from Other
Sources u/s. 56(2)  of the Income-tax
Act, etc., are all connected with the stamp duty ready reckoner
valuation. At a time like this, treating every irregularity in computing stamp
duty as a criminal offence would have drastic consequences.

India is not a Banana Republic where people can
be arrested on a mere difference in the stamp duty reckoner rate and the actual
value on which duty is paid. There could be several explanations for the
difference and even if there are none, arrest should be the last frontier which
should be resorted to. There are enough anti-abuse provisions, penalties which
the authorities can avail of under the Stamp Act. One hopes that after this
rationale decision, tax and other authorities would adopt a more genteel
approach towards taxpayers!

Impact on Mat from First Time Adoption (FTA) Of Ind As

As the book profit based on Ind AS
compliant financial statement is likely to be different from the book profit
based on existing Indian GAAP, the Central Board of Direct Taxes (CBDT)
constituted a committee in June, 2015 for suggesting the framework for
computation of minimum alternate tax (MAT) liability u/s. 115JB for Ind AS
compliant companies in the year of adoption and thereafter. The Committee
submitted first interim report on 18th March, 2016 which was placed
in public domain by the CBDT for wider public consultations. The Committee
submitted the second interim report on 5th August, 2016 which was
also placed in public domain. The comments/ suggestions received in respect of
the first and second interim report were examined by the Committee. After
taking into account all the suggestions/comments received, the Committee
submitted its final report on 22nd December, 2016. Based on the
final recommendation of the committee, the Finance Bill, 2017 prescribes
framework for levy of MAT on Ind-AS companies.

Reference Year for FTA  adjustments

Among other matters, the reference
year for FTA adjustments is clarified in the proposed final provisions. In the
first year of adoption of Ind AS, the companies would prepare Ind AS financial
statement for reporting year with a comparative financial statement for
immediately preceding year. As per Ind AS 101, a company would make all Ind AS
adjustments on the opening date of the comparative financial year. The entity
is also required to present an equity reconciliation between previous Indian
GAAP and Ind AS amounts, both on the opening date of preceding year as well as
on the closing date of the preceding year. It is proposed that for the purposes
of computation of book profits of the year of adoption and the proposed
adjustments, the amounts adjusted as of the opening date of the first year of
adoption shall be considered. For example, companies which adopt Ind AS with
effect from 1st April 2016 are required to prepare their financial
statements for the year 2016-17 as per requirements of Ind AS. Such companies
are also required to prepare an opening balance sheet as of 1st April
2015 and restate the financial statements for the comparative period 2015-16.
In such a case, the first time adoption adjustments as of 31st March
2016 shall be considered for computation of MAT liability for previous year
2016-17 (Assessment year 2017-18) and thereafter. Further, in this case, the
period of five years proposed above shall be previous years 2016-17, 2017-18,
2018-19, 2019-20 and 2020-21.

The above provisions are slightly
confusing because, the FTA adjustments are made at 1st April 2015,
whereas the final provisions allude to FTA adjustments at 31 March 2016 to be
considered for computation of MAT. Does that mean that the FTA adjustments made
at 1st April, 2015 are trued up for any changes upto the end of the
comparative year, i.e, 31st March 2016?

This article provides
clarification on how this provision needs to be interpreted.

Impact of Ind AS FTA Adjustments on MAT

The accounting policies that an
entity uses in its opening Ind AS balance sheet at the time of FTA may differ
from those that it previously used in its Indian GAAP financial statements. An
entity is required to record these adjustments directly in retained
earnings/reserves at the date of transition to Ind AS. The Committee noted that
several of these items would subsequently never be reclassified to the
statement of P&L or included in the computation of book profits.

The final provisions on MAT for
FTA adjustments in Ind AS retained earnings on the opening balance sheet date
that are subsequently never reclassified to the statement of P&L are
summarised below. It may be noted that those adjustments recorded in other
comprehensive income and which would subsequently be reclassified to the profit
and loss, shall be included in book profits in the year in which these are
reclassified to the profit and loss.

Items

The point of time it will be
included in book profits

Changes in revaluation surplus of Property, Plant or Equipment
(PPE) and Intangible assets (Ind AS 16 and Ind AS 38). An entity may use fair
value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE
or an intangible asset as mentioned in paragraphs D5 and D7 of Ind AS 101.

This item is completely kept MAT neutral based on the existing
principles for computation of book profits u/s. 115JB of the Act.  It provides that in case of revaluation of
assets, any impact on account of such revaluation shall be ignored for the
purposes of computation of book profits.

 

Therefore changes in revaluation surplus will be included in
book profits at the time of realisation/ disposal/ retirement or otherwise
transfer of the asset. Consequently, depreciation shall be computed ignoring
the amount of aforesaid retained earnings adjustment.  Similarly, gain/loss on realisation/
disposal/ retirement of such assets shall be computed ignoring the aforesaid
retained earnings adjustment.

Investments in subsidiaries, 
joint ventures and associates at fair value as deemed cost

An entity may use fair value in its opening Ind AS Balance Sheet
as deemed cost for investment in a subsidiary, joint venture or associate in
its separate financial statements as mentioned in paragraph D15 of Ind AS
101. In such cases retained earnings adjustment shall be included in the book
profit at the time of realisation of such investment.

 

Therefore this item is also completely kept MAT neutral from the
perspective of existing treatment.

Cumulative translation differences

An entity may elect a choice whereby the cumulative translation
differences for all foreign operations are deemed to be zero at the date of
transition to Ind AS. Further, the gain or loss on a subsequent disposal of
any foreign operation shall exclude translation differences that arose before
the date of transition to Ind AS and shall include only the translation
differences after the date of transition.

 

In such cases, to ensure that such Cumulative translation
differences on the date of transition which have been transferred to retained
earnings, are taken into account, these shall be included in the book profits
at the time of disposal of foreign operations as mentioned in paragraph 48 of
Ind AS 21.

 

Therefore this item is also completely kept MAT neutral from the
perspective of existing treatment.

Any other item such as remeasurements of defined benefit plans,
decommissioning liability, asset retirement obligations, foreign exchange
capitalisation/ decapitalization, borrowing costs adjustments, etc

To be included in book
profits equally over a period of five years starting from the year of first
time adoption of Ind AS.

 

Section 115JB of the Act
already provides for adjustments on account of deferred tax and its
provision. Any deferred tax adjustments recorded in Reserves and Surplus on
account of transition to Ind AS shall also be ignored.

Examples clarifying how the MAT
adjustments will be made

The Company is in Phase 1. It’s
transition date is April 1, 2015. The year of Ind AS adoption is financial year
2016-17 and the comparative period is financial year 2015-16. On the transition
date the company makes the following adjustments in the opening retained
earnings.

1.  The Company applies the fair
value as deemed cost exemption and revalues the fixed assets from Rs 100
million to Rs. 150 million. On a go forward basis the Company will apply the
cost measurements basis for accounting purposes and the opening cost of fixed
assets will be Rs.150 million under Ind AS.

2.  The Company has investment in two
subsidiaries, whose cost at  April 1,
2015 is Rs. 60 million (Subsidiary 1) and 70 million (Subsidiary 2). On the
transition date the Company records the investments at fair value, Rs. 80
million and Rs. 85 million, respectively, which is the new deemed cost. On a go
forward basis, the investments will be recorded at the deemed cost. During the
financial year, 2015-16, the Company sells Subsidiary 1 at Rs. 82 million.

3.  The Company has investments in
equity mutual funds. Under Ind AS, investments in equity mutual funds are
marked to market and the gains/losses are recognized in P&L. Under Indian
GAAP, the book value of investments in the mutual funds is Rs. 215 million. The
fair value at transition date (1st April, 2015) is Rs. 220 million
and at the end of comparative period (31st March 2016) is Rs 225
million.

4.  The fair value of the above
equity mutual fund at end of 31st March 17 increased by Rs. 7
million and at end of 31st March 18 decreased by Rs. 3 million.

Solution

1.  The fair value uplift of fixed
assets of Rs. 50 million will be completely MAT neutral. For MAT purposes, the
same will be ignored for computing future book depreciation, as well as
gains/losses on sale or final disposal of the fixed assets.

2.  With respect to Subsidiary 2, there
is a fair value uplift of Rs. 15 million. The adjustment to retained earnings
is completely MAT neutral vis-à-vis existing provisions. For the purpose
of MAT, retained earnings adjustment of Rs. 15 million shall be included in the
book profit at the time of realisation of such investment.

3.  With respect to Subsidiary 1,
there is a fair value uplift of Rs. 20 million. However, it is sold in the
comparative period. For the purpose of MAT, retained earnings adjustment of Rs.
20 million as well as fair value uplift of Rs. 2 million in the comparative
period are completely ignored, since the same has already been realised in the
comparative period, on which MAT was applied under Indian GAAP.

4.  The fair value uplift on the
mutual fund of Rs. 5 million is to be included in the book profits for purposes
of determining MAT over the next five years. However, firstly this needs to be
trued up at 31st March ’16. The trued up uplift is Rs. 10 million. For the next five years, Rs. 10 million
would be equally spread, for determining book profits for MAT, in accordance
with the Table below.

           

Previous year

Assessment year

Amount to be added to book profits

 

 

Rs (million)

2016-17

2017-18

2

2017-18

2018-19

2

2018-19

2019-20

2

2019-20

2020-21

2

2020-21

2021-22

2

 5.  The upward fair
valuation in the mutual fund of Rs. 7 million for the year 16-17, will be
included in the Ind AS book profits and MAT profits as well. The downward fair
valuation of Rs. 3 million will be included as loss in the Ind AS book profits.
However, in accordance with the requirements of 115 JB, the same will be added
back to the Ind AS book profits, for purposes of calculating MAT book profits.
This results in a double whammy for companies.

Place of Supply of Goods under GST

Introduction

‘One Nation One Tax’ – The
new system for indirect tax – GST, is now set to commence in India. For quite a
long time it has generated public debate and its shape was eagerly awaited by
all stakeholders. Now the parliament has passed the laws required by the
Centre, and, the States are in the process of doing so. At present, the Central
Goods and Services Tax (CGST), Union Territory Goods & Services Tax Act
(UGST), State Goods and Services Tax (SGST) for many States and Integrated
Goods and Services Tax (IGST) Acts are available.

On going through the
provisions contained in these Acts, it appears that the laws are drafted by
incorporating provisions from different existing Acts, which are being subsumed
in GST like Excise, Service Tax and State VAT etc. Therefore, for the
trading class, some of the provisions are very new and they feel that the
system will be a bit complicated along with too much time-consuming compliance
requirements. However, it is said that any new law has such teething problems,
which may get resolved in the days to come as well as due to steps taken by the
Government to resolve such issues by necessary modifications and clarifications
from time to time. We expect the same, in relation to GST.

Situs of sale

So far as indirect tax on
goods is concerned the basic requirement is to identify the place where tax is
to be discharged.

For sale transactions of
goods, there are various ingredients connected with same like, place of buyer,
place of preparing invoice, place of payment, place of actual despatch, place
of transfer of ownership in goods etc.

In the old days, (prior to
incorporation of Central Sales Tax Act) the States used to levy tax on sale
transaction on the basis of ‘nexus theory’. In other words, taking nexus of any
one ingredient happening in their State, tax was sought to be levied in that
state. A simple example can be that a seller in Maharashtra sells goods to
buyer in Delhi. Maharashtra Government used to levy tax on said sale
transaction in Maharashtra as the seller and the goods were located in their
State. The Delhi Government would try to levy tax on said transaction on the
ground that actual sale i.e. transfer of ownership took place in their State.
Thus on one transaction, more than one State could lay their claim of tax.

This created chaos and
trading community was required to face multi-state tax on one sale
transaction.        

Central Sales Tax Act (CST
Act)

To avoid the above
confusion and unwarranted multi-state levy, the Central Sales Tax Act, 1956 was
enacted. One of the main objects of the Act was to determine place of sale i.e.
situs of sale. Section 4(2) of CST Act reads as under:

“S.4. When is a sale or
purchase of goods said to take place outside a State.—

(1) Subject to the
provisions contained in section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2) to take place inside a State,
such sale or purchase shall be deemed to have taken place outside all other
States.

(2) A sale or purchase of
goods shall be deemed to take place inside a State, if the goods are within the
State –

(a) in the case of specific or ascertained goods, at
the time of the contract of sale is made; and

(b) in the case of unascertained or future goods, at
the time of their appropriation to contract of sale by the seller or by the
buyer, whether assent of the other party is prior or subsequent to such
appropriation.

Explanation.- Where there is a single contract of sale or
purchase of goods situated at more places than one, the provisions of this
sub-section shall apply as if there were separate contracts in respect of the
goods at each places.”

Thus, the ‘place of ‘sale’
was linked with physical ascertainment of goods towards sale. By the above
provision, it was laid down as to which state the sale will be deemed to have
taken place and once it was held to be taking place in one particular state, it
was to be outside all other States. This brought finality to place of sale and
this gave much required relief to the trading community. The nature of
transaction whether interstate or intra state can be decided based on movement
of goods. However, it cannot be taxable in more than one State. Till today, the
system has worked satisfactorily.

GST/IGST Act/SGST Act

The above Acts are collectively
referred to as “GST laws/GST” in this article.

Under GST, the concept of
‘sale’ is replaced by ‘supply’ which is a broad term and includes supply of
goods as well as services.

There are several
incidences by which “supply” can take place and “sale” is one of them.

So far as supply of goods
is concerned, unlike the CST Act, there is no direct provision about situs of
supply of goods. However, the supply of goods may be intra-state or
inter-state. The tax will be attracted accordingly. If it is held to be
intra-state, it will be liable to CGST/SGST and if it is held to be
inter-state, it will be liable to IGST. Situs of supply is required to
be determined to find out the State from which the supply is made and then to
decide its nature i.e. whether intra state or interstate.

Under GST, the provisions
to determine the nature of interstate/intra state supplies are contained in
IGST Act.

Relevant Provisions of
IGST Act        

Section 7 defines the nature of interstate supply.

Section 8 defines the nature of intra state supply.

The nature of supply, as
to whether intra state or interstate, depends upon location of supplier and
place of supply. If both fall in same state, it will be intra state and if in
different states, it will be interstate.

The aspects related to the
above are discussed subsequently in this article.

Section 9 specifically deals with supplies in territorial
waters. It is provided that when the location of supplier or place of supply is
in territorial waters, the supply should be deemed to be in the Coastal State
or Union Territory where the nearest point of the appropriate baseline is
located. The further categorisation as to intra state or interstate should be
determined taking into consideration above position of place of location of
supplier and place of supply.         

As per above provisions,
the Taxable person is required to First determine place of supply of goods. If
such place of supply creates a situation that the location of supplier is in
one state and the place of supply is in different State, there will be
interstate supply. If both are in same state, there will be intra state supply.

There is no definition of
“location of supplier”. However, place of supply is to be determined as per
section 10 reproduced below.

“10. (1) The place of
supply of goods, other than supply of goods imported into, or exported from
India, shall be as under,––

(a) where the
supply involves movement of goods, whether by the supplier or the recipient or
by any other person, the place of supply of such goods shall be the location of
the goods at the time at which the movement of goods terminates for delivery to
the recipient;

(b) where the goods
are delivered by the supplier to a recipient or any other person on the
direction of a third person, whether acting as an agent or otherwise, before or
during movement of goods, either by way of transfer of documents of title to
the goods or otherwise, it shall be deemed that the said third person has
received the goods and the place of supply of such goods shall be the principal
place of business of such person;

(c) where the
supply does not involve movement of goods, whether by the supplier or the
recipient, the place of supply shall be the location of such goods at the time
of the delivery to the recipient;

(d) where the goods
are assembled or installed at site, the place of supply shall be the place of
such installation or assembly;

(e) where the goods
are supplied on board a conveyance, including a vessel, an aircraft, a train or
a motor vehicle, the place of supply shall be the location at which such goods
are taken on board.

(2) Where the place of
supply of goods cannot be determined, the place of supply shall be determined
in such manner as may be prescribed.”

Analysis of Section 10

One of the critical issues
to decide nature of supply transaction will be to decide place of supply.
Section 10 provides clue to find the place of supply. There will be in all five
situations envisaged by section 10(1). All are required to be interpreted
harmoniously.

(a)   Situation
contemplated by section 10(1)(a)- Goods involving movement

This section is applicable
where the supply involves movement of goods. Since it refers to ‘supply
involves movement’, it is understood that the situation is required to be seen
per supply transaction. The nature of goods, whether capable of movement or not
etc., is not relevant. The position can be seen with simple examples:-

A machinery as installed
in factory is for sale by auction. The term of ‘auction’ is that it will be
supplied on “as is where is basis”. Under this situation, it can be said that
movement is not involved in supply.

In the same example, if
condition appears that the recipient should move the goods to its factory, then
it can be said that movement is involved in supply transaction. Section
10(1)(a) appears to cover the second example.

The movement may be
available from written contract/purchase order or any such other relevant
documents.

If not in written form
then it can be inferred from intention of parties. In normal cases the supply
of goods will be deemed to involve movement as the recipient is expected to
take goods to its place.

However, for clarity of
nature of transaction, it will be advisable that parties mention about movement
of goods in the contract document.

Once the goods involve
movement, the next step will be to decide place of supply. As per the said
section, the place of supply will be the location of goods at the time at which
the movement of goods terminates for delivery to recipient.

It is a settled law that
the provisions should be interpreted in its plain language. Reference can be
made to the judgment of Hon. Supreme Court in case of M/s. Polestar
Electronic P. Ltd. (41 STC 409)(SC), where in the Hon. Supreme Court has
observed as under about interpretation of provision:-

“A statutory enactment
must ordinarily be construed according to the plain natural meaning of its
language and no words should be added, altered or modified unless it is plainly
necessary to do so in order to prevent a provision from being unintelligible,
absurd, unreasonable, unworkable or totally irreconcilable with the rest
of  the statute. This rule of literal
construction is firmly established and it has received judicial recognition in
numerous cases.”

Applying the above
principle, the place of supply will be where the movement terminates for
delivery to recipient.

The essential fact will be
to decide when the movement terminates. If any express term in documents, the
issue can be decided accordingly. If no express term in contract, the delivery
point can be decided on inference and intention of parties and relevant facts.
There can be different situations about termination of delivery. For example,
the supply is ex-work. When such is the position, the delivery can be said to
have terminated at place of work/godown, shop of the supplier. This will be
place of supply in above transaction. Obviously, location of supplier and place
of supply being same, it will be considered to be intra-state transaction
attracting CGST/SGST.

The other situation will
be that the delivery is home delivery to recipient. In such a case, the
supplier will carry goods to godown/shop of recipient and delivery will
terminate at such place. If the location of supplier and place of  supply are in different states, it will be interstate sale, attracting IGST.

There can be many other
situations arising on facts of the case. Suppose a supplier in Maharashtra has
agreed to deliver goods to recipient at its godown in Karnataka. In between,
there is a breakdown of transport vehicle, before crossing Maharashtra border.
The parties renegotiate and it is agreed that recipient will take delivery at
breakdown point (which is within Maharashtra) and will carry goods on its own
to Karnataka. Here, though initially the transaction appeared to be inter-state
(delivery point to be in Karnataka), due to change in terms, the delivery will
be deemed to terminate within Maharashtra and the transaction will be intra
state transaction.

It is felt that the
parties should make delivery termination point/place clear in the documents, to
avoid any confusion in future.

The above analysis shows
that the principle of seamless credit is not fulfilled. If a trader of
Karnataka acquires any goods within Maharashtra, where delivery terminates
within Maharashtra, the supplier will charge CGST/SGST. Even if the goods are
taken to Karnataka and consumed there, still no ITC will be eligible to trader
of Karnataka and the ITC will lapse. There will also be cascading effect,
though GST is meant for avoiding the same.

(b)   Section
10(1)(b)- “Bill to ship to” model

This section is not worded
very happily. It appears that the above section is meant to cover cases where
more than two parties are involved before termination of delivery (bill to ship
to model). In existing law such transactions are identified as sale by transfer
of documents and hence have special status as per provisions of section 6(2) of
the CST Act, 1956.

If section 10(1)(b) is
dissected for proper interpretation it shows following position:

“Where the goods are
delivered by the supplier to a recipient

or any other person

on the direction of third
person

whether acting as agent or
otherwise

before or during movement
of goods

either by way of transfer
of documents of title to goods or otherwise

it shall be deemed that
the said third person has received the goods

and the place of supply of
such goods shall be the principal place of business of such person.”    

The section contemplates
delivery to recipient or any other person as per direction of third person.

The reference to third
person is not comprehensible.

Normally, the owner or
would be owner of goods who has power to give direction. In my opinion, the
recipient is the correct person to give direction to supplier. What is locus
standi of third person to give direction is not clear from section and hence,
there is ambiguity in the provision.  

The term ‘recipient’ is
defined in section 2(93) of CGST Act as under:

“(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.”

Thus the person who is
going to pay consideration is the recipient. Only buyer of goods can be liable
to pay consideration and therefore, buyer can be recipient. While placing order
on supplier or afterwards, such buyer can give direction to deliver goods to
third person and the place of supply could be decided accordingly. Instead of
above logical situation, the section refers to “third person” for even delivery
to recipient and provides to consider principal place of business of third
person as place of supply.

It is felt that in the
present form, the above section does not serve any purpose.

Following pictorial
example can be seen to ascertain the position as per literal meaning of section
10(1)(b).

In this case, C will be
third person. As per plain reading of section, C should give direction to
Supplier. It appears to be unrealistic but for the sake of discussion, it is
assumed that C gives direction. In this case, the place of supply will be
principal place of C and it being in Tamil Nadu, for A the sale to B will be
interstate supply.

However, there is no clue
to decide place of supply when B bills to C. There is no third person to give
direction to B and therefore section 10(1)(b) cannot apply for transaction
between B and C. Similar will be the position in all further supply
transactions in chain like from C to D etc.  

Thus, section 10(1)(b)
gives illogical and unexpected results in present form.

There is another view that
one should interpret the section in a workable manner. Under such view it is
suggested that the third person should be considered to be recipient and the
position should be analysed accordingly.

For example, in above diagram,
‘B’ will give direction to ‘A’ to delivery to ‘C’. The place of supply will be
the principal place of business of ‘C’ i.e. Tamil Nadu and the transaction
between ‘A’ and ‘B’ will be liable under IGST. The further transaction between
‘B’ to ‘C’ will also be IGST as in this supply transaction, ‘B’ is supplier and
‘C’ recipient have principal places of business in different States. Thus every
transaction will be required to be seen separately. This appears to be workable
interpretation of section 10(1)(b). However, though the above view is practical
and certainly gives desired meaning one cannot ignore the plain language and
even adjudicating authority may not agree to above workable interpretation. It
is reported that the authorities are going to issue certain guidelines about
place of supply. We hope the above confusion in section is clarified to remove
the ambiguity, which will guide traders for deciding correct nature of
transaction.

In both the above sections
10(1)(a)/(b), one more aspect is about location of supplier. Suppose the place
of business of supplier is in Delhi but goods are located in Maharashtra and
supplied to recipient of Maharashtra, the issue will arise as to in which state
the liability will arise for supplier?

Above difficulties are
being faced as neither situs of sale is provided nor “location of
supplier” is defined. 

It is expected that all
such issues will be clarified at the earliest for ease of business. 

With the above pending
issues of interpretation, the section 10(1)(b) lays down that place of supply
is principal place of business of third person. There is no connection with
actual place of delivery of goods or termination of delivery.

Unlike under CST Act,
under this section there is no continuation of nature of transaction during one
movement by transfer of documents of title to goods. Under the CST Act, all
transactions effected during one interstate movement of goods will remain
inter-state sales till movement terminates, irrespective of addresses of
parties etc. Under GST, every transaction will be different and one
transaction may be inter-state, the next one can be intra state, depending upon
location of supplier and place of supply. The issue of seamless credit may also
get affected due to nature of transaction being different at each stage.

(c)   Section
10(1)(c) – Not involving movement

Section 10(1)(c) – appears to be supplementary to section
10(1)(a)/(b). This section seems to take care where no movement is involved in
the given supply transaction. The example is already given above.

In such a case, the
transaction will always be intra-state attracting CGST/SGST.

(d)  Section 10(1)(d) – Installation/assembly

Section 10(1)(d) deals with situation where installation or
assembly at site is required. The place of installation or assembly will be
place of supply. An example can be of installation of air conditioner. A
Maharashtra supplier supplies air conditioner to Gujarat recipient and installs
it as part of supply transaction. In such a case, the place of supply will be
State of Gujarat. Since the location of supplier and place of supply is in two
different States, transaction will be liable under IGST. However, there is
possibility that, Gujarat authority, considering the goods are brought in
Gujarat as branch transfer and installed in Gujarat may consider it a
intra-state state transaction in Gujarat based on above provision of section
10(1)(d).

This difficulty arises as
no connection is provided between movement of goods from Maharashtra and place
of supply, as under CST Act. Section 3(a) of CST Act provides to consider
transaction as inter-state sale if the movement  of goods from moving state is linked with ultimate sale in other State.

However, under GST, there
is no such inter linking provision. Therefore, even if goods are moved from
Maharashtra for assembly in other State, there is possibility that it may be
considered as intra state sale in assembly state.

The meaning of “assembly”
and “installation” may also be a bone of contention. Mere putting the goods in
place like putting fan in hook in ceiling, will amount to installation? There
may be such debatable issues.

To avoid litigation and
further adverse contingency it is better the transactions are clearly
identified as far as possible in relevant documents.

(e)   Section
10(1)(e) – On board a conveyance

Section 10(1)(e) – deals
with situation where goods are supplied on board a conveyance. “Conveyance” is
defined in section 2(34) of CGST Act as under:

(34) “conveyance”
includes a vessel, an aircraft and a vehicle;

This clause is a good
attempt to resolve the issue being faced presently. In normal course, taxation
of supplier on trains / aircrafts to passengers is a very debatable issue. It
requires per state wise detail about sales taking place in respective states.
To resolve such issue, it is provided that the place of supply will be deemed
to be place where such goods are taken on board. For example, the articles are
taken on board the train at Mumbai, which is actually sold to passengers on
running train travelling through several states.

The place of supply for
all such supplies will be one i.e. Mumbai and tax will be required to be
discharged accordingly. Whether such supply will be interstate or intra state
will further depend upon location of supplier and the place of supply, decided
as above.

Certain issues can still
arise under the above clause. For example, the goods are taken on board at
Mumbai on board an aircraft, which is travelling to Delhi. Certain goods are
sold out on board the aircraft which will mean the place of supply for such goods
will be Mumbai. After Delhi, suppose the aircraft moves to Lucknow as different
flight say from Delhi to Lucknow and remaining goods are sold on board the said
flight. Whether the place of supply will still remain Mumbai ?

The issue arises as one
journey is over and fresh journey starts with original stock. Looking to the
intention of the provision even such goods supplied on board the Lucknow
flight, the place of supply should be Mumbai. However, if a view is taken that
the goods were taken on board for particular flight and the goods taken on
board are for such particular flight, then the place of supply Mumbai will end
on termination of said flight. The next fresh journey will be separate. The
issue will again arise about place of supply. Some clarification on the above
issue will be appreciated.

Residuary – Section 10(2)   

The Act provided by
section 10(2) that where the place of supply cannot be determined with
reference to earlier provisions, then the place of supply should be determined
as may prescribed. The prescription may come by Rules or notification. It can
be presumed that the prescription will solve the issues for remaining
situations as well as debatable issues with reference to situations in section
10(1), discussed above.

Place of supply of goods
imported into or exported from India

Section 11 of IGST Act
reads as under:

“11. The place of supply of goods,––

(a) imported into
India shall be the location of the importer;

(b) exported from
India shall be the location outside India.”

This section is specific
for import/export supplies.

Place of supply is
normally meant to apply to supplies of goods so as to determine nature of
supply. When goods are imported, there is supply by foreign supplier and place
of supply will be relevant to said supplier, if nature of supply is to be
determined in its hands. However, normally such situation will not arise as no
tax is contemplated on foreign exporter, who is supplier.

It appears that the above
clause about place of supply for imported goods will also equally apply to
importer and the place of supply for importer of goods will be the location of
importer. Importer is required to discharge the IGST on imported goods. For
example, importer is in Delhi and the goods are physically unloaded and cleared
at Mumbai Port. The place of supply in such case will be location of importer
and it will be Delhi. The importer in Delhi will be required to pay IGST in
Delhi under GSTN of Delhi.

Section 11 also provides
place of supply for export. In case of export the place of supply will be
located outside India. It means in such a case, the place of supply will be
place in foreign country where the goods are exported.

Since Export is zero rated
supply, it appears that above provision has no practical effect.   

Conclusion

“Place of supply of goods”
is a very important aspect of GST. Payment under correct Act i.e. CGST/SGST or
IGST will depend upon the correct determination of place of supply. It will be
better if ambiguities discussed above are clarified by the authorities at the
earliest time. I hope the above discussion will be useful for initiating
further thought process on the topic.

Destination Based Taxation – The Concept of ‘Place of Supply’, Its Philosophy and Significance

INTRODUCTION

The indirect tax system in India, both at the Centre and the
States’ level, remains unduly complex, unfair, distortionary and structurally
flawed, with a narrow base and susceptible to tax avoidance and evasion. This
is despite the sincere and painstaking efforts made in the past two decades to
bring structural changes in the design of the present tax system.

Needless to say, the basic objective of any tax reform in the
‘Indirect Tax Regime’ would be to address the problems of the current system.
It should not only establish a system that is economically efficient and
neutral in application and simple to administer, but at the same time, be
capable of broadening the tax base while maintaining the autonomy of the
taxation powers of the Centre and the States guaranteed under the Constitution.
The switchover to ‘Goods and Services Tax’ (“GST”) is justified as it is
viewed that GST is capable of addressing the problems associated with the
current tax system and of achieving the above objectives.

After a long and painful wait, GST is finally knocking at the
door of every business entity in the country..! This eagerly-awaited, grand,
‘game-changer’ and gargantuan ‘Tax-reform’ is set to be implemented in the
country from July 1, 2017. If one goes by the oft-repeated, confident and clear
utterances – that brooks ‘no nonsense’ – of the top echelon of the North Block,
GST will certainly meet its destiny on this date..!

‘Place of Supply’ Provisions – Current Tax Regime vis-à-vis
GST Regime

The current Indirect Tax Regime in India is ‘origin-based’
and therefore, a formal concept of ‘Place of supply of goods’ is, as such, not
prevalent. The major principle for determining the ‘situs of sale of
goods’ as prescribed under the Central Sales Tax Act, 1956 (‘CST Act’) is the
‘location of the origin of the goods’. Thus, Central Sales Tax (CST) being
levied under the CST Act is an ‘origin-based tax’ that is against the
‘destination principle’.

Under the Service Tax regime, no doubt, ‘Place of Provision
of Services Rules’ are prescribed which are based on the ‘destination
principle’. However, a close look at these Rules would reveal that their
relevance is primarily in the context of the cross-border i.e. international
transactions in services. Since ‘Service Tax’ is a Central levy, the
determination of ‘place of supply of service’ in case of the domestic
transactions is never an issue.

However, as GST is ‘destination based consumption tax’,
it is essential that an elaborate set of principles governing ‘Place of
Supply’ (POS) for goods or services is provided. The federal character of
Indian Republic also poses another challenge when one contemplate the POS
provisions. (Please refer the discussion in the ensuing paragraphs). The
provisions for determining ‘Place of Supply’, therefore, are critical to the
whole design of GST.

The POS provisions – which are distinct for goods and
services – are contained in the Integrated Goods and Services Act, 2017
(‘IGST Act’). The POS provisions are largely based upon the ‘International
VAT/GST Guidelines’ (‘Guidelines’) issued by OECD in November, 2015. These
important Guidelines merit a brief discussion here.(For the ease of reading,
the terms ‘VAT’ & ‘GST’ are used as synonymous terms throughout the
article.)

OECD’s VAT/GST Guidelines & its significance

The Guidelines are the culmination of nearly two decades of
efforts to provide internationally accepted standard for consumption taxation
of cross-border trade, particularly in services and intangibles. The Guidelines
aim at reducing the uncertainty and risks of double taxation and unintended
non-taxation that result from inconsistencies in the application of VAT in
cross-border context.

a.   Overarching purpose of a VAT: a broad-based
tax on final consumption

The overarching purpose of a VAT is to impose a broad-based
tax on consumption, which is understood to mean final consumption by
households. A necessary consequence of this fundamental proposition is that the
burden of the VAT should not rest on businesses.

The Central design feature of a VAT: staged collection
process

The central design feature of a VAT, and the feature from
which it derives its name, is that tax is collected through a staged process.
This central design feature of the VAT, coupled with the fundamental principle
that the burden of the tax should not rest on businesses, requires a mechanism
for relieving businesses of the burden of the VAT they pay when they acquire
goods, services or intangibles. There are two principal approaches to implementing
the staged collection process of VAT, one is invoice-credit method
(which is a ‘transaction-based method’) and other is subtraction
method (which is ‘entity based method’). Almost all VAT
jurisdictions (including India) of the world have adopted the invoice-credit
method.

This basic design of the VAT with tax imposed at every stage
of the economic process, but with a credit for taxes on purchases by all but
the final consumer, gives the VAT “its essential character in domestic trade as
an economically neutral tax”. As the introductory chapter to the Guidelines
explains: 

“The full right to deduct
input tax through the supply chain, except by the final consumer, ensures the
neutrality of the tax, whatever the nature of the product, the structure of the
distribution chain, and the means used for its delivery (e.g. retail stores,
physical delivery, internet downloads). As a result of the staged payment
system, VAT thereby “flows through the businesses” to tax supplies made to
final consumers”.

POS Provisions : ‘A crucial cog in the GST Wheel’

The principal aim of VAT (or GST) and its central design
demand that VAT system must have mechanisms for identifying the jurisdiction of
consumption, by connecting the supplies to the jurisdiction where final
consumption of the goods or services or intangibles to take place. VAT systems,
thus, need ‘Place of Taxation’ (or ‘Place of Supply’) Rules to implement the
destination principle, not only for business-to-consumer (B2C) supplies, which
involve final consumption, but also for business-to-business (B2B) supplies,
even though such supplies do not involve final consumption. POS provisions,
thus, act as a crucial cog in the GST wheel and keeps it running
uninterruptedly and smoothly.

POS Provisions under GST Regime: Different Perspectives

The POS Provisions under GST regime can essentially be viewed
from the following perspectives, viz:

–  Constitution Perspective

– Destination Perspective

–  Taxability Perspective

–  Seamless Credit Perspective

These are briefly discussed below:

I.   Constitution Perspective

As stated above, India is a federal republic where the Centre
and the States enjoy distinct taxation powers. This division of taxation powers
between the Centre and the States is guaranteed under the Constitution of India
vide Article 246 read with Schedule VII thereof. This Constitutional Scheme of
taxation powers for the Centre and the States has ensured that the Centre
cannot levy tax on the distributive trade and the States cannot levy tax on
services.

However, the core feature of GST requires that both, the
Centre and the States have concurrent jurisdiction to levy tax on all supplies
of goods or services or both and on the same tax base. This objective is
achieved through ‘The Constitution (One Hundred and First Amendment) Act, 2016’
vide which certain significant amendments have been carried out in the
Constitution, paving a way for ultimate introduction of GST in the country.

The inevitability of maintaining the autonomy of taxation
powers of the Centre and the States as guaranteed under the Constitution has
also compelled India to adopt a ‘Dual GST structure’ rather than a ‘unified
GST structure’. Under Dual GST structure, both the Centre and the States
would concurrently levy Central GST (CGST) and State GST (SGST) respectively on
all supplies on a comprehensive basis.

In order to ensure a smooth implementation of GST regime,
keeping in mind the ‘destination principle’ and with a view to avoid any
possibility of conflicting interpretations, the powers to enact the laws
governing ‘Inter-state supplies’ are vested with the Centre only. Thus, the
statutory framework governing Inter-State supplies, imports and exports is
provided by the IGST Act that also contains the principles of determining
‘Place of Supply’ of goods or services or both.

II. Destination Perspective

The fundamental issue of economic policy in relation to the
application of the VAT/GST is whether the levy should be imposed by the
jurisdiction of origin or destination. Under the destination principle, tax is
ultimately levied only on the final consumption that occurs within the taxing
jurisdiction. Under the origin principle, the tax is levied in the various
jurisdictions where the value was added. The key economic difference between
the two principles is that the destination principle places all the firms
competing in a given jurisdiction on an even footing whereas the origin
principle places consumers in different jurisdictions on an even footing.

The application of the ‘destination principle’ in VAT
achieves neutrality in cross-border trade. Thus, in international trade,
applying this principle, exports are not subject to tax with refund of input
taxes (that is, “free of VAT” or “zero-rated”) and imports are taxed on the
same basis and at the same rates as domestic supplies. By contrast, under the
‘origin principle’, each jurisdiction would levy VAT on the value created
within its own borders.

For these reasons, there is a widespread consensus that the
destination principle, with revenue accruing to the country of import where final
consumption occurs, is preferable to the origin principle from both a
theoretical and practical standpoint. In fact, the destination principle is the
international norm and is sanctioned by World Trade Organization (‘WTO’) rules.

Because of the widespread acceptance of the destination
principle for applying VAT to cross-border trade, most of the POS provisions
are generally intended to tax supplies of goods, services and intangibles
within the jurisdiction where consumption takes place.

In theory, POS Provisions or Place of Taxation Rules should
aim to identify the actual place of business used for B2B supplies (on the
assumption that this best facilitates implementation of the destination
principle) and the actual place of final consumption for B2C supplies. However,
the Guidelines recognise that Place of Taxation Rules (or POS Provisions) are
in practice rarely aimed at identifying where business use or final consumption
actually take place. This is a consequence of the fact that VAT must in principle
be charged at or before the time when the object of the supply is made
available for business use or final consumption. In most cases, at that time,
the supplier will not know or be able to ascertain where such business use or
final consumption will actually occur. VAT systems therefore generally use
proxies for the place of business use or final consumption to determine the
jurisdiction of taxation, based on features of supply that are known or
knowable at the time that the tax treatment of the supply must be determined.
For this purpose, B2B supplies are assumed to be supplies where both the
supplier and the customer are recognised as businesses, and B2C supplies are
assumed to be supplies where the customer is not recognised as a business.

III. Taxability Perspective

POS Provisions, when viewed from ‘taxability perspective’,
involve the following considerations, viz:

–   nature of supply, that is, whether the
‘supply’ is ‘Inter-state’ or Intra-State’?

–   subject of supply, that is, whether supply is
of ‘goods’ or ‘services’ or ‘both’?

–   category of supply that is, whether the
supply is ‘business-to-business’ or ‘business-to-consumers’?

I.   ‘Inter-State Supply’ and ‘Intra-State Supply

Section 7 and Section 8 of the IGST Act define, in an
elaborate manner, the terms ‘Inter-State supply’ and ‘Intra-state supply’
respectively.

To summarise, an ‘Inter-state Supply’ of goods or services,
within the terms of Section 7, is:

i.   Where the location of the supplier and the
place of supply are in two different States or two different Union Territories
or a State and a Union Territory;

ii.  Supply of goods into the territory of India,
till they cross the customs frontiers of India;

iii.  Supply of services imported into the territory
of India;

iv. Supply of goods/services to or by an SEZ
Developer or an SEZ Unit;

v.  Supply when supplier of goods or services or
both is located in India and the place of supply is outside India;

vi. Any other supply in the taxable territory, not
being an Intra-state supply and not covered elsewhere u/s. 7.

On the other hand, an ‘Intra-state supply’ of goods or
services in terms of section 8 is where the location of the supplier and the
place of supply of goods/services are in the same State or same Union
Territory. However, ‘Intra-state supply’ shall not include:

i.   supply of goods/services to or by a SEZ
Developer or SEZ Unit;

ii.  supply of goods imported into the territory of
India till they cross the customs frontiers of India; and

iii.  supplies made to a tourist referred to in
Section 15.

In order to determine whether the supply of goods or services
qualify as ‘Inter-state’ or ‘Intra-State’, one has to first determine the
location of the supplier and the place of supply in terms of POS provisions.

Viewed from another angle, it is also important to determine
whether a ‘supply’ is an ‘Inter-state’ or ‘Intra-state’ so as to ensure
discharge of appropriate tax liability and that is, IGST or CGST/SGST. The
adverse consequences in terms of section 19 of the IGST Act or section 77 of
the CGST Act may follow in the event of the wrong determination of the
character of supply and the consequential inappropriate discharge of tax
liability.

POS provisions facilitate the proper determination of the
‘nature or character of supply’.

II.  Subject of ‘supply’: Whether ‘goods’ or
‘services’ or ‘both’?

Implementation of the destination principle i.e. adopting
practical place-of-taxation-rules (or POS rules) that identify the jurisdiction
in which final consumption occurs, raises a host of additional questions
because identification of the jurisdiction in which final consumption occurs
can be effectuated only through proxies that reflect one’s “best guess” where
final consumption is likely to occur since ‘in many (if not most) cases consumption
is not directly observable.’

Implementing the destination principle with respect to
cross-border trade in goods is relatively straight forward, based on the
assumption that the destination of the goods determined by physical flows is a
reasonable proxy for where consumption of the goods is likely to occur. Thus,
exported goods are commonly ‘zero rated’ and imported goods are taxed at the
border.

However, implementing the destination principle is more
complicated with respect to the taxation of cross-border trade in services and
intangibles than with respect to cross-border trade in goods. Until fairly
recently, cross-border trade in services attracted relatively little attention
because most services were consumed where they were performed. Consequently,
there was not much cross-border trade with respect to which a ‘destination’
needed to be identified.

This state of affairs changed dramatically with the enormous
growth in cross-border trade in services, driven by forces of globalisation and
facilitated by technological innovation. With the increasing “disconnect”
between performance and consumption or use of services in a territorial sense,
the traditional rule for determining the place of taxation of services by
reference to the service provider’s establishment becomes problematic. The
problem was exacerbated by the growth of multinational corporations, which
render services in myriad locations through complicated legal structures.  The problem is not merely confined to
designing an appropriate regime for taxing cross border trade in services and
simply adopting a destination-based rule for the place of taxation of services
akin to the rule for the place of taxation of goods.

The more fundamental problem is that the enormous growth in
services involving suppliers in one jurisdiction and customer in another often
involves services that are intangible in nature, making it more difficult both
to determine the appropriate jurisdiction of ‘destination’ and to enforce the
tax on the basis of that determination, because such services are not amenable
to border controls in the same manner as goods. Such services circularly
defined as services “where the place of consumption may be uncertain” or,
perhaps, a bit more precisely, as ‘services and intangible property that are
capable of delivery from a remote location’ include services such as
consultancy, accountancy, legal and other intellectual services, banking and
financial transactions, advertising, transfer of copyright, provision of
information, data processing, broadcasting, telecommunication services, online
supplies of software and software maintenance, online supplies of digital
content, digital data storage and online gaming.

The above challenges, in
fact, raised by cross-border trade in services and intangibles are the raison
d’etre of the OECD’s VAT/GST Guidelines which also is the bedrock on which
the POS Provisions of the IGST Act rest.

III. Category of Supply: Whether B2B or B2C?

The approaches used by VAT systems to implement the
destination principle for B2B supplies and the tax collection methods used for
such supplies are often different from those used for B2C supplies. This
distinction is attributable to the different objectives of taxing B2B and B2C
supplies: taxation of B2C supplies involves the imposition of a final tax
burden, while taxation of B2B supplies is merely a means of achieving the
ultimate objective of the tax, which is to tax final consumption. Thus, the
objective of place of taxation rules (or POS Provisions) for B2B supplies is
primarily to facilitate the imposition of a tax burden on a final consumer in
the appropriate country (and/or the State) while maintaining neutrality within
the VAT system. The overriding objective of place of taxation rules (or POS
Provisions) for B2C supplies, on the other hand, is to predict, subject to
practical constraints, the place where the final consumer is likely to consume
the services or intangible supplied.

In addition, because of the different characteristics of
supplies to businesses and supplies to households, VAT systems often employ
different mechanism to collect the tax in connection with B2B and B2C supplies,
and these different mechanisms in turn often influence the design of place of
taxation rules (or POS Provisions) and of the compliance obligations for
suppliers and customers involved in cross-border supplies.

IV.        Seamless Credit Perspective:

One of the many meanings ascribed to GST reads as under:

“A destination-based Value Added Tax which is levied on
‘Value Added’ to goods and services at each stage in the economic chain of
supply. Therefore, all different stages of production and distribution act as
mere ‘Tax Pass-through’ and the tax essentially sticks on the final consumption
within the taxing jurisdiction. Credit is made available across goods and
services and even across the States. GST thus, operates as a pure VAT.”

It is thus, evident that
all types of supplies, whether Inter-state or Intra-state, of goods or services
or both are likely to be covered within the tax net with only minimal
exclusions. It is therefore imperative to ensure ‘seamless credit’ across the economic
chain of supply of goods or services which is the chief aim of GST or VAT. The
availability of seamless credit will also ensure that tax is not imposed nor
does it rest on the businesses but is ultimately imposed only on the final
consumption in the hands of the final consumer. Since, in principle, GST is a
creditable/refundable tax, it shall not be a cost for the business nor a
revenue proposition for the Centre or the States.

This ‘wash-through’ nature of GST or VAT has a significant
bearing, not only on the conceptual design of IGST and its operative mechanism,
but also the designing of the POS Provisions, particularly in the context of
Inter-state transactions.

Conclusion:

A careful reading and analysis of the POS Provisions
contained in the IGST Act would reveal that the provisions are broadly in
conformity with the OECD International VAT/GST Guidelines as well as prevalent
practices in many VAT /GST jurisdictions of the world. The Guidelines are based
on certain generally accepted principles of tax policy applicable to
consumption taxes and also recognised by the Ottawa Taxation Framework
Conditions (1998). These principles are as follows:

–   Neutrality: Taxation should seek to be
neutral and equitable between forms of electronic commerce and between
conventional and electronic forms of commerce. Business decisions should be
motivated by economic rather than tax considerations. Taxpayers in similar
situations carrying out similar transactions, should be subject to similar
levels of taxation.

–  Efficiency: Compliance costs for
businesses and administrative costs for the tax authorities should be minimised
as far as possible.

–  Certainty and Simplicity: The tax
rules should be clear and simple to understand so that taxpayers can anticipate
the tax consequences in advance of a transaction, including knowing when,
where, and how the tax is to be accounted.

–   Effectiveness and Fairness: Taxation
should produce the right amount of tax at the right time. The potential for tax
evasion and avoidance should be minimised while keeping counteracting measures
proportionate to risks involved.

–   Flexibility: The systems for taxation
should be flexible and dynamic to ensure that they keep pace with technological
and commercial developments.

POS Provisions will certainly be an unknown and unchartered
area for the distributive trade though a section of the manufacturers and
service providers may have some familiarity with the concept in view of the
‘Place of Provision of Services Rules’ currently in vogue under Service Tax
Regime. POS Provisions are like veins of the GST body, carrying both tax and
corresponding credit throughout the body. It is, therefore, not only essential
but also inevitable for all the stakeholders, whether taxpayers or tax
administrators or tax professionals, to gain sufficient understanding of these
provisions so as to be able to comply with the GST law correctly.

 

Acknowledgements:

1.  International
VAT/GST Guidelines by OECD (April 2014)

2.  Discussion Drafts for Public Consultation –
International VAT/GST Guidelines by OECD (Dec. 2014 – Feb. 2015)

3.  A Hitchhiker’s Guide to the OECD’s
International VAT/GST Guidelines by Walter Hellerstein, University of Georgia
School of Law (18 FLA Tax Rev 589 (2016))

4.  Interjurisdictional Issues by Keen &
Hellerstein

5. Jurisdiction to Tax in the New Economy by
Walter Hellerstein (38 GA.L. Rev. I. 28(2003))

“Supply” Under GST – Some Interpretational Issues

The objective of this article is to examine and analyse some
of the important interpretational issues noticed while unravelling the
definition of “Supply” in the Central Goods and Service Tax Act, 2017 (CGST
Act).

Under any taxation legislation, the levy of tax depends on
undertaking of an event. Levy of Excise Duty is on ‘manufacture or production
of goods’, while for levy of Service Tax, there has to be a ‘provision of
service’ and levy of Sales Tax/VAT triggers on ‘sale of goods’. According to
Article 366(12A) of the Constitution of India, ‘Goods and Service Tax’ means “a
tax on supply of goods or services, or both, except ………” The
definition of “supply” contained in the new GST legal framework, is central to
the ambit of its applicability. Therefore, for GST to be levied on a
transaction, it must satisfy the ingredients of definition of ‘supply’.

Section 7 of the CGST Act defines ‘Supply’ as under

“….the expression “supply” includes–

(a) all forms of supply of goods or services or
both such as sale, transfer, barter, exchange, licence, rental, lease or
disposal made or agreed to be made for a consideration by a person in the course
or furtherance of business;

(b) import of services for a consideration whether
or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or
agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods
or supply or services as referred to in Schedule II.”

Whether use of the word ‘includes’ has enlarged the scope
of “supply” to include all transactions even if these are not covered in
Clauses (a) to (d) or the word “includes” is to be construed as equivalent to
“means and includes”.

Where the definition of a term employs the word “includes”,
the natural connotation is of an extensive, rather than restrictive, definition
and construction. This interpretation has been held by judiciary in many cases.
But, this interpretation may be contentious in the context of GST, as it would
render filters of applicability ineffective, granting an arbitrary taxing
power. Further, this could result in transactions that were not intended to be a
“supply”, being held to constitute “supply” for the purposes of this law.

Hence, the implications of the word “includes” in the
definition of “supply” requires consideration. While the use of the word
“includes” in a definition usually denotes that the definition is prima
facie extensive, it is capable of another construction.

Lord Watson in the Privy
Council in the case of Dilworth vs. Commissioner of Stamps1
stated that this alternate construction may become imperative if the context of
the Act is sufficient to show that it was not merely employed for the purpose
of adding to the natural significance of the words or expressions used. It may be equivalent to ‘mean and include’ and in
that case, it may afford an exhaustive explanation of the meaning which for
the purposes of the Act must invariably be attached to those words or
expressions.

________________________________________________

1   (1899) AC 99, pp. 105,
106

The following Supreme Court judgments take cognisance of this
dicta and illustrate possible situations which allow for the word
“includes” to be construed as equivalent to “mean and include”, providing for a
restrictive and exhaustive definition of the term.

1) South Gujarat Roofing Tile Manufacturers
Association vs. State of Gujarat, AIR 1977 SC 90

Entry 22 added by the Gujarat Government to Part I of the
Schedule to the Minimum Wages Act, 1948 is followed by an explanation which
reads: ‘For the purpose of this entry potteries industry includes the
manufacture of the following articles of pottery namely – (a) Crockery, (b)
Sanitary appliances, (c) Refractories, (d) Jars, (e) Electrical Accessories…’

The Supreme Court held that constructing the explanation, the
items included in it were plainly comprised in the expression which showed that
the word ‘includes’ was not used to extend the normal meaning of the
expression. The word ‘includes’ was used in the explanation in the sense of
‘means’ and so the definition provided by the explanation was exhaustive.
Hence, Mangalore pattern roofing tiles manufactories lay outside the ambit of
Entry 22 as they were not included in the Explanation.

2) RBI vs. Peerless General Finance and Investment
Co. Ltd., (1987) 1 SCC 424

The Supreme Court held that interpretation must depend on the
text and the context. They are the bases of interpretation. One may well say if
the text is the texture, context is what gives the colour. Neither can be
ignored. Both are important. That interpretation is best which makes the
textual interpretation match the contextual. A statute is best interpreted
when we know why it was enacted. With this knowledge, the statute must be read,
first as a whole and then section by section, clause by clause, phrase by
phrase and word by word. If a statute is looked at, in the context of its
enactment, with the glasses of the statutemaker, provided by such context, its
scheme, the sections, clauses, phrases and words may take colour and appear different
than when the statute is looked at without the glasses provided by the context.

3) NDP Namboodripad vs. Union of India, (2007) 4
SCC 502

Rule 62 of Part III of the Kerala Services Rules uses the
word “includes” in the definition of “emolument”.

The Supreme Court held that the word “includes” in Rule 62
should be read as “comprises” or “consists of”. Accordingly, clearness
allowance and special allowance cannot be added to the pay for the purposes of
pension as they were not contained in the definition.

Based on above discussion, it is amply clear that use of word
‘includes’, cannot be read to enlarge the scope of ‘supply’ to any absurd
situation. Therefore, in my opinion, a supply without consideration (not
specifically covered by Schedule I will not be considered as a supply liable to
GST, despite use of the word ‘includes’ in the definition.

In the course or furtherance of business

The words ‘in the course or furtherance of business’ would be
important to determine whether particular activity can be taxed or not. The
word ‘business’ has been defined in an inclusive manner in section 2(17) giving
a wide meaning. Activities without profit motive or even infrequent or
irregular transactions are also considered as business. However, despite such a
wide connotation, in my opinion, a personal activity or activities for pleasure
or sport would still not fall under ‘business’. In the case of State of
Mysore vs. K. N. Chandrasekhar AIR 1965 SC 533 and State of Andhra
Pradesh vs. H. Abdul Bakhi AIR 1965 SC 531, it was held that the expression
‘business’ though extensively used as a word of indefinite import, in taxing
statute, it is used in the sense of an occupation, or profession which occupies
the time, attention and labour of a person and is normally with an object of
making profit and not for pleasure or sport. FAQ on GST issued by CBEC (2nd
Edition) has clarified that selling of personal car by an individual is not a
business activity. Therefore, an intention of a person carrying out a
particular transaction can be one of the determining factors in deciding
whether it is a business transaction or not.

Consideration in kind and Barter/Exchange Transactions –

–   Barter/ exchange transactions were not liable
to VAT, as these were considered as transaction without a valuable
consideration. However, GST law specifically includes these transactions in the
definition of supply. Provision of architect/construction services for which
consideration is paid by way of transfer of 
flat by a builder or exchange of old phones/cars for new ones, etc.
are illustration of non-monetary consideration and liable to GST as covered by
definition of “supply”.

–   In case of redevelopment projects where a
developer may agree to construct a new building for existing flat owners, the
service of construction provided by builder would be considered as provided in lieu
of additional FSI received by him. This activity would come in the category
of barter transaction and liable to GST. It is interesting to note that in
barter transactions, both person are making supply to each other and GST is
leviable on both persons, if the transactions satisfy other requirements of the
definition. In such transactions, valuation of each of the supplies will be
governed by the Valuation Rule. Rule 1, provides for considering the open
market value of the goods supplied by the supplier in such cases. Therefore,
despite the consideration for both the supplies being same in commercial sense,
the valuation for taxability under GST may differ.

Whether issuing bills payable to a creditor results in
Exchange liable to GST? The exchange is of one form of payment to another,
therefore, the transaction is in money and neither party receives goods or
services. Therefore, despite being an exchange in common parlance, it will not
be liable to GST.

Unilateral Disposal

In order to cover the disposal as a supply, it has to be made
to another person with a consideration, therefore, unilateral disposal of
waste, even though made in the course of business, e.g. flaring of gas,
disposing refuse, etc. without consideration is not a ‘supply’, consequently,
not liable to GST.

 Supplies without a consideration (Schedule I)
Clause (c)

As per main definition u/s. 7(1)(a), an activity without
consideration is not “supply”. However, Clause (c) provides that in certain
cases, even though there is no consideration, the same would be treated as
‘supply’. Such cases are listed in Schedule I. Hence, normal cases of free
service by a professional or free supply of goods, like free samples or gifts
to customers would not be liable to GST, unless these are covered by the
specified transactions listed in Schedule I.

Permanent transfer of business assets

Permanent transfer or disposal of business assets where input
tax credit has been availed has been deemed to be supply even if it is made
without consideration as per entry 1 of the Schedule I. The word ‘permanent
transfer’ implies that goods should be transferred without any intention or
requirement of having to receive the goods back by a person. Typically,
donation of business assets or disposal in any other manner would qualify as
‘supply’ under this clause, where input tax credit has been claimed on the
same.

Whether destruction by natural causes or intentional
destruction would also be covered within the meaning of disposal? Destruction
by natural causes, in my view, may not be covered under the scope of disposal,
as disposal is an intentional and deliberate act as against the destruction by
natural causes. On the other hand, intentional destruction, say scrapping of a
machine, may be covered in the scope of disposal.

A linked issue to disposal of business asset is that of
double taxation. When any capital goods or plant or machinery is supplied,
proportionate input tax or GST on transaction value, whichever is higher, is
required to be paid in terms of section 18 (6) of CGST Act. On the same
transaction, GST would also be required to be paid, as it is deemed to be
supply under this entry of Schedule I. Further, no input tax credit can be
availed in case where goods are lost, stolen, destroyed, written off or
disposed of by way of gift or free samples as per section 17(5)(h) of CGST Act.
Therefore, unless an exemption is provided for one of these transactions, it
would lead to double taxation.

Gifts to employee of more than Rs. 50,000 in a financial year

Employee and employer have been deemed to be related persons
as per section 15 of CGST Act. Entry 2 of Schedule I provides that supply of
goods between related persons without consideration is also deemed to be
supply. However, the proviso to the said entry provides for an exemption
to gift up to Rs. 50,000 in a year. The term ‘gift’ has not been defined in the
Act. Therefore, whether payments like bonus, free accommodation, free
food/beverages, free transportation, diwali gifts, Sodexo coupons, ex-gratia
payments would be considered as gift? In my view, all payments which are part
of the employment contract cannot be treated as a gift. Pre-decided bonus, free
accommodation are illustrations of this category. Further, there are some
perquisites which are given to employees as part of normal business practice
like free food and beverages during office hours or use of gym in office, as
these may also not be considered as Gift. On the other hand, payment in cash or
kind like Diwali gifts or gift vouchers on achievement by a child of employee
or any ex-gratia payment may come in the category of Gift.

Clause (d) – Schedule
II

Schedule II to the CGST Act lists down activities to be
treated as supply of goods or services and all these activities have been
deemed to be supply as per clause (d) of Section 7(1).

While other clauses of section 7(1) specifically provide for
the existence or otherwise of the conditions of consideration and furtherance
of business, this clause does not mention requirement of any such condition.
Therefore, does it mean that these activities will be considered as supply,
even if they are made without consideration or are not in the course or
furtherance of business? For example, transfer of car to a daughter without any
consideration may fall in entry 1 (a) of said Schedule II. Further, some of the
entries, like 4(a) and (b) provides for coverage under the scope of ‘supply‘
whether or not with a consideration. Entry 5 (f) also prescribe a condition of
consideration. Does it mean that for other entries in the Schedule, there is no
requirement of consideration?

Transfer of Development Right (TDR) – whether covered in GST?

Entry 2(a) of said Schedule provides that any lease, tenancy,
easement, license to occupy land is a supply of service. Further, entry 5 of
Schedule III treats the activity of sale of land as not a supply. Development
Right are one of many rights attached to earth.

As per definition of Immovable Property, u/s. 3(26) of the
General Clauses Act, 1897, any benefit arising out of land is also considered
as an immovable property. As per Entry 18, List III, of Seventh Schedule to the
Constitution, land also includes rights in or over land. It has also been held
by Bombay High Court in Chedda Housing Development Corporation (2007 (3)MHLJ
402 that TDR is an immovable property. In the case of goods, the activity of
any transfer of right in goods without transfer of title has been treated as a
supply of service. However, in case of land and building, only specific modes
like lease, tenancy, easement, and license to occupy land and only lease and
letting out building has been deemed to be a supply of service.

This shows the intention of the legislature to not include
all types of transfer of rights relating to land under the purview of GST. In
the present Service Tax law, a view could have been taken that transaction of
sale of TDR was in the nature of transfer of title in the immovable property,
hence, was excluded from the definition of Service u/s. 65 B (44). However, in
GST law, exclusion is only towards sale of land. Hence, taking a view that sale
of TDR is equivalent to sale of land is fraught with risk.

Construction of Complex

Like in present Service Tax Law, construction service has
been made liable to GST. Entry 5 in Schedule II provides for this activity. In
the said entry, in addition to the issue of completion certificate, one more
condition of first occupation has been added. First Occupation requirement
would be applicable only when requirement of issue of completion certificate is
not there, say in case of villages. Explanation (2) to the said entry provides
that the expression “construction” includes additions, alterations,
replacements or remodeling of any existing civil structure. It means that any
activity, say of alteration of existing flat, would also be covered under the
scope of construction activity.

However, it is unclear as to how the test of receipt of
consideration before issuance of completion certificate or after its first
occupation can be fulfilled in such situations. In fact, there can be cases
where alteration or additions can be made in one part of building, even with
residents staying inside the building. Further, in such cases, generally there
is no requirement to issue completion certificate. Therefore, it appears that
the Explanation has been added without realising the implication thereof.

Conclusion

 The soul
of any taxation law lies in the charging provisions and for any activity to be
considered leviable to GST, it must cross the bar of its coverage under
definition of ‘Supply’. Even though refinements have been made in the final
law, there still exist many areas where clarity eludes a reader. Unless the
Government comes out with reasonable clarifications, disputes are bound to
arise in GST era even for the basic and fundamental issue of definition of a
‘Supply’.

Constitutional Perspective of GST – Issues and Challenges

India is a Union of States, modelled along a federal system
of governance where legislative, administrative and executive powers are
distributed between two levels of government, Parliament and States. The Indian
Constitution bifurcates the power to enact laws between the Parliament and State
Legislatures on diverse subjects, as categorised by the three Lists to the
Seventh Schedule. In respect of matters enumerated in List I, Parliament is
delegated exclusive powers to enact laws, while in respect of matters
enumerated in List II, only State Legislatures have power to enact laws. The
prerogative to enact laws pertaining to matters enumerated in List III is
shared concurrently between Parliament and State Legislatures.

Need for the Constitutional Amendment

Prior to the enactment of the Constitutional (One Hundred and
First Amendment) Act, 2016, the States did not possess the authority to levy
tax on the provision of Services or Manufacture of goods, with the exception of
alcoholic liquor for human consumption, opium, Indian hemp, narcotics and other
narcotic drugs. List II does not assign a bare power to tax supply per se to
the States.

Although a separate entry could have been included in the
Concurrent List enabling the levy of taxes on the supply of goods and services,
Article 254(1) provides that any inconsistency between laws enacted by the
Parliament and the State Legislatures, is to be resolved in favour of the
Parliament, rendering the opposing State law void to that extent. In view of
Article 254(1), the addition of such an entry could not have assigned equal and
concurrent powers to both the Parliament and the State Legislatures.

Consequently, this impasse has been addressed by the
introduction of Article 246A in the Constitution, which reads as under:

“246A. (1) Notwithstanding anything contained in articles
246 and 254, Parliament, and, subject to clause (2), the Legislature of every
State, have power to make laws with respect to goods and services tax imposed
by the Union or by such State.

(2) Parliament has exclusive power to make laws with
respect to goods and services tax where the supply of goods, or of services, or
both takes place in the course of inter-State trade or commerce.

Explanation.—The provisions of this article, shall, in
respect of goods and services tax referred to in clause (5) of article 279A,
take effect from the date recommended by the Goods and Services Tax Council.’’

Article 246A empowers both the Parliament and the State
Legislatures to legislate with respect to GST. The Constitution provides for
the creation of the GST Council (GSTC), which shall inter alia make
recommendations to the Union and the States on:

a.  model Goods and Services Tax Laws, principles
of levy, apportionment of Integrated Goods and Services Tax and the principles
that govern the place of supply;

b.  the rates including floor rates with bands of
goods and services tax;

c.  any special rate or rates for a specified
period, to raise additional resources during any natural calamity or disaster;

d.  special provision with respect to the States
of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

The role of GSTC is limited to that of a recommendatory body.

Are the recommendations of GST Council binding?

To me, it appears that the recommendations of the GSTC are
mere suggestions or guidelines, which the Parliament or the State Legislature,
as the case may be, may or may not accept and implement.The concept of granting
recommendatory powers to constitutional bodies is not unfamiliar. However, the
existing jurisprudence,  discussed herein
below, does not conclusively postulate that the recommendations have to
necessarily be adopted. Therefore, the consequences following non-implementation
of the recommendations by the GSTC will have to be judicially determined.

A)  The United States Constitution provides in
Clause 2 of Section 3, known as the “Recommendation Clause”, that the President
shall recommend to the Congress (Parliament) such measures as he shall judge
necessary and expedient.  This clause has
been interpreted by the US Supreme Court in the case of Youngstown Sheet
& Tube Co. vs. Sawyer1 
to mean that the Recommendation Clause serves as a reminder that the
President cannot legislate unilaterally, and further, that the President merely
has the power to recommend. The prerogative to legislate is possessed
exclusively by the Congress.

B)  Similarly, in the Indian context, Article
233(2) of the Constitution provides for the recommendation of the High Court
for appointment of an advocate or a pleader as the district judge. In the case
of Chandra Mohan vs. State of Uttar Pradesh2, the Apex
Court observed that under Article 233(2), the Governor can only appoint a
person recommended by the High Court. On the other hand, in the case of Supreme
Court  Advocates vs. Union of India3,
it was observed that, “In cases governed by Article 233(2), normally as a
matter of rule, the High Court’s recommendation must be accepted unless there
exist ‘good and weighty reason’ in which case the executive should communicate
its views to the High Court and give the latter an opportunity to react to the
same.” Therefore, the contours and strength of the recommendation power
prescribed by Article 233(2) to the High Court is amenable to ascertainment by
judicial examination. 

Mechanism for Dispute resolution

In cases where the States deviate from the recommendations of
the GSTC and enact an absolutely contrary GST Law, it could lead to utter chaos
and defeat the stated objective of GST, namely, for the provision of a common
national market for goods and services. Whether such a deviation is permissible
or not, and whether the same would withstand judicial scrutiny is something
that only time will tell.

I must however, point out that Article 279A(11) stipulates
that the GSTC shall establish a mechanism to adjudicate any dispute arising
between the Government and the States or between the States out of its
recommendations or implementation thereof. However, the scope of this mechanism
is coloured with opacity. It remains unclear whether it would address a
situation where one State does not follow the recommendations. Further, the
said article does not specifically provide that the resolution of the dispute
under the mechanism would be binding.

It may be relevant to point out that under the Hundred and
Fifteenth Amendment Bill, 2011, Article 279B had proposed that “Parliament
may, by law, provide for the establishment of a Goods and Services Tax Dispute
Settlement Authority to adjudicate any dispute or complaint referred to
it by a State Government or the Government of India arising out of a
deviation from any of the recommendations of the Goods and Services Tax
Council constituted under article 279A that results in a loss of revenue to a
State Government or the Government of India or affects the harmonised
structure of the goods and services tax.”

However, the said Article was not enacted in the
Constitutional Amendment Act and no other mechanism was provided for in such
specific terms.

Is GST a challenge to the ‘Basic Structure Theory’?

Primarily, the GSTC would take decisions on the basis of
majority votes, however, there is a possibility that certain decisions of the
GSTC, which were not accepted by some States or the Centre, are challenged.
Such challenge may have recourse to the theory of “Basic Structure” pronounced
by the Apex Court in the landmark case of Kesavananda Bharati vs. State of
Kerala4 and subsequent judgments building on the principle.

It can be argued that the forefathers of the Constitution had
provided for the division of taxation powers to enable the Parliament and the
State Legislatures to exercise their own freedom. The concept of GST itself may
be challenged on the grounds of impinging upon the freedom of the States and
Base Structure theory.

Non-divestment of powers by the Centre

Further, a subject of intrigue is the possibility of
overlapping concentrations of power. On the one hand, the 101st
Constitutional Amendment Act, 2016 has divested the States of their powers to
tax sale or purchase of goods, except for specified goods, by substituting
Entry 54 of List II of the Seventh Schedule to the Constitution. While on the
other hand, the Union has not divested itself of the power to tax sale/purchase
of any goods in the course of inter-State trade or commerce as also of the
residual power to levy tax of sale/purchase/supply of goods or services, the
supply of which would already have suffered GST. The said entries are
reproduced hereunder for ease of reference:

i)   Entry 54 of State List (List II):

     Existing Entry:

     “Taxes
on sale or purchase of goods other than newspapers, subject to the
provisions of entry 92A of List I.”

     Substituted Entry:

     “Taxes
on the sale of petroleum crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for
human consumption, but not including
sale in the course of inter-State trade or commerce or sale in the course of
international trade or commerce of such goods.”

ii) Entry 92A of the Union List (List I) – to be
retained as it is

     “Taxes
on the sale or purchase of goods other than newspapers, where such sale or
purchase takes place in the course of inter-State trade or commerce.”

iii) Entry
97 of the Union List (List I) – to be retained as it is

     “Any other matter not enumerated in
List II or List III including any tax not mentioned in either of those
Lists.”

Conclusion

The Constitutional Amendment seems to have been
enacted without the provision of any safeguard, or effective redressal
mechanisms addressing deviations from the recommendations of GST Council,
thereby defeating the very principles underlying the GST reform.

GST – A Business Perspective

The Goods & Services Tax (‘GST’), is the biggest
reform in the Indian indirect tax structure since the economy opened up, twenty
six years ago. At last, it will become a reality. The 122nd
Constitution Amendment Bill which was cleared in the Rajya Sabha last August
laid the foundation for the change. It was further cemented by the formation of
the GST Council & passage of the GST Act and Rules. Now with the GST Rates
and Transition provisions finalised, the 1st July deadline for the
radical change is inevitable.

As per the current law, businesses are required to pay
multiple taxes and adhere to multiple compliances and timelines. Once GST comes
into play, all taxes will come under one umbrella, making it much simpler for
the industry. The GST Law will also prove to be a boon for the industry that
currently has to deal with different tax processes in all different States. The
hassle of dealing with different State Governments with varied rules will be
done away with.

This tax aims to make India a single market, avoid the effect
of cascading taxes and reduce tax burden on the consumer. The key features of
this tax regime are elimination of tax on tax, lower rates, faster growth and
system driven compliances for the industry as well as the consumers.

While GST will impact various stakeholders differently, the
consumer shall be the most benefitted party. Consumer items continue to be
exempt from a levy of GST or are to be subjected to GST at lower rate as more
than 50% of the items within the consumer price index bracket are placed at a
lower rate than they presently are.

Having said the above, I am mindful that this is a complete
change for the Industry and its functioning. The way of dealing with
transactions would completely undergo a change with the new concept of supply
resulting in a paradigm shift from the age old scanner of manufacture, sale and
service concepts. This would not only entail changes in business processes, but
would completely change the accounting processes and the ERP system of every
business would require to adapt to this change quickly.

For Corporates, now the decision to set up manufacturing
operations and supply chain would be influenced not by tax benefits, but based
on business efficiencies. With destination based principle of taxation and
export to be zero rated, the competitiveness of Indian firms would surely
increase.

The law in the current form has been successful in attempting
the above. Credit should be given to the Tax Authorities and the political
willingness to achieve this by both the Houses of Parliament, State Governments
and the Finance Ministry.

With the support of the industry and the receptive consumers,
GST will be successfully implemented and accepted by India.

My sincere hope for the future is an India in
which trade is free, compliances are easier, growth is phenomenal and consumers
are satisfied. This would have been best achieved through a single low rate
structure, similar to what was originally proposed.

Indian Goods and Services Tax – A Macro Overview

The Tax

India Goods and Services Tax (GST), a new consolidated
indirect tax, slated to be implemented from 1st July 2017 as per
current indications, is a common tax on supply of both, goods and services, to
be commonly levied and collected by Centre, 28 States and 7 Union Territories,
on a common base, at common rates, having common procedures to be administered
fully electronically through a common digital platform.

Reaching this far, with an enactment, at the Central level,
of all the three laws, Integrated GST, Central GST, Union Territory GST as also
law for imposing Compensation Cess, an innovative instrument to collect tax for
distribution among State Governments for likely loss of revenue on GST
implementation, is no mean achievement.

Most rules are also finalised and agreed, rate schedules are
broadly agreed and announced and the State Governments are in the process of
enacting State GST Acts. This is an unparalleled accomplishment for a country
having a federal structure of governance, with population of over a billion
people and wide diversity in many ways.

We are all now waiting with bated breath for the
implementation of this historic indirect tax reform; a new tax structure which
has many unique and unprecedented features in the history of indirect taxation,
not only in India but around the world.

The Model – Australia, EU and Canada and India

Our new indirect tax system retains the basic principles of
value added tax system, adopts features of indirect taxation system of some
developed, more advanced/experienced nations, encompasses latest
recommendations of Organisation of Economic Co-operation and Development (OECD)
for consumption taxes and tops it with India’s unique challenges, traditions,
culture, level of development, and experience of our own taxation systems.

When we look around the world for comparables, we find that
Australia, Canada and EU have some comparable features in their tax reforms and
consumption tax models.

Australia consolidated wholesale sales tax and state level
duties and taxes into a federal level system of GST in 2000 and they adopted a
standard rate of 10 % (comparatively lower rate). So, they now have only one
Federal GST and states do not levy sales tax as also few other levies, duties
which they were levying prior to introduction of federal level GST described as
“New Tax System”. It used pricing control and anti-profiteering provisions to
monitor prices1.

European Union Council issued a direction2 in 1977
to all member nations to harmonise their national VAT systems through which tax
was levied on supply of goods and services; turnover taxes. The objective was
to achieve a common base for taxation, apply common meanings to the terms
“taxable person”, “taxable transaction” and others, common provisions relating
to place of supply of goods and services, common list of exemptions,
deductions, assessment basis and the like, so as to achieve non-discrimination
as to origin of goods and services and permit fair competition among member
nations. The system, in a way, is similar to our State Level VAT system (except
that it is at independent country level and includes taxation of services and
importation of goods); not comparable with our New GST system.

Canada has a federal structure of governance and they have
national as well provincial level (similar to States in our system) GST3.
The rate of the national level GST is uniformly applied across the country but,
States determine their own system of taxation including rate of tax on supply
of goods and services and they have varied systems. One province (Ontario) has
value added tax system described as Provincial Tax System, some provinces
impose tax only at retail level (British Columbia, Manitoba and Sasketchewan),
some provinces (Nova Scotia, Newfoundland and Labrador) have merged their
provincial taxes with national tax and adopted harmonised system of taxation
(HST) administered by national administrator, the Canada Revenue Agency, and
one province (Alberta) does not impose provincial tax at all4. So, this is also not comparable with Indian system of GST5.

___________________________________________________________________________

1   GST final report –
ACCC oversight of pricing responses to the introduction of the new tax
system-January 2003 –
https://www.accc.gov.au/system/files/GST%20Final%20Report.rtf

2   Sixth Directive,
77/388/EEC -17 May 1977 – ref http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al310063 Article 226b of the Sixth Directive

3   Introduced from
1.1.1991

4   https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)

5   https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)                                 

We, in India, have adopted dual model for taxation of goods
and services whereby Central Government and State Governments (including Union
Territories) will levy and administer the new tax, GST on supply of goods and
services. Uniformity, non-discrimination, no non-double taxation or no
non-taxation are sought to be achieved through overarching GST Council, a body
established through the Constitution having powers to make recommendations on
all key aspects of GST like rate, tax base, goods, services and taxes to be
subsumed in GST and so on. This body is somewhat on the lines of the European
Commission. The voting powers within GST Council are so fixed that neither
Centre alone nor States ( even if they all join hands) can change the decisions
of the Council, a path-breaking move to achieve uniformity and stability as is
described, ‘one tax across the nation’.

GST Features

We have adopted, as charging event, the concept of “supply”,
the term used internationally, replacing manufacture, sale and provision of
services as major taxes, Central Excise Duty (on manufacture levied by Central
Government), State Value Added Tax (on sale of goods levied by State
Governments), Service tax  (on provision
of service levied by Central Government), Octroi and Entry tax (on entry of
goods in local area for consumption levied by Local Authorities and State Governments),
Luxury tax (on specified services levied by State Governments) and specified
cesses levied by Central and State Governments merge into one tax, GST, levied
at the same rate by Central and State Governments on common base.

All taxable goods and services, across the country, when they
move from one state to another, will have paid tax, the Integrated GST (I-GST)
which is sum of Central GST (C-GST) and State GST (S-GST) or Union Territory
GST (UT-GST). This will be so, even in cases where goods/services move to own
branches, depots, distributors, stockists, otherwise than on sale/transfer of
property in goods. The tax so paid, to the extent of B2B (and, in most cases,
when the goods move to own branches, depots and like will be B2B transactions)
will be fully creditable unlike the earlier system where, Central Sales Tax was
not levied on transfer of stocks to own depot, branch ( against F form), levied
at concessional rate for B2B transactions ( against C form) and was not
creditable; it was retained by the originating State.

The objective of this design feature of our GST system is to
ensure that goods and services moving across States do not have to be supported
by C/F/I and like forms, prevalent under the current system for no or
concessional rate of tax ( forms to be obtained from tax department) as also
verified at check-posts set up by State Governments at their borders to capture
movement of goods without taxes, can be done away with (to achieve one tax
across the nation without, sort of, border restrictions) and, at the same time,
provide reasonable assurance to the State Governments of non-leakage of
revenue. Of course, the unscrupulous will attempt to find ways around it;
vigilance and way bill mechanism in the new system seek to track such leakages.

So far as movement of goods and services pursuant to supply
within a State is concerned, goods and services would have paid due tax, C-GST
plus either S-GST or UT-GST .

I would not be surprised, if, after a few years, some of the
Union Territories merge their U-GST and some smaller States merge their S-GST
with C-GST and hand over tax administration to Central Government – like
Harmonized GST of Canada. This could result in a fair degree of saving of tax
compliance cost for businesses and administration cost for governments at State/UT
level.

Gains and Pains

The charge on supplies within one legal entity [identified
based on Permanent Account No. (PAN) allotted by Income tax Department], when
goods move to another State to self has a logic in that it enables transfer of
input tax credit from one State to another where sale will take place and the
input tax credit can be utilised. This feature is enabled through I-GST
mechanism which is a sort of settlement mechanism. I- GST can be used for
payment of I-GST itself, C-GST, S-GST and UT-GST and, in same manner, all those
taxes, C-GST, S-GST and UT-GST, can be used for paying I-GST. Same is not true
so far as C-GST and S-GST/UT–GST are concerned. They will move parallel and not
meet, meaning C-GST input tax credit cannot be utilised for payment of S-GST/UT
GST and vice versa.

This requirement of payment of tax on inter-state transfer of
stocks will add cost in terms of cash flow management. But, a bigger worry of
businesses is valuation – whether administrations will be flexible on this aspect
since the transaction is tax neutral. Current provision, to the effect that
value declared by tax payer for such supplies will be accepted if the taxable
person is eligible for “full” input tax credit or that, the value could be 90%
of the sale price at the time of supply to third parties, is met with
skepticism.

The inclusion of such provision for services though is
puzzling. Valuation of services for transfers within an organisation will be a
challenge and, it appears that the department’s perspective is that even
employee cost must be included to arrive at open market value of services. This
means, taxing employee services which are specifically excluded from charge of
GST. There is provision for input service distribution and that could have been
used for transfer of input tax credits in case of services. Some rethink is
required on this aspect. Hopefully, sooner than later!

Our GST adopts same basic principles of value addition –
which we had adopted for Central Excise Duty, State VAT and Service tax.  The chain for taxation starts from origin and
ends when it reaches the ultimate consumer. 
Taxes paid at each of the earlier stages are rebated through mechanism
of input tax credit. Ideally, therefore, no tax cost should stick to
businesses, they being mere pass -through entities. Practically, that does not
happen due to non-allowance of input tax credit on several grounds like exempt
supplies with taxable supplies, supplies used for personal purposes or those,
where input tax credit is specifically restricted like motor vehicles.

A provision not to allow input tax credit when no tax is
payable on output is a reasonable one as the chain of input tax credit stops
there. The difficulty arises when the list of disallowable input tax credit
becomes large. The items on which input tax credit is not allowable under our
GST include expenses  like outdoor
catering, rent-a-cab, free samples, health insurance of employees and others.
These have been subject matter of significant litigation in the past and
attempt appears to be to clarify intent and avoid litigation; provide
certainty. However, it is desirable that tax paid on all inputs, goods and
services, used for purpose of business ought to be eligible for input tax
credit to minimise tax cost and cascading.

Exports will be zero rated and imports will be charged to
IGST, collected, at the time of clearance of import consignments, with the
Customs duties. There is a feature in export of services that appears to be
different from current regime of service taxation. A supply of service where
supplier is in India and place of supply is outside India is an interstate
transaction. Where the recipient is also outside India, consideration is
received in convertible foreign exchange and the supplier and recipient are not
establishments of distinct persons (different establishment of the same legal
entity), the transaction is “export of service”6 and will be
zero-rated. The difference is, if these three conditions are not fulfilled,
supply will be subjected to IGST though the place of supply is outside India.

The rates and exemptions under GST are more or less
maintained at the current level to ensure that the current overall tax burden
does not increase in GST. There are four rate bands, 5% and 12% (merit rate),
18% (standard rate) and 28% (demerit rate). There is also Compensation Cess
which varies significantly and is fairly steep for luxury/sin goods like
tobacco and tobacco products. It ranges from 1% to 15% for motor vehicles
depending on specifications. Special rate of 0.25% is prescribed for rough
diamonds and 3% for gold, gold jewellery, silver and processed diamonds7.
The exercise of rate fitment is currently ongoing.

The varied rate structure is different from other countries
and a question often asked, in the backdrop of one of the objectives of GST of
simplification of current complex indirect tax structure, is: is this
simplification ? While there could be no two arguments that ideally, one ought
to have only two rates, merit and standard, given the diversity and need for
consideration of all strata of society, variable rate was a must for our
country. Over a period of time, this too will be modified and we too will move
to two or three rate structure.

____________________________________________

6   S2(6)
of IGST Act,20175

7.Statement of Revenue Secretary post
GST Council Meeting of 3 June 2017- Business Standard Article of 5 June,2017-
business-standard.com

Several areas where there was litigation and department has
accepted the position or there are decisions of higher courts, have been
incorporated in the law and will hopefully, reduce litigation. For example, a
specific provision is made as regards amalgamation or merger of companies8.
Not all issues are addressed though and, hopefully, will be addressed as we go
along.

There are a few pain points too like paying tax on reverse
charge basis on purchases from unregistered persons, generating self invoice
and the like. This specific provision will, no doubt, increase cost of
compliance and will lead to the threshold losing its relevance. Reverse charge
is also continued for few services like that of legal services provided by
individual advocate or firm of advocates to business entity. This too is not
compatible with GST concept and ought to have been avoided.

______________________________________

8   S
87 0f CGST Act,20177.

Need for pan India service providers to register in each
state and work out tax liability state wise as also requirement for providing
information about each branch together with name and address of the person in
charge, besides proof of address, is a time consuming exercise. Maybe, going
forward, the IT system will soften this burden.

There is significant unease among pan India suppliers of
goods and services about possibility of differing views/approaches that could
be adopted by different authorities and likely multiple demands on identical
transactions. A centralised audit system for such suppliers by a group
comprising officers representing Central Government and State Governments
(these could be rotated from State to State depending on the volume of activities
in a State and can be done electronically without human intervention) is a
solution, referred to in the passing, and may be adopted as the tax authorities
across different States gain experience.

Requirement of quoting detailed HSN Code or Service
Accounting Code at the time of registration on GSTN portal itself is causing
huge anxiety especially for non-manufacturing sector. Asking this information,
at this early stage of GST implementation, could be done away with. Broad
industry classification could meet the objective; facilitating government in
collating industry-wise data and simplifying process for tax payers from
compliance perspective.

There are very detailed and exhaustive transition provisions
which have envisaged various situations and dealt with them. Yet, there are
areas that need to be addressed. Leasing industry is an example where
transition provision is missing.

A provision that is causing significant apprehension during
transition is that of “anti-profiteering”; up to what level should one go and
how to determine it? There are mixed reports from Australia and more recently,
Malaysia, as to effectiveness of such provisions in controlling prices post GST
implementation. Some sectors like consumer goods or fast moving capital goods,
where there is intense competition, will self-adjust prices and the likelihood
of price increase is less. Monopolies and monopolistic sectors are the ones
where Government will have to focus. This will certainly be an area of intense
interest for all, especially, the consumer groups.

Entirely digital administration is a super feature of our GST
system facilitating several processes like enabling businesses to comply with
laws of all the States from one location; complete one to one matching of
invoices to avoid disputes and demands at a later date. But, this feature has
its own challenges, connectivity issues, comparability and so on. Here again,
as we gain experience, systems and processes will be streamlined. Technology
platform will significantly ease verification of input tax credits and overall
compliances as is the experience with TDS under Income tax.

Mindset change

In the midst of all this, the most encouraging
factor is the constructive approach of Governments, with full support and
attention from the highest level, from Prime Minister, Union Finance Minister,
State Chief Ministers, all Finance Ministers and other functionaries. They are
addressing concerns and suggestions in most rational and consensual manner. We
do hope this positivity continues and percolates down to the administrative
officers; we do hope to see complete “mindset change” all around and
Governments to adopt the maxim that the objective of tax gatherers is to
collect due tax in a fair manner and not penalties; they should not be unjustly
enriched!

GST Finally Arrives!

I am experiencing mixed feelings
as I write this last editorial of my tenure as the editor of one of the most
prestigious journals of our profession. It has been an enthralling journey,
with a number of challenges. Like everything that you do at the BCAS, this
stint as editor has enriched me greatly. The Journal will soon enter its 50th
year and to share with you that golden moment, you will have my young successor
Raman Jokhakar at the helm. Raman is brimming with new ideas and energy. We at
the Society are sure that this heavy responsibility will rest lightly on his
young shoulders.

On each annual day, the Society
brings out a special issue of the Journal with a theme. I am singularly
fortunate that I will sign off, with the GST special, an issue that contains
more than 20 articles from eminent authors covering virtually all the facets of
this new law. Since the issue is fully devoted to GST it does not contain any
of the regular features. Goods and Service Tax (GST), is possibly one of the
most significant milestones in national history since the independence. It has
been discussed for more than a decade and its impact on all sections of society
can be gauged from the fact that the Parliament will hold a special session on
30th June, to mark this historic moment and will ring in this new
law at the stroke of midnight from 1st July 2017.

While we as citizens take pride
in India’s character as a land with diverse people, cultures, languages and
religions, this diversity, at times, is a bottleneck and hurdle for growth of
business. Our country has a federal structure wherein the states have the power
to legislate on the taxation front. Consequently, we had excise levied by the
Centre, octroi, sales tax and other local taxes levied by different states.
With the growth of the service sector, we had the Centre levying service tax
from 1994. All these, different levies, maze of compliances, enabled the
unscrupulous to evade the law.This, finally resulted in increased costs to the
hapless customer. GST was a necessity to support the Prime Minister’s promise
of creating an environment where there would be “ease of doing business”. On 1st
July, it will become a reality. It is significant that this new law commences
on CA Day, possibly indicating the opportunities that it will create for many
of us.

Undoubtedly, the law that has
been passed after the required constitutional amendment is not ideal. One had
expected GST to be one levy to subsume all others but in its current form we
have CGST, SGST and in the case of interstate transactions IGST. Different
registrations in different states will create substantial compliance burden on
business entities. Normally, GST was expected to be levied in a manner that
only the incremental value addition would attract the tax. Unfortunately, due
to stringent rules for grant of input credit that may not happen. Further
reverse charge mechanism (RCM) would create a burden on the registered
taxpayers. It is also felt that RCM may severely affect the small and micro
enterprises who do not register themselves because they do not cross the
threshold of the turnover limit.

Though there are large number of
problems /issues, GST is indeed a historic step. One is hopeful that as we go
along, many of the creases will get ironed out. The government is alive to
various procedural glitches and is responsive to representations from
professionals, businesses and other stakeholders. Another significant
characteristic of GST is the digital platform through which it will be
administered. If this turns out to be robust it will  reduce the leakages and in the long run
consumers will certainly benefit. The next couple of years promise to be
exciting and challenging for professionals.

This special issue seeks to
unravel some of the mysteries of this new law. I am sure that readers will
benefit from finding answers to their questions at one place. I am thankful to
the chairman of the Indirect Tax Committee Govind Goyal and his entire team for
conceptualising this  issue. I am
grateful to all the authors who have devoted their time and energy in
contributing excellent articles.

I must also thank, all my
colleagues, my seniors in the Journal Committee for supporting me in my tenure.
Thanks are due to all authors and contributors to this esteemed journal.
Finally, I must record appreciation for all readers for their love and
affection.

As I write this piece, there is
the relief for having been relieved from a great responsibility, and a tinge of
sadness that I will miss writing to you each month. My successor has assured me
that he will occasionally grant me the opportunity to write to you.

Therefore, I bid adieu, till we
meet again!

Devotion

‘There is no God, but where

there is devotion God exists’

Sadhguru Jaggi Vasudev

Devotion is an integral part of our life – existence –
success and satisfaction come only with devotion. – for example – we are
devoted to our parents, teachers, mentors and family. We professionals would
not be successful if we were not devoted to our profession – our work. We are
devoted to our clients – this is basically devotion to our work which is
reflected in relationship with our clients. I am aware that service to our
clients is ‘barter’ because it is in exchange for monetary reward – but
more than financial reward it is the appreciation and respect we receive from
them. All this is because we are devoted to ourselves and above all we are
devoted to our Creator – one who looks after us through the thick and thin of
our life. Devotion is what keeps us on our path. However the paradox is that
when devotion leads to fanaticism and fundamentalism, it results in
destruction. The fanatic – (devotee) who is a terrorist creates misery
and even war.. This is the reason why it is said that devotion should make one
creative, caring and compassionate. The three ‘C’s represent our
devotion to society and God and has its own rewards. Hence, devotion needs
direction which initially comes from our parents, then from our teachers –
gurus – and thereafter from our own self. Devotion to our self directs us to
have a balanced and realistic expectation from our own self and others.
Devotion is the elixir of life and devotion removes dilemma and yields clarity.
Sadhguru Jaggi Vasudev says ! ‘to be devoted, does something beautiful to
you’.

Devotion – in the ultimate implies that one dissolves into
the object of one’s devotion. Devotion to Krishna converted queen Meera into
one who sang Krishna’s praise in the streets of Mewar. Ultimately, Meera lost /
merged herself in Krishna and became one with Krishna.

Let us consider a few other examples of devotion :

–   Bharat’s devotion to Ram – everyone gives
example of Lakshman’s devotion to Ram but only few mention Bharat’s devotion to
Ram – who surrenders to Ram, rules as his proxy and lives the life of a sanyasi
in Ayodhya till Ram’s return.

–   Devotion of Jesus to God made him say ‘I
and my father are one’ – total loss of identity.

–   Devotion converted doubting Thomas into Saint
Thomas.

–   Surdas plucked his eyes not to be swayed by
his senses from devotion to Krishna.

–   Devotion of Hanuman made him say to Ram ?there
is no difference between you and me’. This devotion – merging of identity
made him immortal – Hanuman is believed to be alive even today in human form.

It is rightly said that `devotion is a one way street and has
the power to create the Creator’. I conclude by saying: without devotion
we stumble through life – so let us develop and live devotion.

I believe no action will give us satisfaction
unless it has a touch of devotion. – for example – we work with devotion
amongst other things to have our daily bread – food, hence let us ask ourselves
a simple question : Do we enjoy our daily bread ! The answer is No
because we consume it mechanically and we hardly enjoy what we eat but if we
are conscious of what we are eating – thank God before and after eating – take
time to enjoy our food we will experience satisfaction. Food will have a
different effect on our mind and body. We must be devoted to HIM who gives us
our daily bread. In other words – eat with devotion.

BCAS Managing Committee Elected Members for 2017-2018

In accordance with Clause No.18 of the Memorandum of
Association of the Bombay Chartered Accountants’ Society, the names of members
who have filed their nomination for Managing Committee are to be exhibited.
Since the number of nominations are equal to that of the number of posts, no
election is necessary. At the Special Committee Meeting held on 10th May,
2017, in addition to the members elected unopposed, 6 other members have been
co-opted to the Managing Committee. The list of elected members and co-opted
members is as under:

President

Narayan R.
Pasari

Vice President

Sunil B.
Gabhawalla

Hon. Joint
Secretary

Manish P.
Sampat

Hon. Joint
Secretary

Abhay R. Mehta

Treasurer

Suhas S.
Paranjpe

Elected Member

Anil D. Doshi

Elected Member

Bhavesh P.
Gandhi

Elected Member

Chirag Himat
Doshi

Elected Member

Divya B.
Jokhakar

Elected Member

Kinjal M. Shah

Elected Member

Mayur B. Desai

Elected Member

Rutvik R.
Sanghvi

Elected Member

Samir L.
Kapadia

Co-Opted  Member

Anand Bathiya

Co-Opted  Member

Devendra H.
Jain

Co-Opted  Member

Ganesh
Rajgopalan                     

Co-Opted  Member

Mandar U.
Telang

Co-Opted  Member

Mihir C. Sheth                    

Co-Opted  Member

Pooja J.
Punjabi

Ex-Officio
Member

Chetan Shah

Member
(Publisher)

Raman H.
Jokhakar

 

The committee will
assume office at the conclusion of the Annual General Meeting on 6th July,
2017.

BCAS In 2016-17. Part – 3

As promised, this is the third and last part on the captioned
subject. The Annual Report for the year will be published soon and you will be
able to see complete details of the happenings throughout the year. As a
member, we urge you to go through the Annual Report and do share your feedback
with us. In this issue, we will cover knowledge sharing through our
publications and various other activities held at the Society.

BCAS Publications:
The year has been eventful with knowledge sharing at the forefront. The Society
released publications on various topics of professional significance.

At the last AGM held in July 2016, the Society released 2
publications. One on “Internal Audit – Practical Case Studies” by CA. Deepjee
Singhal and CA. Manish Pipalia. Internal Audit has been an area that is under
explored by Chartered Accountants. Its potential to add value remains a key
driver looking at the need, utility and the possible revenue to chartered
accountants. Unlike Statutory Audit, the scope of Internal Audit can be as wide
as business. The irony is that businesses do not adequately recognise the value
of Internal Audit. The Companies Act, 2013 has brought new impetus on Internal
Audit for Companies.

The second publication was on “Non-Banking Financial
Companies – A Treatise” by CA. Bhavesh Vora, CA. Zubin Billimoria, CA. Hardik
Chokshi, CA. Gautam V. Shah & CA. Heneel Patel. Today, NBFCs are regulated
entities and are under the supervision of the Reserve Bank of India . The
growth of this sector must be balanced with the objectives of financial
stability, depositor protection and ensuring adequate compliance with
regulations. Considering the role of NBFCs in the economic development and to
ensure systematic and structured growth in this sector, the NBFC regulations
are made over-arching. The compliances are layered and multiple, depending on
the type of NBFC. The deposit accepting NBFCs have the most rigorous guidelines
to adhere to stringent reporting requirements.

BCAS released the 3rd Edition of “Gita for Professionals” by
CA. Chetan Dalal in August 2016. This book received an overwhelming response.
The book has always caught the attention of the young and experienced as it
throws light on aspects of professionalism from the Holy Bhagwat Gita. A Hindi
edition of the book was also simultaneously released which was also well received
by our Hindi reading professionals

BCAS, which had been in the forefront to organise several
workshops on the ICFR came out with a publication in the month of August 2016
called the “Internal Control Over Financial Reporting” by CA. Nandita Parekh.
This book discussed the subject in a simple and lucid language and assisted
such companies to adhere with the requirements of the Companies Act, 2013 and
their auditors to effectively discharge their duties. The Publication contained
ready to use drafts and formats which can be used with some modifications to
design and document the internal controls over financial reporting.

BCAS supported the Government in sharing knowledge on Income
Disclosure Scheme 2016 and came out with a publication on the said subject in
August 2016 called the “Income Disclosure Scheme, 2016” by CA. Bhadresh Doshi.
There had been numerous public meetings addressed by various Principal
Commissioners of Income-tax across the country exhorting people to come clean.
BCAS had the opportunity to attend one such meeting which was jointly held by
ICAI & FICCI. The author along with the BCAS President CA. Chetan Shah had
the honour to hand over a copy of the publication to the hon’ble Finance
Minister, Shri Arun Jaitley on this occasion.

Another publication released was by two young authors from
Ahmedabad CA. Viren Shah & CA. Jeyur Shah on the “Reporting under CARO
2015/2016 (a compilation)“. The book was released in Ahmedabad at the BCAS
Event on the said topic. The book received good response across the country.

Deduction of tax at source from non-residents has always been
a complex subject since the payer effectively needs to determine the tax
liability of the payee in India. The changes brought from time-to-time, and
recently in 2016, including the requirement of e-filing, have added to the
complexities of the procedures. With business boundaries extending globally,
transactions with non-residents are common place. A very important
consideration in any jurisdiction that claims to be business friendly is the
tax regime. After the opening of the Indian economy, there has been a paradigm
shift in cross-border transactions. Thus, BCAS thought of the publication on
International Tax on “Payments to Non – Residents – A Guide on Reporting Tax Deduction
at Source under Section 195” by CA. N. C. Hegde, CA. Mallika Apte, and CA.
Risha Gandhi. This was one of the very fast selling publications and was out of
stock within a short time of 2 months.

The most awaited publication year on year “BCAS Referencer
2016-17” again sold around 5000 copies. This year the Referencer came with an
app with a unique password for users to view it on Windows, Android & IOS
phones. The technological addition to the traditional Referencer received a
very encouraging response. This year’s “BCAS Referencer 2017-18” was released
in April 2017 and is available for sale.

As a tradition, BCAS comes out every year with the
publication “Union Budget – An Analysis” which articulates the various
amendments post budget. This year, post budget in February 2017, the said BCAS
publication which was printed in 2 languages English and Gujarati, crossed a
sale of 35000 copies of English and 3500 copies of Gujarati.

With technology at the forefront BCAS this year came out with
2 e-Publication in flipbook format. One was an e-Publication on “Rules of
Interpretation of Tax Statutes” by Senior Advocate Mr. N. M. Ranka. The book is
a compilation of Mr. Ranka’s authored articles on “Rules of Interpretation of
Tax Statutes” in the Bombay Chartered Accountants’ Society Journal (BCAJ). The
said articles were published in four parts from April 2016 to July 2016. This
e-Publication received 4252 views till date.

The second e-Publication was on “The Direct Tax Dispute
Resolution Scheme 2016 – An Analysis” by CA. Saroj Maniar. This publication has
received 3203 views till date.

A few other publications which are lined up for release
shortly include the “Monograph Series” a set of 5 publications on various legal
aspects, “FAQ on Accounting Standards”, “Audit Checklist”, “Publication on
Equalisation Levy” and others. Do keep in touch with the BCAS knowledge
management portal to know more on the upcoming list.

Other Activities:
Amongst various other activities at BCAS; we are glad to inform you that the
various study circles have been doing exceptionally well with enthusiastic
participation. Study Circles at BCAS have always seen great engagement on
knowledge development by its members. This year too, the response has been good
and an overall of 20 study circle sessions were conducted. A new venture here
was the commencement of BEPS (Base Erosion & Profit Sharing) Study Circle
in December 2016. Since its first meeting in December this Study Circle has
been receiving good participation and has successfully completed 7 sessions
till March 2017.

Some of the key highlights this season without which this
year cannot be called complete are as follows:

One was the Grand 50th Golden Jubilee Residential Refresher
Course. The event details are covered in Part 1 however one cannot miss the
publication which the Society came out during this celebration in January 2017
which is called “Golden Jubilee Residential Refresher Course Nostalgia -A
Collection of memories.” This publication is a golden collection of lasting
memories of the last 50 RRCs in a glimpse. The Journey has been sentimental and
nothing can tarnish the nostalgic experience. At BCAS; the affection shines, as
we scroll through the past. This publication gives access to the enchanting
memories of 50 RRCs and has various eminent authors penning articles on topics
of professional significance.

Another significant activity of the Society is on the most current
topic of GST. Though part 1 on events covered the various seminars on the said
topic we would like to inform you that BCAS is one of the Approved Training
Partners(ATPs) to impart GST Training by NACEN (National Academy of Customs,
Excise and Narcotics). We have 10 certified trainers on board to impart this
training. BCAS has commenced trainings designed and conceptualised as per the
NACEN guidelines prescribed by the government. 

On the technology front BCAS took various steps, starting with
making available sale of publication and events online. BCAS online portal
facilitates its members to purchase publications, enrol for an event or even
pay their membership fees online. The BCAS Lecture meetings held at the BCAS
Hall are now live streamed through its YouTube Channel and today the channel
has moved from 500 subscribers to 3058 as on 31st of May. This has been another
landmark change through which the Society has tried to reach out to various
locations. BCAS website and the BCAJ website both have been given a new look
which is more user friendly and easy to access, at the same time informative.

Finally,
we conclude this year by stating that BCAS is now much vocal, much known and
more approached by professionals. As the saying goes “Changes call for
innovation, and innovation leads to progress.” Thus, every year will have its
own story to tell. All we do is facilitate that change and make it more
glamorous so that all members benefit from it. Keep a look out for our Annual
Report for complete details.

Representation on FEMA provisions

Shri B. P. Kanungo,

Deputy Governor,

Reserve Bank of India,

Mumbai.

Dear Sir,

Sub: Representation on
FEMA provisions

We submit herewith a representation for some provisions under
FEMA which are causing difficulties and injustice for bonafide transactions.

We request for a personal meeting to explain  the matter.

Thanking you,

Yours faithfully,

 

Bombay
Chartered Accountants’ Society,             The
Chamber of Tax Consultants

Chetan
Shah                                                                              Hitesh
Shah                    

President                                                                                       President

 

Cc:
  Smt. Malvika Sinha, Executive  Director

        Shri Shekhar Bhatnagar, Chief
General  Manager-in-charge

        Shri
Jyoti Kumar  Pandey, Chief General  Manager

Representation under FEMA

Background for representation:

1.     FEMA objective and reintroducing
prosecution– FEMA and the regulations were enacted in the year 2000. The
objective was to liberalise the law. The rules are provided and one has to
interpret and follow the same. Prosecution provisions were removed. In 2005,
Compounding rules were enacted “to provide comfort
to the citizens and corporate community by minimizing transaction costs,
while taking severe view of wilful, malafide and fraudulent transactions.”

          However in 2015, prosecution has been
brought back in FEMA. Under sections 13(1A) and 37A, if an Indian resident is
found to have foreign assets in contravention of law, then based on mere
suspicion, equivalent Indian assets can be seized. Further there is
prosecution. Thus a civil law has become semi-criminal law. Under these provisions, even procedural violations
come within the semi-criminal scope.

2.       Change
in interpretation by RBI without change in law – Another issue that we as
practitioners face is interpretation changes that occur when officials change.
This is often on account of the legal language used in the country. Over the
years however this is causing hardship to the people who have undertaken
bonafide transactions. And hardship is compounded when a view is changed all of
a sudden without a clear statutory document. One possible solution to this
problem is creating a library where interpretations of provisions are offered
at any level within the RBI.

          We appreciate that changing
circumstances can change policies and regulations. It is RBI’s
prerogative to change policies. However the
change has to be prospective. We find that
today’s interpretations are being applied to past transactions. This is
causing grave injustice to people.

          Further the change has to be spelt out
clearly in the law- especially if it restricts any facility. It cannot be just
a small phrase inserted somewhere in a regulation. The change in the policy has
to be made abundantly clear. We have given more details and illustrations
later.

3.       In our submission, if there is any
ambiguity in the law, the interpretation has to be in favour of the investor.
If at all RBI considers that compounding is required, then a token penalty
should be levied.

          Due to amendments in FEMA in 2015
wherein prosecution has been brought back, it is all the more necessary that a
liberal interpretation is taken by RBI.

4.     Another issue is absence of definition for
certain terms and different interpretations adopted. By way of illustration,
meaning of some of the common terms like “portfolio investment”,
“acquiring” etc, as interpreted by RBI are different from the
meanings ascribed as per Company Law. The accepted market convention is that if
a meaning is not specified, then normally the meaning under the law closest to
the term (e.g. Company Law) will apply.

5.       Our humble suggestion is that change in
interpretation of law without declaring the change in law – should be
minimised. This is of course a massive work. In
the meantime, past innocent transactions should not be considered as
violations.

          If at all these are procedural lapses,
only a token Compounding fee should be levied. Ideally a general amnesty should
be declared for procedural breaches not involving black money.

          For future transactions, abundant clarity
should be provided.

6.       We clarify that our representation is for
bonafide transactions. In a society there will always be some people who will
deliberately violate the law. We are not representing their matters. Let the
law take its course.

         However we submit that if some people
have violated the law, it cannot be a reason to have a blanket ban on everyone.

 Executive summary of the representations 

A.    Liberalised
Remittance Scheme (LRS):

1.       Investment in unlisted companies made
prior to 5th August 2013 should not be considered as a violation. The investor
should not be asked to unwind the investment and bring back the proceeds. At
the most, a token penalty may be levied.

2.       Holding funds in foreign bank accounts
which are remitted under LRS, should not be considered as a violation.

3.     Remittance made for any foreign asset like
Gold and loan should not be considered as a violation.

4.      There should be no restriction under
Current Account transactions as stated in clause (ix) of Schedule III.

5.      If a person has acquired any assets
outside India under LRS / ODI, he should be permitted to gift the same to
anyone.

B.    Principal(?)
issues:

6.     To route all applications and compliances
through the Authorised Dealer is not working out well. We suggest that one
should be able to file all applications or reports online. The AD should
provide his comments within a specified time limit. If AD does not respond, RBI
should consider the case on merits. Or if the matter is just compliance, it
should be accepted.

7.      In case of violations, RBI should not
insist on unwinding a transaction without considering other laws. Only if the
transaction is fundamentally not permitted (e.g. foreign investment in
agricultural activities), then unwinding may be directed.

8.       RBI prefers to meet the investor but not
the representatives. As a regulator, RBI should meet the bonafide
representatives based on authorisation if so desired.

C.    Real Estate
leasing:

9. A
clarification may be issued that investment in Real estate leasing business is
permitted. The meaning of real estate business can be same for Foreign
investment and overseas investment

Whither Informal Guidance Scheme? – Whether An Obituary Is Due !

Background

When the scheme for informal
guidance was released by SEBI in 2003, it was expected that this will become a
form of advance ruling. More importantly, it would add to the interpretation of
Securities Laws. It would also serve as guidance for future transactions as
parties would know SEBI’s view on a particular issue. To be clear, Informal
Guidance was not at all meant to be the final view of SEBI. However, I submit
the expectations that this will help clarify the law, have been belied. A
recent decision of the Securities Appellate Tribunal (Arbutus Consultancy
LLP vs. SEBI, dated 5th April 2017) has raised questions on the
reliance one could place on the informal guidance.

What is the Scheme for Informal
Guidance?

Often parties undertake
transactions that have implications under the Securities Laws. The consequences
of violation of Securities Laws are severe and could result in SEBI taking
adverse action – for example – penalty, prosecution and debarring those
involved from approaching or dealing in the financial market. Ignorance of law,
as the proverb goes, is no excuse. However, needless to say, a clear
interpretation from the regulator itself should bring clarity and resolve
doubts.

Hence, when SEBI introduced the
Informal Guidance Scheme in 2003, it was seen as a market friendly initiative.
It allowed several categories of persons associated with the securities markets
to approach SEBI to get interpretation on almost any aspect of Securities Laws.

This was expected to avoid
litigation and enhance compliance. The queries and their replies were
specifically intended to be published for public knowledge with the intent of
having universal applicability where facts and issues
were same.

Informal Guidance is of two types.
One is a no-action letter. When a party proposes to undertake a
particular transaction in a particular manner, it may want to know how would
SEBI treat it under a specific provision of Securities Laws. A good example of
this is the subject matter of the SAT decision. The issue is : whether
exemption to inter promoter transfers from requirement of open offer under the
Takeover Regulations would be available on a particular set of facts. The
applicant is required to submit to SEBI the facts and also state the specific
provision on which it requires clarification. SEBI may then, take a view that
such exemption would be available and it would not take any action if the
applicant carries out the transaction exactly as per the proposal placed before
SEBI.

The other is an interpretative
letter. In this case, SEBI is asked to give an interpretation on
a particular provision in the context of a certain set of facts and
transaction.

SEBI gives limited protection to
the person who has received such guidance. It is provided that, in case of
no-action letters, the concerned department of SEBI would (or would not)
recommend any action under the Securities Laws if the transaction is carried
out in the manner put forth. However, in the letter it is clarified that such
guidance “constitutes the view of the Department but will not be binding on the
Board, though the Board may generally act in accordance with the view”.

Interestingly, SEBI will not
respond to a request for Informal Guidance “where a no-action or interpretive
letter has already been issued by any other Department on a substantially
similar question involving substantially similar facts as that to which the
request relates”. This, in my submissions, creates an impression that SEBI may
follow such interpretation in similar cases and hence a fresh informal guidance
is not needed.

Facts of the matter before SAT

In the case before SAT, there was
a complex restructuring transaction that involved inter-se transfers amongst
the promoters of a listed company. In ordinary course, any acquisition of
shares in a listed company would have implications under the SEBI Takeover
Regulations 2011 – for example – if the acquisition is beyond the specified
percentage, it may attract an open offer. However, exemption from open offer is
given for restructuring where the transfer is within the promoters. However,
such exemption is given provided certain conditions are met. One of such
conditions is that the transferor and transferee promoters should have been
disclosed as promoters in the filings with the stock exchange for the preceding
three years. In the present case, to simplify as the listed company was
recently listed, there was a peculiar situation. The transferor and transferee
both were promoters for more than 3 years. However, since the listing had taken
place less than two years back, the condition of three years were not complied
with. Hence, the inter se transfer apparently did not qualify for exemption
from open offer. The acquirer did make an open offer because of certain latter
transactions but at a lesser price based on latter transactions. However, since
the earlier transactions were treated as not exempt, the open offer price
computed by SEBI was higher than offered by the acquirer, hence, SEBI ordered
the acquirer to pay such higher price plus interest.

Before SAT, the acquirer pursued
the argument on merits that the three years post-listing disclosure was not a
strict condition and in reality the promoters were promoters for more than
three years. However, this was an interesting issue as in an earlier `Informal
Guidance’, the view propagated by the acquirer was approved. The informal
guidance had held that if the parties were promoters for more than three years
including in the period before listing, the requirement that there should still
be such three years of disclosure as promoters post listing need not be
complied with.

However, unfortunately, this was
not all. It appeared that in a subsequent Informal Guidance on similar facts,
an opposing view was said to have been expressed. It was even argued/conceded
by SEBI itself that the earlier Informal Guidance was actually incorrect! The
question was whether the earlier Informal Guidance would be helpful to the
acquirer.

Decision of SAT

To begin with, on the
interpretation of the provision itself, SAT was not in agreement with the
acquirer. According to SAT, the requirement of the law was clear. There has to
be at least three years of post listing filing of the parties as promoters with
the stock exchanges. Only if this condition is strictly complied with that the
benefit of exemption to inter se transfers between them would be available.

Then SAT dealt with several issues
relating to Informal Guidance – for example – what is the binding nature of
informal guidance? Does it help persons who were not the original applicant,
even if the facts were similar? Does it bind SEBI? What will be the situation
if there is another contradictory guidance on similar facts? Can a party claim
that the one beneficial to it should be applied?

The acquirer also argued that the
guidance was in the nature of a circular and thus binding on SEBI.

SAT discussed the Informal
Guidance scheme. It noted that the requirement of the provision was clear and
against the view advocated by the acquirer. SAT observed that, “…a wrong
interpretation given by an official cannot be used as a shelter in interpreting
provisions of law.” In my opinion, this by itself would reduce the value of the
original guidance relied on by the acquirer. SAT in any case pointed out that
there was already a subsequent guidance holding a different view.

It reiterated that “…an interpretation
provided under the Scheme by an official of department of SEBI cannot be used
against the correct interpretation of law (in the instant matter SAST/Takeover
Regulations, 2011)”. It also relied on its earlier decision in the case of Deepak
Mehra vs. SEBI ((2010) 98 SCL 216 (SAT). The following observations of the
SAT in Deepak Mehra’s case are relevant and illuminating:-

“The
impugned communication is only an interpretative letter providing under the
scheme an interpretation of the provisions of the Takeover Code as was sought
by Bharti pending finalization of the proposal which may or may not come
through. Clause 12 of the scheme makes it clear that an interpretative letter
issued by a department of the Board constitutes the view of the department but
will not be binding on the Board, though the Board may generally act in
accordance with such a letter. Clause 13 thereof also makes it clear that a
letter giving an informal guidance by way of interpretation of any provision of
law or fact should not be construed as a conclusive decision or determination
of those questions and that such an interpretation cannot be construed as an
order of the Board under section 15T of the Act. While giving its informal
guidance to Bharti, the general manager of the Corporation Finance Department
of the Board had also made it clear that the view expressed therein is not a
decision of the Board on the questions referred to by Bharti. It is, thus,
clear that the views expressed in the impugned communication are the views of
the corporate finance division of the first respondent and they shall not bind
the said respondent. It is further clear that the first respondent has not
taken any final decision in the matter and has passed no order which could said
to be adversely affecting the rights of the appellant or any other shareholder
of Bharti. The informal guidance given by the general manager is not an
“order” which could entitle anyone to file an appeal. The word
“order” is defined in Black’s Law Dictionary (Eighth Edition) as
“1. A command, direction, or instruction. 2. A written direction or
command delivered by a Court or Judge. The word generally embraces final
decrees as well as interlocutory directions or commands.” In the case
before us, the first respondent has not issued any command or direction. An
occasion to issue a direction or pass an order may arise, if and when, the
proposal that is being discussed between the two companies is finalized. If and
when, such a direction is issued or any order passed, it shall be open to any
person who feels aggrieved by that order or direction to come in appeal before
the Tribunal.” 

Conclusion

The decision of SAT, while
confirming to some extent how the Informal Guidance Scheme is viewed, I submit,
reduces the usefulness of the Scheme.

In any case, parties ought not
rely on the `informal guidance’ even for identical transactions. Hence, parties
involved will have to seek specific guidance. It is curious that the Scheme
itself provides that SEBI may refuse giving guidance if a guidance has already
been given on a similar issue!

There can be another interesting
situation. A party may approach SEBI for an informal guidance on a set of
facts. SEBI may give an interpretation that is not acceptable to the party and
it is legally advised that SEBI’s view is not correct in law. What would happen
if the party still goes ahead with the transaction? The Informal Guidance is
surely not binding on the party but there would still be an adverse view of
SEBI on record.

In conclusion, while the Informal Guidance
Scheme may continue to be used, even if sparingly and it should be treated with
a degree of wariness by others. I believe that SEBI should come out with a
clarification on the effectiveness of the `informal guidance’ to clear the confusion
that investors, implementators and advisors are likely to experience. In my
view, the guidance should take the character of a circular issued by the CBDT
under the Income Tax Act. This would reduce litigation and grant certainty. In
the alternative the informal guidance should be treated on par with the
decision of AAR.

Maintenance of Parents

Introduction

Ageing is a natural phenomenon!
But what if in one’s twilight years one’s own children don’t take care of a
person or even worse subject him / her to mental and physical abuse and agony?
There have been cases where the children have not provided even for basic
maintenance and daily needs of their parents. In such a scenario, the
Government of India thought it fit to introduce a legislation to provide
simple, inexpensive and speedy provisions which would enable the suffering
parents to claim maintenance from their children. Accordingly, “The
Maintenance and Welfare of Parents and Senior Citizens Act, 2007” was
enacted on 31st December, 2007 as a Central Act to provide for more
effective provisions for the maintenance and welfare of parents and senior
citizens guaranteed and recognised under the Constitution of India. Let us
consider some of the provisions of this social welfare statute.

Maintenance of Parents and Senior
Citizens

The Act provides for the setting
up of a Maintenance Tribunal in every State which shall adjudicate all matters
for maintenance, including provision for food, clothing, residence and medical
attendance and treatment. The following persons can make an application to the
Tribunal for maintenance of such needs so that he can lead a normal life:

(a) A parent (whether biological,
adoptive or step) or a grandparent can make an application against one or more
of his major children. Interestingly, the parents need not be senior citizens,
i.e., they can be less than 60 years of age.

(b) A childless senior citizen (an
Indian citizen who is at least 60 years of age) can make an application against
his major relative who is legal heir and who is in possession of the senior’s
property or who would inherit his property after the senior’s death. Any person
who is a relative of the senior and who has sufficient means shall maintain him
provided he is in possession of the property of the senior or would inherit his
property. If more than one such relatives are entitled to inherit his property,
then the maintenance would be proportionate to their inheritance.  

     While the senior must be an
Indian and at least 60 years of age, there is no such condition in respect of a
parent. In fact, the Act provides that it applies to citizens of India residing
abroad. How the Act would enforce its jurisdiction in a foreign land is a moot
point.

The application to the Tribunal
can be made by the senior citizen / parent himself, any other person or NGO
authorised by him. The Tribunal can even take suomoto cognisance of the
issue.

After inquiry, the Tribunal would
pass an order for maintenance and failure to comply with its order can lead to
penal action and imprisonment. The maximum maintenance allowance which may be
ordered by the Tribunal shall be such as may be prescribed by the respective
State Governments but not exceeding Rs. 10,000 per month. A claim for
maintenance can alternatively be made by the applicant under Chapter IX of the
Code of Criminal Procedure, 1973 but he cannot make it under both.

The Act also provides for the
constitution of an Appellate Tribunal before whom an appeal against orders of
the Maintenance Tribunal can be filed. Interestingly, the Act only gives the
right of appeal to a senior citizen or a parent aggrieved by the order of the
Maintenance Tribunal. It contains no provision for an appeal by the relative
aggrieved by the order of the Maintenance Tribunal! This is rather strange.
Another interesting facet is that the Act provides that a lawyer cannot
represent either party before the Maintenance Tribunal or the Appellate
Tribunal. However, if a parent so desires, then he can ask the State
Government’s District Social Welfare Officer to represent him. Why should an
Act deprive an old person from availing of legal representation? What if the
senior is a person who is unable to attend proceedings owing to ill-health,
incapacitation? He would then be forced to find some person / NGO who would
appear for him. Is it that easy to find someone? 

Abandoning Seniors

If any person who has been given
the care or protection of senior citizens, leaves them in any place with the
intention of wholly abandoning them, then he shall be punishable with
imprisonment for a term of up 3 month and / or fine of Rs. 5,000. Intention of
wholly abandoning would be demonstrated only through circumstantial evidence
and actual conduct and the onus would be on the person who alleges abandonment.
Such a case would be tried before a Magistrate Court and not by the Maintenance
Tribunal.

Protection of Life and Property

Section 22(2) of the Act mandates
that the State Government shall prescribe a comprehensive action plan for
providing protection of the life and property of senior citizens. To enable
this, section 32 empowers it to frame Rules under the Act. Accordingly, the
Maharashtra Government has notified the Maharashtra Maintenance and
Welfare of Parents and Senior Citizens Rules, 2010. Rule 20 which has
been framed in this regard, provides that the Police Commissioner of a city
shall take all necessary steps for the protection of the life and property of
senior citizens. Some of the important steps laid down under the Action Plan
under Rule 20 are as follows:

(a) Every police station must
maintain an up-to-date list of seniors living within its jurisdiction, especially
those living by themselves. One wonders whether this is being done in practice?

(b) A police officer with a social
worker should visit all seniors at least once a month and as soon as possible
on requests of assistance.

(c) Volunteers’ committees must be
formed for interaction between the police station and seniors.

(d) Every station must maintain a
register of all offences committed against seniors.

(e) Antecedents of servants working
for seniors must be promptly verified by the police on request from seniors.

(f)  A monthly report must be
submitted to the District Magistrate / Director General of Police about crimes
against seniors and the status of complaints and preventive steps taken.

(g) Every Police Commissioner must
start a toll-free help line for seniors. Mumbai police has set up an Elder Line
at 1090. 

Void Transfers

Section 23 of the Act introduces
an interesting provision. If any senior citizen who, after the commencement of
this Act, has transferred by way of gift or otherwise, his property, on the
condition that the transferee shall provide the basic amenities and basic
physical needs to the transferor and such transferee refuses or fails to
provide such amenities and physical needs, then the transfer of property shall
be deemed to have been made by fraud or coercion or under undue influence and
shall at the option of the transferor be declared void by the Tribunal. This
negates every conditional transfer if the conditions subsequent are not
fulfilled by the transferee. Property has been defined under the Act to include
any right or interest in any property, whether movable/immovable/ancestral/self
acquired/tangible/intangible.

In Promil Tomar vs. State of
Haryana, (2014) 175 (1) PLR 94, the Punjab and Haryana High Court has
held that the words ‘gift or otherwise’ in the section would include the
transfer of possession of a property or part thereof. It would cover a transfer
by way of lease, mortgage, gift or sale deed. Even a transfer of possession to
a licencee by a senior citizen would be covered. In Sunny Paul vs. State
NCT of Delhi, WP(C) 10463/2015 (Del), the Delhi High Court has held
that interest of the senior citizen as tenants/licencees of the property is
also covered under the section even though they are not owners of the property.
It further held that a claim for maintenance under the Act and an application
for setting aside a void transfer u/s. 23 of the Act are separate and different
remedies and one is not a pre-condition for the other

In Rajkanwar vs. Sita Devi,
AIR 2015 Raj 61, the Rajasthan High Court has held that a Will would
not be covered under the above provision since it is not a transfer inter vivos
and does not involve any transfer. A Will is only a legal expression of the
wishes of the testator. 

Eviction from House

One of the most contentious and
interesting facets of the Act has been whether the senior citizen / parent can
make an application to the Tribunal seeking eviction from his house of the
relative who is harassing him? Can the senior citizen / parent get his son /
relative evicted on the grounds that one has not been allowing him to live
peacefully? Different High Courts have taken contrary views in this respect.
The Kerala High Court in CK Vasu vs.The Circle Inspector of Police, WP(C)
20850/2011 has taken a view that the Tribunal can only pass a
maintenance order and the Act does not empower the Tribunal to grant eviction
reliefs. A Single Judge of the Delhi High Court in Sanjay Walia vs. Sneha
Walia, 204(2013) DLT 618 has held that for an eviction application, the
appropriate forum would be a Court and not the Maintenance Tribunal.

However, another Single Judge of
the Delhi High Court in Nasir vs. Govt. of NCT of Delhi & Ors., 2015
(153) DRJ 259 has held that while interpreting the provisions, the
object of the Act had to be kept in mind, which was to provide simple,
inexpensive and speedy remedy to the parents and senior citizens who were in
distress, by a summary procedure. The provisions had to be liberally construed
as the primary object was to give social justice to parents and senior
citizens. Accordingly, it upheld the eviction order by the Tribunal. A similar
view was taken in Jayantram Vallabhdas Meswania vs. Vallabhdas Govindram
Meswania, AIR 2013 Guj 160 where the Court held that setting aside of
void transfers u/s. 23 would even include cases where only possession of
property has been given instead of an actual legal transfer. It thus upheld the
vacation of the premises as directed by the Tribunal. A very interesting
judgment was delivered by the Division Bench of the Punjab & Haryana High
Court in J. Shanti Sarup Dewan, vs. Union Territory, Chandigarh, LPA
No.1007/2013 where it held that there had to be an enforcement
mechanism set in place especially qua the protection of property as
envisaged under the said Act.It held that the son was thus required to move out
of the premises of his parents to permit them to live in peace and civil
proceedings could be only qua a claim thereafter if the son so chose to make
but that too without any interim injunction. It was not the other way round
that the son and his family kept staying in the house and asked his parents to
go to the Civil Court to establish their rights knowing fully well that the time
consuming civil proceedings may not be finished during their life time.

The Court held that it did not
have the slightest of hesitation in coming to a conclusion that all necessary
directions could thus be made under the said Act to ensure that the parents
lived peacefully in their own house without being forced to accommodate their
son.

Recently, a Single Judge of the
Delhi High Court had an occasion to consider all the aforesaid judgments on the
power of eviction of the Tribunal. It held that the requirement that the
children or relatives must be in line to inherit the property was mandated only
for issuing direction with regard to maintenance. To invoke jurisdiction for
protection of life of the senior citizen or setting aside void transfers no such
pre-condition had to be satisfied. Further, directions to remove the children
from the property was necessary in certain cases to ensure a normal life of the
senior citizens. After considering all decisions on the issue, the Court held
that it was in agreement with the view expressed in the case of Nasir (supra)
that the provisions of Act, 2007 have to be liberally construed as one of the
primary objects of the Act is to protect the life and property of senior
citizens. Consequently, it held that u/s. 23 of the Act, the Maintenance
Tribunal could issue an eviction order to ensure that senior citizens live
peacefully in their house without being forced to accommodate a son who
physically assaults and mentally harasses them or threatens to dispossess them.

Since the Act conferred on the
Maintenance Tribunal the express power to declare a transfer of property void
at the option of the transferor u/s. 23, it had to be presumed that the intent
of the Legislature is to empower the Maintenance Tribunal to pass effective and
meaningful orders including all consequential directions to give effect to the
said order. The direction of eviction was a necessary consequential relief or a
corollary to which a senior citizen would be entitled upon a transfer being
declared void. It accordingly directed the Police Station to evict the son.

Conclusion

This is an interesting
social welfare statute designed to provide speedy redressal to parents and
seniors. While there continue to be judicial debates on whether eviction is possible,
one tends to think that the decisions upholding eviction would ultimately
prevail. The Delhi High Court, in a somewhat similar case of Sachin vs.
Jhabbu Lal, RSA 136/2016(analysed in detail in this Feature in the
BCAJ of January 2017) has held that in respect of a self acquired
house of the parents, a son had no legal right to live in that house and he
could live in that house only at the mercy of his parents up to such time as
his parents allow. That decision was not rendered under the context of this Act
but yet the ratio was the same. To conclude one only wonders, do we need a law
or a Court to tell us to take care of our parents? The times, truly have
changed!

23. TS-34-ITAT-2017(DEL) GE Energy Parts Inc. vs. ADIT A.Y.: 2001-02, Date of Order: 27th January, 2017

Article 5 and 7 of India USA DTAA – LO of Taxpayer from
where core sales activities of the taxpayer as well as other foreign group
entities are carried on by the expatriates (employed by some of the foreign
group entities) constitute a fixed place PE in India for the Taxpayer as well
as other group entities. An agent who works for more than one entity related to
each other cannot be treated as independent. Such agent who carries on core
sales activities in India constitutes Dependent Agency Permanent Establishment
(DAPE) in India – profit attribution has to consider all the functions performed
and risk taken by the PE

Facts

The Taxpayer was a USA company and tax resident of USA. The
Taxpayer was part of a group engaged in the business of sale of equipment
relating to oil and gas, energy, transportation and aviation business to
customers in India.

Taxpayer had set up a liaison office (LO) in India with the
approval of Reserve Bank of India (RBI), to carry out liaison activities in
India. Taxpayer entered into a service agreement with one of its Indian
affiliate in terms of which the Indian affiliate was required to act as a
communication link with regulatory authorities, provide information of customer
needs, and trends relating to group’s products in India, etc. A survey
under the Act was conducted at the premises of the LO followed by further post
survey enquiry. Following evidences were examined by the Assessing Officer
(AO). 

–   MOU signed with the customers

–   E-mail chains between the employees of
various group entities

–   Commercial proposals to customers and
purchase orders

–  Visa of expatriates

–   Linkedin profiles of personnel in India

–  Letter of awarding of contracts

–   Details of employees working in the liaison
office – like name, job description, self-appraisal report, employment letter

–  Lease deed of liaison office

–  Bank statements

–  Letters filed to RBI

–   Lease agreement in respect of residence of
expatriates

–   Power of attorney granted to expatriates for
issue of cheques

–   Statutory audit report

–   Attendance sheet of employees working in the
LO

Based on the
evidences, following facts were noted

– Various expatriates of foreign group entities
were working in India in leadership roles along with support by team of persons
employed by other group entities (ICo)

–  The expatriates as well as the employees of
ICo (group personnel) undertook various sales and marketing function including
price negotiation, supervision, administration and after sales activities of
the overall lines of businesses of the group irrespective of any specific
entity in India. These activities were carried out from the LO in India.

–   Group personnel managed the business of
foreign group entities, secured orders and did everything possible that could
be done qua the Indian operations of the overseas group in India.

–  Group personnel were fully involved in negotiating
the deal with the customers in India and were not merely acting as
communication channel

•    They made direct offers and entertained
requests of the customers for revision of the offers.

•   They were empowered to change/finalise the
terms and conditions of the customer contracts and hence decision making in
relation to the customer contracts was also done in India.

•    They were in full command of the sales
activities in India and did not tolerate the interference of the overseas group
in deciding the terms to be agreed with the customers or for modifying customer
contracts.

•    Entire correspondence with customers was
done in India by expatriates.

•    They advised overseas group about the manner
in which a proposal is to be sent to customer and this indicated that they
acted as a sales team in India.

–  Specific rooms/chambers in the LO were
allotted to the expatriates at the premises of the LO. Their computer, laptops
and business related documents were all stored in such allotted rooms.

–   Further the group personnel also occupied the
premises of the LO which was evident from the attendance sheet maintained for
people working at the LO premises.

AO contended that in terms of Article 5 of India-USA DTAA, a
sales outlet used for receiving or soliciting orders also constitutes a PE.
Thus the LO from where the sale related activities were carried out and which
was at the disposal of the expatriates resulted in a fixed place PE in India
for the Taxpayer.

Moreover, group personnel, who habitually concluded contracts
and secured orders in India wholly or almost wholly for the overseas group as
well as participated in the price negotiations.

Furthermore, the expatriates and employee also created
Dependent Agency Permanent Establishment (DAPE) in India. Consequently, profits
of Taxpayer making sales in India are liable to be taxed as business income in
India as per Article 5 and 7 of the India-USA DTAA .

Taxpayer argued that the sale consideration in relation to
sale of equipment was not taxable in India since the title in respect of these
equipment was transferred outside India as well as payment was also received
outside India. Moreover, the activities in India were limited to LO activities
as approved by RBI and this is evident by the fact that the RBI approval was
not revoked. Nonetheless, the activities carried out in India were of
preparatory or auxiliary character.

Held

ITAT while upholding the AO’s contention provided the
following justification:

On Fixed place PE

–   Core sales activities of finding the
customers and finalizing the deals with customers including the pre-sale and
post sales activities were done by the expatriates and employees in India. Such
activities being the core activities does not qualify as P&A.

–  The expatriates were constantly using the
premises of the LO, specific chambers/rooms were allotted to them in the LO
premise with their name plates affixed. Though the expatriates were on the
payroll of foreign group entity, they constantly occupied the premises of the
LO and carried out the activities on behalf foreign group entities.

–   Further the employees of ICo also occupied
the premises of LO and worked under the control and supervision of the
expatriates, who in turn worked for the foreign group entities. Evidences found
during the course of survey like attendance sheet maintained at the LO premises
also supported the fact that the premise was used by expatriates and employees
of ICo.

–   Marketing and sales are income generating
activities in themselves, since the core activities in relation to sales and
marketing is carried on in India through the LO, it constitutes a fixed place
PE. 

On Agency PE

–   In the facts of the case expatriates were
working for the foreign group entities who are related to one another. The mere
fact that expatriates work for more than one entity does not make them
independent. The related entities are to be treated as a single unit.

–   Article 5 of the DTAA does not require
negotiating ‘all elements and details of a contract for constitution of a PE it
only requires habitual exercises of an authority to conclude contracts so long
as agent’s activities are not in the nature of P&A

–   Since the activities of the expatriates are
not in the nature of P&A, they clearly have an authority to conclude
contract and hence constitute DAPE.

On attribution of income

–  As espoused by SC in DIT vs. Morgan
Stanley [292 ITR 416], there is no need of any further attribution to PE if
it has been remunerated at ALP.

However, if TP analysis does not adequately
reflect functions performed and risks assumed, there would be a need to
attribute further profits to the PE for those functions/risks which have not
been considered.

– In
the facts of the case, the survey revealed that the activities carried on by
group personnel was not merely liaison activities but extended to commercial
activities however the ALP was determined only on basis the liaison and not the
commercial activities undertaken in India. Since the commercial activities
resulted in a PE in India and such services have not been remunerated at all, there will be
need for further profit attribution to the PE.

Loan or Advance to HUF by Closely Held Company – Whether Deemed Dividend U/S. 2 (22)(e) – Part II

(Continued from the
last issue)

2.5     As mentioned in para 2.4 read with para
2.1.2.1 of  Part-I of this write-up, the
Tribunal had decided the issue in favour of assessee merely by following the
decision of the co-ordinate bench in the case of Binal Sevantilal Koradia (HUF)
[Koradia (HUF) ‘s case] which in turn had followed the decision of the Special
Bench of the Tribunal in Bhaumik Colour’s case [313 ITR 146(AT)]. As further
mentioned in para 2.4 read with para 2.3 of Part –I of this write-up, the High
Court had reversed the decision of the Tribunal merely by referring to the provisions
of section 2(22)(e) and stating that it is not disputed that the Karta is a
member of the HUF which has taken a loan from G. S. Fertilizers Pvt. Ltd.
(GSF). As stated in para 1.4 of Part – I of this write-up, under the New
Provisions, loan given to two categories of persons are covered Viz. i) certain
shareholder (first limb of the provisions) and ii) the ‘concern’ in which such
shareholder has substantial interest (second limb of the provisions).

Gopal and Sons HUF vs. CIT(A)- (2017) 145 DTR 289 (SC)

3.1     The
issue of taxability of the loan taken by the assessee HUF from GSF as deemed
dividend u/s 2(22)(e) in the hands of the assessee HUF for the Asst. Year.
2006-07 came-up for consideration before the Apex Court at the instance of
assessee HUF.The following question of law was raised before the Court:

           “Whether in view of the settled principle that
HUF cannot be a registered shareholder in a company and hence could not have
been both registered and beneficial shareholder, loan/ advances received by HUF
could be deemed as dividend within the meaning of Section 2(22)(e) of the
Income Tax Act, 1961 especially in view of the term ” concern” as defined in
the Section itself?”

3.2      On behalf of the assessee HUF, it was
contended that the tribunal had correctly explained the legal position that HUF
cannot be either beneficial owner or registered owner of the shares and hence
the amount of such loan cannot be taxed as deemed dividend u/s 2(22)(e) in the
hands of the assessee HUF.

3.2.1 In support
of the above contention, raised on behalf of the assessee HUF, reliance was
placed on the observations of the Apex Court in the case of C.P. Sarathy
Mudaliar (83 ITR 170) referred to in para 1.3.1 of Part-I of this write-up in
which, in substance, it is stated that an HUF cannot be a shareholder of the
company and the shareholder of a company is the individual who is registered as
shareholder in the books of the company. In that case, as mentioned in para 1.3
of Part-I of this write-up, the Court took the view that a loan granted to a
beneficial owner of the shares who is not a registered shareholder can not be
regarded as loan advanced to a ‘shareholder’ of the company within the mischief
of section 6A(e) of the 1922 Act.

3.3    On
the other hand, the counsel appearing on behalf of the Revenue had relied on
the findings of the AO and CIT(A) and submitted that on the facts of this case,
the Revenue was justified in taxing the amount in question as deemed dividend
in the hands of the assessee HUF.

3.4     For
the purpose of deciding the issue, the Court noted the facts of the assessee
HUF referred to in para 2.1 of Part-I of this write-up. The Court also referred
to the relevant provisions of section 2(22)(e) including Explanation 3 which
defines the expression “concern” (which includes HUF) and the meaning of
substantial interest of a person in a ‘concern’, other than a company, which
effectively states that a person shall deemed to have substantial interest in a
concern (in this case HUF) if he is, at any time during the previous year,
beneficially entitled to not less than 20% of the income of such ‘concern’ (in
this case HUF).

3.4.1 The Court then also referred to the contention
of the assessee HUF before the CIT(A) that the assessee being HUF, it was not
the registered shareholder and that the GSF had issued shares in the name of
Shri Gopal Kumar Sanei, the Karta of the HUF, and not in the name of the
assessee HUF as shares could not be directly allotted to an HUF and hence, the
New Provisions of section 2(22)(e) cannot be attracted. In this context and in
the context of the provisions of section 2(22)(e), the Court then observed as
under : 

          “Taking note of the aforesaid
provision, the CIT(A) rejected the aforesaid contention of the assessee. The
CIT(A) found that examination of annual returns of the Company with Registrar
of Company (ROC) for the relevant year showed that even if shares were issued
by the Company in the name of Shri. Gopal Kumar Sanei, Karta of HUF, but the
Company had recorded the name of the assessee/HUF as shareholders of the
Company. It was also recorded that the assessee as shareholder was having
37.12% share holding. That was on the basis of shareholder register maintained
by the Company. Taking aid of the provisions of the Companies Act, the CIT(A)
observed that a shareholder is a person whose name is recorded in the register
of the shareholders maintained by the Company and, therefore, it is the
assessee which was registered shareholder. The CIT(A) also opined that the only
requirement to attract the provisions of section 2(22)(e) of the Act is that
the shareholder should be beneficial shareholder. On this basis, the addition
made by the AO was upheld.”

3.5      The Court then noted the view taken by
the Tribunal and its reliance on the decision of the co-ordinate bench in
Koradia HUF’s case (supra) referred to in para 2.1.2 of Part-I of this
write-up. The Court then stated that the High Court has reversed the decision
of the Tribunal with one line observation, viz., ‘the assessee did not dispute
that the Karta is a member of HUF which has taken the loan from the Company
and, therefore, the case is squarely within the provisions of section 2(22)(e)
of the Income-tax Act’.

3.6     The Court then stated that Sec. 2(22)(e)
creates a fiction, thereby bringing any amount otherwise than as dividend in to
the net of dividend under certain circumstances. It gives artificial definition
of dividend. It treats the amount as deemed dividend which is not a real
dividend. As such, the Court reiterated the settled position that a provision
which is a deemed provision and fictionally creates certain kinds of receipts
as dividend is to be given strict interpretation. Therefore, unless all the
conditions contained in the provision are fulfilled, the receipt cannot be
deemed as divided. Further, the Court reiterated another settled principle,
viz., in case of a doubt or where two views are possible, benefit shall accrue
in favour of the assessee.

3.7     After referring to the legal position with
regard to deeming fiction, the Court, in the context of the section 2(22)(e),
stated that certain conditions need to be fulfilled in order to attract these
provisions The Court then pointed out that for the purpose of this case,
following conditions need to be fulfilled

“(a)   Payment is to be made by way of advance or
loan to any concern in which such shareholder is a member or a partner.

(b)    In the
said concern, such shareholder has a substantial interest.

(c)  Such advance or loan should have been made
after the 31st day of May, 1987.”

3.8     After referring to the provisions contained
in Explanation 3 [referred to in para 3.4 above], the Court observed as under :

          “In the instant case, the payment in
question is made to the assessee which is a HUF. Shares are held by Shri. Gopal
Kumar Sanei, who is Karta of this HUF. The said Karta is, undoubtedly, the
member of HUF. He also has substantial interest in the assessee/HUF, being its
Karta. It was not disputed that he was entitled to not less than 20% of the
income of HUF. In view of the aforesaid position, provisions of section
2(22)(e) of the Act get attracted and it is not even necessary to determine as
to whether HUF can, in law, be beneficial shareholder or registered shareholder
in a Company.”

3.9     Finally, the Court decided the issue in
favour of Revenue and concluded as under :

          “ It is also found as a fact, from the
audited annual return of the Company filed with ROC that the money towards
share holding in the Company was given by the assessee/HUF. Though, the share
certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but
in the annual returns, it is the HUF which was shown as registered and
beneficial shareholder. In any case, it cannot be doubted that it is the beneficial
shareholder. Even if we presume that it is not a registered shareholder, as per
the provisions of section 2(22)(e) of the Act, once the payment is received by
the HUF and shareholder (Mr. Sanei, karta, in this case) is a member of the
said HUF and he has substantial interest in the HUF, the payment made to the
HUF shall constitute deemed dividend within the meaning of clause (e) of
section 2(22) of the Act. This is the effect of Explanation 3 to the said
Section, as noticed above. Therefore, it is no gainsaying that since HUF itself
is not the registered shareholder, the provisions of deemed dividend are not
attracted.”

3.9.1  With the above conclusion, the Court stated
that the judgment of the Apex Court in the case C.P. Sarathy Mudaliar (supra)
will have no application. That was a judgment rendered in the context of
section 2(6A)(e) of the 1922 Act wherein there was no provision like
Explanation 3. 

Conclusion

4.1     With the above judgment of the Apex Court,
it is now settled that in case of a loan given by a  closely held company to an HUF (post May
‘87), and if other conditions of the second limb of the New Provisions of
section 2(22)(e) are satisfied, the deemed dividend becomes taxable in the
hands of the HUF. The contention that HUF as such is not a registered
shareholder  and therefore, the New
Provisions of section 2(22)(e) are not attracted even if it is the beneficial
owner of the shares is not likely to support the case of the assessee to avoid
taxation of deemed dividend under the New Provisions in the hands of the HUF.

4.1.1 From the above judgment of the Apex Court, it
would appear that once a loan is given to an HUF by a closely held company and
the registered shareholder of such company with requisite shareholding is a
member of the HUF having substantial interest (i.e. beneficially entitled to
not less than 20% of the income of the HUF), the second limb of the New
Provisions of section  2(22)(e) will be
attracted. In such a case, as observed by the Court (refer para 3.8 above), it
would not be necessary to determine as to whether HUF can, in law, be
beneficial shareholder or registered shareholder in a company.

 4.1.2 Based
on the judicial decisions referred to in part I of this write-up, the view
which prevailed that for the purpose of invoking second limb of the New
Provisions of section 2(22)(e) (dealing with loan given to a ‘concern’),only
such shareholder (with requisite shareholding) who is registered as well as
beneficial owner of the shares should be member or partner in a ‘concern’
should not hold good in view of the observations of the Apex Court (refer paras
3.8 and 3.9 above). However, the requirement that he should be beneficially
entitled to not less than 20% of the income of such ‘concern’ at any time
during the previous year (substantial interest in a ‘concern’) continues.

4.1.3  The above judgment is also relevant for the
purpose of deciding the taxable person under the second limb of the New
Provisions to section  2(22)(e) in cases
where a loan is given to any ‘concern’ referred to in Explanation 3(a) to
section 2(22)(e). It seems that, the issue referred to in para 1.4.2.1 of part
I of this write-up should now impliedly get settled to the effect that in such
cases, the deemed dividend is taxable in the hands of the ‘concern’ to whom the
loan is given by the company. This gives support to the view expressed in CBDT
Circular No. 495 dtd. 22/9/1987 wherein it has been opined that the deemed
dividend, in such case, would be taxed in the hands of a ‘concern’ (i.e.
non-shareholder). As such, in this context, the judicial precedents referred to
in that para will not be useful.

4.2   In the above case, the share certificates
were issued by the company in the name of the Karta but in the annual returns
of the company filed with the ROC, the HUF was shown as registered and
beneficial shareholder. This was the undisputed findings of the lower
authorities and on that basis, the Court, it seems, was inclined to treat the
HUF as registered shareholder also.

          However, on these facts, the Court
concluded that it cannot be doubted that it is the beneficial owner and even if
it is not a registered shareholder, the payment received by the HUF wherein the
concerned shareholder is a member with substantial interest constitutes, in
view of the Explanation 3 to the section 2(22)(e), deemed dividend under the
second limb of the New Provisions of section 2(22)(e) in the hands of the HUF
(of course, to the extent provided in the section).

4.3    In
the above case, the Court also has clearly stated that for the purpose of this
case, to attract the second limb of the New Provisions of section 2(22)(e),
three conditions are required to be fulfilled (mentioned in para 3.7 above).
One such condition requires that in the ‘concern’ to whom the loan is given (in
which the specified shareholder is a member or a partner), such shareholder
should have a substantial interest (i.e. in this case, he should be
beneficially entitled to not less than 20% of the income of the HUF).

4.3.1 It is interesting to note that in the above
case, the Court has proceeded on the basis that it was not disputed that the
Karta (who was claimed to be the registered shareholder) is beneficially
entitled to not less than 20% of the income of the HUF. Therefore, the Court
has not gone into the correctness of the satisfaction of this condition and in
law, there could be debate on satisfaction of this condition.

4.3.2  From the facts of the above case and context
in which the question raised before the Apex Court is ultimately decided, it
would appear that in this case, the Court was not concerned with the issue of
applicability of the second limb of the New Provisions of section 2(22)(e) to
cases where only the beneficial owner of share in a closely held company (with
requisite percentage) is a member of a ‘concern’ with substantial interest and
such company has given a loan to such ‘concern’.

4.4      In the above case, the Apex Court has
reiterated the settled position that section 2(22)(e) is a deeming fiction and
therefore, it has to be strictly construed. The Court has also reiterated other
settled principle that in case of doubt or where two views are possible in
construing a provision under the Act, the view favourable to the assessee
should be taken.

4.5     In
the above case, the Court was concerned with the effect of the second limb of
the New Provisions of section 2(22)(e) read with Explanations 3 and therefore,
effect of the judgment should be confined only to that part of the provisions.

4.6       
In view of the above judgment of the Apex Court, in the context of the
issues under the consideration, many decisions of the courts/Tribunal (referred
to in part I of this write-up) including the decision of the Special Bench in
Bhaumik Colour’s case (supra) will be affected and will have to be read
and applied accordingly.

Payments for Use of Online Database – Whether Royalty?

Issue for
Consideration

Under the
Income-tax Act, payment of royalty is one of the items which is subjected to
deduction of tax at source u/s. 194J, if the payment is made to a resident, or
u/s. 195, if the payment is made to a non-resident. The term “royalty” has been
defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act, as well as
in various double taxation avoidance agreements (DTAAs) that India has signed
with different countries. 

The definition
in explanation 2 to section 9(1)(vi) defines the term “royalty” as under:

Explanation 2. —For the purposes of this
clause, “royalty” means consideration (including any lump sum
consideration but excluding any consideration which would be the income of the
recipient chargeable under the head “Capital gains”) for—

 

(i) the transfer of all or any rights
(including the granting of a licence) in respect of a patent, invention, model,
design, secret formula or process or trade mark or similar property;

 

(ii) the imparting of any information
concerning the working of, or the use of, a patent, invention, model, design,
secret formula or process or trade mark or similar property;

 

(iii) the use of any patent, invention,
model, design, secret formula or process or trade mark or similar property;

 

(iv) the imparting of any information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill;

 

(iva) the use or right to use any industrial,
commercial or scientific equipment but not including the amounts referred to in
section 44BB;

 

(v) the transfer of all or any rights (including
the granting of a licence) in respect of any copyright, literary, artistic or
scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting, but not
including consideration for the sale, distribution or exhibition of
cinematographic films; or

 

(vi) the rendering of any services in
connection with the activities referred to in sub-clauses (i) to (iv), (iva)
and(v).

Explanations 3
to 6 to section 9(1)(vi) clarify various aspects of and terms used in the
definition of royalty. Explanations 4 to 6 were inserted by the Finance Act
2012, with retrospective effect from 1.4.1976. Explanations 3 to 6 read as
under:

Explanation 3. —For the purposes of this
clause, “computer software” means any computer programme recorded on
any disc, tape, perforated media or other information storage device and
includes any such programme or any customized electronic data.

 

Explanation 4. —For the removal of doubts, it
is hereby clarified that the transfer of all or any rights in respect of any
right, property or information includes and has always included transfer of all
or any right for use or right to use a computer software (including granting of
a licence) irrespective of the medium through which such right is transferred.

 

Explanation 5. —For the removal of doubts, it
is hereby clarified that the royalty includes and has always included
consideration in respect of any right, property or information, whether or not—

 

(a) the possession or control of such right,
property or information is with the payer;

(b) such right, property or information is
used directly by the payer;

(c) the location of such right, property or
information is in India.

 

Explanation 6. —For the removal of doubts, it
is hereby clarified that the expression “process” includes and shall
be deemed to have always included transmission by satellite (including
up-linking, amplification, conversion for down-linking of any signal), cable,
optic fibre or by any other similar technology, whether or not such process is
secret;

The issue has
arisen before the courts as to whether fees for subscription to an online
database, containing standard information available to all subscribers, amounts
to royalty or not. While the Karnataka High Court has taken the view that such
payments amount to royalty, the Authority for Advance Ruling has taken a
contrary view, holding that such payments are not royalty.

Factset Research
Systems’ case

The issue came
up before the Authority for Advance Rulings in the case of Factset Research
System Inc., in re (2009) 317 ITR 169 (AAR).

In this case,
the assessee was a US company, which maintained a database outside India
containing financial and economic information, including fundamental data of a
large number of companies worldwide. Its customers were financial
intermediaries and investment banks, which required access to such such data.
The database contained public information collated, stored and displayed in an
organised manner by the assessee, such information being available in the
public domain in a raw form. Through the database combined with the use of
software, the assessee enabled its customers to retrieve this publicly
available information within a shorter span of time and in a focused manner.
The database contained historical information, and the software to access the
database, and other related documentation were hosted on its mainframes and
data libraries maintained at the data centres in the USA.

To access and
view the database, the customers had to download a client interface software
(similar to an Internet browser). Customers could subscribe to specific
database as per their requirements, and could view the data on their computer
screens. The assessee entered into a Master Client License Agreement with its
customers, under which it granted limited, non-exclusive, non-transferable
rights to its customers to use its databases, software tools, etc. the
assessee did not carry on any business operations in India, and it had no agent
in India acting on its behalf, or having an authority to conclude contracts.
Subscription fees were received by it directly outside India from its
customers.

The assessee
sought an advance ruling on the taxability of such subscriptions received by
it, under the Income-tax Act or under the India-USA DTAA. It claimed before the
AAR that such fees received from customers in India were not taxable in India,
as they did not constitute royalty or fees for technical services either under
the Income-tax Act or under the India-USA DTAA. Further, as it did not have any
permanent establishment in India, the fees could not be taxed as business
income in view of article 7 of the India-USA DTAA.

The AAR
examined the material terms of the Master Client License Agreement. It noted
that the assessee granted the licensee limited , non-exclusive,
non-transferable rights to use the software, hardware, consulting services and
databases. The consulting services were provided through certain consultants,
who demonstrated FactSet’s products and its uses to customers. Such services
were not really required, as the assessee provided helpdesk facilitation free
of cost, though there was more such facilitation centre in India. It was further
clarified that no hardware was being provided to customers in India.

The AAR noted
that the services were provided solely and exclusively for the licensee’s own
internal use and business purposes only and that too in the licensee’s business
premises. Only the licensee’s employees, who had a password or user ID, could
access the service. The licensee could not use or permit any individual or
entity under its control to use the services and the licensed material for any
unauthorised use or purpose. All proprietary rights, including intellectual
property rights in the software, databases and all related documentation
(licensed material) remained the property of the assessee or its third-party
data/software suppliers. The licensee was permitted to use the assessee’s name
for the limited purpose of source attribution of the data obtained from the
database, in the internal business reports and other similar documents. The
licensee was solely responsible for obtaining required authorisation from the
suppliers for products received through them, and in the absence of such
authorisation, the assessee had the right to terminate the licensee’s access to
any supplier product.

The licensee
agreed not to copy, transfer, distribute, reproduce, reverse engineer, decrypt,
decompile, disassemble, create derivative works from, or make any part of the
service, including the data received from the service, available to others. The
licensee could use in substantial amounts of the Licensed Materials in the
normal conduct of its business for use in reports, memoranda and presentations
to licensee’s employees, customers, agents and consultants, but the assessee
(suppliers and their respective affiliates) reserved all ownership rights and
rights to redistribute the data and databases. Under the agreement, the
licensee acknowledged that the service and its component parts constituted
valuable intellectual property and trade secrets of the licensor and its
suppliers. The licensee agreed to cooperate with the licensor and suppliers to
protect the proprietary
rights in the software and databases during the term of the agreement.

The agreement
further provided that on termination of the agreement, the licensee would cease
to use all the licensed material, return any licensor hardware on request, and
expunge all data and software from its storage facility and destroy all
documentation, except such copies of data to the extent required by law. The
licensee could not use any part of the services to create a proprietary
financial instrument or to list on its exchange facilities.

On behalf of
the assessee, it was argued before the AAR that the assessee provided to the
subscriber, a mere right to view the information or access to the database,
while online. No transfer, including licensing of any right in respect of
copyright, was involved in this case. The right that the customer got was a
right to use copyrighted database and not copyright in the database. According
to the assessee, clause (v) of explanation 2 to section 9(1)(vi) did not encompass
the use of copyrighted material. The data was available in the public domain,
and was presented in the form of statements/charts after analysis, indexing,
description and appending notes for facilitating easy access. These value
additions were outside the public domain, and the copyright in them was not
transferred or licensed to the subscribers. The copyright which the assessee
had was similar to the head notes and indexing part of law reports. It was
submitted that none of the other clauses of explanation 2 could be invoked to
bring the subscription fee within the ambit of royalty u/s. 9(1)(vi).

So far as the
DTAA was concerned, it was argued that the fee had not been paid for the use of
or the right to use any copyright. The term “use” in the context of royalty
signified exploitation of property in the form of copyright, but not use of the
copyrighted product. The customers did not acquire any exclusive rights
enumerated in section 14(a) of the Indian Copyright Act.

On behalf of
the Department, reliance was placed on sections 14(a)(i) and (vi) of the Indian
Copyright Act for the argument that the rights specified therein were granted
to the customers, and that therefore there was a transfer of rights in respect
of the copyright. It was further argued that the data could be rearranged
according to the needs of the subscriber, and this amounted to adaptation
contemplated by sub clause (vi) of section 14(a) of the Indian Copyright Act.
Clause (iv) of explanation 2 to section 9(1)(vi) was also sought to be invoked
by the Department, by claiming that this amounted to imparting any information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill.

The AAR noted
that the assessee’s database was a source of information on various commercial
and financial matters of companies and similar entities. What the assessee did
was to collect and collate the said information/data, which was available in
public domain, and put them all in one place in the proper format, so that the
customer could have easy and quick access to this publicly available
information. The assessee had to bestow its effort, experience and expertise to
present the information/data in a focused manner, so as to facilitate easy and
convenient reference to the user. For this purpose, it was called upon to do
collation, analysis, indexing and noting, wherever necessary. These value
additions were the product of the assessee’s efforts and skills, and they were
outside the public domain. In that sense, the database was the intellectual
property of the assessee, and copyright attached to it.

In answer to
the question as to whether, in making the centralised data available to the
licensee for a consideration, whether it could be said that any rights which
the applicant had as a holder of copyright in the database were being parted in
favour of the customer, the AAR’s view was in the negative. The copyright or
other proprietary rights over the literary work remained intact with the
assessee, notwithstanding the fact that the right to view and make use of the
data for internal purposes of the customer was conferred upon the customer.
Several restrictions were placed on the licensee, so as to ensure that the
licensee could not venture on a business of his own, by distributing the data
downloaded by him or providing access to others. The grant of license was only
to authorise the licensee to have access to the copyrighted database, rather
than granting any right in or over the copyright as such.

In the view of
the AAR, the consideration paid was for the facility made available to the
licensee, and the license was a non-exclusive license. An exclusive license
would have conferred on the licensee and persons authorised by him, to the
exclusion of all other persons, including the owner of the copyright, any right
comprised in the copyright in a work. According to the AAR, the expression
“granting of license” in explanation 2 to section 9(1)(vi) took its colour from
the preceding expression “transfer of all or any rights”. It was not used in
the wider sense of granting a mere permission to do a certain thing, nor did
the grant of license denude the owner of copyrights of all or any of his
rights. According to the AAR, a license granting some rights and entitlements
attached to the copyright, so as to enable the licensee to commercially exploit
the limited rights conferred on him, is what is contemplated by the expression
‘granting of license’ in clause (v) of explanation 2.

The AAR
rejected the department’s argument that there was a transfer of rights in
respect of the copyright, by noting that the applicant was not conferred with
the exclusive right to reproduce the work (including the storing of it in
electronic medium) as contemplated by sub clause (i) of section 14(a) of the
Copyright Act. The exclusive right remained with the assessee, being the owner of
the copyright. By permitting the customer to store and use the data in the
computer for its internal business purpose, nothing was done to confer the
exclusive right to the customer. Such access was provided to any person who
subscribed, subject to limitations. The copyright of the assessee had not been
assigned or otherwise transferred, so as to enable the subscriber to have
certain exclusive rights over the assessee’s works. The AAR noted that the
Supreme Court, in SBI vs. Collector of Customs 2000 (115) ELT 597, in a
case where the property in the software had remained with the supplier and
license fee was payable by SBI for use of the software in a limited way, at its
own centres for a limited period, had held that “countrywide use of the
software and reproduction of software are two different things, and license fee
for countrywide use cannot be considered as the charges for the right to
reproduce the imported goods.”

The AAR
further negated the Department’s argument that permitting the data to be rearranged
amounted to adaptation, by holding that that was not the adaptation
contemplated by sub clause (vi) of section 14(a) of the Copyright Act read with
the definition of adaptation as per section 2(a). Therefore, according to the
AAR, no right of adaptation of the work had been conferred on the subscriber,
and the subscription fees received by the assessee from the licensee (user of
the database) did not fall within the scope of clause (v) of explanation 2 to section 9(1)(vi).

Examining the
position from the perspective of the DTAA, the AAR observed that the use of or
right to use any copyright of a literary or scientific work was not involved in
the subscriber getting access to the database for his own internal purpose. It
was akin to offering of a facility for viewing and taking copies for its own
use, without conferring any other rights available to a copyright holder. The
AAR observed that the expression “use of copyright” was not used in a generic
and general sense of having access to a copyrighted work, but the emphasis was
on “the use of copyright or the right to use it”. It was only if any of the
exclusive rights which the owner of the copyright had in the database was made
over to the customer/subscriber, so that he could enjoy such right, either
permanently or for a fixed duration of time and make a business out of it,
would such arrangement fall within the ambit of the phrase ‘use or right to use
the copyright’. The AAR noted that no rights of exclusive nature attached to
the ownership of copyright had been passed on to the subscriber even partially,
the licensee was not conferred with the right of reproduction and distribution
of the reproduced works to its own clientele, nor was the subscriber given the
right to adapt or alter the work for the purposes of marketing it. Therefore,
the underlying copyright behind the database could not be said to have been
conveyed to the licensee who made use of the copyrighted product.

The AAR also
rejected the argument of the Department that there was imparting of information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill. According to the AAR, the information which the licensee
got to the database did not relate to the underlying experience or skills which
contributed to the end product, and the assessee did not share its experiences,
techniques or methodology employed in evolving the database with the
subscribers, nor impart any information relating to them. The information or
data transmitted to the database was published information already available in
public domain, and not something which was exclusively available to the
assessee. It did not amount to imparting of information concerning the
assessee’s own knowledge, experience or skills in commercial and financial
matters.

As regards the
Department’s argument that such payment also included equipment royalty, i.e.
for use or right to use any industrial, commercial or scientific equipment,
since the server, which maintained the database, was used by customers as a
point of interface, the AAR was of the view that the consideration was not paid
by the licensee for the use of equipment, but was for availing of the facility
of accessing the data/information collected and collated by the assessee.

The AAR was
therefore of the view that the subscription fee was not in the nature of
royalty, either under the Income-tax Act, or under the DTAA.

Wipro’s case

The issue
again came up for consideration before the Karnataka High Court in the case of CIT
vs. Wipro Ltd 355 ITR 284.

In this case,
the assessee made certain payments to a non-resident, Gartner Group,
USA/Ireland, for obtaining access to the database maintained by the group, on
which no tax was deducted u/s. 195 of the Income-tax Act. A show cause notice
was issued under section 201 to the assessee, asking it to explain the reasons
for non-deduction of tax at source.

The assessee
responded by stating that the payment was akin to making a subscription for a
journal or magazine of a foreign publisher, and though the journal contained
information concerning commercial, industrial or technical knowledge, the payee
made no attempt to impart the same to the payer. According to it, the payment
fell outside the scope of clause (ii) of explanation 2 to section 9(1)(vi).
Further, it was claimed that the payment was not contingent on productivity,
use, or disposition of the information concerning industrial, commercial or
scientific experience in order to be construed as royalty under article 12 of
the DTAA between India and USA. Further, the assessee claimed that the payment
was for the purposes of a business carried on outside India or for the purposes
of making or earning any income from any source outside India, and therefore fell within the exception (b) to section 9(1)(vi).

The assessing
officer held that the payments amounted to royalty within the meaning of
explanation 2 to section 9(1)(vi), or alternatively amounted to fees for
technical services, both of which were liable to tax in India, both under the
Act, as well as under the DTAA. The Commissioner(Appeals) upheld the order of
the assessing officer holding that the payments amounted to royalty.

The Income Tax
Appellate Tribunal allowed the assessee’s appeals, by holding that the payments
made to Gartner Group did not constitute royalty, as the same was in the nature
of subscription made to a journal or magazine, and no part of the copyright was
transferred to the assessee, and that therefore the income was not chargeable
to tax in India.

Before the
High Court, on behalf of the revenue, it was argued that the payment made by
the assessee to Gartner Group was by way of royalty, as what was granted to the
assessee was a licence to have access to the database maintained by Gartner
Group, which was a scientific and technical service. Therefore, there was
transfer of copyright to the extent of having access to the database maintained
by Gartner Group, which access, but for the license, would have been an
infringement of copyright, the copyright continuing to be with Gartner Group.
Therefore, payments made by the assessee amounted to royalty, and could not be
considered to be akin to subscription made to a journal or magazine.

On behalf of
the assessee, it was argued that the payment made by the assessee to Gartner
Group was not by way of royalty, as no part of copyright was transferred to the
assessee for having access to the database. Further, as the right conferred
upon the assessee was only to have access to the database, it was akin to
subscription to a journal or magazine, and nothing more than that, and could
not be called as royalty.

The Karnataka
High Court, after considering the arguments observed that in identical cases,
i.e. ITA No 2988/2005 and connected cases (reported as CIT vs. Samsung
Electronics Co Ltd 345 ITR 494), after considering the contentions which
were identical to the contentions raised in these appeals, the court had held
that the payment made by the assessee to a non-resident company would amount to
royalty. According to the High Court, the fact that the issue in those cases
related to shrink-wrapped or off-the-shelf software, while that in this case
related to access to a database which was granted online, would not make any
difference to the reasoning adopted by the court to hold that such a right to
access would amount to transfer of right to use the copyright, and would amount
to royalty.

The Karnataka
High Court accordingly held that the payment for online access to the database
amounted to royalty.

Observations

To appreciate
the issue, one needs to refer to the facts and the ratio of the Karnataka High
Court decision in Samsung Electronics case (supra); the reason being
that the high court, in deciding Wipro’s case, has simply followed the decision
in Samsung Electronics case. That was a case of payment of licence fees by a
distributor of software to the overseas company and the Court held that for understanding
the meaning of ‘copyright’, one had to make a reference to the Copyright Act,
in the absence of any definition of the term under the Income-tax Act.
According to the Karnataka High Court, the right to copyright work would also
constitute exclusive right of the copyright holder, and any violation of such
right would amount to infringement u/s. 51 of the Copyright Act. According to
the court, granting of licence for taking copy of the software, and to store it
in the hard disk, and to take a backup copy and the right to make a copy
itself, was a part of copyright, since in the absence of licence, it would
constitute an infringement of copyright. Therefore, what was transferred was
the right to use the software (a right to use a copy of the software for the
internal business), an exclusive right which the owner of the copyright owned.

Therefore,
according to the Karnataka High Court, in Samsung Electronics case, the right
to make a copy of the software and use it for internal business by making a copy
of the same, and storing the same in the hard disk of the designated computer,
and taking backup copy, would itself amount to copyright work u/s. 14(1) of the
Copyright Act. Licence was granted to use the software by making copies, which
work, but for the license granted, would have constituted an infringement of
copyright. The supply of a copy of the software and the grant of the right to
copy the software was also a transfer of the copyright, since, copyright was a
negative right, in the absence of which there would be an infringement of the
copyright.

According to
the Karnataka High Court, in Samsung Electronics case, software was different
from a book or a pre-recorded music CD, as books or pre-recorded music CD could
be used once they were purchased, while in the case of software, the
acquisition of the CD by itself would not confer any right to the end-user, the
purpose of the CD being only to enable the end-user to take a copy of the
software and storage in the hard disk of the designated computer. If licence
was granted in that behalf. In the absence of licence, it would amount to
infringement of copyright.

If one
examines the logic of the Karnataka High Court’s decision, it is clear that the
case of a distributor would stand on a different footing from that of an
end-user, because a distributor would have the right to reproduce the software
for further distribution to customers, and the payment of the licence fees
would be in the ratio of the number of software licenses sold by him. In the
case of an end-user, there would be no right to reproduce for resale.

Further, the
Karnataka High Court seems to have lost sight of the fact that the payment for
the license for use of the software is made at the time of purchase of the CD
itself, and the ‘online clicking’ of the terms of the license after
installation of the software on the computer is merely a formality, and does
not involve payment of any further consideration to the owner of the copyright.
Therefore, the distinction sought to be drawn by the Karnataka High Court
between copyrighted articles such as books and music CD on the one hand, and
software on the other hand, does not seem to be valid.

Besides,
access to an online database is quite different from purchase of a
shrink-wrapped software, and an exclusive reliance on the logic of a decision
in Samsung Electronics case  delivered in
the context of purchase of shrink-wrapped software to a case of subscription to
an online database in Wipro’s case does not seem to be justified.

Further, even there
various other High Courts/AAR have taken a view contrary to the view taken in Samsung
Electronics case holding that payments for purchase of shrink-wrapped
software does not amount to royalty, contrary to the view of the Karnataka High
Court. Please see DIT vs. Intrasoft Ltd 220 Taxman 273 (Del), Ericsson AB
vs. DDIT 343 ITR 470 (Del), Dassault Systems K K, in re 322 ITR 125 (AAR),
.

One can also
draw an analogy from the Supreme Court decision in the case of CIT vs. Kotak
Securities Ltd 383 ITR 1, in the context of fees for technical services,
where the Supreme Court has taken the view that provision of a standard service
does not amount to provision of technical services. The services have to be
specialized, exclusive and as per individual requirement of the user or
consumer who may approach the service provider for such assistance/service, to
constitute fees for technical services. In the case of royalty as well, the
same analogy should apply.

Internationally,
also, there is a clear distinction drawn between provision of database services
using a copyright, and transfer or use of a copyright in the OECD Commentary on
“Treaty characterization issues arising from e-Commerce” wherein ,
there is a useful discussion on this aspect under the heads ‘Data retrieval’
and ‘Delivery of exclusive or other high value data’, as under:

“Category 15: Data retrieval

Definition —The provider makes a repository
of information available for customers to search and retrieve. The principal
value to customers is the ability to search and extract a specific item of data
from amongst a vast collection of widely available data.

 

27. Analysis and conclusions —The payment
arising from this type of transaction would fall under Article 7. Some Member
countries reach that conclusion because, given that the principal value of such
a database would be the ability to search and extract the documents, these
countries view the contract as a contract for services. Others consider that,
in this transaction, the customer pays in order to ultimately obtain the data
that he will search for. They therefore view the transaction as being similar
to those described in category 2 and will accordingly treat the payment as
business profits.

 

28. Another issue is whether such payment
could be considered as a payment for services “of a technical nature”
under the alternative provisions on technical fees previously referred to.
Providing a client with the use of search and retrieval software and with
access to a database does not involve the exercise of special skill or
knowledge when the software and database is delivered to the client. The fact
that the development of the necessary software and database would itself
require substantial technical skills was found to be irrelevant as the service
provided to the client was not the development of the software and database
(which may well be done by someone other than the supplier) but rather making
the completed software and database available to that client.

 

Category 16: Delivery of exclusive or other high-value
data

 

Definition —As in the previous example, the
provider makes a repository of information available to customers. In this
case, however, the data is of greater value to the customer than the means of
finding and retrieving it. The provider adds significant value in terms of
content (e.g., by adding analysis of raw data) but the resulting product is not
prepared for a specific customer and no obligation to keep its contents
confidential is imposed on customers. Examples of such products might include
special industry or investment reports. Such reports are either sent
electronically to subscribers or are made available for purchase and download
from an online catalogue or index.

 

29. Analysis and conclusions —These
transactions involve the same characterization issues as those described in the
previous category. Thus, the payment arising from this type of transaction
falls under Article 7 and is not a technical fee for the same reason.”

Though the
discussion is in the context of fees for technical services, the same logic
would equally apply to royalty.

Therefore, the
better view is that of the AAR, that both under the Income-tax Act as well as
under the DTAA, subscription to an online database does not amount to royalty
or the fees for technical services and does not require deduction of tax at
source on payment, nor could it be deemed to be an income accrued in India u/s.
9(1)(vi) or (vii) or DTAA..

The decisions
discussed above (except that of Intrasoft) have been rendered in the context of
the law prevailing prior to 2012. In 2012, explanations 3 to 6 to section
9(1)(vi) were inserted with retrospective effect from 1.4.1976. We need to
perhaps examine whether the amendments affect the issue under consideration?

Explanations 3
and 4 deal with computer software. An online database is not a computer
software. The mere fact that a software may be used to access the database does
not make the payment one for use of the software. The payment remains in
substance for access of the information contained in the database. These
explanations 3 and 4 therefore do not apply to subscription to online
databases.

Explanation 6
deals with use of a process. In the case of subscription to an online database,
there is in substance no payment for use of a process. Even if the method of
‘logging in’ is regarded as a process, that is merely incidental to the access
to the database. The payment cannot be regarded as having been made for use of
a process, but for access to the information contained in the database.
Explanation 6 also therefore does not apply.

Explanation 5
deals with consideration for any right, property or information, and clarifies
that it would amount to royalty, irrespective of whether the possession or
control of such right, property or information is with the payer, whether such
right, property or information is used directly by the payer, or whether the
location of such right, property or information is in India. In case of an
online database, the consideration is surely for information, which is not
within the control of the payer. However, the imparting of information under
explanation 5 by itself cannot be read in isolation, and has to be read along
with the main definition of “royalty” in explanation 2 to section 9(1)(vi).
This is evident from the fact that if one reads explanation 5 in the absence of
explanation 2, it has no meaning at all in the context of section
9(1)(vi). 

Clause (ii) of
explanation 2 refers to the imparting of any information concerning the working
of, or the use of, a patent, invention, model, design, secret formula or
process or trade mark or similar property. An online database does not provide
working of any such intellectual property, but merely provides financial or
general information in an organised manner. Clause (iv) of explanation 2 refers
to the imparting of any information concerning technical, industrial,
commercial or scientific knowledge, experience or skill. In case of an online
database, as rightly pointed out by the AAR in Factset’s case, no information
regarding knowledge, experience or skill of the database provider is provided
to the subscriber. Therefore, subscription to an online database does not fall
under either of these clauses. The insertion of explanation 5, though with
retrospective effect, therefore does not change the position in law that was
prevailing prior to the amendment, in so far as subscription to an online
database is concerned.

Even after the amendments, the law therefore seems to
be the same – subscription to an online database does not amount to royalty,
either under the Income-tax Act or under the DTAA.

The Finance Act, 2017

1       Background

          Shri Arun Jaitley, the Finance
Minister, presented his Fourth Budget with the Finance, Bill 2017, in the Lok
Sabha on 1st February, 2017. This was a departure from the old
practice inasmuch as that this year’s Budget was presented to the Parliament on
the first day of February instead of the last day and the Railway Budget was
now merged with the General Budget. Thus, the Railway Minister has not
presented a separate Railway Budget.

          After some discussion, the Parliament
has passed the Budget with some amendments to the Finance Bill, 2017 as
presented. The President has given his assent to the Finance Act, 2017, on 31st
March, 2017. There are in all 150 Sections in the Finance Act, 2017, which
include 89 sections which deal with amendments in the Income-tax Act, 1961, the
Finance Act, 2005 and the Finance Act, 2016.

1.1     During the Financial year 2016-17, the
Parliament passed the Constitution Amendment Act paving the way for introduction
of Goods and Services Tax (GST) legislation to replace the existing Excise
Duty, customs Duty, Service Tax, value Added Tax etc., GST council has
been constituted and it is hoped that GST will be introduced effective from 1st
July, 2017. Another major step taken by the Government during the financial
year 2016-17 was demonetisation of high denomination bank notes with a view to
eliminate corruption, black money and fake notes in circulation.

1.2     In Financial Year 2016-17, two Income
disclosure schemes were introduced by the Government with a view to enable
persons, who had not disclosed their unaccounted income to declare the same and
get immunity from rigorous penalty and prosecution provisions under the
Income-tax Act. The first disclosure scheme was provided in the Finance Act,
2016, and was in force from 01-06-2016 to 30-09-2016. The second scheme was
provided by the Taxation (Second Amendment) Act, 2016 which was in force from
17-12-2016 to 31-03-2017.

1.3     In Para 181 of the Budget Speech, the Finance
Minister has stated that the net revenue loss due to Direct Tax proposals in
the Budget is about Rs. 20,000/- crore. There is no significant loss or gain in
any of the indirect tax proposals.

1.4     In this article, some of the important
amendments made in the Income-tax Act by the Finance Act, 2017, are discussed.
Most of the amendments have only prospective effect. Some of the amendments
have retrospective effect.

2.      Rates of Taxes:

2.1     In the case of an Individual, HUF, AOP etc.,
following changes are made w.e.f. A.Y. 2018-19 (F.Y. 2017-18)

(i)  The rate of tax in the first slab of Rs. 2.50
lakh to Rs. 5.00 lakh has been reduced from 10% to 5%. Similarly, in the case
of a Senior Citizen the rate of tax in the first slab of Rs. 3.00 Lakhs to
Rs.  5.00 lakh will now be 5% instead of
the existing rate of 10%. This will give some relief to assessees in the lower
income group. There is no change in the rates of tax in other two slabs or in
the rate of Education Cess which is 3% of tax

(ii) Section 87A granting rebate upto Rs. 5,000/- to
a Resident Individual if his total income does not exceed Rs. 5 lakh has been
reduced from A.Y. 2018-19 in view of the above relief in tax. It is now
provided that the maximum rebate available under this section shall not exceed
Rs. 2,500/- and that such rebate will be available only if the total income
does not exceed Rs. 3.50 lakh.

(iii) At present, the rate of Surcharge is 15% of the
tax if the total income of an Individual, HUF, AOP etc., is more than
Rs. 1 crore. In view of the reduction in the rate of tax in the first slab, as
stated above, it is now provided that a surcharge of 10% of the tax will be
chargeable if the income of such an assessee is more than Rs. 50 lakh but less
than Rs.1 crore. If the income exceeds Rs. 1 crore, the existing rate of 15%
will continue.

2.2     In the case of a domestic company, the
rates of tax for A.Y. 2018-19 (F.Y. 2017-18) will be as under:

(i)  Where the total turnover or gross receipts of
a company does not exceed Rs. 50 crore, in F.Y. 2015-16, the rate of tax will
be 25%. It may be noted that in A.Y. 2017-18 (F.Y. 2016-17) where the turnover
or gross receipts of a company did not exceed Rs. 5 crore., in F.Y. 2014-15,
the rate of tax was 29%.

(ii) In case of all other companies the rate of tax
will be 30%.

(iii) There is no change in the rate of surcharge or
education cess.

2.3     In the case of a Domestic company which is
newly set up on or after 1.3.2016, engaged in the business of manufacturing or
production etc., the rate of tax will be 25% subject to the conditions
laid down in section 115 BA of the Income-tax Act. This concessional rate is
applicable at the option of the company as provided in the above section. This
section was inserted by the Finance Act, 2016.

2.4     In the case of a Firm (including LLP),
Co-operative Society, Foreign Company or Local Authority, there is no change in
the rates of Income tax, Surcharge and Education Cess. Similarly, there is no
change in the rate of tax on book profit of a Company as provided in section
115JB.

2.5     Last year, a new section 115BBDA was
inserted in the Income tax to provide for levy of tax at the rate of 10% (Plus
applicable Surcharge and Education Cess) on the Dividends in excess of Rs. 10
lakh received from Domestic companies by any resident Individual, HUF or a Firm
(including LLP). This section is now amended to provide that, w.e.f. A.Y.
2018-19, this tax of 10% will be payable by all resident assessees, excluding
domestic companies and certain funds, public trusts, institutions referred to
in section 10(23C) (iv) to (via) and public trusts registered u/s. 12AA. This
will mean that this additional tax of 10% on dividends received in excess of
Rs. 10 lakh will be payable in A.Y. 2018-19 and subsequent years by all
resident Individuals, HUF, Firms, LLPs, Private trusts, AOP, BOI, foreign
companies etc. The exemption is given to only domestic companies and
certain public recognised trusts.

3.      Tax Deduction and collection at source:

3.1     TDS from Rent (New Section 194-1B) –
Increase in obligation of Individuals and HUF’s

          At present, section 194-I provides
that an Individual or HUF who is liable to get his accounts audited u/s. 44AB
should deduct tax from Rent if the amount exceeds Rs.1,80,000/- per year. Now,
section 194-1B is inserted w.e.f. 1.6.2017 which provides that any Individual
or HUF who is not covered by section 194-I (Tenant) will have to deduct tax at
source at the rate of 5% from payment of rent for use of any building or land
or both if such rent exceeds Rs. 50,000/- per month or part of the month. This
tax is to be deducted at the time of credit of rent for the last month of the
Financial Year. If the premises are vacated by the tenant earlier during the
year, the tax is to be deducted from rent of the month in which the premises
are vacated. Thus, the deduction of tax is to be made only once in the last
month of the relevant year or last month of the tenancy. The tax deductor is
not required to obtain Tax Deduction Account Number (TAN). The person receiving
the rent will have to furnish his PAN to the tenant. If PAN is not provided,
the tax will have to be deducted at the rate of 20% of the rent. It may be
noted that the amount of tax required to be deducted at the rate of 20% should
not exceed the rent payable for the last month of the relevant year or the
month of vacating the premises. The obligation under this section applies to a
lessee, sub-lessee, tenant, sub-tenant etc.

3.2     TDS from consideration payable u/s.
45(5A) – New section 194-1C:

          New section 194-1C is inserted w.e.f.
1.4.2017 to provide that tax at the rate of 10% shall be deducted from the
monetary consideration payable to a resident in the case of a Joint Development
Agreement (JDA) to which section 45(5A) is applicable.

3.3     TDS from fees payable to Professionals –
Section 194-J:

          Section 194-J is amended w.e.f.
1.6.2017 to provide that in the case of a payment to a person engaged in the
business of operation of Call Centre, the rate of TDS shall now be 2% instead
of 10%.

3.4     TDS from payment on Compulsory
Acquisition – Section 194-LA:

          This section is amended w.e.f.
1.4.2017 to provide that no tax shall be deducted at source from compensation
payable pursuant to an award or agreement made u/s. 96 of Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013.

3.5     TDS from Insurance Commission – Section
194D:

          Under Section 194D, the rate for TDS
from Insurance Commission is 5% if such commission exceeds Rs. 15,000/-. In
order to give relief to Insurance Agents, section 197A is now amended w.e.f.
1.6.2017 to provide that an Individual or HUF can file self-declaration in Form
15G / 15H for non-deduction of tax at source in respect of Insurance Commission
referred to in section 194D. Therefore, an Insurance Agent who has no taxable
income can now take advantage of this amendment.

4.      Exemptions and Deductions:

4.1     Exemption on partial withdrawal from
National Pension Scheme (NPS) New section 10(12B)

          At present withdrawal from NPS is
chargeable u/s. 80CCD(3) on closure or opting out of the NPS subject to certain
conditions. Section 10(12A) provides that 40% of the amount payable on such
closure or opting out of NPS. Now, new section 10(12B) provides that if an
employee withdraws part of the amount from NPS according to the terms of the
Pension Scheme, exemption will be allowed to the extent of the Contribution
made by him. This benefit will be available from A.Y. 2018 – 19 (F.Y. 2017-18)
onwards.

4.2     Income of Political Parties – Section
13A:

          At present, political parties
registered with the Election Commission of India are exempt from paying Income
tax subject to certain conditions provided in section 13A. This section is
amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide as under:

(i)  No donation of Rs. 2000 or more shall be
received by a Political Party otherwise than an account Payee Cheque, bank
draft or through Electoral Bonds.

(ii) Political Party will have to compulsorily file
its return of income as provides in section 139(4B) on or before the due date.

          Thus, even if a donation of Rs. 2000/-
or more is received in cash or its Income tax Return is not filed in time, the
Political Party shall lose its exemption u/s. 13A.

          A new Scheme of issuing Electoral
Bonds is to be framed by RBI. Under the scheme, a person can buy such Bonds and
donate to a Political Party. Such Bonds can be enchased by the Political party
through designated Banks. It will not be necessary for the Political party to
maintain record about the name, address etc. of donors of such Bonds
consequential amendments are made in the Reserve Bank of India Act, 1934 and
the Representation of the People Act, 1951.

4.3     Deduction of Donations – Section 80G:

          At present, section 80G (5D) provides
that no deduction for donation u/s. 80G will be allowed the amount of donation
exceeding Rs. 10,000/- is in cash. This limit is now reduced to Rs. 2,000/- by
amendment of the section w.e.f. A.Y. 2018-19 (F.Y. 2017-18). Therefore, if
donation of more than Rs. 2,000/- is given in cash, deduction u/s. 80G will not
now be available.

4.4     Deduction to Start-Up Companies – Section
80 -IAC:

          At present, section 80-IAC provides
that eligible Start-ups-incorporated between 1.4.2016 to 31.3.2019 can claim
100% deduction of the profit earned for 3 consecutive years. This claim can be
made in any 3 years out of the first five years from the date of incorporation.
This period of 5 years has been extended to 7 years by amendment of the section
to provide relief to start-up companies. Thus, an eligible Start-up company can
claim the deduction u/s. 80-1AC in respect of profits for any 3 years out of 7
years from the date of its incorporation.

4.5     Deduction in respect of affordable Housing
Projects – Section 80 IBA:

          This section was enacted last year by
the Finance Act, 2016, w.e.f. 2017-18. It provides for deduction of 100% of the
income from affordable Housing Projects approved during the period 1.6.2016 to
31.3.2019 subject to certain conditions. By amendment of this section w.e.f.
1.4.2017, some of the conditions are related as under:

(i)  Under the existing section, the eligible
project should be completed within 3 years. This period is now increased to 5
Years.

(ii) The reference to “Built-up Area” in the section
is changed to “Carpet Area”. Therefore, it is now provided as under:

(a) If the project is located within cities of
Chennai, Delhi, Kolkata or Mumbai the carpet are of the residential Unit cannot
exceed 30 Sq. Mtrs.

(b) For other places (including at places located
within 25 Kilometers of the cities mentioned in (a) above) the carpet are of
the residential Unit cannot exceed 60 sq. Mtrs. It may be noted that other
conditions in existing section 80 – IBA will have to be complied with for
claiming the deduction provided in the section.

5.      Charitable Trusts:

          Some
of the provisions relating to the exemption granted to public Charitable
Trusts, University, Educational Institutions, Charitable Hospital etc.,
u/s. 10(23C), 11 and 12A have been amended w.e.f. A.Y. 2018 – 19 (F.Y. 2017-18)
with a view to make them more stringent. These amendments are as follows:

(i)  Under the existing provisions of section 11,
the corpus donations given by one trust to another trust were considered as
application of income in the hands of donor trust. Further, the recipient trust
was able to claim the exemption in respect of such corpus donations without
applying them for charitable or religious purposes. In order to curb such a
practice, amendment of the section provides that any corpus donation out of the
income to any other trust or institution registered u/s./12AA shall not be
treated as application of income of donor trust for charitable or religious
purposes.

(ii) Similar amendment has been made in section
10(23C) in respect of corpus donations given by any fund, trust, institution,
any university, educational institution, any hospital or other medical
institution referred to in Section 10(23C)(iv) to (via) or to any other trust
or institution registered u/s./12AA.

(iii) It may be noted that the above restriction
applies to corpus donation given by a trust from its income to another trust.
This restriction does not apply to a donation given by one trust to another
trust out of the corpus of the donor trust.

(iv) At present, there is no explicit provision in
the Act which mandates the trust or institution to approach for fresh
registration in the event of adoption of new object or modifications of the
objects after the registration has been granted. Section 12A has now been
amended to provide that the trust shall be required to obtain fresh
registration by making an application to CIT within a period of thirty days
from the date of such adoption or modifications of the objects in the prescribed
Form.

(v) Further, the entities registered u/s. 12AA are
required to file return of income, if the total income without giving effect to
the provisions of sections 11 and 12 exceeds the maximum amount which is not
chargeable to income-tax. A new clause (ba) has been inserted in section 12A
(1) so as to provide for a further condition that the trust shall furnish the
return of income within the time allowed u/s. 139 of the Act. In case the
return of income is not filed by a trust in accordance with the provisions of
section 139(4A), within the time allowed, the trust or institution will lose
exemption u/s. 11 and 12.

6.      Income from House Property:

6.1     At present, section 23(4) provides that if
an assessee owns two or more houses, which are not let out, he can claim
exemption for one house for self occupation. For the other houses, he has to
pay tax by determining the ALV on notional basis as provided in section 23(1)
(a). In the cases of CIT vs. Ansal Housing Construction Ltd 241 Taxman
418(Delhi) and CIT vs. Sane and Doshi Enterprises 377 ITR 165 (Bom),
it has been decided that this provision is applicable in respect of houses held
as Stock-in-trade by the assessee. In order to give relief to Real Estate
Developers, section 23 is amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18). By this
amendment, it is provided that if the assessee is holding any house property as
his stock-in-trade which is not let out for the whole or part of the year, the
Annual Value of such property will be considered as NIL for a period upto one
year from the end of the financial year in which the completion certificate is
obtained from the Competent Authority. This new provision will benefit the Real
Estate Developers. It may be noted that this relief cannot be claimed by other
assessees who do not hold the house property as their stock-in-trade.

6.2     Section 71 provides that Loss under any
head of income (Other than Capital Gains) can be set off against income from
any other head during the same year. Therefore, loss under the head “Income
from House Property” can be set off against income under any other head of
Income. Section 71 is now amended to provide that any loss under the head
income from house property which is in excess of Rs. 2 lakh in any year will be
restricted to Rs. 2 lakh. In other words, an assessee can set off loss under
the head income from house property in A.Y. 2018-19 and onwards only to the
extent of Rs. 2 lakh in the year in which loss is incurred. The balance of the
loss can be carried forward for 8 assessment years and set off against income
from house property as provided in section 71B. This amendment will adversely
affect those cases where, on account of high interest rates on housing loans,
the assesses have to suffer loss in excess of Rs. 2 lakh in any year.

7.      Income from Business or profession:

7.1     Provision for Doubtful Debts – Section
36(1) (viia) – At present, specified banks are allowed deduction upto 7.5%
of the total income, computed in the specified manner, if they make provision
for doubtful debts. From the A.Y. 2018-19 (F.Y. 2017-18) this limit is
increased to 8.5% by amendment of section 36(1)(viia).

7.2     Determination of Actual Cost – Section
43(1) and 35AD(7B) – Where any asset on which benefit of section 35AD is
taken is used for any purpose not specified in that section, the deduction
granted under the section in earlier years will be deemed to the income of the
assessee. There was no provision for determination of actual cost of the asset
in such cases. In order to clarify this position, an amendment is made in
Explanation 13 of section 43(1) to provide that in such cases the actual cost
of the asset shall be the actual cost, as reduced by the depreciation which
would have been allowed to the assessee had the asset been used for the
purposes of the business since the date of its acquisition. Although this
amendment is effective from A.Y. 2018-19, since it is a clarificatory
amendment, it may be applied with retrospective effect.

7.3     Maintenance of Books – Section 44 AA
– This section requires a person carrying on Business or Profession to maintain
books of accounts in the manner specified in the section. At present such
person has to comply with this requirement if his income exceeds Rs. 1.20 lakh
or his turnover or gross receipts exceed Rs. 10 lakh in any one of the three
preceding years. In order to reduce compliance burden in the case of an
individual or HUF carrying on a business or profession, these monetary limits
are increased from A.Y. 2018-19 (F.Y. 2017-18) in respect of income from Rs. 1.20
lakh to Rs. 2.50 lakh and in respect of turnover or gross receipts from Rs. 10
lakh to Rs. 25 lakh .

7.4     Tax Audit u/s. 44 AB in Presumptive Tax
Cases – Finance Act, 2016, had raised the threshold limit for turnover in
cases of persons eligible to take advantage of section 44AD from Rs. 1 crore to
Rs. 2 crore w.e.f. A.Y 2017-18. However, the limit for turnover for tax audit
u/s. 44AB was not increased in such cases. Section 44AB has now been amended
w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to provide that in the case of a person who
opts for the benefit of section 44 AD, the threshold of total sales turnover or
gross receipts u/s. 44AB will be Rs. 2 crore. In other words, such person will
not be required to get his accounts audited u/s. 44AB for F.Y. 2016-17 and
subsequent years.

7.5     Presumptive Taxation – Section 44AD
– An assessee who is eligible to claim the benefit of presumptive taxation u/s.
44AD can offer to pay tax by estimating his income at the rate of 8% of his
sales turnover or gross receipts if such turnover / gross receipts do not
exceed Rs. 2 crore. In order to encourage digital transactions, this section is
amended w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to provide that the profit presumed
to have been earned in such cases shall be 6% (instead of 8%) of the gross
turnover or gross receipts which are received by account payee cheque, bank
draft or any other electronic media during the financial year or before the due
date for filing return of income u/s. 139(1). In respect of the balance of the
turnover / gross receipt the rate of presumptive profit will continue to be at
the rate of 8%.

7.6     Tax on Carbon Credits – Section 115BBG
– As per the Kyoto Protocol, carbon credits in the form of Certified Emission
Reduction (CER) Certificate are given to entities which reduce the emission of
Greenhouse gases. These credits can be freely traded in the market. Currently,
there are no specific provisions in the Act to deal with the taxability of the
income from carbon credits. However, the same is being treated as business
income and taxed at the rate of 30% by the Income-tax Department. There are
some conflicting decisions (Refer TS-141 (Ahd), 365 ITR 82 (AP) and 385 ITR 592
(Kar). In order to clarify the position, a new section 115BBG has been inserted
to tax the gross income from transfer of Carbon Credit at the rate of 10% plus
applicable surcharge and cess. No expenditure will be allowed from such income.
This section will come into force w.e.f. A/Y:2018-19 (F.Y:2017-18).

8.      Measures to discourage Cash Transactions:

          One of the themes, as stated in the
Budget Speech of the Finance Minister this year, was to encourage Digital
Economy in our country. In Para 111 of the Budget Speech he had stated that
promotion of a digital economy is an integral part of Governments strategy to
clean the system and weed out corruption and black money. To achieve this goal
some amendments are made in the various sections of the Income-tax Act which
will be effective from 1st April, 2017. In brief these amendments
are as under:

8.1     Section 35AD – This section provides
for investment linked deduction of capital expenditure incurred for specified
business, subject to certain conditions. This section is now amended to provide
that any capital expenditure exceeding Rs. 10,000/- paid by the assessee in a
day, otherwise than by an account payee cheque, bank draft or any electronic
media will not be allowed as deduction.

8.2     Section 40A(3) and (3A) – Under this
section, any payment of expenses in excess of Rs. 20,000/-, in a day, is not
allowed as a deduction in computing income from business or profession unless
such payment has been paid by account payee cheque, bank draft or any
electronic media. This section is now amended and the limit of Rs. 20,000/-
is reduced to Rs. 10,000/-. Thus, payments in excess of Rs. 10,000/- made in
cash to any party, in a day, will be disallowed from A.Y. 2018-19
(F.Y. 2017-18).

8.3     Section 80G – At present, deduction
u/s. 80G for any eligible donation is not allowed if such donation in excess of
Rs. 10,000/- is paid in cash. This limit is reduced to Rs. 2,000/- by amendment
of section 80G. Therefore, all donations to eligible public trusts in excess of
Rs. 2,000/- will have to be made by account payee cheque, bank draft or any
electronic media.

8.4     Section 13A – As stated earlier, a
political party, claiming exemption u/s. 13A, cannot receive any donation in
excess of Rs. 2,000/- in cash.

8.5     Section 43(1) – This section deals
with determination of actual cost of a capital asset used in a business or
profession. In order to curb cash transactions, this section is amended w.e.f.
1.4.2017 to provide that capital expenditure in excess of Rs. 10,000/- paid, in
a day, otherwise than by an account payee cheque, bank draft or through
electronic media shall be ignored for calculating the cost of the asset
acquired by the assessee. Therefore, payments made for purchase of an asset,
payments to a labourer or similar payments for transport or installation of a
capital asset, if made in cash, in excess of Rs. 10,000/-, in a day, will not
form part of the cost. Thus, the assessee will not be able to claim
depreciation on such amount.

8.6     Section 44AD – As stated earlier,
with a view to encourage digital economy section 44AD (1) has been amended
w.e.f. A/Y: 2017-18 (F.Y: 2016-17).  A
person carrying on business in which the Sales Turnover or Gross Receipts do
not exceed Rs. 2 crore has option to pay tax on presumptive basis by estimating
net profit @ 6% of such turnover or gross receipts if the amount received is in
the form of account payee cheque, bank draft or any electronic media. This will
encourage small traders covered by this presumptive method of taxation to make
their sales through digital mode.

8.7    Curb on Cash Transactions – Sections 269ST,
271 DA and 206C (1B)

(i)       New Section 269ST: A new section
269 ST has been inserted in the Income-tax Act. This section has come into
force on 1.4.2017. The section provides that no person shall receive Rs. 2 lakh
or more, in the aggregate, from another person, in a day, or in respect of a
single transaction or in respect of transactions relating to one event or
occasion in cash. In other words, all such transactions have to be made by
account payee cheques, bank draft or any electronic media. It is, however, provided
that this section shall not apply to amount received by a Government, Bank,
Post Office, Co-operative Bank, transactions referred to in section 269 SS and
such transactions as may be notified by the Central Government. By a press note
dated 5.4.2017 the CBDT has clarified that this section will not apply to
withdrawal of Rs. 2 lakh or more from one’s Bank account. This section applies
to all persons whether he is an assessee or not.

(ii)      New Section 271DA: This is a new
section inserted in the Income-tax Act w.e.f. 1.4.2017. It provides for levy of
penalty equal to the amount received by the person in contravention of the
above section 269ST. This penalty can be levied by a Joint Commissioner of
Income tax. If the person is able to prove that there was good and sufficient
reason for such receipt of money, no penalty may be levied. Readers may note
that the test “good and sufficient reason”, is a sterner test than “reasonable
cause “.

(iii)     Section 206C(1D) and (1E): In view
of the introduction of the above two sections the requirement of collection of
tax at source u/s. 206C(1D) on sale consideration for sale of Jewellery in
excess of Rs. 5 lakh and other goods and services in excess of 2 lakh has been
deleted.

9.      Income from Other Sources:

9.1     Section 56(2) (vii) and (viia) : The
concept of taxation of Gifts received in the form of money or property, in
excess of Rs. 50,000/-, from non-relatives has been introduced in section 56(2)
(vii) some years back. This was extended to receipt of shares of closely held
companies by a firm or a closely held company at prices below market value u/s.
56(2) (viia). These provisions operated in a restricted field. In order to
widen to scope of these sections, substantive amendments are made in the
section. Therefore, operation of the provisions of these sections are now
restricted upto A.Y. 2017-18 (F.Y. 2016-17).

9.2     New Section 56(2)(x) – Effective
from 1.4.2017, section 56(2)(x) has now been inserted. This section will
replace sections 56(2)(vii) and 56(2)(viia). The new section provides that any
receipt by a person of a sum of money or property, without consideration or for
inadequate consideration, in excess of Rs. 50,000/-, shall be taxable in the
hands of the recipient under the head “Income from Other Sources”. There are,
however, certain exceptions provided in the section. This new provision will
now cover all persons, whether he is an Individual, HUF, Firm, Company, AOP,
BOI, Trust etc, and tax will be payable by them if any money or property is
received by the person and the aggregate value of such property is in excess of
Rs. 50,000/-.

9.3     The exceptions provided in section 56(2)
(x) are more or less the same as provided in existing section 56 (2) (vii).
Therefore, any receipt (a) from a relative, (b) on the occasion of the marriage
of the Individual, (c) Under a will or by way of inheritance, (d) in
contemplation of death of the payer or donor, (e) from a Local Authority, (f)
from or by a public trust registered u/s. 12A or 12AA, or an University, educational
institution, hospital or medical institution referred to in section 10(23C),
(g) by way of a transactions not regarded as transfer u/s. 47(i), (vi), (via),
(viaa), (vib), (vic), (vica), (vicb), (vid) or (vii) and (h) from an Individual
by a trust created or established solely for the benefit of relatives of the
Individual will not be taxable u/s. 56(d)(x). It may be noted the expressions
“Relative”, “Fair Market Value”, “Jewellery”, “Property”, “Stamp Duty
Valuation” etc., in the section shall have the same meaning as in the
existing section 56(2)(vii).

9.4     The effect of this new section 56(2)(x) can
be, briefly, explained as under:

(i)  Existing section 56(2)(vii) applied to only
gifts received by an Individual or HUF. New section will now apply to gifts
received by an Individual, HUF, Company, Firm, LLP, AOP, BOI, Trust (excluding
public trusts and private trust for relatives) etc.

(ii) Existing section 56(2) (viia) applied to a
closely held company, Firm, or LLP receiving shares of a closely held company
without consideration or for inadequate consideration. New section will apply
to any gift received by a company (whether closely held or listed company) Firm
or LLP in the form of shares of a closely held or a listed company, or a sum of
money, or any movable or immovable property.

(iii) New section exempts gifts from Local Authority
as defined in section 10(20). It is for consideration whether capital subsidy
received by a Company, Firm, LLP, AOP, Trust etc. from a Government will
now become taxable.

(iv) Similarly, if any movable or immovable property
is given to a company, Firm, LLP, AOP, Trust etc., by the Government, at
a concessional rate, the same may become taxable in the hands of the recipient.

(v) Gift by any Individual to a trust for his relatives
is exempt under this section. However, no exemption is provided in respect of a
gift received from a company, Firm , LLP etc., by a trust created for
the benefit of the its employees or others. Therefore, such gifts may now
become taxable under the new section.

(vi) In respect of an existing family trust, various
clauses of the trust deed giving benefits to beneficiaries will have to be
examined before making any further gift to the trust. If any benefit is given
to a non-relative, such further gift on or after 1.4.2017 will be taxable in
the hands of the Trust.

(vii)Any
Bonus Shares received by a Shareholder from a company may now be considered as
receipt without consideration. This may lead to litigation, and the CBDT should
come out with a clarification in this regard.

(viii)Any
Right shares issued to a shareholder by a company at a price below its market
value may be considered as a movable property received for inadequate
consideration.

(ix) From the wording of the Section, it is possible
that a view may be taken that in the case of transfer of capital asset (a) by a
company to its wholly owned subsidiary company, (b) by a wholly owned
subsidiary company to its holding company, (c) on conversion of a proprietary
concern or a firm into a company or (d) on conversion of a closely held company
into LLP as referred to in section 47(iv), (v), (xiii), (xiib) and (xiv) the
tax will be payable by the transferee under this new section on the difference
between the fair market value of the asset and the value at which the transfer
is made. This will be unfair as the transferor is exempt from tax and the cost
in the hands of the transferor is to be considered as cost in the hands of the
transferee under sections 47 and 49. This certainly is not the intent of
section 56(2)(x). The issue may arise because while the transaction is not a
transfer for the purposes of section 45, section 56 does not contain any
specific exclusion.

9.5     Consequential amendment is made in section
2(24) to provide that any gift which is taxable u/s. 56(2)(x) shall be deemed
to be “income” for the purposes of the Income-tax Act. Consequential amendment
is also made in section 49(4) to provide that for computing the cost of
acquisition of the asset received without consideration or for inadequate
consideration will be determined by adopting the market value adopted for levy
of tax u/s. 56(2)(x).

9.6     Section 58 – This section gives a
list of some of the payments which are not deductible while computing income
under the head “Income from Other Sources”. It is now provided that, with
effect from A.Y. 2018-19 (FY 2017-18), the provisions of section 40(a) (ia)
providing for disallowance of 30% of the amount payable to a resident if TDS is
not deducted. Similar provision exists for disallowance of expenditure for
computing income under the head income from business or profession.

10.    Capital Gains:

10.1   Section 2(42A) – This section defines
the term “Short Term Capital Asset” to mean a capital asset held by the
assessee for less than 36 months preceding the date of its transfer. There are
some exceptions to this rule provided in the section. Third proviso to
this section is now amended w.e.f. A.Y 2018-19 (F.Y. 2017-18) to provide that a
Capital Asset in the form of Land, Building or both shall be considered as a
short – term capital asset if it is held for less than 24 months. In other
words, the period of holding any Land / Building for the purpose of
consideration as long term capital asset is reduced from 36 months to 24
months.

10.2   Sections
2(42A), 47 and 49 – At present, there is no specific exemption from levy of
capital gains tax on conversion of Preference Shares of a company into Equity
Shares. Section 47 has now been amended w.e.f. AY 2018-19 (F.Y. 2017-18) to provide
that such conversion shall not be treated as transfer. Consequently, section
2(42A) has also been amended to provide that the period of holding of the
equity shares shall include the period for which the preference shares were
held by the assessee. Similarly, section 49 has been amended to provide that
the cost of acquisition of equity shares shall be the cost of preference
shares.

10.3   Sections 2(42A) and 49 – Last year,
section 47 was amended to provide that transfer of Unit in a consolidating plan
of a mutual fund scheme by a unit holder against allotment of units in the
consolidated plan under that scheme shall not be regarded as taxable transfer.
However, consequential amendments were not made in sections 2(42A) and 49.
Therefore, these sections are now amended w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to
provide that the period of holding of the unit shall include the period for
which the units were held in the consolidating plan of the M.F. Scheme.
Similarly, the cost of acquisition of the units allotted to the unit holder
shall be the cost of units in the consolidating plan.

10.4   Joint Development Agreement – Section
45(5A) (i) This is a new provision introduced from 1.4.2017, with a view to
bring clarity in the matter of taxation of joint development of any property
(land, building or both). Section 45(5A) provides that if an Individual or HUF
enters into a registered agreement (specified agreement) in which the owner of
the property allows another person to develop a real estate project on such property
in consideration of a share in such property, the capital gain shall be
chargeable to tax in the year in which the completion certificate is issued by
the competent authority for whole or part of the project. It may be noted that
the above consideration may be wholly by way of a share in the constructed
property or partly in such share and the balance in the form of monetary
consideration. In respect of the monetary consideration, the developer will
have to deduct tax at source @ 10% u/s 1941C. It may so happen that monetary
consideration is paid at the time of registration of the agreement whereas the
share in the constructed property may be received after 2 or 3 years. In such a
case, the assessee will be able to claim credit for TDS only in the year in
which capital gain becomes taxable when the completion certificate is received.

(ii)  It is also provided in the above section that
the full value of the consideration in respect of share in the constructed
portion received by the assessee shall be determined according to the stamp
duty valuation on the date of issue of the completion certificate.
Consequently, amendment is made in section 49 to provide that the cost of the
property received by the assessee under the above agreement shall be the stamp
duty value adopted for the computation of capital gains plus the monetary
consideration, if any.

(iii)  It is further provided that, in case the
assessee transfers his share in the project on or before the date of issue of
the completion certificate, the capital gain shall be chargeable in the year in
which such transfer takes place. In such a case, the stamp duty valuation on
the date of such transfer together with monetary consideration received shall
be deemed to be the full value of the consideration.

(iv) It may be noted that the above provision
applies to an Individual or HUF. Therefore, if such joint development agreement
is entered into by a Company, Firm, LLP, Trust etc. the above provision
will not apply.

10.7   Section 48 – Exemption from Capital Gains
tax is at present granted to a non-resident investor who has “Subscribed” to
Rupee Denominated Bonds issued by an Indian Company. This exemption is granted
is respect of foreign exchange gains on such Bonds. From the A. Y. 2018-19
(F.Y. 2017-18), this exemption can also be claimed by a non-resident who is
“holding” such Bond.

10.8   Shifting the base year for cost of
acquisition of a capital asset – Section 55

(i)  This section provides that where the assessee
has acquired a capital asset prior to 1.4.1981, he has an option to substitute
the fair market value as on that date for the actual cost. The amendment to
this section now provides that from the A.Y. 2018 – 19 (F.Y. 2017-18) if the
assessee has acquired the asset prior to 1-4-2001, he will have option to
substitute the fair market value on that date for the actual cost.

(ii) Consequently, section 48 has also been amended
to provide that indextion benefit will now be available in such cases with
reference to the fair market value of the asset as on 1.4.2001. Consequent
amendment is also made for determining indexed cost of improvement of the
capital asset.

10.9   Long term Capital Gains Tax. Exemption –
Section 10(38) (i) At present, Long term capital gain on transfer of equity
shares of a company is exempt u/s 10(38) where Securities Transaction Tax (STT)
is paid at the time of sale. In order to prevent misuse of this exemption by
persons dealing in “Penny stocks”, this section is amended w.e.f. A.Y 2018-19
(F.Y. 2017-18) to provide that this exemption will now be granted in respect of
equity shares acquired on or after 1-10-2004 if STT is not paid at the time of
acquisition of such shares.  However, it
is also provided that such exemption will be denied only to such class of cases
as may be notified by the Government. Therefore, cases in which this exemption
is not given will be liable to tax under the head long term capital gain.

(ii)  It may be noted that the Government has issued
a draft of the Notification on 3-4-2017 which provides that the exemption u/s.
10(38) will not be available if equity shares are acquired by the assessee
under the following transactions on or after 1.10.2014 and no STT is paid at
the time of purchase of equity shares.

(a)  Where acquisition of listed equity share in a
company, whose equity shares are not frequently traded in a recognised stock
exchange of India, is made through a preferential issue other than those
preferential issues to which the provisions of chapter VII of the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 does not apply:

(b)  Where transaction for purchase of listed
equity share in a company is not entered through a recognised stock exchange;

(c)  Acquisition of equity share of a company
during the period beginning from the date on which the company is delisted from
a recognised stock exchange and ending on the date on which the company is
again listed on a recognized stock exchange in accordance with the Securities
Contracts (Regulation) Act, 1956 read with Securities and Exchange Board of
India Act, 1992 and any rules made thereunder;

          Considering the intention behind this
amendment, it can safely be presumed that clause (b) of the above notification
refers to purchase of equity shares of a listed company whose shares are not
frequently traded.

10.10  Full
Value of Consideration – New Section 50CA             (i)  This is a new section which is inserted
w.e.f. A.Y. 2018-19 (F.Y. 2017-18). It provides that where the consideration
for transfer of shares of a company, other than quoted shares, is less than the
fair market value determined in the manner prescribed by Rules, such fair
market value shall be considered as the full value of consideration for the
purpose of computing the capital gain. For this purpose the term “Quoted Share”
is defined to mean share quoted on any recognised stock exchange with
regularity from time to time, where the quotation of such share is based on
current transaction made in the ordinary course of business.

(ii) This new provision will have far reaching
implications. It may be noted that section 56(2)(x) provides that where a
person receives shares of a company (whether quoted or not) without
consideration or for inadequate consideration, he will be liable to tax on the
difference between the fair market value of the shares and the actual
consideration. This will mean that in the case of a transaction for transfer of
shares of the unquoted shares the seller will have to pay capital gains tax on
the difference between the fair market value and actual consideration u/s. 50CA
and the purchaser will have to pay tax on such difference under the head income
from other sources u/s. 56(2) (x).

(iii) It may be noted that this section can be
invoked even in cases where an assessee has transferred for inadequate
consideration unquoted shares to a relative or transferred such shares to a
trust created for his relatives although such a transaction is not covered by
section 56(2)(x).

(iv) In the case of Buy-Back of shares by a closely
held company if the consideration paid by the company to the shareholder is
below the fair market value as determined u/s 50CA, this section may be invoked
to levy capital gains tax on the shareholder on the difference between the fair
market value and the consideration actually received by him.

10.11  Section 54EC – At present investment of
long term capital gain upto `50 lakhs can be made in Bonds of National High
Authority of India or Rural Electrification Corporation Ltd., for claiming
exemption. By amendment of this section it is provided that the Government may
notify Bonds of other Institutions for the purpose of investment u/s. 54EC to
claim exemption from capital gains.

10.12  Section 112(1)(c)(iii) –  In the case of a Non-resident the rate of tax
on long term capital gain on transfer of shares of unlisted companies is
provided in this section if the assessee does not claim the benefit of the
first and second proviso to section 48. This benefit was available
w.e.f. 1.4.2017 as provided in the Finance Act, 2016. By amendment of this
provision the benefit is given from 1.4.2013.

11.    Minimum Alternate Tax (MAT):

11.1   Section 115JB (2) provides for the manner in
which Book Profits of a Company are to be calculated. This is to be done on the
basis of the audited accounts prepared under the provisions of the Companies
Act 1956. Since, the Companies Act, 2013 (Act), has replaced the 1956 Act,
reference to 1956 Act is now modified and reference to relevant provisions of
2013 Act are made.

11.2   Impact of Ind AS – Section 129 of the
Companies Act provides that the financial statements shall be in the form as
may be provided for different class or classes of companies as per Schedule III
to the Act. This Schedule has been amended on 6/4/2016 and Division II has been
added. Instructions for preparation of financial statements and additional
disclosure requirements for companies required to comply with Ind AS have been
given in this part of Schedule III. The form of Statement of Profit and Loss is
also given. In the light of these changes, the provisions of section 115JB have
been amended by inserting new sub-sections (2A) to (2C) which are applicable to
companies whose financial statements are drawn up in compliance with Ind AS.
Since the Ind AS are required to be adopted by certain companies from financial
year 2016-17 onwards and by other companies in 2017-18 onwards, the following
adjustments are to be made in the computation of ‘book profit’ from the
assessment year 2017-18 onwards;

(i)   Section 115JB (2A) provides that any item
credited or debited to Other Comprehensive Income (OCI) being ‘items that will
not be reclassified to profit or loss’ should be added to or subtracted from
the ‘book profit’, respectively. It is also provided that for the following
items included in OCI, viz., Revaluation surplus for assets in accordance with
Ind AS 16 and Ind AS 38 and gains or losses from investment in equity
instruments designated at fair value through OCI as per Ind AS 109 the amounts
will not be added to or subtracted. However, it will be added to or subtracted
from ‘book profit’ in the year of realisation/disposal/retirement or otherwise
transfer of such assets or investments. Further, this section provides for
addition to or reduction from the book profit of any amount or aggregate of the
amounts debited or credited respectively to the Statement of Profit and Loss on
distribution of non-cash assets to shareholders in a demerger as per Appendix A
of the Ind AS 10. 

(ii)  Section 115JB (2B) provides that in the case
of resulting company, if the property and liabilities of the undertaking(s)
being received by it are recorded at values different from values appearing in
the books of account of the demerged company immediately before the demerger,
any change in such value shall be ignored for the purpose of computing of book
profit of the resulting company.

(iii)  Section 115JB (2C) provides that the ‘book
profit’ in the year of convergence and subsequent four previous years shall be
increased or decreased by 1/5th of transition amount. The term
‘transition amount’ is defined to mean the amount or the aggregate of the
amounts adjusted in Other Equity (excluding equity component of compound
financial instruments, capital reserve and securities premium reserve) on the
convergence date but does not include (a) Amounts included in OCI which shall
be subsequently reclassified to the profit or loss; (b) Revaluation surplus for
assets as per Ind AS 16 and Ind AS 38; (c) Gains or losses from investment in
equity instruments designated at fair value through OCI as per Ind AS 109; (d)
Adjustments relating to items of property, plant and equipment and intangible
assets recorded at fair value as deemed cost as per Paras D5 of Ind AS 101; (e)
Adjustments relating to investments in subsidiaries, joint ventures and
associates recorded at fair value as deemed cost as per para D15 of Ind AS 101:
(f) Adjustments relating to cumulative translation differences of a foreign
operation as per para D13 of Ind AS 101.

(iv) Proviso to section 115JB (2C) further
provides that the effect of the items listed at (b) ;to (e) above, shall be
given to the book profit in the year in which such asset or investment is
retired, disposed, realised or otherwise transferred. Further, the effect of
item listed at (f) shall be given to the book profit in the year in which such
foreign operation is disposed or otherwise transferred.

(v)  The term ‘year of convergence’ means the
previous year within which the convergence date falls. The terms ‘convergence
date’ means the first day of the first Ind AS reporting period as per Ind AS
101.

        The above amendments are applicable
with effect from AY 2017-18 (F.Y:2016-17).

11.3   Extension of period for availing of MAT
and AMT credit Section 115JAAand 115JD: Under the existing provisions of
section 115JAA, credit for Minimum Alternate Tax (MAT) paid by a company u/s.
115JB is allowable for a maximum of ten assessment years immediately succeeding
the assessment year in which the tax credit becomes allowable. Similarly, for
non-corporate assessees liable to Alternate Minimum Tax (AMT) u/s.115JC, credit
for AMT is allowable for maximum of ten assessment years as per section 115JD.
Both the sections 115JAA and 115JD are amended and the period of carry forward
of MAT/AMT Credit is increased from 10 years to 15 years.

11.4   Restriction of MAT and AMT credit with
respect to foreign tax credit (FTC) – Section 115JAA and section 115JD have
been amended to provide that if the Foreign Tax Credit (FTC) allowed under
sections 90 or 90A or 91 against MAT or AMT liability, is more than the FTC
admissible against the regular tax liability (tax liability under normal
provisions), such excess amount of FTC shall be ignored for the purpose of
calculating MAT or AMT credit to be carried forward.

12.    Transfer Pricing:

12.1   Domestic Transfer Pricing – Section 92BA –
At present, payments by an assessee to certain “Specified Persons” u/s. 40A(2)
(b) were subject to transfer pricing reporting requirement u/s. 92BA. Sections
92,92C, 92D and 92E applied to such transactions if they exceeded Rs. 20 crore.
The assessee was required to obtain audit report u/s. 92E in Form 3CEB for such
transactions. This provision is now deleted from A.Y. 2017-18 (F.Y. 2016-17).
However, the provisions of section 92BA will continue to apply to transactions
referred to in sections 801A, 801A(8), 801A (10), 10AA etc., as stated
in section 92BA (ii) to (vi).

12.2   Secondary Adjustments in Income – New Section
92CE –

(i)   This is a new section inserted w.e.f. AY.
2018-19 (F.Y. 2017-18). This section provides for Secondary adjustment in
certain cases. Such adjustment is to be made by the assessee where primary
adjustment to transfer price is made (a) Suomoto by the assessee in his
return of income; (b) Made by the Assessing Officer which has been accepted by
the assessee; (c) Determined by an advance pricing agreement entered into by
the assessee u/s. 92CC; (d) Made as per the safe harbor rules framed u/s. 92CB;
or (e) Arising as a result of resolution of an assessment by way of the mutual
agreement procedure under an agreement entered u/s. 90 or 90A for avoidance of
double taxation.

(ii)  The terms ‘primary adjustment’ and ‘secondary
adjustment’ have been defined in section 92CE(3).

(iii)  Where, as a result of the primary adjustment,
there is an increase in the total income or reduction in the loss of the
assessee, the assessee is required to repatriate the excess money available
with the associated enterprise to India, within the time as may be prescribed.
If the repatriation is not made within the prescribed time, the excess money
shall be deemed to be an advance made by the assessee to such associated
enterprise and the interest on such advance, shall be computed as the income of
the assessee, in the manner as may be prescribed.

(iv) This section shall not apply where the primary
adjustment in any year does not exceed Rs. 1 crore.

(v)  This section will not apply to assessment year
2016-17 and earlier years. The wording of the section is such that the section
may apply to assessment year 2017-18.

12.3   Concept of Thin Capitalisation – New
Section 94.B – This is a new section inserted w.e.f. A.Y. 2018-19 (F.Y.
2017-18) – It provides that, where an Indian Company or permanent establishment
of a foreign company in India, being a borrower incurs any expenditure by way
of interest or of similar nature exceeding Rs. 1 crore and where such interest
is deductible in computing income chargeable under the head “Profits and Gains
from Business or Profession” in respect of debt issued by a non-resident, being
an associated enterprise of such borrower, deduction shall be limited to 30 per
cent of EBITDA (earnings before interest, taxes, depreciation and amortisation)
or interest paid, whichever is less. It is also provided that for the purpose
of determining the debt issued by the non-resident, the funds borrowed from a
non-associated lender shall also be deemed to be borrowed from an associated
enterprise if such borrowing is based on implicit or explicit guarantee of an
associated enterprise. It is, further, provided that interest which is not
deductible as aforesaid, shall be allowed to be carried forward for 8
assessment years immediately succeeding the assessment year in which the interest
was first computed, to be set-off against income of subsequent years subject to
overall deductible limit of 30 %. These provisions shall not apply to entitles
engaged in Banking or Insurance business.

13.    Return of Income:

13.1   Section 139 (4C) – This Section is
amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide that Trusts or
Institutions which are exempt from tax u/s. 10(23AAA) Fund for welfare of
Employees, section 10(23EC) and (23 ED) Investors Protection Fund, 10(23EE)
Core Settlement Guarantee Fund, and 10 (29A) Coffee Board, Tea Board, Tobacco
Board, Coir Board, Spices Board etc., shall have to file their returns
within the time prescribed u/s. 139 if their income (Without considering the
exemption under the above sections) is more than the
taxable limit.

13.2   Revised
Return of Income – Section 139(5) – At present return of income filed u/s.
139(1) or 139 (4) can be revised u/s. 139(5) before the expiry of one year from
the end of the relevant assessment year or before the completion of the
assessment. This time limit is now reduced by one year and it is provided that
from A/Y:2018-19 (F.Y: 2017-18) return u/s. 139(5) can be revised before the
end of the relevant Assessment Year. Therefore, an assessee can revise his
return u/s. 139(5) for A.Y. 2017-18 upto 31.3.2019 whereas return for A.Y.
2018-19 can be revised on or before 31.03.2019 u/s 139(5).

13.3   Quoting of Aadhaar Number – New Section 139AA
– This is a new section which has come into force w.e.f. 1.4.2017. It provides
for quoting for Aadhaar Number for obtaining PAN and in the Return of Income.
Briefly stated, the section provides as under.

(i)   Every person who is eligible to obtain
Aadhaar Number has to quote the same on or after 1.7.2017 in (a) the
application for allotment of PAN and (b) the return of income. Thus in the
return of income filed on or after 1.7.2017 for A.Y. 2017-18 or a revised
return u/s. 139(5) failed for A.Y. 2016-17 it will be mandatory to quote
Aadhaar Number.

(ii)  If a person has not received Aadhaar Number,
he will have to quote the Enrolment ID of Aadhaar application issued to him.

(iii)  Every person who is allotted PAN as on
1.7.2017 and who is eligible to obtain Aadhaar Number, will have to intimate
his Aadhaar Number to such authority on or before the date to be notified by
the Government in the prescribed form.

(iv) If the above intimation as stated in (iii)
above is not given, the PAN given to the person shall become invalid.

(v)  The provisions of this section shall not apply
to such persons as may be notified by the Central Government.

          As Non-Residents, HUF, Firms, LLP,
AOP, Companies etc. are not eligible to get Aadhaar Number this section
will not apply to them.

13.4   New Section 234F – (i) This is a new
section inserted w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide for payment of a
fee payable by an assessee who delays filing of return of income beyond the due
date specified in section 139(1). The fee payable in such cases is as follows:

Status of return

Amount of Fee

 

Total income does not exceed  Rs. 5,00,000

Total income exceeds Rs. 5,00,000

If the
return is furnished on or before 31st December of the relevant
assessment year.

Rs. 1,000

Rs. 5,000

In any
other case i.E return is furnished after 31st December or return
is not furnished at all

Rs.1,000

Rs. 10,000

(ii)      The above fee is payable mandatorily
irrespective of the valid reasons for not furnishing return within the due
date. As a result of levy of fee, the penalty leviable u/s. 271F for failure to
furnish return of income will not be leviable.

(iii)     The consequential amendment is also made in
section 140A to include a reference to the fee payable u/s. 234F. Therefore,
the assessee is required to pay tax, interest as well as fee before furnishing
his return. Section 143(1) has also been amended to provide that in the
computation of amount payable or refund due on account of processing of return,
the fee payable u/s. 234F shall be taken into account.

(iv)     This Fee is payable in respect of return of
income for A.Y. 2018-19 and onwards. It is necessary to make a representation
to the Government that there is no justification for such a levy of Fee when
section 234A provides for payment of interest at the rate of 1% PM or part of
the month for the period of the delay in submission of the return of income.
Further, section 239(2)(c) provides that a Return claiming Refund of Tax can be
filed within one year of the end of the assessment year. Therefore, persons
filing return of income claiming refund due to excess payment of advance tax or
TDS will be penalized by this provision of mandatory payment of Fee even if
they file the return claiming refund u/s. 239(2)(c) within one year from the
end of the assessment year.

14.    Assessments, Reassessments and Appeals:

14.1   Section
143(1D) : At present, it is not mandatory to process the return of income
u/s. 143(1) if notice u/s.143(2) is issued for scrutiny assessment. This
section is now amended to provide that, from the A.Y. 2017-18 onwards, the
processing of the returns and issuance of refunds u/s. 143(1) can be done even
if notice u/s. 143(2) is issued. It may, however, be noted that a new section
241A is inserted, from A.Y. 2017-18 to give power to the Assessing officer to withhold
the refund till the completion of assessment u/s. 143(2) if he is of the
opinion that granting the refund will adversely affect the revenue. For this
purpose, he has to record reasons and obtain prior approval of the Principal
CIT.

14.2   Section 153(1) – The existing time
limit for completion of assessment reassessment, re-computation etc., is
revised by amendment of section 153 (1) as under. Such time limit is with
reference to the number of months from the end of assessment year.

Particulars

Existing
Time Limit From End of  A.Y.

Revised
Time Limit From End of A.Y.

Completion
of Assessment U/s. 143 Or 144

 

 

(i)  Relating to AY 2018-19

21
months

18
months (30-9-2020)

(ii)
Relating to AY 2019-20 or  later

21
months

12
months

Completion
of assessment u/s. 147 where

notice
u/s. 148 is served on or after
1st April 2019

 

9
months from the end of the Financial Year.

12
months from the end of the Financial Year.

Completion
of fresh assessment in  pursuance to an
order passed by the ITAT or revision order by 
CIT or order giving effect to any order of any appellate authority 

9
months from the end of Financial Year.

12
months from the end of Financial Year.

          Where a reference is made to the TPO,
the time limits for assessment will be increased by 12 months.

          Similar time limits have been
prescribed u/s. 153 A and 153B for completion of assessments in search cases.
It may be noted that the time limit of 2 years u/s. 245A (Settlement Commission
Cases) is also reduced as provided in section 153(1).

14.3   Foreign Tax Credit – Section 155(14A) A
new sub-section (14A) is inserted in section 155 w.e.f. A.Y. 2018-19 (F.Y.
2017-18) to enable an assessee to claim credit for foreign taxes paid in cases
where there is a dispute relating to such tax. Now section 155(14A) provides
that, where credit for income-tax paid in any country outside India or a
specified territory outside India referred to in sections 90, 90A or section 91
has not been given on the grounds that the payment of such tax was under
dispute, the Assessing Officer shall rectify the assessment order or an
intimation u/s. 143(1), if the assessee, within six months from the end of the
month in which the dispute is settled, furnishes evidence of settlement of
dispute and evidence of payment of such tax along with an undertaking that no
credit in respect of such amount has directly or indirectly been claimed or
shall be claimed for any other assessment year. It is also provided that the
credit of tax which was under dispute shall be allowed for the year in which
such income is offered to tax or assessed to tax in India.

14.4   Authority
for Advance Ruling (AAR) – Chapter XIX – B – With a view to promote ease of
doing business, various sections in Chapter XIXB dealing with Advance Rulings
by AAR have been amended w.e.f. 1.4.2017. By this amendment, the AAR will now
be able to give Advance Rulings relating to Income tax, Central Excise, Customs
Duty and Service Tax. It is possible that this provision will be extended to
GST also after this new tax is introduced by merging Excise, Customs, Service
Tax, VAT etc. Accordingly, consequential amendments are made in the
other sections. Further, amendments are made in the sections dealing with
appointment of Chairman, Vice-Chairman and other members of AAR.

14.5   Advance Tax Instalments – Section 211
– This section is amended w.e.f. A.Y. 2017-18 to provide that an assessee
engaged in a professional activity and opting for taxation on presumptive basis
u/s. 44ADA can pay Advance Tax in a single instalment on or before 15th
March instead or usual 4 instalments. Thus, the benefit at present enjoyed by
the assessees covered u/s. 44AD is extended to those covered by section 44ADA.
Further, section 234C is amended to provide that in such cases interest will be
payable on shortfall of Advance tax only for one instalment due in March.

14.6   Interest on shortfall in Advance Tax –
Section 234C –  At present,
difficulty is experienced in paying Advance Tax instalments on dividend income
taxable u/s. 115 BBDA as the timing of declaration of dividend is uncertain.
Therefore, the first proviso to section 234C is now amended with effect from AY
2017-18, to provide that interest shall not be chargeable in case of shortfall
on account of under-estimation or failure to estimate the taxable dividend as
long as advance tax on such dividend is paid in the remaining instalments or
before the end of the financial year, if dividend is declared after 15th
March of that year.

14.7   Interest on Refund of TDS – Section
244(1B) – Sub-section (1B) is added w.e.f. 1.4.2017 to provide for payment
of interest by the Government on refund of TDS. It is now provided that
interest @ 0.5% per month or part of the month shall be paid for the period
beginning from the date on which the claim for refund of TDS in Form 26B is
made, or, where the refund has resulted from giving effect to an order of any
appellate authority, from the date on which the tax is paid, till the date of
grant of refund. However, no interest will be paid for any delay attributable
to the deductor.

15.    Search, Survey and Seizure:

15.1   Sections 132 and 132A – Under sections
132(1) and 132(1A) if the specified authority has ‘reason to believe’ about
evasion of tax by any assessee he has power to pass order for search. Section
132(1) is now amended w.e.f. 1.4.1962 and section 132(1A) is amended w.e.f.
1.10.1975 to provide that the specified authority is not required to disclose
these reasons to the assessee or any appellate authority i.e CIT(A) or ITA
Tribunal. Similar amendment is made in section 132A(1) dealing with requisition
of books of account, documents etc., w.e.f. 1.10.1975. This provision
will deprive the right of the assessee from knowing the reasons for any search.
This amendment goes against the declared policy of the Government about
transparency in the tax administration and also against the assurance that no
amendments in tax laws will be made with retrospective effect. From the wording
of the section, it is evident that such reasons will be disclosed only to the
High Court or Supreme Court if the matter is agitated in appeal or a Writ.

15.2   Section 132(9B)(9C) and (9D) – Sub-sections
(9B) to (9D) have been inserted in section 132 w.e.f. 1.4.2017 to provide that
during the course of a search or seizure or within a period of sixty days from
the date of which the last of the authorizations for search was executed, the
authorised officer, for protecting the interest of the revenue, may attach
provisionally any property belonging to the assessee, with the prior approval
of Principal Director General or Director General or Principal Director or
Director. Such provisional attachment shall cease to have effect after the
expiry of six months from the date of order of such attachment.

          It is also provided that in the case
of search, the authorised officer may, for the purpose of estimation of fair
market value of a property, make a reference to a Valuation Officer referred to
in section 142A. It is also provided that the Valuation report shall be
submitted by the Valuation Officer within sixty days of receipt of such
reference.

15.3   Section 133 – This section authorises
certain Income tax Authorities to call for information for the purpose of any
inquiry or proceeding under the Income tax Act. By amendment of this section
w.e.f. 1.4.2017 this power is now given to Joint Director, Deputy Director and
Assistant Director. It is also provided that where no proceeding is pending,
the above authorities can make an inquiry. The existing requirement of
obtaining prior approval of Principal Director, Director or Principal
Commissioner or Commissioner is now removed.

15.4   Section 133A – At present, the
specified Income tax Authority can conduct a Survey operation at the premises
where a person carries on any business or profession. By an amendment of this
section from 1.4.2017, this power to conduct survey is extended to any place at
which an activity for charitable purpose is carried on. Thus, such survey can
be conducted on charitable trusts also. However, this amendment does not
authorise survey at a place where a Religious Trust carries on its activities.

15.5   Sections 153A and 153C – Section 153A
relates to assessment in cases of search or requisition. In such cases, at
present, assessment for six preceding assessment years can be reopened. The
section is amended w.e.f. 1.4.2017 extending the period of 6 years to 10 years.
The extension of 4 years is subject to the following conditions –

(i)   The Assessing Officer has, in his possession,
books of account or other documents or evidence which reveal that the income
which has escaped assessment amounts to or is likely to amount to Rs. 50 lakh
or more in the aggregate in the relevant four assessment years (falling beyond
the sixth year);

(ii)  Such income escaping assessment is represented
in the form of asset which shall include immovable property being land or
building or both, shares and securities, deposits in bank account, loans and
advances;

(iii)  The escaped income or part thereof relates to
such assessment year or years; and

(iv) Search u/s. 132 is initiated or requisition
u/s. 132A is made on or after the 1st day of April, 2017.

          In a case where the above conditions
are satisfied, a notice can be issued for the relevant assessment year beyond
the period of six years. Further, similar amendment has been made to section
153C relating to assessment of income of any other person to whom that section
applies.

16.    Penalties:

16.1   New Section 271J – (i) This is a new
section inserted w.e.f. 1.4.2017. At present, assessees are required to obtain
reports and certificates from a qualified professional under several provisions
of the Income tax Act. The section provides that the assessing officer or
CIT(A) can levy penalty of Rs.10,000/- on a chartered Accountant, Merchant
Banker or Registered Valuer if it is found that he has furnished incorrect
information in any report or certificate furnished under any provision of the
Act or the Rules. However, section 273B is amended to provide that if the
concerned professional proves that there was a reasonable cause for any such
failure specified in section 271J, then the above penalty will not be levied in
such a case.

ii)   It may be stated that such a provision to
levy penalty on a professional who is assisting the Income tax Department by
giving expert opinion in the form of a report or certificate can be considered
as a draconian provision. The power to penalise a professional is with the
Regulatory Body of which he is a member. Giving such a power to an officer of
the Department, is not at all justified. Such a penal provision can be opposed
for the following reasons.

(a)  In the case of Chartered Accountants, there
are sufficient safeguards under the C.A. Act to discipline a member of ICAI if
he gives a wrong report or a wrong certificate. Therefore, there was no need
for making a provision for levy of penalty under the Income-tax Act.

(b)  This section gives power to levy such penalty
to the assessing officer or CIT (A).

(c)  There is no clarity as to which officer will
levy such penalty. Whether the A.O. under whose jurisdiction the professional
is practicing or the A.O. of his client to whom the report or the certificate
is given? Professionals issue such certificates to their clients situated in
various jurisdictions in the same city or in different cities. If the officers
making assessments of various clients are to levy such penalty, it will create
many practical issues and will require professionals to face litigation at
various places involving lot of time and expenses for actions of different
officers at various places.

(d)  This section refers to incorrect information
in a “Report” or “Certificate”. It is well known that Report given by a
professional only contains his opinion whereas the certificate states whether
information given in the certificate is true or not. Therefore, penalty cannot
be levied for the opinion given in a ‘Report’ (e.g. Audit Report or a Valuation
Report). Further, the certificate is also given on the basis of information
given by the client and the evidence produced before the professional.
Therefore, if incorrect information is given by the client, the professional
cannot be penalised.

(e)  This section comes into force w.e.f. 1/4/2017.
It is not clarified in the section whether it will apply to report or
certificate given by a professional on or after 1/4/2017. If this is not so,
the A.O. or CIT(A) can apply the penal provision under this section while
passing orders on or after 1/4/2017 in respect of report or certificate given
in earlier years. If the section is applied to reports or certificates given by
a professional prior to 1/4/2017 the provision will have retrospective effect.
This will be against the principles of natural justice. It is settled law that
no penalty can be levied for any acts or omissions committed prior to the date
of enactment of a penalty provision.

(f)   If this
section is considered necessary, the CBDT should issue a circular to the effect
that (a) the section shall apply to reports or certificates issued on or after
1.4.2017, and (b) the penalty under this section can be levied only by the A.O.
or CIT (A) of the range or ward where the professional is being assessed to
tax.

16.2   The Taxation (Second Amendment) Act, 2016,
was passed in December, 2016. This Act amends some of the sections of the
Income-tax Act relating to higher rates of taxation and penalties w.e.f. A.Y.
2017-18. These provisions are discussed in the following paragraphs.

16.3   Section 115 BBE:            (i) Section 115BBE of the Income-tax Act deals with
rate of tax on income referred to in sections (i) 68 – Cash Credits, (ii) 69 –
Unexplained Investments, (iii) 69A – Unexplained Money, bullion, jewellery or
other valuable articles, (iv) 69B- Amount of Investments, Jewellery etc.
not fully disclosed, (v) 69C – Unexplained Expenditure and (vi) 69D – Amount
borrowed or repaid on a hundi in cash. The section provides that the rate of
tax payable on addition made by the Assessing Officer (AO) under the above
sections, if no satisfactory explanation for the above deposits/investments/
expenditure etc., is furnished by the assessee, will be at a flat rate
of 30% plus applicable surcharge and education cess. This section is now
amended w.e.f. 1-4-2017 (A.Y. 2017-18) as under:

(a)  It is now provided that in respect of income
referred to in sections 68, 69, 69A, 69B, 69C or 69D which is offered for tax
by the assessee in the Return of Income filed u/s. 139 the rate of tax on such
income will be 60% plus applicable surcharge and education cess.

(b)  Further, if the income referred to in sections
68, 69, 69A, 69B, 69C or 69D is not offered for tax but is found by the AO and
added to the income of the assessee by the AO the rate of tax will be 60% plus
applicable surcharge and education cess. 

(ii)  Section 2(9) of the Finance Act, 2016 dealing
with surcharge on tax has also been amended w.e.f. A.Y. 2017-18. It is now
provided that the rate of surcharge will now be 25% in respect of tax payable
u/s. 115BBE irrespective of the quantum of total income for A.Y. 2017-18. This
means that any income in the nature of cash credit, unexplained investments,
unexplained expenditure etc. which is offered for taxation u/s. 139 or
which is added to declared income by the AO u/s. 68, 69,69A to 69D will now be
taxable in the case of Individual, HUF, AOP, Firm, Company etc. at the
rate of 60% (instead of 30% earlier) plus surcharge at 25% of tax (instead of
15% earlier). Besides the above, education cess at 3% of tax will also be
payable.

(iii)  It may be noted that if an Individual, HUF,
AOP, Firm, Company etc. deposits old `500/1,000 notes in his Bank a/c
between 10-11-2016 and 30-12-2016 and he is not able to give satisfactory
explanation for the source, he will have to pay tax at 75% (60%+15%) plus
Education Cess even if this income is shown in the Return u/s. 139 for A/Y:
2017-18.

16.4   Penalty in Search Cases – Section 271 AAB –
(i)    Section 271AAB was inserted in the
Income-tax Act by the Finance Act, 2012 w.e.f. 1-7-2012. Under this section,
penalty is leviable at the rate ranging from 10% to 90% of undisclosed income
in cases where Search is initiated u/s. 132 on or after 1-7-2012. By amendment
of this section, it is provided that the existing provisions of section 271AAB
(1) for levy of Penalty will apply only in respect of Search u/s. 132 initiated
between 1-7-2012 and 15.12.2016.

(i)       New Section 271AAB(1A) provides w.e.f.
15.12.2016  for levy of penalty at 30% of
undisclosed income in cases where Search is initiated on or after 15.12.2016.

For this
purpose, the conditions are as under:

(a)      The assessee admits such income u/s. 132(4)
and specfies the manner in which it was earned.

(b)      The assessee substantiates the manner in
which such income was earned.

(c)      The assessee files the return including
such income and pays tax and interest due before the specified date.

(ii)      If the assessee does not comply with the
above conditions the rate of penalty is 60% of undisclosed income. It may be
noted that prior to this amendment the rates of penalty were 10% to 90% under
specified circumstances.

16.5   Section 271AAC – (i)       This section is inserted w.e.f. 1-4-2017
(A.Y. 2017-18) to provide for levy of penalty in respect of income from cash
credits, Unexplained investments, unexplained expenditure etc. added by
the A.O. u/s. 68, 69, 69A to 69D. This penalty is to be computed at the rate of
10% of the tax payable u/s. 115BBE (1)(i). Since the tax payable u/s.
115BBE(1)(i) is 60% of the income added by the AO u/s. 68, 69, 69A to 69D, the
Penalty payable under this section will be 6% of the income added by the AO
under the above sections. Thus, the total tax (including penalty) in such cases
will be 83.25% (77.25% + 6%).

(ii)  It may be noted that no penalty under this new
section will be payable if the assesse has declared the income referred to in
sections 68, 69, 69A to 69D in his return of income u/s. 139 and paid the tax
due u/s. 115BBE before the end of the relevant accounting year. In other words,
if any assessee wants to declare the amount of old notes deposited in the bank
during the specified period in his return of income u/s. 139 for A.Y. 2017-18,
he will have to pay the tax at 75% (including surcharge) and education
cess.  In this case the above penalty
will not be levied.

(iii)  It is also provided that in the above cases no
penalty u/s. 270A will be levied on the basis of under reported income. It is
also provided that the procedure u/s. 274 for levy of penalty and time limit
u/s. 275 will apply for levy of penalty u/s. 271AAC.

17.    Other Important Provisions:

17.1   Section
79 – At present, a closely held company is not allowed to carry forward the
losses and set-off against income of a subsequent year if there is a change in
shareholding carrying more than 49% of the voting power in the said subsequent
year as compared to the shareholding that existed on the last day of the year
in which such loss was incurred. By amendment of this section, w.e.f. AY
2018-19 (F.Y. 2017-18), it is now provided to relax the applicability of this
provision to start-up companies referred to me section 80-IAC of the Act. This
section will enable the eligible start–up company to carry forward the losses
incurred during the period of seven years, beginning from the year in which
such company is incorporated, and set off against the income of any subsequent
previous year. However, it is provided that such benefit shall be available
only if all the shareholders of such company who held shares carrying voting
power on the last day of the year or years in which the loss was incurred
continue to hold those shares, on the last day of the previous year in which
loss is sought to be set-off. Thus, dilution of voting power of existing
shareholders would therefore not impact the carry forward of losses so long as
there is no transfer of shares by the existing shareholders. However, change in
voting power and shareholding consequent upon the death of a shareholder or on
account of transfer of shares by way of gift to any relative of shareholder
making such gift, shall not affect carry forward of losses.

17.2   Section 197(c) of Finance Act, 2016 –
This section came into force on 1-6-2016. A doubt was raised in some quarters
that under this section A.O. can issue notice for assessment or reassessment
for income escaping assessment for any number of assessment years beyond 6
preceding years. This had created some uncertainty. In order to clarify the
position this section is now deleted
w.e.f. 1.6.2016.

17.3   General Anti-Avoidance Rule (GAAR):

          It may be noted that sections 95 to
102 dealing the provisions relating GAAR inserted by the Finance Act, 2013,
have come into force from 1.4.2017. CBDT has issued a Circular No.7 of 2017
dated 27.1.2017 clarifying some of the doubts about these provisions.

17.4   Place of Effective Management (POEM) –
Section 6 (3) was amended by the Finance Act, 2016, w.e.f. 1.4.2017. Under this
section, a Foreign Company will be deemed to be Resident in India if its place
of Effective Management is in India. This provision will come into force from
A.Y. 2017 – 18 (F.Y. 2016-17). By circular No. 6 dated 24/1/2017 issued by the
CBDT,  it is explained as to when the
provisions of this section will apply to a Foreign Company.

17.5   Income Computation and Disclosure
Standards (ICDS) – CBDT has notified ICDS u/s 145(2) of the Income-tax Act.
They are applicable to assesses engaged in business or profession who maintain
accounts on accrual method of accounting. These standards are applicable w.e.f.
A.Y. 2017 – 18 (F.Y. 2016-17). By Circular No.10 of 2017 dated 23.03.2017, CBDT
has clarified some of the provisions of ICDS which can be followed while filing
the return of income for A.Y. 2017-18 and subsequent years.

18.    To Sum Up:

18.1   During the Financial Year 2016-17 the
Government has taken some major steps such as introduction of two Income
Disclosure Schemes, one during the period 01.06.2016 to 30.09.2016 and the
other during the period 17.12.2016 to 31.03.2017, advancing the date for
presentation of Budget to first day of February, merging Railway Budget with
the General Budget, Demonetisation of high value currency notes, finalising the
structure for GST etc. All these steps are stated to be for elimination
of corruption, black money, fake notes in circulation and other administrative
reasons.

18.2   The declared policy of the Government is to
ensure that there is “Ease of Doing Business in India”. For this purpose the
administrative procedures have to be simplified and tax laws also have to be
simplified. However, if we consider the amendments made in the Income-tax Act this
year it appears that some of the provisions have complicated the law and will
work as an impediment to creating an environment where there is ease of doing
business.

18.3   The insertion of new section 56(2)(x) is one
section which will create may practical problems during the course of transfer
of assets within group companies and for business reorganisation. In case of
some transfer of assets there will be tax liability in the hands of the
transferor as well as the transferee in respect of the same transaction.

18.4   Amendment in section 10(38) levying tax on
sale of quoted shares through stock exchange if STT is not paid at the time of
purchase will raise many issues. If the Notification to be issued for exclusion
of some of the transactions from this amendment is not properly worded,
assessees will find difficulties in taking their decisions about business
reorganization.

18.5   New section 50CA is another section which
will create many practical problems. There will be litigation on the question
of valuation of unquoted shares. In some cases the seller of unquoted shares
will have to pay capital gains tax u/s. 50CA and at the same time the purchaser
will have to pay tax under the head Income from other sources u/s. 56(2)(x) on
the same transaction.

18.6   Provision in new section 234F relating to
levy of Fee for late filing of the Return of Income is also unfair as the
assessee is also required to pay interest @1% p.m. for the period of delay.
Further, persons claiming refund of tax will also be required to pay such fee
for late filing of Return of Income with Refund application.

18.7   Provisions relating to levy of penalties are
very harsh. Further, insertion of new section 271J for levy of penalty on
professionals for giving incorrect information in the report or certificate
given to the assessee is not at all justified. Many practical issues of
interpretation will arise. Strong representation is required to be made for
deletion of such type of penalty.

18.8   Amendments in the provisions relating to
search, survey and seizure will have far reaching implications. Arbitrary
powers are given to officers of the Income tax Department which are liable to
be misused. Denial of reasons for conducting search and seizure operations upto
ITAT Tribunal level can be considered to be against the principles of natural
justice. This provision is liable to be challenged in a court of law.

18.9        Taking
an overall view of the amendments made by this year’s Finance Act, one would
come to the conclusion that very wide and arbitrary powers are given to the
officers of the tax department for conducting search, survey and seizure
operations and levy of penalty. If these powers are not used in a judicious
manner, one would not be surprised if unethical practices increase in the administration
of tax laws. This will go against the declared objective of the present
Government to provide a cleaner tax administration.

Should Agricultural Income Be Taxed?

The taxability of agricultural income has been a topic of
discussion in the recent past. Niti Aayog the government’s think tank,
recommended taxing income beyond a particular threshold and the Chief Economic
advisor felt that given the constitutional limitations, the states should tax
agricultural income. As expected the opposition criticised the move threatening
an agitation. Finally, the finance minister stepped in to clarify that the
government had no intention of taxing agricultural income.

The mention of the term “agricultural income” always results
in a wry smile on the face of every tax professional and tax official. This is
because on most occasions the term is used as an attempt to explain undisclosed
income.

The Seventh Schedule of the Constitution clearly delineates
the subjects/areas on which the Centre and the States can legislate. Entries 82,
86 and 87 of the Union list grant the Centre the power to tax income, capital
value of assets and levy estate duty on property other than agricultural land.
Entries 46, 47 and 48 of the state list grant the power of such taxation to the
states. There is no entry in regard to agricultural income / land in the
Concurrent List. Article 366 of the Constitution defines agricultural income to
mean agricultural income as defined for the purposes of enactments relating to
Income tax. It must be mentioned that as far as the Income Tax Act, 1961 is
concerned, it grants a specific exemption to agricultural income in terms of
section 10(1), and agricultural income is computed only to determine the rate
of taxation of other income.

What then is the current scenario in regard to reporting of
agricultural income? Reports state that for assessment year 2014-15, four lakh
tax payers claimed exemption in respect of agricultural income of Rs.9,338
crore. This includes some corporates in the private and public sector. Considering
that agricultural income constitutes 15% of India’s GDP, this is indeed an
insignificant figure. This means that a large part of agricultural income
remains unreported to the tax authorities.

Agricultural income and agricultural land have always had a
special status, right from the times of colonial rule. This is probably because
such land was the subject matter of certain levies. Subsequently, large
holdings of agricultural land were prohibited and were subject to a ceiling.
After the independence, the right to tax agricultural income was granted to the
States.

The States, possibly on account of the political influence
that farmers wield, have refrained from taxing such income or over the years
withdrawn the levy. Maharashtra introduced an Act to tax agricultural income in
1962 but repealed it in 1989, as did the largest Indian State Uttar Pradesh
which enacted such a law in 1948 but repealed it in 1957. Assam has such
legislation but it taxes only tea cultivation. Kerala is possibly the only state
that levies such a tax aggressively.

It is possibly the time to revisit this issue. Readers may
feel that while reports of farmers committing suicide, and the waiver of loans
are doing the rounds, it is not appropriate to debate this aspect. It must be
pointed out that it is nobody’s case that a farmer who has no income is to be
taxed. But it is equally true that there are land barons who have circumvented
land ceiling laws, have huge income which is going untaxed. If an argument that
agriculture is subject to vagaries of nature is raised, it must be pointed out
that tax legislation provides for carry forward of losses and in any case these
are aspects which can be taken care of.

If at all the taxation of agricultural income becomes a
reality, who should have the power to tax it – the Centre or the States? To my
mind, agriculture like any other activity is an income earning activity, and
the powers of taxation should rest with the Centre and not the States. Another
reason for this is that keeping such powers with the States is likely to create
inequality. Even today, Kerala taxes plantation income at 50% while there is no
such taxation in the neighbouring state Tamil Nadu, putting the Kerala farmers
to a disadvantage.

Taxing farmers having income over a high threshold may
possibly be a way to start. According to the agricultural census of 2011,
farmers holding more than 25 acres were few in number. They were 35% in Punjab,
22% in Rajasthan, 12% in Gujarat and 10% in Madhya Pradesh. I am deeply
conscious that there are many hurdles including a constitutional amendment that
will have to be overcome and many creases that will have to be ironed out, but
it is time that the government takes a relook at this issue. When the GST dust
settles down it may be a good time to start!

Attachment

‘Birds fly
away and leave the nest deserted

Such is the
short-lived friendship soul and body share’

G. U. Pope

1.    We are all
attached to our family, work and environment –including the way we live. More
than our work we are attached to the result of our work – efforts. We are
attached to our resources including money and spend enormous effort in
protecting our resources and persons we are attached to, especially family and
friends. Above all, we are attached to our selves – this mind-body complex. In
other words, ‘attachment’ is an emotion and a very strong one. It binds us and
at times blinds us. Attachment is bare and lacks pretensions. Yet, it is
attachment that spurs us into action and we achieve our aims and goals in life
– action with attachment means success.

2.1  On the other
hand, our saints have singled out ‘attachment’ as the root cause of all human
suffering. Hence it is rightly said that `attachment and pride’ are the
intrinsic cause of unhappiness.

2.2  Attachment is
said to have six arms : desire, anger, greed, jealousy, arrogance and delusion.
Hence, these six arms together or any one of them generate worry and
insecurity. Attachment creates fear of loss as loss in inevitable even in love
and marriage is destined by death and even otherwise.

2.3  Brahma Kumaris
believe : Attachment keeps one entangled in the web of ‘me’ and ‘mine’ and the
need to hold on to whatever one is attached to. This makes one selfish, petty
and narrow-minded.

2.4  Our inability
to let go of ‘me and mine’ is the genesis of all attachment. Hence, remove the
thorn of ‘attachment’ to experience happiness. Let us reckon and realise that
‘attachment’ generates restlessness whereas detachment brings in calm – as it
converts one into an observer – an observer who observes but has no reactions.

3.    Attachment is
also an illusion, because the fact of life is ‘one comes alone and goes alone’.
However, the irony is, one lives life in attachment – hence one enjoys and
suffers because of attachment to people, objects, wealth and above all one’s
thoughts. The antidote to attachment is detachment – that is – being attached
minus the sense of ownership.

4.1  ‘The real question
is : can one work without attachment ! That is, there is no reaction whether
one succeeds or fails. In other words, one works for work’s sake without caring
for the results. It needs to reckoned and realised that one should not be
attached even to one’s duty – treat duty as action without expectation of even
‘thank you’.

4.2  One needs to
realise: attachment is based on expectations whereas detachment leads to
acceptance resulting in peace of mind making life pleasant. Detach, observe and
enjoy the games mind plays.

4.3  The issue is:
can this equanimity be achieved !

4.4  The answer is
yes. Dare to dream your way out of attachment – dream during day and night and
above all pray to live a life of ‘attachment with detachment’ and it will
happen. Saints live their lives in this manner, they love and serve humanity
with detachment. Jesus loved with detachment. Ram ruled with detachment – Raja
Janak is often quoted as an example who lived and ruled with attachment coupled
with detachment. Krishna preaches to Arjun to perform his duty – fight the war
– with detachment to the result.

4.5  Enjoy wealth,
comfort, fame and above all this ‘mind-body complex’ but to have peace be
detached to all these because detachment is the only antidote to attachment and
suffering.

5.1 Detachment is to
accept everything that comes without being emotional and believe implicitly in
what Adi Shankracharaya advises :

u  All that has happened has
happened for the best

u  All that is happening is
happening for the best

u  All that will happen will happen
for the best.

5.2        The
irony is : we get attached to detachment.

Interaction of CTC Members with Tax Professionals at Mumbai

REPRESENTATION

15th March, 2017

Central Technical Committee
ITO (HQ)
Aayakar Bhavan
Mumbai.

Respected Sirs

Sub: Interaction of CTC Members with Tax Professionals at Mumbai

We write to you in continuation of our discussion on the 20th February 2017 at Mumbai. We take this opportunity to present a few suggestions with a request to consider the same. These suggestions, if accepted, will go a long way in reducing contentioustax issues.

We request you to consider these suggestions favourably. We will be happy to present ourselves for any explanation and clarification that may be required by you.  

Thanking you,

We remain,

Yours truly,
For Bombay Chartered Accountants’ Society,

Chetan Shah                                                       Ameet Patel    
President                                                             Chairman,
                                                                            Taxation Committee

1.     Applicability of Section 50C to transactions covered by Section 45(3):

    In a case where assesse transfers capital asset being land or building or both and the full value of consideration for such a transfer is lower than the stamp duty value of the asset so transferred, section 50C deems stamp duty value of the asset transferred to be the full value of consideration. Thus, for applicability of section 50C the consideration for transfer of land or building or both has to be compared with the stamp duty value thereof which necessarily presupposes existence of consideration. In the absence of consideration, section 50C will not be applicable.

    In a situation where an assessee introduces his capital asset into a firm or an association of persons where he is a partner or a member, Supreme Court has held that there is no consideration. It is said that in such cases consideration lies in the womb of the future – Sunil Siddharthbhai v.CIT [(1985) 156 ITR 509 (SC)]. It was to overcome the ratio of this decision that section 45(3) was introduced in the Act w.e.f. 1.4.1988. Section 45(3) deems the amount credited to the account of the partner / member to be the full value of consideration. Therefore, by a fiction created by section 45(3) the amount credited to the account of the partner / member who has introduced the asset is regarded as full value of consideration.

    A question arises as to whether in a case where an assessee introduces capital asset being land or building or both in a firm in which he is a partner and the amount credited to his capital account in the books of the firm is lower than the stamp duty value of the asset so introduced by him, are the provisions of section 50C applicable. It is submitted that for the following reasons, provisions of section 50C are not applicable to such a case –

i)     consideration for introducing the asset into the firm in which assesse is a partner lies in womb of the future and therefore the value credited to the account of the partner / member is not consideration for transfer but it is deemed to be full value of consideration for charging capital gains;

ii)     section 50C creates a fiction. Section 45(3) also creates a fiction. It is settled position in law that there cannot be a fiction on a fiction.

Suggestion:
 Appropriate clarification be issued by the CBDT clarifying that the provisions of section 50C are not applicable to cases covered by section 45(3).

2.     Section 115JB:

Tax on book profits was introduced because it was felt that many companies are making profits, declaring dividends but because of incentives under the provisions of the Act they are not paying any taxes. The intention of the provision is never to tax the same amount twice once under the normal provisions of the Act and once under the provisions of section 115JB. There are several instances where because of the timing difference between point when the profits are offered for taxation under the provisions of the Act and the time when they are recorded in the books of accounts, the charge of tax under the normal provisions of the Act arises in a year which is different from the year in which the transaction is recorded in the books of accounts. To illustrate, in view of the inclusive definition of ‘transfer’ as defined in section 2(47) of the Act, the charge to capital gain arises in the year in which possession is granted whereas the profit on sale is recorded in the books in the year in which conveyance is executed. There could be a gap of one or two years between the two events. This results in the assessee paying tax under the normal provisions in the year of handing over possession and in subsequent year the same profits form part of “book profits”. Another example could be of a person who is engaged in development and construction of housing projects and is following project completion method in his books of accounts but for taxation purposes, to avoid any controversy, is following percentage completion method. In such a case, also, the profits get taxed under the provisions of the Act first and then in a subsequent year, on completion of the project, the very same profits form part of “book profits”. Itis relevant to mention that the Andhra Pradesh High Court has in the case of CIT v. Nagarjuna Fertilisers & Chemicals Ltd. [52 taxmann.com 397 (AP)] held that MAT is restricted to income “incomes of relevant tax year” and incomes undisputedly pertaining to earlier tax year/s cannot be roped in for MAT; and that it is a cardinal principle of taxation that same income cannot be subjected to tax more than once in different years in absence of specific provisions and MAT provisions are no exception to this principle.

Suggestion:
Section 115JB should be suitably amended to provide for adjustment in cases where the profit included in “book profit” is to be charged to tax under the normal provisions in a different year i.e. a year other than theyear in which the profit is recorded in the books of account. The Act should incorporate what has been laid down by the Hon’ble Andhra Pradesh High Court in the case of CIT v. Nagarjuna Fertilisers & Chemicals Ltd. (supra).

3.     Non-Levy of Late Filing Fee u/s. 234E prior to 01-06-2015

The legislature has introduced section 234E vide Finance Act, 2012 to provide for fees for late filing of TDS return. The Hon’ble Bombay High Court in the case of Rashmikant Kundalia and Ors v. UOI & Ors. (2015) 54 Taxmann.com 200 (Bom) has upheld the constitutional validity of the section. As a matter of fact, the Hon’ble Apex court has admitted SLP against the decision of the Hon’ble Bombay High court.

Vide amendment made by the Finance Act, 2015, the Legislature amended the section 200A w.e.f. 01-06-2015 to enable the revenue to levy late filing fee u/s. 234E vide order passed u/s. 200A. By virtue of this amendment, a question arises as to whether the late filing fees prescribed u/s. 234E were legitimately levied for the period prior to 01.06.2015 or not. Various courts and tribunals have deliberated on this and have given consistent view that the levy of late filing fees u/s. 234E prior to 01.06.2015 vide intimation u/s. 200A was not permissible under the law. Attention in this regard is drawn to various decisions as under:-

Recently the Hon’ble Kerala High Court in the case of Fateraj Singhvi v. UOI73 taxmann.com 252 (Kar) has held that section 200A is not retrospective and has only prospective application from 01-06-2015. The Hon’ble High Court observed that the mechanism provided for computation of fee and failure for payment of fee under section 200A which has been brought about with effect from 1-6-2015 cannot be said as only by way of a regulatory mode or a regulatory mechanism but it can rather be termed as conferring substantive power upon the authority. Thus, amendment made under section 200A has prospective effect, hence, no computation of fee for demand or intimation for fee under section 234E could be made for TDS deducted for respective assessment year prior to 1-6-2015.

The Hon’ble Amritsar Bench of ITAT in the case of Sibia Healthcare Pvt Ltd. v. DCIT (TDS)63 taxmann.com 333 has held that the revenue was not competent to levy fee u/s. 234E prior to 01-06-2015 by passing an order u/s.200A.

The Hon’ble Mumbai ITAT in the case of Kash Realtors Pvt Ltd v. ITO [2016-TIOL-1842-ITAT-MUM] and the Chennai ITAT in the case of G. Indhirani v. DCIT (60 taxmann.com 312) have also affirmed that prior to 01.06.15, fees u/s 234E of the Act could be levied in intimation u/s 200A of the Act in respect of defaults in furnishing TDS statements.

Now, the situation that has arisen by the act of levying such late filing fees in the intimation issued u/s. 200A for the respective years prior to 01.06.2015 needs rectification u/s. 154 as the same is a mistake apparent from record for the very fact that during that period, there was no enabling provision to levy such late filing fees. Attention in this regard is also invited to the judgment in the case of Gajanan Constructions and others v. DCIT, CPC (TDS) – Pune ITAT -(1292 & 1293/PN/2015).

Accordingly, the late fee levied needs to be deleted suo-moto by rectifying the intimation/ order passed u/s. 200A of the Act. The above position though seems to be simple and clear has various complex practical issues and what seems to be a fairly straight path is full of bumpers, speed breakers and hurdles. The first among them being the recent shift in rectification mechanism. Practically, the concerned Income Tax Officer (TDS) have informed that they do not have any power of rectification and the powers of rectification have been conferred with the CPC (TDS).

The rectification enabled by CPC (TDS) has limited options of rectification available to the deductor. The mechanism does not allow the deductor to apply for rectification in this peculiar circumstance.

Practically, neither the Income Tax Officer (TDS) is empowered nor the systems at CPC (TDS) are enabled to allow processing of rectification application of such kind.

Accordingly, this leads to uncertainty in the mind of the deductor and has no other option but to drag his case into unnecessary litigation adding to his cost and grievance.

Suggestion:
The CBDT should enable the Income Tax Officer and/or system at CPC (TDS) to resolve this issue and delete all the demands raised u/s. 234E for the years prior to 01-06-2015 at its own motion.

4.     Disallowance u/s. Section 40A(3) in case of unaccounted transactions:-

Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque / bank draft exceeds Rs. 20,000/-, no deduction of such expenditure is allowed u/s. 40A(3) of the Act. (Now proposed to be in excess of Rs. 10,000/-).

The said section is quite unambiguous and simple in terms of language but what acquires significance is its implementation in a peculiar circumstance where books of accounts are not prepared and incriminating loose papers in the form of noting, etc. about unaccounted sale / purchase transactions are found in the course of search and seizure action.

For example, in a situation where certain loose sheets / documents containing a noting of unaccounted sale transactions are found and seized in the course of search, the Assessing Officer has the detail of unaccounted sales and under the provisions of Act, he is required to make a proper and just estimate of income earned by the assessee on such unaccounted sales by bringing on record material in the form of comparables in support of his estimate of profit earned by the assessee. In other words, in such a situation, the Act, under the provisions of section 2(24) r.w.s. 5, mandates the Assessing Officer to correctly assess the income earned by the assessee.

However, currently, divergent and extravagant views have been taken by few of the Assessing Officers. It has been seen in such situations that the Assessing Officers have taxed the entire unaccounted sales by disallowing the unaccounted purchases under the guise of section 40A(3). This results in taxing the entire unaccounted sales which is not “income” as defined u/s. 2(24) of the Act. An Assessing Officer is allowed to tax only the element of income and not the total turnover by applying the provision of section 40(A)(3) of the Act which actually results in absurdity and is unlawful. The Hon’ble Apex Court in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) has held that income tax is a tax only on income. The real income theory has not only been accepted but in fact propounded by the Hon’ble Apex courts as well as various High Courts time and again. The Assessing Officer to protect itself from these embarrassments tries to disallow purchases u/s. 40A(3) of the Act. It is significant to note that though the purchase is stated to be disallowed u/s. 40A(3), the resultant addition amounts to taxation of the entire sale proceeds thereby grossly disregarding the settled law laid down by the Hon’ble Apex Court. Therefore, such an action of the Assessing Officer is completely against the spirit of the law laid down by the Apex Court.

Further, the following ingredients to invoke provision of section 40A(3) of the Act needs to be met cumulatively:-
– Payment of expenditure is made in cash
– Payment exceeds Rs. 20,000/- (Now proposed Rs. 10,000/-)
– Payment is made to a person in a day

Thus, the burden of proof to prove the existence of cumulative ingredients as per section 40A(3) lies heavily on the Assessing Officer and if the same is not evident from the loose sheets, there does not arise any question of making disallowance under the said section unless the onus is appropriately discharged by the Assessing Officer.

It is true that section 40A(3) does not make any distinction between the transactions recorded in the books of accounts or not recorded in the books of accounts. However, it is also true that if no books of accounts are maintained as per the provisions of section 145 of the Act, the Assessing Officer is duty bound to make the best judgment assessment u/s. 144 of the Act which requires him to take into account all relevant material which he has gathered to determine the amount of income earned. Hence, in a given situation, a significant question arises as to whether any expense can be disallowed when the books of accounts have not been maintained and income is to be estimated on the basis of incriminating material found in the course of search. In fact, when the income is to be estimated, then there cannot be any locus standi of a specific claim of expenditure made. The question is simple and clearly answered in unanimity by various Hon’ble High Courts that no disallowance u/s 40A(3) is warranted when income is estimated – [Indwell Constructions v. CIT (1998) 232 ITR 776 (AP); CIT v. Purshottamlal Tamrakar (270 ITR 3140) (MP); CIT v. Banwarilal Banshidhar (1998) 148 CTR 533 (All.)]. Accordingly, once the Assessing Officer estimates income, he is debarred from making disallowance under the normal provisions of the Act. The Kerala High Court in the case of CIT v. PD Abrahm (2012) 252 CTR 407 has held that unaccounted expenditure can be set off against unaccounted income which again supports the real income theory.

There also prevails a decision of the Hon’ble Gujarat High Court in the case of Hynoup Food and Oil Industries reported at 290 ITR 702 which has taken acontrary view against the assessee. However, considering the various divergent views of the courts, the Hon’ble Pune ITAT in the case of Shri Narendra Mithailal Agrawal (ITA no. 811 & 808/ PN/2010) has followed the decision of the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd (1973) 88 ITR 192 (SC) and has rendered the verdict in favour of the assessee.

In entirety, the above position though appears amply clear as to no disallowance of expenses can be made on estimation of income, it does not seem to be digestible to the departmental officers and therefore the assessee is made to pass through the long-drawn process of litigation.

Suggestion:
It is advisable that the CBDT makes necessary amendment in Rule 6DD to include the situations of unaccounted transactions as exceptional circumstance so that no disallowance u/s. 40A(3) of the Act is made when in such situations, the Assessing Officer is required to estimate income on his best judgment after taking into account the relevant material gathered in his possession and thereby avoid gross injustice of bringing to tax the entire sale proceeds.

5.     Difficulty in availing credit of Tax deducted at source for assesses following cash system of accounting

Assesse following cash system of accounting record income on receipt basis i.e as and when the amount is received by him. The payer however deducts tax as and when provision is made in the books for amount payable. TDS therefore appears in Form 26AS of the year in which the payer makes the provision. The assessee claims credit for tax in the year in which he actually receives the amount. Since the TDS credit does not appear in Form 26AS of the year in which the assesse has offered the income to tax based on cash system of accounting, credit is not granted to him, though the income from which tax is deducted is duly offered for tax in the relevant year. TDS credit is not granted to the assesse in the year in which it appears in 26AS because the income from which the said tax is deducted is not offered for tax in that year.

Due to the mismatch in the year in which TDS credit appears and 26AS and the year in which income is offered for tax, the assesse does not get credit for TDS in either of the years and often has loose the claim forever.

The issue is very relevant for professional like lawyers, chartered accountants, architects, who record income on cash basis.
In such cases, the concerned tax payers have no recourse but to make repeated requests to the CPC for rectification. Thereafter, the case gets transferred to the field officers. The assessee has to then make fresh application to the field officer and it requires herculean efforts to finally get an order of rectification passed.

Suggestion:
There has to be proper mechanism for granting credit of TDS where income has been offered for tax on cash basis of accounting.

6. Payment made to non-residents, who do not have PAN

Section 206AA requires deduction of tax at source @ 20% if the payee does not have a PAN. Notification dated June 24, 2016 was issued to state that on submission of specific documents by a non-resident provisions of section 206AA would not apply and tax can be deducted as per the rate applicable under the Act or as per the applicable DTAA. Form 27EQ available on NSDL website does not have any provision/field to enter details of such alternative documents received due to which, tax is deducted at lower rate and not at 20%. In the absence of such mechanism, demand is raised for short deduction of tax while processing the TDS statement filed.

Suggestion:
Form 27EQ needs to be amended to capture the simplification as stated in the notification.

7.    Applicability of Sec.43B to both employee and employer contributions. No disallowance u/s 36(1)(va) if paid before due date of filing return of income.

Sections 36(1)(va) of the Act provides that deduction in respect of any sum received by the taxpayers as contribution from his employees towards any welfare fund of such employees is allowed only if such sum is credited by the taxpayer to the employee’s account in the relevant fund on or before the due date under the relevant Statute. The issue arises as to whether due date for payment of employees contribution to staff welfare fund viz. ESIC / PF under section 36(1)(va) is same as contemplated under section 43B.

The following court rulings have been passed in favour of taxpayer wherein it is held that Sec.43B is applicable to both employee and employer contributions – see CIT v. Kichha Sugar Co. Ltd. [2013] 216 Taxman 90 (Uttarakhand), CIT v. Hemla Embroidery Mills (P.) Ltd. [2013] 217 Taxman 207 (Punj. &Har.), Spectrum Consultants India Pvt Ltd v. CIT [2013] 215 Taxman 597 (Kar.), CIT v. AIMIL Ltd. [2010] 188 Taxman 265 (Delhi) , CIT v. State Bank of Bikaner & Jaipur [2014] 225 Taxman 6 (Raj.) , CIT v. Jaipur Vidyut Vitran Nigam Ltd. [2015] 228 Taxman 214 (Raj.) CIT v. Magus Customers Dialog (P.) Ltd. [2015] 231 Taxman 379 (Kar.), Sagun Foundry (P.) Ltd v. CIT [2017] 78 Taxmann 47 (Allahabad).

However, the Assessing Officer are making disallowance u/s 36(1)(va) read with Sec.2(24)(x) even if the contribution received from the employees is deposited before the due date for filing the Income Tax Return.

Suggestion:
The CBDT should come out with circular to clarify the settled position that “due date” for payment of employees contribution to staff welfare fund viz. ESIC / PF under section 36(1)(va) is same as contemplated under section 43B i.e due date for filing the return of income.

Deactivation of Duplicate PAN Cards

REPRESENTATION

14th March, 2017

The Chairman,
Central Board of Direct Taxes
Government of India
North Block
New Delhi – 110 001.

Dear Sir,

Sub: Deactivation of Duplicate PAN Cards

Recently, the CBDT has begun the initiative of deactivation of duplicate PAN issued to tax payers. We wholeheartedly welcome this move to clean up the system and avoid misuse by certain unscrupulous persons. At the same time, we would like to bring to your kind attention genuine problems faced by several tax payers because of this initiative.

It has been noted that often a tax payer is not even aware that he/she has been allotted two different PANs. In many such cases, the tax payer has, for the past several years, been using only one of the two PANs allotted to him. However, because of the fact that such a person has more than one PAN allotted to him/her, the income-tax department, following its new initiative, suo motu cancels one of the PANs. In this regard, no prior intimation is given to the concerned tax payer.

Some of our members have brought to our notice that in some cases, it has so happened that the PAN that was regularly being used by the tax payer for many years has been deactivated.

As a result of deactivation of the regularly used PAN which would be linked to the bank accounts and other agencies, such tax payers are interalia not able to pay advance tax, access Income Tax e-filing portals or file Income tax returns.

Such persons whose active PAN is deactivated have to follow up continuously with the income-tax department for reactivation of the PAN. This is causing a lot of unnecessary inconvenience to the tax payers. It appears that in some cases, more than a month has passed since the tax payer has made an application for reactivation of the PAN but no action has been taken.

On behalf of the tax paying community, we appeal to you to look into the past history about usage of the PAN before deactivating the PAN and also to give the concerned tax payer an intimation about two PANs being allotted to him and a prior notice before deactivating one of the PAN allotted to him. Also, after a PAN is deactivated, the concerned person must be intimated by the income-tax department about the deactivation. Also, if the PAN has been in regular use, then the tax payer must be given an opportunity of being heard in the matter before any action is taken.

Since the current financial year is drawing to an end very soon, we humbly request your good self to take immediate action in the matter so that genuine tax payers do not suffer.

Thanking you,
Yours sincerely,

For Bombay Chartered Accountants’ Society,

Chetan Shah                                                           Ameet N. Patel    
President                                                                 Chairman, Taxation Committee

POST-BUDGET MEMORANDUM ON DIRECT TAX LAWS 2017-18

THE FINANCE BILL – 2017


1.    Clause 6 – Sec 10(38) – genuine cases should be protected

We welcome the government’s resolve to prevent the misuse of the exemptions provided in section 10. The misuse of section 10(38) by unscrupulous investors and market operators who work hand in glove to bypass the law and evade taxes has got to be stopped. The proposed amendment in section 10(38) is therefore, in principle, required.

However, as rightly pointed out in the Explanatory Memorandum, there is a need to protect the genuine investors who could have acquired shares without paying STT. In particular, the following types of acquisitions will not involve payment of STT:

1.    Shares issued to employees under ESOP schemes.
2.    Transfer amongst current and former employees of shares vested from a former ESOP scheme.
3.    Investments made/shares acquired by regulated entities such as SEBI registered Alternate Investment Funds, Domestic Venture Capital Funds, and Foreign Venture Capital Investors; And also investments (of fresh issuances) of Mutual Funds, FPI Category I, II, III, or transactions in regulated entities, such as insurance companies,
banks, etc.
4.    Issue of fresh shares to promoters, post 1st October, 2004 / issue of equity shares in a preferential issue under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
5.    Inter-se transfer of equity shares within the promoter group.
6.    Transactions which are specifically excluded from the definition of transfer by section 47 of the Income-tax Act, which include inheritance, conversions, etc.
7.    Corporate restructuring approved by a Court/NCLT – e.g. mergers, demergers etc.
8.    Issue of equity shares under the Qualified Institutions Placement (‘QIP’) route under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
9.    Equity shares received pursuant to split or consolidation of shares of a listed company.
10.    Equity shares of a listed company issued pursuant to slump sale of business to such listed company.
11.    Equity shares of a listed company acquired off-market pursuant to an approval obtained from the Indian regulatory authorities.
12.    Equity shares acquired pursuant to a group restructuring scheme.
13.    Equity shares acquired by a subsidiary company from its parent and vice versa.
14.    Equity shares issued by private limited company which is subsequently listed on stock exchange.

Further, even if STT has actually been paid at the time of acquisition of shares, practically, it would be very difficult for a shareholder to prove this. When shares are sold several years after the date of acquisition, the shareholder would have difficulty in tracing the documents evidencing the acquisition.

Suggestions:
Care must be taken to ensure that the various types of acquisitions listed above are notified for being excluded from the rigours of the amendment proposed in section 10(38).

Where the holding period of the shares exceeds 36 months, the proposed amendment should not be made applicable. In such cases, the requirement of proving that STT was paid at the time of acquisition of the shares should be removed.

2.    Clause 9(ii): Section 12A(1)(ab) –

The time limit of 30 days provided in the new clause proposed to be inserted is too short. Many NGOs are run by volunteers. It is unfair to cast such an onerous responsibility on them. For example, where the amendment to the trust deed is sanctioned by a Court etc., it may take time to get copies of the court order. 30 days’ period is impractical and merely onerous.

Suggestion:
Instead of 30 days, the time limit should be 6 months.
 
3.    Clause 9(ii): Section 12A(1)(ba) –

The condition of filing the return of income within the time specified in section 139(4A) is too harsh and unfair. There could be several genuine reasons for a charitable trust not being able to file its return in time.

Suggestion:
We therefore urge that this clause be withdrawn.
In the alternative, we suggest that there should be an enabling provision to condone the delay in case a reasonable cause is provided by the concerned trust.

4.    Clause 15 – Section 40A(3)

Not only in this clause, but in various other clauses (Clauses 11, 13, 16, 21, 83), there is reference to payment by “account payee cheque, account payee bank draft or use of electronic clearing system through a bank account”.

Today’s fast changing technology provides several other modes of transferring money or making payments such as digital wallets, credit cards etc.

Since the government’s intention is to curb the use of cash and promote modes of payment which can be traced, it is imperative that any mode other than cash should be encouraged. It has been noticed that post the demonetisation drive, large number of people have started using digital wallets and credit cards for making payments. It is therefore necessary to bring these modes also within the list of acceptable modes of transacting.

Suggestion:
At all places where the words “account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account” have been used, the following words may be added at the end – “or use of such electronic mode of payment as may be notified from time to time”. This will enable the government to notify new modes of electronic transfers that may be conceptualized at a future date.

5.    Clause 22 – Section 45(5A)

In principle, we welcome the amendment as it will bring clarity to the contentious issue of taxation of gains arising in case of Joint Development Agreements and will reduce litigation. However, there are certain anomalies in the proposals which, if removed, will make the amendment more meaningful and will cover more tax payers.

Suggestions:
a)    Presently, JDAs between societies and Developers are not covered as the new section refers only to ‘Individual or HUF.

    We therefore suggest that the words “, being an individual or a Hindu undivided family,” in the Line No. 19 of Clause 22 be deleted.
b)    Presently, in the Explanation to the proposed sub section (5A), the definition of “specified agreement” refers to a registered agreement in which a person owning land or building or both. This is likely to cause unintended litigation and disputes.

We therefore suggest that the word “owning” in the Line No. 35 of Clause 22 be replaced with “holding”.

c)    Presently, Section 45(2) lays down the taxation of gains arising on conversion of a capital asset into stock in trade of a business carried on by the assessee. This provision has stood the test of time and has been well accepted by the tax payers as well as the tax department.

    We therefore suggest that the proposed sub section (5A) be worded on similar lines as sub section (2) of section 45 so that there is consistency and clarity about the taxation of such transactions.

6.    Clause 26 – Section 50CA

The proposed section will result in double taxation of the same amount in the in the hands of the payer and the receiver. Also, it is likely to create unending litigation on account of the vague and complicated definition contained in the Explanation.

Suggestion:
We therefore urge that this clause be withdrawn.

In the alternative, it is also submitted that the term ‘quoted share’ used in proposed section 50CA is defined as follows:

‘Quoted share’ means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.’

This definition is likely to create ambiguity and result in unintended litigation. The term “regularity” is highly subjective and could be with reference to the volume of transactions on the stock exchange or it could be with reference to a particular time period.    

Similarly, the term “shares” is not defined. Therefore, disputes could arise as to whether preference shares are also covered by this provision.

The definition of “quoted share” may be amended as under

‘Quoted share’ means the equity share quoted on any recognised stock exchange and traded on not less than such number of days during the period of 12 months preceding the date of transfer as may be notified, where the quotation of such share is based on current transaction made in the ordinary course of business.’

It is also suggested that this section should be made applicable to shares of a company in which the public is not substantially interested.
 
7.    Clause 29 – Section 56(2)(x)

    The existing sections 56(2)(vii) and 56(2)(vii a) are being replaced  by section 56(2)(x).  The proposed section 56(2)(x) will have far reaching consequences. In brief, the proposal is to tax any “Person” who receives any gift in cash or kind from any other person or persons. Existing Section 56(2)(vii) only refers to gifts received by an Individual or HUF. Further, section 56(2)(viia) referred to shares received by a firm or company. By use of the word “Person” it will mean that the new section will apply to gifts received by all assessees (i.e. company, firm, LLP, Individual, HUF, AOP, BOI etc.)
    The effect of this new provision will be that any amount received by following persons without consideration or for inadequate consideration will be taxable as income from other sources.

(i)    Any amount settled in a private trust or any gift received by such a trust.

(ii)    Any subsidy received from the Government by any company (including a public sector company) or other person.

(iii)    Any bonus shares received by a shareholder from a company.

(iv)    Any right shares issued to a shareholder by a company at a price below its fair market value.

(v)    In the case of Buy Back of shares by a company if the shares are purchased at a price below the fair market value.

(vi)    If a company, including a listed company or a firm, receives shares of a listed company without consideration or at a consideration below fair market value.  (This was not taxable under section 56(2)(vii a) so far).    

This suggested amendment will extinguish the entire concept of formation of private trusts in our country. At present, there is no clarity whether the status of a trust is to be determined with reference to the status of the beneficiaries or with reference to the status of the trustees. There are contradictory judicial pronouncements. In some cases the status of the trust is determined with reference to the status of beneficiaries. In other cases the trust is treated as an AOP or BOI. By use of the word “Person” in the proposed section 56(2)(x), the gift to a  private trust will be treated as  gift to a “person”. It is, therefore, suggested that this amendment be dropped.  In the alternative, it may be provided in the Section 56(2)(x) that this section shall not apply to a trust which receives any property with a specific direction that it forms part of the corpus of the trust.

Suggestion:
We therefore suggest that the existing provisions be continued and the proposed amendment be dropped.

8.    Clause 31 – Section 71(3A) – Restriction of set off of loss from House Property

This proposal to restrict the set off of loss under the head “Income from House Property” to Rs. 2,00,000 per year will affect thousands of tax payers who have availed of loans in the past based on the law as it stood then. This will also adversely impact the real estate sector which is already reeling under a lot of pressure because of lack of liquidity and reduced offtake of new properties lying unsold.

Suggestions:
We therefore urge that this clause be withdrawn.
In the alternative, the amendment should apply to loss arising on account of interest on loans taken after 31st March, 2017.

9.    Clause 32 – Section 79(b) r.w.Section 80(IAC):

a)    The definition of eligible start up in 80(IAC) (4) Explanation (ii) requires that the total turnover of the business should not exceed Rs. 25 crore from 1-4-16 to 31-3-21. Clarification is required regarding turnover exceeding Rs. 25 crore in any of the previous years as any increase in a later year should not disentitle the assessee for the deduction in any earlier year.

The section as it is presently worded results in ambiguity in situations when, at a later date, the turnover of the eligible start up increases and crosses Rs. 25 crore. At that stage, the company would become ineligible for the deduction under section 80IAC. However, there are doubts about the deduction already claimed in the earlier years. Because of the ambiguity, there are chances that assessments of past years may be reopened to disallow the deduction
already claimed.

Suggestion:
It cannot be the intention of the government to penalize a start up as against a company which is not a start up. As per the language of the proposed new section 79(2), a start up will never be able to carry forward any losses incurred after the period of 7 years from the date of incorporation, irrespective of whether any change of shareholding has taken place or not.  Further, as a company should not be discouraged from expanding its business and increasing its turnover, the section should clearly spell out that in the event that the turnover crosses Rs. 25 crore, the start up would cease to be a start up and thus cease to be eligible for the exemption from loss of set off of losses only from subsequent years, but for the earlier years, the set off already claimed as per law would not be affected.

10.    Clause 42 – Section 92CE – Secondary Adjustments

The proposed section is not in accordance with international best practice. Hardly any other country has such a practice. Further, the Companies Act, 2013 also does not have explicit provisions relating to ‘adjustments’ in the
books of accounts of the assessee. In any case, Non-discrimination Article in the DTAAs could be invoked by the non-resident entities.

On another front, reciprocal secondary adjustments by the other countries may not be beneficial for India and would hurt the Government’s initiative of enhancing ease of doing business in India.
 
Suggestions:
We therefore urge that this amendment be withdrawn.
In the alternative, we suggest that the Secondary Adjustment should not apply to resident companies covered under Domestic Transfer Pricing regulations and it should be restricted to only international transactions.

11.    Clause 43 – Section 94B – Thin Capitalisation:

We strongly believe that this amendment is not conducive for better investment environment and is counter productive to the excellent initiatives of the government in the form of “Make in India”, “Start up India” etc.

Suggestions:
We therefore urge that this amendment be withdrawn.

In the alternative, we suggest as under:
a)    The provision should not apply to loss making companies;
b)    Instead of simply restricting deduction on account of interest to 30% of EBIDTA, appropriate debt equity ratio should be prescribed as per international practices;
c)    The terms ‘Implicit or’ in 1st proviso to section 94B(1) should be deleted to avoid litigation.

12.    Clause 50 – Sections 132(1) & 132(9B)

A.    132(1) Explanation after 4th proviso and 132(1A) new Explanation – non-disclosure of reason to believe / reason to suspect

    This amendment is not in line with the government’s thrust on providing transparency in governance in the country. Non-disclosure of reasons is not a good practice and will give rise to unfettered powers in the hands of the tax officers. It will once again lead to a regime of tax terrorism which the present government has studiously tried to curb. Non-disclosure of reason to believe / reason to suspect, to any person or authority or the appellate tribunal would only compel assessees to seek relief or remedy from the High Courts which in turn would lead to an increase in backlogs in the Courts. Lastly, these two amendments are proposed on a retrospective basis with effect from 1st April, 1962 and 1st October, 1975 respectively. It has been a stated intention of the government to not bring in any retrospective amendments and therefore the proposed amendment is contrary to the said intention and once gain gives rise to uncertainty in tax laws.

Suggestion:
We therefore urge that this clause be withdrawn

B.    132 (9B) – Provisional Attachment

This provision is likely to be misused and would cause harassment to tax payers. It would also lead to protracted litigation.

Suggestion:
We therefore urge that this clause be withdrawn

13.    Clause 58(i): Section 153(1):

Suggestion:
This amendment may be supplemented by simultaneously reducing the time limit for issuing notice for selection of cases for scrutiny as provided in the Proviso to section 143(2).

14.    Clause 63 – Section 194(IB)

We welcome this move to curb tax evasion and misuse of certain exemption sections by unscrupulous persons. However, the section as it is presently worded will cover thousands of people who may not even be paying any income-tax because their total income is below the threshold limit. Similarly, there will be thousands of tax payers in the income slab of Rs. 2,50,000 to Rs. 5,00,000 who may be impacted by this section. Practically, it would be very difficult for such persons to comply with the TDS provisions.

Suggestion:
The section should not be made applicable to those persons whose total income does not exceed Rs. 5,00,000 in the preceding financial year.

15.    Clause 75 – Section 234F

U/s 239(2)(c), a return claiming refund can be filed within one year of the end of the assessment year. As per the proposed section 234F, even such cases would be covered and would be liable to the proposed fee. This would unnecessarily cause such persons to pay a fee even though the Revenue is not adversely affected by the late filing of the return.

Suggestion:
No fee should be charged from a person who files the return of income beyond the normal time limit and in whose case, a refund is due as per the return filed.

16.    Clause 83 – Section 269ST

269ST(a) begins with ‘ No person shall receive an amount ….’
The word amount will include not only sum of money but any transfer for any value’. This is unintended and should be amended to clearly apply only to cash transactions. In fact, Memorandum brings out the intention.
Suggestion:
The word “amount” in line no. 39 in Clause 83 should be replaced with “sum of money”.
 
17.    Clause 86 – Section 271J:

It is widely felt that this provision could be subjected to widespread misuse and would result in harassment of honest and genuine professionals. Also, in any case, there is no provision for preferring an appeal to the ITAT in respect of orders passed by the CIT.

Suggestions:
We therefore urge that this section be withdrawn.

In the alternative, we suggest that the right of appeal to the ITAT be given to the affected person by way of a suitable amendment in section 253. Also, in order to provide a prospective impact of the section, an amendment should be made in the section to the effect that the section would apply to the certificates / reports issued on or after 1st April, 2017.

18.    Schedule 1 – Part III: The lower rate of tax has been made applicable in case of smaller domestic companies whose turnover for F.Y. 2015-16 did not exceed Rs. 50 crore. This is a welcome amendment.

However, inadvertently, companies which are incorporated after 31st March, 2016 will not be entitled to the benefit of this concessional tax rate. Since the requirement of the turnover being less than Rs. 50 crore for F.Y. 2015-16 does not prohibit such an eligible company from continuing to pay tax in a later year even if its turnover crosses Rs. 50 crore, it is obvious that ultimately, the government intends to cover all companies at a later date for the reduced corporate tax rate of 25%. This was also the stated intention as per the speech made by the Honorable Finance Minister in July 2014 immediately after the present government was voted to power. That being the case, the companies incorporated after 31st March, 2016 should not be excluded from the scope of this amendment.

Suggestion:
The reduced rate of 25% should be made applicable to all companies incorporated on or after 1st April, 2016.

REPRESENTATION – THE FINANCE BILL – 2017

REPRESENTATION

8th March, 2017

Mr. Arun Jaitley
Hon. Minister of Finance
Government of India
North Block
New Delhi – 110 001.

Respected Sir,

THE FINANCE BILL – 2017

We compliment you for the focused and non populist Budget that was presented on 1st February. The idea of combining the Rail Budget and the Finance Budget is also a welcome one.

We also wholeheartedly support the various initiatives taken by the government in expanding the formal economy and reducing the use of cash in the daily transactions that the people of India enter into.

The Housing-for-all is truly a one of its kind social project in the world. Nobody has attempted a project of this scale in such a short time. And the budget proposals for Affordable Housing are in the right direction towards this project. We appreciate the deep thought but simple provisions to incentivize the private sector to put their might behind this project. We feel the proposals, be it the Industry status, tax holidays or interest subvention, are adequate and will attract a lot of serious players in the Affordable Housing sector.

Many of the provisions like three moving up the indexation base year, reducing the holding period for long term capital gains, deferring the incidence of tax in JDA etc will additionally achieve the task of bringing more land supply for development.

We take this opportunity to make certain suggestions for rationalization of law, rectification of certain anomalies in the proposed amendments as also clarifying certain ambiguities so that the amendments meet the intended objectives of the government.

We would be happy to personally explain the suggestions if we are presented with an opportunity to do so.

For Bombay Chartered Accountants’ Society,

Chetan Shah                                                              Ameet N. Patel    
President                                                                   Chairman, Taxation Committee
CC:
–    Shri Santosh Kumar Gangwar, Minister of State for Finance
–   Shri Arjun Ram Meghwal, Minister of State for Finance
–   The Finance Secretary
–   Dr. Hasmukh Adhia, The Revenue Secretary, Ministry of Finance
–   The Chairman, Central Board of Direct Taxes
–   Joint Secretary, TPL-I
–   Director, TPL-I
–   Director, TPL-II

BCAS In 2016-17. Part – 1

You have been in touch with the Society during the entire year, learning and sharing knowledge through its various media. We would like to give you a glimpse of what has gone by in a capsule format. In the coming 3 months’ issues, including this issue we will be updating you with the happenings during the year April 2016 to March 2017.

This month let us summarise the enriching learning experience at BCAS through Lecture Meetings, Workshops and Seminars.

In the May Issue, we will cover various activities pertaining to Students and the Representations made by the Society.

Lastly in June we will cover knowledge sharing through our publications and various other activities held at the Society.

This year the Society has conducted 26 Lecture Meetings, 31 Seminars and Workshops including the Residential Refresher Courses and 19 Joint Programs with various organisations.

Lecture Meetings: During the year, besides the various routine meetings on filing of income tax returns, implications of changes in the accounting standards or aspects of international taxation, the Society conducted lecture meetings like “Business Reorganisation and Restructuring” by CA. Pinakin Desai, “Cyber Crime, Cyber Security and Cyber Laws” by CA. Sachin Patil, (IPS), DCP, Mumbai Police and “Crude Diplomacy & Global Economy” by Mr. Kushal Thaker. These lecture meetings though significant for the profession covered a broad avenue of various areas where Chartered Accountants do not generally venture independently. These lectures received an overwhelming response.
With GST round the corner, how can BCAS not touch upon the GST aspects ? The Society had one lecture meeting by CA. Bhavna Doshi on GST and another session post the Budget by Advocate Vikram Nankani touching upon the various issues pertaining to GST in the coming months. Both these lecture meetings had Q&A from participants and an overall interactive participation.

A new concept of “Expert Chat @ BCAS” commenced this year in August 2016. The concept of Chat with an expert is appreciated drawing more and more attendance and viewership. The first one was “Winning Global Marketplace” where Mr. Lee Frederiksen, Ph.D. was in a fireside chat with Mr. Nishith Desai. This was followed by various others including “Is BEPS answer to Tax Planning?” Where CA. Rashmin Sanghvi was in fireside chat with CA. Sushil Lakhani. The Society also covered the Demonetisation which was the talk of the nation in November via an Experts Chat @ BCAS -“Issues and Impact of Demonetisation” where experts like Ms. Sucheta Dalal a journalist, and Mr. Dharmakirti Joshi an Economist from CRISIL were in a fireside chat with CA. Ameet Patel. All chat sessions received an overwhelming response. Another aspect of Expert Chat was covered by Mr. Jalaj Dani of Asian Paints on “Effective Professionalization of Family Managed Business – Opportunities & Challenges”. The chat was moderated by CA. Shariq Contractor. BCAS recently tied up with the Institute of Internal Auditors (IIA) -Mumbai Chapter for conducting various joint events. This commenced with a session by Mr. Richard Chamber IIA President and CEO who was in a chat with Ms. Nandita Parekh at the Experts Chat @ BCAS Session on “Internal Audit 2017: Global Trends and Outlook”.

BCAS has been hosting its videos of lecture meetings on its YouTube Channel. Since August, it has also been live streaming its Lecture Meetings held at BCAS Hall at Jolly Bhavan office. This has benefitted many professionals across the country. Our YouTube Subscriber base has increased from 500 subscribers last year to more than 2,500 today.

 Here are a few statistics:
 
In terms of watch time, the viewership has increased by 176% over the last year.

 

While so many new things are happening around lecture meetings, the age-old tradition of the Society is not missed with its Budget Lecture meetings. Senior Advocate Shri S E Dastur continued to enthral the audience with his lucid style of presenting the speech on the “Direct Tax Provisions of the Finance Bill 2017”. The hall was packed with 3,000 people at the venue and over 15,000 watching live from various parts of the country.

Seminar & Workshops (including Residential Refresher Courses): If you have been a regular reader of the BCAJ you must definitely have glimpsed through the Golden Jubilee Residential Refresher course (RRC) held at Jaipur in the February Issue. This was the 50th year of the RRC’s being organised by the Society and the celebration was a grand one witha blend of knowledge and enjoyment. The Golden Jubilee RRC had an overwhelming response of 275 participants from all across the country. The 20th International Tax Conference was held at an international location, Sri Lanka in August where the Sri Lankan Finance Minister Ravi Karunanayake was invited as chief guest. The conference had again very elaborative technical coverage with speakers like CA. Pinakin Desai, CA. Padamchand Khincha & CA. T. P. Ostwal. Besides this local speakers namely Shri Suresh R. I. Perera and Shri Shiluka Goonewardane talked about the Taxation in Sri Lanka and the Investments in Sri Lanka respectively.

The 7th Residential Study Course on IndAS was held at Silvassa in February 2017 where the various issues relating to IndAS- 109, aspects on ICDS vs. IndAS, Case Studies on Revenue Recognition under IndAS – impact on different sectors, Case Studies on Consolidation and Business Combinations, Case Studies on Real Estate/Infrastructure Companies and Accounting Standards for Non-IndAS were covered.

Besides these the 2nd Batch of Mentoring Miracle kick started in January with a large number of mentees enrolling for the same. Technology being the forefront in todays’ economy BCAS conducted a two day seminar on “Advanced Excel” in November and a “Workshop on Audit In IT Empowered World – Techniques For Effectiveness & Efficiency” in March. Both received tremendous response and had in store great learnings on the various techniques used in a system based environment.

The Seminar on “Estate Planning, Wills and Family Settlement Critical Aspects” held in December was a full house. The program also sold more than 100 Pendrives of the recorded event. A two day workshop on “Mergers & Acquisitions” held in January had excellent speakers like Dr. Lalit Kanodia – Chairman Datamatics, Mr. Suresh Kotak – Chairman Kotak Group, Dr. Anup Shah, Adv. Sharad Abhyankar – Sr. Partner – Khaitan & Co., Adv. – Akil Hirani- Majmudar & Partners, CA. T.P. Ostwal, Mr. Sudhir Valia – Exec. Director Sun Pharma Ltd, CA. Hiten Kotak, CA. Himanshu Kishnadwala, CA. Sridhar Swamy & CA. Mitil Chokshi. This workshop attracted participation from various parts of the country.

In    August, the Society conducted the “Workshop on NBFC” covering significant topics in that area like Prudential Norms & Compliances – Important Aspects, Statutory Audit Aspects under Companies Act, 2013, Internal Audit Perspective for NBFCs and Internal Financial Controls for NBFCs.

The latest is the GST season, where the Society has already organised three houseful seminars with more than 300 participants at each session. The recent one was in the month of February. This two-day program brought together eminent speakers in the field of Indirect tax at one table to educate our members on GST.

While we talk about the various seminars and workshops let us also glance through the various courses at BCAS which also attracted excellent participation. “Four Days Orientation Course on Foreign Exchange Management Act (FEMA)” held in the month of March received more than 100 participations.

This was the 17th year of the Society where it has been conducting the “DTAA Course” successfully. This year also the Course was completed over 14 session on weekends covering aspects of various treaties, BEPS and Equalisation levy.

Non-Technical topics like the Leadership camp covering “Chanakya Business Sutra” by Mr. Mahendra Garodiya, “Heal without medicine” a program on healing without any medicines, public speaking program and “workshop on the CPR training” for members including free health check-up all received a welcome response from various participants in the profession.

The Youth being the pulse of the nation and the future of the profession cannot be set aside. Thus the Society also holds the Youth RRC every year with this year being the consecutive 4th year. BCAS held this RRC jointly with ICAI. Participants from both organisations attended and enjoyed the learning at Alibaug.

The Society has joined hands with various other organisations.

Event

Speaker

Jointly with

Seminar on

Internal Financial Controls
and CARO
Reporting under Companies Act, 2013

 

CA. Himanshu Kishnadwala
&

CA. Abhay Mehta

Chartered Accountants
Association,
Ahmedabad

Challenges of Transforming
India

Mr. Amitabh Kant

Forum of Free Enterprise

Two Days Seminar jointly
with Ahmedabad Chartered Accountants Association (ACAA)

CA. Sonalee Godbole

CA. Mayur Nayak

CA. Vishal Gada

CA. Mandar Telang

CA. Bhadresh Doshi

Advocate Sunil Lala

Association of Chartered
Accountants’ of Ahmedabad

Full Day Workshop on Writing
and
Drafting Skills

CA. Raman Jokhakar, CA. Anil
Sathe

Aurangabad Branch of WIRC

Full Day Seminar on
Alternative Fund Raising Options for Corporates

Mr. Nimesh Shah,

Mr. Abizer Diwanji,

Mr. Bhavesh A. Shah,

Mr. Amit Tripathi,

Mr. N. S. Venkatesh,

Chambers of Tax Consultants

Full Day Seminar on Goods
& Services Tax

CA. Sunil Gabhawalla

CA. Udyan Choksi

CA. Mandar Telang

CA. Govind Goyal

DTPA Study Circle, Kolkata

Two Days Workshop on
Accounting Standards (AS) and Standards on Auditing (SAs)

CA. Ashutosh Pednekar

CA. Abhay Mehta

CA. Himanshu Kishnadwala

Eminent faculty from
KCAS 

Kanpur Chartered
Accountants’ Society

Workshop on GST, MVAT and
Service Tax

Various Speakers

AIFTP, CTC, MCTC, STPAM
& WIRC of ICAI

Lecture Meeting-The Union Budget Meeting 2017-18 arranged by
Nani A. Palkhivala Memorial Trust

Mr. H. P Ranina

Forum of Free Enterprise

Event

Speaker

Jointly with

Under the auspices of Amita Memorial Trust, A talk in memory of
Amita Momaya-The Road less Travelled

Ms. Mittal Patel

The Chamber of Tax Consultants

Lecture Meeting on RBI and its Autonomy

Mrs. Usha Thorat – Former Deputy Governor, Reserve Bank of India

CA Rajendra Chitale

Mr. A. K. Purwar-Former Chairman, State Bank of India

Forum for Free Enterprise and the A D Shroff Memorial Trust

While
we continue with lots more this season, a few more aspects will be covered in
the coming next 2 issues of the BCAS Journal. The Annual Report of the Society
will also detail all these activities along with participation numbers and
various other statistics.

Practice – A “True And Fair” Choice for A Fresh Chartered Accountant in Current Times?

1.    Introduction

A Chartered Accountant reaches a major crossroad of his life when he is qualifies and has to decide between practice and service. Unfortunately, in recent times, from a majority of the persons qualifying opt for service in industry or the Big 4 as their first choice and very rarely choose practice as a career. The Institute of Chartered Accountants (ICAI) statistics reflect the number for associate members who are in full time practice at 46,308 out of total 171,357 CA’s i.e. 27%.

2.    Probable reasons for choosing employment over practice

This trend is also evident from my personal experience:

(a)    Out of 25 odd aspiring CA’s in my CA group of 1999, it is sad to note that I am the only one who has opted for independent practice. There are of course some who are with the profession as Big 4 employees, but a majority is with the corporate sector.

(b)    Only a couple of trainees have opted for practice out of approx. 50 odd trainees trained by our firm in the last 14 years.

(c)    On the personal front as well my Chartered Accountant sibling has opted to make a career in the Big 4 and has never shown interest in practice.

On the other hand, the global trends as reflected in June 2015 by the International Federation of Accountants (IFAC) pegs the number of accountants in public practice at 45.1%. This brings me to the moot point on why are the statistics of qualified CA’s opting for practice in India so low as compared to global norms? The reasons for not opting for practice, as a career choice may be attributable to the challenges faced by a CA practitioner: –

(a)    Lower earnings in the initial struggle period of practice as against an assured fixed pay package from day one of employment
(b)    No readymade post-retirement benefits in individual practice for the practitioners as against those in employment where the employer provides for post -retirement employee benefit plans.

(c)    Need to operate from home until one can afford to buy/lease an office as against in employment where you can work with the best infrastructure and state- of -the-art facilities.

(d)    No structured career path vs. a structured career path with a fast track plan in place.

(e)    Little travel opportunity vs. attractive global business trips at the employer’s cost.

(f)     Networking for developing good contacts, identifying mentors etc. is currently on limited and on a trial and error basis since it is random, unstructured and luck also plays a dominant role since it is not always possible to be at the right place at the right time. (I am not referring to networking as envisaged by the ICAI which does not seem to have taken off).

(g)  Difficulty in retaining good staff who trains with the firm but leave for greener pastures elsewhere.

(h)  In recent years, it is becoming increasingly difficult for the smaller firms to get the reasonably priced trainees, which has resulted in their costing being thrown off gear due to the need to opt for more expensive semi qualified staff.

(i)    The clients in India are also extremely price sensitive and generally resist increase in payments by CA practitioners. This results in many of the smaller CA firms continuing to accept lower fees from their clients out of insecurity and fear of losing clients.     
(j)    The general public perception is that a good CA is one who is good in “managing” client’s issues with the various government authorities. They feel that generally all CA’s earn substantial portion of their income from such malpractices. This though only a perception unnecessarily taints the entire profession, which can otherwise play an important role in the country’s economic growth
by partnering and supporting business by leveraging their expertise/ knowledge in the right and ethical manner.

(k)    There is also the challenge of losing work due to technological development. For instance, many corporate players have created websites providing online assistance for filing Income tax returns, Company formation etc., at a fraction of a cost charged by CA firms. There is a strong possibility that CA practitioners will lose their staple practice if they do not carve a niche for themselves.

(l)    It is widely known that almost 70% of the practitioners are sole proprietors and there is a general aversion to partnering with others possibly due to lack of formal forums / guidance to network, distrust for peers and non-willingness to trade off size with independence.  The proliferation of smaller sole proprietary set ups may be the reason why there is a mad scramble to get work at any cost, resulting in undercutting of prices.  If the proprietary firms join hands to form bigger set ups, then the fee structure would definitely be more competitive and fair for CA’s.

(m)    Since I have joined practice, there has been a major overhaul of laws, starting with replacement of FERA with FEMA, introduction of Service tax, introduction of new corporate laws, the recently introduced RERA and Benami Prohibition Act, the proposed introduction of GST etc.  It has become increasingly necessary for the practitioners to quickly unlearn the old and learn the new in order to stay updated and relevant.

(n)     Due to the superior technology adopted by various government departments and more integration between databases of different government departments, the defaults made by tax filers are detected more briskly and penalty orders issued immediately. It has become most important for CA’s to regularly educate and guide their clients to be compliant in all respects so that they are safeguarded from such penalties.

(o)     Recently, there have been news of the database of some CA firms being hacked resulting in them losing access to their own database. This has made it extremely important for the firm/partners to take professional help in ensuring the firm network and databases are secured and regularly backed up.

Therefore, practice is not for the weak-hearted especially in larger cities where the competition is cut throat and one has to be constantly alert to opportunity and reinvent the wheel to survive.  

3.    Meeting the challenge and the way forward- my personal experience

In my initial years of practice, there was no conscious thought given to actively developing the practice. With a ready-made practice, which I became partner in, I had thought that I just need to stick around and learn the tricks of the trade. I spent the maximum time and energy in execution mode i.e. in interacting with clients, execution of jobs on hand and updating my knowledge and skill sets. Our firm never had any growth plan or strategy and we generally trudged along doing our daily jobs, like a rudderless ship. I remember not knowing how much would be our firm’s turnover and profitability at the end of the year. The big Surprise would be revealed only after all accounts were updated at the time of tax return deadline in September. Our outstanding fees were also averaging at 8 months since most clients would pay before the next audit/ tax filing due to lack of regular follow up on our part. We would randomly provide annual increments to staff including performance incentives, even before our financial position was known to us. This coupled with the lack of special efforts to add to our top line, slowly resulted in the shrinkage of our bottom line. We soon realised such an approach was not sustainable since although we were successful in keeping our staff happy, it was at the expense of the firm’s long-term prospects.  

Ever since, we have started focusing our energies on steadily developing the practice and have changed tracks to introduce the following professional initiatives, which has definitely helped set the firm into “growth mode”. These are the steps we have taken :

(a)    It is very important to do an honest SWOT analysis of your firm, and align your firm’s growth plan to its strengths. It is also important for the firm partners to take into consideration their areas of interest so as to have a well-defined firm strategy.  We have thus identified newer areas of practice, identified industries or service lines to focus upon etc., and have devised a growth strategy for the firm covering 3 years, wherein the aim is for the newer areas of practice to contribute more than the traditional areas of practice, to the topline.

(b)    We have also introduced an annual process of budgeting firm performance in March every year, taking into consideration the previous year’s performance.  We regularly monitor firm performance against targets set at a monthly frequency such that the firm’s performance is known to us before we head into the 4th quarter.

(c)    We also conduct Monthly Outstanding reviews, to ensure the receivables do not become sticky thereby adversely impact our cash flows. We have also introduced a system of sending follow up emails for the slow moving debts and a stop service policy in case the dues go beyond 6 months, so that the clients do not take us for granted.

(d)    We have introduced the policy to periodically review rates charged to clients per service line and to formally communicate any increase vide formal communication so that the client understands that it would be the norm rather than an exception.  We have also fixed minimum thresholds for our fees, below which we would not accept/continue the work. This has helped in weeding out clients who do not appreciate your services and unnecessarily object to fee increase.

(e ) We have also introduced the practice of issuing an engagement letter for the new jobs.  This has ensured that the terms and conditions on which we undertake the assignment are well spelt out at the start and accepted in writing by the client. There is also a policy to collect the mandate fee of 50% of the fee for walk- in clients, who have not been referred by our contacts.

(f ) For the purpose of continuously engaging with the clients, we have started the practice of meeting key clients identified by the firm at the start of the year, at regular intervals. We also send regular mailers to all clients containing interesting articles, recent key changes in law etc.

(g) Managing the IT systems to ensure data is kept secure and is regularly backed up, software bought are updated regularly, business continuity planning etc. is especially important in the current world, where the technology drives most business.  We have outsourced the IT systems to a professional to manage the IT risks.

(h) In recent times we have carefully developed a web presence and we ensure that it is regularly reviewed and updated with latest details with respect to firm Partners, offerings etc.   

(i)    For a small enterprise, where the partners are involved in execution, it is very challenging to spend time on networking. However, it is extremely important to slot time for networking into your calendar since unless you continuously expose yourself further to newer people/corporates, the opportunities would not be so forthcoming.  For this reason, we have devised internal targets to ensure each partner meets two new people per week.

(j)     We have also introduced the practice of determining key result areas (KRA’s) for the key staff at the start of the year, so that the incentives paid are aligned to firm performance and the individual’s achievement of KRA’s.

(k) We have also focused on creating standardised processes and procedures and regularly training the staff in this regard, which would help the firm in scaling up through creation of efficiencies.

(l)     Since the results of the trainees in our firm in recent years have not been good, we have started regular in house trainings for the trainees and also encourage them to attend relevant programs conducted by
the ICAI.

(m) We also have devised a system of weekly trackers for the staff, wherein we allocate works to staff and also regularly monitor the status of the works.  

(n)    It is possible that to many readers the steps that we have taken seem elementary, but my experience is that despite this knowledge of what is necessary,  many of my contemporaries do not put it  into action.

4.    Expectations from Institutions and peers

Although in recent years, ICAI & BCAS have been very active in the development and marketing of the profession, and have taken noteworthy initiatives, there is yet scope
to do more to alleviate the challenges faced by the current practitioners and help practice become the top career choice:

(a)    Although there are myriad seminars for developing knowledge on various laws, there are very limited seminars/courses focusing on developing public speaking, presentation skills and other soft skills that are important for a practitioner.  The professional institutes should consider a tie-up with premier Management Institutes for creating specialised communication courses for CA’s, which may help them develop their communication/ presentation skills.

(b)    Currently, there are multiple study circles where the focus is generally on knowledge sharing, but there could be groups regularly meeting with a specific focus on practice management to share specific practice experiences, network and encourage tie-ups/ partnerships. The practice experience shared could cover topics relevant to practitioners like draft of a partnership agreement /MOU, recent tools available for CA office management, etc.

(c)    Like the ICAI has created separate portals for WOMEN CA, professional development etc. ICAI could create a portal for the Corporates to post their specific requirements for audit/ special assignments etc.  The SME practitioners could log in and regularly check for such requirements and send their best quotation. The regulatory framework of the ICAI should, be such that this becomes a possibility.

(d)    There is a lot of literature available in the market including self-help books focusing on individual practitioners.  Regular columns may be introduced in the publications to recommend and review these books, which may help the practitioners who are avid readers.

e)    Senior members in practice in the bigger Indian firms may be encouraged to share their experiences in practice and provide insights into practice development. For instance, M/s ABC wishes to have an office in Goa, but does not know how to go about the same and build a presence. The only way the firm would learn is by speaking to other firms who have successfully done it. I am aware that BCAS has such a program but these type of events need to increase. If there were regular columns/articles in the professional magazines wherein the partners of the larger firms would share their experiences on how they have expanded their reach, others could benefit from it.

(f)    Another effort lacking is for formal mentoring programs to be introduced for younger members, so they can gain considerably from the experience of the seniors in the profession. Here again BCAS has such a program but it needs to be publicised much more.

(g)    Although there is a portal for registration of articled trainees which firms can use for recruitment of trainees, the same needs to be improved since the information available therein as regards articled trainees is not updated promptly, which unnecessary results in waste of time.

Conclusion
The thought process behind penning this article is for the following stakeholders in the profession: –

(a)   For the new practitioners to learn from my experience, to get out of the execution mode, view the big picture and to consciously take steps to grow their firm to its full potential.

(b)     For the professional bodies of our erudite profession to further support and empower practitioners so that the newly qualified CA’s seriously consider practice as a “true and fair” choice rather than join the service bandwagon, which is the trend in recent years.

Overseas Direct Investments – Write-Off of Investment

BACKGROUND
The Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued thereunder came into force from 1st June, 2000. Since then, over last 16 years, they have undergone several changes.

Beginning December 2015, RBI is issuing Revised Notifications in substitution of the original Notifications issued on May 3, 2000. Previously, annually on July 1,  RBI was issuing Master Circulars with shelf life of one year. In another change, from January 1, 2016, most of the Master Circulars have been discontinued and substituted with Master Directions (except in case of – Foreign Investment in India and Risk Management and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions will be updated on an ongoing basis, as and when any new Circular / Notification is issued. However, in case of any conflict between the relevant Notification and the Master Direction, the relevant Notification will prevail.

CONCEPT AND SCOPE
The issues relating to write-off of investments in overseas subsidiary / joint venture entity and some other issues connected therewith are being discussed in this article.

OVERSEAS DIRECT INVESTMENT
Vide Notification No. FEMA 120/RB-2004 dated July 7, 2004, RBI notified the revised Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. This Notification repealed and substituted Notification No FEMA 19/2000-RB dated 3rd May 2000 which had notified Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000.

The purpose of this Notification is to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment (or financial commitment) by Indian entities in overseas joint ventures and / or wholly owned subsidiaries. This Notification also regulates investment by a person resident in India in shares and securities issued outside India. Updated provisions in this regard are contained in FED Master Direction No. 15/2015-16.

This article discusses the following aspects in the context of overseas investment made by an Indian party in the shares of an overseas entity.

1.    Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables.
2.    Sale of shares in a WOS / JV involving write off of the investment (or financial commitment).

1.    Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables

Almost all businesses suffer teething troubles and have a gestation period during which it will generally incur losses. However, over time, the business comes on track and also recoups the initial losses. Indeed, in some cases it may happen that despite the best efforts of the Indian party, the business continues to suffer losses and may require restructuring. Such instances are increasingly noticed in the post-2008 period which is marked by global economic turmoil.

If appropriate corrective action is not taken at the appropriate time, it may not only affect the viability and continuity of the business but the overseas entity may become sick and be in an irrecoverable situation although the business may have good potential. In such cases, the possible solution could be to restructure the balance sheet of the overseas entity by setting-off the past losses against the paid-up capital and reserves. However, this would also require the shareholders to write down their investment in the overseas entity.

In this background, in 2011 RBI amended Notification No. FEMA 120/RB-2004 and inserted Regulation 16A which permits the Indian Party (investors / promoters) to undertake restructuring of the overseas entity. Regulation 16A permits write-off of investment as well as receivables subject to compliance with certain conditions.

Such write off is permitted in case of both Wholly Owned Subsidiary (WOS) of the Indian Party or a Joint Venture (JV) of the Indian Party along with overseas investor(s). However, in case of a JV, the write-off is permitted only if the Indian Party holds at least 51% stake in the JV.

What can be written-off
The Indian Party can write-off the following investments / dues from the foreign entity: –
1.    Equity share capital.
2.    Preference share capital.
3.    Loans given.
4.    Royalty
5.    Technical knowhow fees.
6.    Management fees.

Available Routes for restructuring and write-off
This restructuring and write-off can be done either under the Automatic Route or under the Approval Route. The maximum amount that can be written-off under the Automatic Route as well as the Approval Route is 25% of the equity investment made by the Indian Party in the overseas WOS / JV.

AUTOMATIC ROUTE
A company listed on a recognised stock exchange in India can avail of the Automatic Route. The Indian Party is required to report the write-off / restructuring to RBI, through the designated AD Category-I Bank within 30 days of the write-off/restructuring.

APPROVAL ROUTE
An unlisted Indian Party can write-off / restructure its investment / receivables in overseas WOS / JV only after obtaining prior approval of RBI. It will need to apply to RBI, through the designated AD Category-I Bank.

Documents to be submitted
Both under the Automatic Route as well as the Approval Route, the Indian Party is required to submit the following documents together with its application.

a)    A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party.
b)    Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.

2.    Sale of shares in a WOS/JV involving write off of the investment (or financial commitment)

Depending upon the business exigencies, an Indian Party may consider selling its shares in the overseas WOS / JV. Regulation 16(1) grants general permission to an Indian Party to disinvest the shares subject to certain conditions if the sale does not result in any loss.

However, it is not necessary that the sale will always result in profit. Hence, RBI has granted general permission for disinvestment of shares by an Indian Party where such disinvestment results in a loss. It may be noted that the computation of ‘loss’ in case of Notification No. FEMA 120/RB-2004 is distinct from that the computation of ‘loss’ in terms of the Income-tax Act, 1961. For FEMA purpose, the ‘loss’ is to be understood as realisation of disinvestment proceeds of shares which are less than the investment made. Thus, there would be a ‘loss’ when the disinvestment proceeds on the sale of shares are lower than the amount paid at the time of purchase of shares.

Again, disinvestment by an Indian Party in its overseas WOS / JV, resulting in a loss or write-off on investment, can be either under the Automatic Route or the Approval Route.

AUTOMATIC ROUTE
The Indian Party can avail the Automatic Route if it complies with any of the following four criteria.

1.    The overseas JV / WOS is listed on a stock exchange outside India.
2.    The Indian Party is listed on a stock exchange in India and it has net worth of not less than Rs. 100 crores.
3.    The Indian Party is listed on a stock exchange in India, it has net worth of less than Rs. 100 crores but investment in the overseas JV / WOS does not exceed US $ 10 million.
4.    The Indian Party is unlisted and the investment in the overseas entity does not exceed US $ 10 million.

Once the Indian Party qualifies under any of the aforementioned criteria, it will need to comply with the following conditions.

a.    If the shares of the overseas JV / WOS are listed, the sale should be effected through the stock exchange.

b.    If the shares of the overseas JV / WOS are not listed and they are disinvested by a private arrangement, the share price should not be less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS.

c.    The Indian Party should not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS.

d.    The overseas concern should have been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year must have been submitted to RBI.

e.    The Indian Party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.

f.    The Indian Party should submit details of such disinvestment through its Bank in Part III of Form ODI within 30 days from the date of disinvestment.

g.    Sale proceeds should be repatriated to India within 90 days from the date of sale of the shares / securities.

APPROVAL ROUTE
If an Indian Party does not satisfy the criteria / conditions mentioned above, it should obtain prior approval from RBI for undertaking divestment in its overseas WOS / JV.

SPECIFIC WINDOW IN CASE OF A LISTED COMPANY HAVING EXPORTS

In addition, Regulation 171 provides another window for write-off in case of a listed company. Thus, if the proceeds realised by an Indian Party listed on any stock exchange in India from sale of shares or security referred to in Regulation 16 (1)2  are less than the amount invested in the shares or security transferred, the Indian Party may write off the differential amount if such differential amount does not exceed the percentage approved by the RBI, from time to time, of the Indian Party’s actual export realization of the previous year.

If, however, the differential amount is more than the percentage approved by RBI from time to time, of the Indian Party’s actual export realisation of the previous year, prior permission of RBI would be required for write-off.

SIGNING OFF
As pointed out above, transfer by way of sale of shares of a JV / WOS outside India as well as restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables, requires fulfillment of various conditions and also involves various compliances. It would be prudent to examine the facts carefully and in appropriate cases, wherever applicable, apply to the RBI for permission which may be granted subject to such conditions as the RBI may consider appropriate.

1    It may be noted that while Notification No. FEMA 120/RB-2004 includes Regulation 17, Master Direction No. 15/2015-16 on investment in JV/WOS does not make any mention thereof.
2    While Regulation 17 mentions Regulation 16(1), it also mentions “for a price less than the amount invested in the shares or security transferred”. A case where sale proceeds are less than investment is within the ambit of Regulation 16(1A) and not within the ambit of Regulation 16(1). Hence, Regulation 16(1) should be read as Regulation 16(1A).

SEBI Again Initiates Action against Statutory Auditors for Fraud, Negligence, Etc.

SEBI has initiated action yet another time against auditors of a listed company that was alleged to have carried out massive frauds, made false/fake/duplicate books of accounts, etc. In an earlier case, SEBI had actually debarred an auditor/Chartered Accountant from issuing any certificates under various Securities Laws. This case was discussed earlier in this column in the April, 2016 issue of this Journal. Further, as will also be discussed later herein, the Bombay High Court had held that SEBI did have power to take action against auditors and that such powers were not the exclusive prerogative of the Institute of Chartered Accountants of India. This results in not only SEBI being able to debar auditors but also  initiate other actions such as penalties, prosecution, etc. Action under other laws such as the Companies Act, 2013, can also not be ruled out.

This particular case (Order of SEBI dated 16th February 2017 in the matter of Arvind Remedies Limited) has an interesting and perhaps worrisome feature. SEBI has taken a view that the concerned auditors had been negligent in their duties as auditors and failed to maintain requisite professional standards in their work. Based on this, the auditors have been accused  of fraud, manipulation, deceit, etc. These allegations are not only more serious but can result in far stricter punishment.

FACTS OF THE CASE
A forensic audit was carried out of the listed company, Arvind Remedies Limited, by a consortium of bankers. Several findings were made by these forensic auditors and also by SEBI’s own subsequent investigation. Some of alleged frauds/manipulation, etc. were as follows:-

1.    Maintenance of multiple sets of books of accounts.
2.    Recording of bogus sales.
3.    Allegedly making fake sales/entries with several companies.
4.    Destruction of large amount of inventories which SEBI suspects to be originally non-existent.
5.    Reduction of a large amount of tangible assets in a suspicious manner.
    And so on.

The turnover of the company had reduced very substantially. The share price on stock exchange too had reduced to a small fraction of the price in preceding period. It was alleged that during the relevant period the Promoters sold a very substantial number of shares and reduced  their shareholding from 46.84% to 3.58%. The Promoter Director also had drawn a large amount as commission on sales which SEBI has alleged to be fake.

Around this time, the erstwhile auditors (“the Auditors”) of the Company resigned and a new firm was appointed. The findings by the new firm were similar to findings of SEBI/the forensic auditor.

ACTION BY SEBI AGAINST THE COMPANY AND PROMOTER DIRECTOR
SEBI alleged that the Company and its promoter director were guilty of violation of several provisions of the SEBI Act/SEBI (PFUTP) Regulations relating to manipulations, frauds, etc. It also alleged that the promoter director had drawn a large amount of commission on the basis of bogus sales. Accordingly, it issued the following interim directions:-

1.    Debarred the Company and the promoter director from accessing the securities markets, buying/selling shares, etc.

2.    Directed the promoter director to impound the commission that he had drawn on basis of allegedly bogus sales.

SEBI also directed the promoter director not to alienate any of his assets till the amount of commission was duly impounded in the manner specified by SEBI.

ACTION AGAINST THE AUDITORS
SEBI had sought a statement from the Auditors on various issues to which replies were given by them. Pursuant to such replies and investigation, SEBI made several observations against the role of the Auditors. SEBI stated: “For negligence in certification of accounts of listed company, failure to maintain professional standards in Audit, the Statutory Auditor and its proprietor were prima facie alleged to have violated – i. Section 12A(a), (b) and (c) of the SEBI Act and Regulation 3(b), (c) and (d) and Regulation 4(1) and 4(2)(a), (e), (f), (k) and (r) of the PFUTP Regulations.” (emphasis supplied).

Again, SEBI pointed out several alleged lapses of the Auditors such as not reporting on certain discrepancies in the accounts. Based on this, SEBI observed, “The irregularities perpetrated by ARL, its Director and Statutory Auditor, discussed hereinabove are prima facie in violation of Sections 12A(a), (b) and (c) of the SEBI Act; Regulations 3(b), (c) and (d) read with Regulations 4(1) and 4(2)(a), (e), (f), (k) and (r) of the PFUTP Regulations. “

Thus, SEBI has alleged that the Auditors have prima facie violated the provisions relating to fraud, manipulation, deceit, etc. as contained in the SEBI Act and the PFUTP Regulations.

These provisions provide for certain fairly serious violations. Section 12A(a) concerns with use of “any manipulative or deceptive device or contrivance” in connection with certain issue/purchase/sale of securities. Section 12A(b) deals with employment of “any device, scheme or artifice to defraud” in connection with issue or dealing of securities. Regulation 4(2)(r) of the PFUTP Regulations deal with “planting false or misleading news which may induce sale or purchase of securities.”

Thus, and to repeat, these are serious violations alleged.

The interim order also operates as a show cause notice to the Auditors asking them to show cause as to why they should to be debarred from giving various certificates for having allegedly committed violations of the provisions relating to fraud, manipulation, deceit, etc.

Whether negligence/lower professional standards in audit can be treated as fraud, deceit, etc.

In the earlier order in the case of Shashi Bhushan discussed in an earlier article in this column, the auditor concerned was specifically alleged to have committed the violations relating to fraud, etc. In other words, the allegation was that he was party to such things.

In the present case, the order, though not wholly clear/consistent, seems to be on a different footing. The Auditors are not specifically alleged to be party to such fraud, etc. The allegation against them is that they have been negligent in their audit and/or they have applied lower professional standards in their audit. However, whether such negligent work can amount to fraud, manipulation, etc.? The latter are allegations that can result in severe consequences of debarment, penalty, prosecution and perhaps more.

The Order/Show Cause notice further states that “The Statutory Auditor therefore, enabled ARL and its Director to perpetrate manipulation/fraud on genuine investors in the securities market.” Thus, it appears that the allegation is that the alleged actions/defaults of the Company/director were a consequence of such alleged negligence, etc.

It will be interesting to read the final order of SEBI on the matter and how it bridges what I see as a gap between alleging negligence/low professional standards in audit and an active fraud/manipulation/deceit. Negligence/low professional standards in audit is surely a default that ought to be acted upon but allegation of fraud, manipulation, etc. are different and serious defaults. Negligence, it is submitted, does not amount to committing fraud which requires mens rea and a conscious and active participation to commit such an act.

WHETHER SEBI HAS POWERS TO ACT AGAINST AUDITORS
To consider whether SEBI has powers to act against auditors of a listed company, the decision of the Bombay High Court in Price Waterhouse & Co. vs. SEBI (2010) 103 SCL 96) is relevant. The Court had observed therein:-

“25. ….The powers available to the SEBI under the Act are to be exercised in the interest of investors and interest of securities market. In order to safeguard the interest of investors or interest of securities market, SEBI is entitled to take all ancillary steps and measures to see that the interest of the investors is protected. Looking to the provisions of the SEBI Act and the Regulations framed thereunder, in our view, it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that the SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company. Whether such directions and orders are required to be issued or not is a matter of inquiry. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants.
….
With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market.”

The Court thus has held that where a Chartered Accountant is “instrumental in preparing false and fabricated accounts”, SEBI does have jurisdiction to act in interests of investors/markets. The Court further observed:-

“If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.”

It is clear thus that SEBI does have power/jurisdiction to take action against a Chartered Accountant who connives/colludes with the management of the company to concoct false accounts.

However, the questions that this particular case presents are two. Whether negligence/applying lower professional standards in auditing by itself amount to fraud. Secondly, whether such negligence, etc. itself are actionable
by SEBI. 

IMPLICATIONS ON OTHER PROFESSIONALS AND GENERALLY THROUGH OTHER LAWS
Action by SEBI against the Chartered Accountant does not rule out action by the Institute of Chartered Accountants of India for defaults of professional negligence, misconduct, etc. Further, action is also conceivable under other laws such as the Companies Act, 2013, etc.

Adverse action is also possible in appropriate cases against other professionals such as Company Secretaries, lawyers, etc.

It will be of interest whether and to what extent the defence of double jeopardy (under Article 20(2) of the Constitution of India) of double punishment for the same offence would be available.

CONCLUSION
The liability of auditors of entities to which Securities Laws apply have only increased over the years. Apart from increasingly complex laws and wider requirements/scope of audit and other work, there are multiple regulators who end up regulating the same work. The auditors would have thus to be prepared to defend their work against action by different regulators/forums and also be subject to multiple forms of adverse action for the same work.

Joint Holder or Nominee is the Question

INTRODUCTION
Succession planning is catching up with modern India. Earlier, people in India would think of wills, trusts and other modes of estate planning only when they were of a ripe old age. However, today even younger people are considering what is the best mode of planning for one’s assets so that there is a smooth transmission to the family. And rightly so, since life is uncertain and hence, planning for one’s affairs would only mean that an already mourning family has one less problem to face!

When it comes to estate planning, the most basic form of planning is a joint ownership of assets and a nomination. However, there is a fair deal of confusion as to the difference between these two and which is superior of the two. Let us examine the meaning of these two very important tools and when to use which.

JOINT HOLDING
A joint holder as the name suggests is joint in ownership along with the 1st holder or the main holder. Joint ownership could be in respect of bank accounts, demat accounts, share certificates, flat ownership certificates, etc. A joint holding is the opposite of a single / sole ownership. Depending upon the mode of joint holding, in certain assets, the joint holder can operate the assets along with or after the lifetime of the primary holder. To illustrate in the case of bank accounts, the following modes are possible:

(a)    Either or Survivor – under this mode, either of the joint holders can operate the account. Moreover after the death of the primary member, the joint holder would automatically become the sole holder of the account.

(b)    Former or Survivor – under this mode, the joint holders can operate the account only after the death of the primary member. Once the primary member dies, the joint holder would automatically become the sole holder of the account. However, during the lifetime of the primary member, the joint holder cannot operate the account.

Table F of Schedule I to the Companies Act, 2013 lays down the model Articles of Association of a limited company. Clause 23 of this Table F provides that on death of a joint holder of shares, the survivor member would alone be recognised by the company as having any title to his interest in the shares.

NOMINATION
Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository/demat accounts, mutual funds, Government bonds/securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death.

The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face which whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc. and the nominee.

The nomination seeks to avoid any confusion in cases where the will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.   

A nomination continues only up to and until such time as the will is implemented. No sooner the will is implemented, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is for all purposes a trustee of the property. He cannot claim precedence over the legatees mentioned in the will and take the bequests which the legatees are entitled to under the will.

The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), in the context of a nomination under a life insurance policy held that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. Once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), the Supreme Court examined the National Savings Certificate Act and various other provisions and held that, the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest. Again, in Shipra Sengupta v Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.

The Supreme Court reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299. In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee. A similar view has been taken by the Bombay High Court in Nozer Gustad Commissariat vs. Central Bank of India, 1993(2) Bom.C.R.8 and Antonio Jaoa Fernandes vs. Asst. Provident Fund Commissioner, 2010(3) All MR 599 in respect of balance standing in the employee provident fund of the deceased.

The position of a nominee in a flat in a co-operative housing society was analysed by the Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA NO. 4646of 2006(SC). The Supreme Court held that there can be no doubt that the holding of a valid nomination does not ipso facto result in the transfer of title in the flat in favour of the nominee. However, consequent upon a valid nominationhaving been made, the nominee would be entitled to possession of the flat. Further, the issue of title had to be left open to be adjudicated upon between the contesting parties. It further held that there can be no doubt, that where a member of a cooperative society nominates a person, the cooperative society is mandated to transfer all the share or interest of such member in the name of the nominee.The Supreme Court concluded, that it was open to the other members of thefamily of the deceased, to pursue their case of succession or inheritance in respect of the flat, in consonance with the law.

The position was a bit murky when it came to a nomination in respect of shares in a company or a depositary account. The Companies Act, 2013 in the form of section 72 read with Rule 19 of the Companies (Share Capital and Debentures) Rules, 2014 (in respect of nomination for physical shares) and Bye Law 9.11 made under the Depositories Act, 1996 (which deals with nomination for securities held in a dematerialised format) provide that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder/debenture holder, prevail over any law or any testamentary disposition, i.e., a will. A Single Judge of the Bombay High Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014 that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent under the Companies Act and the Depositories Act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone in supersession of the testamentary/intestate succession. Another Single Judge of the Bombay High Court, had an occasion to consider the above provisions of the Companies Act and the earlier decision of the Bombay High Court in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014. It held that the earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay High Court decisions.

A nomination, if held supreme, wholly defenestrates the Indian Succession Act. According to the judgment in Harsha Nitin Kokate, a nomination becomes a “Super-Will” one that has none of the defining traits of a proper Will. Thus, a nomination, even under the Companies Act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.

A division bench of the Bombay High Court in Shaktia Yezdani vs. Jayanand Jayant Salgaonkar, Appeal No. 313/2015 Order dated 01.12.2016 considered both the earlier Single Judge decisions. It also analysed all the Supreme Court and High Court decisions on the superiority of a will over a nomination. It held that the provisions of the Companies Act are not materially different from the provisions of other Acts which provide for nomination. A nomination does not become a testamentary disposition under the Indian Succession Act.  As has been consistently held, a nominee does not get an absolute title to the property. Nomination never overrides testamentary or intestate succession. The legislative intent by virtue of the Companies Act is not to make nomination a third mode of succession after testamentary or intestate succession.  It concluded that the provisions of the Companies Act have nothing to do with the law of succession. Hence, the view of the Single Judge in Harsha Nitin Kokate’s case (supra) was incorrect and that of the Single Judge in Jayanand Jayant Salgaonkar was correct. Thus, the Division Bench has, for the time being, placed nomination even under the Companies Act / Depositories Act, at par with nomination for other assets, i.e., subservient to a will/ intestate succession.

WHICH IS SUPERIOR – JOINT HOLDING OR NOMINATION?
The big question which most people are asking is that what should be done – a joint ownership or a nomination of both? A joint holder is definitely on a higher pedestal as compared to a nominee since he is already entered as an owner. All that the bank/depositary participant /society needs to do is to strike out the name of the deceased primary member and take the joint holder on record as the primary member. So the descending order of hierarchy when it comes to succession planning would be Will – Joint Holding – Nomination. Of course, one can even place a trust right at the top of the pyramid. Thus, in cases where one is certain that after him the asset should go to a particular person then a joint holding is definitely advisable, e.g., in the case of a husband and a wife. In addition, a nomination may be created as an alternative beneficiary, e.g., in favour of the child of the couple. If there are joint holders, the nomination must be signed by all the joint holders and the nominee’s right would arise only when all the joint holders die.

One overarching fact to be borne in mind is that neither a joint holder nor a nomination creates a legal ownership over the asset in question. That is determined solely on the basis of the will (in cases of testamentary succession) or by the intestate law (e.g., the Hindu Succession Act, 1956 in case of Hindus dying intestate or Indian Succession Act for Parsis dying intestate).

It is advisable that the fact of joint holding/nomination is also reproduced in the will of the person. Moreover, the beneficiaries under the will should be co-terminus with the joint holders/nominees wherever possible to avoid any variance and disputes. Further, always have a habit of reviewing all joint holdings and nominations. There have been several instances of people making nominations or adding joint holders long back and then forgetting about it. In many cases, these past actions come back to haunt the family of the deceased by causing succession hurdles.

CONCLUSION
Considering the confusion and myths surrounding succession planning, joint ownership, nomination, is it not time to entirely redo the Indian Succession Act, 1925? Is it right to interpret succession issues in the light of a 92-year old Act? There should be a comprehensive law dealing with all forms and modes of estate planning across various asset classes. That would go a long way in reducing the pending litigation before our judiciary since a large number of cases pertain to succession disputes!

Prohibition of Benami Property Transactions Act, 1988 (As Amended) – An Overview [Part – I]

In the last couple of years, there has been an immense hue and cry about curbing benami transactions and black money. The number of benami transactions in the real estate and other sectors have increased astronomically. In the absence of an effective regulation, the black or ill-gotten money is easily parked in the opaque real estate industry. Since the year 2014, this issue also assumed significant importance in view of the election manifesto of Bharatiya Janata Party and subsequent focus and determination of the present government, reflected in the substantial amendments to the applicable law and prompt actions initiated for its effective implementation.

The Benami Transactions (Prohibition) Act, 1988 has been completely revamped in the year 2016 by the Benami Transactions (Prohibition) Amendment Act, 2016 and the government is vigorously invoking the amended law in achieving its objective of combating the menace of black money and corruption. The purpose of this article is to provide a brief history of the law on benami transactions, and give an overview of the law dealing with such transactions and the journey of the vital changes in law.

1.    Background & Brief History

A.    Background
a)    The earliest noteworthy mention of benami transactions was in the 18th century when the British had colonised the territory of India. In the case of Gopeekrist Gosain vs. Gungapersuad (1854) 6 MLA 53, it was held that such benami transactions were a part of India’s custom and therefore must be recognised unless otherwise provided by law.

    Thereafter, sections 81 and 82 of the Indian Trusts Act, 1882 extended legislative recognition to benami transactions due to which the Indian Courts were bound to enforce them. The rationale provided for justifying these transactions was section 5 of the Transfer of Property Act, 1882 according to which there is no prohibition on transfer of property in the name of one person for the benefit of the other.

b)    In the last few decades, many such transactions were entered between parties to deploy ill-gotten wealth and to defraud and frustrate various law enforcement authorities under various laws. In order to remedy this situation the Parliament introduced section 281A in the Income-tax Act, 1961 [the ITA] to prohibit the institution of suits with regards to benami properties. The widespread menace of illegal benami transactions was not effectively curtailed and therefore sections 81 and 82 of the Indian Trust Act, 1882 and section 281A of the ITA were repealed by the Benami Transactions (Prohibition) Act, 1988 w.e.f. 19-5-1988. Thereafter following the recommendations of the 57th Law Commission Report the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 was promulgated by the President on 19th May, 1988.

c)    The said Ordinance was subjected to criticism in the media and public on the grounds that it was not an effective mechanism to curb benami transactions. Accordingly, 130th Law Commission Report submitted certain recommendations as enumerated below:-

–    All kinds of property must be covered by benami transactions.
–    The new law must declare that entering into benami transactions is an offence except when a father or husband transfers property in the name of his daughter or wife.
–    Omission of section 94 of the Transfer of Property Act, 1882.
–    Acquisition of such properties under the same procedure as provided in Chapter XXA dealing with acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, of the ITA.
d)    Thus, after incorporating the relevant recommendations of the Law Commission the Benami Transactions (Prohibition) Bill was passed by both the Houses of Parliament and on 5th September 1988, it became the Benami Transactions (Prohibition) Act, 1988.

B.    Benami Transactions (Prohibition) Act, 1988 now renamed as Prohibition of Benami Property Transactions Act, 1988

The Benami Transactions (Prohibition) Act, 1988 now renamed by the Benami Transactions (Prohibition) Amendment Act, 2016 as Prohibition of Benami Property Transactions Act, 1988 [the Benami Act] was enacted in order to prohibit all benami transactions and confiscating of property which has been held as benami. The pre-amended Act consisted of only 9 sections out of which Sections 3, 4 and 5 were significant.

–    Section 3 prohibited entering into a benami transaction. The exceptions to the same were as follows:

    “the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife of the unmarried daughter.”

–    Section 4 provided that no suit or claim shall be maintained to enforce rights with respect to benami properties. The exceptions to the same were:

“(a)     where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or (b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”

–    Section 5 provided that the benami properties shall be acquired by authority without any compensation or payment in return.

C.    Delay in implementation of the Act

The menace of benami transactions has flourished not due to lack of appropriate legal framework but mainly due to non-implementation/lack of proper implementation of the enacted laws and lack of adequate administrative infrastructure. In other words, although 28 years ago the Benami Act was passed by the Parliament, it was not implemented despite the request by the Central Vigilance Commission [CVC] to the government to empower the CVC under the Benami Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the law. Hence, recently the present government brought in a new bill to completely revamp the Benami law in tune with the current circumstances and requirements and to deal with growing challenges.

D.    Benami Transactions (Prohibition) Amendment Act, 2016

The original Benami Transactions (Prohibition) Act, 1988 i.e. the ‘Principal Act’ was woefully inadequate to address the rampant menace of benami transactions in a country with widespread poverty and illiteracy.

    In the recent past, there have been various instances in which people used their unaccounted money to purchase property in name of a fictitious or non-existent person. Therefore, the need for a strong mechanism to combat such activities has become inevitable. The object and purpose of the Benami Transactions (Prohibition) Amendment Act, 2016 is not only to efficaciously prohibit benami transactions but also to prevent evasion of law by illegal practices. The most significant aspect of the Amendment Act is that all the benami properties shall be confiscated after following due procedure of law.

    However, the law extended immunity under the Income Declaration Scheme, 2016 to those who made a declaration in respect of their benami properties.

E.    Development of the law on prohibition of benami transactions
–    On 13th May, 2015, the Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in Lok Sabha in order to amend and incorporate certain very important provisions of the Benami Act i.e. amendment to the definition of benami transactions, establishment of Adjudicating Authority and Appellate Tribunal, penalties on benami transactions.
–    The Amendment Bill, 2015 was then referred for examination to the Standing Committee on Finance. On 28th April, 2016, the Standing Committee’s report was submitted.
–    On 22nd July, 2016, the government proposed amendments to the Amendment Bill, 2015. On 27th July, 2016 the Amendment Bill was passed by the Lok Sabha and on 2nd August, 2016 the Rajya Sabha approved the same.
–    The Amendment Bill received the President’s assent on 10th August, 2016 and the Benami Transactions (Prohibition) Amendment Act, 2016 [the Amendment Act, 2016] was brought into force.

F.    Reason for enlargement of the Act from 9 sections to 72 sections instead of enacting a new Benami Act

    A question arises as to why the government has chosen to make such a large number of amendments i.e. from 9 sections to 72 sections, instead of enacting a new law altogether.

    This was explained by the Finance Minister during the parliamentary debate, as follows:

    “Anybody will know that a law can be made retrospective, but under Article 20 of the Constitution of India, penal laws cannot be made retrospective. The simple answer to the question why we did not bring a new law is that a new law would have meant giving immunity to everybody from the penal provisions during the period 1988 to 2016 and giving a 28 year immunity would not have been in larger public interest, particularly if large amounts of unaccounted and black money have been used to transact those transactions. That was the principal object.”

2.    Meaning of Benami Transaction

What is Benami?
The term “Benami” has its origin in the Persian language which implies “without a name”. The term “benami” implies made, held, done, or transacted in the name of (another person). It is used in Hindu law to designate a transaction, contract, or property that is made or held under a name that is fictitious or is that of a third party who holds as ostensible owner for the principal or beneficial owner.

The benami transaction is any transaction in which property is transferred to one person for a consideration paid by another person. In this kind of transaction the person who pays for the property does not buy it under his/her own name. The person on whose name the property has been purchased is called the benamidar and the property so purchased is called the benami property. The person who finances the deal is the real owner. The property is held for the benefit, direct or indirect, of the person paying the amount.

In simple terminology, benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person; therefore, the former will be the nominal owner and the latter will the real owner of the property. The Privy Council in the case Pether Perumal vs. Muniandy (1908) ILR 35 Cal. 551 held that the person who lends his name for the purchase of property and has ostensible title, i.e., the benamidar is nothing but an alias for the real owner who has beneficial ownership of the property.

The Amendment Act, 2016 has substituted the definition of ‘benami transaction’ and the substituted definition, considerably expanding the scope of the term, reads as follows.

     “(9) “benami transaction” means, –

    (A) a transaction or an arrangement –

(a)    where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b)    the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except when the property is held by –

(i)    a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;

(ii)    a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;

(iii)    any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;

(iv)    any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.

    Explanation – For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force, –

(i)    consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;

(ii)    stamp duty on such transaction or arrangement has been paid; and

(iii)    the contract has been registered;”

Prior to its substitution, the definition of ‘benami transaction’ read as follows:

“2(a)”benami transaction” means any transaction in which property is transferred to one person for a consideration paid or provided by another person.”

    In the context of pre-amended provisions of the Act, the Supreme Court in the case of G. Mahalingappa vs. G. M. Savitha [2005] 147 Taxman 583 (SC) held that the following findings of fact were arrived at by the appellate court and the trial court, and would conclusively prove that the transaction in question was benami in nature:

(1)    the appellant had paid the purchase money.
(2)    the original title deed was with the appellant.
(3)    the appellant had mortgaged the suit property for raising loan to improve the same.
(4)    he paid taxes for the suit property.
(5)    he had let out the suit property to defendant Nos. 2 and 5 and collecting rents from them.
(6)    the motive for purchasing the suit property in the name of plaintiff was that the plaintiff was born on an auspicious nakshatra and the appellant believed that if the property was purchased in the name of plaintiff/respondent, the appellant would prosper.
(7)    the circumstances surrounding the transaction, relationship of the parties and subsequent conduct of the appellant tend to show that the transaction was benami in nature.
    Similarly, in the context of cases under the ITA, various courts and tribunals have laid down various tests for deciding the issue regarding benami nature of transactions. However, it is important to keep in mind the enlarged scope of the definition of the ‘benami transaction’ substituted by the Amendment Act, 2016.

Meaning of some other important terms

    The Amendment Act, 2016 has substituted or inserted various other important definitions in the Act, some of which are given below for ready reference.

“(8)    “benami property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property;”

“(10)    “benamidar” means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name;”

“(12)    “beneficial owner” means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar;”

“(16)    “fair market value”, in relation to a property, means –

(i)    the price that the property would ordinarily fetch on sale in the open market on the date of the transaction; and

(ii)    where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with such manner as may be prescribed;”

“(24)    “person” shall include (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not; (vi) every artificial juridical person, not falling under sub-clauses (i) to (v);”

“(26)    “property” means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property;”

“(29)    “transfer” includes sale, purchase or any other form of transfer of right, title, possession or lien;”

3.    Prohibition and consequences of  Benami Transactions

A.    Benami Transactions – A punishable Offence

a)    Section 3(1) provides that no person shall enter into any benami transactions.

b)    Section 3(3) provides that whosoever enters into any transaction on or after the date of commencement of Amendment Act, 2016 i.e. 1-11-2016, shall be punishable in accordance with the new Chapter VII i.e. new section 53 of the Act.

c)    Section 53(1) provides that where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of benami transaction.

d)    Section 53(2) provides that whoever is found guilty of the offence of benami transaction referred to in sub-section (1) mentioned above, shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty-five per cent of the fair market value [FMV] of the property.

e)    The FMV of the property shall be determined in accordance with section 2(16) read with Rule 3 of the Prohibition of Benami Property Transaction Rules, 2016 [the Rules]. Presently, Rule 3 prescribes the methodology of valuation of unquoted equity shares i.e. higher of its cost of acquisition, FMV as per Discounted Cash Flow method and value determined in prescribed manner as per prescribed formula.

B.    Prohibition of the right to recover property held benami

a)    Section 4(1) provides that no suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property.

b)    Section 4(2) provides that no defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property.

C.    Property held benami liable to confiscation.

    Section 5 provides that any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Central Government.

D.    Prohibition on re-transfer of property by benamidar.

    Section 6 provides that no person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf. Any such re-transfer shall be deemed to be null and void. However, this prohibition shall not apply to a re-transfer made in accordance with the provisions of section 190 of the Finance Act, 2016 i.e. under the Income Declaration Scheme, 2016.

4.    Authorities

    Chapter III and sections 7 to 23 of the Act deal with various authorities under the Act and their powers.

    Section 18 of the Act provides that the following shall be the authorities for the purposes of the Act, namely:

a)    The Initiating Officer;
b)    The Approving Authority;
c)    The Administrator; and
d)    The Adjudicating Authority.
    An Adjudicating Authority shall consist of a Chairperson and at least two other members.

    The Central government has vide notification no. 3288(E), dated 25-10-2016, notified that the Adjudicating Authority appointed u/s. 6(1) of the Prevention of Money-laundering Act, 2002 [PMLA] and the Appellate Tribunal established u/s. 25 of PMLA shall discharge the functions of Adjudicating Authority and Appellate Tribunal under the Benami Act until the appointment of Adjudicating Authority and establishment of Appellate Tribunal under this Act.

    Section 19 deals with the powers of discovery and inspection, enforcing attendance, compelling production of books of accounts and other documents, issuing commissions, receiving evidence on affidavits etc.

    Section 21 provides for the power to call for information while power to impound documents is given in section 22. In addition, section 23 provides for the power of authority to conduct inquiry etc.

5.    Attachment, Adjudication and Confiscation

    Chapter IV and sections 24 to 29 of the Act deal with the attachment, adjudication and confiscation of the benami property.

A.    Notice and attachment of property involved in benami transaction

    Section 24 and Rule 5 provide for issue of notice by the Initiating officer to any person believed to a benamidar and to beneficial owner, provisional attachment of the property for a period not exceeding 90 days, passing of appropriate order for continuing provisional attachment or revocation of the provisional attachment order (after making such inquires and calling for such reports or evidence as he deems fit and taking into account all relevant materials) and in case of order for continuation of provisional attachment or order for provisional attachment, draw up a statement of the case and refer it to the Adjudicating Authority within 15 days of the attachment.

B.    Manner of service of notice
    Section 25 provides for manner of service of the notice on the person named therein either by post or as if it were a summons issued by a Court under the Code of Civil Procedure, 1908 and to be addressed to specified addressees in various cases.

C.    Adjudication of benami property

    Section 26 contains provisions relating to the process to be followed by the Adjudicating Authority in respect of adjudication of benami property. On receipt of a reference from an Initiating Officer, the adjudicating authority shall issue notice within 30 days to (a) the person specified as a benamidar therein; (b) any person referred to as the beneficial owner therein or identified as such; (c) any interested party, including a banking company; (d) any person who has made a claim in respect of the property and provide not less than 30 days to furnish the information sought.

    The Adjudicating Authority shall, after (a) considering the reply, if any, to the notice issued under s/s. (1); (b) making or causing to be made such inquiries and calling for such reports or evidence as it deems fit; and (c) taking into account all relevant materials, provide an opportunity of being heard to the person specified as a benamidar therein, the Initiating Officer, and any other person who claims to be the owner of the property, and, thereafter, pass an order (before the expiry of one year from the end of the month in which the reference under sub-section (5) of section 24 was received) (i) holding the property not to be a benami property and revoking the attachment order; or (ii) holding the property to be a benami property and confirming the attachment order, in all other cases.

D.    Confiscation and vesting of benami property

    Section 27 provides that where an order is passed in respect of any property under sub-section (3) of section 26 holding such property to be a benami property, the Adjudicating Authority shall, after giving an opportunity of being heard to the person concerned, make an order confiscating the property held to be a benami property. In case an appeal has been filed against the order of the Adjudicating Authority, the confiscation of property shall be made subject to the order passed by the Appellate Tribunal u/s. 46.

    The procedure for confiscation of the property is prescribed in Rule 6, which provides that the adjudicating officer shall send a copy of the order of confiscation to the Authorised Officer. The rule contains separate procedure for confiscation in respect of immovable property and moveable property.

    It is further provided that nothing in sub-section (1) shall apply to a property held or acquired by a person from the benamidar for adequate consideration, prior to the issue of notice under sub-section (1) of section 24 without his having knowledge of the benami transaction.

    Where an order of confiscation has been made, all the rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and no compensation shall be payable in respect of such confiscation. Any right of any third person created in such property with a view to defeat the purposes of this Act shall be null and void.

E.    Management of properties confiscated

    Section 28 provides that the Administrator shall have the power to receive and manage the property, in relation to which an order of confiscation has been made. Rules 7, 8 and 9 contain relevant rules in respect of receipt of the confiscated property, management of confiscated property and disposal of the same.

    The Central government has vide notification no. 3290 (E), dated 25-10-2016, directed that the Income-tax Authorities specified u/s. 116 of the Income-tax Act, 1961, as mentioned in the notification, to exercise the powers and to perform the functions of the ‘Authority’ i.e. Approving Authority, Initiating Officer and Administrator, under the Act.

F.    Possession of the property.

    Section 29 provides that where an order of confiscation in respect of a property has been made, the Administrator shall proceed to take the possession of the property. The Administrator shall (a) by notice in writing, order within seven days of the date of the service of notice to any person, who may be in possession of the benami property, to surrender or deliver possession thereof to the Administrator or any other person duly authorised in writing by him in this behalf; (b) in the event of non-compliance of the order referred to in clause (a), or if in his opinion, taking over of immediate possession is warranted, for the purpose of forcibly taking over possession, requisition the service of any police officer to assist him and it shall be the duty of the officer to comply with the requisition.

6.    Appeals

    Chapter V and sections 30 to 49 of the Act and Rule 10 together with Form 3, contain relevant provisions relating to appeal to Appellate Tribunal against the order of the Adjudicating Authority and Appeal to high Court against the order of the Appellate Tribunal.

7.    Offences and Prosecution

    In addition to confiscation of the benami property and penalty for benami transactions mentioned earlier in the context of section 3, section 54 provides that any person who is required to furnish information under the Benami Act knowingly gives false information to any authority or furnishes any false document in any proceeding under the Benami Act, shall be punishable with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to 5 years and shall also be liable to fine which may extend to 10% of the FMV of the benami property.

    No prosecution can be instituted against any person in respect of any offence u/s. 3, 53 or 54 without the prior sanction of the CBDT.

8.    Other Important provisions

a)    Certain transfers to be null and void
    
     Section 57 provides that notwithstanding anything contained in the Transfer of the Property Act, 1882 or any other law for the time being in force, where, after the issue of a notice u/s. 24, any property referred to in the said notice is transferred by any mode whatsoever, the transfer shall, for the purposes of the proceedings under this Act, be ignored and if the property is subsequently confiscated by the Central Government u/s. 27, then, the transfer of the property shall be deemed to be null and void.

b)    Proceedings etc. against legal representatives

    Section 66 provides where a person dies during the course of any proceeding under the Benami Act, any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased.

    Any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative and all the provisions of this Act, except section 3(2) relating to entering into benami transaction prior to 1-11-2016 and the provisions of Chapter VII relating to offences and prosecution, shall apply accordingly.

    Where any property of a person has been held benami u/s. 26(3), then, it shall be lawful for the legal representative of the person to prefer an appeal to the Appellate Tribunal, in place of the person and the provisions of section 46 relating to appeals to Appellate Tribunal shall, so far as may be, apply, or continue to apply, to the appeal.

c)    Provisions of the Act to override other laws

    Section 60 clarifies that the provisions of the Benami Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of any other law for the time being in force.

    Section 67 provides that the provisions of the Benami Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

In this connection, the Finance Minister, during the parliamentary debate, clarified as follows:

“Is this law in conflict with the Income-tax Act in any way? The answer is ‘no’. The Income-tax deals with various provisions of taxation, the powers to levy the tax and prescribes procedures etc. This particular law deals with any benami property which is acquired by a person in somebody else’s name to be vested in the Central Government. So the two Acts are supplementary to each other as far as this Act is concerned.”

The above gives an overview of the amended Benami law. In the next part of the Article, we shall deal with certain important questions which are likely to arise in the mind of a reader.

Section 92C of the Act – As maximum international transactions were undertaken by Taxpayer with its AEs in Canada and USA where ALP was determined through MAP, and as only two transactions were undertaken with AEs in Australia and UK, margin determined through MAP with respect to major international transactions should be applied for remaining transactions also.

14.  [2017] 81
taxmann.com 169 (Bangalore – Trib)

CGI Information System & Management Consultants (P) Ltd
vs. DCIT

A.Y:2005-06, Date of Order: 21st April, 2017

Facts

The Taxpayer had rendered software development services to
its AEs in US, Canada, Australia and UK. AEs of Taxpayer in USA and Canada had
approached respective competent authorities for resolution of TP adjustment
dispute insofar as it related to software development services provided by the
Taxpayer with regard to international transactions through MAP under DTAA.
Under MAP, arm’s length price was determined at 117.5%. The Taxpayer had
maximum international transactions with its AEs in USA and Canada while those
with its AEs in UK and Australia were minimal.

In respect of International transactions of the Taxpayer with
AEs in Australia and UK, the AO adopted 25.32 % profit margin.

Held

–  In J. P. Morgan Services (P) Ltd vs. Dy
CIT [2016] 70 taxmann.com 228 (Mum. – Trib) held that whatever margin has
been applied through MAP with respect to major international transactions, the
same should be applied for the remaining transactions.

–  The maximum international
transactions were undertaken by the Taxpayer with its AEs in Canada and USA.
Only two transactions were undertaken with AEs in Australia and UK. Therefore,
the same ALP of 117.50 % should be applied with respect to remaining two
international transactions.

Imprisonment And Penalty Under Rera Realty Firm’s Directors, Partners And Officers, Beware!

BACKGROUND OF REAL ESTATE LAW

Real estate business, perceived to be non-transparent, is now
required to fall in line with stringent requirements of the Real Estate (Regulation
and Development) Act, 2016 (“RERA”).

Under RERA, real estate companies are required to furnish
exhaustive particulars to the regulator. Some of these are:

–  Promoters to do prior registration of
projects with the regulator before advertising, booking or selling apartments;

–   Each phase of a project must be registered
separately as a standalone;

–   Every application for completion certificate
should have minute details, including past project details, delivery status and
legal cases pending against the promoter;

–   Developer must be ready with approval and
commencement certificate, sanctioned plan and project details at all times.

Offences under RERA will attract serious consequences
including imprisonment in some cases. This is intended to deter promoters,
directors, partners and officers of the real estate concerns from indulging in
financial malpractices and cheating.

Recently, promoters of a well-known realty company were
arrested by the Economic Offences Wing (EOW) of the Delhi Police for alleged
fraud in their real estate project in which Rs. 363 crore were collected from
customers. It is alleged that the promoters siphoned Rs. 200 crore off their
project and stashed the same abroad. They have also been accused of duping
buyers who booked flats in their residential project.  

Nearing 1 May 2017, the implementation date of RERA,
the government notified the remaining sections of RERA on 19 April 2017. This
has put an end to the speculation about extension of implementation deadline.
Thus, RERA is viewed as a positive step and shows the government’s firm resolve
to protect home buyers’ interest.

RERA – A NEW LAW

RERA is a new legislation. Most of its provisions came into
force on 1 May 20161. Remaining provisions came into force on 1 May
20172. Thus, now all provisions are notified and the entire Act has
come into force by 1 May 2017. The following are the provisions that were
notified on 19 April to come into force on 1 May 2017. [The others were earlier
notified and came into force a year earlier on 1 May 2016].

(i)   Sections 3 to 10: Registration of real estate
projects and registrationof real estate agents.

(ii)  Sections 11 to 18: Functions and duties of
promoter.

(iii)  Section 19: Rights and duties of allottees

(iv) Section 40: Recovery of interest or penalty or
compensation and enforcement of order

(v)  Sections 59 to 70: Offences, penalties and
adjudication

(vi) Section 79: Bar of jurisdiction

(vii) Section 80: Cognisance of offences.

Section 69 of RERA which [has come into force on 1 May 2017]
deals with the liability of promoters, directors, partners and officers of the
realty companies, firms and other non-individual entities, came into force on 1
May, 2017.

Since RERA is new, its provisions including section 69 would
need to be interpreted on the basis of similarly worded provisions of other
legislations. For example, section 42 of the Foreign Exchange Management
Act, 1969 (FEMA) shows that the same is identically worded and corresponds
to section 69 of RERA. Accordingly, provisions of section 69 may be interpreted
by relying on the propositions concluded in the decisions rendered u/s. 42 of
FEMA or similarly worded sections in other laws.

 

1   See Notification
No. SO 1544 (E) [F No. O-17034/18/2009-11] dated
26 April, 2016

2   See
Notification No. 1216(E) [F No. O-17034/275/2017-H] dated
19 April, 2017

Offences under RERA are punishable under Chapter VIII thereof
(sections 59-68). The gist of the penal provisions is given below.

Sr

Description of offence

Penal consequence

1

Violation of section
3 requiring prior registration of the real estate project

Penalty upto 10% of
the estimated project cost

2

Continuing violation
of section 3

Imprisonment upto 3 years and/or
fine upto further 10% of the estimated project cost

3

Providing false
information or failure to apply for registration alongwith documents
specified under section 4

Penalty upto 5% of
the estimated project cost

4

Failure to comply
with other provisions (i.E. Other than section 3 and 4)

Penalty upto 5% of
the estimated project cost

5

Real estate agent’s
failure to do prior registration or comply with the functions specified in
section 10(2)

Penalty @10,000/-
per day of default with the ceiling of 5% of cost of apartment / land /
building

6

Promoter’s failure
to comply with orders of Authority

Penalty upto 5% of
the estimated project cost

7

Promoter’s failure
to comply with Tribunal’s Order

Imprisonment upto 3 years and/or
fine upto 10% of the estimated project cost

8

Real estate agent’s
failure to
comply with orders of the Authority

Penalty upto 5% of
the estimated cost of plot/apartment/building

9

Real estate agent’s
failure to comply with Tribunal’s order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of plot/apartment/building

10

Allottee’s failure
to comply with orders of Authority

Penalty upto 5% of
estimated cost of the plot/apartment/building

11

Allottee’s failure
to comply with Tribunal’s Order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of the plot/apartment/building

The persons liable to punishment would often involve
companies, partnership firms and association of individuals. As will be seen
from the abovementioned gist, the punishment is by way of stiff fine and in
four cases, also by way of imprisonment.

A partnership firm is merely a compendious description of its
partners. However, a company is a juristic entity distinct from its
shareholders1. In case of a partnership, it may also be difficult to
link any partner directly with the offence committed by the firm. For this
reason, in the provisions of a statute dealing with offences, partnership firms
are treated as companies. In section 69, this is evident from the Explanation
which is extracted here:

________________________________________

1   Bacha F. Guzdar vs.
CIT (1955) 27 ITR 1 (SC)

“Explanation
— For the purpose of this section—

(i)  “Company” means any body corporate and
includes a firm or association of individuals; and

(ii) “Director”, in relation to a firm, means a
partner in the firm.”

In terms of the Explanation to section 69, a company
means a body corporate and includes a firm or association of individuals; and a
director in relation to a firm, means a partner in the firm. A firm is not a
distinct legal entity and, prima facie, proceedings cannot be initiated
against a firm. Under the Explanation, however, a firm is regarded as a
company for the purposes of this section and therefore, proceedings against a
firm would be valid.

It may be noted that the definition of “company” is inclusive
in nature and could be interpreted in wider manner so as to include even other
entities and persons.

GIST OF SECTION 69 OF RERA

Before section 69 is analysed in detail, it would be better
to review the gist of its provisions.

Section 69 deals with the offences committed by firms,
companies and association of individuals. A company has been defined to include
a firm or association of individuals for the purposes of this section. In terms
of section 69(1) and 69(2), therefore, the persons who are liable to be charged
with the offence committed by the company, firm, association, etc. would
include the following persons:

–  A person in charge of the business of the
company, firm, association, etc.;

–   A person who is responsible to the company,
firm, association, etc. for the conduct of its business;  

–   Director of the company;

–   Partner of the firm;

–   Secretary of the company;

–   Manager of the company, firm, association, etc.;

–   Any other officer of the company, firm,
association, etc.

If an offence under RERA is committed by a company, firm,
association, etc., both, the person in charge of the company firm,
association, etc. and the company, firm, association, etc. are
deemed to be guilty of such offence. The person charged with the offence,
however, will not be liable to punishment if he proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent commission of such offence. Where the offence has been committed by a
company with the consent or connivance of, or is attributed to any neglect of
secretary, director, manager or any other person in charge of the business of
the company, such person will also be deemed to be guilty of the offence and
liable to be proceeded against and punished accordingly.

RATIONALE UNDERLYING SECTION 69

Since a company is not a physical person, the pain of
punishment cannot be inflicted on it. Unlike an individual, the company does
not have mind that can be guilty of criminal intent. Hence, for a company,
punishment under RERA is not practical. It is, therefore, necessary to punish
the functionaries of the company, association, etc. whose duties,
responsibilities and conduct represent the policy of the company.

The Joint Committee of Parliament had also discussed the
spirit and content of the various clauses in the Bill (which was eventually
enacted into the repealed FERA) pertaining to vicarious liability of the
functionaries of company, etc. The following observations made by the
Joint Committee are enlightening:

“…..in corporations also, extent
of vicarious liability cannot be extended beyond the acts which are punishable
with fines. First, a clear distinction should
be made between vicarious liability of the master for acts of the servant, and
imputation of the actions of a person in the employment, or acting on behalf of
the Corporation which are properly imputable to the latter. Imputed liability is not vicarious but original
liability. The principles of vicarious responsibility has been developed in
the law of tort, because it has seemed socially and economically necessary to
hold the master – and that it is in many cases a corporation liable vis-à-vis
third parties for acts committed within his sphere of operations. The master is held liable to recover against his
servant. The law of tort is, however, concerned with the economic
adjustment of burdens and risks, and the principle of vicarious liability is
applicable to the criminal law only in so far as the criminal law is
approximated to the objectives of the law of tort i.e. where the law is
essentially concerned with the enforcement of certain objective standards of
conduct, through the imposition of fines, rather than with the individual guilt
of a person. This point to the area of strict responsibility which is largely,
though not entirely, co-extensive with the area of so-called public welfare
offences”. [Emphasis supplied]

PERSONS LIABLE TO IMPRISONMENT AND/OR FINE

A reference to the Explanation to section 69 of RERA
shows that the provisions of section 69 are applicable to the persons in charge
of the business of or responsible to the companies, partnership firms, body
corporates and any other associations of individuals. The word “includes”
in the definition of the “company” given in the Explanation seems to
expand the sweep of section 69 so as to also cover the other non-individual
entities, such as, trust, society, etc. Directors, partners, managers,
secretaries and other officers of the company, body corporate, associations of
individuals, trusts, societies, etc. would be covered by section 69 provided
any such person was regarded as “in charge of” or “responsible to”
the company for the conduct of its business. While the company would be primarily
liable for the consequences of the offence committed by it under RERA, the
director, partner, manager, secretary, other officer and functionaries of the
company, partnership, associations of persons, trust, society, etc.
would be vicariously liable for the offences committed under RERA by the
primary offender. Indeed, the charge of vicarious liability u/s. 69 can be
fastened on such functionary only after establishing that he was in charge of
or responsible to the company for the conduct of its business at the time
when the offence was committed by the company. A review of various
provisions of RERA shows that the business in real estate sector conducted in
the form of non-individual entities, such as, a company, a partnership firm,
AOP, trust, society, etc. would attract the vicarious liability provided
u/s. 69. Thus, the following persons connected with the real estate business
would be covered under the wide sweep of the vicarious liability provided u/s.
69 of RERA and would be punishable with fine and/or imprisonment, as the case
may be.

–   Promoters, directors, partners and officers
of realty companies, firms, etc., and builders, developers, etc.
engaged in the real estate business

–   Companies, firms and association, etc.
in the business of Real estate agents

–   Allottees of the plots, apartment, and
buildings

–   Architects

–   Engineers

–   Various entities defined as “person”
in section 2 [zg]

All the abovementioned persons concerned with or engaged in
the real estate business in the form of company, partnership firm, AOP,
society, trust and other non-individual entities and the functionaries of such
entities are covered under the wide sweep of section 69 of RERA and would be
punishable with fine and/or imprisonment, as the case may be.

Accordingly, show cause notices for the offence under RERA
may be issued to such functionaries in addition to the show cause notice issued
to the non-individual entities, i.e., company, partnership firm, AOP, trust,
society, etc.

LIABILITY OF THE PERSON-IN-CHARGEOF THE COMPANY, FIRM, ETC.

Section 69(1) deals with the directors, senior executives and
employees of the company and partners and key officers of partnership firms,
associations of individuals, etc. who are in charge of or responsible to
the company, firm, etc. for the conduct of its business. Where an
offence has been committed by a company under RERA, apart from the company
being liable for such offence, the person who was in charge of or was responsible
to the company for the conduct of its business at the time of such offence
is also liable to the penal consequences of the offence. The offence may be of
any provision of RERA. Indeed, the deeming provision that the offence has been
committed by such person is a matter of presumption. Such presumption can be
rebutted by establishing that the offence was committed without the knowledge
of the person or that he had exercised all due diligence to prevent the
commission of such offence. It is settled law1 that a person, who
has failed to carry out a statutory obligation, cannot be punished unless he
either acted deliberately in defiance of law or was guilty of conduct
contumacious or dishonest or that he acted in conscious disregard of his
obligations.

In Girdharilal Gupta vs. D. N. Mehta2, a
leading case on vicarious liability, it has been held by the Supreme Court that
such provision [Corresponding to section 69(1)] is a highly penal provision
since it makes the person in charge of or responsible to the company for the
conduct of its business, vicariously liable for the offence committed by the
company. Therefore, this section must be construed strictly. In other words, to
charge a person with vicarious liability for the impugned offence committed by a
company, it is necessary for the Department to establish the following:

__________________________________________________________

1   Hindustan Steel Ltd
v. State of Orissa (1972) 83 ITR 26 (SC).

2    AIR
1971 SC 28

–   at the time the offence was committed by the
company, the person was in charge of or was responsible to the company for the
conduct of the business of the company; or

–   the offence was committed with the consent or
connivance of the person; or

–  the offence was attributable to the neglect
of the person.

“PERSON-IN-CHARGE” –
CONNOTATION OF

The material expression in section 69(1) is the “person
in-charge of”. Connotation of this expression was examined by the Supreme Court in Girdharilal Gupta vs.
D. N. Mehta3. This expression has been explained by the
Supreme Court in following words.

“A person ‘in-charge’ must mean the person in overall control of the
day-to-day business of the company. This inference follows from the
wordings of s/s. (2). It mentions director, who may be a party to the policy
being followed by the company and yet not be
in-charge of the business of the company. Further, it mentions manager, who
usually is in charge of the business but not in overall charge. Similarly, the
other officers may be in charge of only some part of business”. (Emphasis
supplied)

In this connection, one may also note the decision of the
Delhi High Court in Umesh Modi vs. Dy Director4 in which
distinction has been drawn between the directors in charge of day to day
affairs of the company’s business and other directors who are not.

A person cannot be convicted of the offence merely because
he, as a partner, has a right to participate in the firm’s business under the
terms of the Partnership Deed5. When a person in charge of business
goes abroad, it would not mean that he ceases to be in charge, unless it is
established that he gave up the charge in favour of another person.

Similarly, it is only that partner/director who is in charge
of or responsible to the firm/company who could be made liable u/s. 69 and,
therefore, those partners who had not signed the relevant documents, say,
regarding exports, could not be visited with penalty concerning the offence
pertaining to export transactions6.

__________________________________________________

3   AIR 1971 SC 2162

4   [2015] 130 SCL 621
(Del)

5   State of Karnataka
vs. Pratap Chand (1981) 128 ITR 573 (SC).

6   Sofi
Carpets vs. Directorate of Enforcement (1990) 50 Taxman 439 (FERAB).

In the undernoted case1, a company was found
guilty of contravention of FERA. Adjudication proceedings were initiated
against the company and also against the appellant in his capacity as a
director. On investigation, it was found that the bank certificate furnished
during the investigation showed that another director was exclusively in charge
of the company’s accounts. This certificate was, however, not brought on
record. The matter was remanded for identifying the director who was in charge
of and was responsible to the company for the conduct of its business. The
expression “person in charge of and was responsible to the company”, was
interpreted threadbare in the undernoted case2 in which it was held
that the expressions “in charge of” and “responsible to” are
synonymous. A person in charge of the business was, thus, always responsible
therefor3.

DISTINCTIVE FEATURE OF SECTION 69

However, the said proposition is not applicable to section 69
of RERA because of the word “or” between the two expressions “was in charge
of” and “was responsible to” in section 69(1). To this extent, section
69 is different from the corresponding provisions in other laws, such as,
section 42 of FEMA, section 62 of Prohibition of Benami Property
Transactions Act, 1988. In those Acts, the word between the said two
expressions is “and” whereas in section 69 of RERA, it is “or” between the said
two expressions.

JOINT AND SEVERAL LIABILITY OF THE COMPANY AND THE PERSON-IN-CHARGE

The words “as well as” in section 69(1) clearly suggest that
the liability for the offence committed by the company is joint and several as
between the company and its director, partner or functionary who, at the time
the offence was committed, was in charge of and responsible to the company,
firm, etc. for the conduct of its business.

Accordingly, it would not be proper for the person charged
with the offence u/s. 69(1) to argue that the company should be charged first
and that his being charged for the same offence was conditional upon the
company being first so charged. This argument does not appear tenable because
the section does not lay down any condition that the person-in-charge of the
company cannot be separately charged for the offence committed by the company
when the company itself was not prosecuted. From the words “as well as”, it is
clear that each such person or any one of them may be charged separately or
alongwith the company, the only requirement for the same being that there
should be a finding that the offence was committed by the company4.

______________________________________________________

1   Biren N. Shah v. DE
(1999) 104 Taxman 496 (FERAB).

2   N. Sasikala v.
Enforcement Officer (1998) 93 CC 355 (Mad).

3   ANZ
Grindlays Bank, Bombay v. Directorate of Enforcement (1999) Cr LJ 2970 (Bom).

In the undernoted case5, the appellant was
mother–general of a registered society running a convent. She was charged with
contravention of certain FERA provision. On appeal, it was held that the
appellant could not be proceeded against for transactions made on behalf of a
registered society unless the society was found guilty of the contravention.
Similarly6, if the charge against the company itself was not
established, none of the directors of the company could be held liable.Thus, it
would be irrational to charge a person mentioned in that section with vicarious
liability independent of the proceedings to first charge the company for the
offence.

In Raman Narula vs. Director7, the Delhi
High Court has held that where no factual basis was laid by the Directorate for
alleging that the noticee was in-charge of and responsible to the company for
conduct of its business, he could not be held vicariously liable for the
alleged contravention by the company.

BURDEN OF PROOF – ON THE DEPARTMENT

A reading of section 69(1), the Proviso to section
69(1) and section 69(2) offers an interesting review of “burden of proof”.

Section 69(1) shows that the burden of proof is on the
Department to establish the following:

–  The company, firm, etc. has committed
offence of any provisions of RERA.

–  At the time the offence was committed, the
person charged with the offence was in charge of the company, firm, etc.
or

–   At the time the offence was committed, the
person was responsible to the company, firm, etc. for the conduct of its
business.

__________________________________________________________________________________________________

4   Sheoratan Agarwal
v. State of M P AIR 1984 SC 1824 (rendered in the context of the analogous
provisions of section 10 of the Essential Commodities Act, 1955). Per contra:
Union of India v. Annamalai (1987) 11 ECC 240 (Mad).

5   Nambibai Mary v.
Directorate of Enforcement (1990) 50 Taxman 534 (FERAB).11          N Sasikala v. Enforcement Officer
(1998) 93 CC 355 (Mad).

6   Shirin Sabbir
Rangwala (Mrs) v. Directorate of Enforcement (1991) 55 Taxman 39 (FERAB);
Nowrosjee Wadia Sons (P) Ltd v. Directorate of Enforcement (1999) 106 Taxman
551 (FERAB); Rakesh Jain v UoI [2015] 53 Taxmann.com 133 (Del).

7     [2014] 216 SCL
120 (Del)

Unless the Department discharges the burden of proving the above
facts, the Department’s action u/s. 69(1) would be ab initio void1.

As regards the nature of
the burden of proof under the Proviso to section 69(1) and u/s. 69(2), a
reference may be made to the relevant synopsis headings (infra).

In the undernoted case2,
Special Director called the petitioner for personal hearing. Petitioner filed
writ petition contending that he had no role with regard to remittances and
receipts of foreign exchange in the conduct of IPL in 2009 in South Africa and
that a separate committee was set up to administer IPL with a separate bank
account to be operated by the Treasurer. On these facts, it was held that as
far as opening and operating bank account of IPL and obtaining permission of
Reserve Bank for making remittances or receipts of foreign exchange was
concerned, the petitioner was not in charge of and responsible for such
operational matters. Accordingly, it was considered necessary for adjudicating
authority to form the opinion whether the petitioner was at all covered by the
substantive part of section 42(1) of FEMA [section 69(1)].

Likewise, in the undernoted case3, the appellant
contended that he was not aware of the transaction in question as he was not
looking after day to day affairs of the company. The Department failed to prove
that the appellant was in charge of affairs of the company and he was also
looking after day to day affairs of the company including the transaction in
question. It was also noted that similar penalty on other directors was set
aside by the High Court. Accordingly, the penalty imposed on the appellant was
also set aside.

PRIVATE AGREEMENT – CANNOT OVERRIDE THE STATUTORY PROVISION

In the undernoted case4, there was a change in
ownership and management of a company pursuant to an agreement. The agreement
provided that all personal liabilities attached to the office of the managing
director or director will continue to be the personal liabilities of the
directors under whose charge the offence was committed and the incoming
directors were not responsible for the offence committed prior to the takeover.
On appeal by the incoming directors who contested the charge, it was held that
such term in the agreement cannot absolve the company and the present
management merely because the offence was committed before the present
management took over. It was held that the terms of the agreement could not
override statutory provisions as there is no estoppel against statute.

_____________________________________________________________________________________________________________________________

1   See Sayed Wahid vs.
Director of Enforcement (1988) 37 Taxman 16 (FERAB); See Also: Kavita Dogra vs.
Director (2014) 126 SCL 182 (Del).

2   Shashank Vyanktesh
Manohar vs. Union of India (2013) 122 SCL 317 (Bom)

3   Sanjay Dalmia vs.
Special Director (2014) 123 SCl 311 (ATFFE).

4   Iyer & Sons Pvt
Ltd vs. Directorate of Enforcement (1990) 53 Taxman 160 (FERAB).

EXERCISE OF DUE DILIGENCE – PROVISO GIVES BENEFIT OF DOUBT

In the undernoted case5, the Chairman of the appellant
company had given power-of-attorney to conduct the company’s business at the
time when contravention of a FERA provision took place. It was held that though
the Chairman would come within the meaning of “a person in charge of and
responsible to the company” for the conduct of its business at the time of
the contravention, he was entitled to the benefit of the Proviso to
section 68(1) [corresponding to the Proviso to section 69(1)] since he
had exercised all due diligence to prevent the contravention.

LIABILITY UNDER SECTION 69 IS NOT ABSOLUTE

In the undernoted case6 , the Supreme Court has
once again observed that while deciding the matter, it is open for the Court to
consider that the liability of the person is vicarious or that the offence was
committed without his knowledge or neglect.

Thus, even if the documents relied upon indicate that the
offence was committed, it would not be a ground for denying a person inspection
of all such documents7 .

ILLUSTRATIVE CASES

Having regard to the principles discussed above, some
illustrative cases may be reviewed in which the person-in-charge argued on
various grounds that he cannot be charged for the offence committed by the
company.

DIRECTOR

Director of a company may
be held liable by virtue of section 69(2) if the offence was committed with his
connivance and he had actively acquiesced in the commission of the offence1.
Likewise, where the Director was duty-bound to supervise the sale of foreign
currency which was physically handled by his subordinate, the director can be
held liable for the offence arising from such sale2.

_____________________________________________________________________

5   Pheroze Kudianavala
Pvt Ltd vs. Directorate of Enforcement (1991) 54
Taxman 164 (FERAB)

6   AIR 1971 SC 2162;
see also: Lalit Kumar Modi vs. Special Director (2014) 125 SCL 330 (Bom).

7   Lalit
Kumar Modi vs. Special Director  (2014)
125 SCL 330 (Bom); Shashank Vyanktesh Manohar vs. Union of India (2013) 122 SCL
317 (Bom)

The nature of liability of a director is merely vicarious.
Accordingly, a director cannot be held guilty3 without first, the
company being held guilty and that, too, after adducing reasons for invoking
his vicarious liability.

Section 69(1) extends the liability, by a deeming fiction,
only to such directors who, at the relevant time, were in charge of or were
responsible to the company for the conduct of its business. In the undernoted
case4, petitioners had ceased to be directors by the company on 14
November, 1997. This was disclosed in Form No. 32 filed with the Registrar of
Companies. The export proceeds were to be realised by the company for the year
ended 31 March 2008. It was held by the Delhi High Court that the contravention
in respect of such export receivable could take place only after 31 March 2008
by which time the petitioners ceased to be directors of the company. On this
ground, the submission of the petitioners (that the proceeding against them was
not sustainable in law), was accepted by the Delhi High Court by relying on the
decision of the Supreme Court in S.M.S. Pharmaceuticals Ltd vs. Neeta Bhalla5.

However, in ANZ Grindlays Bank Ltd vs. Director6,
the Supreme Court has held that even if the company cannot be punished, it does
not mean that the persons referred to u/s. 68(1), (2) of FERA [section 69(1),
(2)] cannot also be punished. Indeed, a Director who had ceased to be a
director as evidenced by form No. 32, cannot be said to be in charge of the
affairs of the company or responsible for the conduct of its business in
respect of the transactions after he ceased to be a director7.

_____________________________________________________________________________

1   Directorate of
Enforcement v. South India Viscose Ltd (1990) 50 Taxman 501 (FERAB).

2   Travels &
Rental (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

3   C R Das Gupta v.
Special Director (2000) 112 Taxman 608 (FERAB); Eupharma Laboratories Ltd v.
Enforcement Directorate (2000) 110 Taxman 469 (FERAB); Nowrosjee Wadia &
Sons P Ltd v. Director of Enforcement (1999) 106 Taxman 55‘; S P Singh v.
Director of Enforcement (1990) 104 Taxman 503 (FERAB).

4   Bhupendra V. Shah v.
Union of India – WP(C) 19881 of 2004, WP(C) 26 and WP(C) 1038 of 2005 decided
by Delhi High Court on 26 March 2010; M M Shah v. Dy Director (2010 104 SCL 79
(Bom)

5   (2005) 8 SCC 89.

6   (2005) 58 SCL 350
(SC).

7   Bhupendra
V. Shah v. Union of India (WP/C 19881/04 decided on 26-3-2010 by Delhi High
Court); M. M. Shah v. Dy Director (2010) 104 SCL 79 (Bom)

It is possible in some cases that a director is merely
concerned with laying down the policy for the company’s business and is not
concerned with the day to day or operational matters of the company. This
aspect was examined by the Allahabad High court in R. K. Khandelwal vs.
State8. In this decision, Allahabad High Court has observed that
there can be directors who merely lay down the policy and are not concerned
with the day to day working of the company.

Accordingly, the mere fact that a person is a director of the
company does not automatically make him liable for the offence committed by the
company particularly when the other ingredients of section 69(1) are not
established so as to make him vicariously liable. In this respect, a reference
may also be made to the Supreme Court decision in S M S Pharmaceuticals Ltd
vs. Neeta Bhalla9. In this case, the Supreme Court has
categorically held that the vicarious liability is cast on persons who may have
something to do with the transaction complained of and not on the basis of
merely holding a designation or office. It would depend on the role he plays
and not on his designation or status. The said decision was rendered in respect
of section 141 of the Negotiable Instruments Act but was held by the Bombay
High Court as applicable to section 42 of FEMA [section 69] as the wordings of
both the provisions are in pari uthoriz [see: Shashank Vyanktesh
Manohar vs. Union10 ].

MANAGING DIRECTOR

Normally, managing director is appointed by an agreement with
the company or by a resolution of the company or by the company’s Memorandum and
Articles of Association. These are the sources from which the managing director
derives the powers of management entrusted to him. Thus, if the managing
director is to be charged for the offence committed by the company, it would
not be sufficient for the Department to merely make an allegation to that
effect without anything more. For charging the managing director with the
vicarious liability u/s. 69(1), first of all, the burden of proof must be
discharged by the Department by adducing appropriate evidence. If, however, the
Department fails to bring sufficient evidence to discharge such burden, the
managing director cannot be charged for the offence committed by the company11.
Where, however, the Managing Director was dutybound to supervise the sale of foreign
currency which was physically handled by his subordinate, the Managing Director
can be held liable for the offence concerning such sale1 .

_______________________________________________________

8   [1964] 62 A L J 625

9   [2005] 63 SCL 93
(SC)

10  [2013] 37
taxmann.com 151 (Bom), para 35]

11   E
Merck (I) Ltd v. Director of Enforcement (1988) 39 Taxman 47 (FERAB).

However, a reference may be made to another decision2 in
which managing directors of two companies which were charged with contravention
of FERA were deemed guilty of such contravention in terms of section 68(1)
[section 69(1)].

EX-DIRECTOR

In the undernoted case3, the company and its
ex-director were charged for failure to repatriate export proceeds. On appeal
by the ex-director, it was held that penalty on ex-director was justified since
he did not take reasonable steps to repatriate export proceeds. It was
particularly observed that he had not sought intervention of Indian and Russian
diplomatic authorities in time in respect of export proceeds receivable from
Russia.

In a similar situation, it was held by the Delhi High Court4
that the ex-director was not vicariously liable where there was no evidence to
show in what manner she was responsible to the company for the conduct of its
business. Where the show cause notice on the ex-director was served at the
address of the company at the time when he had ceased to be a director, it was
held that such service was not proper service and the Order based on such
improper service was unsustainable in law5.

NON-EXECUTIVE DIRECTOR

Can a director of the company who is not in full time
employment and who is not involved in the day-to-day management of the company
be charged with contravention by invoking section 69(2)? Having regard to the
aforesaid discussion on the principles of the burden of proof u/s. 69(2), the
answer is ‘no’. This answer has greater relevance to the professional
directors, independent directors and the nominees of the financial
institutions. The proposition that such director, simpliciter cannot be charged
with the offence committed by the company is fortified by the undernoted
decision of the Calcutta High Court6.

PROFESSIONAL/NOMINEE DIRECTOR

In the undernoted case7, the Bombay High Court
held that nominee/professional director cannot be vicariously held liable for
acts of commission or omission of subordinates.

1   Travels &
Rentals (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

2   Telco
Ltd v. Special Directorate of Enforcement (1991) 55 Taxman 85 (FERAB).

3   Dheklapara Tea
Company Ltd v. DE (1998) 100 Taxman 470 (FERAB).

4   Kavita Dogra v DoE
[2014] 126 SCL 182 (Del)

5   Shailendra Swarup v
Special Director [2015] 54 taxmann.com 79 (Del)

6   Bhagwati Prasad Khaitan v.
Special Director of Enforcement (1977) CrLJ 1821 (Cal).

PROPRIETOR

Business concerns are often floated in the names which may
not contain proprietor’s name. Ostensibly, therefore, the show cause notice may
be issued in the name of the concern as also in the name of the proprietor. The
moot point, however, is whether it was in order to invoke section 68(1) of FERA
[corresponding to 69(1)] at all? This question has been examined in the
undernoted case8 in which it was held that a proprietary concern and
its proprietor both are same. Hence, section 68(1) [section 69(1)] cannot be
invoked in case of a proprietary concern.

PARTNER

Can a partner be charged for the offence committed by the
firm? The answer appears to be ‘yes’. In principle and by analogy, vicarious
liability could be extended to contravention by partnership firms2.
However, having regard to the Explanation defining the “company” and
“director”, coupled with the Proviso to section 69(1), a partner cannot
be charged unless the following two conditions are fulfilled.

Firstly, the Department has discharged the following
triple-burden of proof.

–  The partnership had committed offence of any
provision of RERA;

–   At the time when the offence was committed,
the partner was in charge of the business of partnership; or

–   At the time the offence was committed, the
partner was responsible to the partnership firm for the conduct of its
business.

Secondly, the partner was unable to prove that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent commission of the offence. Thus, where the non-resident
partners were fully aware of the affairs of the appellant firm as also the
affairs of the foreign buyers who were related to them, such non-resident
partners can be held vicariously liable for the offence10. On the
other hand, where the non-resident partner was employed abroad and had not
taken part in the day to day affairs of the firm, he could not be held liable
for the offence committed by the firm1

_____________________________________________________________________________________________

7   M M Shah v. Dy
Director (2010) 104 SCL 79 (Bom)

8   Apex Exports &
Baljeet Singh v. DE (1997) 92 Taxman 452 (FERAB).

9   Brij Trading Co. v
Enforcement Directorate (2014) 126 SCL 118 (Del)

10  Simertex v.
Director (2006) 69 SCL 177 (ATFE).

.

Assuming that the Department succeeds in discharging such
triple-burden of proof, still if the partner is able to rebut the charge in
terms of the Proviso, he cannot be punished2. Thus, penalty cannot
always be imposed on managing partner3.

However, where the firm is penalised for the offence, the
partners of the firm cannot be penalised again for the same offence since
partnership firm is just a compendious description for the partners
constituting the firm and the firm does not exist independently of the partners
particularly for the purposes for imputing the penal liability4.

In the undernoted case5, a partnership firm was
charged with failure to repatriate export proceeds. On investigation, it was
found that the partner in charge had taken “reasonable steps” to repatriate
export proceeds. On appeal, it was confirmed that reasonable steps were taken
to repatriate the export proceeds. It was held that reasonable steps taken by the
partner should be regarded as reasonable steps taken by the firm. It was also
held that, once the finding was reached that one partner had taken reasonable
steps to repatriate export proceeds, the charge cannot be sustained either
against the firm or against any other partner. The fact that the firm was
already penalised is also a factor to be weighed while deciding the liability
of partners under this section6.

In the last-mentioned case, the Court examined the
phraseology of section 140 of the Customs Act which was in pari uthoriz
with the relevant FERA provision (corresponding to section 69).

_____________________________________________________________________________

1   United Enterprises
v. Special Director (2002) 35 SCL 273 (ATFE)

2   Agarwal Trading Co
v. Asst Collector of Customs AIR 1972 SC 648; Girdhari Lal Gupta v. D N Mehta
AIR 1971 SC 28.

3   SRC Exports (P) Ltd
v. Director of Enforcement (2000) 112 Taxman 142
(FERAB); See also: Chhabra Handicrafts v. Deputy Director (2000) 111 Taxman 138
(FERAB).

4   K B.S.H. Export
House v. Director of Enforcement (1988) 41 Taxman 138 (FERAB). Tarak Nath Sen
v. Union of India AIR 1975 CAL 337; Mohan, Prop. Kandan Mohan Exports v.
Director (2009) 95 SCL 58 (ATFE);

     Jagmohan Tandon v.
Director (2003) 46 SCL 273 (ATFE); Garments India Exporters v. Director (2005)
62 SCL 276 (ATFE); Hathibhai Bulakhidas v. Director (2002) 36 SCL 764 (FERAB).

5   Lakshmi Garments v.
DE (1996) 86 Taxman 259 (FERAB).

6   Tarak Nath Sen v.
Union AIR 1975 Cal 337.

It may be noted that the nature of liability of a partner is
merely vicarious. Accordingly, a partner cannot be held guilty without the firm
being held guilty and that, too, after adducing proper reasons for invoking the
vicarious liability7.

SLEEPING PARTNER

Sleeping partners cannot be held liable for the offence
committed by the firm and penalties cannot be imposed on them8.

POWER-OF-ATTORNEY HOLDER

In case of proprietary concerns, it is usual for the
proprietor to delegate certain functions of business to others who are not his
employees but who act as his agents and act on his behalf in terms of the
power-of-attorney executed by the proprietor in their favour.

All acts of the holder of the power-of-attorney are done by
him in his capacity as mere agent of the proprietor. The responsibility for all
acts done by the agent rests on the proprietor. Accordingly, the concept of
joint and several liability cannot be invoked in such cases to fasten vicarious
liability u/s. 69(1) on the power-of-attorney holder9. However,
where the power-of-attorney holder is in full control of business of a
non-resident, he would be vicariously liable for the offence10.

EXPORT MANAGER – NOT A PERSON IN-CHARGE OF THE COMPANY

Generally, the show cause notice alleging non-repatriation of
export proceeds is issued to the export manager on the premise that he was the
person in charge of the export business. Is it possible for the export manager
to argue that he was not the person in charge of the business? This question
was considered in the undernoted case11. In that case, a company
applied for permission to export certain machinery for participating in an
exhibition in USA. The permission was given on the condition that the machinery
will be re-imported. The company failed to re-import the machinery pursuant to
which the show cause notice was issued charging the company, its director and
the export-manager for the alleged contravention. Penalty was imposed on all
the three. While the company and its director paid the penalty, the
export-manager contended that he was not the person in charge of the company’s
affairs and accordingly, he could not be considered guilty even for abetment.

It was observed that in view of the provisions of section
68(2) of RERA [section 69(2)] the export manager could be held guilty only
if it was proved that the offence was committed with his consent or
connivance or was attributable to neglect on his part. It was also observed
that when the company had a managing director in charge of the company’s affairs,
the other functionaries could not be considered to be in-charge of the
company’s affairs. Accordingly, the penalty levied on the export manager was
set aside.

________________________________________________________________

7   Sumangal Enterprises
v. DE (1999) 104 Taxman 489 (FERAB).

8   Chhabra Handicrafts
v. Dy Director (2000) 111 Taxman 138 (FERAB).

9   Rajathi Agencies v.
Director of Enforcement (1988) 39 Taxman 56 (FERAB).

10  Simertex v. Director
(2006) 69 SCL 177 (ATFE)

11  R K Caprihan v.
Director of Enforcement (1988) 38 Taxman 23 (FERAB).

LEGAL REPRESENTATIVE

The liability u/s. 69(1) is on the person who, at the time
the offence was committed, was in charge of or was responsible to the company
for the conduct of its business. It is extremely arguable whether the legal
representatives of such person can be held liable by imputing such vicarious
liability. The tenor of section 69 also does not appear to suggest that if
there is any offence of any provisions of the Act by father, his legal
representatives would be vicariously liable for the same. This issue was
examined by the Madras High Court1 where a sole proprietor was
charged for some offence. The proprietor’s sons had no interest in the
proprietary business of their father and had never taken part in its management
or control during the lifetime of their father. Accordingly, they argued that
they cannot be regarded as “the person in charge of and responsible for the
conduct of the business of” the proprietary concern. The lower authorities held
the sons liable for the offence which was alleged to have been committed by
their father. While deleting the penalty, the Court made the following
observations:

“There
is no provision in the Foreign Exchange Regulation Act that, if there is any
contravention of the provisions of the Act by the father, his legal
representatives would be vicariously liable and responsible for the same. The application of the doctrine of vicarious
liability in the criminal law may be described as actuated by necessity rather
than desirability. Criminal responsibility is generally regarded as being
essentially personal in character and it is with considerable diffidence that
the principle is accepted whereby a man may be found guilty and punished for an
offence which is actually committed by another.

One
member of a family is not vicariously liable for acts of another member merely
because of the family relationship. Thus one spouse is not liable for the
torts of the other, nor the parent for the
torts of the child if nothing more than relationship appears in the case.

 

___________________________________________________________________________________________________

1   P N P Thulkarunai
& Co v. Director, Enforcement Directorate (1969) 39 CC 101 (Mad).

 

Thus, the doctrine of vicarious
liability is not of general application in the field of statutory crimes.

They are no doubt heirs of their
father. But when they succeeded to the estate of their father, they formed
themselves into a partnership business. They never partook of any interest in
the sole proprietorship concern of their father. [Emphasis supplied]

WHEN DOES THE BURDEN OF PROOF SHIFT FROM THE DEPARTMENT?

The Proviso to section 69(1) deals with this issue.
Its language signifies two things.

Firstly, for invoking the Proviso, the
Department must discharge the initial burden of proof in terms of section
69(1). Thus, where there was no evidence to show in what manner the director
was responsible to the company for the conduct of its business and the facts
relevant to the director were not discussed in the Order, it was held that the
Department had failed to make out a case for vicarious liability2. Secondly,
only after the Department discharges the burden of proof, the same would shift
to the person charged. The burden of proof so shifted is, however, rebuttable
and hence it is open to the person charged to prove the existence of any of the following two facts:

–  The offence was committed without his
knowledge; or

–  He had exercised due diligence to prevent the
commission of the offence.

It has been held3 that a mere averment that the
company had exercised due diligence or that the offence was committed without
the knowledge of the company or the officers responsible for the conduct of the
business would not suffice to establish a defence under the Proviso to
section 42(1) of FEMA [corresponding to Proviso to section 69(1)]. In
the absence of proper disclosure of the internal arrangements made by the
company to ensure proper conduct of the business according to the guidelines
framed, it was held that there indeed was failure to discharge the burden under
the Proviso to section 42(1) of FEMA [corresponding to Proviso to
section 69(1)].

__________________________________________________________

2   Kavita Dogra v. DoE
[2014] 126 SCL 182(Del)

3    V.
S. Ubhaykar v. Special Director (2012) 112 SCL 114 (Bom)

CONSIDERATIONS RELEVANT FOR SHIFTING THE BURDEN

What considerations should weigh the authorities for
ascertaining whether the person has discharged the burden which shifted to him
in terms of the Proviso? This question was considered by the Supreme
Court1.

The Supreme Court held, among others, that in case of a
partnership firm, acting partner would be liable for the offence committed by
the firm and unless the acting partner proves that he was not aware of the
offence or that he had exercised due diligence to prevent it and the fact that
when the offence was committed, he was out of India would be of no avail.

MITIGATING FACTORS-MAY RESCUE PROMOTER, DIRECTOR, PARTNER,
ETC.

In the undernoted case2, the appellant guest-house
had accepted rupees from foreigners in contravention of FERA. The partner and
manager of the guest-house were penalised u/s. 68(1), (2) of FERA [section
69(1), (2)]. The appellant pleaded that there was no mala fide
intention. The penalty against the partner was set aside in terms of the Proviso
to section 68(1) of FERA [Proviso to section 69(1)] on the ground
that he was not aware that the contravention was committed. Penalty on the
manager, too, was set aside on the basis of the following mitigating factors.

–  Contravention occurred unwittingly and
without awareness of the contravention.

–  The Department did not dispute that the
appellant fully co-operated with the Department.

–  There was no past history of contravention,
this being the first and the only one.

–   Appellant had not benefitted from the
contravention.

–  Appellant’s averment – that had he known the
correct legal requirement, he would have certainly complied with the same – was
not disputed by the Department.

It was observed that if all offenders are treated alike
without giving due weightage to the honest conduct of some of them, it may make
even honest persons dishonest.

______________________________________________________________________

1   Giridharilal Gupta
vs. D N Mehta AIR 1971 SC 28.

2   Sangam Guest House
vs. Dy Director [2002] 35 SCL 20 (ATFE)

Delhi High Court3 has held that mere fact that in
the opportunity notice given to the appellant, it was stated that the appellant
was in charge of and responsible for the day to day functioning is not enough
to discharge the initial burden cast on the Department to prove so. In that
case, neither in the order of Special Director nor of the Appellate Tribunal,
there was any finding that the appellant was in charge of and was responsible
for the day to day working of the company.

OFFENCE COMMITTED WITH CONNIVANCE OF PROMOTER, DIRECTOR,
PARTNER OR OFFICER

While section 69(1) deals with the persons who, at the time
of contravention, are in charge of or responsible to the company for the
conduct of its business, section 69(2) imposes liability on a functionary who
is a director, partner, manager, secretary or other officer. However, the
Department is required to prove not only the fact that the functionary
proceeded against was a director, partner etc. but also the fact that the
offence was committed either with the consent or connivance of such functionary
or is attributable to any neglect on his part. Unless both these facts are
established, the functionary would not be liable for punishment. Thus, in the
undernoted case4, a company was found guilty of receiving payment in
rupees from non-resident. The investigation showed that the payment was
received by the appellant. The adjudicating officer charged the appellant u/s.
68(2) of FERA [section 69(2)] on the ground that contravention took place with
his consent. On appeal, the finding of the adjudicating officer was confirmed
that the contravention took place with his consent so as to attract section
68(2). [section 69(2)].

NATURE OF BURDEN OF PROOF ON THE DEPARTMENT

The language of section 69(2) suggests that the burden of
proving the consent, connivance or neglect of the functionary lies on the
Department.

HOW WILL THE DEPARTMENT DISCHARGE SUCH BURDEN?

As regards “connivance”, it would be necessary for the
Department to establish that the offence was committed in the circumstances
showing that but for the reticence of the functionary, it was possible for him
to prevent the commission of such offence.

____________________________________________________________________________________

3   Parag Dalmia vs.
Special Director (2012) 115 SCL 57 (Del)

4   Bhupinder Singh vs.
DE [1997] 95 Taxman 315 (FERAB)

As regards “neglect”, the Department must first
ascertain as to what is the spectrum of the duties of director, partner,
officer, etc. This can be done by examining the letter of his appointment,
agreement, the resolution, etc. from which he derived the powers
exercised by him in discharge of his duties. Thereafter, the Department will
have to adduce evidence that it was possible for the functionary to do an act
in discharge of the duties assigned to him which in fact he did not.

SUMMATION : TWO ISSUES

While summing up the discussion on the liability of
promoters, directors, partners and officers of the realty companies, firms,
association, etc. following two issues deserve some further thought.

First, what is the distinction between the provisions
of section 69(1) and section 69(2)?

Second, is there any possibility of the peculiarly
structured real estate transactions triggering the provisions of Prohibition of
Benami Property Transactions Act, 1988 that came into force
retrospectively from 19 May 1988 ?

As regards the first issue, the principal distinction is that
u/s. 69(1), the burden of proof lies on the Department. Once the Department
discharges it, the Proviso shifts the burden to the person vicariously
charged with the offence.

On the other hand, section 69(2) casts the burden of proof on
the Department without the opportunity of shifting the same to the functionary
of the company vicariously charged thereunder.

As regards the
applicability of Prohibition of Benami Property Transactions Act, 1988,
one may note the following.

Real estate developers across India are currently in a
quandary over how to deal with properties they have aggregated over the years through
proxies.

Because of restrictive land ceiling laws, it was common for
real estate developers to amass land holdings through proxies—normally through
firms not directly controlled
or owned but funded by way of loan or subscription to share capital.

Despite the Benami Transactions (Prohibition) Act being
in force from 1988, not much attention was paid to the parcels of land acquired
by developers through proxies because the law had no implementing agency until
now and hence was rarely applied.

With the income-tax department now starting to crack the whip
on the transactions in which the actual beneficiary is different from the
registered owner, many real estate developers across India who have structured
the transactions through land aggregators are in a quandary.

In the run-up to 2016 November amendment to the benami law,
many real estate developers hurriedly “reversed” benami transactions by
transferring properties back to themselves from their proxies who previously
held them. But under the amended law, such ‘re-transfers’ are banned with
retrospective effect.

Of the 72 sections of the amended Benami Act, only
three came into force last year; the rest were made effective from 19 May 1988
through the 2016 November amendment.

Real estate developers claim that their acquisitions through
proxies should not be treated in the same manner as any other transaction aimed
at tax evasion or concealment of wealth. According to them, proxies were used
only to get past restrictive land ceiling laws.

Under the amended Benami law, people involved in benami
transactions face up to seven years in jail and confiscation of properties
without compensation.

The aim of the Benami Act is to curb black money. Real
estate developers will be in difficulty if it is used to take on land
aggregation through proxies.

If it can be established that the motive for
creating multiple ownership in land aggregation was not to avoid tax, hopefully
the government may not bracket such transactions with benami transactions.

Clarifications on Security Deposits And Key Management Personnel

Presentation of Security
Deposits

An
electricity distribution company collects security deposit at the time of issue
of electricity connection, which is refundable when the connection is
surrendered. The entity expects that most of the customers will not surrender
their connection. A question was raised to the Ind AS Transition Facilitation
Group (ITFG) whether such a security deposit shall be classified as a ‘current
liability’ or a ‘non-current liability’ in the books of the electricity
company?

The
ITFG at the first instance concluded that the security deposit should be
presented as current liability on the basis of Paragraph 69 of Ind AS 1,
Presentation of Financial Statement, which states as under:

“An
entity shall classify a liability as current when:

a)  it
expects to settle the liability in its normal operating cycle;

b)  it
holds the liability primarily for the purpose of trading;

c)  the
liability is due to be settled within twelve months after the reporting period;
or

d)  it
does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period”

The
ITFG opined “Although it is expected that most of the customers will not
surrender their connection and the deposit need not be refunded, but
surrendering of the connection is a condition that is not within the control of
the entity. Hence, the electricity company does not have a right to defer the
refund of deposit. The expectation of the company that it will not be settled
within 12 months is not relevant to classify the liability as a non-current
liability. Accordingly, the said security deposits should be classified as a
current liability in the books of the electricity company.”

However,
subsequently the ITFG withdrew the above guidance. Among other matters, the
ITFG stated that the concept of current and non-current classification already
existed under Indian GAAP and is not new to Ind AS. Hence, there is no need for
transition group guidance on the matter. Rather, the classification should be
based on Ind AS 1 and Ind AS compliant Schedule III principles. Some may argue
that by withdrawing the guidance, ITFG is permitting electricity companies to
present the security deposit as non-current. The supporters of this view
believe that in withdrawing the guidance, the ITFG must have focussed on the
substance of the arrangement, and the redemption pattern, which indicates that
the security deposit was non-current.

Author’s
View on some related matters

Pursuant
to the above change, electricity and similar companies, for example, a company
that provides gas connection or water supply, would classify security deposits
received from the customers as current or non-current liability based on
estimated redemption pattern. This view would generally apply in limited
circumstances such as in monopolistic or oligopolistic situations where choices
available to the consumer to change the service provider are highly limited.
This view should not apply by analogy in all cases. For example, in the case of
security deposit received by a consumer goods company from
retailers/distributors, the classification of security deposits would continue
to be current.

The
other question not addressed by the ITFG is whether the security deposits, once
presented as non-current needs to be discounted to its present value followed
by subsequent unwinding of the discount. One view is that discounting would be
required. On initial discounting, the security deposit would be stated at its
present value. The difference between the amount of security deposit received
and the present value will be treated as deferred income. The deferred income
will be credited to the P&L income, generally on a straight line basis to
reflect the true value of the goods or services provided to the customer. On
the other hand, the unwinding of the discounting will result in the security
deposit being reflected at its original value just before redemption. The
unwinding will be done on an effective interest rate method and the consequent
financial expense will be debited to P&L. The accounting will result in a
mis-match in the P&L as the deferred income is recognised on a straight
line basis whereas the financial expense is recognised on an effective interest
rate basis.

The
author’s view is that the new guidance (viz., non-current presentation of
deposit by electricity and similar companies) arising from withdrawal of old
ITFG view is relevant only for presentation in the balance sheet. Recognition
and measurement of security deposits, including those accepted by the
electricity and similar companies, would continue to be governed by Ind AS 109 Financial
Instruments principles. Consequently, the author believes that there is no
need to discount the security deposits.

WHETHER INDEPENDENT DIRECTORS ARE KEY MANAGEMENT
PERSONNEL?

Whether
independent directors should be considered as key management personnel (KMP)
under Ind AS 24 Related Party Disclosures?

Authors’
View

Ind
AS 24 defines the term ‘key management personnel’ as “the persons having
authority and responsibility for planning, directing and controlling the
activities of the entity directly or indirectly, including any director (whether
executive or otherwise) of that entity.”

Under
Indian GAAP, AS 18 Related Party Disclosures excludes non-executive
directors from the definition of KMP. However, under Ind AS, it is quite clear
that all directors  whether  Executive or Non-executive will generally be
considered as KMP. Furthermore, the Companies Act, 2013, prescribes very
onerous responsibilities for independent directors. These responsibilities
include taking executive responsibilities. This includes authority and
responsibility for planning, directing and controlling the activities of the
entity. Hence, independent directors are KMP under Ind AS 24.

ITFG may provide
appropriate guidance on this matter.

3. Book profit – Accounts prepared and certified in accordance with the provisions of the Companies Act – has to be accepted – cannot be altered – Section 115JB Explanation .

CIT – 6 vs. Century Textiles and Industries Ltd.[Income tax Appeal no. 1072 of 2014, dt : 16/01/2017 (Bombay High Court)].

[Asst CIT vs. Century  Textiles and Industries Ltd,. [ITA No. 3261/MUM/2009; Bench : C ; dated 13/09/2013 ; AY 2005-06, Mum. ITAT ]

During the course of assessment proceedings, the AO noticed that the assessee had debited to its Profit and Loss Account an amount of Rs.12.41 crore being the arrears of depreciation for the earlier A.Y 2000-01 and 2001-02. The AO called upon the assessee to explain why the depreciation relating to earlier AY should not be added back to the Book Profits. The assessee pointed out that its accounts had been prepared in accordance with the provisions of the Companies Act which were duly audited. Therefore, in view of the decision of the Apex Court in CIT vs. Apollo Tyres Ltd [255 ITR 273] wherein it has been stated that the book profit as prepared and certified in accordance with the provisions of the Companies Act, has to be accepted and cannot be altered to determine book profit for purpose of section 115JB of the Act except as provided in the Explanation thereto. Notwithstanding the above, the AO did not accept the same and added arrears of depreciation for the A.Y 2000-01 and 2001- 02 to the audited book profits to determine the book profits for the purpose section 115JB of the Act.

Being aggrieved, the assessee filed an appeal to the CIT(A). The appeal was allowed by the CIT(A) following the decision of Apollo Tyres Ltd (supra) .Thus deleted the addition made by the AO.

Being aggrieved the Revenue carried the issue in appeal to the Tribunal. The Tribunal referred to the judgment of Hon’ble High Court of Bombay in case of Kinetic Motor Company Ltd. (262 ITR 330) in which the High Court referred to the judgment of Hon’ble Supreme Court in case of Apollo Tyres Ltd. (Supra) and held that the accounts prepared and certified in accordance with part 2 and part 3 of schedule VI of the companies Act could not be tinkered with and AO had no jurisdiction to go beyond the net profit shown in the such accounts. The Tribunal, therefore, deleted the addition made.

On further appeal, the High Court held that the issue stands concluded by the decision of the Apex Court in Apollo Tyres Ltd. (supra) and the decision of this Court in Kinetic Motor Co. Ltd. (supra). The above decisions have held that it is not permissible to the AO to tinker with the profit declared in the audited account maintained in terms of Schedule VI of the Companies Act. As the order of the Tribunal has merely followed decision of the Apex Court in Apollo Tyres Ltd. (supra) question as formulated does not give rise to any substantial question of law.

The other grievance of the Revenue was that the clause (iia) was inserted only in Finance Act, 2006 w.e.f. 1st April, 2007 and is not applicable for the year under consideration. However, the court observed that the grievance of the revenue does not carry the issue in the present facts any further as the Tribunal has not allowed the claim of the respondent-assessee by relying upon clause (iia) of explanation to section 115JB of the Act. Further that this issue was not urged before the authorities under the Act. Therefore, in view of the decision in CIT vs. Tata Chemicals Ltd. [256 ITR 395], it cannot be urged before this Court for the first time.

2. Sale of shares – capital gain vs Business Income- consistency – own funds – considering the volume and frequency of purchase / sale of shares – held not a trader: Section 45

CIT – 4 , vs. Shri Upendra K. Doshi. [ Income tax Appeal no. 848 of 2011; AY 2008-09 dated : 15/11/2016 (Bombay High Court)].

[Shri Upendra K. Doshi vs. DCIT [ITA no:7854/M/2014 dated 14/08/2013 ; A Y: 2005-06 to 2008-09. Mum. ITAT ]

The assessee purchased and sold certain shares, profit from which was claimed as Short term/Long term capital gain depending upon the period of holding. The AO did not dispute the long term capital gain. However, he treated the assessee as a trader instead of investor and accordingly re-characterised the amount shown as ‘Short term capital gain’ as ‘Business income’.
The ld. CIT(A) noticed that the assessee consistently held the shares as ‘Investment’ and this treatment of profit from sale of shares as ‘capital gain’ stood accepted by the AO in earlier year as well. He, therefore, directed to treat the amount as Short term capital gain as against the ‘Business income’ held by the AO.

Being aggrieved, the Revenue filed an appeal before the Tribunal. The Tribunal observed that the treatment of Long term capital gain has been accepted by the AO. The only dispute is about the treatment of profit from sale of shares etc., other than long term capital assets, which the AO treated it as ‘Business income’. The assessee gave similar treatment to the shares by keeping it as ‘Investment’ on the lines as was done in the earlier years. For the immediately preceding assessment year i.e. 2004-05, the assessee showed Long term capital gain and Short term capital gain from the transfer of shares.

The AO accepted profit from transfer of shares as short term/long term capital gain respectively in the assessment made u/s. 143(3) of the Act for such earlier year. Similar is the position for the A.Y. 2003-04 in which the assessee again showed profit from the transfer of shares as Long term capital gain and Short term capital gain which was assessed by the AO as such in assessment made u/s. 143(3) of the Act. This shows that the assessee held and declared the shares as ‘Investment’ and this stand came to be accepted by the Revenue. Thus the ld. CIT(A) order was upheld .

Being aggrieved by the order of the Tribunal, the Revenue filed an appeal before the High Court. The Hon’ble High Court took the note of the fact that appeals for AY 2005-06 and AY 2006-07 are admitted by the High Court considering the frequent and voluminous transactions carried out with borrowed funds in shares held as “Short Term Capital Gain”. The Hon’ble court observed that in the subject assessment year, the assessee has carried out the business activity out of its own funds and the authorities have also rendered a finding of fact that the transactions are not large nor so frequent so as to hold that the assessee was a trader in shares.

The finding of fact arrived at both by the CIT(A) as well as the Tribunal for the subject assessment year that the assessee was an investor in shares out of its own funds and considering the volume and frequency of purchase / sale of shares is not a trader has not been shown to be perverse by the Revenue. In the above view, the appeal was dismissed.

1.Reopening of assessment – No tangible material before the AO for assuming the jurisdiction u/s. 147- Reopening notice was bad in law: Section 148

CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):

The assessee-company was engaged in trading of dyes and chemicals. A search was carried out in business premises of assessee wherein documents seized showed that assessee had paid commission to sister concern for rendering services of sales agent. According to the Assessing Officer, the relationship between the parties militated against the claim being bona fide, particularly in the absence of proof of rendition of service by the sales agent. He thus rejected assessee’s claim for payment of commission. The Commissioner(Appeals) noted that sister concern had been appointed as sales agent for the sake of maintaining uniformity in sale prices and to avoid unnecessary and uneconomical competition between the sister concerns. A decision thus came to be taken by the entities that a bifurcation of duties was called for and one concern was identified to act as the selling agent for the entire group of companies. The transaction thus found favour with the Commissioner as being bona fide and genuine. The Tribunal also approved the findings of the Commissioner (Appeals) and allowed the claim.

On appeal by the Revenue, one of the questions raised was:

“Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the price difference borne by the assessee company in respect of the transaction with M/s. United Bleachers Limited, a sister concern, could not be disallowed alternatively, u/s. 40A(2), ignoring the reasons given in support of the addition by the Assessing Officer.?”

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

“i)    There is no prohibition that related parties cannot engage in business transactions. Such an interpretation would render the provisions of section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing Officer to effect a disallowance of payments that are, ‘in his opinion’ excessive or unreasonable giving regard to fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by him or accruing to him. Such ‘opinion’ has to be based on tangible material and not assumptions and suspicions.

ii)    The provisions of section 40A(2) are not automatic and can be called into play only if the Assessing Officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the Assessing Officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax.

iii)    The Supreme Court in the case of Vodafone International Holdings BV. vs. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 points out the difference between ‘looking through’ a transaction and ‘looking at’ a transaction settling the position that a conclusion of colourable/sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bona fide and acceptable. Nothing is placed on record to indicate that the findings are perverse. Thus there is no need to interfere with the concurrent findings of the authorities. In the result, revenue’s appeal is dismissed.”

6. Settlement Commission – Application for settlement of case – Maintainability – Application offering undisclosed foreign income and assets – A. Ys. 2005-06 to 2014-15- Section 245C – Effect of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 – Act coming into force w.e.f. 01/07/2015 – Return filed on 21/05/2015 and notice u/s. 148 issued on 29/05/2015 – Application for settlement maintainable

Arun Mammen vs. UOI; 391ITR 23 (Mad):

Assessee had filed returns of income on 21/05/2015 disclosing foreign income and assets. On 29/05/2015, the Assessing Officer issued notices u/s. 148 of the  Act. The assessee made applications before the Settlement Commission for settlement of the cases. The Settlement Commission rejected the applications holding that the Commission does not have jurisdiction to entertain these applications offering undisclosed foreign income and assets.

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

“i)    Explanatory notes dated July 2, 2015 issued in Circular No. 12 of 2015 have clarified that the Black Money(Undisclosed Foreign Income and Assets) and Imposition of tax Act, 2015 comes into effect from 01/07/2015.

ii)    The assessee having filed their return of income on 21/05/2015 and notice having been issued u/s. 148 by the Assessing Officer on 29/05/2015 which was before coming into effect of the provisions of the 2015 Act, the applications submitted by the assessee before the Settlement Commission were maintainable.”

5. Refund – Interest on refund – Section 244A – A. Ys. 2007-08 and 2008-09 – Period for which interest payable – Exclusion of period of delay caused by assessee – Belated claim during assessment or revised return not a delay caused by assessee – Claim of assessee accepted in appeal by Commissioner (Appeals) – Time taken for appeal proceedings cannot be excluded

Ajanta Manufacturing Ltd. vs. Dy. CIT; 391 ITR 33(Guj):

For the A. Ys. 2007-08 and 2008-09, the assessee had claimed refund with interest in respect of relief given by Commissioner (Appeals). Refund was granted but the Commissioner held that the assessee would not be entitled to interest up to the period of giving effect to the order of the Commissioner(Appeals).

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

“i)    In cases covered under sub-section (1) of section 244A of the Income-tax Act, 1961, the assessee would be entitled to interest on refund at specified rate. Under sub-section (2) of section 244A, however, such interest would not be payable to the assessee if the proceedings which resulted in refund are delayed by reasons attributable to the assessee, whether wholly or in part. In such a case the period of delay so attributable to the assessee would be excluded from the period for which interest is payable.

ii)    The act of revising the return or revising a claim during the course of assessment proceedings could not be said to be a reason for delaying the proceedings which could be attributable to the assessee. The fact that the assessee had filed an appeal which ultimately came to be allowed by the Commissioner, could not be a reason for delaying the proceedings which could be attributed to the assessee.
iii)    The Department did not contend that the assessee had needlessly or frivolously delayed the assessment proceedings at the original or appellate stage. In the absence of any such foundation, the mere fact that the assessee made a claim during the course of the assessment proceedings which was allowed at the appellate stage would not ipso facto imply that the assessee was responsible for causing the delay in the proceedings resulting in refund. Under the circumstances, the order passed by the Commissioner was not valid.”

4.Recovery of tax – Stay of demand during pendency of appeal before CIT(A) – Circular/Instruction No. 1914 dated 02/02/1993 and Circular dated 29/02/2016 modifying Instruction No. 1914 – Circular No. 1914 deals with collection and recovery of income tax, however it does not standardise the quantum of lumpsum payment required to be made by asssessee as a pre-condition of stay of disputed demand before CIT(A). Circular dated 29-2-2016 being a partial modification of Circular No. 1914 merely prescribes the percentage of the disputed demand that needs to be deposited by assessee. Thus, although process for granting stay was streamlined, and standardised by Circular dated 29-2-2016 but it could not mean that Instruction No. 2-B(iii) contained in Circular No. 1914 dealing with situation of unreasonably high pitched or dealing with situation of genuine hardship caused to assessee was erased by Circular dated 29-2-2016, therefore, both these factors should have been considered by both, Assessi

Flipkart India (P.) Ltd. vs. ACIT; [2017] 79 taxmann.com 159 (Karn):

For the A. Ys. 2014-15 and 2015-16, the assessee had filed appeals before the CIT(A) against the assessment orders. The assessee also filed applications for stay of the disputed demand during the pendency of appeals. Relying on the CBDT Circular dated 29/02/2016, the assessee was directed to pay 15% of the disputed demand for grant of stay of the balance.

The assessee filed writ petitions challenging the said orders. The Karnataka High Court allowed the writ petition and held as under:
“i)    Undoubtedly, the present case raises the issue of balancing the interest of the Revenue, and the interest of an assessee. Needless to say, the Revenue does have the right to realise the assessed income tax amount from the assessee. However, while trying to realise the said amount, the Revenue cannot be permitted, and has not been permitted by the Circulars mentioned above, to act like a Shylock. It is precisely to balance the conflicting interests that certain guidelines have been prescribed by Circular No.1914, and Circular dated 29.2.2016. The Circular dated 29.2.2016 clearly states that the circular is “in partial modification of Instruction No.1914”. Therefore, the Circular dated 29.2.2016 does not supersede the Circular No.1914 in toto, but merely “partially modifies” the instructions contained in Circular No.1914.

ii)    According to Instruction No.4(A) of Circular dated 29.2.2016, it is a general rule, that 15% of the disputed demand should be asked to be deposited. But, according to Instruction No.4(B)(a) of the Circular dated 29.2.2016, the demand can be increased to more than 15%; according to Instruction No.4(B)(b) of the Circular dated 29.2.2016, the percentage can be lower than 15%, provided the permission of the Prl. CIT is sought by the Assessing Officer. However, in case the Assessing Officer does not seek the permission from the Prl.CIT, and in case the assessee is aggrieved by the demand of 15% to be deposited, the assessee is free to independently approach the Prl. CIT. The assessee would be free to request the Prl. CIT to make the percentage of disputed demand amount to be less than 15%.

iii)    It is true that Instruction No.4 (B)(b) of the Circular dated 29.2.2016, gives two instances where less than 15% can be asked to be deposited. However, it is equally true that the factors, which were directed to be kept in mind both by the Assessing Officer, and by the higher superior authority, contained in Instruction No.2-B(iii) of Circular No.1914, still continue to exist. For, as noted above, the said part of Circular No.1914 has been left untouched by the Circular dated 29.2.2016. Therefore, while dealing with an application filed by an assessee, both the Assessing Officer, and the Prl. CIT, are required to see if the assessee’s case would fall under Instruction No.2-B(iii) of Circular No.1914, or not? Both the Assessing Officer, and the Prl. CIT, are required to examine whether the assessment is “unreasonably highpitched”, or whether the demand for depositing 15% of the disputed demand amount “would lead to a genuine hardship being caused to the assessee” or not?

iv)    A bare perusal of the two orders, both dated 23.11.2016, clearly reveal that the Assessing Officer has relied upon Instruction No.4(B)(b) of the Circular dated 29.2.2016, and has concluded that since the petitioner’s case does not fall within the two illustrations given therein, therefore, it is not entitled to seek the relief that less than 15% should be demanded to be deposited by it. Moreover, the Assessing Officer has jumped to the conclusion that the petitioner’s finances do not indicate any hardship in this case. However, the Assessing Officer has not given a single reason for drawing the said conclusion. Since the petitioner has been constantly claiming that it has suffered loss from the very inception of its business, from 2011 to 2016, the least that the Assessing Officer was required to do was to elaborately discuss as to whether “genuine hardship” would be caused to the petitioner in case the petitioner were directed to pay 15% of the disputed demand amount or not? Yet the Assessing Officer has failed to do so. Therefore, this part of the order, naturally, suffers from being a non-speaking order. Hence, the said orders are legally unsustainable.

v)    A bare perusal of the order dated 25.1.2017 also reveals that the Prl. CIT has failed to appreciate the co-relation between Circular No.1914, and Circular dated 29.2.2016. The Prl. CIT has failed to notice the fact that the latter Circular has only “partially modified” the former Circular, and has not totally superceded it. The Prl. CIT has also ignored the fact that Instruction No.2-B(iii) contained in Circular No.1914 continues to exist independently of and in spite of the Circular dated 29.2.2016. Therefore, it has failed to consider the issue whether the assessment orders suffers from being “unreasonably highpitched”, or whether “any genuine hardship would be caused to the assessee” in case the assessee were required to deposit 15% of the disputed demand amount or not? Thus, the Prl. CIT has failed to apply the two important factors mentioned in Circular No.1914.

vi)    For the reasons stated above, this Writ Petition is, hereby, allowed. The twin orders dated 23.11.2016, and the order dated 25.1.2017, are set aside. The case is remanded back to the Prl. CIT to again decide the Review Petitions filed by the petitioner. The Prl. CIT is further directed to decide the Review Petition within a period of two weeks from the date of receipt of the certified copy of this order.”

3.Offences and prosecution – Compounding of offences – Sections 276B and 279(2) – Failure by assessee to deposit amount deducted as tax at source – Rejection of application for compounding on basis of guidelines by CBDT – Assessee’s failure to deposit amount collected beyond its control – Chief Commissioner should consider objective facts on merits before exercising jurisdiction – order rejecting application for compounding not sustainable

Sports Infratech P. Ltd. vs. Dy CIT; 391 ITR 98 (Del):

The assessee failed to deposit the amounts deducted as tax from the sums payable under various contracts. A complaint u/s. 276B of the Act, 1961 was filed against the assessee. The assessee sought for compounding of the offence u/s. 279(2) of the Act. The Chief Commissioner rejected the application on the ground that the compounding was not permissible in view of the guidelines issued by the CBDT imposed especially in view of para 8(v) thereof which stated that the offences having a bearing in a case under investigation by any other Central or State agency such as the CBI, were not to be compounded.

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

“i)    The rejection of the assessee’s application was entirely routed on the Chief Commissioner’s understanding of the conditions of ineligibility in para 8(v). The view was based upon an erroneous understanding of law. While exercising jurisdiction, the Chief Commissioner should consider the objective facts before it.

ii)    The assessee’s failure to deposit the amounts collected was beyond its control and was on account of seizure of books of account and documents. But for such seizure, the assessee would quite reasonably be expected to deposit the amount within the time prescribed or at least within the reasonable time. Instead of considering these factors on their merits and examining whether indeed they were true or not, the Chief Commissioner felt compelled by the text of para 8(v). The material on record in the form of a letter by the Superintendent of CBI also showed that a closure report was in fact filed before the competent court.

iii)    Therefore, the refusal to consider and accept the assessee’s application u/s. 279(2) of the Act could not be sustained. The impugned order is hereby set aside. The Chief Commissioner is hereby directed to consider the relevant facts and pass necessary orders in accordance with law within six weeks after granting a fair opportunity to the petitioner.”

2.Charitable purpose – Sections 10(23C)(vi), 12AA and 80G – Trust registered u/s. 12A and income exempt u/s. 10(23C) – Surplus income utilised for charitable purposes – Trust entitled to approval for purpose of section 80G

CIT vs. Gulabdevi Memorial Hospital; 391 ITR 73 (P&H):

The assessee, a charitable trust was registered u/s. 12A of the Income-tax Act (hereinafter for the sake of brevity referred to as the “Act”), 1961 since 1977 and was also granted approval for section 80G and the same were renewed from time to time till the A. Y. 2009-10. On 23/03/2009, the assessee filed application for approval u/s. 80G for the period 2010-11 to 2014-15. The Commissioner rejected the application. The Commissioner found that the assessee was generating substantial surplus and was spending only a small percentage for charitable purposes. The Commissioner was of the view that the assessee had disentitled itself for the grant of renewal of exemption u/s. 80G of the Act as according to him, the assessee had deviated from its charitable objects. The Tribunal held that the assessee was entitled to approval for the purposes of section 80G.

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

“i)    It was admitted that the assessee was registered u/s. 12AA and that it has been held entitled to exemption u/s. 10(23C)(vi). The assessee was granted exemption u/s. 80G of the Act from the year 1997 till the passing of the order. Further, the finding of the Tribunal, that the assessee had never misutilised its funds, had not been assailed.

ii)    The generated surplus having been ploughed back for expansion purposes also remained undisputed by the Revenue. The charges for its services were also considered by the Tribunal and were found to be extremely reasonable. The assessee was entitled to approval for purposes of section 80G.”

1. Business expenditure – Disallowance u/s. 40A(2) – A. Y. 1997-98 – Disallowance is not automatic and can be called into play only if AO establishes that expenditure incurred is, in fact, in excess of fair market value

CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):

The assessee-company was engaged in trading of dyes and chemicals. A search was carried out in business premises of assessee wherein documents seized showed that assessee had paid commission to sister concern for rendering services of sales agent. According to the Assessing Officer, the relationship between the parties militated against the claim being bona fide, particularly in the absence of proof of rendition of service by the sales agent. He thus rejected assessee’s claim for payment of commission. The Commissioner(Appeals) noted that sister concern had been appointed as sales agent for the sake of maintaining uniformity in sale prices and to avoid unnecessary and uneconomical competition between the sister concerns. A decision thus came to be taken by the entities that a bifurcation of duties was called for and one concern was identified to act as the selling agent for the entire group of companies. The transaction thus found favour with the Commissioner as being bona fide and genuine. The Tribunal also approved the findings of the Commissioner (Appeals) and allowed the claim.

On appeal by the Revenue, one of the questions raised was:

“Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the price difference borne by the assessee company in respect of the transaction with M/s. United Bleachers Limited, a sister concern, could not be disallowed alternatively, u/s. 40A(2), ignoring the reasons given in support of the addition by the Assessing Officer.?”

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

“i)    There is no prohibition that related parties cannot engage in business transactions. Such an interpretation would render the provisions of section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing Officer to effect a disallowance of payments that are, ‘in his opinion’ excessive or unreasonable giving regard to fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by him or accruing to him. Such ‘opinion’ has to be based on tangible material and not assumptions and suspicions.

ii)    The provisions of section 40A(2) are not automatic and can be called into play only if the Assessing Officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the Assessing Officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax.

iii)    The Supreme Court in the case of Vodafone International Holdings BV. vs. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 points out the difference between ‘looking through’ a transaction and ‘looking at’ a transaction settling the position that a conclusion of colourable/sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bona fide and acceptable. Nothing is placed on record to indicate that the findings are perverse. Thus there is no need to interfere with the concurrent findings of the authorities. In the result, revenue’s appeal is dismissed.”

Loan or Advance to Huf by Closely Held Company – Whether Deemed Dividend U/S. 2 (22)(E) – Part I

Introduction

1.1       Section 2(22) of the Income-tax Act,1961 (the Act) provides inclusive definition of the term “dividend”. Sub-clauses (a) to (e) create a deeming fiction to treat certain distributions/ payments by certain companies to their shareholders as dividend subject to certain conditions and exclusions provided in section 2(22) ( popularly known as ‘deemed dividend’). Such distribution/ payments can be treated as ‘deemed dividend’ only to the extent to which the company possesses ‘accumulated profits’. The expression “accumulated profits” is also defined in inclusive manner in Explanations 1 & 2 to section 2 (22).

1.2       Prior to the amendment by Finance Act, 1987, section 2(22)(e) broadly provided that dividend includes any payment by a company, not being a company in which public are substantially interested (‘closely held company’) of any sum  (whether as representing a part of the assets of the company or otherwise ) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company(Old Provisions). Section 2(32) defines the expression ‘person who has a substantial interest in the company’ as a person who is the beneficial owner of shares, not being shares entitled to a fix rate of dividend, whether with or without a right to participate in profits (shares with fixed rate of dividend), carrying not less than 20% of the voting power in the company. ”Under the Income-tax Act, 1922 (1922 Act), section 2(6A)(e) also contained similar provisions with some differences [such as absence of requirement of substantial interest etc.] which are not relevant for the purpose of this write-up.

1.2.1    The Finance Act, 1987 (w.e.f. 1/4/1988) amended the provisions of section 2(22)(e) and expanded the scope thereof. Under the amended provisions, dividend includes any payment by a company of any sum (whether as representing a part of the assets of the company or otherwise) made after 31/5/1987 by way of advance or loan to a shareholder, being a person who is the beneficial owner of the shares ( not being shares with fix rate of dividend) holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or partner and in which he has substantial interest. For the sake of brevity, in this write-up `advance’ or loan both are referred to as loan. Simultaneously, Explanation 3 has also been inserted to define the term “concern” and substantial interest in a concern other than a company. Accordingly, the term ‘concern’ means a Hindu undivided family (HUF), or a firm or an association of person [AOP] or a body of individual [BOI] or a company and a person shall be deemed to have substantial interest in a ‘concern’, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such ‘concern’. It may be noted that in relation to a company, the person having substantial interest will be decided with reference to earlier referred section 2(32). As such, with these amendments, effectively not only loan given to specified shareholder but also to a ‘concern’ in which such shareholder has substantial interest is also covered within the extended scope of section 2(22)(e) (New Provisions). In this write-up, we are only concerned with loans given to HUF and therefore, reference to other categories of ‘concern’ such as Firm, AOP, Company etc. are ignored for convenience. As such, the reference to the expression ‘concern’ in this write-up should be construed as referring to HUF or, at best, in the context, to other non-corporate entities such as Firm, AOP etc.  

1.2.2    Section 2(22)(e) also covers any payments by a ‘closely held company’ on behalf, or for the individual benefit, of any such shareholder with which we are not concerned in this write-up and therefore, the reference to the same is excluded. The requirement of possessing ‘accumulated profits’ continues in all the above provisions. It may also be noted that there are some issues with regard to the scope of the expression ‘accumulated profits’ inclusively defined in the Explanations 1 and 2 of section 2(22) with which also we are not concerned in this write-up.

1.2.3    For the purpose of considering the applicability of section 2(22)(e), the courts/various benches of Tribunal have also considered the object of these provisions and have understood that, the purpose is to bring within the tax net accumulated profits distributed by closely held companies to their shareholders, in the form of loans to avoid payment of tax on dividend. The purpose being that the persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding payment of tax on dividend by having their companies pay or distribute money in the form of loan [Ref:-Alagusundaram Chettiar – (2001) 252 ITR 893 – SC, Mukundray Shah – [2007] 290 ITR 433 (SC), Subrata Roy – (2015) 375 ITR 207 (Del) –SLP dismissed (2016) 236 Taxman 396 (SC) -, Bagmane Construction (P). Ltd – (2015) 331 Taxman 260 (Kar), Amrik Sing – (2015) 231 Taxman 731 ( P & H) – SLP dismissed – (2016) 234 Taxman 769 (SC)-, Chandrashekar Maruti – (2016) 159 ITD 822 (Mum), etc.]

1.3       Under the 1922 Act, in the context of the provisions contained in section 2(6A)(e), the Apex Court in the case of C.P. Sarathy Mudaliar (83 ITR 170) had held that the section creates a deeming fiction to treat loans or advances as  “dividend” under certain circumstances. Therefore, it must necessarily receive a strict construction. When section speaks of “shareholder”, it refers to the registered shareholder [i.e. the person whose name is recorded as shareholder in the register maintained by the company] and not to the beneficial owner of the shares. Therefore, a loan granted to a beneficial owner of the shares who is not a registered share holder cannot be regarded as loan advanced to a ‘share holder’ of the company within the mischief of section 2(6A)(e). As such, the HUF cannot be considered as a shareholder within the meaning of section2 (22) (e), when shares are registered in the name of its Karta and therefore, loan given to the HUF could not be considered as deemed dividend.

1.3.1    In the above case, the Court also observed as follows:

           “……It is well settled that an HUF cannot be a shareholder of a company. The shareholder of a company is the individual who is registered as the shareholder in the books of the company. The HUF, the assessee in this case, was not registered as a shareholder in the books of the company nor could it have been so registered. Hence there is no gain-saying the fact that the HUF was not the shareholder of the company.”

           The above judgment was also followed by the Apex Court in the case of Rameshwarlal Sanwarmal (122 ITR 1) under the 1922 Act. As such, under the 1922 Act, the position was settled that for an amount of loan given to a shareholder by the closely held company to be treated as deemed dividend, the shareholder has to be a registered shareholder and not merely a beneficial owner of the shares.

1.3.2    For the sake of clarity, it may be noted that section 6A(e) of the 1922 Act, as well as the Old Provisions did not apply to loan given to any specified ‘concern’. Such cases are covered only under the New Provisions referred to in para 1.2.1.

1.3.3    Principle laid down by the Apex Court referred in para 1.3, has been applied, even in the context of the Act. As such, the expression ‘shareholder’ appearing in section 2(22) (e) has been understood by the courts as referring to a registered shareholder [i.e. the person whose name is recorded as shareholder in the register maintained by the company] and this proposition, directly or indirectly, found acceptance in large number of rulings. [Ref:- Bhaumik Colour (P). Ltd – (2009) 18 DTR 451 (Mum- SB), Universal Medicare (P) Ltd – (2010) 324 ITR 263 (Bom), Impact Containers Pvt. Ltd. – (2014) 367 ITR 346 (Bom), Jignesh P. Shah – (2015) 372 ITR 392, Skyline Great Hills – (2016) 238 Taxman 675 (Bom), Biotech Opthalmic (P) Ltd.- (2016) 156 ITD 131 (Ahd), etc.]

1.4       Under the New Provisions, loan given to two categories of persons are covered Viz. i) certain shareholder (first limb of the provisions) and ii) the ‘concern’ in which such shareholder has substantial interest (second limb of the provisions).

1.4.1       In the context of loan given to shareholder, under the first limb of the New Provisions, the reference is to a shareholder, being a person who is the beneficial owner of shares and as such, two conditions are required to be fulfilled i.e. the person to whom the loan is given should be a registered shareholder as well as he should also be beneficial owner of the shares. In addition, he should hold shares carrying at least 10 % voting power. As such, as explained by the special bench of the Tribunal in Bhaumik Colour’s case (supra), if a person is a registered shareholder but not the beneficial shareholder then the provisions of the section 2 (22)(e) contained in the first limb will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also this part of the provisions of the section 2(22)(e) will not apply.

1.4.2    In respect of loan given to a ‘concern’ (second category of person), under the second limb of the New Provisions, such shareholder (referred to in the first limb) should be a member or partner thereof and he should have a substantial interest in the ‘concern’ as defined in Explanation 3 (b) to section 2(22). Accordingly, to invoke this second limb of the provisions in respect of a loan given to a ‘concern’, as explained by the special bench of the Tribunal in Bhaumik Colour’s case (supra), the concerned shareholder must be both registered as well as beneficial shareholder holding shares carrying at least 10 % voting power in the lending company and such shareholder should be beneficially entitled to not less than 20% of income of such ‘concern’ at any time during the previous year.

1.4.2.1 Even in cases where the condition for invoking the second limb of the New Provisions are satisfied (i.e. the person is a registered shareholder as well as beneficial owner of the shares), the issue is under debate that, in such cases, where the loan is given to a ‘concern’ in which such shareholder has substantial interest whether the amount of such loan is taxable as deemed dividend in the hands of such shareholder or the ‘concern’ to whom the loan is given. In this context, the CBDT (vide Circular No. 495 dated 22/9/1987) has expressed a view that in such cases, the deemed dividend is taxable in the hands of the ‘concern’. However, the judicial precedents largely, directly or indirectly, shows that in such cases, the deemed dividend should be taxed in the hands of the shareholder [Ref: in addition to most of the cases referred to in para 1.3.3, Ankitech (P) Ltd. – (2012) 340 ITR 14 (Del), N. S.N. Jewellers (P) Ltd.- (2016) 231 Taxman 488 (Bom), Alfa Sai Mineral (P) Ltd. – (2016) 75 taxmann.com 33(Bom),Rajeev Chandrashekar -(2016) 239 taxman 216 (Kar), etc. (in last three cases SLP is granted by the Apex Court- Ref:- 237 Taxman 246, 243 Taxman 140 and 243 Taxman 139 respectively)].

1.4.3    For the purpose of invoking the New Provisions, the positions in law referred to in paras 1.4.1 and 1.4.2 have largely held the field in subsequent rulings.

1.5       In the context of loan given to an HUF by a closely held company in which karta of the HUF is the registered shareholder having requisite shareholding, the issue was under debate as to whether the new Provisions relating to deemed dividend will apply and if these provisions are applicable, the amount of such deemed dividend should be taxed in whose hands i.e. the registered shareholder or the HUF, which received the amount of loan.

1.6       Recently, the issue referred to in para 1.5 came up for consideration before the Apex Court in the case of Gopal & Sons (HUF) and the issue, based on the facts of that case, is decided by the Court. Considering the importance of this and its possible far reaching impacts, it is thought fit to consider this in this column.

CIT vs. Gopal and Sons HUF – ITA No. 73 of 2014 (Calcutta High Court)

2.1       The relevant facts in the above case were: the case relates to Asst. Year. 2006-07. The assessee [i.e. Gopal and Sons (HUF)] seems to have made some investment in shares during the previous year and the source thereof was out of funds received from G. S. Fertilizers Pvt. Ltd. (GSF) in which, according to the Assessing Officer (AO), the assessee HUF had requisite shareholding. The AO also noticed that the opening balance in the advance account of the assessee HUF with GSF in the Financial Year 2005-06 was Rs. 60,25,000/- and the closing balance was Rs. 2,61,33,000/-. As such, the AO found that the assessee HUF had received advances from GSF during the year. From the Audit Report, Annual Return, etc. filed by the GSF with the Registrar of Companies (ROC) for the relevant period, the AO found that the Gopal and Sons (HUF) (i.e. assessee) was a registered shareholder (as per the annual return of GSF), holding 3,92,500 shares of GSF which comes to 37.12 % shares of the said company. Accordingly, the holding of the assessee HUF was more than 10 % of the voting power in the GSF. Therefore, the AO concluded that Gopal and Sons (HUF) (i.e. assessee) was both, the registered share holder holding shares of the company and also beneficial owner of the shares carrying more than 10 % of voting power in the company. From the company’s audited accounts, the AO found that there was a balance of Rs. 1,20,10,988/- as “Reserve & Surplus” as on 31/3/2006. It seems that the AO treated this as “accumulated profits” of GSF and this fact does not seem to have been disputed by the assessee HUF. Accordingly, applying the new Provisions of section 2(22)(e) of the Act, the AO treated the advances received from the GSF as deemed dividend in the assessment of assessee HUF to the extent of Rs. 1,20,10,988/- (i.e. limited to the amount of ‘accumulated profits’).

2.1.1   The Commissioner of Income-Tax- Appeals [CIT-(A)] confirmed the action of the AO, by observing in para 8.5 and 8.6 as under:

           “8.5. However, I do not find any force in the submission of the appellant. As per record, there is no dispute that the appellant HUF is beneficial owner of the shares. On examination of Annual Returns filed by the company with ROC for the relevant year, it was observed by the AO that though, the shares might have been issued by the company in the name of Shri Gopal Kumar Sanei, Karta of HUF, but the company has recorded name of the appellant HUF as shareholder of the company. In the annual return filed with ROC, Gopal & (HUF) has been recorded as shareholder having 37.12% share holding. The annual return filed by the company is replica of shareholder register maintained by the Company. According to the Companies Act, a shareholder is a person whose name is recorded in the register of share holders maintained by the company. The company, M/s. G.S. Fertilizers Pvt. Ltd. has recorded the name of Gopal & Sons (HUF) as a shareholder. Thus, the appellant is not only the beneficial holder of the shares but also the registered shareholder. Further, as per the provisions of section 2(22)(e) as amended w.e.f. 1.4.1998*, the only requirement to attract provisions of section 2(22)(e) is that the shareholder be beneficial shareholder. The decision of Hon’ble Apex Court relied upon by the appellant pertains to 1922 I.T. Act and the decision of the Apex Court was with reference to provisions of section 2(6A)(e) of the I.T. Act, 1922. In fact, in the same case as in the case reported in 122 ITR 1, the Hon’ble Supreme Court in the case reported in 82 ITR 628 (SC) has held as under:

            “Shares held by Karta, when shares were acquired from the funds of the HUF, could be considered to be shares held by the HUF and then loan made to the family could fall within the definition of “dividend” in section 2(22)(e).”

           The Hon’ble Supreme Court in the case of Kishanchand Lunidasing Bajaj vs. CIT reported in 60 ITR 500 (SC) has held:

           “Shares were acquired with the funds of a HUF and were held in the name of Karta. HUF could be assessed to tax on the dividend from those shares.”

           The Hon’ble Kerala High Court in the case of Gordhandas Khimji (HUF) vs. CIT reported in 186 ITR 365 (Ker.) has held:

          “Advances to HUF shareholder by the company to the extent of its accumulated profits will be assessable as deemed dividend in the hands of HUF and not in the hands of Karta.”

          Recently, ITAT, Mumbai Special Bench in the case of ACIT vs. Bhaumik Colour (P) Ltd. reported in 118 ITD 1 has held that for the purpose of taxing the deemed dividend, the shareholder must be both beneficial and registered shareholder. Though, as mentioned above, as per the amended provisions of section 2(22)(e) of the Act, the share holder should be beneficial owner of the shares holding not less than ten per cent of the voting power, even if the ratio of the decision of the Special Bench (Supra) is considered in the case of appellant, the appellant is both beneficial as well as registered share holder of the company as mentioned above.

           (8.6) In view of above facts, discussion and legal position, I am of the opinìon that the AO was justified in making the addition of Rs. 1,20,10,988/- by provisions of section 2(22)(e) of the Act. The case of the appellant is covered under the provision of section 2(22)(e) from all the angles Therefore, the addition of Rs.1,20,10,988/- is hereby confirmed. The ground no. 2 is dismissed.”

           * This should be 1.4.1988

2.1.2    The above referred issue came-up for consideration before the Kolkata bench of the Tribunal (ITA No. 2156/K/2009) at the instance of the assessee (alongwith other issues with which we are not concerned in this write-up) for the Asst. Year. 2006-07. On behalf of the assessee, it was contended that the issue is covered in favour of the assessee by the decision of the tribunal in the case Binal Sevantilal Koradia (HUF) [ITA No. 2900/MUM/2011) rendered on 10/10/2012 for the Asst. Year. 2007-08 and in that case, the Tribunal has followed the decision of the special bench of the Tribunal in Bhaumik Color’s case as well as the judgment of the Rajasthan High Court in case of Hotel Hill Top (supra). In that case, the Tribunal has also noted that the same view has been taken by the Bombay High Court in the case of Universal Medicare (P) Ltd. (supra).

2.1.2.1 After referring to the findings of the CIT (A) referred to in para 2.1.1 above and the decision relied on by the counsel of the assessee, the Tribunal decided the issue in favour of assessee (vide order dtd. 27/1/2013) by observing as under:

         “In the aforesaid judgment of Mumbai Tribunal in the case of Binal Sevantilal Karodia (HUF), supra, the Tribunal was followed the decision in the case of ACIT vs. Bhaumik Colour Pvt. Ltd. 313 ITR 146(AT). The Ld. Sr. DR has not controverted that this issue is covered. We find that this issue is covered by the order of Mumbai Tribunal in the case of Binal Sevantilal Karodia (HUF), supra. Hence, taking it as covered matter, we allow this issue of assessee’s appeal.”

2.2      At the instance of the Revenue, the above issue relating to taxability of deemed dividend in the hands of the assessee HUF(along with other issues with which we are not concerned in this write-up) came-up before the Calcutta High Court for which following two questions were raised:

          “i) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in deleting the addition of Rs.1,2010,988/- as deemed dividend under section 2(22)(e) of the Income-tax Act by relying on a decision of Mumbai Tribunal in the case of Bimal Sevantilal Karodia HUF where the assessee was neither a shareholder nor a beneficial shareholder without considering that in the present case the assessee HUF is a beneficial as well as registered share holder having 37.12% share holding of the company and for this the order passed by the learned Tribunal is perverse and deserved to be set aside ?

         ii) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in placing reliance on a decision of Mumbai Tribunal in the case of Bimal Sevantilal Karodia HUF without considering that the facts of the said case is squarely different from that of the present assessee ?”

2.3       The Court decided the issue (vide order dtd. 13/2/2015) in favour of the Revenue by observing as under:

         “In so far as question Nos.1 and 2 are concerned, Mr. Bharadwaj, learned Advocate appearing for the assessee did not dispute that the Karta is a member of the HUF which has taken the loan from the Company and, therefore, the case is squarely within the provisions of section 2(22)(e) of the Income Tax Act, which reads as follows:

          “any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”

Therefore, question No.1 is answered in the affirmative.

Question No.2 need not be answered. The appeal is thus disposed of.”
2.4   From the above factual position leading to the decision of the High Court, it may be relevant to note that neither the Tribunal nor the High Court has analysed in detail the relevant positions of law for invoking and applying the new Provisions relating to deemed dividend and its application to the facts of the case of the assessee HUF. The Tribunal has merely followed the decision of its co-ordinate bench referred to in para 2.1.2 and the High Court merely stated that the Karta is a member of HUF which has taken a loan from the company and therefore, the case is covered within the new Provisions.

A Report

Golden Jubilee Residential Refresher Course (GJRRC) of
Bombay Chartered Accountants’ Society (BCAS) was held
at ITC Rajputana Palace Hotel, Jaipur from 19th January
2017 to 22nd January 2017. In all, 278 members from 40
cities of India participated to witness this Golden Event.

On the First day, CA. Chetan Shah, President BCAS
welcomed the participants of GJRRC. He introduced CA.
Pinakin Desai, Past President of BCAS who enriched
many members with his profound knowledge and has
presented 28 papers in RRCs. He acknowledged the
efforts of Seminar Committee for raising number of
participants from 225 to 270 to accommodate maximum
members. He highlighted the VISION of the Society to
make optimum use of technology and innovation to reach
out to members across India. He also informed that BCAS
has been selected to impart training on GST with NACEN,
as an “Accredited Training Partner” to the Government of
India.

CA. U day Sathaye, Chairman Seminar Committee
welcomed everybody and explained the importance of
RRCs. He compared RRC to a Guru. He acknowledged
contribution of Paper writers, Group Leaders and Members
in making RRCs a success and highlighted the relationship
that has been developed over many years particularly with
participants from cities other than Mumbai. He appreciated
the response from outstation members which is increasing
every year. He also shared his thoughts about CA. Pinakin
Desai’s contribution in RRCs.

CA. Pinakin Desai, Past President of BCAS inaugurated
GJRRC. He mentioned that in the past, Group Discussion
alone used to expose what is happening around. Now
the scenario has changed. There is a change in subjects,
method of Auditing and Complex Laws are in force. It has
become a necessity that professionals must be techno
savvy. Tax department is tightening the controls, resulting
in the task of professionals becoming difficult. Compliance
of tax laws is becoming burdensome. He concluded with
a clear message that there is a need to be updated on
every front in profession including technology.

The first technical session was chaired by CA. M ayur
Nayak, Past President of BCAS. CA. T. P. Ostwal
answered issues raised by members during Group
Discussion on his paper titled Case Studies on R ecent
Developments and Issues in Cross border Taxation.

In his inimitable style covering day to day issues in the fields
of Equalization Levy, Transfer Pricing, Indirect Transfers,
Residential Status, Place of Effective Management and
Taxability of the Overseas Dividends in the hands of the
Indian shareholders, he dealt with the questions raised
in the case studies along with issues communicated by
group leaders and provided solutions to the problems.

On the Second day, 20th January, 2nd technical session
was chaired by CA. R aman Jokhakar, Past President of
BCAS. CA. H imanshu Kishnadwala presented paper
titled Ind-AS Implementation Issues.

The speaker after initially giving a background on
applicability of IndAS in India and carve-outs from IFRS,
dealt with some issues on IndAS implementation faced
by Phase I companies. He also covered the notification
issued by MCA for companies not covered under IndAS
and who need to follow the ‘upgraded’ standards from 1st
April 2016 onwards.

The Third technical session was chaired by CA. Ashok
Dhere, Past President of BCAS. CA. Pinakin Desai
answered issues raised by members during Group
Discussion on his paper titled Significant Recent
Controversies/Developments under the Income Tax Act –
Case Studies.

The paper writer in his inimitable style explained the various
nuances in interpretation of tax laws. The case studies
were extremely relevant in everyday practice, and the
presentation was extremely useful to all the participants.
In all, the paper as well as the lucid explanations of the
paper writer, was a rich and rewarding experience for the
delegates.

In the evening, all participants visited Chokhi Dhani,
a theme village resort in the outskirts of Jaipur city.
Everybody enjoyed the activities in Chokhi Dhani followed
by sumptuous and tasty Rajasthani dinner. It was really a
memorable evening.

On the Third day, 21st January, the fourth technical session
was chaired by CA. Govind Goyal, Past President of
BCAS. CA. M adhukar H iregange presented paper titled
Role & R esponsibilities of CAs in GST Regime.

He enlightened the participants on the opportunities
available to the chartered accountants in the pre and
post implementation of GST, in the fields like Operational
Consultancy, Network Support and Infrastructure,
Accounting, Compliance, Transitional Support including
Audits/Assurance areas. He felt that Chartered
Accountants are in a better position to assess the impact
of GST on their clients. He enlightened the members
as regards various efforts and initiatives taken by ICAI
by contributing in the law making process. He said this
is a Golden Opportunity for professionals by tracking
development at Industry level and creating awareness by
advising their clients.

The Fifth technical session was chaired by CA. Anil
Sathe, Past President of BCAS. CA. Saurabh Soparkar
answered issues raised by members during Group
Discussion on his paper titled Re-opening and R evision
of Assessments.

The learned speaker, through various case studies,
explained that while the assessment was a concept that
was not new to tax practitioners, it had attained significant
importance in the last decade. He mentioned that earlier,
assessments were the norm and reassessments were
an exception. However in the recent past, the Income
tax Department embarked on reassessments in a large
number of cases, either on account of the scrutiny being
inadequate at the time of assessment or on account of
receipt of information, post-assessment. Judicial forums,
particularly the high Courts and the apex court, looked at
reassessments very seriously and unless the threshold
conditions were satisfied, did not permit the Department
to have a second innings. The Speaker mesmerised
the audience with his command over the subject. His
analysis of the various judicial pronouncements was also
extremely useful.

Golden Jubilee Function

On 21st evening, everyone was waiting eagerly for the
special celebration of the Golden Jubilee RRC. The
function was organised in a different way this year as
compared to similar evening functions at the RRCs in
the past. CA. Nandita Parekh & CA. Ameet Patel, past
president of the BCAS jointly compered the event. They
began by welcoming the Chief Guest Mr. T. N. M anoharan,
Past President of ICAI and Guest of H onour M r. Nilesh
Vikamsey, V ice President of ICAI. Both the guests
addressed the gathering. Mr Manoharan spoke about
his experiences at the past RRCs and he also spoke
about the special qualities of the RRCs organised by the
BCAS. He also spoke about the role played by bodies like
BCAS in the development of the CA profession. Mr Nilesh
Vikamsey too complimented the BCAS on the golden
jubilee of the RRC. He spoke about the recent initiatives
taken by the ICAI for its members. He also cautioned the
delegates about the threat of disruption that technology is
likely to cause amongst the professionals in the country.
He also gave examples of how the ICAI has quickly
responded to the expectations from the Government on
various fronts. Both the guests set the right tone for a
memorable celebration of the GJRRC.

Thereafter, the past chairmen of the Seminar Committee –
CA. Pranay M arfatia, CA. Govind Goyal & CA. R ajesh
S. Shah were felicitated for their contribution to the
RRC. The delegates also remembered the contribution
of Nayan Parikh, another past chairman who could not
remain present on account of health reasons. Rajeev
Shah, convenor of the committee was felicitated for being
a convenor of the committee for 10 years. Vice President
of the Society CA. Narayan Pasari presented his views.

CA. U day Sathaye, Chairman, Seminar Committee was
then felicitated for his contribution in all RRCs. He has
been chairman for 10 RRCs including GJRRC which is the
highest number of chairmanship of Seminar Committee.
He mentioned that the members of the Seminar
Committee take each RRC as a separate programme with
a mission and challenge. He elaborated that the success
of RRCs is achieved with effective Team Management,
Planning, Assessment of Risk, Crisis Management and
Negotiation skills. He gave many examples from earlier
RRCs where members of the Seminar Committee have
overcome various difficulties to provide comfort to the
participants. He acknowledged valuable support of all
previous chairmen of seminar committee namely Late
CA. Shailesh Kapadia, CA. Nayan Parikh, CA. Pranay
Marfatia, CA. Govind Goyal and CA. Rajesh Shah. All
of them had always provided guidance and had actively
participated in all RRCs. He also highlighted the changing face of RRC over last 30 years
in terms of Group Discussion,
Participation of Members
etc. He concluded his views
on a positive note that this
wonderful relationship will
continue with the support of
the members attending RRCs
in future.

Thereafter, several members
were called upon to share their
experiences of the past RRCs.
Some who had come for the
first time also spoke about
their experience of the GJRRC.

The event was made all the more memorable by an Army
Band which marched into the hall in full splendour and
performed some tunes which were enjoyed by all. The
delegates were awed by the ceremonial band.

The event was interspersed with humour and wit and all
the delegates had an enjoyable time.

This celebration function was very ably hosted by CA.
Nandita Parekh and CA. Ameet Patel, Past President of
BCAS.

The finale of the GJRRC was the Panel Discussion on
last day i.e. 22nd January. This was the first time that such
a session was held at the RRC. The experiment was
highly successful. The session was chaired by CA. T.
N. M anoharan. The panelists were CA. Pradip Kapasi,
Past President of BCAS, CA. Gautam Doshi, Past
Chairman of WIRC of ICAI, CA. Dinesh Kanabar and
CA. Sunil Gabhawalla, Joint Secretary of BCAS. The
discussion was moderated by CA. Shariq Contractor,
Past President of BCAS and CA. Jayant Gokhale, Past
Central Council member of ICAI.

The panelists discussed five case studies which covered a
wide range of topics. The large number of issues from the
field of Accounting, Direct Tax, Indirect Tax, International
Tax, FEMA, Stamp Duty etc. were covered extensively by
the panelists.

In the concluding session, CA. U day Sathaye, Chairman
Seminar Committee and CA. Chetan Shah, President
BCAS thanked everybody for making GJRRC a great
success. GJRRC concluded with a commitment to meet
again next year.

SEBI’s Guidance Note On Board Evaluation – Much Needed Road Map

Background

The Securities and Exchange Board of India (SEBI) has issued
a Guidance Note on Board Evaluation on 5th January 2017. While not
intended to act as interpretation of the law, it serves as a great and much
needed road map for implementation of several provisions in the Companies Act,
2013, and SEBI Regulations on corporate governance. Auditors have guidance from
the Institute of Chartered Accountants in respect of several areas of their
work and increasingly Company Secretaries have from their alma mater.
However, the Board of Directors and individual directors generally find their
role, obligations and even liabilities having increased manifold but yet do not
have detailed formal guidance as to how they are to carry on their work. This
knowledge gap is felt even more, since most directors may not be well
conversant with the law.

The Guidance Note, to reiterate, does not have a binding
effect. However, I submit that diligent compliance in letter and spirit can be
a good defence in case of action against independent directors by regulators.
Such action can be expected to be manifold considering that corporate governance
is now a law with severe consequences for violations. Indeed, it is possible, I
submit, as also elaborated later, that gross non-compliance of this Guidance
Note could lead to a presumption of violation.

Overview

Requirements of corporate governance earlier were mainly in
the erstwhile Clause 49 of the Listing Agreement. However, now, they are part
of the statutes and indeed they are not only elaborate and detailed but
overlapping too. They are now contained in the Companies Act, 2013 (“the Act”),
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
(“the Regulations”).

On the subject matter of the Guidance Note, there are
requirements on how the Board, its Committees and its members would be
evaluated, selected, recommended for removal, etc. The requirements of
corporate governance in this sense are intended to be self-regulating. The law
lays down that such evaluation should take place, who should carry out such
evaluation and what should be disclosed in respect of such evaluation. However,
the manner in which the evaluation should be carried out has not been specified
leaving a gap which companies may fill in different ways, some more elaborately
and in detail and some summarily or even perfunctorily. The Guidance Note is
intended to fill this gap to help companies and their boards to carry out this
function.

Requirements of law relating to board evaluation

The law prescribes categories of companies to which the
requirements apply. Some important provisions in such law in relation to Board
evaluation, functions of Board, Committees are as follows:-

1. There has
to be a Nomination and Remuneration Committee. It is this Committee that
carries out functions relating to setting up criteria for selection &
evaluation of Board/Directors and related matters.

2.
Independent Directors are also expected to carry out certain evaluation of the
Board, of non-independent directors, the Chairperson, etc. The
Independent Directors, in turn, are evaluated by the Board as a whole, excluding
the director being evaluated.

3.
Generally, detailed functions of Board are laid down including the manner in
which it will function.

However, as is seen above, the law lays down the basic
structure of who shall perform and what functions shall they perform. How they
should perform is left largely unsaid. The Guidance Note provides these
details.

Aspects covered by the Guidance Note

The Guidance Note covers the following aspects

Subject of Evaluation i.e. who is to be evaluated. This
includes the Board as a collective unit, various Committees, independent
directors, executive/non-executive directors, the Chairman and senior
management.

Process of Evaluation including laying down of objectives
and criteria to be adopted for evaluation of different persons. Depending
on who is to be evaluated, the criteria differs. Thus, the Chairman may be
judged, inter alia, on his leadership qualities. The Board be may judged on how
it performs its strategic functions, how diverse it is in terms of
experience/seniority, cross functional expertise, gender, etc., whether
it allows all members to freely participate, etc. The Independent
Directors would also be evaluated in terms of their distinguishing functions.

Feedback to the persons being evaluated; While the
evaluation may give some clear finding about suitability for continuation or
unsuitability (and hence removal), more often the evaluation may highlight
areas for improvement. Feedback to such persons is helpful.

Action Plan based on the results of the evaluation
process; Post evaluation, a plan would have to be suggested to fill in the
deficiencies observed by training, etc.

Disclosure to stakeholders on various aspects;
This can be critical as evaluation would not only have to be done but seen to
have been done. The law requires that the policy relating to some of the
evaluation parameters should be disclosed in the Board’s Report. However, it
would be up to the Company whether or not the actual results of the evaluation
are disclosed, the action taken on the evaluation, etc. and the Guidance
Note keeps this discretionary.

Frequency of Board Evaluation; The law requires that
the board evaluation has to be done once in a year. The Guidance Note suggests
that this should be a continuous process in terms of regular feedback.

Responsibility of Board Evaluation: As stated earlier,
depending on who is to be evaluated, the person who carries out this evaluation
changes. Obviously, there cannot be self-evaluation as a rule. Indeed, the
person being evaluated is required to be absent when he or she is being
evaluated. There also ought not also be conflict of interest generally. The
Guidance Note places higher emphasis on the Chairman in terms of steering the
process of Board evaluation generally.

Review of the entire evaluation process periodically.
The evaluation process itself needs to be evaluated from time to time! The
manner in which the evaluation is carried out thus requires a periodic review
and improvement.

Internal vs. External evaluation:- Evaluation can be
internal with each group evaluating the other. Internal evaluation has
advantage of familiarity and close observation over extended periods of time.
However, there may be concerns here whether this can result in mutual back-scratching
or even otherwise whether the evaluation is sufficiently
well-informed/professional. External evaluators may not only bring objectivity
but also professionalism as well as experiences from other evaluations.

Evaluation of Committees

The Committees are required to be evaluated in terms of their
constitution, the functions assigned to it, its actual functioning, its
effectiveness in terms of its objectives, etc.

Detailed guide to board functioning

The Guidance Note talks in great detail about the evaluation
of the Board. While this is meant to be a guide to evaluate it, it by itself
serves also as good guidance on how a Board should function. The Guidance Note
throws detailed light on several aspects such as agenda to be circulated
including how early and how detailed, the manner in which discussions take
place and how they are recorded, the role the Board should really play such as
formulating strategy, relation with the CEO and senior management, what role it
should play in risk management, etc. Thus, while serving as a benchmark for
evaluation, it also actually serves as a road map of actual functioning of the
Board.

Consequences of
non-evaluation/non-following of the Guidance Note

The Guidance Note and the covering circular to it of SEBI
clearly specifies that it is intended to provide guidance and is not to be
interpreted as a law. However, consider some consequences of
non-compliance relating to these matters. For example, section 178
(which deals with constitution and role of Nomination and Remuneration
Committee and other matters) has a sub-section (8) that states that in case of
non-compliance, the company is punishable with fine. Further, officers in
default may be punishable with imprisonment upto a year or fine or both. This
may sound fairly serious for a provision relating to corporate governance.
Non-compliance with the SEBI Regulations too has consequences in terms of
penalty and prosecution. SEBI also has powers, and indeed has in the past
applied these powers, to debar persons and has other wide powers too.

It may also happen that wrongdoing in various forms may be
found in a Company. In such an event, the role of every board member would be
examined minutely. If provisions relating to board, directors, etc.
evaluation are not observed, adverse consequences may follow on those who have
defaulted. In such a situation, question will arise whether these provisions
were duly complied with in terms of law.

It is obvious then that the Guidance Note should be taken
seriously. Even if not meant to be a law, it may be a good preliminary
defence of non-compliance if the provisions of the Guidance Note are observed.
Gross non-compliance could be prima facie evidence of violation of the
provisions.

For example, section 178(2) of the Act provides that “the
Nomination and Remuneration Committee…shall carry out evaluation of every
director’s performance”. In context of the Guidance Note, it may not be
sufficient to show that some evaluation was carried out. The evaluation
itself may be questioned if the provisions of the Guidance Note were not
followed and otherwise it was not found to be sufficiently detailed.
Following the Guidance Note may help meet the preliminary onus.

Conclusion

There is criticism, which is valid to an extent, that many
western practices of corporate governance may not have direct application in
India where there is dominant position of Promoters both in terms of large
shareholding and board control. However, even in this context, it is recognised
that corporate governance serves a very valuable purpose. Hence, it is now
implemented not as a voluntary code but as mandatory and comprehensive law. The
liability of the Board, directors generally and, in particular, Independent
Directors, key managerial personnel, is ever increasing. Guidance is thus
needed not just on how they should perform but also, in case of any wrong doing
found, how will their actions – which are often subjective and circumstances
based – be judged.

The Guidance Note serves a good purpose in this.
It will not be surprising if more Guidance Notes will be released in the future
for functioning of other pillars of corporate governance. For example, the role
of the Audit Committee is very important, almost next to the Board itself. A
Guidance Note on how SEBI expects it to function would be helpful as an active
guidance as also a benchmark for defence when things go wrong.

Gratuitous Possession of Property

Introduction

Consider a case of a person who
was in need of a house to stay and some close relative of his helped him by
allowing him to stay gratuitously in his spare house. This person continues
staying in this house for a significantly long period of time due to the
goodwill gesture extended to him by his relative. Since possession is often
considered to be nine-tenths of the law, can he now claim that by virtue of
such a long period of possession, he has acquired a legal right in the property
and hence, he also has a title to the property? Strange as this proposition may
sound, this is a reality which several people are experiencing.

The Delhi High Court had an
occasion to consider a somewhat analogous issue in the case of Sachin vs.
Jhabbu Lal, RSA 136/2016 (analysed in detail in this Feature in the
BCAJ of January 2017). In that case, the Delhi High Court held that in
respect of a self acquired house of the parents, a son had no legal right to
live in that house and he could live in that house only at the mercy of his
parents up to 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.

However, would the position be on
a different footing if a close relative was allowed to stay in a house for a
fairly long period of time out of sympathy, natural love and affection? This
was the issue deliberated by the Supreme Court in the case of Behram Tejani
vs. Azeem Jagani, CA 150/2017 (SC).

Facts of the Case

A person named Mohammed Ali Tejani
(“the deceased”) died, leaving behind a will. Prior to his death, he had a
fractional ownership in various immovable properties, flats in Mumbai. One such
property was a residential flat. The deceased resided in this flat with his
wife and his family members. After his death, his wife and his daughter’s son
(‘grandson’) continued to reside in this flat.

Under his will, the deceased
bequeathed his fractional ownership in all his immovable properties, including
the abovementioned residential flat, to his 4 brothers in equal proportion. He
did not provide for any life interest benefit or carve out any interest in this
flat for his wife or his grandson. The will was sought to be probated.

The grandson prayed before the
Bombay City Civil Court for a temporary injunction restraining the
beneficiaries under the will from dispossessing him and his grandmother from
the aforesaid flat since they were in use and possession of the same.

In reply to this, his 4 grand
uncles, i.e., the deceased’s brothers (also the beneficiaries named by the
deceased under his will) stated that the wife of the deceased was merely
allowed to use and occupy the suit premises by the defendants out of love and
sympathy without any fees or compensation; that the suit premises belonged to
them as co-owners since the testator had bequeathed his right, title and
interest in the building to them. They further stated that nonetheless, out of
sympathy, close blood relationship and out of love and affection, the
deceased’s wife had been allowed to use the suit premises. Further, since she
has no right, title or interest in the suit premises she could have no right to
permit any other person much less her grandson to interfere with the ownership
right of the co-owners. Accordingly, they opposed the grant of any interim
relief to the grandson.

The Bombay City Civil Court
dismissed the injunction prayer of the grandson. It held that the deceased’s
wife herself had no right in this premises. Only on a sympathetic ground she
was allowed to occupy the premises. In such facts, when the grandson came
before the Court claiming equitable relief like injunction, he had to prima
facie show some rights to claim the relief. If protection was asked for,
one must clearly seek ascertaining his legal rights. He merely claimed that he
was residing with his grandmother and if she herself did not have a right in
the property, then an injunction type of a protection could not be granted in
favour of the grandson.

On appeal, the Bombay High Court
overruled the verdict of the City Civil Court and upheld the grant of a
temporary injunction. It held that legal right of possession alone cannot be
the basis unless it is adjudicated, for overlooking the “settled possession”.
While deciding the possession right the City Civil Court had actually given a
finding against the maternal grandmother and decided that even she had no right
to occupy the premises and therefore, there was no question of permitting her
grandson to reside therein. The concept of “settled possession” could not be
equated with in all matters-“legal possession”. It depended upon the facts and
circumstances of a case.

It further held that the lower
Court proceeded on a wrong footing of law that the possession can be granted
only to the person who has a legal right to occupy the premises and no one
else. It felt that the law must take its due course with a foundation to
dispossess the person in possession of the premises only after a due trial. In
view of the same, it was inclined to observe that the order passed by the City
Civil Judge was against the settled principle of law with regard to the
possession of the property. It was however, made clear that the High Court was
only dealing with the protection of the possession of the premises and not the
ownership and/or title of the maternal grandmother of the plaintiff.

Accordingly, the beneficiaries
under the will of the deceased appealed to the Supreme Court.

Supreme Court’s Verdict

The Apex Court analysed the will
and observed that the will bequeathed the entire interest of the deceased in
the immovable properties in favour of his brothers. Neither the deceased’s wife
nor the grandson had any interest in these properties. She did not have any
right qua the premises in question but was permitted to occupy merely
out of love and affection. The status of the grandmother was thus of a
gratuitous licensee and that of her grandson was purely of a relative staying
with such a gratuitous licensee.

The Court referred to its earlier
decision in the case of Rame Gowda (Dead) by LRS. vs. M. Varadappa
Naidu(Dead), 2004(1) SCC 769. In that decision, the Supreme Court dealt
with the issue of settled possession by a person. It referred to Salmond on
Jurisprudence which held “that few relationships are as vital to man as that
of possession, and we may expect any system of law, however primitive, to
provide rules for its protection. . . . . . . Law must provide for the
safeguarding of possession….. Legal remedies thus appointed for the protection
of possession even against ownership are called possessory, while those
available for the protection of ownership itself may be distinguished as
proprietary.”

It also analysed its decision in Lallu
Yeshwant Singh (dead) vs. Rao Jagdish Singh, (1968) 2 SCR 203 where it
was held that the Law respects possession even if there is no title to support
it. It will not permit any person to take the law in his own hands and to
dispossess a person in actual possession without having recourse to a court. No
person can be allowed to become a judge in his own cause. Next, in Nair
Service Society Ltd. vs. K.C. Alexander, (1968) 3 SCR 163, the Apex
Court held that a person in possession of land assumed character of an owner
and exercising peaceably the ordinary rights of ownership has a perfectly good
title against all the world but the rightful owner. When the facts disclosed no
title in either party, possession alone decided. The court quoted Loft’s maxim ‘Possessio
contra omnes valet praeter eur cui ius sit possessionis (He that hath
possession hath right against all but him that hath the very right)‘ and
said, “A defendant in such a case must show in himself or his predecessor
a valid legal title, or probably a possession prior to the plaintiff’s and thus
be able to raise a presumption prior in time”.    

The Court thus held that it was
clear that so far as the Indian law was concerned, the person in peaceful
possession was entitled to retain his possession and in order to protect such
possession, he may even use reasonable force to keep out a trespasser. A
rightful owner who had been wrongfully dispossessed of land may retake
possession if he could do so peacefully and without the use of unreasonable
force. If the trespasser was in settled possession of the property belonging to
the rightful owner, the rightful owner shall have to take recourse to law; he
cannot take the law in his own hands and evict the trespasser or interfere with
his possession. The law will come to the aid of a person in peaceful and
settled possession by injuncting even a rightful owner from using force or
taking law in his own hands, and also by restoring him in possession even from
the rightful owner (of course subject to the law of limitation), if the latter
has dispossessed the prior possessor by use of force. It is the settled
possession or effective possession of a person without title which would
entitle him to protect his possession even as against the true owner. The
concept of settled possession and the right of the possessor to protect his
possession against the owner had come to be settled by a catena of
decisions, such as, Munshi Ram and Ors. vs. Delhi Administration,(1968) 2
SCR 455;Puran Singh and Ors. vs. The State of Punjab (1975) 4 SCC 518 and Ram
Rattan and Ors. vs. State of Uttar Pradesh (1977) 1 SCC 188. The Court
further observed that it was difficult to lay down any hard and fast rule as to
when the possession of a trespasser can mature into settled possession. The ‘settled
possession’ must be (i) effective, (ii) undisturbed, and (iii) to the knowledge
of the owner or without any attempt at concealment by the trespasser. The
phrase ‘settled possession’ did not carry any special charm or magic in it; nor
was it a ritualistic formula which could be confined in a strait-jacket. An
occupation of the property by a person as an agent or a servant acting at the
instance of the owner would not amount to actual physical possession.

It laid down the following tests
which could be adopted as a working rule for determining the attributes of
‘settled possession’ :

(i)   that the trespasser must be in
actual physical possession of the property over a sufficiently long period;

(ii) that the possession must be to
the knowledge (either express or implied) of the owner or without any attempt
at concealment by the trespasser and which contains an element of animus
possidendi. The nature of possession of the trespasser would, however, be a
matter to be decided on the facts and circumstances of each case;

(iii) the process of dispossession
of the true owner by the trespasser must be complete and final and must be
acquiesced to by the true owner; and

(iv) that one of the usual tests to
determine the quality of settled possession, in the case of culturable land,
would be whether or not the trespasser, after having taken possession, had
grown any crop. If the crop had been grown by the trespasser, then even the
true owner has no right to destroy the crop grown by the trespasser and take
forcible possession.

Next, the Supreme Court analysed
the ratio of another of its earlier decisions, Maria Margarida Sequeira
Fernandes and others vs. Erasmo Jack De Sequeira (Dead) through LRS, 2012 (5)
SCC 370. In this case, the appellant was married to a Naval Officer who
was transferred from time to time outside Goa and hence, on the request of her
brother she gave possession of the premises to him as a caretaker. The
caretaker held her property only on her behalf. The brother filed a suit for injunction
against his sister, the legal owner.

The Supreme Court observed that in
civil cases, pleadings were extremely important for ascertaining the title and
possession of the property in question. Possession was an incidence of
ownership and could be transferred by the owner of an immovable property to
another such as in a mortgage or lease. A licensee held possession on behalf of
the owner. Possession was important when there were no title documents and
other relevant records before the Court, but, once they come before the Court,
it is the title which has to be looked at first and due weightage be given to
it. Possession cannot be considered in vacuum. There was a presumption that
possession of a person, other than the owner, if at all it was to be called
possession, was permissive on behalf of the title-holder. Further, possession
of the past was one thing, and the right to remain or continue in future was
another thing. It was the latter which was usually more in controversy than the
former, and it was the latter which had seen much abuse and misuse before the
Courts. A title suit for possession had two parts – first, adjudication of
title, and second, adjudication of possession. If the title dispute was removed
and the title was established, then, in effect, it became a suit for ejectment
where the defendant must plead and prove why he must not be ejected.

In an action for recovery of
possession of immovable property, upon the legal title to the property being
established, the possession of the property by a person other than the holder
of the legal title was presumed to have been under and in subordination to the
legal title. It is for the person resisting a claim for recovery of possession
or claiming a right to continue in possession, to establish that he has such a
right. To put it differently, wherever pleadings and documents established
title to a particular property and possession was in question, it will be for
the person in possession to give sufficiently detailed pleadings, particulars
and documents to support his claim in order to continue in possession.

In Maria Sequeira’s case, the
brother did not claim any title to the suit property. Undoubtedly, the sister
had a valid title to the property which was clearly proved.The lower Courts had
failed to appreciate that the premises in question was given by the sister to
her brother herein as a caretaker.The brother’s suit for injunction against his
sister was not maintainable, particularly when it was established beyond doubt
that he was only a caretaker and he ought to have given possession of the
premises to the sister who was the true owner of the suit property on demand.
Admittedly, he did not claim any title over the suit property and he had not
filed any proceedings disputing the title of the appellant. The Supreme Court
held that an occupation of the property by a person as an agent or a servant at
the instance of the owner will not amount to actual physical possession.

It further held that the
possession of a servant or agent was that of his master or principal as the
case may be for all purposes and the former cannot maintain a suit against the
latter on the basis of such possession. Merely because the plaintiff was
employed as a servant to look after the property, it cannot be said that he had
entered into such possession of the property as would entitle him to exclude
even the master from enjoying or claiming possession of the property or as
would entitle him to compel the master from staying away from his own property.

In Maria Sequeira’s case, the
Court held that Principles of law which emerged were as under:-

(i)   No one acquired a title to the
property if he or she was allowed to stay in the premises gratuitously. Even by
long possession of years or decades, such person would not acquire any right or
interest in the said property.

(ii)  A caretaker, watchman or
servant can never acquire interest in the property irrespective of his long
possession. The caretaker or servant had to give possession forthwith on
demand.

(iii)  The Courts were not justified
in protecting the possession of a caretaker, servant or any person who was
allowed to live in the premises for some time either as a friend, relative,
caretaker or as a servant.

(iv) The protection of the Court
could only be granted or extended to the person who had a valid, subsisting
rent agreement, lease agreement or license agreement in his favour.

(v)  The caretaker or agent held a
property of the principal only on behalf of the principal. He acquired no right
or interest whatsoever for himself in such property irrespective of his long
stay or possession.

Hence, in Maria Sequeira’s case,
the judgment of the lower Courts were set aside and the Supreme Court directed
that the possession of the suit premises be handed over to the sister, who was
admittedly the owner of the suit property.

Accordingly,
after analysing and following the ratio of the above decisions, the Supreme
Court in Tejani’s case, concluded that a person holding the premises
gratuitously or in the capacity as a caretaker or a servant would not acquire
any right or interest in the property and even long possession in that capacity
would be of no legal consequences. In the circumstances, the City Civil Court
was right and justified in rejecting the prayer for interim injunction and that
decision was correct. However, it clarified that the matter having come up
before the Supreme Court from an interim order and since the main suit itself
was pending, observations made by it were not to be taken as concluding the
controversy and the merits of the matter will be gone into by the Court at the
appropriate stage.

Conclusion

It is apparent that a gratuitous possessor can
claim no vested right in the legal owner’s property. This clear cut verdict
helps to clarify matters. This decision read with the Delhi High Court’s
decision that an adult son cannot claim that he has a legal right to stay in
his parents’ home would go a long way in resolving several possession disputes.

19. [2017] 77 taxmann.com 166 (Ahmedabad – Trib.) DCIT vs. Bombardier Transportation India (P.) Ltd. A.Ys.: 2013-14, Date of Order: 3rd January, 2017

Sections – 9(1)(vi) / 9(1)(vii) of the Act,
Article 12 of India-Canada DTAA – Use of certain equipment in course of
rendition of services does not result in any use of or right to use the
equipment for recipient of service. Hence, payment for such services cannot be
treated as royalty

Facts 1

The Taxpayer, an Indian company, was a
member-company of an international Group engaged in the business of
manufacturing and supply of rail transportation system. It was a wholly owned
subsidiary of a Singapore based Group Company. During the relevant assessment
year, Taxpayer had made payments to its Canadian Group Company towards its
share of costs in relation to the information system support services availed
by Canadian company at group level.

Before the AO the Taxpayer contended as
follows.

–  The
payments were made towards information system support services at group level.
The amounts were determined on the basis of cost allocation. The Taxpayer
contended that the since the payments were in the nature of reimbursements,
they could not partake the character of income.

–  Provisions
of section 9(1)(vi) of the Act treating the payments as ‘royalty’ could not be
invoked unless there was transfer of all or any of the rights (including
granting of any license) in respect of copyright of a literary, artistic or
scientific work.

–  Additionally,
in terms of Article 12(3) of India-Canada DTAA, only payments having an element
of use of IPRs could be considered as royalties whereas the impugned payments
were for standard facilities. Further, the Canadian company had not received
any payment for commercial exploitation of copyright embedded in the
applications.

–  Hence,
such payments did not qualify as ‘royalty’.

     However, the AO concluded
that the impugned payments were consideration for “use or right to use any
industrial, commercial or scientific equipment” and hence, taxable u/s.
9(1)(vi) of the Act as well as article 12(3)(b) of India-Canada DTAA. After a
detailed analysis of the payments, he was of the view that a major portion of
the payment was for the use or right to use industrial, commercial or
scientific equipment.

Held 1

(i)  The payments made by the
Taxpayer to Canadian company were in the nature of reimbursements based on cost
allocations and did not involve any income element.

(ii) Though rendition of
service may involve use of certain equipment it does not result in any use of
or right to use the equipment. Even if a part of consideration could be said to
be on account of use of equipment by breaking down all the components of
economic activity for which consideration is paid, it is neither practicable,
nor permissible, to assign monetary value to each of the components and
consider that amount in isolation for deciding character of that amount.

(iii) Even if the payment is
considered as payment for use of software, in absence of transfer of copyright,
it cannot be treated as royalty.

(iv) In Kotak Mahindra
Primus Ltd vs. DDIT [(2007) 11 SOT 578 (Mum)], deciding on a similar issue,
the Tribunal observed that the Indian company did not have any control over, or
physical access to, the mainframe computer in Australia, and that since the
payment was for specialised data processing, there cannot be any question of
payment for use of the mainframe computer.

(v) Thus, even if one were to
proceed on the basis that equipment was used in rendition of services, such
payment, or part thereof, cannot be treated as payment for use of equipment.
Further, details furnished by the Taxpayer support the fact of reimbursement.
Hence, the payment was not FTS. In absence of any income embedded in
reimbursement payment, question of withholding of tax did not arise.

Facts 2

The Taxpayer
additionally availed administrative, marketing and procurement services from
the Canadian company. AO contended that the services rendered by the Canadian
company were technical in nature and such services made available, technical,
knowledge, skill and experience to the Taxpayer. Hence, payment for such
services was covered as FTS under article of India-Canada DTAA.

Held 2

(i)  Article 12(4)(a) could be
invoked only if the services provided, inter alia, “make available”
technical knowledge, experience, skill, know-how, or processes or consist of
the development and transfer of a technical plan or technical design.

(ii) The services provided by
the Canadian company were simply management support or consultancy services
which did not involve any transfer of technology. The AO had also not contended
that the recipient of service was enabled to perform these services on its own
without any further recourse to the service provider.

(iii) In this context the
connotation of the expression ‘make available’ needs to be examined. Technology
is “made available” when the person acquiring the service is enabled to apply
the technology. in CIT vs. De Beers India Pvt. Ltd [(2012) 346 ITR 467
(Kar)], the Court held that the technical or consultancy service rendered
should be such that it “makes available” (i.e., imparts) technical knowledge,
etc. to the recipient whereby he could derive enduring benefit and utilise the
knowledge or know-how on his own in future without the aid of the service
provider.

(iv)  Since
the aforementioned tests were not satisfied in case of the Taxpayer, the
payment for services could not be considered as FIS. The fact that the services
rendered involved provision of certain technical inputs and that such inputs
resulted in providing value addition to the Taxpayer, was not relevant in
determining if make available condition is satisfied or not.

Section 35DDA and Payments under Voluntary Retirement Scheme

ISSUE FOR CONSIDERATION

Section 35DDA provides for a deduction, of one-fifth of the amount of an expenditure, on payment of any sum to an employee, in connection with his voluntary retirement in accordance with the scheme for such retirement. The balance expenditure is allowed to be deducted, in equal instalments, for each of the four succeeding previous years. The section also contains a disabling provision, that provides that no deduction shall be allowed for an expenditure on voluntary retirement referred to in section 35DDA. It however does not prescribe any condition that requires to be incorporated in the scheme, nor does it require the scheme to be approved by any authority.

Section10(10C) confers an exemption from income tax for a receipt , in the hands of an employee, on his retirement, up to Rs. 5 lakh under a voluntary retirement scheme that is framed as per the guidelines prescribed in Rule 2BA.

An interesting issue has arisen about the application of section 35DDA to a payment of an expenditure under a scheme of voluntary retirement which is not framed as per the guidelines prescribed under Rule 2BA. In such circumstances, whether the deduction for expenditure would be restricted to one-fifth or not is an issue over which conflicting views are available. The issue that arises, in the alternative, is about the deduction in full of the amount of expenditure u/s. 37 of the Act.

While the Delhi bench of the Income tax Appellate Tribunal has held that for a valid application of section 35DDA, it was necessary that the scheme was framed as per the guidelines prescribed under Rule 2 BA, the Mumbai bench held that the provisions of section 35DDA applied once the payment was made under a scheme, even where the scheme did not meet the requirements of rule 2BA. When asked to address the issue of full deductibility, the Delhi bench held that the deduction was possible provided the expenditure was of revenue nature. The Mumbai bench however held that the expenditure was to be amortised for deduction in five equal annual instalments.

WARNER LAMBERT’S CASE
The issue arose in the case of DCIT vs. Warner Lambert (India) (P) Ltd., 33 taxmann.com 686(Mum.) for A.Y. 2003-04. The assessee company in that case was engaged, inter alia, in the business of trading, importing, marketing, manufacturing and sale of ayurvedic medicines, breath fresheners, chewing gums and drugs. It had claimed 100% deduction for payment made to an employee of an amount of Rs. 17 lakh who had opted to retire on account of restructuring of the business of the company . It explained that the said expenditure was not in accordance with the scheme of voluntary retirement to which provisions of section 35DDA applied and, accordingly, the said amount had been claimed in full. The AO observed that the said expenditure was incurred clearly under the voluntary retirement scheme and was to be allowed, as per section 35DDA, at one-fifth of the claim spread over a period of five years. The assessee pointed out that the claim was allowable u/s. 37(1) of the Act. The AO however, applied the provisions of section 35DDA by holding that the said provisions included payment of an expenditure under schemes of any nature for granting voluntary retirement to employees prior to its actual retirement date. According to the A.O, it was not material that the schem was framed under the prescribed guidelines of rule 2BA.

In appeal, the CIT(A) observed that the AO had not brought any material on record to show that the assessee had paid any compensation under the existing scheme. He further held that since the assessee had himself contended that payment was not under any scheme of voluntary retirement, the applicability of provisions u/s. 35DDA merely on presumption was not justified.

In appeal to the Tribunal by the Income tax Department, it was submitted by the Revenue that a specific bar had been imposed for not allowing deduction under any other provisions of the Act vide section 35DDA sub-section (6), for an expenditure covered by sub-section (1) of section 35DDA and as such the assessee could not have resorted to section 37(1) of the Act for claiming the deduction. It was pointed out that w.r.e.f 1st April, 2004 on substitution of the words ‘in connection with’ for ‘at the time of”, the amount that has been paid ‘in connection with’ voluntary retirement scheme was covered by the provisions of section 35DDA and only one-fifth of the amount paid could be allowed as a deduction. It was further submitted that no approval of any competent authority was required for the voluntary retirement scheme adopted by the assessee.

In reply, the assessee submitted that no formal scheme had been adopted by the company and only an option was given to those employees who were not absorbed, on reorganisation, to opt for VRS which was to be considered in the overall context. It was further explained that the scheme contemplated u/s. 35DDA was the same as in section 10(10C) and, therefore, for invoking section 35DDA, it was necessary that the scheme adopted by the company confirmed with the requirements set out in R. 2BA and as no such scheme was framed, the provisions of section 35 DDA were not applicable.

The honourable Tribunal was not inclined to accept the plea of the Income tax Department to the effect that the provisions of section 35DDA were applicable because the payment had been made in pursuance to a scheme of voluntary retirement and that it was not necessary that the said scheme should have also complied with the guidelines prescribed under Rule 2 BA r.w.s. 10 (10C) of the Act. It stated that on a bare perusal of the section, it was revealed that the provisions of the section were attracted only when the payment had been made to an employee in connection with his voluntary retirement, in accordance with any scheme of voluntary retirement. It observed that the legislature inserted the section in order to allow only one-fifth of the total expenditure since the payment reduced the burden on the assessee relatable to subsequent years.

In order to resolve the dispute, the honourable Tribunal held that the principles of harmonious construction of statute were to be applied which required that a statute be received as a whole and one provision of the Act should be in conformity of the other provisions in the same Act so as to ensure uniformity in interpretation of the whole statute. It further observed that the provisions relating to voluntary retirement scheme were contained in section 10(10C) and all the conditions laid down therein had to be fulfilled before an exemption could be availed by an employee under the said section; that the income and expenditure go together in the scheme of the Act; that it was difficult to appreciate that a claim for an expenditure could be held to be covered by section 35DDA whereas while allowing exemption of the same expenditure in the hands of the payee, only those claims were entertained which confirmed to the guidelines laid down under r. 2BA; that the language in sections 35DDA and 10(10C), clearly referred to a scheme or schemes of voluntary retirement; though it was true that section 35DDA did not specifically refer to section 10(10C) but principles of harmonious construction required that the conditions as laid down under Rule 2BA had to be met before a deduction u/s. 35DDA could be allowed.

The Tribunal noted that the scheme adopted by the assessee did not confirm to the guidelines laid down under Rule 2BA and therefore, it could not be held that the provisions of section 35DDA were applicable in the company’s case. The claim made by the company for deduction u/s. 37 was accordingly upheld by the tribunal.

SONY INDIA’S CASE
The issue arose again in the case of Sony India (P) Ltd., 21 taxmann.com 224 (Delhi) for assessment year 2005-06.

In that case the assessee company, on closure of one of its units, had floated a VRS scheme for employees of said closed unit and one-fifth of the payments made there under was claimed u/s. 35DDA. The A.O however, observed that for claiming deduction under s.35DDA provisions of rule 2BA were to be satisfied; as the assessee’s VRS scheme was not framed in accordance with Rule 2B, VRS expenditure claimed by assessee were liable to be disallowed. The assessee had claimed one-fifth of the amount of expenditure incurred on payment under the voluntary retirement scheme of the company to its employees and claimed that such an expenditure was to be allowed as per section 35DDA of the Act. The expenditure so claimed was disallowed by the A.O in assessment. Amongst the different reasons, one of the reasons of the AO, for disallowance of the claim of one-fifth of the expenditure on payments to employees under the voluntary retirement scheme, was that the scheme was not framed as per the guidelines prescribed under Rule 2BA.

The assessee, in the alternative, pleaded that the expenditure was otherwise deductible u/s. 37(1) but the A.O rejected the said plea by holding that the expenditure was incurred for achieving a benefit of enduring nature and as such it was capital in nature; the expenditure on VRS was to reduce the staff strength with a view to achieve viability and profitability of business, benefit of which was to endure over a number of years. the said expenditure could not be allowed u/s. 37(1) but was allowable only u/s. 35DDA.

On appeal by the assessee, the Commissioner (Appeals) came to the conclusion that the said expenditure was not in respect of retrenchment of employees of closed unit but the said expenditure was incurred in terms of the VRS. However, the VRS was not in accordance with rule 2BA. Therefore, the Commissioner (Appeals) held that the expenditure had been incurred to sustain the business for a longer period of time resulting in a benefit of enduring nature and thus, was capital in nature. Accordingly, the appeal of the assessee was dismissed on that ground.

On further appeal, amongst the other grounds, the assessee placed the following grounds before the Tribunal; Whether the Commissioner (Appeals) was unjustified in reading the conditions of Rule 2BA in section 35DDA? Whether VRS expenditure was otherwise allowable as deduction u/s. 37(1)?

The Tribunal noted that in the Bill, leading to enactment of section 35DDA, a provision was made regarding the application of Rule 2BA which portion was deleted when the Bill was passed and, thus, the conditionalities of the rule had not been incorporated intentionally in the section; the deletion of conditionalities originally incorporated in the Bill showed that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA; the legislature left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme; the plain language of the provision supported the case of the assessee; that it was not simply the case of taking guidance from a definition section but required modification of the provisions of section 35DDA by incorporating a part of section 10(10C) in it which incorporation did not find support from any rule of construction. The Tribunal held that there was no compelling reason to read section 35DDA as suggested by the revenue and therefore, the scheme of the assessee was held to be a VRS, to which the provisions of section 35DDA was applicable.

Dealing with the claim for the deduction u/s. 37(1) of the Act, the Tribunal noted the observations made by the Kerala High Court in the case of CIT vs. O E N India Ltd., 8 taxman.com 246 and in particular the following observations while allowing the deduction in full following the various court decisions. “It is mentioned that the test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature depends upon the finding as to whether the assessee has created any fixed asset or not. If an asset has been created, the expenditure will certainly be capital in nature. Where the expenditure does not lead to creation of a fixed asset, the expenditure is generally revenue in nature. However, creation of an asset is not a mandatory requirement. The expenditure incurred for achieving a benefit of enduring nature is also capital in nature. When this test is applied, it is felt that the purpose of introduction of VRS is to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment will give long-term benefit to the assessee. The VRS floated with a view to encourage massive retirement is primarily to streamline the business by restructuring the work force with a view to increase profitability and to make the business viable. Therefore, the benefit will endure over a number of years to come. Accordingly, the payment under the VRS for retirement of a number of employees is nothing but a capital expenditure which could be claimed as a deduction in a phased manner over several years. It is for the assessee to provide rational basis to ascertain the number of years over which the benefit endures and accordingly write off the amount of expenditure by amortizing it over those number of years. Section 35DDA is a virtual declaration of the fact that the expenditure should not be allowed in one year and it has to be amortized over a few years. Therefore, even prior to introduction of section 35DDA, the assessee was entitled to claim deduction of expenditure in a phased manner over a number of years which have to be rationally fixed by the assessee.” The Tribunal noted that the having stated so, the court abundantly made it clear that the aforesaid had been stated only with a view to express the opinion of the court and it was not intended to disturb the settled position through various high courts’ decisions, which had not been contested before the Supreme Court. The court held that the entire amount paid under the VRS had to be held to be revenue in nature to bring in line its decision with the decisions of various high courts.

The Tribunal however held that the assessee was entitled to deduction of one-fifth of the expenditure u/s. 35DDA as claimed for the reason that it had failed to establish that the expenditure was not capital in nature. According to the Tribunal, the facts suggested that the payment was made on closure of an unit and such payment was to be held to be on capital account unless it was established by the assessee that the business of the unit closed was closely interlaced and interlinked with the business continued by the assessee.

OBSERVATIONS
Section 35DDA (1) of the Act reads as under; “Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of( in connection with) his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.”

The relevant part of section 10(10C) reads as under :” any amount received or receivable by an employee of- (i)………. (ii) any other company; or ….. on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or ……, to the extent such amount does not exceed five lakh rupees. Provided that the schemes of the said companies or ……….., governing the payment of such amount are framed in accordance with such guidelines including inter alia criteria of economic viability as may be prescribed (rule 2BA) .”

On an apparent reading of section 35DDA, what one gathers is that for a valid application of section 35DDA, the payment of expenditure to an employee should have been made in connection with his voluntary retirement under a scheme of such retirement. On fulfilment of these conditions, one-fifth of the expenditure would fall for allowance in the year of payment and the balance will be allowed in four equal annual instalments.

The section by itself does not prescribe that the scheme should have been framed as per guidelines prescribed rule 2BA. As long as the payment (not revenue in nature) is made under a scheme for voluntary retirement, the case for deduction should be governed by the provisions of section 35DDA and if so no deduction shall be allowed under any other provisions of the Income Tax Act. For the purposes of claiming an exemption u/s. 10(10C), in the hands of an employee, it is however essential that the receipt is under a scheme i.e. framed as per the guidelines prescribed under Rule 2BA.

It is the above noted distinction between the two provisions of the Act, one dealing with the payment and the other dealing with the receipt that prompted the tribunal in the Warner Lambert’s case to recommend a harmonious reading of section 35DDA & 10(10C) so as to include only such payments within the ambit of section 35DDA which are made under a scheme that meets the guidelines of Rule 2BA , and that the deduction is not to be restricted to one-fifth of the amount of expenditure but may qualify for a full deduction provided of course it is otherwise allowable. With utmost respect there is nothing in section 35DDA that stipulates reading in the manner that requires that the scheme referred to in section 35DDA should be so framed so as to meet the conditions of rule 2BA. Likewise there is nothing in section 10(10 C) that provides that the receipt by an employee should be from an employer whose case is covered by section 35 DDA . In our respectful opinion, the provision of these sections are independent of each other and operate in different fields even through both of them deal with the common subject of voluntary retirement. Accordingly the Tribunal in Sony India’s case was right in holding that scheme referred to in section 35DDA need not have been framed as per the guidelines prescribed under Rule 2BA.

The Finance Bill, leading to enactment of section 35DDA, contained a provision that required that the scheme referred to in section 35DDA is framed as per Rule 2BA however, the said requirement was omitted when the Bill was enacted and with this the condition for application of the rule was not retained intentionally in the section. The deletion of the condition originally incorporated in the Bill showed that legislative intent was not to incorporate all the conditions of section 10(10C) in section 35DDA. The legislature has consciously left the scheme of voluntary retirement, referred to in section 35DDA, open-ended and has not place any restriction on the scheme. The plain language of the provision supports the case of literal interpretation and that it is not simply the case of taking guidance from another provision of the Act for its understanding but requires a modification of the provisions of section 35DDA by incorporating a part of section 10(10C) in it which incorporation amount to doing violence to the language of section 35DDA and does not find support in any rule of construction. There is no compelling reason to read section 35DDA as being suggested by a few.
 
The disabling provisions of section 35DDA(6) can not help the case of mandatory application of section 35DDA in all cases of payment on voluntary retirement so as to restrict the deduction to one-fifth of the expenditure even where the expenditure is otherwise allowable in full. In our opinion, the provision of s/s. (6) has a limited application to only such cases which are otherwise covered by the provisions of s/s.(1). In other words, the expenditure of revenue nature should be deductible in full u/s. 37 of the Act and only those which do not so qualify for full deduction will be governed by section 35DDA. It is this larger issue, about the eligibility of an expenditure on payment of compensation towards voluntary retirement for deduction in full, u/s. 37, on being established that it is an expenditure wholly and exclusively incurred for the purposes of business, has remained to be directly addressed. It is possible that a payment of the nature being discussed would qualify for a full deduction once it is established to be of a revenue nature. The scope of section 35DDA should be restricted only to such expenditure that are otherwise not allowable under the provisions of section 37 of the Income-tax Act.

The test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature. Applying the test depends upon the finding as to whether the expenditure incurred has the effect of achieving a benefit of enduring nature and if yes, it is capital in nature.

When that test was applied, it was felt that the purpose of introduction of VRS was to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment would give long-term benefit to the assessee. It is for the assessee to provide a rational basis to ascertain whether the benefit is of enduring nature and even if not so, it is otherwise allowable in the year in which it is incurred. Section 35DDA is not a virtual declaration of the fact that the expenditure should not be allowed in one year and it has to be amortised over a few years.

22. [2017] 78 taxmann.com 123 (Mumbai – Trib.) Goldberg Finance (P.) Ltd. vs. ACIT ITA No. : 7496 (Mum) of 2013 A.Y.: 2009-10 Date of Order: 19th January, 2017

Section 115JB – Clause (iic) inserted in Explanation 1 to
section 115JB by the Finance Act, 2015 is remedial and curative in nature and
is to be reckoned as retrospective. It was never the purpose of the Act to tax
any income or receipts which is otherwise not taxable under the Act.

FACTS 

During the previous year relevant to AY 2009-10 the assessee
company was a member of two AOPs viz. Cosmos Estate and Cosmos Properties. The
assessee received share of income amounting to Rs. 54,58,717 from Cosmos
Properties. This amount was credited to Profit & Loss Account. Since the
amount was credited to P & L Account, the Assessing Officer (AO) charged it
to tax u/s. 115JB of the Act. 

Aggrieved, the assessee preferred an appeal to CIT(A) who
confirmed the action of the AO by relying on the order of the Tribunal, for
earlier year, in case of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that Clause (iic) inserted by the Finance Act, 2015 w.e.f.
1.4.2016 provides that the amount of income being share of the assessee in the
income of the AOP on which no income tax is payable in accordance with the
provisions of section 85 and any such amount is credited to P&L account,
then same shall be reduced while computing the book profit is curative in
nature and should be applied retrospectively. It was also contended that this
amendment is subsequent to the decision of the Tribunal, in the case of
assessee, for earlier year.

HELD 

The intention of the legislature which can be gauged by the
Explanatory notes to the amending Act, was to provide similar remedy which was
applicable to the partners whose share income from the profit of the firm was
not liable to MAT. If an amendment in law has been brought by the legislature
in the statute which is curative in nature, to avoid unintended consequences
and to provide similar benefit to other class of assessee, then it has to be
treated as retrospective in nature even though it has not been stated
specifically by the amending Act. Clause (iic) inserted in Explanation 1 to
section 115JB by the Finance Act, 2015 is remedial and curative in nature as it
was brought in the statute to provide similar benefit to the member of the AOP
which was earlier applicable to the partner of the firm, therefore, it is to be
reckoned as retrospective. 

The legislature by this amendment has thus removed this
imparity between two classes of assessees so that mischief or prejudice caused
to other class of assessees should be removed. The mischief which has been
sought to be remedied is that the share income of the member of the AOP which
was not taxable in terms of section 86 was getting taxed under MAT while
computing the book profit. This was also never the purpose of section 115JB to
tax any income or receipts which is otherwise not taxable under the Act. Any
remedy brought by an amendment to remove the disparity and curb the mischief
has to be reckoned as curative in nature and hence, is to be held
retrospectively.

This ground of appeal
filed by the assessee was allowed by the Tribunal.

21. [2017] 78 taxmann.com 152 (Kolkata – Trib.) Twenty First Century Securities Ltd. vs. ITO ITA Nos. 464 & 465 (Kol) of 2014 A.Ys.: 2008-09 & 2009-10Date of Order: 3rd February, 2017

Sections 197, 201(1A) – Certificate u/s. 197 is with
reference to the person to whom the income is paid and is not with reference to
any sum as may be specified in the certificate. Levy of interest u/s. 201(1A)
cannot be sustained on the amount of tax not deducted on difference between the
amount paid to the assessee and the amount stated in the certificate.

FACTS 

The assessee company paid interest to two persons who had
obtained certificate u/s.197 of the Act authorizing the assessee to deduct tax
at lower rate. The amount of interest paid by the assessee to these two persons
exceeded the amount mentioned in the certificate issued u/s. 197. The assessee,
however, deducted tax at a lower rate on the entire amount paid. The Assessing
Officer (AO) held that the assessee ought to have deducted tax at normal rate
on the amount of interest in excess of what was stated in the certificate
issued u/s. 197. The AO levied interest u/s. 201(1A) on amount of tax short
deducted.

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 after going through the provisions of section
197, section 201(1) & 201(1A) and Rule 28AA held that the statutory
provision of deduction of tax at source at lower rate is “person specific” and
cannot be extended to the amounts specified by the recipient of the payment
while making an application for grant of certificate u/s. 197 of the Act in
Form No. 13. The Tribunal observed that the AO has annexed the details in
Schedule II of Form No. 13 to the certificate issued u/s. 197 of the Act. It
held that by doing so, the AO cannot treat the assessee as a person who has not
deducted tax at source to the extent of payments made by the assessee over and
above the sum specified in the certificate u/s. 197 of the Act. It concurred
with the arguments on behalf of the assessee that the certificate u/s. 197 of
the Act is with reference to the person to whom the income is paid and not with
reference to any sum as may be specified in the certificate. It held that,
therefore, the assessee cannot be treated as a person who has not deducted tax
at source on the difference between the amounts specified in the certificate
issued under s.197 of the Act and the amounts actually paid by the assessee.
Consequently, the levy of interest u/s. 201(1A) of the Act was held to be
unsustainable and directed to be deleted.

The appeals filed by
the assessee were allowed.