BCAJ | Bombay Chartered Accountant Journal

Allowability Of Interest On Delayed Payment Of Tax Deducted At Source

Issue for Consideration

Chapter XVII of the
Income-tax Act, 1961 contains several provisions for collection and recovery of
tax, by way of Tax Deduction at Source (‘TDS’) and Tax Collection at Source
(‘TCS’), by the payer and the receiver respectively. The payer and receiver are
also tasked with remitting the TDS and TCS to the government, filing periodic
statements and issuing certificates in respect of the same. Interest is levied
u/s. 201(1A), on the payer/receiver, for the period of delay in case of
non-deduction or collection of tax, or for failure to pay the same as required
by the Act.

Section 37(1) of the Act
provides for allowance of a deduction in respect of any expenditure, which is
not dealt with in sections 30 to 36 and is not in the nature of capital
expenditure or personal expenses of the assessee, but is laid out or expended
wholly and exclusively for the purposes of the business or profession.

Further, Explanation 1 to
section 37(1) declares that, for the removal of doubts, any expenditure
incurred by an assessee for any purpose which is an offence or which is
prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and no deduction or allowance shall be made in respect
of such expenditure.

Four attributes emerge from
the provisions of section 37 as being essential for claiming deduction in respect
of any expenditure in computing the income under the head “Profits and gains of
business or profession” –

1) It
must not be capital in nature;

2) It
must not be personal in nature;

3) It
must be laid out or expended wholly and exclusively for the purposes of
business or profession; and

4) It
must not be incurred for a purpose which is an offence or which is prohibited
by law.

In
claiming the deduction u/s. 37(1) for interest u/s. 201(1A), an issue arises as
to whether such interest can be considered to be incurred wholly and exclusively for the
purpose of business or profession.

Conflicting decisions of
the different benches of the Tribunal, delivered in recent times, have
reignited the controversy. The Ahmedabad bench has, in two separate decisions,
taken a view that no deduction can be allowed in respect of such interest and
the Kolkata bench, on the other hand, has upheld the allowability of deduction
of interest in a recent decision.

Shree Saras Spices & Food P.
Limited’s case

The issue came up before
the Ahmedabad bench of the Tribunal in the case of Shree Saras Spices &
Food P. Limited vs. DCIT ITA Nos. 2527/Ahd/2010 and 1220/Ahd/2012 for
assessment years 2007-08 and 2009-10.

In the said case, the
assessee had claimed deduction in respect of interest on TDS. The A.O.
disallowed the same. The assessee challenged the addition before the CIT(A),
who dismissed the appeal and confirmed the action of the A.O., relying on the
Supreme Court decisions in the case of East India Pharmaceutical Works Ltd.
vs. CIT (1997) 224 ITR 627 (SC) and Bharat Commerce & Industries
Ltd. vs. CIT (198) 230 ITR 733 (SC). The CIT(A) observed that interest was
paid on TDS only upon late payment to the Government treasury, which implied that
the assessee had utilised Government funds and paid interest as a compensation
for enjoyment of the amount due to the Government.

On second appeal by the
assessee, the Tribunal also noted that the assessee had used the Government
money for its own purposes and interest on late payment of TDS was not
allowable as was held in East India Pharmaceutical Works Ltd. vs. CIT
(supra) and accordingly, dismissed the appeal.

The issue of allowability
of interest on late payment of TDS was also examined by the Ahmedabad bench in
an earlier decision in the case of ITO vs. Royal Packaging ITA No.
1363/Ahd/2010 for assessment year 2005-06.

In that case, interest on
TDS was disallowed by the A.O. on the ground that since TDS was not allowable,
interest on same was also not allowable. On appeal before the CIT(A), it was
argued by the assessee that since interest received on tax refund was taxable,
in the same manner, interest on late payment of TDS was an allowable expense.
The CIT(A) accepted the contention of the assessee and deleted the addition
made by the A.O.

On further appeal, the
Tribunal relying on the Supreme Court decision in the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), held that interest on late
payment of TDS is also not allowable and restored the disallowance made by the
A.O.

Narayani Ispat Pvt. Ltd.’s case

Recently, the issue had
once again arisen before the Kolkata bench in the case of DCIT vs. Narayani
Ispat Pvt. Ltd. ITA No. 2127/Kol/2014 for assessment year 2010-11.

In that case, interest on
late payment of service tax and TDS was claimed by the assessee as a part of
its interest and finance expenses. However, the A.O., relying on the Supreme
Court decision in the case of Bharat Commerce & Industries Ltd. vs. CIT
(supra), disallowed the claim of interest.

The assessee preferred an
appeal against the addition before the CIT(A), wherein it was pointed out that
in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra),
the disallowance was made in respect of interest u/s. 215 of the Act due to
delay in the payment of income tax on the income disclosed under Voluntary
Disclosure of Income and Wealth Act, 1976, which was different from the
interest u/s. 201(1A) on late deposit of service tax and TDS. The assessee
relied on the decision of the Karnataka High Court in the case of CIT vs.
Mysore Electrical Industries Ltd. 196 ITR 884 (Kar), where interest for
failure to pay PF contribution was held deductible, and also on the Supreme
Court decision in the case of Lachmandas Mathura Das vs. CIT 254 ITR 799 (SC),
where interest on sales tax arrears was held deductible. Accepting the
arguments of the assessee, the CIT(A) held that the impugned interest expense
was incurred wholly and exclusively for the purpose of business and was thus,
allowable.

The Tribunal, in further
appeal by the Revenue discussed the judgement in the case of Bharat Commerce
& Industries Ltd. vs. CIT (supra) in detail and distinguished its facts
since it dealt with interest on delayed payment of income tax, whereas in the
appeal before the tribunal, interest was paid for delayed payment of service
tax and TDS. The Tribunal observed that interest for delay in making payment of
service tax and TDS was compensatory in nature and not in the nature of
penalty. It also delved upon the decision of the Supreme Court in the case of Lachmandas
Mathura Das vs. CIT (supra), and held that its principles can be applied to
interest on delayed payment of TDS, noting that interest on late payment of TDS
related to expenses claimed by the assessee which were subjected to the TDS
provisions and that TDS did not represent tax of the assessee, but rather the
tax of the payee. The deduction allowed by the CIT(A) in respect of interest on
TDS was thus upheld by the Tribunal.

Observations

The issue under
consideration is relevant for a large number of assessees.

Section 40(a)(ii) of the
Act expressly provides for disallowance of any sum paid on account of any rate
or tax levied on the profits or gains of any business or profession under the
head ‘Profits and Gains of Business Profession’. The case for disallowance of
income tax levied on the profits and gains of the business or profession is
thus specifically settled by the express provisions of the Act. Similarly
settled by the decisions of the Supreme Court, is the proposition of the law
that any interest paid for delay in payment of income tax on profits and gains
of business or profession is also not deductible in computing the profits and
gains of business. It is also settled that any interest paid on borrowings made
for payment of such income tax is also not deductible in computing such profits
and gains of business.

In the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), the assessee, a
manufacturing company, had claimed deduction in respect of interest on delay in
payment of advance tax u/s. 37(1) of the Act on the ground that delayed payment
of taxes resulted in increase in the assessee’s financial resources, which
became available for its business. The assessee also contended that the
interest paid to the Government represented in effect, the interest on capital
that would have been borrowed by it otherwise and thus, it was an expense
incurred wholly and exclusively for the purpose of its business.

The Apex Court observed as under –

“When interest is paid
for committing a default in respect of a statutory liability to pay advance
tax, the amount paid and the expenditure incurred in that connection is in no
way connected with preserving or promoting the business of the assessee. This is
not expenditure which is incurred and which has to be taken into account before
the profits of the business are calculated. The liability in the case of
payment of income- tax and interest for delayed payment of income-tax of
advance tax arises on the computation of the profits and gains of business. The
tax which is payable is on the assessee’s income after the income is
determined. This cannot, therefore, be considered as an expenditure for the
purpose of earning any income or profits.”

The Supreme Court, in the
said case, in conclusion, held that the interest levied u/s. 139 and section
215 of the Income-tax Act was not deductible as a business expenditure u/s.
37(1) of the Act. The court in that case held that the income tax was a tax on
profit of the business and was therefore not allowable as a deduction.
Similarly, interest also was not deductible as the same was inextricably
connected with the assessee’s tax liability; if the income tax was not a
permissible deduction u/s. 37, any interest payable for default in payment of
such income tax could not be allowed as a deduction. In arriving at the
conclusion, the court followed its own decision in the cases of East India
Pharmaceutical Works Ltd, 224 ITR 627 and Smt. Padmavati Jaikrishna, 166
ITR 176, where decisions dealt with the issue of deductibility of interest
paid on moneys borrowed for payment of income tax.

The principles that emerge
from the observations of the Apex Court in the above decision as well as in the
various decisions cited therein, are that interest on delayed payment of income
tax would take its colour from the principal amount of income tax and thus, it
could not be considered to be incurred wholly and exclusively for the purpose
of business and consequently, such interest cannot be claimed as a deduction.
Where, however, the principal amount is an expenditure for the purpose of
earning any income or profits and is incidental to the business, whether
interest on delayed payment thereof would be allowed as a deduction u/s. 37(1)
is a question that was not addressed by the court.

The Bombay High Court had
the occasion to examine the issue of deductibility u/s. 37(1) of the interest
u/s 201(1A) of the Act. The court, in a brief order, upheld the disallowance of
the deduction u/s. 37 by simply following the decisions in the cases of Aruna
Mills Ltd, 31 ITR 153 (Bom.), Ghatkopar Estate and Finance Corporation Pvt.
Ltd, 177 ITR 222 (Bom.), Bharat Commerce Industries Ltd, 153 ITR 275 (Del.) and
Federal Bank Ltd, 180 ITR 37 (Kerela) after noting that the high courts in
the above referred decisions had taken a similar view.

Subsequently, the Madras
High Court in the case of Chennai Properties and Investments (P) Ltd., 239
ITR 435 (Mad) examined the deductibility u/s. 37(1) of the interest u/s.
201(1A) of the Act. The court noted that the interest paid took it’s colour
from the nature of the principal amount remaining unpaid.The principal amount
being income tax, interest thereon was in the nature of a direct tax, and could
not be regarded as a compensatory payment, and was therefore not allowable as
business expenditure. In deciding against the assessee, the court followed the
decision of the Supreme Court in the case of Bharat Commerce and Industries
Ltd, 230 ITR 733 (SC).

In spite of the issue of
the deductibility and allowance of interest paid for delay in payment of the
tax deducted at source levied u/s 201(1A) being decided against the assessee by
the high courts, in our considered opinion, it remains open and debatable.
While the Bombay and the Madras High Courts have examined the issue and have
held against the allowability of such interest, the said decisions, in our very
respectful opinion, cannot be taken to have been delivered on due examination
of the law, in as much as the courts, in those cases, have simply relied on the
precedents to arrive at a conclusion without appreciating that the decisions,
referred to as precedents, were concerned with the payment of interest under
sections 139, 215 and 270, levied for delay in payment of income tax on gains
of business. None of them were concerned with the payment of interest on
delayed payment of the tax deducted at source. Neither was this distinction
highlighted before the courts nor did the courts on their own examine the vital
difference between the tax on income and the tax deducted at source. It is
possible that the decisions in question may be reviewed or reconsidered or
dissented or distinguished. The law shall remain debatable till such time as
the same is examined by the highest court of the land.

It is significant to note
that usually a tax is deducted at source on payments made by a businessman in
his character as a trader and, in most of the cases, such payments are
expressly or otherwise deductible under the Act, in computing the Profits and
Gains of Business or Profession. In the absence of any specific provisions such
as section 40(a), for expressly disallowing the payments, the tax deducted and
withheld is a part of the expenditure of the payer and in no manner can be construed
as a tax on his profits or gains of business or profession. Therefore,
provisions of section 40(a)(ii) have no application to such payments or
interest thereon. In fact, the entire expenditure representing the payment,
including tax deducted and withheld, is deductible in law without reservation.

The
term “tax” is defined u/s. 2(43) to mean income tax chargeable under the
provisions of Income-tax Act and includes the fringe benefit tax. On a bare
reading of this provision, it is clear that the term “tax” in no manner
includes the tax deducted at source which is tax on somebody else’s income and
not on the income of the assessee payer; in any case, the tax deducted at
source is not an income tax ‘chargeable’ under the provisions of the Act.

The view of the Kolkata
Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), thus,
appears reasonable that TDS, by itself, does not represent income tax of the
assessee, but is a deduction from the payment made to a party in respect of
expenses claimed by the assessee, at a certain percentage prescribed in the
Act. So long as the expenses from which tax is deducted, relate to the business
of the assessee, the TDS thereon would also be considered to be relating to the
business of the assessee and therefore, interest on delayed payment of such TDS
would be considered to be incurred wholly and exclusively for the purpose of
business.

It may be true that the
interest for delay in payment of the tax deducted at source would not be
considered to be interest on capital borrowed for the purposes of business and
therefore, may not be eligible for deduction u/s. 36(1)(iii) of the Act. The same however, would be eligible for deduction
u/s.37(1) of the Act, being an expenditure wholly and exclusively incurred for
the purposes of business.

The better view therefore, is that
interest on delayed payment of the tax deducted at source, payable u/s. 201(1A)
or any other similar provision, is deductible in law in computing the Profits
and Gains of Business or Profession of the payer. _

shailesh.kwebmaker

Will the sweeping sway of technology disrupt the Republic?

A very Happy New Year 2018! 2018 will be the
year when this third millennium becomes an ‘adult’ and so will all those born
at the turn of this century!

Most facets of our life are affected at
their root by the sweeping sway of technology. Politics, Religion and law
making appear to have remained comparatively untouched by disruption in spite
of being in dire ‘need’. As we celebrate our Republic Day on 26^thJanuary
2018 and with it our constitutional democracy, here are my thoughts on why
large parts of our constitutional democracy should look forward to disruption.

As citizens, it is our duty to ask
questions. If there is one duty at the top of the list of a citizen it is to
question the government. Questioning is the price that government should pay
for holding our country in trust. A government has to stand the test of
questioning, which is the price of Trust and Power and obligation for being
elected. Those trusted with the country are answerable – not in elections but
on a regular less frequent basis. I am tempted to pose some questions (Q)
on the three pillars of our constitutional framework to allow you to take a
quick check on where we stand:

Q on the
Judiciary:

Is legal recourse guaranteed by constitution
available to the citizens considering its prohibitive costs, disproportionate
complexity and procedure and near eternal ‘time to resolution’? (Numerous CJIs
have said this, and therefore no evidence is necessary to prove this).

Q on the
Executive:

Do you as a citizen feel inclined to seek,
as your first preference, government services in education, health, sanitation,
safety, social welfare, housing, etc.? What are the odds of receiving a timely,
courteous and appropriate service?

Q on the
Legislature:

Do those who made a commitment to uphold the
spirit of constitution, get carried away by narrow political ideology, and
underperform to deliver their lofty promises, have little accountability and
treat themselves as an entitled class? Do most elected representatives
strengthen rather than fiddle with the rule of law, government institutions and
administrative mechanism to pollute the vital breath of our democracy?

The answers to questions such as these tell
us that something very important is still amiss! The spirit of our constitution
and the vision of its makers are yet to blossom.

Can Aadhaar disrupt Democracy?

Aadhaar, rather than just a tool for
subsidies or policing, could well become the REAL and DIRECT BEDROCK¹of DEMOCRACY for India! Today, we have
few thousand people² sitting in legislatures representing 1.3
billion people. Their speed, direction and intention have a lot to ask for.
Once mobile and Aadhaar settle down, there is a massive opportunity beyond
economic and social. Here is throwing a few thoughts and questions (and
wishes):

a. Can Aadhaar be used to vote
(including preferences, recommendations) directly on critical issues – more
frequently – and bring about direct view points of people without any filters?

b. Can Aadhaar be used as a
participation and oversight tool on those who govern us? Rather than a 5 year
big fights and yearly battles in states, can Aadhaar linked participation bring
agility and stability to elections. Rather than being tracked, ensuring we can
track what the elected are up to.

c. Can Aadhaar neutralise
blame game? When people decide directly, there is no one to blame. All the
worthless paid mudslinging will end (and some tv channels will end too).

d. Can Aadhaar be used to test
draft laws before being passed and get direct empirical feedback to measure
perceptions and potential implications directly from citizens/stakeholders?
While we thought we elect ‘representatives’ to do just that, they seem to take
it too lightly.

Imagine a problem in your locality –
shouldn’t people living there give preferences, solutions and be directly
involved in arriving at a solution than just having some ward officer or some
councillor decide our fate. Instead of the triad of long debates, bad
decisions, and timid execution; why not have everyone directly concerned, get
involved.

Of course, there will be norms and ground
rules to avoid endless debate or pitfalls of group decision. Considering the
state of democracy and ill effects of politicisation of issues; a mandatory
participation of people would allow our country to overcome evils the present
model has thrown up. This participation could be the dawn of real freedom and
real responsibility. Such approach could open the high citadels of power to
those who actually own it and not those who ‘win’ it. Then a minister will not
have to go to a calamity affected area to give government aid and claim credit
for himself / party for giving what belonged to people in the first place.

Let us imagine a new level at which direct
participative democracy can transform our country. Let’s ask – Will
DELEGATION undergo disruption where DIRECT is possible? Can this diffuse the
drama of representational election based on political ideology and bring the
ideology of the constitution to the forefront? With growth of technology,
the very idea of Sovereign can undergo disruption. Could some of this be the
eventual fruition of the constitution makers’ dream – Purna Swaraj. Such
disruption in the idea of Republic could make the real winner stand up on the
high pedestal – the Citizen, the Indian, YOU.

________________________________________________________________________

[1] English meaning of Aadhaar

[2] Perhaps 0.002% people

shailesh.kwebmaker

Life Skills (Part 2)

It is Alright to Fail

History is replete with examples that most
successful people did face multiple failures at various stages of their lives
but developed a crucial life skill of accepting it as part of learning
experience of life. When you accept that it is alright to fail and there need
not be any stigma attached to it you are emancipated from the greatest barrier
of fear that holds you back from living life fully. It is only then you can
dream without casting limitations to yourself. Failure also gives you a crucial
understanding that life offers no guarantee that all your wishes have to be
fulfilled. In fact, it is God’s way of pushing you towards options that destiny
may have in store for you to let you succeed.

There is No Perfect Decision

It is important to understand that the
choices in life may not be black and white always to help you make a perfect
decision. There could be grey areas with complex implications. In fact, the
decision that you take under such circumstance will always be an amalgam of
facts and intuition. There is no point in lamenting the decision taken then in
hindsight. The choices may not be between better and best always and you may
sometimes need to decide between the worse and worst.

Thus, this life skill teaches you that there
is nothing like a perfect decision but only an appropriate decision under
circumstances then prevailing. This understanding makes you free from the
baggage of the past.

Giving is the Best Take-away in Life

One of the most mysterious life skills to
learn is that life is a teaser. The more you pursue material gains the more
they elude you. It is important to understand that somehow it works in reverse
order. When you want something, you need to be prepared to give in selfless
manner. By some strange logic, it comes back to you in abundance. Giving
creates positive ripples in environment around you which then creates a
conducive circumstance to give you in abundance. Giving is to be construed as
what you can give selflessly. It may not always be money. It could be a smile,
an encouragement, love, care, genuine praise, sincere desire to help….
anything which you can give genuinely.

Listening

Listening is a life skill which can help you
not only to overcome most difficult situations but can also help you grab an
opportunity. When your child draws a picture of the family and portrays you
with mobile on your ear, perhaps he is telling you to listen that he needs your
time. A good client telling you nicely that he loved your previous year’s work
the best is a message that he has reason to be unhappy this year. Right
listening can save you from some difficult future situations. Similarly, when
you learn to listen to your inner voice, it can lead you towards opportunity
hitherto overlooked. This is God’s way of pushing you towards your destined
path, provided you have learnt to listen.

Life skills help you find your bearing with
peace in mind and confidence to live life fullest with rich experience. They
help you find your roots.

As Osho says “Once you are rooted in your
own centre, nothing from outside can move you”. _

shailesh.kwebmaker

16 Section 54 – Acquisition of a flat in a building under construction is a case of `construction’ and not `purchase’. Construction of new house may commence before transfer of old house but should be completed within a period of 3 years from the date of transfer of old house.

[2017] 88 taxmann.com 275 (Mumbai-Trib.)

Mustansir I Tehsildar vs. ITO

ITA No. : 6108/Mum/2017

A.Y. : 2013-14 Date of Order: 18^th December, 2017

FACTS

During the previous year relevant to the
assessment year under consideration, on 5-12-2012, the assessee sold his 1/3^rd
share in Flat No.2902 of an apartment named Planet Godrej located at Byculla,
Mumbai, for a consideration of Rs.126.83 lakh. Long term capital of Rs. 78.36
lakh accrued to the assessee on transfer of his flat in
Planet Godrej.

The assessee had earlier, vide agreement
dated 5.2.2010, booked a flat at Elegant Tower, which was under construction.
The details of payments made to the builder are as detailed below:-

Particulars of payment

Rupees

Before the date of transfer of old house

From 12.04.2007 to 03-11-2009

86,38,225

On 21.4.2012

7,28,525

Sub-total (a)

93,66,750

Payments subsequent to the date of transfer of old house

14.06.2014

3,12,225

22.10.2014

7,28,525

Sub-total (b)

10,40,750

Total (a + b)

1,04,07,500

Thus, the aggregate payments made by the
assessee towards the new flat were Rs.104.07 lakh. Since the aggregate of
payments made was more than the amount of Capital gain, the assessee claimed
that entire amount of capital gain of Rs.78.36 lakh was deductible u/s. 54 of
the Act. The assessee treated the acquisition of new flat as a case of “Construction”. As per the provisions of section 54, the new
flat is required to be constructed within 3 years from the date of transfer of
old flat. Since the old flat was transferred on 05-12-2012, the assessee submitted
that the time limit was available up to December, 2015 and the new flat was
acquired before that date.

The Assessing Officer (AO) treated the case
of acquisition of new house by the assessee as a case of purchase and not of
construction. He, accordingly, held that the purchase should have been between
06-11-2011 to 04-12-2014. Accordingly, he held that –

(a) the payments aggregating to
Rs.86.38 lakh made between 12-04-2007 to 03-11-2009 falls outside the period
mentioned above and hence not eligible for deduction u/s. 54 of the Act;

(b) the capital gains not
utilised for purchase of new asset before the due date for filing return of
income should have been deposited in Capital gains Account Scheme as per the
provisions of section 54 of the Act. The payments of Rs.3,12,225/- and Rs.7,28,525/-made
on 14.6.2014 and 22.10.2014 respectively have violated the provisions of
section 54 of the Act, since the assessee did not deposit them in Capital gains
Account scheme. Accordingly, the AO held that the above said two payments are
not eligible for deduction u/s. 54 of the Act;

(c) The payment of
Rs.7,28,525/- made on 21-04-2012 was within the range of period mentioned by
him. Accordingly, he allowed deduction u/s. 54 of the Act only to the extent of
Rs.7,28,525.

Aggrieved, the assessee preferred an appeal
before CIT(A) who following the decision of the Bombay High Court in the case
of CIT vs. Smt. Beena K. Jain (217 ITR 363)(Bom.) held that the
acquisition of the new house by the assessee was a case of purchase and not
construction. He, confirmed the action
of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the Hon’ble Bombay
High Court in the case of Mrs. Hilla J. B. Wadia (216 ITR 376)(Bom.) has held
that booking of flat in an apartment under construction must also be viewed as
a method of constructing residential tenements.

Accordingly, the co-ordinate bench has taken
the view in the case of Sagar Nitin Parikh (ITA No.6399/Mum/2011 dated
03-06-2015) that booking of flat in an apartment under construction is a
case of “construction”. In view of the above said decision of the
Hon’ble Bombay High Court and the Tribunal, the acquisition of new flat in an
apartment under construction should be considered as a case of “construction”
and not “purchase”. The Tribunal set aside the view taken by the tax
authorities and held that the assessee has constructed a flat and the
provisions of section 54 should be applied accordingly.

It also noted that section 54 of the Act
provides the condition that the construction of new residential house should be
completed within 3 years from the date of transfer of old residential house.

It noted that the Hon’ble Karnataka High
Court has held in the case of CIT vs. J. R. Subramanya Bhat [1987](165 ITR
571) that commencement of construction is not relevant for the purpose of
section 54 and it is only the completion of construction. The above said ratio
has been followed in the case of Asst. CIT vs. Subhash Sevaram Bhavnani
[2012](23 taxmann.com 94)(Ahd. Trib.). Both these cases support the
contentions of the assessee.

The Tribunal held that, for the purpose of
section 54 of the Act, it has to be seen whether the assessee has completed the
construction within three years from the date of transfer of old asset. It noted
that there is no dispute that the assessee took possession of the new flat
within three years from the date of sale of old residential flat.

The Tribunal held that the assessee has
complied with the time limit prescribed u/s. 54 of the Act. Since the amount
invested in the new flat prior to the due date for furnishing return of income
was more than the amount of capital gain, the requirements of depositing any
money under capital gains account scheme does not arise in the instant case.
Further, the Hon’ble High Court has held in the case of K.C.Gopalan [(1999)
107 Taxman 591 (Kerala)] that there is no requirement that the sale
proceeds realised on sale of old residential house alone should be utilised.

The Tribunal held that the assessee is
entitled for deduction of full amount of capital gains u/s. 54 of the Act, as
he has complied with the conditions prescribed in that section. It set aside the order passed by Ld CIT(A)
and directed the AO to allow the deduction u/s. 54 of the Act as claimed by the
assessee.

shailesh.kwebmaker

2 Section 271D – Penalty – Accepting/ repaying loans/ advances via journal entries contravenes section 269SS & 269T – Penalty cannot be levied if the transactions are bona fide, genuine & reasonable cause u/s. 273B

CIT vs. Lodha Properties Development Pvt. Ltd.
ITA No: 172 of 2015 (Bom High Court)
A.Y.: 2009-10, Dated: 06th February, 2018
[Lodha Properties Development Pvt. Ltd. vs. ACIT; ITA No. 476/Mum/2014;
Dated: 27th June, 2014 Mum. ITAT]

The assessee who belongs to the Lodha group , was engaged in the business of land development and construction of real estate properties. Assessee filed the return of income declaring the total income at Rs. NIL and the same was subsequently revised to adjust carry forward losses. Assessment was completed determining the total income of Rs. 26,69,084/- under the special provisions of section 115JB of the Act. In the assessment, vide para 6, the AO, mentioned about “Accepting / repayment of loans other than account payee cheques / draft”. Eventually, AO mentioned that such accepting / repayment of loans other than account payee cheques / drafts (through journal entries) amounts to violation of the provisions of section 269SS and 269T of the Act.

The assessee submitted that the loans received are by way of “journal entries? and there is no acceptance of cash by any method other than the one prescribed in the statute. The core transactions were undertaken by way of cheque only and however, the assessee resorted to the journal entries for transfer / assignment of loan among the group companies for business consideration. In case of journal entries, as per the assessee, the liabilities are transferred / assigned by the group companies to the assessee or to take effect of actionable claims /payments/ received by group companies on behalf of the company. The journal entries were also passed in the books of accounts for reimbursement of expenses and for sharing of the expenses within the group.

The assessee further submitted during the period when journal entries were passed, the assessee company was under the bona fide belief that there is no breach of provisions of income tax Act considering recognized method of assigning credit / debit balance by passing journal entries.

In such cases, the provisions of section 269SS of the Act have no application and for this, the assesse relied on the judgement of the Honble Madras High Court in the case of CIT vs. Idhayam Publications Ltd [2007] 163 Taxman 265 (Mad.) which is relevant for the proposition that the deposit and the withdrawal of the money from the current account could not be considered as a loan or advance. It is the contention of the assessee that there is no cash transactions involved and relied on the contents of the CBDT Circular No.387, dated 6th July, 1984 and mentioned that the purpose of introducing section 269SS of the Act is to curb cash transactions only and the same is not aimed at transfer of money by transfer / assignment of loans of other group companies.

Addl. CIT mentioned that even bona fide and genuineness of the transactions, if carried out in violation of provisions of section 269SS of the Act, the same would attract the provisions of section 271D of the Act .

The ld. CIT(A) confirmed the findings recorded by the A.O.

The Tribunal held that there is no finding in the order of the AO that during the assessment proceedings the impugned transactions constitutes unaccounted money and are not bona fide or not genuine. As such, there is no information or material before the AO to suggest or demonstrate the same. In the language of the Hon’ble High Court in the case of Triumph International (I) Ltd, 345 ITR 370 (Bom), neither the genuineness of the receipt of loan/deposit nor the transaction of repayment of loan by way of adjustment through book entries carried out in the ordinary course of business has been doubted in the regular assessment. Admittedly, the transactions by way of journal entries are aimed at the extinguishment of the mutual liabilities between the assessees and the sister concerns of the group and such reasons constitute a reasonable cause.

In the present case, the causes shown by the assessee for receiving or repayment of the loan/deposit otherwise than by account-payee cheque/bank draft, was on account of the following, namely: alternate mode of raising funds; assignment of receivables; squaring up transactions; operational efficiencies/MIS purpose; consolidation of family member debts; correction of errors; and loans taken in case. In our opinion, all these reasons are, prima facie, commercial in nature and they cannot be described as non-business by any means. Further, it was observed that why should the assessee under consideration take up issuing number of account payee cheques / bank drafts which can be accounted by the journal entries.

Further, there is no dispute that the impugned journal entries in the respective books were done with the view to raise funds from the sister concerns, to assign the receivable among the sister concerns, to adjust or transfer the balances, to consolidate the debts, to correct the clerical errors etc. In the language of the Hon?ble High court, the said “journal entries? constitutes one of the recognised modes of recording the loan/deposit. The commercial nature and occurrence of these transactions by way of journal entries is in the normal course of business operation of the group concerns. In this regard, there is no adverse finding by the AO in the regular assessment. AO has not made out in the assessment that any of the impugned transactions is aimed at non commercial reasons and outside the normal business operations. Accordingly, the appeal of the assessee was allowed.

The Hon. High Court observed that the Tribunal has on application of the test laid down for establishment of reasonable cause, for breach of section 269SS of the Act by this Court in Triumph International Finance (supra) found that there is a reasonable cause in the present facts to have made journal entries reflecting deposits.

In the above circumstances, the view taken by the Tribunal in the impugned order holding that no penalty can be imposed upon by the Revenue as there was a reasonable cause in terms of section 271B of the Act for having received loans / deposits through journal entries is at the very least is a possible view in the facts of the case. Accordingly appeal of dept was dismissed.

shailesh.kwebmaker

The PNB Saga

The Punjab National Bank (PNB) scam involving Rs. 11,400 crore became public about a fortnight back and still continues to be in focus in the media, both electronic and print. Apart from PNB fraud, instances of frauds are being reported in other banks as well. Multiple investigating agencies have suddenly woken up and have started investigations. Premises of companies directly connected as well as related entities are being raided, properties are being seized or attached and several persons have been arrested, while the main players have already fled the country.

The Finance Minister, Mr. Arun Jaitley, while speaking at the Economic Times Global Business Summit, said ‘(there are) at least multiple layers of auditing system which either chose to look the other way or do a casual job’. He blamed the bank management, the regulator and the auditors. However, as the Minister under whom the regulator and the banks operate, he was not ready to accept any responsibility. He, in fact, said politicians are made accountable while regulators are not. He seems to have forgotten the political interference in the functioning of banks, particularly in sanctioning of loans. Reserve Bank of India has described the fraud as `a case of operational risk arising out of delinquent behaviour by the bank’s employees’. Others have called it a ‘system failure’.

Mr. Jaitley’s remarks, particularly blaming auditors, have generated sharp reactions from the profession. Mr. Jaitley, while blaming the auditors, did not consider the third possibility that the auditors did their job as was required of them, but yet the frauds happened. Obviously, in such a case the auditors cannot and should not be accused of ‘looking the other way’ or ‘doing a casual job’. However, the fact is that whenever there is rise in crime or atrocities against women, do people not ask “What was the police doing”? On the same logic, when there are massive frauds in the banks carried on for years, is it unreasonable if stakeholders question the efficacy of the audit process?

As a profession, we cannot do what Jaitley brazenly did – refuse to accept any responsibility. On the other hand, we need to look into increasing the effectiveness of audits. If the profession cannot provide a reasonable assurance as expected by the stakeholders, the future of the profession itself would be at stake.

It is surprising that the Letters of Undertaking issued through SWIFT messaging did not form part of the Core Banking Solutions (CBS). Reserve Bank of India had issued instructions to the banks pointing out this weakness, but it appears no follow up was done. None of the audits appear to have even considered this and consequently felt the need to modify their procedures to check the transactions. It is surprising that foreign branches of the Indian Banks in whose favour LoU were issued did not realise that these were not in accordance with the guidelines of the Reserve Bank of India. All these questions and many more need answers. At this stage, one can only hope that the enquiry is swift (pun not intended), thorough and impartial.

While the blame game is on, the Reserve Bank of India has appointed an Expert Committee. It is a matter of pride that the Committee is headed by a senior chartered accountant – Mr. Y. H. Malegam. The Committee will, inter alia, look into the reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment, and the steps needed to prevent it.

Today, audit assignments have become rather onerous. The businesses have grown manifold in size, operations are spread across nations and have become extremely complex. Add to that the changes that take place with great speed in the nature of business. There is pressure to complete the audit within a short period and to keep the cost of audit low. Accounting standards have become complex and are changing rather frequently. Pressure on managements to show progress quarter on quarter has increased the chances of manipulation of the financial statements at the instance of those charged with governance. In this scenario, auditor has an unenviable job to do.

Traditionally, where volume of transactions is large, auditors have depended on sampling techniques, including some rather sophisticated ones. Possibly, with data analytics, artificial intelligence, machine learning, the way we carry out audit may further change substantially in the future. With technology, the auditor will be able to draw far better conclusions than those based on sample checking. Machine learning may lead to development of models for predicting accounting frauds and possibility of the misstatements in the financial statements. Technology will not only be able to process a very large amount of data, but its true potential is in its ability to predict risk and future events. The auditors will have to be far more tech savvy, employ specialists and draw conclusions based on data processed using modern technology.

Internationally, businesses have started experimenting with artificial intelligence and machine learning. The professions have also started making large investments in these new technologies. It may take a while for smaller firms to be able to afford the use of these technologies. But, the past experience indicates that what was thought rather unaffordable, has, in a very short period, become easily affordable. DVD writers, mobile telephony, Internet are just some examples of technology becoming affordable.

But in spite of technological developments, one will still have human ingenuity, which will try and beat the system and we will have another scam like that of Harshad Mehta or PNB!! Let us hope that the profession in the meantime enhances its skill sets so that it can play a role in mitigating such risk.

shailesh.kwebmaker

Meditation: A panacea to many ills. But how to meditate?

Fortunately, today everyone is aware of what Meditation is and what its benefits are.

And the benefits are so many and all of them are really so fantastic, that it is recommended that everyone on this earth should meditate every day for whatever time possible.

This, in my view, will definitely increase the global peace to a much higher level, automatically.

However, one question which most people ask is, (What to do? I try a lot to meditate but it does not happen. My mind keeps wandering here, there and everywhere)

Answer to this question is very simple and i.e. in Meditation you don’t do anything.

Paradoxically, in our life, we are so much used of constantly doing something or the other that the moment we sit for meditation, our mind very naturally starts wandering, here, there and everywhere. And that is how we feel that we are not able to do meditation.

Meditation, in fact, is non-doing, so that our mind which is constantly having a traffic of thoughts even while we are asleep, gets some rest which is so much essential for it, to pull itself, in a balanced state for the duration for which we live on this earth.

Actually, most health problems which people experience on this earth such as BP, Sugar, Arthritis, spondylitis, hypertension, depression are basically psychosomatic problems, that is, all these are mind-related problems.

That means, all these health problems occur when the mind of the person concerned has been at discomfort for an unreasonably long time.

Really speaking, it’s not difficult to meditate. It only needs some practice with total awareness and consciousness. Therefore, for those of you, who may like to meditate and experience its benefits, I thought of writing this post and share the process for traveling the “journey from doing to non-doing” which goes like this.

Whenever you wish to meditate, sit comfortably, keeping your back straight and your eyes closed. Then, take few deep long breaths in and out, feeling that your body and mind are slowly getting relaxed.

Now just follow two steps one after the other for as much time as you feel like.

1. With your eyes closed, remember every person, one by one, who has helped you in one way or the other in your life right from your childhood days. And then keep on thanking them in your heart with great sense of deep gratitude. Keep on doing so, as long as you feel like.

2. Now switch to the 2nd step and that is, remember every person right from your childhood days who may have hurt you in some way or the other in your life. And just forgive them in your heart one by one, as most people make mistakes out of ignorance.

Likewise, it is also possible that you too may have hurt or harmed some people in your life knowingly or unknowingly. Seek forgiveness from them for your wrong deeds. It is possible that some of these people may not be around, it doesn’t really matter.

Just follow the above two steps for as long as you feel like. And when you feel complete, just thank the Almighty and wish well-being, peace, prosperity, bliss, happiness for everyone on this earth and move on.

I am sure, this will facilitate your progress on the path of meditation and you will start enjoying benefits of meditation, equanimity of mind being one of them.

Wishing you a life full of peace, prosperity, bliss and happiness.

shailesh.kwebmaker

Companies (Amendment) Act, 2017 – Part I: Genesis and Changes in Key Definitions

Companies Act 1956 was replaced in the year 2013 with a new avatar as the Companies Act 2013. When an act was on the statute book for a period of almost 60 years and a new act has come in its place, it was bound to have issues from practical perspectives, besides challenges and shortcomings.

To overcome these issues, the new Act had to undergo several amendments in its first few years. If we look at the evolution of this Act, of the total 470 sections of the Companies Act, 2013 the status as on date is as under:

Particulars

Number
Of sections

Sections
Notified on different dates

428

Sections
yet to be enforced

Sections
Deleted

Total

470

Major amendments were done in the year 2015. At the time of these amendments it was felt that the matter needs further relook and hence Companies Law Committee was constituted (CLC) to address these issues. The CLC made its recommendations which culminated in Companies Amendment Bill, 2016.

Companies Amendment Bill, 2016 was introduced in Lok Sabha in March 2016 and was referred to Standing Committee on Finance (Committee) for further examination. After considering various suggestions of the Committee this Bill was renamed as Companies Amendment Bill, 2017 and was reintroduced and passed in Lok Sabha in July 2017.

This Bill was approved by Rajya Sabha on 19th of December 2017 and has received President’s Assent on 3rd January 2018. It was notified on the same day in the official gazette and will be called as The Companies (Amendment) Act, 2017.
OBJECTIVE/GUIDING PRINCIPLES BEHIND AMENDING THE COMPANIES ACT, 2013
The amendments introduced in The Companies (Amendment) Act, 2017 are guided by the following objectives1 :-

(i) addressing difficulties in implementation owing to undue stringency of compliance requirements,

(ii) facilitating ease of doing business for companies, including start-ups, in order to promote growth with employment,

(iii) harmonisation with accounting standards, and other financial and economic legislations,

(iv) rectifying omissions and inconsistencies in the Act, and

(v) Carrying out amendments in provisions relating to qualification and selection of members of NCLT and NCLAT in accordance with the Supreme Court directions.

The key amendments in the Companies (Amendment) Act, 2017, are2 :

a) Simplification of the private placement process, involving doing away with separate offer letter, details/record of applicants to be kept by company and to be filed as part of return of allotment only, and reducing number of filings to Registrar
[section 42].

b) Allowing unrestricted object clause in the Memorandum of Association dispensing with detailed listing of objects, with a view to ease incorporation of companies; Self-declarations to replace affidavits from subscribers to memorandum and first directors [sections 4 and 7].
________________________________________________________________
1 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 1.12
2 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 1.14

c) Provisions relating to forward dealing and insider trading in securities to be omitted from Companies Act as these are covered under SEBI regulations [sections 194 and 195].

d) Requirement of approval of Central Government for Managerial remuneration above prescribed limits to be replaced by approval through special resolution by shareholders in general meeting [sections 196 and 197].

e) Companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement [section 185].

f) Amendment of definitions of associate company and subsidiary company to ensure that ‘equity share capital’ is the basis for deciding holding-subsidiary relationship rather than “both equity and preference share capital” [section 2].

g) Rationalisation of penal provisions with reduced liability for procedural and technical defaults. Penal provisions for small companies and One Person Companies to be reduced [various sections].

h) Auditor reporting on internal financial controls to be restricted with regard to financial statements [section 143].

i) Frauds involving an amount less than Rupees 10 lakhs to be compoundable offences [section 447].

j) Reducing requirement for maintaining deposit repayment reserve account from 15% each for two years to 20% during the maturing year [section 73].

k) Test of materiality to be introduced for pecuniary interest for testing independence of Independent Directors [section 149].

l) Recognition of the concept of beneficial owner of a company proposed in the Act. Register of beneficial owners to be maintained by a company, and filed with the Registrar. [Section 90].

m) Re-opening of accounts to be limited to 8 years [section 130].

n) Requirement for annual ratification of appointment/continuance of auditor by members to be removed [section 139].

o) Provisions relating to Corporate Social Responsibility to bring greater clarity [section 135].

CHANGES IN KEY DEFINITIONS

Let us now consider a few important amendments made by the Act in the definitions. In total, 14 Definitions have been amended. I am discussing major amendments hereunder.

I. Associate Company – Section 2 (6)

Section before Amendment

After Amendment

Remarks

For the purposes of this clause, ?significant influence
means control of at least twenty per cent of total
share capital, or of business decisions under an agreement;

For the purpose of this clause—

(a) the expression “significant influence”
means control of at least twenty percent, of total voting power, or
control of or participation in business decisions under an agreement;

(b) the expression “joint venture” means a
joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement;’

The definition is made more specific from existing percentage
of share capital to percentage of total voting power.

Latter portion of the Explanation is amended from control
of business decisions under an agreement to “or control of
or participation in business decisions under an agreement.”

However, a joint venture is defined but joint
arrangement is still not defined.

Probable Impact would be –

? Total
voting power to be referred to;

? Control
determined through total voting power only and not by capital

? Agreement
is essential element to establish control through participation

Presently an Associate Company is a related party of
Investor. However, for Associate Company, Investor was not a related party
(i.e. Converse was not true). This anomaly is sought to be removed by
amending Section 2(76) to include an investing company or the venturer of the
company as related party of an investee i.e. an Associate;

(For more details please refer amendment to section
2(76) below).

Definition of Associate Company in clause 6 of section 2 is amended so as to substitute existing explanation as under:

GENESIS OF THIS AMENDMENT:
In fact, at the time of representations before Standing Committee, various stake holders had suggested that the words “control of or participation in business decisions under an agreement” from the explanation may be deleted.

The Ministry of Corporate affairs however in response suggested3 as under:

“Various innovative and complex instruments are being used by business entities to exercise control or significant influence over other entities. It is felt that in order to cover various situations including through issue of instruments referred to above through which companies may exercise significant influence over other companies, the phrase “or control of or participation in business decisions under an agreement” needs to be retained in the explanation. “

Suggestion of MCA was accepted and that of the stakeholders rejected. However, in the process, this definition of Significant Influence has undergone a change to incorporate even participation in business decisions under an agreement.

II. Financial Year – Section 2(41), Change of Financial Year in the case of Associate Company of a Company incorporated outside India

Section before Amendment

After Amendment

Remarks

First Proviso:

Provided
that on an application made by a company or body corporate, which is a
holding company or a subsidiary of a company incorporated outside India and
is required to follow a different financial year for consolidation of its
accounts outside India, the Tribunal may, if it is satisfied, allow any
period as its financial year, whether or not that period is a year:

“Provided
that on an application made by a company or body corporate, which is a
holding company or a subsidiary or associate company of a company
incorporated outside India and is required to follow a different financial
year for consolidation of its accounts outside India, the Tribunal may, if it
is satisfied, allow any period as its financial year, whether or not that
period is a year.”

Post
Amendment, even an Associate Company of a company incorporated outside India
can apply to the Tribunal for a different financial year.

This
amendment will facilitate ease of doing business.

________________________________________________________
3 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 2.4

III. Section 2(46), Holding Company

Section before Amendment

After Amendment

Remark

?holding company, in relation to one or more other
companies, means a company of which such companies are subsidiary companies;

Explanation—For the purposes of this clause, the
expression “company” includes anybody corporate

Presently Body corporate is not included in the
definition of Holding Company.

This amendment has far reaching implications for
ascertaining the status of the Subsidiary company as to whether it is Public
or Private. For the said purpose, one will have to ascertain the status of
Body Corporate. (Definition of Public Company u/s. 2(71) may be referred.)

Henceforth, Subsidiary Companies who would otherwise be
a Small Company, will now have to ascertain whether they continue to be so,
based on the status of their holding company (body corporate) (Refer section
2(85) of the Companies Act)

A body corporate, which may earlier be excluded from
Related Party Disclosure, will now be included as a related party.

For more details, please refer amendment to section
2(76) below.

GENESIS OF THIS AMENDMENT:
The Stakeholders in their written memorandum suggested on this clause as under:-

“The proposed insertion should not take place in view of the “ease of doing business” in Indian Companies.”

The Ministry responded as under:

“Attention is invited to section 4 of the erstwhile Companies Act, 1956, wherein the proposed explanation was applicable for both the terms ‘holding company’ and ‘subsidiary company’. The intention behind the change in section 2(46) is to bring harmony between provisions of section 2(87) and 2(46) of the Bill. It goes without saying that overseas holding companies will have to comply with the provisions of the jurisdictions in which these are incorporated. However, it would be appropriate to have this provision to ensure that transactions entered with overseas holding companies are carried out with adequate disclosures and thus any abuse is avoided. The suggestion, therefore, may not be considered.”

The Committee, while endorsing the view of the Ministry, recommended that the proposed amendment in Explanation to Clause 2(v) relating to clause (46) of the Companies Act, 2013 on definition of “holding company” may be retained in order to ensure adequate disclosure in regard to transactions entered with overseas holding companies.

IV. Section 2(49), Interested Director

Interested director was defined u/s. 2(49) as under:

“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company;

The term interested director was relevant for the purposes of section 174 (Quorum), 184 (Disclosure of interest by director) and section 189 (Register of contracts or arrangements in which directors are interested).Unfortunately, definition of interested director was very wide and leading to the confusion as to which definition is to be used.

FAQs published by ICSI in the year 2014 sought to answer the question but that too with a caution. (Refer last two lines in reply to the question)

Question and reply reads as under:

Q. Section 2(49) defines the term ‘interested directors’ whereas at various sections reference to section 184 is drawn to mean/define interested director. Section 2(49) is wider than section 184 leading to confusion – which definition should be applied?

Ans. Section 2(49) of the Companies Act, 2013 defines interested director as a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company;

Section 184 (2) provides that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be
entered into—

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,

shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Wherever the term ‘interested director’ appears in the Act and the Rules thereon, read sections 2(49) and 184 together.

Section 2(49) is now deleted and thus confusion in the term is sought to be avoided.

V. Section 2(51), Key Managerial Personnel (KMP)

Section before Amendment	After Amendment	Remarks
“Key managerial personnel” in relation to a company, means—	“Key managerial personnel” in relation to a company, means—	This change in the definition now enables Companies to designate whole time employees as KMP besides the four designation based categories. This is an enabling provision.
(i) the Chief Executive Officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the Chief Financial Officer; and (v) Such other officer as may be prescribed.	(i) the Chief Executive Officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the Chief Financial Officer; (v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and (vi) such other officer as may be prescribed

Section before Amendment

After Amendment

Remarks

“Key
managerial personnel” in relation to a company, means—

“Key
managerial personnel” in relation
to a company, means—

This
change in the definition now enables Companies to designate whole time
employees as KMP besides the four designation based categories.

This
is an enabling provision.

(i)
the Chief Executive Officer or the managing director or the manager;

(ii)
the company secretary;

(iii)
the whole-time director;

(iv)
the Chief Financial Officer; and

(v)
Such other officer as may be prescribed.

(i)
the Chief Executive Officer or the managing director or the manager;

(ii)
the company secretary;

(iii)
the whole-time director;

(iv)
the Chief Financial Officer;

(v) such other officer, not more than one level below the
directors who is in whole-time employment, designated as key managerial
personnel by the Board; and

(vi)
such other officer as may be prescribed

VI. Section 2(57), Net Worth

Section before Amendment

After Amendment

Remark

“net worth” means
the aggregate value of the paid-up share capital and all reserves created out
of the profits and securities premium account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation

net worth” means
the aggregate value of the paid-up share capital and all reserves created out
of the profits, securities premium account and
debit or credit balance of profit and loss account, after deducting
the aggregate value of the accumulated losses, deferred expenditure and
miscellaneous expenditure not written off, as per the audited balance sheet,
but does not include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation.

In
absence of clarity, one was not clear about treatment to be given to Debit or
credit Balance in Profit and Loss Account. Unfortunately, while introducing
this amendment, transition to Ind AS of several companies is lost sight of.
It would have been in the fitness of things, if clarification on the
components of Other Comprehensive Income (OCI) was also given. Especially
this assumes importance because OCI includes unrealized gains too.

VII. Section 2(71), Public company

Section before Amendment

After Amendment

Remark

Public company means a company which— (a) is not a private company;
(b) has a minimum paid-up share capital as may be prescribed: …………

“(a) is not a private company; and”

The word “and” is added so as to clarify that cumulative conditions
are to be observed. This provision is more clarificatory in nature.

VIII. Section 2(76) Related Party

Section before Amendment

After Amendment

Remark

(viii)
any company which is—

(A)
a holding, subsidiary or an associate company of such company; or

(B)
a subsidiary of a holding company to which it is also a subsidiary;

“(viii)
anybody corporate which is—

A.
a holding, subsidiary or an associate company of such company;

B.
a subsidiary of a holding company to which it is also a subsidiary; or

C.
an investing company or the venturer of the company;

Explanation — For the purpose of this clause, “the investing
company or the venturer of a company” means a body corporate whose investment
in the company would result in the company becoming an associate company of
the body corporate.

“Company”
is replaced with “body corporate” and investing companies/ venturer are also
added to the list.

The
amended Explanation has expanded the scope of the definition of related
parties.

The
reference to body corporate is consequent upon inclusion of body corporate in
the definition of holding company.

Refer
discussions above for impact on Associate Company [Section 2(6)] and Holding
Company [Section 2(46)].

GENESIS OF THIS AMENDMENT:

At the time of representations to the Committee, MCA had suggested as under:

Suggestions were received by the Committee, pointing out that the term “related party”, as currently defined, used the word ‘company’ in Section 2(76)(viii), meaning thereby that those entities that were incorporated in India would come in the purview of the definition. This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company. It noted that this would be unintentional and would seriously affect the compliance requirements of related parties under the Act. The Committee, therefore, recommended that section 2 (76) (viii) be amended to substitute ‘company’ with ‘body corporate’

IX.Section 2(87) Subsidiary Company

Sub section is amended to the effect that a company will be treated as subsidiary in case the holding company exercises or controls more than 50% of the total voting power either of its own or together with one or more of its subsidiary companies. Currently, the Act provides for exercise or control of more than half of the total share capital (Which included Preference Capital). Henceforth, holding of Preference Shares only will not be considered for control and instead only voting power will be considered.

Preference shares, which is often a quasi loan is rightly excluded. For example, optionally convertible redeemable preference shares are effectively a loan and the option exists only for the purpose of security of the lender.

This change also makes the definition consistent with AS 21 – Consolidated Financial Statements. However, the change falls short of its coherence with the Ind AS.

As regards layers of Subsidiaries, the proviso to Section 2(87) remains and was notified on 20th September 2017.

•It will be interesting to see what happened after introduction of Companies Amendment Bill 2016 as regards the proviso referred to above.
•The Companies Act 2013 permits Central Government to impose a cap on layers of subsidiaries a company can have. Companies Amendment Bill 2016 removed the restrictions on number of layers of a subsidiary company. Standing Committee had no recommendation on this issue. Finally (Quietly?) on 5th April 2017, amendments were circulated which restored the position which existed in the Companies Act 2013. (Source Notice of Amendments, The Companies (Amendment) Bill, 2016, Lok Sabha, April 5, 2017 http://www.prsindia.org/uploads/media/Companies,%202016/Notice%20of%20Amendments,%20Apr%205,%202017.pdf)
•One may now refer to the Companies (Restriction on number of layers) Rules, 2017 which have become effective from 20th September, 2017.

X.Section 2(91) Turnover

Existing Definition

As Amended

Remark

“turnover”
means the aggregate value of the realization of amount made from the
sale, supply or distribution of goods or on account of services rendered, or
both, by the company during a financial year;

“turnover”
means the gross amount of revenue recognised in the profit and loss account
from the sale, supply, or distribution of goods or on account of services
rendered, or both, by a company during a financial year;

Previously
“turnover” was indicative of realisations made.

Now the shift is to amount recognised in Profit and Loss
Account. The concept of turnover is important since several obligations of
the company are linked to the turnover.

Interestingly
amended definition now refers as “a company “instead of “the company” before
amendment.

CONCLUSION

The Standing Committee Report states that more than two thousand suggestions were received from the stake holders4. Additionally, responses of CLC and views of MCA were considered in finally amending the Act. The amendments also include inputs given by Standing Committee. This entire process, having taken massive amount of interactions and deliberations over a period of about 2 years from 2016 has resulted in the Companies (Amendment) Act, 2017 which seems like a largely cohesive document as far as definitions are concerned. _
___________________________________________________________
4 37th Report of the Standing Committee on Finance dated 01-12-2016
Para 1.8

shailesh.kwebmaker

An Ode To The Trouble Maker

In the initial stages of the freedom
struggle, a well-intentioned person suggested to Gandhiji that to fight the
mighty British empire was akin to banging one’s head against a wall. It would
be a foolish effort and would only cause grief and pain. Gandhiji’s response
was simple, but underlined his character and spirit. He replied, “you are
probably right, but may be this once the wall will break!”

Be it Gandhiji, Washington, Jefferson,
Copernicus or Martin Luther King, they were all trouble makers and
non-conformists. They questioned status quo and were always ready to shake the
system.

We humans are social animals and conforming
to certain societal norms is ingrained in our DNA as a survival trait since our
days as hunters and gatherers. Largely, this helps in an organised and
harmonised community living for the collective benefit of all. So, being a
trouble maker does not mean you don’t learn from your parents, peers or the
society. It also does not mean that you act in a manner that causes physical
harm or impinges upon someone else’s legitimate rights.

Indeed, non-conformity for the sake of
non-conforming is still conformity. If one chooses to question everything, then
one needs to question such questioning? If one rebels against everything
popular only for the sake of rebellion, then one is, in effect, conforming to
our society’s non-conformist trends. In order to truly be a non-conformist is
to live and present yourself without thinking of people’s perception of you. As
Bill Vaughn said, “If there is anything the non-conformist hates
worse than a conformist, it’s another non-conformist who doesn’t conform to the
prevailing standard of non-conformity.”

So, being a rebel just for the sake of being
different is not only meaningless but counter-productive. On the other hand,
blind conformity is equally dangerous, because it means following other people
not because you believe in their ideas or agree with them, but because you want
to fit in instead of standing out.To be a non-conformist in the Gandhian sense,
means to celebrate your uniqueness without allowing society to influence your
decisions and choices. It means to question the present norms and to accept
that which appeals to your conscious and intellect, while challenging those
that are morally repugnant or rationally questionable.

History is replete with examples of great
thinkers who were persecuted and hounded by those in positions of authority for
daring to be different. After all, the world hates those who shake up the
system as there is inherent security in maintaining status quo. Galileo died in
isolation, a broken man for advocating the Copernican view that the Earth was not
the centre of the universe. His views were considered blasphemous as it went at
that time against the doctrine of the Church. Galileo responded by stating
that, “I do not feel obliged to believe that the same God who endowed
us with sense, reason and intellect has intended us to forgo their use”. Albert
Einstein was right when he said, “Great spirits have always encountered
violent opposition from mediocre minds” or as Mignon McLaughlin said,
“Society honours its living conformists and its dead troublemakers”.

So let me reproduce this ode to the trouble
makers by Rob Siltanen, “Here’s to the crazy ones. The misfits. The rebels.
The troublemakers. The round pegs in the square holes. The ones who see things
differently. They’re not fond of rules. And they have no respect for the status
quo. You can quote them, disagree with them, glorify or vilify them. About the
only thing you can’t do is ignore them. Because they change things. They push
the human race forward. And while some may see them as the crazy ones, we see
genius. Because the people who are crazy enough to think they can change the
world, are the ones who do.”

Therefore, let us be the ones who refuse to
be satisfied with the way things are and insist upon bringing about positive
changes, even when success is not guaranteed. Maybe it is time to awaken a
little bit of Gandhi in
all of us!! _

shailesh.kwebmaker

51st Residential Refresher Course (RRC) Report

The 51st Residential Refresher Course (RRC) of Bombay Chartered Accountants’ Society (BCAS) was held at Hotel
Dreamland, Mahabaleshwar from 11th January 2018 to 14th January 2018. In all, 100 participants from various parts of
India joined this flagship programme of BCAS.
On the first day, CA. Narayan
Pasari, President BCAS
welcomed the participants.
He highlighted the journey
of BCAS RRCs and recent
activities undertaken by BCAS.

He shared his experience about
his journey with BCAS from
joining the Seminar Committee
to the Presidentship. He also
shared the vision of BCAS
to promote young members
( ) to be able professionals
and hence promoted 3 of them
at this RRC.

CA. Uday Sathaye, Chairman
Seminar Committee welcomed
everybody and explained the
importance of RRC in adding
value to the professional life of BCAS members
participating in RRCs. He compared RRC to a Guru.
He acknowledged contribution of Paper Writers,
Group Leaders and Participants 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 introduced and shared his thoughts about CA.
Pranay Marfatia, Past President and Chief Guest
of this 51st RRC. He highlighted CA. Pranaybhai’s
contribution towards success of earlier RRCs.
Thereafter, an audio clip was played, as rich
compliments were made by many Past Presidents
of BCAS about CA. Pranaybhai’s Involvement,
Dedication and Contribution to BCAS activities.

CA. Pranay Marfatia, Past President of BCAS then
inaugurated the 51st RRC. He shared his experience
of past RRCs. He spoke on changing paradigm of the
CA Profession. He also shared his views about the
expectation by the regulators and the stake holders from
CA Profession and the future challenges. He concluded
his address with a clear message that there is a need to
be updated on every front in profession and one should
not compromise on any principles.

The First Technical Session was chaired by CA. Pradip
Kapasi, Past President of BCAS. Dr. Rakesh Gupta
dealt with the issues raised by participants during Group
Discussion on his paper titled Case Studies in Taxation.
In his inimitable style covering all the issues in the
fields of Business Income, Capital Gains, Assessment
Proceedings etc., he dealt with the questions raised in the
case studies along with issues communicated by group
leaders and provided answers to the queries raised. His
command over the subject was appreciated by everybody.
On the second Day, the 2nd Technical Session was chaired
by CA. Rajesh Shah, Past President of BCAS. CA. Dhinal
Shah, Central Council Member – ICAI presented paper
titled Insolvency & Bankruptcy Code, Challenges
and Professional Opportunities. He commenced his
presentation with the process of registering as Insolvency
Professional (IP) by Chartered Accountants. He
highlighted the important role that Chartered Accountants
can play in the revival of defaulting companies and the
expected challenges to be faced by IP. His presentation
was very helpful to the participants particularly from the
point of view of the subject being a new area of practice.
The Third Technical Session was chaired by CA. Anil
Sathe, Past President of BCAS where CA. Bhadresh
Doshi dealt with ICDS- Significant Issues.

In his unique style, CA. Bhadresh Doshi explained various
points in interpretation issues in ICDS in view of Recent
Delhi High Court Judgements annulling various ICDS.
These issues are very relevant in day to day practice
and the presentation was extremely useful to all the
participants. The contents of paper as well as the lucid
explanations by the paper writer, was a rich and rewarding
experience for the delegates.

In the evening, participants had free time for sightseeing
etc. After dinner, participants enjoyed music and
entertainment programme.

On the third day, the Fourth Technical Session was
chaired by CA. Rajesh Muni, Past President of BCAS.
CA. Anand Bathiya presented paper on Corporate
Governance. He elaborated on the key amendments in
Governance of Listed Companies introduced by SEBI
and the important provisions of The Companies (Am
endment) Act 2017. He also highlighted the significant
amendments affecting the obligations and responsibilities
of the Auditors.

The Fifth Technical Session was chaired by CA. Govind
Goyal, Past President of BCAS where CA. Mandar
Telang presented paper titled GST – Legal Issues. He
enlightened the participants on recurring issues in GST.
He highlighted the practical problems affecting various
sectors of economy through his relevant and analytical
case studies.

He shared his experience of the importance of GST
implication in structuring the business process of various
industries.

An evening session was chaired by CA. Prafullachandra
Oak where CA. Chandrashekhar Vaze presented
his thoughts on “Code of Ethics need for Eternal
Vigilance”. He quoted lots of examples and his
experience from disciplinary cases. He very effectively
highlighted the need of following code of ethics and doing principle centered practice. The points raised by CA.
Vaze were very well received by the participants and he
also answered the questions raised by the participants on
the subject.

On the last day of RRC, a Panel Discussion was anchored
by CA. Sunil Gabhawalla and CA. Sangeeta Pandit
on “CA practice- Challenges & Opportunity- Across
Multiple profession Domains”.

CA. Bhavana Doshi, CA. Anil Sathe, CA. Nandita
Parekh and CA. Anup Shah were the esteemed
Panellists. During the three hours of the discussion, the panellists were very candid and open in their thoughts.
The Panel Discussion covered topics such as how to
obtain Domain Knowledge, develop Entrepreneurship
Skills, Mentor and retain Talent, work in Groups, adapt
to Technology, emerging Areas of Practice and host of
other issues. There was also a discussion on Succession
Planning and Sustainability of CA Firms. The Panel
Discussion was concluded on a very positive note with a
request from the participants that similar session should
be held in all future RRCs.

CA. Uday Sathaye, Chairman Seminar Committee and
CA. Narayan Pasari, President BCAS concluded the
51st RRC by acknowledging all the participants with a Big
Thank You!

Everybody parted with a commitment to meet again
next year.

shailesh.kwebmaker

Yes, but…

Presentation of the Union Budget (UB) has
remained an important date in a Chartered Accountant’s annual timeline. The UB
season creates a (predictable) buzz. By the time this BCAJ reaches you, you
would have got a complete download (and perhaps an overload) of the finance
bill provisions. I thought that I shouldn’t tax you with more of that and
instead share some observations of the buzz and drama of the budget ‘season’.

At a high level, the buzz hangs between the
two extreme points of self glorification and mindless criticism. Compared to
the ‘high’ of the stock markets, the pitch of glorification and criticism
remain consistent without going into the red. This editorial is dedicated to
the drama of ‘budget season’ rather than details of ‘budget provisions’.

Precursor: A (tasteful) tradition

The season starts traditionally. The first
‘photo op’ is the Halwa making ceremony, done somewhere in a secret bunker of
the finance ministry. It marks the beginning of the quarantine period of those
officials, who after eating the delicious Halwa on a chilly Delhi day, choose
to remain in isolation till February 1. Two days before the UB, the national
Economic Survey is unveiled, building the tempo and setting the tone. Former
CEA, Kaushik Basu’s tweet sums up well: Reading India’s Economic Survey
2017-18 it is clear that the Survey is in very good shape. I wish I could say
the same for what it surveys. And then comes the ‘B’ Day. The FM enters the
parliament, personally carrying a (unbranded¹) briefcase with (secret)
budget documents in it.

The Budget Speech

The budget speech is like the annual sacred
sermon by the highest financial pontiff. As I enter the office, a bit late
since I arrived in Mumbai the same day at dawn, people are ready with
headphones plugged into their computers waiting for the FM to begin.

_______________________________________________________________

1 Emphasis is important considering recent
controversy over branded apparel worn by a politician.

these quintessential words balance and seal the budget speech.
With these words, every FM accentuates the government’s sole and focused
commitment towards the marginalised. The budget speech must also consider four
vital elements – Psychology, Politics, Economics and Strategy². The
speech will get evaluated by the quality and proportion of each ingredient. Yet
after listening, a common citizen wonders as to why a recent report³ claimed that 73% new wealth created in last
one year went only to the richest 1%. Today the problem is not just poverty,
but inequality (the word that did not find place in the UB speech). The men who
feed us with their tilling and toil, why do they have to commit suicide: one
farmer every 40 minutes since last ten years?

Figures and Figures of Speech: Poetry and
Hindi

The speech not only contains large figures
in thousands of crores, but is also generous in use of figures of speech. FM’s
talk was delivered in English yet it was generously embellished with Hindi:
couplets, punch lines, quotes and Sanskrit to reduce monotony and serve
implicit purposes. Switchover to Hindi was often made at places where
commitment towards the under privileged needed accentuation. Memorable ones
from 2018 speech were: those wearing

____________________________________________________________

2 Inspired by Late Nani Palkhivala’s writings on
1981-82 Union Budget

3
By Oxfam. Amongst other things, the study found that it will take 941
years for a minimum wage worker in rural India to earn what the top paid
executive at a leading Indian garment firm earns in a year.

Ratings and Ranting

Post the FM’s
speech, ‘analysis’ race starts on channels and internet. While lesser mortals
require time to read and understand a document that is detailed and mammoth,
such as the country’s budget, the ‘experts’ from every field show up on
channels to give their ‘considered’ views. Some of it sounds like, talking about
the wrapper before seeing the wrapped gift.

The day is
abuzz with variety of sound bites, tweets and posts. The ruling party people go
‘Wah Wah’ with clichés like “Pro Farmer” “Path Breaking” “Historic” “Pro Poor”.
The opposition parties just use the thesaurus to find antonyms of those words
to call it: “Pro Rich”, “Anti Poor”, “Inflationary” etc.. Some channels attempt
to unleash a verbal WWE⁴ like match in their studios with people
‘debating’ and ranting. Rising volume and interruptions by the anchor/panellists
serve as substitutes for reason and respect. One TV channel put a link to rate
the budget while FM was still into his speech. 1500 people had even rated it
before the FM had completed his talk and the UB was not even uploaded on the
MoF website.

___________________________________________________

4 World Wrestling Entertainment

On the other
hand, professionals start reading the fine print, for they know that Budget
Speech is not the Finance Bill and the devil is always hidden in the details.
While all this is going on, the number of ‘temporary economists’ spiral on
social media. Tweets and Posts glide hash tags (#) to prominence. Most
fascinating observations, are often those that state the obvious: “a good
budget, there was little room for tinkering indirect taxes due to GST being
dealt separately now.” My favourite comment came from an international rating
agency in 2017 (even the Economic Survey of India 2017 mentioned it for its
Poor Standards) – “India’s 2017-2018 budget illustrates the government’s
commitment to improving its fiscal performance over the medium term, despite the
hit to near-term growth from the demonetisation initiative” – stating the
obvious without conveying the expected meaning. Lastly, many industry bodies
find ways to praise the budget. Well, who wants to mess with power, which
continues to remain the largest litigant in India and even a significant
impediment to ease of doing business and to ease of living too!

And you wonder…

Yes, the journalists and businesses are ranking and debating, but the
common man is standing – in a line to get his share of benefits of growth. Yes,
India story cannot be talked down, but our complex nation needs a leap
to remain fit for future. Yes, budgets have come and budgets have gone, but
the bridge between intention of FMs and expectation of people is yet to be
completed: by impeccable execution! A big “Yes” to the budget, yet the “But”
remains!

Raman Jokhakar

Editor

shailesh.kwebmaker

On Not Building A Top Global Indian Audit Firm

Several thought provoking facts and figures have been presented recently in various forums on the captioned subject. However, some key perspective notes need to be added in, to make clear the present plight of IAF (Indian Audit firms). These are as follows–

The Vision

The Vision presented by our Hon. PM Shri Narendra Modi on the CA Day on 1st July 2017 is path-breaking in many ways. For the first time, in India, the recognition has come to the fact that the large firms in the country’s audit practice are not Indian Firms. While it is an open secret, the fact that it has been woven into a distinctive vision for Indian Audit Firms, and that too by the highest office, is what makes it path-breaking. There need be absolutely no confusion going forward that Indian Audit Firms have fallen far far behind. This is the obverse of the vision statement pronounced by our Hon PM. This fact simply cannot be stressed enough. It is the basis for the “wake up call”. It is not that India does not have audit and auditors. It is just that we don’t have Indian Audit firms providing auditing at the forefront – both domestically and globally – an unhealthy change that happened over the last two decades. What makes it all the more poignant and purposeful, is that such clarity and such vision did not come up from within the apex professional body of the country which found itself at the receiving end, instead of being in a position of claiming credit of having stood up for and presented a vision for Indian Firms versus Multinational Audit Firms (MAF).

The Structure

A comparative review of Firms in India and the UK or the USA is certainly required and has also been presented. However, this “landscape” requires a panorama photo to accompany it and complete the beautiful picture. Taking the population as a basis, India is truly far behind the West – absolute numbers are of limited value when the denominators are starkly different. The structure of the profession also is totally different in India. Non-regulated entities of the MAF operating in India dominate the scene. This is unlike any other country in the world. ICAI overseas only a small fraction of the head-count when one takes into account this factor. This brings in rampant non-regulation. It brings in a wide spread “non-level playing field” which is the term utilised in the two investigation reports approved by the Central Council of ICAI in 2003 and 2011 on the operations of MAF in India. And to say the least, all this has resulted into an attrition of goodwill and image for the professional bodies, so much so that Government has just finalised plans to create a new regulatory body which will reduce the present professional bodies to educational institutions.

Benchmarking

Coming now to the capture of Top 100 or Top 500 companies etc by the MAF, the numbers are very misleading if one does the calculations based on the number of entities. A credible analysis shows that the audit revenue of the MAF crosses Rs. 5,000 crores while the Top 20 IAF taken together stand at less that Rs. 200 Crores, pre-rotation. That is less than 4% market share. The most important fact however is missed when we only compare numbers, and that is the reality that in the West, the coverage by the MAF is a coverage by their own Western-headquartered Firms. While in India, the financial sector suffers a systemic risk since it is foreign firms that have the maximum majority of workshare. Apart from this systemic risk, it is a serious loss of space to generations of young future Indian CAs who find it impossible to enter into “own practice” as it happened for the first 50 years after our independence, before the MAF took over. Another huge issue of concern, is that when India becomes a global economic power 10 years hence, India will not have any global presence in auditing. These truly are our benchmarks. The post audit rotation numbers would be even more dismal – the present market share maybe less than 1 percent. Sometimes, in arguments driven by statistics, the baby does get swept out with the bathwater.

History

When we talk of the history of the MAF in India, we should not forget to bring up an important fact pointed out by the respected senior member of our profession, Shri S. Gurumurthy. (Books Unsquared, August 2017, Outlook Magazine, https://www.outlookindia.com magazine/story/the-books-unsquared/299171).
He observed that the RBI is the “original culprit” in allowing FDI into audit through automatic permissions in the consulting route by the MAF, which is not permitted. His prophetic predictions of the detriment to be caused to India through his White Paper of 2001 have sadly come to pass a dozen years later – be it the loss of our profession’s stature, or the many scams. Our Hon PM has said recently that this is a sad thing. This is also confirmed by ICAI in numerous adverse observations in the two Reports against the MAF operations in India. The gains made by the MAF are therefore illegally derived by acquiring as many as the Top 50 IAF over the last 20 years and steadily increasing market share through various means thereafter, and then to add fuel to the fire, using audit rotation to squeeze out IAF by various means, underpricing of services being one such. The errors of Brazil, Argentina, Korea and elsewhere, have got repeated in India – the practice base of local professional firms has been seriously negated.

Non-issues

The other issues on management, technology, thought-leadership and ideology are not relevant at this point. They can be caught up with fairly, for sure. When there is no business left in corporate India for audit by IAF, they are just niceties for the evening cocktail circuit. China has a vision of making its Top 50 CPA firms global and foreign FDI and firms are now banned in auditing of Chinese companies.

Conclusion

The horse has bolted – if you care to notice. Despite this, the time to act is now. The good news is that research in 2015 by IIM-A concludes that the advantage of the MAF is only a “market perception” and there is no superiority in the quality of the financial statements audited by MAF. Our policy maker’s vision is clear. India has come to its ‘patanjali’ moment, in terms of corporate consumers’ shift for auditing services to Indian audit firms. The process of making a global Indian audit firm has begun. _

shailesh.kwebmaker

New Section 90 In Companies Amendment Act 2017 – Aims At Benami Shareholders, Shoots Everyone Else But Them

Background

‘Shell companies’ have been in the news
recently. On how money is laundered, laws are avoided/evaded, benami properties
are held, etc. through such companies. This is more so
post-demonetisation when it has been alleged that a large sum of money has been
laundered through such companies. A series of actions have been taken. Several
listed companies have got their trading on stock exchanges restricted. Though
many got relief thereafter, it is also seen that investigations have been
initiated into activities of many such companies. Directors of such companies
have also been debarred.

It has been perceived that shares of such
companies may be held benami, thus making it difficult to catch the real
culprits. There are of course laws to deal with benami holdings including the
most prominent Prohibition of Benami Property Transactions Act, 1988, which too
was substantially amended in 2016.

A further step has now been taken to,
inter alia, tackle such benami holdings through an amendment to section 89
and through introduction of a new section 90 by the Companies Amendment Act
2017, which has received the assent of the President on 3^rdJanuary
2018. However, the provisions, as this article is being written, await
notification.

Essentially, the said section 90, in very
wide terms, requires disclosure by individuals who, singly or jointly with
others, hold/control substantial interests in companies. This supplements and
indeed widely extends section 89 which requires disclosure of beneficial
interests in shares. This effectively appears to be intended to require
disclosure not just of benami holdings but also holding by eventual individual
owners.

However, the provisions are very widely and
even loosely/ambiguously worded. They will apply not just to listed companies
but also to unlisted/private companies. Further, disclosure, at least one time,
will be required by almost all companies, who then will have to make onward
disclosures to the Registrar.

Existing Section 89

Section 89 of the Companies Act 2013 deals
with disclosure of beneficial interests. A person who holds shares in his name
but who does not hold the beneficial interest therein is required to make a
declaration in the prescribed manner. This section corresponds to section 187-C
of the Companies Act, 1956. Now it has been amended by introduction of the
following definition which will be relevant also for section 90 discussed
below:

“(10) For
the purposes of this section and section 90, beneficial interest in a share
includes, directly or indirectly, through any contract, arrangement or
otherwise, the right or entitlement of a person alone or together with any
other person to—

(i) exercise or
cause to be exercised any or all of the rights attached to such share; or

(ii) receive or
participate in any dividend or other distribution in respect of such
share.”.

As can be seen, the scope of section 89 is
thus widened.

New Section 90

Section 90 goes much further beyond the
provisions of section 89. It requires that individuals who hold or control significant
holding in a company should disclose such fact to the Company. The Company will
record this declaration in a specified register and also make disclosures to
the Registrar. Some relevant extracts from the said section are given below
(emphasis supplied):-

90. (1) Every individual, who acting alone or together, or through one or more persons
or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than
twenty-five per cent. or such
other percentage as may be prescribed, in
shares of a company
or the right to exercise, or
the actual exercising of significant
influence or control as defined in clause (27) of section 2,
over the company (herein referred to as “significant beneficial
owner”), shall make a declaration to the company, specifying the nature of
his interest and other particulars, in such manner and within such period of acquisition
of the beneficial interest or rights and any change thereof, as may be
prescribed:

Provided that the Central Government may
prescribe a class or classes of persons who shall not be required to make
declaration under this sub-section.

…

(4) Every company shall file a return of
significant beneficial owners of the company and changes therein with the
Registrar containing names, addresses and other details as may be prescribed
within such time, in such form and manner as may be prescribed.

(5) A company shall give notice, in the
prescribed manner, to any person (whether or not a member of the company) whom
the company knows or has reasonable cause?to believe—

(a) to be a significant beneficial owner
of the company;

(b) to be having knowledge of the
identity of a significant beneficial owner or another person likely to have
such knowledge; or

(c) to have been a significant beneficial
owner of the company at any time during the three years immediately preceding
the date on which the notice is issued, and who is not registered as a
significant beneficial owner with the company as required under this section.

…..

(7) The company shall,—?(a) where that person fails to give the company the information
required by the notice within the time specified therein; or?(b) where the information given is not satisfactory, apply to the
Tribunal within a period of fifteen days of the expiry of the period specified
in the notice, for an order directing that the shares in question be subject to
restrictions with regard to transfer of interest, suspension of all rights
attached to the shares and such other matters as may be prescribed.

(8) On any application made under
sub-section (7), the Tribunal may, after giving an opportunity of being heard
to the parties concerned, make such order restricting the rights attached with
the shares within a period of sixty days of receipt of application or such
other period as may be prescribed.

(9) The company or the person aggrieved
by the order of the Tribunal may make an application to the Tribunal for
relaxation or lifting of the restrictions placed under sub-section (8).

(10) If any person fails to make a
declaration as required under sub-section (1),?he shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to ten lakh rupees and where the failure is a
continuing one, with a further fine which may extend to one thousand rupees for
every day after the first during which the failure continues.

(11) If a company, required to maintain
register under sub-section (2) and file the information under sub-section (4),
fails to do so or denies inspection as provided therein, the company and every
officer of the company who is in default shall be punishable with fine which
shall not be less than ten lakh rupees but which may extend to fifty lakh
rupees and where the failure is a continuing one, with a further fine which may
extend to one thousand rupees for every day after the first during which the
failure continues.

(12) If any person wilfully furnishes any
false or incorrect information or suppresses any material information of which
he is aware in the declaration made under this section, he shall be liable to
action under section 447.

To which categories of companies does this
section apply?

Section 90 applies to all types of
companies, whether public or private, whether listed or unlisted. All persons
who hold such significant beneficial ownership are required to make such
declaration, except where the Central Government has exempted them.

What type of holdings are required to be
disclosed?

The following types of holdings/control are
required to be disclosed:

1. Beneficial interest of at
least 25% (or such other prescribed percentage) in shares of a company

2. Right to exercise
significant influence or control.

3. Actual exercising of
significant influence or control.

Such holding, etc. would be by an
individual either by himself or together or through other persons including
even persons outside India. The holding/control may be in a private, public or
even a listed company.

Implications

The implications of the new provisions are
wide. Almost every company will see such disclosures, unless the holding is so
widely held that no individual or group hold a significant holding/control. It
applies to all companies – private, public or listed. These disclosures will
then have to be recorded and then filed to Registrar. There will be massive
paperwork, even if one-time. A husband-wife company where each holds such 50%
will require disclosure by both persons. Private equity firms will have to make
such disclosures if they hold such significant holdings. Listed companies will
also see such disclosures. Even if none of these are benami holdings. Even
foreign shareholders are covered.

The wording is wide and, at some places,
ambiguous. Certain definitions are not given and hence may result in further
ambiguity. Take some examples.

If an individual holds/controls ‘together’
with another person, disclosure is required. However, it is not clear what
‘together’ means. Does it have a meaning similar to ‘persons acting in concert’
as defined in detail under the SEBI SAST Regulations?

Often directors, trustees, etc. may
exercise voting rights for companies, trusts, etc. Will they too have to
make disclosures? The Central Government may notify persons who are exempted
from making disclosures.

Shareholding particularly in groups and
listed companies may be held in complex structures. Is the law sufficient to
unravel such structures to find out who, if any, are ultimate persons who hold
shares or have or exercise control? SEBI and RBI have given guidance under
certain circumstances how to find who are real ultimate owners. But the Act
does not give any guidance.

Apparently, the provision will apply to
existing holdings as well as fresh acquisitions. Hence, a one-time declaration
would have to be made.

In any case, will the objective of detecting
benami holdings be achieved? The Prohibition of Benami Property Transactions
Act provides for confiscation of the properties and prosecution of persons
involved. Thus, making such a disclosure could be invitation for such serious
actions. The penalties for not making such disclosures, though significant in amount,
are not very large and does not result in any prosecution under the Act.

The Company has an obligation to notify
persons who hold shares or control to such extent if it has reason to believe.
If they do not take action, they too may face action.

Action by Company which believes a person who
is a significant beneficial owner

If the Company has reason to believe that
there is a person who has such holding/control, it needs to notify such person
to make a disclosure. If such person does not make a disclosure, the Company
has to approach the Tribunal to investigate. If it is found by the Tribunal
that there exists such holding, etc., then it may direct that the
transfer of such shares shall be restricted and all rights relating to such
shares shall be suspended.

Penalties

There are penalties if such individuals do
not make such disclosure. A penalty of Rs. 1 to 10 lakh plus upto Rs. 1000 for
every day of delay can be levied. False disclosures can result in prosecution.
The Company too faces penalties.

Conclusion

Clearly, these provisions need
reconsideration. It is submitted that it should not be notified and brought
into effect. Ideally, a revised and well drafted provision should be introduced
or, second best, through circulars and rules, the implications need to be
diluted and restricted. _

shailesh.kwebmaker

Money Laundering Act: Arrest And Bail

Introduction

Money laundering is a
serious offence which poses a threat not only to the financial systems of a
country but also to its integrity and sovereignty. To curb this offence of
money laundering, India passed the Prevention of Money Laundering Act,
2002 (“the Act”). It is an Act which has assumed great significance in
the recent times. Several economic offences, such as, insider trading, under
the Prevention of Corruption Act, copyright infringement, cheating, forgery,
fraudulently preventing creditors, etc., have been added to the list of
scheduled offences under the Act and now the Act has been used as a weapon in
the fight against financial crimes. The Act is also important since it has
arrest provisions. The matter of bail in respect of an arrest under the Act is
something which has attracted great attention. Let us examine some of these
crucial provisions.

Money Laundering

The offence of Money
Laundering is dealt with by section 3 of the Act. The essential limbs of the
charging section are as under :

(i) Whosoever
directly or indirectly

(ii) attempts
to indulge or knowingly assists or knowingly is a party or is actually involved
in any process or activity connected with

(iii) the
proceeds of crime and projecting it as untainted property

(iv) shall
be guilty of offence of money-laundering.

Under section 3 of the Act,
the categories of persons responsible for money laundering is extremely wide.
Words such as “whosoever”, “directly or indirectly” and “attempts to indulge”
would show that all persons who are even remotely involved in this offence are
sought to be roped in. The entire section revolves around the term “proceeds
of crime”.

The term “proceeds of
crime” has been defined by section 2(1) (u) to mean any property
derived or obtained, directly or indirectly, by any person as a result of
criminal activity relating to a scheduled offence or the value of any such
property or where such property is taken/held outside India, then the property
equivalent in value held within India. It is also relevant to note that not
only must there be proceeds of crime but the accused must either project it or
claim it to be as untainted property in order that it is an offence of money
laundering.

The Schedule to the Act
lays down a list of crimes such as drug trafficking, murder, homicide,
extortion, robbery, forgery of a valuable security, will or authority to make
or transfer any valuable security or to receive any money, counterfeiting of currency, illegal trafficking in arms and
ammunition, poaching, etc. Thus, any proceeds from these crimes is covered by
the definition of proceeds of crime. As the Schedule is exhaustive only those
crimes which are covered by the Schedule and no other offences would fall
within its purview. The Act divides the
offences under the Schedule into three Parts: Part A, Part B and Part C. Part A offences are treated as money
laundering no matter howsoever small the amount involved in the offence,
whereas Part B offences are treated as money laundering, if and only if, the
amount involved exceeds Rs.1 crore.
Part C relates to offences covered under Part A or against property
under the Indian Penal Code which have cross-border implications. An important
addition to Part C is an offence of wilful attempt to evade any tax, penalty or
interest under the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015.

The term “property”
is defined by section 2(1)(v) to mean any property or assets of every
description, whether corporeal or incorporeal, movable or immovable, tangible
or intangible and includes deeds and instruments evidencing title to, or
interest in, such property or assets, wherever located. It may be noted that
section 3 even covers indirect usage of laundered money. Thus, even if the
money is converted into some other asset, the provisions of section 3 would
apply. U/s. 24, the burden of proving that
proceeds of crime are untainted property shall be on the accused.

Offences

Whoever commits the offence
of money-laundering shall be punishable with rigorous imprisonment for a term
from 3 years to 7 years and fine. In case of any offence specified under
paragraph 2 of Part A of the Schedule, maximum term is 10 years.

Further, u/s.45, in case of
a scheduled offence specified under Part A of the Schedule to the Act for which
the term is more than 3 years, the accused cannot be released on bail unless
two cumulative conditions are satisfied -the Public Prosecutor has been given
an opportunity to oppose such release and once he opposes, the Court is
satisfied that there are reasonable grounds for believing that the accused is
not guilty of such offence and that he is not likely to commit any offence
while on bail. This provision for granting bail overrides anything contained to
the contrary in the Code of Criminal Procedure, 1973 which applies to
procedures relating to arrest, bail, confiscation, investigation, prosecution, etc. It is this bail provision which has garnered
maximum attention.

The Supreme Court in Gautam
Kundu vs. Directorate of Enforcement (Prevention of Money-Laundering Act),
(2015) 16 SCC 1, without going into the Constitutional validity of
section 45, held that the conditions specified u/s. 45 of the Act were mandatory
and needed to be complied with which was further strengthened by the provisions
of section 65 and also section 71 of the Act. Section 65 required that the
provisions of the Criminal Procedure Code should apply in so far as they were
not inconsistent with the provisions of this Act and section 71 provided that
the provisions of the Act had overriding effect notwithstanding anything
inconsistent contained in any other law for the time being in force. The Act
had an overriding effect and the provisions of the Code would apply only if
they were not inconsistent with the provisions of the Act. Therefore, the
conditions enumerated in section 45 of PMLA had to be complied with even in
respect of an application for bail made u/s.439 of the Code. That coupled with
the provisions of section 24 provided that unless the contrary was proved, the
Court presumed that proceeds of crime were involved in money laundering and the
burden to prove that the proceeds of crime were not involved, was on the
appellant. The same view was followed by the Supreme Court in Rohit
Tandon vs. The ED, Cr. A 1878-1879/2017.

Evolution of the Act

Before analysing the
aforesaid section 45, it would be interesting to understand how the Act has
evolved from 2002 to its present form. When the Act was enacted, there were two
categories of scheduled offences – Part A and Part B of the Schedule to the
Act. Part A offences were treated as money laundering no matter howsoever small
the amount of offence involved, whereas Part B offences were treated as money
laundering, if and only if, the amount involved exceeded Rs. 30 lakh. Part A at
that time contained only two offences – Paragraph 1 contained sections 121 and
121A of the Indian Penal Code, which dealt with waging or attempting to wage
war or abetting waging of war against the Government of India and conspiracy to
commit such offences and Paragraph 2
dealt with offences under the Narcotic Drugs and Psychotropic Substances Act,
1985. Except for these two serious offences, all other offences were listed
under Part B of the Schedule.

Thus, as originally
enacted, the Act provided that the twin conditions applicable u/s. 45(1) would
only be in cases involving waging of war against the Government of India and
offences under the Narcotic Drugs and Psychotropic Substances Act. For all
offences under Part B, these conditions were not applicable.

The 2009 Amendment
increased offences under Parts A and B of the Schedule. In Part A, offences
under the Indian Penal Code, relating to counterfeiting, offences under the
Unlawful Activities (Prevention) Act, 1967, etc., were added. In Part B,
offences from the Indian Penal Code, Securities and Exchange Board of India Act
1992, Customs Act 1962, CopyrightAct 1957, Trademarks Act 1999, Information
Technology Act, etc., were added.

By the Amendment Act of
2012, a major change was made by which the entire Part B offences were
incorporated in Part A of the Schedule. Thus, the monetary limit of Rs. 30 lakh
no longer applied to these offences which were now made a part of Part A.

By the Finance Act of 2015,
the monetary limit of Rs.30 lakh under the Part B of the Schedule was raised to
Rs.1 crore and Part B of the Schedule incorporated one solo entry, pertaining
to false declarations and false documents under the Customs Act, 1962. Thus,
only in respect of this offence is there a monetary threshold.

Bail Provisions Challenged

It was in this backdrop
that the constitutional validity of the twin conditions laid down u/s. 45(1)
for granting bail to an accused under the Act were challenged before the
Supreme Court in Nikesh Tarachand Shah vs. UOI, WP(Cr.) 67/2017 (SC).
The Supreme Court considered four alternative scenarios in which bail was
sought by a person arrested under the Act:

No.

Arrest
Scenario

Whether
s.45(1) applies?

Can
Bail be granted without satisfying twin conditions?

Arrested
for money laundering alone without attracting a scheduled offence

No
since Part A to Schedule does not apply

Yes

Arrested
for money laundering along with offence under Part B of the Schedule

No
since Part A to Schedule does not apply

Yes

Arrested
for money laundering along with offence under Part A of the Schedule for
which the term is 3 years or less

No
since although Part A to Schedule applies, the imprisonment is for 3 years or
less

Yes

Arrested
for money laundering along with offence under Part A of the Schedule for
which the term is more than 3 years

Yes
since Part A to Schedule applies and the imprisonment is for more than 3
years

The Court observed that the
likelihood of the accused getting bail in the first three situations was far
greater than in the fourth illustration, merely because he was being prosecuted
for a Schedule A offence which had imprisonment for over 3 years, a
circumstance which had no nexus with the grant of bail for the offence of money
laundering. This was something which could not by itself lead to grant or
denial of bail. It also observed that if an accused was tried for a scheduled
offence independently without the added tag of money laundering, then he could
easily get bail under the Code of Criminal Procedure but if was tried along with
section 3 of the Act, then the twin conditions of section 45 got attracted.
This was unfair,

It further observed that
section 45 requires the Court to decide whether it has reasonable grounds for
believing that the accused is not guilty of an offence under Part A. Thus,
while the accused has been arrested for an offence of money laundering, bail
would be denied on grounds germane to the scheduled offence, whereas the person
prosecuted would ultimately be punished for a completely different offen ce –
namely, money laundering. This, was laying down of a condition which had no
nexus with the offence of money laundering at all. Further, a person who may
prove that there were reasonable grounds for believing that he was not guilty
of the offence of money laundering may yet be denied bail, because he was
unable to prove that there were reasonable grounds for believing that he was
not guilty of the scheduled offence.

It held that the Act was
enacted so that property involved in money laundering may be attached and
brought back into the economy, as also that persons guilty of the offence of
money laundering must be brought to book. A classification based on sentence of
imprisonment of more than 3 years of an offence contained in Part A of the
Schedule, had no rational relation to the object of attaching and bringing back
into the economy large amounts by way of proceeds of crime. When it came to
Section 45, it was clear that a classification based on sentencing qua a
scheduled offence had no rational relation with the grant of bail for the
offence of money laundering.

The Court also observed
that certain similar offences were either incorporated or not incorporated
under Part A and hence, for some twin conditions for bail applied but not so
for the other. For instance, while counterfeiting of Government stamps was
included in the Act as a scheduled offence, counterfeiting of Indian coins was
not. Both were punishable with the same term under the Criminal Procedure Code,
but bail conditions would apply differently for each of them.

Another anomaly pointed out
by the Court was that while granting of bail required fulfilment of twin
conditions in respect of a specific situation, granting of anticipatory bail
did not attract any conditions for the very same situation. Thus, if pre arrest
bail was granted, which continued throughout the trial, for an offence under
Part A of the Schedule and money laundering, such a person would be out on bail
without him having satisfied the twin conditions of section 45. However, if in an
identical situation, he was prosecuted for the same offences, but was arrested,
and then he applied for bail, the twin conditions of section 45 would have
first to be met.

Accordingly, for the above
reasons, the Apex Court held that section 45(1) was extremely unjust,
manifestly arbitrary and discriminatory and would directly violate the
fundamental rights of the accused under the Constitution of India. It also held
that the earlier Supreme Court decisions on section 45 of the Act proceeded
onthe footing that section 45 was constitutionally valid and then went on to
apply section 45 to the facts of those cases. Hence, they were not of any
assistance in the case under question where its constitutional validity itself
was challenged.

Ultimately, the Apex Court
declared that section 45(1) of the Act insofar as it imposed two further
conditions for release on bail, was unconstitutional as it violated Articles 14
and 21 of the Constitution of India. All the matters in which bail had been
denied, because of the presence of the twin conditions contained in section 45,
were sent back to the respective Courts which denied bail.

Conclusion

This is a very important
decision since it deals with bail which is a basic right of an accused who is
imprisoned. The Supreme Court, in an old case of Gurbaksh Singh Sibbia
vs. State of Punjab, (1980) 2 SCC 565, had laid down that bail is the
rule and refusal an exception and that a presumably innocent person must have
his freedom to enable him to establish his innocence.This decision has given
strength to the old adage, presumed innocent until proven guilty, otherwise the
section required an accused to demonstrate his defence at the bail stage
itself! _

shailesh.kwebmaker

Changing Face Of Practice Management

Generalisations
can be grossly misleading, but this one I will still make. We as Chartered
Accountants love to complain and project ourselves as victims. We genuinely
believe that we are tirelessly slogging away for unappreciative and
unresponsive clients. I find this a self-defeatist attitude stemming from a
lack of enjoyment and pride in the job we are doing. If there is a real problem
then let us fix it. As they say, if you are not lighting any candles, don’t
complain about being in the dark.

To fix the
problem, we need to ask some basic questions. As individuals, we often ponder
over some existential questions, but fail to ask similar questions relating to
our professional existence:

– What is the
purpose of our existence and why are we making all these efforts?

– Where do we
see ourselves in the next 5/10 years and what efforts are we making towards
that end?

– How do our
clients and others see us?

These and
similar core questions will help us decide the strategy for managing our
professional practice.

Size Matters

Over the last
few decades, businesses have evolved and have got far more complex on the
backbone of technology. Indeed, the technology revolution has permitted
businesses to assume structural changes and scales never contemplated or thought
feasible before.

The unfortunate truth is that Chartered
Accountancy(CA) firms have not evolved at the same pace. The records of ICAI
shows that less than 10 % of the Indian CA firms are more than 4 partners
strong and hence most often incapable of providing the full range of
professional service to their clients.

Professional
firms have a choice; to either remain small and create a niche for themselves
or build scale and become a one-stop shop for their clients. A firm where
partners individually would create a niche for themselves, but the firm
collectively would cater to the full range of services. The reality however, is
that firms have chosen to remain small for all the wrong reasons. The chief
reasons are – unwillingness to give up the name, protecting tenancy rights,
fear of losing independence, etc.

Firms that
remain small get into the vicious cycle, often unable to retain clients that
are growing both in scale and in complexity.

Clients that
are growing, face ever more complexity in terms of their structure, operations
and compliance needs. This throws up tremendous opportunities for the CA firms
that have adapted to changing environment. Clients do not look for
one-dimensional solutions from the perspective of audit or tax or corporate
law, but from a comprehensive business viewpoint. The professional (even if he
is operating in a niche area) must therefore develop the competence to look at
the client problem in a holistic manner, thereby providing value to the client.

Perhaps, the
only way to build expertise over diverse areas of practice, each having its own
complexities, is to build scale, induct talent, and recognise that it is no
longer possible for a professional to have expert knowledge in all areas of
professional practice. Firms should also think of building multi-disciplinary
teams and collaborate with other professionals, such as lawyers, cost
accountants, information technology professionals, management graduates, etc.

Think
Strategically

Scale can be
achieved only if the CA firms think strategically and professionalise the way
they manage their practice, which is entirely different from rendering
professional services to clients. Many CA firms have grown up as family run
businesses, where the control and decision-making vests with the person who
started the practice and at best is handed down to family members. Outsiders
have very little chance of taking the leadership position and this creates a
serious impediment to attracting talent and consequently professionalising the
firm.

CA firms
compete in the professional space in two distinct areas: 1) To attract clients;
and 2) Recruit and retain competent staff. Perhaps, in a growing economy such
as India, attracting clients is a lesser problem. The bigger challenge and
determinant of success is the ability to attract, develop, retain & deploy
competent staff.

Today, the
Indian economy is doing well and the rising tide has lifted up all boats. It is
the right time to invest in internal competencies, put in place robust
processes and build scale, as that alone will help provide consistent quality
and value to the client, even when, inevitably, the tide turns. As Warren
Buffet said, “it is only when the tide goes down that you find out who is
swimming naked”.

Eventually,
clients will pay based on their perception of the value they have received.
Goods are consumed but services are experienced. In order to win client loyalty
and enhance reputation, CA firms will have to focus on customer experience. It
is said that: Satisfaction = Perception – Expectation. When a
client gives an assignment, he has certain expectations as to the quality of
service he ought to receive. At the end of the assignment, if the client
perceives that his total experience is better than his initial expectation,
then his satisfaction quotient remains high. In other words, if one can deliver
more than what was expected by the client, it helps cement relationships. One
of the best compliments is when a client introduces you as one who “delivers
more than what he promises”.

Standardisation
to leverage growth

CA firms need
to standardise their processes and procedures for rendering professional
services. Even complex assignments can be broken down to simple executable
steps. These steps can be standardised and templates/checklists can be prepared
for their execution. This would help in delegation of work, resulting in
improved efficiency in its execution. Of course, professional work requires
intellectual application and cannot and should not be totally standardised. However,
the portion that can be standardised – and most often this is the major portion
of the total work – should be standardised, so that the senior team can focus
on the critical issues where the actual value addition happens.

As the firm grows, standardisation also helps
maintain service standards and consistency in the stand and position taken by
the firm across locations and across partners in technical, legal, statutory
and operational matters.

Linked to
standardisation is institution building and positioning of the firm. A client
operating from multiple locations is happy to deal with a firm that can support
him in all the locations, but would necessarily expect the same service level.
Standardisation gives him that look and feel of consistency and assurance that,
across locations and partners, the service level will remain the same.

Professional
firms do rely on the individual brilliance and charisma of their partners.
However, to ensure continuity and to achieve smooth succession, it is important
to give confidence to the client that the firm, as an institution, will deliver
quality service in a predictable manner on a consistent basis. As Aristotle
said, “We are what we repeatedly do. Excellence, then, is not an act, but a
habit”.

We have
unfortunately seen many examples of reputed firms headed by highly respected
professionals wither away once that professional has completed his innings. One
of the critical requirements of growth is to build trust and confidence in the
institution, and not just in a particular individual. Standardisation goes a
long way in institution building.

Focus on
training and quality

CA firms are
integral part of the knowledge economy and can deliver quality service only if
they have trained, competent and motivated staff. Firms that intend to grow and
remain relevant will have no choice but to invest in their human resources.
Partners can leverage their ability to execute more work by delegating it to
competent trained juniors. Standardisation of work coupled with regular training
of staff would help a CA firm reach its full potential.

In order to
reap the maximum benefit of training, one has to create an atmosphere where
staff can work at their optimum level. High salary is only one facet of
motivation. If the staff has independence, challenging work, and a nurturing
environment, it will go a long way in retaining talent. A formal unbiased
appraisal system with 360 degree feedback mechanism, coupled with mentoring,
would help staff understand the expectations of the firm and do course
correction, when required. It would also help in the partners understanding the
aspirations, expectations and problems faced by the staff, creating a virtuous
circle. A well-defined path for rising in the ranks of the firm would provide
motivation and a sense of belonging.

The staff
members constantly deal with the staff of the client and often gain invaluable
insights relating to client expectations, opportunities for new work and
weaknesses in delivery of service. Honest feedback from the staff would be of
immense value in initiating remedial and even strategic decisions.

A formal Human Resource (HR) approach will
ensure that all issues relating to staff are formally and systematically
managed. This will ensure that small irritants are addressed promptly without
festering into deeper problems. It will also result in a feedback system, where
information will flow both ways from management to staff and vice versa.

It is a common
complaint of CA firms that there is tremendous resistance from clients to fee
increases, and there is a hanging sword of losing assignments to fellow
professionals willing to work at a lower fee. There may be some truth in this,
but the fact remains that most clients do not change their CA unless there are
compelling reasons to do so, and fees is rarely one of them. CA firms should
focus on enhancing the quality of their service by knowledge building and
thereby raising the bar on efficiency. If the firm renders service at the
highest level of professional expertise, fees should never be a problem. The
problem is when CA firms demand premium fees without building on quality and
excellence.

Position your
firm

Further, the CA
firm should be clear about the area of practice that it intends to occupy and
the value proposition that it brings to the table. The operational strategy,
the pricing decision, the HR policies will all flow from this understanding.

David H.
Maister discusses a very interesting concept in his book entitled “Managing the
Professional Service Firm”. The services that professional firms render can be
broadly classified as:

Brains (Expertise) practice: Hire us because we
are smart.Generally,
these are non-recurring assignments where the stakes are high and the client is
willing to pay a premium price, but wants the highest level of professional
expertise. The execution of the assignment would typically require intense
involvement of the partner and lightning quick response time. The assignment
would require innovative, out of the box thinking with minimal scope of
standardisation and downward delegation.

Grey Hair (Experience) practice: Hire us because
we have been through this before: Most medium and small CA firms fall under this
category. They have the experience and have done similar assignments many times
over. It could be statutory audit or other recurring work like filing a tax
return or attending a scrutiny assessment. Each assignment may have its unique
features, requiring partner time, but also a large component that can be
standardised and delegated.The clients may believe that they can get the same
level of service or in any case have the same end result achieved by going to
another professional firm. Relationship, trust and comfort levels of the client
play a major role in ensuring an enduring relationship.

Procedural (Efficiency) practice: Hire us because
we know how to do this and can deliver it efficiently: This practice could be akin to
business process outsourcing. Companies may want to transfer certain processes
to a professional firm as they may have dedicated and trained staff to do these
functions. These assignments would be repetitive and would necessarily need to
be standardised, with only exceptional matters required to be escalated to
seniors or partners’ attention. Profitability would be achieved by increasing
operational efficiency and quick turnaround would be the name of the game.

Firms that
carry out “Efficiency work” cannot expect the fee scales of the “Expertise”
firms. However, they could achieve the same level of earnings by improving
internal efficiencies, standardising, streamlining processes, and putting in
place quality review systems to ensure that mistakes are minimised and/or
detected early. It is not that any one of the above areas of practice is
preferable to the other and a CA firm may be in more than one of the above
spaces. The point is that the strategies, focus and approach would necessarily
have to be different for each of the above-mentioned areas.

Managing
knowledge

Professional
firms generate a great deal of knowledge material, which perhaps is one of
their most valuable assets. Yet, most often, there is no well-defined system or
process to manage this knowledge base efficiently without compromising
security. As the firm grows, the same research work or knowledge material
prepared by one partner/team is likely to be duplicated by other partners and
other locations. This results in not just inefficiency, but also exposes the
firm to risk due to different partners potentially taking a different position
on the same technical point. Managing knowledge and creating a structure where
this knowledge is assimilated, stored, updated and shared by all partners and
senior staff, easily and seamlessly can become a differentiator between a
successful firm and just any other firm.

Adopting technology

We are living
in times of technology revolution and yet many CA firms have failed to
adequately harness the power of technology. Size and scale would give CA firms
the ability to invest in technology that enables them to leverage their
professional expertise many times over. It would enable them to computerise and
delegate the repetitive tasks or tasks that require data mining and computer
aided analytics, leaving time to concentrate on matters requiring professional
acumen. In addition, technology can be used to analyse information and generate
reports in ways not possible until now, both with regard to client servicing
and practice management. Of course, technology poses its own threats and hence,
every upgradation should address concerns about data security.

CA firms should
make innovative use of technology to stay ahead of the curve and not
grudgingly, because it is no longer possible to function without it.

Think Global

In times where
the world has become a village, CA firms cannot remain local when practically
all their clients – big or small- have international connects. They will have
to maintain a global perspective, while enhancing their local expertise, so
that they can advice local businesses looking to expand globally and global
businesses looking to come to India.

Perhaps, the
obvious choice is to become part of an international network or association.
This sends a strong and clear message that your firm has the reach and connects
to handle cross border transactions.

Being part of
an international association gives the firm a chance to interact with other
professional firms from all over the world and imbibe the best of professional
practices across countries and continents. It gives an understanding that there
are many paths to professional excellence and it is for each firm to choose the
path that most suits its local environment and specific growth aspirations.

Attending the
meetings of the international association also provides an opportunity to bond
closely with fellow professionals and develop close friendships. This helps
both parties to understand the capabilities, practice standards and ethical
values followed by the respective firms. Clients often look up to a CA as a
confidant and a guide for all their problems and needs.

The CA firm can
recommend a reliable foreign firm in an alien jurisdiction with much greater
confidence, when it has interacted with the partners of such firm personally.
Such an international association also creates a framework for doing joint assignments requiring professional expertise in multiple geographical
locations. Working together is much
easier and rewarding, when parties know each other at a personal level.

The truth is
that, insular domestic practice will fall short of client needs and expectation
and will struggle to
remain relevant.

To sum up

We are living
in exciting times where the environment in which we operate is constantly
changing. This throws up tremendous opportunities; but to capture them, CA
firms will have to take strategic decisions, be proactive and willing to
constantly adapt and innovate. The future will belong to those who break free
from old dogmas and are willing to constantly challenge themselves to achieve
excellence. _

shailesh.kwebmaker

When Negligence/Lapses Become Knowing Frauds? Lesson From The Price Waterhouse Order

SEBI’s Order – whether and when mere
negligence amounts to connivance to fraud?

SEBI’s order in Price Waterhouse’s case (of
10^th January 2018) is a worrisome precedent not just for auditors,
but also for almost every person associated with securities markets including
independent directors and CFOs from whom certain standards of care are expected
in the discharge of their duties. The issues are :

1. When can a person be held
to have committed fraud?

2. Does not holding a person
guilty of fraud require a much higher and stricter benchmark of proving `mens
rea’ (i.e. guilty mind/wilful act) beyond reasonable doubt? SEBI has
held that in case of auditors, under certain circumstances proving `mens rea’
is not required.

Let us put this in a different way. What
would be the consequence to a person who has exercised less than `due care’
whilst performing his duties? The issue is : Would he be liable of negligence
or fraud? This is because the consequences for both would be different and they
can be more severe for fraud.

SEBI has effectively held that a series of
such negligent acts would amount to fraud under certain circumstances. This is
by applying a lower benchmark and test of ‘preponderance of probabilities’,
instead of proving mens rea beyond reasonable doubt.

The effect of this is far reaching. Take
another category, that is directors/independent directors. The Companies Act,
2013 and the SEBI LODR Regulations both provide for comprehensive duties of
directors. Will a director who performs his duties short of `due care’ be held
to have participated in `fraud’.

SEBI’s order is of course under challenge
and it could be some time before a final resolution as to whether the findings
in the order are upheld or reversed. However, considering that SEBI has relied
on relevant rulings of the Supreme Court and the Bombay High Court, it will be
necessary to examine the findings in the order and the reasoning for the
punishment. Needless to emphasise, for the purpose of this article, the
findings in the SEBI’s order are presumed to be true and the focus is on the
principles enunciated.

Brief background

While the Satyam case is widely known, SEBI
summarises some of its findings in the order. It is stated that a more than Rs.
5000 crore shown as cash/bank balances in balance sheet of Satyam was
non-existent and hence fraudulently stated. Similarly, the revenues and profits
too were overstated for several years, which resulted in over statement of
cash/bank balances. The question before SEBI was : whether the auditors were
aware of such falsification and connived with the management? or whether their
non-detection of such falsification was on account of being merely negligent?

Negligence vs. connivance

Why does it matter whether the role of the
auditors of Satyam (“the Auditors”) was of being merely negligent or whether
they had connived in such falsification? When SEBI initiated action against the
auditors, seeking to, inter alia, debar them from acting as auditors for
a specified period, the jurisdiction of SEBI to act against auditors was
challenged before the Bombay High Court. It was contended that only the
Institute of Chartered Accountants of India could act against auditors who are
chartered accountants, for not carrying out their duties in accordance with
professional standards, and not SEBI. However, the Bombay High Court rejected
this argument, but with a condition. It effectively held that if it was a mere
case of not adhering to prescribed professional standards while carrying out
the audit, SEBI may not have any jurisdiction. However, if it could be shown
that the auditors had knowingly participated or connived in the fraud, then
SEBI could have jurisdiction.

The Bombay High Court observed in Price
Waterhouse & Co. vs. SEBI ([2010] 103 SCL 96 (Bom.)), “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 further said, “In a given case, if
ultimately it is found that there was only some omission without any mens rea
or connivance with anyone in any manner, naturally on the basis of such
evidence the SEBI cannot give any further directions.” Thus, it is not
enough to show that the auditors had not followed the prescribed professional
standards but it is also necessary to establish that they had done this in
connivance with and in collusion with the management.

Supreme Court on “connivance” vs.
“negligence”

In SEBI vs. Kishore R. Ajmera ([2016] 66
taxmann.com 288 (SC)), the Supreme Court had examined this issue in context
of role of stock brokers vis-à-vis acts of their clients. Stock brokers
too have to follow certain norms and code of conduct. Stock brokers are of
course, unlike auditors, registered and regulated directly by SEBI. The
observations and conclusions of the Court on when negligence becomes connivance
are applicable in the present case too. The Court observed as follows (emphasis
supplied):

“Direct proof of
such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of
preponderance of probabilities so far as adjudication of civil liability
arising out of violation of the Act or the provisions of the Regulations framed
thereunder is concerned. Prosecution under Section 24 of the Act for violation
of the provisions of any of the Regulations, of course, has to be on the basis
of proof beyond reasonable doubt. ……Upto an
extent such conduct on the part of the brokers/sub-brokers can be attributed to
negligence occasioned by lack of due care and caution. Beyond the same,
persistent trading would show a deliberate intention to play the market.”

The Court thus laid down certain important
criteria. Firstly, it made a distinction between proceedings for adjudication
of civil liability and for prosecution. The present case, it may be
recollected, was not of prosecution. The Court said that the criteria here is
`preponderance of possibilities’. It also generally explained that to some extent,
a default can be attributed to negligence. But persistence of negligence will
show a deliberate intention to do so. This is the criteria SEBI applied in
SEBI’s Order.

How did SEBI hold the auditors to have acted
in connivance with management?

SEBI found that the Auditors had not carried
out the audit in accordance with the prescribed standards. The issue is : Does
this amount to mere negligence or does this amount to acting this in connivance
with the management? SEBI examined the audit process followed from time to time
and made the following pertinent observations and conclusions:

1. “There can be only two
reasons for such a casual approach to statutory audit – either complacency
or complicity.”

2. “I find that while the
Noticees have justified their acts by selectively quoting from various AAS, the
marked departures from the spelt-out Auditing standards and Guidance Notes are
too stark to ascribe the colossal lapses on the part of auditors to mere
negligence. It is inconceivable that the attitude of professional skepticism
was missing in the entire exercise spanning over 8 long years.”

3. ?”All these factors turn the needle of suspicion away from negligence
to one of acquiescence and complicity on the part of the auditors.”

4. “The preceding paragraphs
have unambiguously shown that there has been a total abdication by the auditors
of their duty to follow the minimum standards of diligence and care expected
from a statutory auditor, which compels me to draw an inference of malafide and
involvement on their part.

5. “The auditors were well
aware of the consequences of their omissions which would make such accumulated
and aggregated acts of gross negligence scale up to an act of commission of
fraud for the purposes of the SEBI Act and the SEBI (PFUTP) Regulations.”

Making the above observations, and recording
a finding of repetitive non-observance of certain professional auditing
standards, SEBI held that the acts/omissions were not merely negligence but
amounted to connivance in the commission of fraud. It thus issued directions of
debarment, disgorgement of fees, etc. against the Auditors.

Conclusion and relevance for other persons
associated with the securities markets

Though this is not the first case to be
dealt with in this manner, it is obvious, considering the detailed analysis and
the stakes involved, that those involved with listed companies are being
closely examined. Further, the principles now well settled will surely be
followed in future cases.

There are many persons – some registered
with SEBI and some not – who may need to take note of this. Any person who is
expected to observe some standards of behaviour whilst performing his duties in
relation to securities markets will have to take, if one may say, a little more
than `due care’.

Directors of companies, particularly
independent directors, are one such group of persons. The Companies Act, 2013
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
prescribe the role of the Board/directors/independent directors in great detail.
A director may not have actually participated in a fraud, but if he does not
perform his duty with diligence expected of a person of his
background/expertise and if this happens repeatedly, he may be subject to such
action by SEBI.

Registered intermediaries of various types
such as stock brokers, portfolio managers, investment advisors, etc. all
too would have cause for concern.

Compliance Officers and CFOs are yet another
category who have a prescribed role under various SEBI Regulations. Defaults by
them may make them subject to action by SEBI.

Needless to emphasise, much will also depend
on the facts of the case.

It needs to be reiterated for emphasis
that, for initiating prosecution, a higher standard of proving mens rea beyond
reasonable doubt is still required. However, the consequences of SEBI orders of
debarment/disgorgement by itself can be harsh enough in terms of loss of
livelihood, monetary loss and loss of reputation. _

shailesh.kwebmaker

Companies Act: Operation Delyening

Introduction

A bariatric surgeon is one who cuts away
layers of fat from an obese person in order to have a slimmer structure. The
Ministry of Corporate Affairs (“MCA”) has also donned the role of such a
surgeon by trimming away vertical layers of subsidiaries (or step-down
subsidiaries) in order to present a leaner and clearer corporate structure. Its
scalpel for this highly impactful operation was the Companies (Amendment
Act), 2017 to the Companies Act, 2013 (“the Act”) coupled with the
Rules issued under the Act. The Amendment Act has introduced several changes to
the Act but the one which had the most disruptive effect is in fact not a part
of the Amendment Act. Initially, the Amendment Bill had decided against
restricting vertical layers of subsidiaries but subsequently on account of the
action against shell firms and other similar events, the MCA decided to retain
the restriction in the Amendment Act. Thus, the Amendment Act does not amend
the existing position in the Companies Act, 2013 of restricting the number of
layers of vertical subsidiaries.

Amendment

The original definition of section 2(87) of the Act which defined the
term “subsidiary” provided that a subsidiary in relation to a
company, which was the holding company, meant one in which the holding company
controlled the composition of the board of directors or exercised or controlled
more than half the total share capital either on its own or together with its
subsidiaries. The definition as it stood had generated several problems since
even a passive investor, e.g., a private equity investor, who owned more than
50% of the total share capital but not 50% of the total voting power was
treated as the holding company of the investee company. This created unique
problems for several investors and investees alike.

This definition was amended by the Amendment
Act to replace total share capital with total voting power.
Hence, the Amendment restores the old position, i.e., in order to be treated as
a subsidiary, the holding company must control more than 50% of the total
voting power and not merely 50% of the total capital. Accordingly, all shares
not carrying voting rights, e.g., non-voting shares, preference shares, etc.,
would be ignored while determining whether there is a holding-subsidiary
relationship between 2 companies.

The proviso to this definition provides that
such classes of holding companies as may be prescribed by the MCA shall not
have more than the prescribed number of layers of subsidiaries. The Companies
(Amendment) Bill, 2016 sought to delete this proviso and permit holding
companies to have as many layers as they desired. However, when the Bill was
passed by the Lok Sabha this deletion was dropped, i.e., the original position
of restriction in number of layers of subsidiaries, was retained.

Rules

Pursuant to the proviso being retained, the
MCA notified the Companies (Restriction on Number of Layers) Rules,
2017 (“the Rules”) on 20^thSeptember 2017. The Rules
provide that on and from 20^th September 2017, a company cannot have
more than 2 layers of subsidiaries. A layer in relation to a holding company
has been defined to mean one or more subsidiaries. A layer thus, is a vertical
layer of a subsidiary. However, in computing the limit of 2 layers, 1 layer
comprising of one or more wholly owned subsidiaries is excluded. Thus, the
total number of layers which a company can have is 1 + 2 = 3, i.e., 1 layer of
wholly owned subsidiaries + 2 layers of other subsidiaries which may or may not
be wholly owned. For instance, HCo has 5 wholly owned subsidiaries – A to E.
All of these would constitute 1 layer which would be exempted. Each of these
wholly owned subsidiaries can now incorporate 2 vertical layers, e.g., A can
incorporate A1 and A1, in turn, can have A2. A1 and A2 would constitute 2
vertical layers in relation to HCo. However, A2 cannot incorporate A3 since
that would mean that HCo would violate the prescribed limits. It may be noted
that the restriction is on vertical layers and not horizontal subsidiaries.
Thus, in the above example, instead of 5 subsidiaries, A to E, HCo can have
many more direct subsidiaries (whether 100% or less), say, A to Z. However, the
number of step-down subsidiaries would be limited as per the Rules.

Section 2(87) provides that company includes
a body corporate and hence, the definition of subsidiary would even encompass a
foreign body corporate which is a subsidiary of the Indian holding company.
Also, a subsidiary in the form of a Limited Liability Partnership, being a body
corporate, would be covered.

Gateways

The Rules do not apply to the following
types of companies:

(a) a Bank

(b) a Systemically Important
Non-Banking Finance Company, i.e., NBFCs whose asset size is of Rs. 500 cr. or
more as per its last audited balance sheet.

(d) a Government Company

The Rules provide grandfathering to existing
layers of subsidiaries even if they are in excess of the limits prescribed by
the Rules. For availing of this protection, holding companies were required to
file a prescribed return with the Registrar of Companies latest by 17^thFebruary
2018. The protection further provided that after the commencement of the Rules,
such a holding company cannot have any additional layers over and above those
which have been grandfathered. Further, if the existing layers are reduced
after the commencement of the Rules, then it cannot have new layers over and
above the limit prescribed by the Rules. To give an illustration, HCo had 5
layers of subsidiaries prior to the enactment of the Rules. These layers would
be protected by the grandfathering provisions and can continue. However, HCo
cannot incorporate any fresh 6^th layer of subsidiary.If HCo were to
sell the shares of one of the subsidiaries and be left with 4 layers then it
cannot now incorporate any fresh layer of subsidiaries since that would again
violate the provisions of the Rules, but it can continue with the 4 layers
which have been grandfathered.

Another exemption provided by the Rules is
that the limit of 2 layers would not affect a company from acquiring a company
incorporated abroad which already has subsidiaries beyond 2 layers and these
are allowed under the laws of such foreign country. However, this exemption is not provided if such a
foreign company desires to subsequently set up multiple layers of foreign
subsidiaries. Thus, it would not be possible to have multiple foreign layers
even if the foreign laws were to permit them.

Impact Analysis

The Rules would severely impact the creation
of Special Purpose Vehicles (“SPVs”) which are very prevalent especially
in sectors such as, infrastructure, real estate, roads, etc. In these
sectors, it is a common practice to have multiple layers for different
projects. For instance, a real estate company may have 2 subsidiaries, one for
commercial projects and one for residential. Within each of them, there may be
holding companies for different regions, e.g., one for Mumbai, one for Delhi,
one for Chennai, etc. Under each regional holding company, there may be
an SPV for a specific project. The benefit of a layered structure is that it
facilitates value unlocking at multiple levels. A strategic investor/project
partner can invest at the SPV level. A financial investor who is interested
only in residential projects in Mumbai can invest at the Mumbai layer level
since he would then get access to all the projects in Mumbai. Similarly,
investors could invest at the residential level or even at the corporate level.Such
structuring would be constrained by the limit on the layers. Also, in a case
where the 1^st layer is not of wholly owned subsidiaries, the limit
would be of only 2 layers and not 1+2 =3.

Another area which would be affected is that
of outbound investment. It is quite common for Indian companies to have
multiple layers when investing abroad. For instance, an Indian company may have
an Intermediate Holding Company (IHC) in a tax haven, followed by a Regional
Holding Company (RHC) say, one in a European country for housing all European
ventures and another in an African country for all African ventures. Under the
RHC would be the countrywise SPVs. These layers would now also have to toe the line
laid down under the Rules. However, on a related note, the Reserve Bank of
India also does not easily approve of multi-layered structures for outbound
investments involving the use of multiple layers of foreign SPVs. Thus, the
Companies Act restrictions and the RBI’s views under the Foreign Exchange
Management Act are now similar.

Same Difference

A similar restriction already existed in
section186 (similar to section 372/372A of the Companies Act, 1956) of the Act.
According to this section, a company cannot make an investment through more
than two layers of investment companies. Thus, any company, desiring to make an
investment, can do so either directly or through an investment company or
through one investment company followed by a 2^nd layer of investment
company. However, it cannot have a 3^rdlayer of investment company
under the 2^nd layer of the investment company.

It may be noted that the prohibition is on
having more than 2 layers of investment companies and hence, we need to
ascertain what constitutes an investment company? The section
defines an ‘investment company’ to mean a company whose principal
business is acquisition of shares, debentures or securities.

Secondly, it must be a company whose principal
business is acquisition of securities. What is principal business has now
been defined by the Amendment Act. According to these tests, a principal
business is defined if it satisfies the following conditions as per its audited
accounts:

(i) Its assets in the form of
investment in shares, debentures or other securities constitute not less than
50% of its total assets; OR

(ii) Its income from investment
business constitutes not less than 50% of its gross income.

The Act expressly provides that the
restriction on two layers of investment companies even applies to an NBFC whose
principal business is acquisition of securities.

The investor company could be an investment
or an operating company, but it cannot route its investment via more than 2
layers of investment companies. If the investment is routed through an
operating company or one whose principal business is not acquisition of
securities, then the restriction u/s. 186 on 2 layers would not apply.

The prohibition on making investments only
through a maximum of two layers of investment companies will not affect the
following two cases:

(i) a company from acquiring any other company incorporated in a
country outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country; or

(ii) a subsidiary company from having any investment subsidiary for
the purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.

Certain
Government companies have also been exempted from this provision.

The Rules u/s. 2(87) provide that they are
not in derogation to the exemptions contained u/s. 186(1). Thus, the Rules
would apply equally to an investment company as long as they are not in
derogation of the proviso to section 186(1).

One may compare the restrictions contained
in section 186 vs. section 2(87) as follows:

Details

Section 186

Section 2(87)

Restriction on

More than 2 layers of investment companies

More than 2 layers of subsidiaries

Applies to

All companies, including NBFCs but excluding certain
Government companies.

All companies other than banks, NBFCs, insurance companies,
Government companies.

Type of layers prohibited

Only investment companies – not applicable to operating
companies

All types of subsidiaries, whether operating or investment.

Companies or body corporates?

Only companies

All types of subsidiaries, whether companies or body
corporates.

Effective from

1^st April 2014

20th September 2017, the date from which the Rules were notified.

Conclusion

India Inc. is going to find it tough to
grapple with these provisions more so when it is used to having multiple
layers. The objective seems to be to cut through the opacity haze of multiple
layers and provide more transparency to the regulators to find out who is the
real investor. Clearly, thin is in!! _

shailesh.kwebmaker

Companies (Amendment) Act, 2017 – Important Amendments Which Have Relevance From Audit

In the first part, I have covered
definitions along with its impact and also reasons/ background for such
amendments. In this article, I propose to cover amendments which are of
importance and relevance from Audit of small and medium-sized companies and issues
one may face while carrying their audit. I have thus avoided matters applicable
to listed companies

I. Public deposits:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Presently, companies are required to deposit an amount of not less than 15% of the deposits maturing during the financial year and financial year next following which is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account. ( Section 73)	Companies Amendment Act 2017 (CAA 2017) now provides that an amount of not less than 20% of the deposits maturing during the following financial year is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.	Companies Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are self-explanatory which read as under : The Committee felt that though the provision was a safeguard for depositors, it would increase the cost of borrowing for the company as well as lock-up a high percentage of the borrowed sums. Accordingly, the requirement for the amount to be deposited and kept in a scheduled bank in a financial year should be changed to not less than twenty percent of the amount of deposits maturing during that financial year, which would mitigate the difficulties of companies, while continuing with reasonable safeguards for the depositors who have to receive money on maturity of their deposits. Currently Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that amount of deposit pursuant to these rules shall not fall below fifteen per cent. of the amount of deposits maturing, until the end of the current financial year and the next financial year. This provision in the case of larger deposit accepting companies required huge amount to be blocked in deposits since it required two financial years to be considered for maintenance of liquid assets . Thus amendment made now will help in reducing the financial burden of deposit accepting companies especially in the falling interest rate scenario.
Presently, companies accepting deposits are required to get the deposits insured.	This requirement is done away with.	CLC Observations in Para 5.2 of the report are self-explanatory which read as under : It was also noted by the Committee that as on date none of the insurance companies is offering such insurance products. Considering the above situation, the provisions of Section 73(2) (d) along with relevant Rules are omitted.
Presently, companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits.( Section 73)	CAA 2017 provides that companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company has made good the default and a period of five years has elapsed since the date of making good the default.	Thus post-amendment, Company can accept deposits after 5 years from the date of making good such default (In repayment of deposit and/or interest). CLC Observations in Para 5.3 of the report are self-explanatory which read as under : The Committee noted that imposing a lifelong ban for a default anytime in the past would be harsh. Therefore, it was recommended that the prohibition on accepting further deposits should apply indefinitely only to a company that had not rectified/made good earlier defaults. However, in case a company had made good an earlier default in the repayment of deposits and the payment of interest due thereon, then it should be allowed to accept further deposits after a period of five years from the date it repaid the earlier defaulting amounts with full disclosures.
Currently, deposits accepted and interest thereon, which remained unpaid at the commencement of Companies Act, 2013 was required to be paid within one year or before the expiry of the stipulated period, whichever was earlier. ( Section 74)	CAA 2017 now provides that such amounts shall be repaid within three years or before the expiry of the stipulated period, whichever was earlier.	Under Companies Act 2013, deposits are allowed to be accepted by only eligible companies and this has put lot of restrictions on the companies which had accepted deposits under Companies Act 1956 . To overcome the difficulties faced by such companies, repayment is now permitted up to 3 years or maturity , whichever is earlier.
Currently, Section 76A(1)(a) provides that in respect of contraventions of Section 73 or 76, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees;	CAA 2017 provides that a company will be punishable with a fine of one crore rupees or twice the amount of deposit accepted by the company, whichever is lower.	Normally, rules of Penalty require that Penalty be imposed with reference to the quantum of offence committed. Thus flat penalties provided under the current provisions were disproportionate to the offence committed and hence this amendment seeks to correlate penalty with the underlying deposit.
Currently, it is provided that an officer of the company who is in default shall be punishable with imprisonment or fine.	Now it is provided that an officer of the company who is in default shall be punishable with imprisonment and fine.	In the process, the offence has been made non-compoundable.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently,
companies are required to deposit an amount of not less than 15% of the
deposits maturing during the financial year and financial year next following
which is to be kept in a Scheduled Bank and called as Deposit Repayment
Reserve Account. ( Section 73)

Companies
Amendment Act 2017 (CAA 2017) now provides that an amount of not less than
20% of the deposits maturing during the following financial year is to be
kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.

Companies
Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are
self-explanatory which read as under :

The
Committee felt that though the provision was a safeguard for depositors, it
would increase the cost of borrowing for the company as well as lock-up a
high percentage of the borrowed sums. Accordingly, the requirement for the
amount to be deposited and kept in a scheduled bank in a financial year
should be changed to not less than twenty percent of the amount of deposits
maturing during that financial year, which would mitigate the difficulties of
companies, while continuing with reasonable safeguards for the depositors who
have to receive money on maturity of their deposits.

Currently
Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that
amount of deposit pursuant to these rules shall not fall below fifteen per
cent. of the amount of deposits maturing, until the end of the current
financial year and the next financial year.

This
provision in the case of larger deposit accepting companies required huge amount
to be blocked in deposits since it required two financial years to be
considered for maintenance of liquid assets . Thus amendment made now will
help in reducing the financial burden of deposit accepting companies
especially in the falling interest rate scenario.

Presently,
companies accepting deposits are required to get the deposits insured.

This
requirement is done away with.

CLC
Observations in Para 5.2 of the report are self-explanatory which read as
under :

It
was also noted by the Committee that as on date none of the insurance
companies is offering such insurance products.

Considering
the above situation, the provisions of Section 73(2) (d) along with relevant
Rules are omitted.

Presently,
companies accepting deposits are required to certify that the company has not
committed any default in the repayment of deposits accepted either before or
after the commencement of this Act or payment of interest on such deposits.(
Section 73)

CAA
2017 provides that companies accepting deposits are required to certify that
the company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of
interest on such deposits and where a default had occurred, the company
has made good the default and a period of five years has elapsed since
the date of making good the default.

Thus
post-amendment, Company can accept deposits after 5 years from the date of
making good such default (In repayment of deposit and/or interest).

CLC
Observations in Para 5.3 of the report are self-explanatory which read as
under :

The
Committee noted that imposing a lifelong ban for a default anytime in the
past would be harsh. Therefore, it was recommended that the prohibition on
accepting further deposits should apply indefinitely only to a company that
had not rectified/made good earlier defaults.

However,
in case a company had made good an earlier default in the repayment of
deposits and the payment of interest due thereon, then it should be allowed
to accept further deposits after a period of five years from the date it
repaid the earlier defaulting amounts with full disclosures.

Currently,
deposits accepted and interest thereon, which remained unpaid at the commencement
of Companies Act, 2013 was required to be paid within one year or before the
expiry of the stipulated period, whichever was earlier. ( Section 74)

CAA
2017 now provides that such amounts shall be repaid within three years or
before the expiry of the stipulated period, whichever was earlier.

Under
Companies Act 2013, deposits are allowed to be accepted by only eligible
companies and this has put lot of restrictions on the companies which had
accepted deposits under Companies Act 1956 .

To
overcome the difficulties faced by such companies, repayment is now permitted
up to 3 years or maturity , whichever is earlier.

Currently,
Section 76A(1)(a) provides that in respect of contraventions of Section 73 or
76, the company shall, in addition to the payment of the amount of deposit or
part thereof and the interest due, be punishable with fine which shall not be
less than one crore rupees but which may extend to ten crore rupees;

CAA
2017 provides that a company will be punishable with a fine of one crore
rupees or twice the amount of deposit accepted by the company, whichever is
lower.

Normally,
rules of Penalty require that Penalty be imposed with reference to the
quantum of offence committed. Thus flat penalties provided under the current
provisions were disproportionate to the offence committed and hence this
amendment seeks to correlate penalty with the underlying deposit.

Currently,
it is provided that an officer of the company who is in default shall be
punishable with imprisonment or fine.

Now
it is provided that an officer of the company who is in default shall be
punishable with imprisonment and fine.

In
the process, the offence has been made non-compoundable.

II. Registration and
Satisfaction of Charges:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Currently,
the charge holder can register the charge only in case the company fails to
do so within the period specified in section 77, which is 300 days.

CAA
2017 now provides that the person in whose favor the charge has been created
can file the charge on the expiry of 30 days from the creation of charge
where a company (borrower) fails to file such charge

This
amendment is welcome from the point of view of the lender.

Primary
obligation for registration was with the borrower u/s 77 which allowed
creation of charge up to 300 days on payment of additional fees. After such
period, application for condonation was required to be done by the company or
any other person interested in such charge. It was felt that the wordings of
the present section required a waiting period up to 300 days for creation of
charge by the lender. But in the process the charge remained to be registered
and as such loan under the charge remained unsecured. This anomaly is sought
to be removed by this amendment.

A
company was required to report satisfaction of charge within a period of 30
days from the date of such satisfaction failing which an application for
condonation of delay had to be made before the Regional Director.( Section
82)

The
company can now report satisfaction of charge within a period of 300 days.

This
amendment now brings reporting period of satisfaction in line with creation
of charge and as such a welcome measure.

III. Annual Returns to be filed by the Companies:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Section
92(1) Every company shall prepare a return (hereinafter referred to as the
annual return) in the prescribed form containing the particulars as they
stood on the close of the financial year regarding—

(j)details,
as may be prescribed, in respect of shares held by or on behalf of the
Foreign Institutional Investors indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by them;

Provided
that in relation to One Person Company and small company, the annual return
shall be signed by the company secretary, or where there is no company
secretary, by the director of the company.

Section
92(1):

(a)
clause (c) shall be omitted;

(b)
in clause (j), the words “indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by
them” shall be omitted;

“Provided
further that the Central Government may prescribe abridged form of annual
return for One Person Company, small Company and such other class or classes
of companies as may be prescribed”;

The
details related to disclosing indebtedness and details with respect to
name, address, country of incorporation etc. of FII in the annual return of
the company are also omitted.

It
is further provided that the Central Government may prescribe the abridged
form of annual return for One Person Company (‘OPC’), Small Company and such
other class or classes of companies as may be prescribed.

This
amendment thus seeks to achieve an objective of avoiding duplication of
information.

Further
proviso when implemented will achieve simplicity in the case of companies
proposed to be covered in the proviso.

Section
92(3)

An
extract of the annual return in such form as may be prescribed shall form
part of the Board‘s report.

Section
92(3)

Every company shall place a copy of the
annual return on the website of the company if any, and the web-link of such
annual return shall be disclosed in the Board’s report.”

CAA
2017 has omitted the requirement of MGT-9 i.e. extract of annual return to
form part of the Board’s Report. The copy of annual return shall now be
uploaded on the website of the company if any, and its link shall be
disclosed in the Board’s report.

This
amendment was largely guided by the fact that report of the Board of Directors
was becoming very much lengthier and expensive especially for the listed
companies.

Time
limit of 270 days within which annual return could be filed on payment of the
additional fee has been done away with. It is further provided that a company
can file the annual return with ROC at any time on payment of a prescribed
additional fee.

All
the measures proposed hereinabove are expected to simplify Annual Return
filing process and avoid duplication of information.

;

IV. Dividend:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Presently dividend can be paid u/s 123(1) from : Current Year Profits or Accumulated Profits or from a and b above or From money provided by Central or State Governments pursuant to a guarantee given	A proviso is added as under : “Provided that in computing profits any amount representing unrealized gains, notional gains or revaluation of assets and any changes in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded; Reserves are clarified as “free reserves” so as to bring clarity as to the source of the dividend.	Consequent upon Ind AS Applicability to Phase I and Phase II companies, this amendment is clarificatory and a welcome measure. This has become essential since one of the sources for payment of dividend is free reserves and definition of free reserves under Section 2 (43) excludes unrealised or notional gains and l credits to such reserves on account of measurement of assets and liabilities at fair value. Thus primary source of reserves being profits are also sought to be brought in line with definition of free reserves for the purpose of determination of distributable profits.
Section 123 (3)The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the	Section 123 (3) The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:	Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. The dividend for a financial year of the company (which is called ‘final dividend’) is payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors. Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting
average dividends declared by the company during the immediately preceding three financial years.	Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.”	(which is called ‘interim dividend’). [Source: Monograph on Dividend by ICSI ] Thus it is now clarified that Interim dividend will not only mean dividend paid during the financial year but also dividend declared from the closure of financial year till holding of an AGM.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently
dividend can be paid u/s 123(1) from :

Current
Year Profits or

Accumulated
Profits or

from
a and b above or

From
money provided by Central or State Governments pursuant to a guarantee given

A
proviso is added as under :

“Provided
that in computing profits any amount representing unrealized gains, notional
gains or revaluation of assets and any changes in carrying amount of an asset
or of a liability on measurement of the asset or the liability at fair value
shall be excluded;

Reserves
are clarified as “free reserves” so
as to bring clarity as to the source of the dividend.

Consequent
upon Ind AS Applicability to Phase I and Phase II companies, this amendment
is clarificatory and a welcome measure.

This
has become essential since one of the sources for payment of dividend is free
reserves and definition of free reserves under Section 2 (43) excludes
unrealised or notional gains and l credits to such reserves on account of
measurement of assets and liabilities at fair value. Thus primary source of
reserves being profits are also sought to be brought in line with definition
of free reserves for the purpose of determination of distributable
profits.

Section
123 (3)The Board of Directors of a company may declare interim dividend
during any financial year out of the surplus in the profit and loss account
and out of profits of the financial year in which such interim dividend is
sought to be declared:

Provided
that in case the company has incurred a loss during the current financial
year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared
at a rate higher than the

Section
123 (3) The Board of Directors of a company may declare interim dividend
during any financial year or at any time during the period from closure of
financial year till holding of the annual general meeting out of the surplus
in the profit and loss account or out of profits of the financial year for
which such interim dividend is sought to be declared or out of profits
generated in the financial year till the quarter preceding the date of
declaration of the interim dividend:

Dividends
are usually payable for a financial year after the final accounts are ready
and the amount of distributable profits is available. The dividend for a
financial year of the company (which is called ‘final dividend’) is payable
only if it is declared by the company at its annual general meeting on the
recommendation of the Board of directors. Sometimes dividends are also paid
by the Board of directors between two annual general meetings without
declaring them at an annual general meeting

average
dividends declared by the company during the immediately preceding three
financial years.

(which is called ‘interim dividend’).

[Source:
Monograph on Dividend by ICSI ]

Thus
it is now clarified that Interim dividend will not only mean dividend paid during
the financial year but also dividend declared from the closure of financial
year till holding of an AGM.

V. Financial Statements:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Section 129(3)- ‘Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):	Revised Section 129(3)- “Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):	As regards consolidation of accounts, main concern related to the inclusion of associate companies in absence of the specific provisions. This concern now is addressed and consolidation will have to be done even if there is no subsidiary. The consolidated financial statement of the company, its subsidiaries and associates should be in accordance with the applicable accounting standards which is now specifically provided in the section itself.

Explanation.—For the purposes of this subsection, the word ?subsidiary? shall include associate company and joint venture.	This explanation stands deleted after the amendment	This amendment is consequential to the changes mentioned hereinabove.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
129(3)-

‘Where
a company has one or more subsidiaries, it shall, in addition to financial
statements provided under sub-section (2), prepare a consolidated financial
statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the annual general
meeting of the company along with the laying of its financial statement under
sub-section (2):

Revised
Section 129(3)-

“Where
a company has one or more subsidiaries or associate companies, it shall, in
addition to financial statements provided under sub-section (2), prepare a
consolidated financial statement of the company and of all the subsidiaries
and associate companies in the same form and manner as that of its own and in
accordance with applicable accounting standards, which shall also be laid
before the annual general meeting of the company along with the laying of its
financial statement under sub-section (2):

As
regards consolidation of accounts, main concern related to the inclusion of
associate companies in absence of the specific provisions. This concern now
is addressed and consolidation will have to be done even if there is no
subsidiary.

The
consolidated financial statement of the company, its subsidiaries and
associates should be in accordance with the applicable accounting standards
which is now specifically provided in the section itself.

Explanation.—For the purposes of this
subsection, the word ?subsidiary?
shall include associate company and joint venture.

This
explanation stands deleted after the amendment

This
amendment is consequential to the changes mentioned hereinabove.

VI. Reopening of Accounts:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Existing Sec 130 of the Act provides that reopening can be done on the basis of an order from court or tribunal. The said section provides that court or tribunal will give a notice to various regulatory authorities and will take into consideration representations made by such regulatory authorities. However, the said section did not provide for an opportunity of representing to any other concerned party.	CAA, 2017 has now amended the said section to give an opportunity to other persons concerned of making a representation before an order is passed by the tribunal or court.	Presently in the case of reopening, notice was required to be given to various regulatory authorities and court or tribunal is required to take into consideration representations of such regulatory authorities . Surprisingly it did not provide for representation to persons concerned such as auditors even though court/ tribunal had an inherent power to give notice to any other interested parties. This amendment will remove this anomaly since it is now provided in the section itself.

Existing section did not provide the time limit up to which reopening could be done	CAA, 2017 now provides that reopening cannot be done for a period earlier than 8 financial years immediately preceding the current financial year unless Central Government has given a direction under Section 128(5) for maintaining the accounts for a longer period.	Section 128(5) provides for the period for which books are required to be maintained which cannot go beyond 8 financial years immediately preceding current financial year except with the permission of the Central Government. Thus the amendment seeks to align the period of maintenance of books of accounts with the reopening.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Existing
Sec 130 of the Act provides that reopening can be done on the basis of an
order from court or tribunal. The said section provides that court or
tribunal will give a notice to various regulatory authorities and will take
into consideration representations made by such regulatory authorities. However,
the said section did not provide for an opportunity of representing to any
other concerned party.

CAA,
2017 has now amended the said section to give an opportunity to other persons
concerned of making a representation before an order is passed by the
tribunal or court.

Presently
in the case of reopening, notice was required to be given to various
regulatory authorities and court or tribunal is required to take into
consideration representations of such regulatory authorities . Surprisingly
it did not provide for representation to persons concerned such as auditors
even though court/ tribunal had an inherent power to give notice to any other
interested parties. This amendment
will remove this anomaly since it is now provided in the section itself.

Existing
section did not provide the time limit up to which reopening could be done

CAA,
2017 now provides that reopening cannot be done for a period earlier than 8
financial years immediately preceding the current financial year unless
Central Government has given a direction under Section 128(5) for maintaining
the accounts for a longer period.

Section
128(5) provides for the period for which books are required to be maintained
which cannot go beyond 8 financial years immediately preceding current
financial year except with the permission of the Central Government.

Thus
the amendment seeks to align the period of maintenance of books of accounts
with the reopening.

VII. Financial Statements, Board’s report etc.:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.( Section 134)	The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon .	The amendment provides that the Chief Executive Officer shall sign the financial statements irrespective of the fact whether he is a director or not because Chief Executive Officer is a Key Managerial Personnel, and is responsible for the overall management of the company. Further, since the appointment of a managing director is not mandatory for all companies, it is proposed to insert the words “if any”, after the words “managing director”.

Presently extract of Annual Return is required to be annexed to the Board’s Report. ( Section 134)	Now annual return is to be placed on the website and web address is required to be mentioned in the Board’s report.	The Requirement of having an extract of Annual return (Form MGT-9) has been done away with by placing the copy of annual return on the website of the company (if any) and the web address/ link is to be provided. As mentioned in the Annual Return part above, this seeks to avoid duplication and voluminous information which was associated with report of the Board of Directors.

Right of member to copies of audited financial statement [ Section 136(1) ] A copy of the financial statements, including consolidated financial statements, if any, auditor‘s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than 21 days before the date of the meeting:	A provision is now made for a situation where the required copies are sent less than 21 days before the date of the meeting. Accordingly, If the copies of the documents are sent less than 21 days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members— (a) holding, if the company has a share capital, majority in number entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or (b) having, if the company has no share capital, not less than 95% of the total voting power exercisable at the meeting:	Amendment to sub-section (1) of section 136 provides that copies of audited financial statements and other documents may be sent at shorter notice if ninety-five percent of members entitled to vote at the meeting agree for the same. Section 101 of the Act provides that the consent of members holding at least ninety-five percent of the voting power be obtained to call a general meeting at a notice shorter than twenty-one days. For circulation of annual accounts to members, the MCA had clarified by way of a circular dated 21^stJuly 2015 that the shorter notice period would also apply to the circulation of annual accounts. It is now provided in the Amendment Bill itself.

Appointment and Ratification: It was provided that every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. It was further required that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting.( Section 139)	The requirement to place the matter relating to such appointment for ratification by members at every annual general meeting has been removed.	In view of this amendment, controversy as to whether the form is required to be filed with ROC after every ratification stands resolved. Besides, inconsistency between removal (which required Special Resolution and Central Government Approval) and non ratification (which required only Board Approval) stands resolved.

Resignation of auditor: The penalty for non-filing of the return of resignation with the Registrar made the auditor punishable with fine, not less than fifty thousand rupees but which may extend to five lakh rupees.( Section 140)	The penalty for non-filing of the return of resignation with the Registrar shall now make the auditor punishable with fine not be less than fifty thousand rupees or the remuneration of the auditor, whichever is less.	This form filing requirement was to be complied by the Auditor who was resigning. (Form ADT 3).

Eligibility : Presently, it was provided in Section 141(3)(i) as under: The following persons shall not be eligible for appointment as an auditor of a company, namely:- (i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.	In section 141 of the principal Act, in sub-section (3), for clause (i), the following clause shall be substituted namely:- (i) a person who, directly or indirectly, renders any service referred to in Section 144 to the company or its holding company or its subsidiary company. Explanation.—For the purposes of this clause, the term “directly or indirectly” shall have the meaning assigned to it in the Explanation to section 144.‘	Existing provisions were not very happily worded and gave an impression that Auditor could not provide services referred to in Section 144 to any other company. Amendment now made makes it clear that such services are not to be provided to auditee company or its holding or subsidiary company.
Access to the records : Presently the proviso to Section 143(1) reads as under : Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.	(i) in sub-section (1), in the proviso, for the words “its subsidiaries”, at both the places, the words “its subsidiaries and associate companies” shall be substituted;	The change now made will enable auditors of the holding company to have right to access records of associate companies. As associate includes, Joint Venture (JV), access will now be available to the records of JVs also.
Internal Financial Controls: Presently as per the provisions of Section 143(3)(i) auditor is required to report : whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.	Amendment provides as under: in sub-section (3), in clause (i) for the words “internal financial controls system”, the words “internal financial controls with reference to financial statements” shall be substituted;	This amendment is in pursuance of the suggestion of Companies Law Committee in Para 10.11which are worth noting: Section 143 (3) (i) requires the auditor to state in his report whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. This has to be read with Section 134 (5) (e) on the Directors’ Responsibility Statement which also defines internal financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014. Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory from FY 15-16 onwards. It has been expressed that auditing internal financial control systems by auditors would be an onerous responsibility. It was also expressed that their responsibility should be limited to the auditing of the systems with respect to financial statements only and that this cannot be compared with the responsibility of directors which is wider and can be discharged as they have other resources like internal auditors, etc. who can be used for this purpose. In this regard, the Committee recommended that the reporting obligations of auditors should be with reference to the financial statements. Thus this amendment is now brought in line with the Guidance Note issued by ICAI.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board at least by the chairperson of the company where he is
authorised by the Board or by two directors out of which one shall be
managing director and the Chief Executive Officer, if he is a director in the
company, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of a One Person Company,
only by one director, for submission to the auditor for his report thereon.(
Section 134)

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board by the chairperson of the company where he is authorised by the
Board or by two directors out of which one shall be managing director, if
any, and the Chief Executive Officer, the Chief Financial Officer and the
company secretary of the company, wherever they are appointed, or in the case
of One Person Company, only by one director, for submission to the auditor
for his report thereon .

The
amendment provides that the Chief Executive Officer shall sign the financial
statements irrespective of the fact whether he is a director or not because
Chief Executive Officer is a Key Managerial Personnel, and is responsible for
the overall management of the company. Further, since the appointment of a
managing director is not mandatory for all companies, it is proposed to
insert the words “if any”, after the words “managing director”.

Presently
extract of Annual Return is required to be annexed to the Board’s Report. (
Section 134)

Now
annual return is to be placed on the website and web address is required to
be mentioned in the Board’s report.

The
Requirement of having an extract of Annual return (Form MGT-9) has been done
away with by placing the copy of annual return on the website of the company
(if any) and the web address/ link is to be provided. As mentioned in the
Annual Return part above, this seeks to avoid duplication and voluminous
information which was associated with report of the Board of Directors.

Right
of member to copies of audited financial statement [ Section 136(1) ]

A
copy of the financial statements, including consolidated financial
statements, if any, auditor‘s report and every other document required by law
to be annexed or attached to the financial statements, which are to be laid
before a company in its general meeting, shall be sent to every member of the
company, to every trustee for the debenture-holder of any debentures issued
by the company, and to all persons other than such member or trustee, being
the person so entitled, not less than 21 days before the date of the meeting:

A
provision is now made for a situation where the required copies are sent less
than 21 days before the date of the meeting. Accordingly, If the copies of
the documents are sent less than 21 days before the date of the meeting, they
shall, notwithstanding that fact, be deemed to have been duly sent if it is
so agreed by members—

(a)
holding, if the company has a share capital, majority in number entitled to
vote and who represent not less than 95% of such part of the paid-up share
capital of the company as gives a right to vote at the meeting; or

(b)
having, if the company has no share capital, not less than 95% of the total
voting power exercisable at the meeting:

Amendment
to sub-section (1) of section 136 provides that copies of audited financial
statements and other documents may be sent at shorter notice if ninety-five
percent of members entitled to vote at the meeting agree for the same.

Section
101 of the Act provides that the consent of members holding at least
ninety-five percent of the voting power be obtained to call a general meeting
at a notice shorter than twenty-one days.

For
circulation of annual accounts to members, the MCA had clarified by way of a
circular dated 21^stJuly 2015 that the shorter notice period would
also apply to the circulation of annual accounts. It is now provided in the
Amendment Bill itself.

Appointment
and Ratification:

It
was provided that every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.

It
was further required that the company shall place the matter relating to such
appointment for ratification by members at

every
annual general meeting.( Section 139)

The
requirement to place the matter

relating
to such appointment for

ratification
by members at every annual general meeting has been removed.

In
view of this amendment, controversy as to whether the form is required to be
filed with ROC after every ratification stands resolved.

Besides,
inconsistency between removal (which required Special Resolution and Central
Government Approval) and non ratification (which required only Board
Approval) stands resolved.

Resignation
of auditor:

The
penalty for non-filing of the return of resignation with the Registrar made
the auditor punishable with fine, not less than fifty thousand rupees but
which may extend to five lakh rupees.( Section 140)

The
penalty for non-filing of the return of resignation with the Registrar shall
now make the auditor punishable with fine not be less than fifty thousand
rupees or the remuneration of the auditor,

whichever
is less.

This
form filing requirement was to be complied by the Auditor who was resigning.
(Form ADT 3).

Eligibility
:

Presently,
it was provided in Section 141(3)(i) as under: The following persons shall
not be eligible for appointment as an auditor of a company, namely:-

(i)
any person whose subsidiary or associate company or any other form of entity,
is engaged as on the date of appointment in consulting and specialised
services as provided in section 144.

In
section 141 of the principal Act, in sub-section (3), for clause (i), the
following clause shall be substituted namely:-

(i)
a person who, directly or indirectly, renders any service referred to in
Section 144 to the company or its holding company or its subsidiary company.

Explanation.—For
the purposes of this clause, the term “directly or indirectly”
shall have the meaning assigned to it in the Explanation to section 144.‘

Existing
provisions were not very happily worded and gave an impression that Auditor
could not provide services referred to in Section 144 to any other company.

Amendment
now made makes it clear that such services are not to be provided to auditee
company or its holding or subsidiary company.

Access
to the records :

Presently
the proviso to Section 143(1) reads as under :

Provided
that the auditor of a company which is a holding company shall also have the
right of access to the records of all its subsidiaries in so far as it relates
to the consolidation of its financial statements with that of its
subsidiaries.

(i)
in sub-section (1), in the proviso, for the words “its
subsidiaries”, at both the places, the words “its subsidiaries and
associate companies” shall be substituted;

The
change now made will enable auditors of the holding company to have right to access records of
associate companies.

As
associate includes, Joint Venture (JV), access will now be available to the
records of JVs also.

Internal
Financial Controls:

Presently
as per the provisions of Section 143(3)(i) auditor is required to report :

whether
the company has adequate internal financial controls system in place and the
operating effectiveness of such controls.

Amendment
provides as under:

in
sub-section (3), in clause (i) for the words “internal financial
controls system”, the words “internal financial controls with
reference to financial statements” shall be substituted;

This
amendment is in pursuance of the suggestion of Companies Law Committee in
Para 10.11which are worth noting:

Section
143 (3) (i) requires the auditor to state in his report whether the company
has adequate internal financial controls system in place and the operating
effectiveness of such controls. This has to be read with Section 134 (5) (e)
on the Directors’ Responsibility Statement which also defines internal
financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014.
Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the
requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory
from FY 15-16 onwards. It has been expressed that auditing internal financial
control systems by auditors would be an onerous responsibility. It was also
expressed that their responsibility should be limited to the auditing of the
systems with respect to financial statements only and that this cannot be
compared with the responsibility of directors which is wider and can be
discharged as they have other resources like internal auditors, etc. who can
be used for this purpose. In this regard, the Committee recommended that the
reporting obligations of auditors should be with reference to the financial
statements.

Thus
this amendment is now brought in line with the Guidance Note issued by
ICAI.

VIII: Corporate Social Responsibility (CSR) (Section 135):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Applicability : Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an Independent Director.	In section 135 of the principal Act,— in sub-section (1) – (a) for the words “any financial year”, the words “the immediately preceding financial year” shall be substituted; (b) the following proviso shall be inserted, namely:— “Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”;	Eligibility criteria for the purpose of constituting the corporate social responsibility committee and incurring expenditure towards CSR is proposed to be calculated based on immediately preceding financial year. Currently this eligibility is decided based on preceding three financial years. In case of a company which is not required to appoint an Independent Director and such company is required to appoint CSR Committee, such committee can be constituted with two or more directors.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Applicability
:

Every
company having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore or
more during any financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors,
out of which at least one director shall be an Independent Director.

In
section 135 of the principal Act,—

in
sub-section (1) –

(a)
for the words “any financial year”, the words “the immediately
preceding financial year” shall be substituted;

(b)
the following proviso shall be inserted, namely:—

“Provided
that where a company is not required to appoint an independent director under
sub-section (4) of section 149, it shall have in its Corporate Social
Responsibility Committee two or more directors.”;

Eligibility
criteria for the purpose of constituting the corporate social responsibility
committee and incurring expenditure towards CSR is proposed to be calculated
based on immediately preceding financial year. Currently this eligibility is
decided based on preceding three financial years.

In
case of a company which is not required to appoint an Independent Director
and such company is required to appoint CSR Committee, such committee can be
constituted with two or more directors.

IX: Remuneration of Managerial Persons (Section 197):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Remuneration of Managerial Personnel ( Section 197)
First Proviso to Subsection 1 allowed the company in general meeting ( with the approval of the Central Government) to authorise the payment of remuneration exceeding 11% of the net profits of the company, subject to provisions of Schedule V.	The requirement of taking approval from Central Government has been done away with.	CLC has observed in Para 13.5 of the report as under : Currently, the law in countries like the US, the UK and Switzerland, does not require the company to approach government authorities for approving remuneration payable to their managerial personnel, even in a scenario where they have losses or inadequate profits and empowers the Board of the companies to decide the remuneration payable to Directors. Further, the Committee also recommended that the requirement for government approval may be omitted altogether, and necessary safeguards in the form of additional disclosures, audit, higher penalties, etc. may be prescribed instead. Keeping in line this philosophy, Approval of Central Government is dispensed with and Special Resolution is replaced in the place.
Second Proviso allowed companies to pass ordinary resolution in general meeting and prescribe remuneration in excess of limits specified therein.	The second proviso has been amended by replacing ordinary resolution by special resolution	This amendment is consequential.
	Additionally a third proviso has been inserted which provides that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.	Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.
Sub Section 3 : Provided that in case a company had no profits or its profits were inadequate, the company could not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (5) except in accordance with the provisions of Schedule V and if it was not able to comply with such provisions, with the previous approval of the Central Government.	the words “and if it is not able to comply with such provisions, with the previous approval of the Central Government” shall be omitted.	This amendment is consequential.
Sub Section 9: If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.	Sub Section 9 is amended as under: If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.”;	Period of Recovery in the event of excess remuneration now stands extended to 2 years subject to passing of Special Resolution. Existing section did not provide for any time limit within which such excess remuneration paid was to be recovered.
Sub Section 10: The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government	Sub Section 10 The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by special resolution within two years from the date the sum becomes refundable	Presently, act did not provide time limit within which refund of excess remuneration was to be made. This amendment is consequential to the amendment made in the previous clause.
	Proviso inserted : Provided that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining approval of such waiver.	Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.
Sub Section 11: In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company‘s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.	Sub Section 11: the words “and if such conditions are not being complied, the approval of the Central Government had been obtained” shall be omitted;	Thus in such cases, special resolution of the company in general meeting will suffice. The theme of the law makers now seems to be shifting to the self regulation rather than government approvals.
	Sub Section 16: The auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed.	Presently clause xi of CARO 2015 has mandated for this reporting which is now brought under the provisions of the act. This will possibly lead to duplication of reporting unless MCA clarifies the position .
	Sub Section 17: On and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of this section [as it stood before such commencement], which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended.”	This provision is enabling provision which deals with approvals pending as on the date of the commencement of new section. This also shows lesser indulgence of the government in the approval process.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Remuneration
of Managerial Personnel ( Section 197)

First
Proviso to Subsection 1 allowed the
company in general meeting ( with the approval of the Central Government) to
authorise the payment of remuneration exceeding 11% of the net profits of the
company, subject to provisions of Schedule V.

The
requirement of taking approval from Central Government has been done away
with.

CLC
has observed in Para 13.5 of the report as under :

Currently,
the law in countries like the US, the UK and Switzerland, does not require
the company to approach government authorities for approving remuneration
payable to their managerial personnel, even in a scenario where they have
losses or inadequate profits and empowers the Board of the companies to
decide the remuneration payable to Directors.

Further,
the Committee also recommended that the requirement for government approval
may be omitted altogether, and necessary safeguards in the form of additional
disclosures, audit, higher penalties, etc. may be prescribed instead.

Keeping
in line this philosophy, Approval of Central Government is dispensed with and
Special Resolution is replaced in the place.

Second
Proviso allowed companies to pass
ordinary resolution in general meeting and prescribe remuneration in excess
of limits specified therein.

The
second proviso has been amended by replacing ordinary resolution by special
resolution

This
amendment is consequential.

Additionally
a third proviso has been inserted which provides that, where the company has defaulted in
payment of dues to any bank or public financial institution or non-convertible
debenture holders or any other secured creditor, the prior approval of the
bank or public financial institution concerned or the non-convertible
debenture holders or other secured creditor, as the case may be, shall be
obtained by the company before obtaining the approval in the general meeting.

Equity
demands that parties affected by any decision should be consulted prior to
taking of such decisions. Although most lenders have such clauses as a part
of their agreement, legal compulsion was lacking which is now provided for in
the section itself.

Sub
Section 3 :

Provided
that in case a company had no profits or its profits were inadequate, the
company could not pay to its directors, including any managing or whole-time

director
or manager, by way of remuneration any sum exclusive of any fees payable to
directors under sub-section (5) except in accordance with the provisions of
Schedule V and if it was not able to comply with such provisions, with the
previous approval of the Central Government.

the
words “and if it is not able to comply with such provisions, with the
previous approval of the Central Government” shall be omitted.

This
amendment is consequential.

Sub
Section 9:

If
any director draws or receives, directly or indirectly, by way of
remuneration any such sums in excess of the limit prescribed by this section
or without the prior sanction of the Central Government, where it is
required, he shall refund such sums to the company and until such sum
is refunded, hold it in trust for the company.

Sub
Section 9 is amended as under:

If
any director draws or receives, directly or indirectly, by way of

remuneration
any such sums in excess of the limit prescribed by this section or without approval
required under this section, he shall refund such sums to the

company,
within two years or such lesser period as may be allowed by the company,
and until such sum is refunded, hold it in trust for the company.”;

Period
of Recovery in the event of excess remuneration now stands extended to 2 years
subject to passing of Special Resolution. Existing section did not provide
for any time limit within which such excess remuneration paid was to be
recovered.

Sub
Section 10:

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless permitted by the Central Government

Sub
Section 10

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless approved by the company by special resolution within
two years from the date the sum becomes refundable

Presently,
act did not provide time limit within which refund of excess remuneration was
to be made. This amendment is consequential to the amendment made in the
previous clause.

Proviso
inserted :

Provided
that where the company has defaulted in payment of dues to any bank or public
financial institution or non-convertible debenture holders or any other
secured creditor, the prior approval of the bank or public financial
institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining approval of such waiver.

Sub
Section 11:

In
cases where Schedule V is applicable on grounds of no profits or inadequate
profits, any provision relating to the remuneration of any director which
purports to increase or has the effect of increasing the amount thereof,
whether the provision be contained in the company‘s memorandum or articles,
or in an agreement entered into by it, or in any resolution passed by the
company in general meeting or its Board, shall not have any effect unless
such increase is in accordance with the conditions specified in that Schedule
and if such conditions are not being complied, the approval of the Central
Government had been obtained.

Sub
Section 11:

the
words “and
if such conditions are not being complied, the approval of the Central
Government had been obtained” shall be omitted;

Thus
in such cases, special resolution of the company in general meeting will
suffice. The theme of the law makers now seems to be shifting to the self
regulation rather than government approvals.

Sub
Section 16:

The
auditor of the company shall, in his report under section 143, make a
statement as to whether the remuneration paid by the company to its directors
is in accordance with the provisions of this section, whether remuneration
paid to any director is in excess of the limit laid down under this

section
and give such other details as may be prescribed.

Presently
clause xi of CARO 2015 has mandated for this reporting which is now
brought under the provisions of the act.
This will possibly lead to duplication of reporting unless MCA
clarifies the position .

Sub
Section 17:

On
and from the commencement of the Companies (Amendment) Act, 2017, any
application made to the Central Government under the provisions of this
section [as it stood before such commencement], which is pending with that
Government shall abate, and the company shall, within one year of such
commencement, obtain the approval in accordance with the provisions of this
section, as so amended.”

This
provision is enabling provision which deals with approvals pending as on the
date of the commencement of new section. This also shows lesser indulgence of the government in the
approval process.

X: Calculation of Profits (Section 198):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Section 198 : Calculation of profits.		Section 198 : Calculation of profits.
(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company;	(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company unless the company is an investment company as referred to in clause (a) of the Explanation to section 186	CLC in Para 13.9 observed as under: Section 198(4) requires that while calculating profits for managerial remuneration, the profits on sale of investments be deducted. The Committee agreed to the argument that Investment Companies, whose principal business was sale and purchase of investments, would not be using the correct profit figures, and may need to comply with the requirements of Schedule V to pay remuneration to its managerial personnel. It was recommended, that specific provisions for such companies be incorporated in the Act.
	3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— “(f) any amount representing unrealised gains, notional gains or revaluation of assets.”;	This clause is newly added consequent upon Ind AS applicability to the companies. In Para 13.7 of its report, CLC observed as under: The Committee examined Section 198 as to whether it has outlived its utility in current times where the Accounting Standards prescribe a robust framework for the determination of yearly profit or loss for the company, and the possibility of using the net profit before tax as presented in the financial statements, for basing the determination of managerial remuneration. Alternative formulations were considered, but found to be more complex, and further the present formulation is well accepted. Therefore, no change, other than on account of requirement of Ind AS, was recommended. This amendment is consistent with the amendment related to distributable profits for the purposes of dividends discussed above under Dividends.
(4) In making the computation aforesaid, the following sums shall be deducted, namely: (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained; ( Portion marked in bold is omitted after amendment)	(4) In making the computation aforesaid, the following sums shall be deducted, namely: (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;	CLC in Para 13.8 has observed as under : Section 198(4)(l) mandates the deduction of ‘brought forward losses’ of the company while calculating the net profit, for the purpose of computing managerial remuneration in the subsequent years. However, the clause did not provide for the deduction of brought forward losses of the years prior to the commencement of the Act, which may be an inadvertent omission. Thus amendment now made has amended Section 198(4)(l), to include brought forward losses of the years subsequent to the enactment of the Companies (Amendment) Act, 1960 and inadvertent omission existing is corrected .

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
198 : Calculation of profits.

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company;

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company unless the company is an investment company as
referred to in clause (a) of the Explanation to section 186

CLC
in Para 13.9 observed as under:

Section
198(4) requires that while calculating profits for managerial remuneration,
the profits on sale of investments be deducted. The Committee agreed to the
argument that Investment Companies, whose principal business was sale and
purchase of investments, would not be using the correct profit figures, and
may need to comply with the requirements of Schedule V to pay remuneration to
its managerial personnel. It was recommended, that specific provisions for
such companies be incorporated in the Act.

3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

“(f)
any amount representing unrealised gains, notional gains or revaluation of
assets.”;

This
clause is newly added consequent upon Ind AS applicability to the companies.

In
Para 13.7 of its report, CLC observed as under:

The
Committee examined Section 198 as to whether it has outlived its utility in current times where the
Accounting Standards prescribe a robust framework for the determination of
yearly profit or loss for the company, and the possibility of using the net
profit before tax as presented in the financial statements, for basing the determination
of managerial remuneration. Alternative formulations were considered, but
found to be more complex, and further the present formulation is well
accepted. Therefore, no change, other than on account of requirement of
Ind AS, was recommended.

This
amendment is consistent with the amendment related to distributable profits
for the purposes of dividends discussed above under Dividends.

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

(l)
the excess of expenditure over income, which had arisen in computing the net
profits in accordance with this section in any year which begins at or
after the commencement of this Act, in so far as such excess has not been
deducted in any subsequent year preceding the year in respect of which
the net profits have to be ascertained;

(
Portion marked in bold is omitted after amendment)

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

CLC
in Para 13.8 has observed as under :

Section
198(4)(l) mandates the deduction of ‘brought forward losses’ of the company
while calculating the net profit, for the purpose of computing managerial
remuneration in the subsequent years. However, the clause did not provide for
the deduction of brought forward losses of the years prior to the
commencement of the Act, which may be an inadvertent omission. Thus amendment now made has amended
Section 198(4)(l), to include brought forward losses of the years subsequent
to the enactment of the Companies (Amendment) Act, 1960 and inadvertent
omission existing is corrected .

If one looks at the amendments discussed
hereinabove, various difficulties which were experienced at the time of
implementation of the provisions are sought to be removed. Amendments are made
to clarify the position which was ambiguous. Some of the provisions which were
inconsistent when read with the Rules are amended so as to bring these
inconsistencies to an end and thus an objective of rectifying omissions and
inconsistencies is largely achieved. _

shailesh.kwebmaker

Impact of Ind AS 115 on Real Estate Companies

An Exposure draft namely Ind AS 115 Revenue from Contracts with
Customers is awaiting approval by the Ministry of Corporate Affairs. There is uncertainty on the effective date of
the Standard, but it may apply as early as from accounting periods beginning on
or after 1 April, 2018. In this article,
we discuss the impact of Ind AS 115 on real estate companies, particularly in
the context of development and sale of multi-unit residential or commercial
property before the entity constructs the property.

Ind AS 115 specifies the requirements an entity must apply to measure
and recognise revenue and the associated costs. The core principle of the
standard is that an entity will recognise revenue when it transfers control of
the underlying goods and services to a customer. The principles in Ind AS 115
are applied using the following five steps:

1. Identify the contract with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations

5. Recognise revenue when or as the entity satisfies each performance
obligation.

Ind AS 115 requires recognition of revenue when or as the entity
satisfies each performance obligation. This requirement is one of the key
hurdles for real estate companies. Currently, the Guidance Note on
Accounting for Real Estate Transactions (GN) requires real estate companies
to apply the percentage of completion method.

Under Ind AS 115, an entity will have to evaluate whether it satisfies
the performance obligation to its customer at the time of delivery of the real
estate unit or over time as the construction is in progress. If an entity
cannot demonstrate that the performance obligation is satisfied over time, it
will not be able to recognis e revenue over time. In simpler terms, the entity
will have to record real estate sales on the completed contract method, instead
of the percentage of completion method (POCM).

Satisfaction of
performance obligations

An entity recognises revenue only when it satisfies a performance
obligation by transferring control of a promised good or service to a customer.
Control may be transferred at a point in time or over time. Control of the good
or service refers to the ability to direct its use and to obtain substantially
all of its remaining benefits. Control also means the ability to prevent other
entities from directing the use of and receiving the benefit from a good or
service. The benefits of an asset are the potential cash flows (inflows or
savings in outflows) that can be obtained directly or indirectly in many ways,
such as by:

a) using the asset to produce goods or provide services;

b) using the asset to enhance the value of other assets;

c) using the asset to settle liabilities or reduce expenses;

d) selling or exchanging the asset;

e) pledging the asset to secure a loan; and

f) holding the asset.

The control model is different from the ‘risks and rewards’ model in
current Ind AS 18 and the GN. As per the GN, the completion of revenue
recognition process is usually identified when the following conditions are
satisfied.

a) the entity has transferred to the buyer the significant risks and
rewards of ownership of the real estate;

b) the entity retains neither
continuing managerial involvement to the degree usually associated with
ownership nor effective control over the real estate sold;

c) the amount of revenue can be measured reliably;

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

e) the costs incurred or to be incurred in respect of the transaction
can be measured reliably.

The differences in the model may result in different accounting
outcomes.

Performance
obligations satisfied over time

An entity transfers control of a good or service over time, rather than
at a point in time when any of the following criteria are met:

1) The customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs. For example, when
cleaning services are provided, the customer simultaneously receives and
consumes the benefits.

2) The entity’s performance creates or enhances an asset that the
customer controls as the asset is created or enhanced. For example, an entity
constructs an equipment for the customer at the customer’s site.

3) The entity’s performance does not create an asset with an
alternative use to the entity and the entity has an enforceable right to
payment for performance completed to date.

The first criterion is not applicable because the entity’s performance
creates an asset, i.e., the real estate unit that is not consumed immediately.
The second and the third criteria are discussed below. The Standard contains
requirements on when performance obligations are satisfied over time. When a
performance obligation is not satisfied over time, it will be deemed to have
been satisfied at a point in time.

Customer
controls asset as it is created or enhanced

The second criterion in which control of a good or service is
transferred over time, is where the customer controls the asset as it is being
created or enhanced. For example, many construction contracts contain clauses
indicating that the customer owns any work-in-progress as the contracted item
is being built. In many jurisdictions, the individual units of an apartment
block are only accessible by the purchaser on completion or near completion.
However, the standard does not restrict the definition of control to the
purchaser’s ability to access and use (i.e., live in) the apartment. In Ind AS
115.33, the standard specifies: The benefits of an asset are the potential cash
flows (inflows or savings in outflows) that can be obtained directly or
indirectly in many ways, such as by:

a) using the asset to produce goods or provide services (including
public services);

b) using the asset to enhance the value of other assets;

c) using the asset to settle liabilities or reduce expenses;

d) selling or exchanging the asset;

e) pledging the asset to secure a loan; and

f) holding the asset.

In some jurisdictions, it may be possible to pledge, sell or exchange
the unfinished apartment. Careful consideration will be required of the
specific facts and circumstances. The September 2017 Update of IFRIC, discusses
this issue in detail, and concluded that the second criterion is not fulfilled
in most developments of a multi-unit complex. Consequently, PCOM cannot be
applied in such cases. Particularly, the IFRIC emphasised the following:

1) In applying the second criterion, it is important to apply the
requirements for control to the asset that the entity’s performance creates or
enhances. In a contract for the sale of a real estate unit that the entity
constructs, the asset created is the real estate unit itself. It is not, for
example, the right to obtain the real estate unit in the future. The right to
sell or pledge this right is not evidence of control of the real estate unit
itself.

2) The entity’s performance creates the real estate unit under
construction. Accordingly, the entity assesses whether, as the unit is being
constructed, the customer has the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the part-constructed real estate
unit. The Committee observed the following:

a) although the customer can resell or pledge its contractual right to
the real estate unit under construction, it is unable to sell the real estate
unit itself without holding legal title to it;

b) the customer has no ability to direct the construction or
structural design of the real estate unit as the unit is constructed, nor can
it use the part-constructed real estate unit in any other way;

c) the customer’s legal title (together with other customers) to replace
the entity, only in the event of the entity’s failure to perform as promised,
is protective in nature and is not indicative of control.

d) the customer’s exposure to changes in the market value of the real
estate unit may indicate that the customer has the ability to obtain
substantially all of the remaining benefits from the real estate unit. However,
it does not give the customer the ability to direct use of the unit as it is
constructed.

Thus, the customer does not control the part-constructed unit. In
simpler terms, the performance obligation is satisfied when the real estate
entity delivers the constructed unit to the customer. At that point in time the
real estate entity recognises revenue.

Asset with no
alternative use and right to payment

The third situation in which control is transferred over time has the
following two requirements that must both be met:

–The
entity’s performance does not create an asset with alternative use to the
entity.

– The
entity has an enforceable right to payment for performance completed to date.

Asset with no
alternative use

An asset created by an entity has no alternative use if the entity is
either restricted contractually or practically from readily directing the asset
to another use (e.g., selling it to a different customer). A contractual
restriction on an entity’s ability to direct an asset for another use must be
substantive. In other words, a buyer could enforce its rights to the promised
asset if the entity sought to sell the unit to a different buyer. In contrast,
a contractual restriction may not be substantive if the entity could instead
sell a different unit to the buyer without breaching the contract or incurring
significant additional costs. Furthermore, a practical limitation exists if an
entity would incur significant economic losses to direct the unit for another
use. A significant economic loss may arise when significant costs are incurred
to redesign or modify a unit or when the unit is sold at a significantly
reduced price.

Enforceable
right to payment for performance completed to date

An entity has an enforceable right to payment for performance completed
to date if, at any time during the contract term, the entity would be entitled
to an amount that at least compensates it for work already performed. This
right to payment, whether by contract or by law, must be present, even in
instances in which the buyer can terminate the contract for reasons other than
the entity’s failure to perform as promised. The entity’s right to payment by
contract should not be contradictory to any law of the land.

Many real estate companies sell real estate on a small down payment,
followed by the rest of the payment being made at the time of delivery of the
real estate; for example, a 20:80 scheme, wherein 20% of the consideration is
paid upfront on booking, followed by 80% payment on delivery of the unit. The
customer can walk away without making the rest of the payment, if he is not
interested in taking delivery of the unit. Such real estate contracts do not
meet the criterion of enforceable right to payment for performance completed to
date.

To meet this criterion, the amount to which an entity is entitled must
approximate the selling price of the goods or services transferred to date,
including a reasonable profit margin. The standard clarifies that including a
payment schedule in a contract does not, by itself, indicate that the entity
has an enforceable right to payment for performance completed to date. The
entity needs to examine information that may contradict the payment schedule
and may represent the entity’s actual right to payment for performance
completed to date (e.g., an entity’s legal right to continue to perform and
enforce payment by the buyer if a contract is terminated without cause).

In some contracts, a customer may have a right to terminate the contract
only at specified times during the life of the contract or the customer might
not have any right to terminate the contract. If a customer acts to terminate a
contract without having the right to terminate the contract at that time
(including when a customer fails to perform its obligations as promised), the
contract (or other laws) might entitle the entity to continue to transfer to
the customer the goods or services promised in the contract and require the
customer to pay the consideration promised in exchange for those goods or
services. In those circumstances, an entity has a right to payment for
performance completed to date, because the entity has a right to continue to
perform its obligations in accordance with the contract and to require the
customer to perform its obligations (which include paying the promised
consideration).

Conclusion

In light of the requirements of Ind AS 115, many real estate companies
in India may not qualify for POCM. However, the third criterion discussed above
is a small window available for real estate companies in India to achieve POCM
recognition. To qualify for POCM recognition, real estate companies should
ensure that they have a contractual right to collect payment from the customer
for work completed to date and that the contractual right is not in
contradiction with any law of the land. _

shailesh.kwebmaker

26 Sections 9, 44BB, 44DA and 115A of the Act – Prospecting for or extraction or production of mineral oil is not technical services – therefore, payments for rendering of services for extraction or production of mineral oil as sub-contractor would not be FTS – since payment was received by non-resident Taxpayer from another non-resident for services in connection with prospecting for extraction or production of mineral oil, such payments would be covered by section 44BB.

[2018] 89 taxmann.com 416 (Mumbai – Trib.)
Production Testing Services Inc vs. DCIT
A.Y.: 2011-12, Date of Order: 27th October, 2017

Facts

ONGC had awarded a contract for providing
certain services to a company incorporated in Scotland and having a project
office in Mumbai (“F Co”). F Co, in turn, sub-contracted the work to the
Taxpayer, which was a non-resident. The Taxpayer received certain payments from
F Co. The Taxpayer offered the receipts to tax u/s.44BB of the Act.

The AO held that since F Co was providing
services to ONGC, the Taxpayer who was sub-contracted the said work by F Co was
indirectly performing the services for ONGC. The AO further held that services were
technical services provided by the Taxpayer for prospecting extraction or
production of mineral Oil. The AO also noted that as per the TDS certificates,
tax was withheld u/s. 194J (which, inter alia, applies in case of FTS).
Accordingly, the AO treated the receipts as ‘fees for technical services’
(“FTS”) u/s. 115A of the Act.

DRP upheld the findings of the AO.

Held

– Perusal
of the contract showed that the contractor was solely responsible for the
performance of the contract. The contract further stated that if the contractor
engaged any sub-contractor for performing the contract, then the sub-contractor
shall be under the complete control of the contractor and that there shall not
be any contractual relationship between such sub-contractor and ONGC.

– Thus,
the Taxpayer, who was engaged as a sub-contractor, had nothing to do with ONGC.
Therefore, the AO and DRP were wrong in holding that the amount received by the
Taxpayer for rendering services were indirectly received from ONGC. Hence, the
payments were received by the Taxpayer from FCo.

– In Oil & Natural Gas Corpn. Ltd. vs. CIT
[2015] 376 ITR 306/233 Taxman 495/59 taxmann.com 1, the Supreme Court has
held that prospecting for extraction or production of mineral oil is not to be
treated as technical services for the purpose of Explanation 2 of 9(1)(vii),
and such activity would be covered by section 44BB.

– Section
115A(b) presupposes existence of FTS, therefore, the payments received for
rendering of services for extraction or production of mineral oil by the
Taxpayer would not fall within the ambit of FTS. Since the pre-condition for
invoking of section 115A is missing, the same would not be attracted.

– The
contention of the Taxpayer that it had received the payments for rendering the
services from F Co, which was a foreign company, had merit. Since the receipts
of the Taxpayer were from F Co, and not from Government or an Indian concern,
the provisions of section 115A and section 44DA were excluded.

– Section
44BB has special and specific provisions for computing profits and gains of a
non-resident in connection with the business of providing services or
facilities in connection with or supplying plant and machinery on hire used or
to be used in the prospecting for or extraction or production of mineral oils.
Hence, the services provided by the Taxpayer in connection with extraction or
production of mineral oil were covered by section 44BB. _

shailesh.kwebmaker

25 Section 9 of the Act and Article 12 of India-USA DTAA – payments to USA subsidiary towards provision of inputs for new product development including market survey expenses in USA, being FIS under Article 12(4), were taxable in India; remittances to an employee towards expenses of overseas representative offices were not taxable in India.

[2018] 89
taxmann.com 445 (Chennai – Trib.)

Tractors &
Farm Equipment Ltd. vs. ACIT

A.Y. 2006-07,
Date of Order: 27^th September, 2017

Facts

The Taxpayer
was engaged in manufacture and sale of tractors and farm equipment. It had
established a subsidiary In USA (“US Co”) for sale of tractors in USA. The
Taxpayer had entered into agreement with US Co to provide assistance for
promoting sale of tractors through advertisement, to provide market inputs to
enable increased sale of its tractors and maintain stock. The Taxpayer was
reimbursing promotional activity expenses to US Co on the basis of supporting
documents. The Taxpayer had also set up overseas representative offices in
London, Vienna and Belgrade for sale of tractors and had remitted funds towards
reimbursement of expenses to overseas representative office. The remittances
were made to the account of an employee of the Taxpayer. The employee had
periodically submitted detailed accounts with supporting documents in respect
of expenses incurred.

The Taxpayer contended that none of the
payments made to US Co were fee for technical/consultancy services. Further,
they being reimbursements, there was no element of profit. Hence, the
remittances were not taxable in India.

The AO
held that as the Taxpayer did not withhold tax while making payments to US Co
and overseas representative offices, such payments were to be disallowed u/s.
40(a)(i) of the Act.

With respect to payment to overseas
representative office, the Taxpayer contended that the payment was merely a
reimbursement towards periodic maintenance expenses incurred by the
representative office and hence, was not taxable in India.

The
CIT(A) confirmed the order of the AO in respect of payments made to US Co but
deleted disallowance in respect of payments made to overseas representative
offices.

Held

– The
Taxpayer had paid US Co for expenses for two kinds of services. One, sales
promotion and two, market development.

– As
per Distribution Agreement between the Taxpayer and US Co, the payments were
made “to provide inputs for new Product Development – Improvements in the
present range of products” to US Co “towards the market survey expenses to be
incurred in USA”. Thus, these payments were towards services rendered by US Co
to provide inputs for new product development including market survey in USA.
Such services were covered within the definition of ‘Fees for included
services’ in Article 12(4) of DTAA.

– The
debit note issued by US Co showed that reimbursement was for expenses incurred
towards detailed review of specifications of compact tractors, obtaining
feedback of dealers/end users, consulting experts/professional engineers
regarding current use and future requirements and evolving broad specifications
for a new range of compact utility models. The debit note also supports the
fact that the services fell within the definition of ‘Fees for included
services’ in Article 12(4) of DTAA.

– As
regards remittance towards expenses of overseas representative offices, the AO
had neither doubted the genuineness of the expenditure nor had he brought any
material on record for supporting disallowance. Merely because the employee
acted as an authorized signatory in another entity, does not mean that the
payment was not towards reimbursement of expenses of overseas offices of the
Taxpayer.

shailesh.kwebmaker

24 Sections 5(2), 9, 15, 90(2), 192(2) of the Act; Article 16 of India-USA DTAA – if employee is non-resident and no part of services under employment are performed in India, salary is not subject to withholding in India; employer can consider foreign tax credit at the stage of withholding tax.

AR No 1299 of 2012
Texas Instruments (India) Pvt. Ltd., In re
A.Ys.: 2011-12 and 2012-13, Date of Order: 29th January, 2018

Facts

The applicant, was an Indian entity which
had sent an employee on an assignment to the USA for two years. During that
period the employee was on payroll with its group entity in the USA (US Co).
While he was in USA, though the employee had not rendered any service in India,
for fulfilling his personal obligations, he received part of the salary in
India from the applicant.

In respect of financial year 2011-12 the
employee would have been a non-resident (“NR”)
in India and for financial year 2012-13 he would have been a resident in
India.

The employee would be resident in the USA
for the calendar years 2010, 2011 and 2012 as per the US domestic laws.
Accordingly, his global income, including salary paid in India, would be taxable
in USA.

The applicant sought ruling of AAR on the
following questions.

Question 1: Whether the Applicant is obliged
to withhold taxes on the salary paid in India to the employee in financial year
2011-12, when the employee qualified as an NR in India;

Question 2: Whether the Indian employer can
consider claim of foreign tax credit (“FTC”) at withholding stage in respect of
the taxes paid in the USA by the employee in financial year 2012-13 when he
would be a resident in India.

The applicant contended as follows before
the AAR.

As regards question 1

– In
terms of section 5(2) of the Act, the scope of total income of a non-resident
comprises income received in India, including salary received by the employee
in India. However, it is to be computed in terms of section 2(45) of the Act, after providing
reliefs, such as, treaty reliefs. Hence, first the taxability of salary needs
to be determined and then the availability of treaty benefit for computing the
taxable total income.

– Since
no services were rendered in India, salary for employment exercised in the USA
would not accrue in India. This is supported by the provisions of section 15
read with explanation to section 9(1)(ii) of the Act, decision in DIT vs.
Sri Prahlad Vijendra Rao (ITA No 838/ 2009) and decision in CIT vs.
Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom) and commentary by Professor
Klaus Vogel on Article 15 of the OECD Model Convention

– U/s.
90 of the Act, the employee is entitled to adopt either the provisions of the
Act or India-USA DTAA, whichever is more beneficial. As per Article 16 of DTAA,
the salary received by a USA resident in respect of employment is taxable only
in USA since the employment is not exercised in India. Hence, though the salary
was to be paid in India, , it would not be taxable in India.

– U/s.
192 of the Act, an employer is required to withhold taxes only if salary is
chargeable to tax in India. Also, as per section 192 read with section 2(10) of
the Act, taxes are required to be withheld considering the average rate of tax,
which is determined by dividing income-tax on total income by the total income.
In the instant case, as the total income with respect to salary paid in India
would not be chargeable to tax in India, the average rate of tax will work out
to Nil.

As regards question 2

– The
employee would be a resident in India for financial year 2012-13. Hence, in
terms of Article 25 of India-USA DTAA he will be entitled to claim FTC on taxes
paid in USA.

– Section
192(2) of the Act provides that an employee working under more than one
employer during any financial year can furnish details of salary and TDS to one
of the employers, and such employer is obliged to consider the same while
arriving at the quantum of total taxes to be withheld.

– Since
withholding tax provisions apply only to the extent of actual tax liability,
the treaty relief should be available to the employee at the tax withholding
stage without having to wait to seek this relief only at the time of filing
return of income.

– Hence,
relying on decisions in British Gas India Private Limited (AAR/725/2006)
and Coromandel Fertilizers Ltd [1991] 187 ITR 673 (AP), the Indian
employer would be required to consider FTC while arriving at the taxes to be
withheld at source in India.

The tax authority contended as follows before the AAR.

As regards question 1

– U/s.
5(2) of the Act, any income (which includes salary) received in India is liable
to tax in India. Hence, it will be subject to withholding tax. Salary due from
an employer in India is chargeable to tax in India and its payment will trigger
withholding tax obligations in India.

– An
Indian employment contract is an evidence of employer-employee relationship in
India. If the employer is an Indian entity, the employment is considered to be
exercised in India. Place where services are actually rendered or where the
employee is physically present is not relevant.

As regards question 2

– Grant
of claim of FTC involves interpretation of the articles of DTAA and examination
of satisfaction of other conditions, such as, actual payment of taxes in USA,
attribution of tax to income, etc. Only tax authority would have such
expertise. An employer would neither have the opportunity nor such expertise to
carry out such exercise at the time of withholding tax at source. From
financial year 2012-13, there is an additional requirement for obtaining a Tax
Residency Certificate (“TRC”) in order to avail Treaty benefits.

– Further,
section 192 of the Act does not provide for allowing FTC at the withholding
stage. Hence, the Indian employer cannot give benefit of FTC at the time of
withholding tax.

Held

As regards question 1

– U/s.
4 of the Act, income tax is to be charged in accordance with, and subject to,
provisions of the Act, on the total income of a taxpayer. The total income
chargeable to tax for a non-resident is subject to other provisions of the Act.

– The
judicial decisions cited by the Indian employer, and decision in Utanka Roy
vs. DIT (International Taxation) (2017) 390 ITR 109 (Cal), have held that,
the actual place of rendering services is the key test in determining place of
accrual of salary to a non-resident, and that salary received in respect of
services rendered outside India has to be considered as being earned outside India.
Since the employee was rendering services in the USA during FY 2011-12, the
salary accrued to him in USA and not in India.

– Whether
the employer was an Indian entity or not was immaterial and the only material
point for consideration is the place where the services were rendered. This is
also supported by the Commentary by Klaus Vogel on Article 15 and Explanation
to section 9(1)(ii) of the Act.

– Further,
even as per the provisions of Article 16 of DTAA, any income from services
rendered in USA would be chargeable to tax in USA. Thus, applying section 90 of
the Act, the beneficial provisions of the DTAA would prevail.

– Accordingly,
as the employment was exercised in the USA, the salary did not accrue in India.
Therefore, the Indian employer is not required to withhold taxes on the portion
of salary paid in India to its NR employee.

As regards question 2

– Under
Article 25 of India-USA DTAA, the employee is entitled to benefit of claim of
FTC.

– U/s.
192(2) of the Act, in respect of payments received by an employee from more
than one employer, the employee could furnish details of salary paid and tax
deducted to one of the employers, who would then be required to consider the
same at the time of withholding tax.

– Although,
the machinery provisions of the Act do not provide for claim of FTC at
withholding stage, the judicial decisions cited by the applicant had held that
FTC can be considered by the Indian employer at the withholding stage. Thus,
the Indian employer could consider the same while computing withholding tax.

– However,
while the Indian employer can consider FTC at the time of withholding tax, it
is also obligated to exercise due diligence in satisfying itself about the
details of period of residence, TRC, details of income earned and taxes
deducted, the period of income, etc., before doing so.

– If
the tax authority believes that the Indian employer has failed in carrying out
such due diligence, it may take appropriate action under the Act.

shailesh.kwebmaker

23 Articles 5, 7 of Indo-Swiss DTAA – Referral fee received by Dubai branch of a Swiss company from its India branch for referring an Indian resident client was ‘commission’ – since such fee was not attributable to PE in India of the Taxpayer, it was not taxable in India.

[2018] 90 taxmann.com 181 (Mumbai – Trib.)
DCIT vs. Credit Suisse AG
A.Y.: 2011-12, Date od Order: 9th February, 2018

ACTS
The Taxpayer was an entity incorporated in, and tax-resident of, Switzerland. The Taxpayer was a member of a global banking group providing various financial services globally. With permission of RBI, the Taxpayer had established a branch in India (“India Branch”). The Taxpayer also had a branch in Dubai. (“Dubai Branch”).

Dubai Branch had referred an Indian resident client to India Branch. India Branch handled the assignment and in accordance with global policy of the group, paid half of the fee to Dubai Branch as referral fee. The Taxpayer contended that referral fee received by Dubai Branch was ‘business income’. Since Dubai Branch did not have a PE in India, in terms of Article 5 of Indo-Swiss DTAA fee was not liable to tax in India. According to the AO, since the referral fee was payable in connection with a transaction between India Branch and referred client, it was in the nature of ‘fee for technical services’ and not ‘business income’. Hence, in terms of section 5(2)(b), read with section 9(1)(i) of the Act, referral fee was taxable in India since it was deemed to accrue or arise in India.

According to the DRP, Dubai Branch referred the client and it had no PE in India. Such income could not be attributed to activity of India Branch1.

HELD
– Mere fact that the fee was payable by India Branch to Dubai Branch, after execution of the work was no ground to determine the nature of the payment.

– In concluding that the ‘referral fee’ is in the nature of ‘commission’ to be taxed as ‘business income’ and not as ‘fees for technical services’ the DRP has referred and relied upon the decisions in Cushman & Wakefield (S) Pte. Ltd., 305 ITR 208(AAR) and CLSA Ltd., vs. ITO (International Taxation), 56 SOT 254(Mum) by the DRP. The tax authority has not brought any contrary decision.

– The tax authority has not countered the contention of the Taxpayer that Dubai Branch had no PE in India and also that PE in India of the Taxpayer, i.e., India Branch, had no role to play in the performance of the referral activity in question.
– Since the referral activity was undertaken outside India, and since PE of the Taxpayer had no role to play in the referral activity, the referral fee earned by Dubai Branch could not be considered to be attributable to PE in India of the Taxpayer. Therefore, the DRP was right in applying Article 7 of Indo-Swiss DTAA and holding the referral fee as non-taxable in India.

1 Though the decision has not made any mention, it may be noted that Article 7(1) of Indo-Swiss DTAA contains only limited force of attraction.

shailesh.kwebmaker

11 Section 263 – Fringe Benefit Tax is not “tax” as defined in section 2(43) and cannot be disallowed u/s. 40(a)(v) or added back to “Book Profits” u/s. 115JB. Consequently, even if there is lack of inquiry by the AO and the assessment order is “erroneous” under Explanation 2 to section 263, the order is not “prejudicial to the interest of the revenue”.

Rashtriya Chemicals & Fertilizers Ltd. vs. CIT (Mumbai)
Members : Joginder Singh (JM) and Manoj Kumar Aggarwal (AM)
ITA No.: 3625/Mum/2017
A.Y.: 2012-13.
Date of Order: 14th February, 2018.
Counsel for assessee / revenue: Ketan K. Ved / Narendra Singh Jangpangi

FACTS

The total income of the assessee, engaged as
manufacturer of fertilizers and chemical products was assessed to be Rs.198.12
crores under normal provisions and Rs.365.02 crores u/s. 115JB as against
returned income of Rs.193.66 Crores & Rs.365.02 Crores under normal
provisions and u/s. 115JB respectively.

Subsequently, the said assessment order was
subjected to exercise of revisional jurisdiction u/s. 263 by CIT on the
premises that corresponding adjustment of certain employee benefits expenses of
Rs.11.91 Crores being tax borne by the assessee on deemed perquisites on the
value of accommodation provided to employees and which were not admissible u/s.
40(a)(v), was omitted to be carried out while arriving at book profits u/s.
115JB. Therefore, the order being erroneous and prejudicial to the interest of
the revenue, required revision u/s. 263. After providing due opportunity of
being heard to the assessee, CIT directed the AO to re-compute Minimum
Alternative Tax [MAT] u/s. 115JB and raise demand against the assessee for the
same.

Aggrieved by the directions of Ld. CIT, the
assessee has by way of the appeal, challenged invocation of revisional
jurisdiction u/s. 263.

HELD

The Tribunal observed that the said item of
expenditure viz. taxes borne by the assessee on deemed perquisites on the value
of accommodation provided to the employees was not allowable to assessee while
arriving at income under normal provisions in terms of provisions of section
40(a)(v) and the assessee himself, has added the same while computing income
under the normal provisions.

The Tribunal noticed that computation of
‘Book Profits’ was neither provided by the assessee during hearing before the
AO nor discussed in any manner. In the quantum order, the AO picked up the
figures of ‘Book Profits’ as per ‘Return of Income’ without applying any mind thereupon
and adopted the same as such without any iota of discussion in the quantum
assessment order. The Tribunal was of the opinion that, prima facie, this is a
case of ‘no inquiry’ by AO and not the case of ‘inadequate inquiry’ or ‘Lack of
Inquiry’ or ‘adoption of one of the possible views’. The statutory provisions
as contained in section 263 including Explanation-2 create a deeming fiction
that the order of Assessing Officer shall be deemed to be erroneous in so far
as it is prejudicial to the interests of the revenue if, in the opinion of CIT
the order is passed without making inquiries or verification which should have
been made.

The Tribunal observed that the only question
which survives for consideration is whether the omission to carry out the stated
adjustment in the Book profits as envisaged by CIT has made the quantum order
erroneous and prejudicial to the interest of the revenue and whether the stated
adjustment was tenable in law or not?

The Tribunal noted that computation of Book
Profits u/s.115JB has to be in the manner as provided in Explanation-1 to
section 115JB. The Minimum Alternative Tax [MAT] provisions as contained in
section 115JB, as per well-settled law, are a complete code in itself and
create a deeming fiction which is to be construed strictly and therefore,
whatever computations / adjustments are to be made, they are to be made
strictly in accordance with the provisions provided in the code itself. The
clause (a) of Explanation-1 envisages add-back of the amount of Income Tax paid
or payable and the provision therefor while arriving at Book Profits. Further,
in terms of Explanation-2 to section 115JB, the amount of Income Tax
specifically includes the components mentioned therein. The Tribunal noticed the legislative intent
for introducing Explanation 2 from the Explanatory Memorandum to the Finance
Bill, 2008.

Taxes borne by the assessee on non-monetary
perquisites provided to employees forms part of Employee Benefit cost and akin
to Fringe Benefit Tax since they are certainly not below the line items since
the same are expressly disallowed u/s. 40(a)(v) and the same do not constitute
Income Tax for the assessee in terms of Explanation-2. The Tribunal observed
that this view is fortified by the judgment of Tribunal rendered in ITO vs.
Vintage Distillers Ltd. [130 TTJ 79] where the Tribunal has taken the view
that the term ‘tax’ was much wider term than the term ‘Income Tax’ since the
former, as per amended definition of ‘tax’ as provided in section 2(43)
included not only Income Tax but also Super Tax & Fringe Benefit Tax.
Therefore, without there being any corresponding amendment in the definition of
Income Tax as provided in Explanation-2 to section 115JB, Fringe Benefit Tax
was not required to be added back while arriving at Book Profits u/s. 115JB.
Similar view has been expressed in another judgement of Tribunal titled as Reliance
Industries Ltd Vs. ACIT [ITA No. 5769/M/2013 dated 16/09/2015] where the
Tribunal took a view that ‘Wealth Tax’ did not form part of Income Tax and therefore,
could not be added back to arrive at Book Profits since the adjustment thereof
was not envisaged by the statutory provisions.

The Tribunal held that the adjustment of
impugned item as suggested by CIT was not legally tenable in law which leads to
inevitable conclusion that the omission to carry out the said adjustment did
not result into any loss of revenue. Therefore, one of the prime condition viz.
prejudicial to interest of revenue to invoke the revisional jurisdiction under
the provisions of section 263 has remained unfulfilled and therefore, the
impugned order could not be sustained in law.

The Tribunal set aside the order
passed. The appeal filed by the assessee
was allowed.

shailesh.kwebmaker

10 Section 54 – If agreement for purchase of residential flat is made and the entire amount is paid within three years from the date of sale, the basic requirement for claiming relief u/s. 54(1) of the Act is taken as fulfilled.

Seema Sabharwal vs. ITO (Mumbai)
Members : Sanjay Garg (JM) and Annapurna Gupta (AM)
ITA No. 272/Chd/2017
A.Y.: 2013-14. Date of Order: 5th February, 2018.
Counsel for assessee / revenue: M. S. Vohra / Manjit Singh

In a case where agreement is entered into
and amount paid within the period mentioned in section 54, the claim for relief
cannot be denied on the ground that as per the agreement with the builder, the
house was to be completed within 4 years, whereas, as per provisions of section
54 of the Act, the house should have been constructed within 3 years from the
date of transfer of original asset.

The procedural and enabling provisions of
s/s. (2) cannot be strictly construed to impose strict limitations on the
assessee and in default thereof to deny him the benefit of exemption
provisions. If assessee at the time of
assessment proceedings proves that he has already invested the capital gains on
the purchase / construction of the new residential house within the stipulated
period, the benefit under the substantive provisions of section 54(1) cannot be
denied to the assessee.

FACTS

The assessee sold a residential flat on
17.9.2012 for a consideration of Rs. 5,20,00,000. Long term capital gain arising on sale of
this flat was Rs. 2,97,78,977. The
Assessing Officer (AO) noticed that the assessee had claimed exemption for Rs.
3,00,00,000 on account of investment in another flat on 11.9.2014. On perusal of the purchase deed, the AO
noticed that the assessee was to get possession of the flat on or before
August, 2016. The AO concluded that the
assessee had only purchased the right to purchase the flat which was proposed
to be given after 4 years from the date of transfer in August 2016. He held that the conditions of section 54 had
not been complied with and, therefore, he denied the claim of Rs. 2,97,78,977.

Aggrieved, the assessee preferred an appeal
to the CIT(A) where it contended that in various cases it has been held that if
assessee invests capital gains in a house which is under construction and due
to some reasons, the possession is delivered late to the assessee, even then
the investment of the amount will be considered towards the purchase /
consideration of the house and that the assessee will be eligible to claim
deduction u/s. 54 of the Act.

The CIT(A) held that the case laws relied
upon were distinguishable and were relating to claim of deduction u/s. 54F and
not under section 54 as is the present case.
He held that while section 54F requires that the investment is to be
made, section 54 requires the purchase / construction to be completed. He
further observed that even the assessee was supposed to deposit the proceeds
from the sale of house property in specified scheme / capital gains account,
however, the assessee in this case did not deposit the same in the capital gain
account / scheme with the bank rather the assessee had deposited the amount in
FDRs. The assessee had failed to comply with the conditions stipulated u/s.
54(2) of the Act. He confirmed the action
of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that various courts
have held that if the assessee invests the amount in purchase / construction of
building within the stipulated period and the construction is in progress, then
the benefits of exemptions, cannot be denied to the assessee. Reliance in this respect can be placed on the
decision of the jurisdictional High Court of Punjab & Haryana in the case
of Mrs. Madhu Kaul vs. CIT, ITA No. 89 of 1999 vide order dated 17.1.2014
and further on the decision of the Calcutta High Court in the case of CIT
vs. Bharati C. Kothari (2000) 160 CTR 165 and also on the decisions of the
various co-ordinate Benches of the Tribunal.

On going through the provisions of sections
54 and 54F of the Act, the Tribunal did not find any such distinction as drawn
by CIT(A) or any such dissimilarity in the wordings of the provisions from
which any such conclusion can be drawn that u/s. 54F of the Act the investment
is to be considered and/or that u/s. 54 off the Act, the house must be
completed within the stipulated period of three years or that investment is not
to be considered.

It observed that the decision of the
Calcutta High Court has categorically held that if the agreement for purchase
of residential flat is made and the entire amount is paid within three years
from the date of sale, the basic requirement for claiming relief u/s. 54(1) of
the Act is to be taken as fulfilled. The
Tribunal held that this issue is squarely covered in favor of the assessee by
the various decisions of the Hon’ble High Court.

As regards non-deposit of the amount in
capital gains account scheme before the due date for filing of return u/s.
139(1) of the Act, the Tribunal held that sub-section (1) of section 54 is a
substantive provision enacted with the purposes of promoting purchase /
construction of residential houses. However, sub-section (2) of section 54 is
an enabling provision which provides that the assessee should deposit the
amount earned from capital gains in a scheme framed in this respect by the
Central Government till the amount is invested for the purchase / construction
of the residential house. This
provision, according to the Tribunal, has been enacted to gather the real
intention of the assessee to invest the amount in purchase / construction of a
residential house.

S/s. (2) puts an embargo on the assessee to
casually claim the benefit of section 54 at the time of assessment, without
there being any act done to show his real intention of purchasing / constructing
a new residential unit. S/s. (2) governs the conduct of the assessee that the
assessee should put the amount of capital gains in an account in any such bank
or institution specifically notified in this respect and that the return of the
assessee should be accompanied by submitting a proof of such deposit, hence,
s/s. (2) is an enabling provision which governs the act of the assessee, who
intends to claim the benefit of exemption provisions of section 54.

The enabling provision of s/s. (2) cannot
abridge or modify the substantive rights given vide sub-section (1) of section
54 of the Act, otherwise, the real purpose of substantive provision i.e. s/s.
(1) will get defeated. The primary goal of exemption provisions of section 54
is to promote housing. The procedural
and enabling provisions of s/s.(2) thus cannot be strictly construed to impose
strict limitations on the assessee and in default thereof to deny him the
benefit of exemption provisions.

The Tribunal held that if the assessee at
the time of assessment proceedings, proves that he has already invested the
capital gains on the purchase / construction of the new residential house
within the stipulated period, the benefit under substantive provisions of
section 54(1) cannot be denied to the assessee.
Any different or otherwise strict construction of s/s. (2) will defeat
the very purpose and object of the exemption provisions of section 54 of the
Act. The Tribunal observed that this
view is fortified by the decision of the Karnataka High Court in the case of CIT
vs. Shri K. Ramachandra Rao, ITA No. 47 of 2014 c/w ITA No. 46/2014, ITA No.
494/2013 and ITA No. 495/2013, decided vide order dated 14.7.2014 where the
High Court has directly dealt with this issue while interpreting the identical worded
provisions of section
54F(2) of the Act.

Since the assessee had invested the amount
and had complied with the requirement of substantive provisions, the Tribunal
held that the assessee is entitled to the claim of exemption u/s. 54 of the
Act.

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

15 Section 37, CBDT Circular No. 5 of 2012 – Expenditure incurred on AMP by a pharma company, on organising conferences and seminars of doctors, with the main object of updating the doctors of latest developments and to create awareness about new research in medical field which is beneficial to the doctors, cannot be disallowed.

[2018] 89 taxmann.com 249 (Mumbai – Trib.)

Solvay Pharma India Ltd. vs. Pr.CIT

ITA No. : 3585 (Mum) of 2016

A.Y.: 2011-12 Date of Order: 11^thJanuary, 2018

Medical Council of India Regulations do not
apply to pharma companies.

FACTS

The assessee company incurred Advertisement
expense of Rs. 25,02,929 and Publicity and Propaganda Expense of Rs.
15,94,99,360. The assessee in his letter
informed the Assessing Officer (AO) that Advertisement expenses are in
compliance with CBDT Circular No. 5/2012 dated 1.8.2012 but did not furnish any
further details. The AO neither called
for the books of accounts nor called for any evidence such as invoices,
vouchers, etc. The assessee was neither asked
to file by the AO nor did it suo moto file any corroborative details in respect
of Publicity and Propoganda Expenses.

The CIT was of the view that if any
expenditure incurred is claimed u/s. 37 especially those expenditure which the
business entity incurs on items which may broadly be classified as
`Advertisement, Marketing and Business Promotion’ (in short AMP), the
possibility of incurring expenditure on prohibited items as per Explanation
below section 37(1) of the Act exists which must be ruled out by some
examination of corroborative evidence called for and produced before the
AO. Since the AO did not make any
inquiry, the CIT held the assessment order to be erroneous and prejudicial to
the interest of the revenue. He rejected
the contentions of the assessee that the MCI regulations are not applicable to
pharma companies but only to medical practitioners. He also rejected the contention that
expenditure so incurred is not in the nature of freebies to the doctors.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal held that the MCI Regulations
are not applicable to the assessee, the question of assessee incurring
expenditure in alleged violation of the regulation does not arise.

CBDT Circular No. 5 of 2012 seeks to
disallow expenditure incurred by pharmaceutical companies interalia in providing
`freebies’ to doctors in violation of the MCI Regulations. The term “freebies” has neither been defined
in the Income-tax Act nor in the MCI Regulations. However, the expenditure so incurred by
assessee does not amount to provision of `freebies’ to medical
practitioners. The expenditure incurred
by it is in the normal course of its business for the purpose of marketing of
its products and dissemination of knowledge etc. and not with a view to giving
something free of charge to the doctors.
The act of giving something free of charge is incidental to the main
objective of product awareness.
Accordingly, it does not amount to provision of freebies. Consequently, there is no question of
contravention of the MCI Regulations and applicability of Circular No. 5 of
2012 for disallowance of the expenditure.

Explanation to section 37(1) provides an
embargo upon allowing any expenditure incurred by the assessee for any purpose
which is an offence or which is prohibited by law. This means that there should be an offence by
an assessee who is claiming the expenditure or there is any kind of prohibition
by law which is applicable to the assessee.
Here in this case, no such offence of law has been brought on record, which
prohibits the pharmaceutical company not to incur any development or sales
promotion expenses.

CBDT Circular
dated 1.8.2012 in its clarification has enlarged the scope and applicability of
`Indian Medical Council Regulation, 2002’ by making it applicable to the
pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI
regulation to the pharmaceutical companies by the CBDT is without any enabling
provisions either under the provision of the Income-tax Law or by any
provisions under the Indian Medical Council Regulations. The CBDT cannot
provide casus omissus to a statute or notification or any regulation
which has not been expressly provided therein.

The beneficial circular may apply
retrospectively but a circular imposing a burden has to be applied
prospectively only. Here, in this case the CBDT has enlarged the scope of
`Indian Medical Council Regulation, 2002’ and made it applicable for the
pharmaceutical companies. Therefore,
such a CBDT circular cannot be reckoned to have retrospective effect. The free
sample of medicine is only to prove the efficacy and to establish the trust of
the doctors on the quality of the drugs. This again cannot be reckoned as
freebies given to the doctors but for promotion of its products.

The pharmaceutical company, which is engaged
in manufacturing and marketing of pharmaceutical products can promote its sale
and brand only by arranging seminars, conferences and thereby creating
awareness among doctors about the new research in the medical field and
therapeutic areas, etc. Every day there are new developments taking
place around the world in the area of medicine and therapeutic, hence in order
to provide correct diagnosis and treatment of patients, it is imperative that
the doctors should keep themselves updated with the latest developments in the
medicine and the main object of such conferences is to update the doctors of
the latest developments, which is beneficial to the doctors in treating the
patients as well as the pharmaceutical companies.

The Tribunal did not find any merit in the
order passed u/s. 263. It allowed the appeal filed by the assessee.

shailesh.kwebmaker

14 Section 56(2)(vi) – Amount received by the assessee, at the time of her retirement, from the firm, after surrendering her right, title and interest therein, is for a consideration and therefore, not taxable u/s. 56(2)(vi).

2017] 89 taxmann.com 95 (Pune-Trib.)

Smt. Vasumati Prafullachand Sanghavi vs.
DCIT

ITA No. : 161/Pune/2015

A.Y.: 2008-09 Date of Order: 13^thDecember, 2017

FACTS

For the assessment year under consideration,
the assessee filed her return of income declaring therein a total income of Rs.
88,330. The Assessing Officer (AO) issued a notice u/s. 147 of the Act on the
ground that the amount of Rs. 21,52,73,777 received by her on relinquishing her
share in the partnership firm Deepak Foods (DF) has escaped assessment.

During the year under consideration, the
assessee retired as a partner from Deepak Foods and received an amount of Rs.
21,66,52,000. This amount was claimed in the return of income and was accepted
by the AO in the regular assessment as exempt.

The capital balance of the assessee, on the
eve of retirement from the firm, was Rs. 13,78,223. In the return of income,
the assessee furnished a note stating that the credit balance in capital
account of the assessee includes share of Goodwill received from Deepak Foods
on retirement from the firm. While
assessing the total income in reassessment proceedings, the Assessing Officer
(AO), by relying upon the decision of the Pune Tribunal in the case of Shevantibhai
C. Mehta vs. CIT [2004] 4 SOT 94 (Pune) taxed Rs. 21,52,73,777 as income
from long term capital gains. Further,
the AO, alternatively, assessed the amount of Rs. 21,52,73,777 as income from
other sources.

Aggrieved, the assessee preferred an appeal
to CIT(A) where it was contended that the similar addition was made in the
assessment of Smt. Shakuntala S. Sanghavi, the other retiring partner, who also
received identical amount. In her case,
upon completion of the assessment, the CIT in revision proceedings set aside
the order passed by the AO and taxed the amount in an order passed u/s. 263 of
the Act. The Tribunal quashed the revision order of CIT both on facts and on
merits. Consequential order passed by AO u/s. 143(3) r.w.s. 263 was also
quashed and original order restored by the Tribunal in the case of Smt.
Shakuntala S. Sanghavi. The assessee relied on the order of the Tribunal in the
case of Shakuntala S. Sanghavi vs. ACIT [ITA No. 956(Pn) of 2013) relating to
AY 2008-09, order dated 22.3.2014] regarding finality of the issue by the
Tribunal on the taxability of the said receipts.However, the CIT(A) held that
the amounts received by the assessee from Deepak Foods constitute a gift
taxable u/s. 56(2)(vi) of the Act.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the ratio of the
decision of Pune Bench of the Tribunal in the case of Smt. Shakuntala S.
Sanghavi (supra) and order of the Tribunal in the case of ITO vs.
Rajnish M. Bhandari [IT Appeal No. 469 (PN) of 2011, dated 17.7.2012] and
the judgment of the Bombay High Court in CIT vs. Riyaz A. Sheikh [2014] 221
Taxman 118 (Bom.) suggest that the receipts of this kind are not to be
taxed under the head `Income from Capital Gains’ as well as under the head
`Income from Other Sources’ in general.
In view of the order of the Tribunal in the case of Smt. Shakuntala S.
Sanghavi, on similar facts, the non-taxability of the said receipt under the
head `Capital Gains’ as well as under the provisions of section 56 of the Act,
i.e. under the head `Income from Other Sources’ has reached finality.

As regards taxability of the said receipt
under the specific provision of section 56(2)(vi) of the Act, the Tribunal
noted that the assessee received
compensation of Rs. 21,66,32,000 from Deepak Foods on her
retirement when she surrendered her right, title, interest in the said
firm. Therefore, the amount of
compensation cannot be said to have been received without consideration. It observed that it is not the case of the
revenue that the assessee continues to be a partner even after receipt of the
consideration and that the assessee has not surrendered the rights of every
kind in the firm.

The Tribunal decided the appeal in favour of
the assessee.

shailesh.kwebmaker

45 Section 92C – Transfer pricing Computation of arm’s length price (ALP) – A. Y. 2006-07 – Comparable and adjustment – There is no provision in law which makes any distinction between a Government owned company and a company under private management for purpose of transfer pricing audit and/or fixation of ALP – A company cannot be excluded as a comparable only on ground that company has far higher turnover – Where both comparable and assessee were in segment of manufacture of tractors and power tillers and all functions of comparable company and assessee were same, said company should not be rejected as a comparable only because of its higher turnover

CIT vs. Same Deutz – Fahr India (P.)
Ltd.; [2018] 89 taxmann.com 47 (Mad):

The assessee-company was in the segment of
manufacture of tractors and power tillers. It entered into international
transactions with its associated enterprise (AE). The Transfer Pricing Officer
(TPO) had rejected the comparable companies selected by the assessee except one
VST Tillers in the transfer pricing documentation on the ground that the said
company recorded huge turnover whereas the turnover of assessee was very small
and, hence, not comparable. TPO had selected HMT Limited as one of the
comparables on functional similarity, but while determining the ALP, he had not
included HMT Limited as a comparable. The Tribunal found, on facts, that both
were comparable and the assessee was in the segment of manufacture of tractors
and power tillers and all the functions of HMT Limited and the assessee were
the same and that TPO ought not to have rejected said company as a comparable
only because of its higher turnover, as it would be impossible to find out
comparables with all similarities, including similarity of turnover.

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

“i) The Tribunal very rightly
observed and held that refusal to include a company as a comparable only on the
ground that the company had far higher turnover was not justified. The Tribunal
also very rightly observed that no comparable could have exactly the same
turnover. The Tribunal found, on facts, that both comparable and the assessee
was in the segment of manufacture of tractors and power tillers and all the
functions of HMT Limited and the assessee were the same and that TPO ought not
to have rejected said company as a comparable only because of its higher
turnover, as it would be impossible to find out comparables with all
similarities, including similarity of turnover.

ii) In the grounds of appeal,
it is urged that the Tribunal failed to appreciate that HMT Limited was a
Government owned company and the functions performed under Government
management were altogether different from a private company. There is no provision
of law which makes any distinction between a Government owned company and a
company under private management for the purpose of transfer pricing audit
and/or fixation of ALP. There is no reason why a Government owned company
cannot be treated as a comparable.

iii) It
is reiterated that the Tribunal found, on facts, that the functionality of HMT
Limited and the assessee were the same. In our considered opinion, the decision
of the Tribunal does not warrant interference of this court.”

shailesh.kwebmaker

44 TDS – Fees for technical services or payment for work – Sections 194C and 194J – Fees for technical services or payment for work – Sections 194C and 194J – A. Ys. 2008-09 to 2011-12 – Broadcasting of television channels – Placement charges, subtitling, editing expenses and dubbing charges – Are part of production of programmes – Not fees for professional or technical services – Amounts paid falling u/s. 194C and not section 194J

CIT vs. UTV Entertainment Television
Ltd.; 399 ITR 443 (Bom):

The assessee company carried on the business
of broadcasting of television channels. It paid certain amounts on account of
carriage/placement fees, editing/subtitling expenses and dubbing charges. Tax
at source was deducted by the assessee on these amounts u/s. 194C of the Act,
at the rate of 2%. The relevant period is A. Ys. 2008-09 to 2011-12. The
Assessing Officer was of the view that the amounts were in the nature of fees
payable for technical services and, therefore, tax should have been deducted
u/s. 194J. Accordingly he passed orders u/s. 201(1)/201(1A) and raised demand.
The Commissioner (Appeals) and the Tribunal accepted the assesee’s claim and
held that the tax has been rightly deducted at 2% u/s. 194C of the Act.
Accordingly, they set aside the order of the Assessing Officer.

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

“i) When
services are rendered as part of the contract accepting placement fees or
carriage fees, they were similar to services rendered against the payment of
standard fees paid for broadcasting of channels of any frequency. The placement
fees were paid under a contract between the assessee and the cable operators or
multi system operators. Considering the nature of transactions, the payments
were not in the nature of commission or royalty.

ii) Commissioner (Appeals) had
found that by agreeing to place the channel on any preferred band, the cable
operator did not render any technical service to the distributor or television
channel. He had rightly found that if the contract was executed for
broadcasting and telecasting the channels of the assessee, the payment was
covered by section 194C as it fell within clause (iv) of the definition of
“work”. Therefore, when placement charges were paid by the assessee to the
cable operators and multi system operators for placing the signals on a
preferred band, it was a part of work of broadcasting and telecasting covered
by sub-clause (b) of clause (iv) of the Explanation to section 194C. It was
found that by an agreement to place the channel on a prime band by accepting
placement fees, the cable operator or multi system operator did not render any
technical services. The Commissioner (Appeals) had recorded detailed findings
on the basis of material on record.

iii) Regarding subtitling
charges also, the finding of fact recorded by the Commissioner (Appeals), which
was confirmed by the Tribunal, was that the work of subtitling was also covered
by the definition of “work” in sub-clause (b) of clause (iv) of the Explanation
to section 194C which covered the work of broadcasting or telecasting including
production of programmes for such broadcasting and telecasting and that the
work of subtitling was part of production programmes.

iv) The findings of fact
recorded by the appellate authorities and the view taken by the Tribunal were
justified. No question of law arose.”

shailesh.kwebmaker

43 Section 271(1)(c) – Penalty – Concealment of income – A. Y. 2014-15 – Condition precedent – No specific finding that conduct of assessee amounted to concealment of particulars of income or furnishing inaccurate particulars of income – Assessee not found to have furnished inaccurate particulars but making incorrect claim of rebate – Voluntary withdrawal of claim pursuant to notice – No concealment of income – Order imposing penalty unsustainable

Gopalratnam Santha Mosur vs. ITO; 399 ITR
155 (Mad):

The relevant year is A. Y. 2014-15. The
assessee sold an immovable property and paid the entire capital gains tax
applicable in respect of the transaction. Thereafter she claimed 50% of the
capital gains tax as rebate under DTAA between India and Canada. The Assessing
Officer issued a notice proposing to disallow the claim for rebate. In
response, the assessee submitted a revised income computation statement,
withdrawing the claim to the rebate and requesting the Assessing Officer to
give effect to the revised tax payable and issue the refund. The assessment
order was passed considering the revised statement. The Assessing Officer also
imposed a penalty of Rs. 23,31,787 u/s. 271(1)(c) of the Act for concealment of
income.

The assessee filed a writ petition
challenging the order of penalty. The Madras High Court allowed the writ
petition and held as under:

“i) Until and unless the
authority had rendered a specific finding that the conduct of the assessee
amounted to concealment of particulars of her income or had furnished
inaccurate particulars of such income, the provisions of section 271(1)(c)
could not be invoked. The Assessing Officer had to form an opinion that it was
a case where penalty proceedings had to be initiated and reasons were required
to justify and order imposing penalty.

ii) The basic parameters had
not been fulfilled. In response to the notice, the assessee had submitted a
reply stating that after she was served notice u/s. 143(2), she had furnished
all the required documents called for during the course of assessment and that
the Assessing officer had asked for the details on the rebate claimed by her
according to the DTAA and in response to the show-cause notice, the assessee
had mentioned that she had inadvertently claimed a rebate of 50% on the total
tax payable and had submitted a revised computation withdrawing the rebate
claimed. The assessee had filed a revised computation statement and
accordingly, the assessment was completed.

iii) Thus, the withdrawal of
the rebate claim was voluntary and could not be brought within the expression
concealment of particulars or furnishing inaccurate particulars. There was no
concealment of income nor submitting of inaccurate information, as all the
relevant details were furnished by the assessee. There had been no
misrepresentation of the facts to the Assessing Officer and that the
inadvertent claim to rebate on the tax liability which had admittedly been paid
in the other country showed that the intention of the assessee was not to
furnish inaccurate particulars or conceal her income.

iv) The Assessing Officer had
not rendered any finding that the details supplied by the assessee in her
return were erroneous or false or that a mere claim for rebate amounted to
furnishing of inaccurate particulars. Thus the order passed u/s. 271(1)(c)
levying penalty was unsustainable.”

shailesh.kwebmaker

42 Section 144C – International transactions – Assessment – A. Y. 2009-10 – Draft assessment order – Final assessment order giving effect to directions of DRP – AO not entitled to introduce new disallowance not contemplated in draft assessment order

CIT vs. Sanmina SCI India P. Ltd.; 398
ITR 645 (Mad):

Pursuant to a reference u/s. 92CA(1) of the
Act, an order of transfer pricing determining the arm’s length price (ALP) of
international transactions was passed by the Transfer Pricing Officer (TPO)
culminating in an order of draft assessment u/s. 143(3) r.w.s. 144C(1) of the
Act. The assessee filed objections before the Dispute Resolution Penal (DRP)
against the draft assessment order. The DRP issued directions in relation to
the transfer pricing adjustment as well as claim to relief u/s. 10A of the Act.
Effect was given to the directions of the DRP. While doing so the Assessing
Officer introduced a new disallowance not contemplated in the draft order of
assessment being the aggregation of income or loss from variations, sources
under the same head of income prior to allowance of relief u/s. 10A and since
the aggregation resulted in a loss, he did not allow relief u/s. 10A of an
amount of Rs. 2.98 crore. The returned loss of an amount of Rs. 19,14,03,268
was thus reduced to the extent of deduction u/s. 10A of an amount of Rs. 2.98
crore. The Tribunal set aside the adjustment effected by the Assessing Officer
in relation to treatment of brought forward losses prior to allowance of
deduction u/s. 10A of the Act. The Department was directed to grant deduction
prior to effecting adjustment of brought forward losses.

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

“i) The scheme of section 144C
would be wholly violated if the Assessing Officer takes it upon himself to
include in the final order of assessment additions, disallowances or variations
that do not form part of the order of draft assessment. The powers of an Assessing
Officer u/s. 144C(13) have clearly been limited to giving consequence to the
directions of the DRP and cannot extend any further. Any attempt by the
Assessing Officer to delve beyond would result in great prejudice to an
assessee in the light of the express stipulation that no opportunity is to be
provided and an interpretation to further such a conclusion would be wholly
unacceptable and contrary to law.

ii) Acceptance of the
proposition advanced by the Department would amount to giving leave to the
Assessing Officer to pass more than one order of assessment in the course of a
single proceeding, which was not envisaged in the scheme of the Act. Subsequent
assessments either rectifying, revising or reopening the original assessment
were permitted by exercising specified powers under different statutory
provisions. The order of draft assessment u/s. 144C(1) was for all intents and
purposes is an order of original assessment though in draft form.

iii) The order of Tribunal to
this effect was right in law and called for no interference. The variation in
the order of final assessment relating to the priority of set off of losses was
purely misconceived and was in excess of jurisdiction by the Assessing Officer
in terms of section 144C(13) of the Act.”

shailesh.kwebmaker

41 u/s. 80-IA(4) – Infrastructure project – Deduction- A. Y. 2003-04 – Development of infrastructure facility – Effect of section 80-IA(4) – Person developing infrastructure facility and person operating it may be different – Both entitled to deduction u/s. 80-IA(4) on portion of gains received

Principal CIT vs. Nila Baurat Engineering
Ltd.; 399 ITR 242 (Guj):

The assessee was engaged in the business of
civil construction and installation of various infrastructure projects. For the
A. Y. 2003-04, the assessee had claimed deduction u/s. 80-IA(4) of the Act, and
the same was allowed by the Assessing Officer. Subsequently, the Assessing
Officer issued notice u/s. 148 for reassessment on the ground that after
completion of the construction work, the assesee had assigned the task of
maintenance and toll collection of the road to one RTIL and hence the deduction
u/s. 80-IA(4) had been granted erroneously. Accordingly, the deduction was
disallowed in the reassessment order. The Tribunal held that the assessee was
entitled to deduction u/s. 80-IA(4).

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

“i) Under sub-section (4) of
section 80-IA of the Act, an enterprise carrying on the business of developing,
or operating and maintaining, or developing, operating and maintaining
infrastructure facility would be eligible for deduction. Thus, this provision
itself envisages that in a given project the developer and the person maintains
and operates may be different. Merely because the person maintaining and
operating the infrastructure facility is different from the one who developed
it, that would not deprive the developer of the deduction under the section on
the income arising out of such development.

ii) By virtue of the operation
of the proviso, the developer would not be deprived of the benefit of deduction
under sub-section (1) of section 80-IA on the profit earned by it from its
activity of developing the infrastructure. The proviso does not operate to
deprive the developer of the benefit of the deduction even after the facility
is transferred for the purpose of maintenance and operation but the profit
element would be split into one derived from the development of the
infrastructure and that derived from the activity of maintenance and operation
thereof.

iii) The assessee having
transferred the facility for the limited purpose of maintenance and operation
to RTIL, it would receive a fixed payment of Rs. 328 lakh per annum
irrespective of the toll collection by RTIL. This profit element therefore
would be relatable to the infrastructure development activity of the assessee
and would qualify for deduction u/s. 80-IA of the Act. RTIL would have a claim
for deduction on its profit arising out of maintenance and operation of
infrastructure facility which apparently would exclude the pay out of RS. 328
lakh to the assessee.”

shailesh.kwebmaker

40 U/s. 80-IB(10)(a) – . Housing project – Deduction – Completion certificate – Assessee completing construction and applying for certificate of completion before stipulated date – Delay in issuance of completion certificate beyond control of assessee – Assessee entitled to deduction

Principal CIT vs. Ambey Developer P.
Ltd.; 399 ITR 216 (P&H):

The assessee was a builder. For the A. Y.
2010-11, the assesee claimed deduction u/s. 80IB(10)(a) of the Act, in respect of the housing project completed
by it in the relevant year. The assessee had filed a completion certificate
from the Municipal Town Planner dated 30/12/2011 with a letter written to the
Commissioner dated 29/03/2010 for completion certificate. The Assessing Officer
held that the housing project approved on 01/04/2005 should have been completed
within five years from the end of the month in which it was approved, i.e.
31/03/2010. The Assessing Officer disallowed the claim for deduction u/s.
80IB(10) of the Act and added it back to the assessee’s taxable income. The
Commissioner (Appeals) allowed the deduction holding that delay in issuance of
the completion certificate was beyond the control of the assessee and was not
attributable to him. The Tribunal confirmed this.

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

“i) Though the words used in
clause (ii) of the Explanation to section 80-IB(10)(a) is “shall”, but it would
not necessarily mean that in every case, it shall be taken to be a mandatory
requirement. It would depend upon the intent of the Legislature and not the
language in which the provision is clothed. The meaning and the intent of the
Legislature would be gathered not on the basis of the phraseology of the
provision but taking into consideration its nature, its design and the
consequences which would follow from interpreting it in a particular way alone.

ii) The purport of clause (ii)
of the Explanation to section 80-IB(10)(a) of the Act is to safeguard the
interests of the Revenue wherever the construction has not been completed
within the stipulated period. Thus, it cannot mean that the requirement is
mandatory in nature and would disentitle an assessee to the benefit of section 80-IB(10)(a) of the Act even where
the assessee had completed the construction within the stipulated period and
had made an application to the local authority within the prescribed time. The
issuance of the requisite certificate is within the domain of the competent
authority over which the assessee has no control.

iii) The construction was
completed before the stipulated date, i.e., 31/03/2010 and the certificate of
completion was applied on 29/03/2010 and was issued to the assessee on
31/12/2011. The assessee in such circumstances could not be denied the benefit
of section 80-IB(10)(a) of the Act.”

shailesh.kwebmaker

39 U/s. 80-IC – Deduction An ‘undertaking or an enterprise’ established after 07/01/2003, and carried out ‘substantial expansion’ within specified window period, i.e., between 07/01/2003 and 01/04/2012, would be entitled to deduction on profits at rate of 100 per cent, u/s. 80-IC post said expansion

Stovekraft India vs. CIT; [2017] 88
taxmann.com 225 (HP)

The assessee started its business activity
with effect from 06/01/2005 and treating the F. Y. 2005-2006 (A. Y. 2006-2007),
as initial assessment year, claimed deduction on profits at the rate of 100 per
cent u/s. 80-IC of the Act. Sometime in
the F. Y. 2009-10, the assessee carried out ‘substantial expansion’ of the
‘Unit’ and by treating the said Financial Year to be the ‘initial assessment
year’, further claimed deduction at the rate of 100 per cent, instead of 25 per
cent, u/s. 80-IC. The Assessing Officer denied the claim of deduction at the
rate of 100 per cent with effect from Financial Year 2009-10 after undertaking
‘substantial expansion’, so carried out holding that the assessee was not
entitled to deduction not at the rate of 100 per cent but on reduced basis at
the rate of 25 per cent, as provided u/s. 80-IC. He concluded that only such of
those units, existing prior to incorporation of section 80-IC in the statute,
i.e. 07/01/2003, could undertake substantial expansion and units established
subsequent to the said date being termed as ‘new industrial units’ were
ineligible for exemption u/s. 80-IC, even though they might had carried out any
expansion, substantial or otherwise. He held that, for the purpose of section
80-IC, the assessee can have only one assessment year as initial assessment
year. The Tribunal upheld the decision of the Assessing Officer.

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

“i) What is of importance is
the stipulation under sub-clause (ii) of clause (b) of sub-section 2 of section
80-IC, insofar as State of Himachal Pradesh is concerned. If between 07/01/2003
and 01/04/2012, a ‘Unit’ has ‘begun’ or ‘begins’ to manufacture or produce any
article or thing, specified in the Fourteenth Schedule or commences any
operation ‘and undertakes substantial expansion’ during the said period, then
by virtue of sub-section (3), it shall be entitled to deduction at the rate of
100 per cent of profits and gains for five assessment years, commencing from
‘initial assessment year’ and thereafter at the rate of 25 per cent of the
profits and gains. The only restriction being that such substantial expansion
is not formed by splitting up, or reconstruction, of the business already in
existence. At this stage, it is noted that under sub-section (6) of section
80-IC, there is a cap(10 years) with regard to the total period for which a
‘Unit’ is entitled to such deduction.

ii) Can there be more than one
‘initial assessment year’, as the authorities below have held it not to be so?
Clause (v) of sub-section (8) of section 80-IC, defines what is an ‘initial
assessment year’. It is only for the purpose of this section. Now, ‘initial
assessment year’ has been held to mean the assessment year relevant to the
previous year in which the ‘Unit’ begins to manufacture or produce article or
thing or commences operation or completes substantial expansion. Significantly,
the Act does not stipulate that only units established prior to 07/01/2003
shall be entitled to the benefits u/s. 80-IC. The definition of ‘initial
assessment year’ is disjunctive and not conjunctive. The initial assessment year
has to be subsequent to the year in which the ‘Unit’ completes substantial
expansion or commences manufacturing etc., as the case may be.

iii) A bare look at Explanation
(b) of section 80-IB (11C) and section 80-IB(14)(c) would reflect that, earlier
[till section 80-IC was inserted with effect from 01/04/2004], ‘substantial
expansion’ was not included in the definition of ‘initial assessment year’.
Earlier definition had used words ‘starts functioning’, ‘company is approved’,
‘commences production’, ‘begins business’, ‘starts operating’, ‘begins to
provide services’. But section 80-IC (8)(v) changed wordings [of ‘initial
assessment year’] to ‘begins to manufacture’, ‘commences operation’, or
‘completes substantial expansion’. Thus, legislature consciously extended the
benefit of ‘initial assessment year’ to a unit that completed substantial
expansion.

iv) This is absolutely in
conjunction and harmony with clause (b) of sub-section (2) of section 80-IC,
which postulates two things – (a) an
undertaking or an enterprise has ‘begun’, it is in the past tense or (b)
‘begins’, which is in presenti. Significantly, what is important is the
word ‘and’ prefixed to the words ‘undertakes substantial expansion’ during the
period 07/01/2003 to 01/04/2012.

v) Words ‘commencing with the
initial Assessment Year’ are relevant. It is the trigger point for entitling
the unit, subject to the fulfillment of its eligibility for deduction at the
rate of 100 per cent, for had it not been so, there was no purpose or object of
having inserted the said words in the section. If the intent was only to give
100 per cent deduction for the first five years and thereafter at the rate of
25 per cent for next five years, the Legislatures would not have inserted the
said words. They would have plainly said, ‘for the first initial five years a
unit would be entitled to deduction at the rate of 100 per cent and for the
remaining five years at the rate of 25 per cent’.

vi) Thus, the question, which
further arises for consideration, is as to whether, it is open for a ‘Unit’ to
claim deduction for a period of ten years at the rate of 100 per cent or not.
It is legally permissible. The statute provides for the same.

vii) Also, ‘substantial
expansion’ can be on more than one occasion. Meaning of expression ‘substantial
expansion’ is defined in clause (8(ix)) of section 80-IC and with each such
endeavour, if the assessee fulfils the criteria then there cannot be any
prohibition with regard thereto. For what is important is not the number of
expansions, but the period within which such expansions can be carried out
within the window period [07/01/2003 to 01/04/2012], and it is here the words
‘begun’ or ‘begins’ and ‘undertakes substantial expansion’ during the said
period, as stipulated under clause (b) sub-section 2 of section 80-IC, to be of
significance. The only rider imposed is by virtue of sub-section (6) of section
80-IA, which caps the deduction with respect to assessment years to which a
unit is entitled to.

viii)The Act does not create distinction between the old units,
i.e., the units which stand established prior to 07/01/2003 (the cutoff date),
and the new units established thereafter. Artificial distinction sought to be
inserted by the revenue, only results into discrimination. The object, intent
and purpose of enactment of the section in question is only to provide
incentive for economic development, industrialisation and enhanced employment
opportunities. The continued benefit of deduction at higher rates is available
only to such of those units, which fulfil such object by carrying out
‘substantial expansion’.

ix) Both the Assessing Officer
as well as the Appellate Authority(s)/Tribunal erred in not appreciating as to
what was the intent and purpose of insertion of section 80-IC. Thus, in view of
the above discussion, these appeals are allowed and orders passed by the
Assessing Officer as well as the Appellate Authority and the Tribunal, in the
case of each one of the assessees, are quashed and set aside, holding as under:

a) Such of those undertakings
or enterprises which were established, became operational and functional prior
to 07/01/2003 and have undertaken substantial expansion between 07/01/2003 upto
01/04/2012, should be entitled to benefit of section 80-IC, for the period for
which they were not entitled to the benefit of deduction u/s. 80-IB.

b) Such of those units which
have commenced production after 07/01/2003 and carried out substantial
expansion prior to 01/04/2012, would also be entitled to benefit of deduction
at different rates of percentage stipulated u/s. 80-IC.

c) Substantial expansion
cannot be confined to one expansion. As long as requirement of section
80-IC(8)(ix) is met, there can be number of multiple substantial expansions.

d) Correspondingly, there can
be more than one initial assessment years.

e) Within the window period of
07/01/2013 upto 01/04/2012, an undertaking or an enterprise can be entitled to
deduction at the rate of 100 per cent for a period of more than five years.

f) All this, of course, is
subject to a cap of ten years. [Section 80-IC(6)].”

shailesh.kwebmaker

38 Sections 2(15) and 11 – Charitable trust – Exemption – A. Ys. 2010-11 and 2011-12 – Charitable purpose – Effect of insertion of proviso in section 2(15) – Trust running educational institutions – purchase of land for charitable purposes – inability to utilise land for charitable purpose – Sale of land in plots – sale consideration utilised for charitable purposes – Assessee entitled to exemption –

CIT vs. Sri Magunta Raghava Reddy
Charitable Trust; 398 ITR 663 (Mad):

The assessee was a trust running educational
institutions. It purchased lands to an extent of 71.89 acres in the year
1986-87 for the purpose of setting up a medical college and old age home. The
assessee could not obtain the necessary permissions from the competent
authorities and accordingly the said land could not be utilised for the said
purpose. Therefore, the assessee divided the land into plots and sold the plots
and received profits in different years. The profit was utilised for the
charitable purposes. For the A. Ys. 2010-11 and 2011-12, the Assessing Officer
brought to tax, a sum under the head, ”income from business”. The Tribunal held
that the assessee was entitled to exemption u/s. 11.

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

“i) Merely because the lands
were sold from 1994 onwards, and fetched a higher value, it could not be said
that it was only for profit motive. When there was no prohibition in the
Income-tax Act, 1961, restraining unutilised land to be sold in smaller extent,
such activity of the assessee, could not be construed as predominant business
activity.

ii) The material on record
further disclosed that the sale proceeds of the lands were utilised only for
charitable purposes and not diverted. Even going by the subsequent conduct of
the assessee in utilizing the profits earned, only for charitable purposes, it
was evident that the intention of the assessee was not to engage continuously
in business or trade or commerce. The assessee was entitled to exemption u/s.
11.”

shailesh.kwebmaker

37 Sections 10A, 10B, 254 and 263 – Appellate Tribunal Power to direct consideration of alternative claim – A. Y. 2010-11 – Revision – Commissioner directing withdrawal of exemption u/s. 10B – Appeal against order of Commissioner refusing to consider claim u/s. 10A – Tribunal has power to direct consideration of alternative claim of assessee to exemption u/s. 10A

CIT vs. Flytxt Technology P. Ltd.; 398
ITR 717 (Ker):

For the A. Y. 2010-11, the Assessing Officer
had allowed the assessee’s claim for exemption u/s. 10B of the Income-tax Act,
1961 (Hereinafter for the sake of brevity referred to as the “Act”).
The Commissioner invoked his jurisdiction u/s. 263 of the Act and held that the
assessee was not entitled to exemption u/s. 10B of the Act and directed the
Assessing Officer to withdraw the exemption granted u/s. 10B. The assessee
raised an alternative claim for exemption u/s. 10A of the Act. The commissioner
refused to consider the assessee’s claim. The Tribunal directed the Assessing
Officer to decide the issue afresh including the claim of the assessee for the
benefit of section 10A.

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

“i) Section 254 of the Act
obliged the Tribunal to consider the appeal and pass such orders thereon as it
thinks fit. Even if the power conferred on the Commissioner u/s. 263 only
authorised him to examine whether the order passed by the Assessing Officer was
erroneous and prejudicial to the interest of the Revenue, that restriction of
the power could not affect the powers of the Tribunal which was bound to
exercise u/s. 254 of the Act.

ii) Therefore, there was no
illegality in the order passed by the Tribunal.”

shailesh.kwebmaker

Sale Of Composite Package Vis-À-Vis Levy Of Tax On Component Of Package – Legality

Introduction

Under
VAT laws, tax can be levied on sale of ‘goods’. What is ‘goods’ is always a
question of facts. However, a very peculiar situation arose in taxation under
VAT era.

Normally
when a package is sold, it is considered as single ‘goods’ for levy of tax. The
rate of tax is applied as per rate applicable to goods sold by such package.
The situation was thus very simple and straight.

But,
the Judgement in State of Punjab vs. Nokia India Pvt. Ltd. (77 VST
427)(SC) has brought in a different aspect. In this case, battery of
mobile was sold along with mobile as one unit and tax rate applicable to mobile
i.e. 5% was charged. However, when the battery was sold separately, it was
considered as liable to tax @ 12.5% as other goods.

Hon.
Supreme Court held that, even if battery is sold as one unit with mobile still
the tax on the value of battery should be at 12.5%. Thus, the price was
separated into two rates. This has created many issues in taxation under VAT
era.

Allahabad High Court judgement

Recently
Hon. Allahabad High Court had an occasion to deal with ratio of above
judgement.

The
facts, as narrated by Hon. High Court in case of Samsung (India)
Electronics vs. Commissioner of Commercial Taxes, U.P. (57 GSTR 1) (All)
are as under:

“The
seminal issue which arises in this batch of revisions is whether a mobile
charger when sold as part of a composite package comprising the said article as
well as a mobile phone is liable to be taxed separately treating it to be an
unclassified item under the provisions of the U.P. VAT Act 20081. The issue
itself has arisen consequent to the Department taking the position that the
charger is liable to be taxed separately in light of the decision rendered by
the Supreme Court in State of Punjab Vs. Nokia India Pvt Ltd2. The principal
questions of law as framed and upon which the rival submissions centered read
thus:

“A.
Whether the Tribunal ought to have held that the entire composite set having a
mobile phone and mobile charger having a single MRP was liable to assessed to a
single classification under Entry No. 28 of Schedule-II, Part B of the Act?

B. Whether the Tribunal erred in applying the
judgment dated 17.12.2014 by the Hon’ble Supreme Court, in the case of State of
Punjab V. Nokia Private Limited, to the Applicant’s facts and circumstances and
in view of the fact that Entry No.28 of Schedule-II, Part-B of the Act reads
differently from the entry considered by the Hon’ble Supreme Court?”

This
revision has called in question an order of the Tribunal dated 12^th
January 2017 which has affirmed the view taken by the assessing authority that
the charger although sold as part of a composite package was not liable to be
taxed at the rate of 5% as contemplated under Entry-28 appearing in Part-B of
Schedule-II but as an accessory and therefore liable to be treated as an unclassified item and chargeable to tax @
14%. The relevant entry of the Schedule reads as follows:-

“Cell
phones and its parts but excluding cell phone with MRP exceeding Rs.
10,000/-.”

Both the
assessing authority as well as the Tribunal have rested their decisions on the
judgement of the Supreme Court in Nokia to hold that a charger is liable
to be treated and viewed as an accessory and not an integral part of the mobile
phone. It is in the above backdrop that these revisions have travelled to this
Court.”

Contentions

On
behalf of dealer it was submitted that the ratio of Nokia cannot be
applied when it is composite one package and assumption of separate sale of
charger as an accessory is not permissible.

The
prime submission was that facts in case of Nokia before Supreme Court
were different. It was further submitted that there was no intent to affect a
separate sale of charger and that on an application of the dominant intention
test it would clearly be evident that the charger could not have been taxed
separately. It was the submission that the sale of the charger along with the
mobile phone in a composite package would fall within the specie of a composite
contract and therefore, tax could have been levied only in terms of Entry-28 as
one goods.

It
was explained that since the composite package carried and bore a single MRP,
it was not permissible for the respondents to levy tax separately on the
charger and the mobile phone.

In
addition, other judgements rendered with reference to above Nokia
judgment were brought to notice of High Court as well as Circular issued by
Central Government clarifying upon judgement of Nokia, was also cited.

On
behalf of Department, amongst others, the main thrust was that the ratio of
judgement in Nokia is applicable.

Judgements
were cited to stress that charger is accessory and hence liable at separate
rate.

Holding of High Court

Hon.
High Court analysed judgement in Nokia and about principles of
applicability of judgment of Hon. Supreme Court. It is observed as under:

“From
the aforesaid authorities, it is quite vivid that a ratio of a judgement has
the precedential value and it is obligatory on the part of the Court to cogitate
on the judgement regard being had to the facts exposited therein and the
context in which the questions had arisen and the law has been declared. It is
also necessary to read the judgement in entirety and if any principle has been
laid down, it has to be considered keeping in view the questions that arose for
consideration in the case.

One
is not expected to pick up a word or a sentence from a judgement de hors
from the context and understand the ratio decidendi which has the
precedential value. That apart, the Court before whom an authority is cited is
required to consider what has been decided therein but not what can be deduced
by following a syllogistic process.” (emphasis supplied) As has been
succinctly explained in the decisions noticed above, the ratio is the principle
deducible from the application of the law to the facts of a particular case and
it is this which constitutes the true ratio decidendi of the judgement.

Each
and every conclusion or finding recorded in a judgement is not the law
declared. The law declared is the principle which emerges on the reading of the
judgment as a whole in light of the questions raised. It is on these basic
principles that the Court proceeds to ascertain the ratio decidendi of Nokia.”

Regarding
facts in Nokia vis-à-vis Present case before it, Hon. High Court
observed as under:

“A
careful reading of the entire decision establishes beyond doubt that the Court
found that a charger and mobile phone are not composite goods. This evidently because
a charger cannot possibly be recognised as an integral part or constituent of a
mobile phone. A mobile phone is not an amalgam of various products and a
charger. Since the submission advanced before the Court was that these were
composite goods, the Supreme Court proceeded to recognise a charger to be an
accessory to a mobile phone.

The
contention which is urged before this Court namely that the sale of the mobile
phone along with its charger in a single retail package constitutes a composite
contract and requires the application of the dominant intention test was
neither urged nor considered by the Supreme Court. The Supreme Court
consequently in Nokia did not record any finding nor did it declare the law to
be that the sale of a mobile phone and its charger in a single retail package
would not constitute a composite contract.

On an
overall consideration of the aforesaid aspects, this Court finds itself unable
to hold that Nokia is a precedent at all on the question of a composite contract being subjected to tax.”

Hon.
High Court ultimately decided issue in favour of dealer by observing as under:

“Proceeding
then to the doctrine of “dominant intention” or the “dominant
nature” test [as the Supreme Court chose to describe it in BSNL], what it
basically bids the Court to do is to identify and recognise the “substance
of the contract” and the true intent of parties. The enquiry liable to be
undertaken must pose and answer the question whether in a composite contract
there exists a separate and distinct intent to sell. While BSNL dealing with
the dominant nature test was concerned with the splitting of the element of
sale and service, in the facts of the present case, the application and
invocation of that principle requires the Court to consider whether there was a
separate and distinct intent to effect a sale of the charger or whether its
supply was a mere concomitant to the principal intent of sale of a mobile
phone.

Admittedly,
the mobile phone and charger are sold as part of a composite package. The
primary intent of the contract appears to be the sale of the mobile phone and
the supply of the charger at best collateral or connected to the sale of the
mobile phone. The predominant and paramount intent of the transaction must be
recognised to be the sale of the mobile phone. In the case of transactions of
the commodity in question, the Court must also bear in mind that a charger can
possibly be purchased separately also. However in case it is placed in a single
retail package along with the mobile phone, the primary intent is the purchase
of the mobile phone. The supply of the charger is clearly only incidental. In
any view of the matter, there does not appear to be any separate or distinct
intent to sell the charger.

Regard
must also be had to the fact that the Court is considering the case of a
composite package, which bears a singular MRP. The charger is admittedly
neither classified nor priced separately on the package. It is also not
invoiced separately. The MRP is of the composite package. The respondents
therefore cannot be permitted to split the value of the commodities contained
therein and tax them separately. This especially when one bears in mind that
entry 28 itself correlates the article to the MRP.

The
third aspect which also commends consideration is that the MRP mentioned on the
package is for the commodities or articles contained therein as a whole. It is
not for a particular commodity or individual article contained in the composite
retail package. The Court notes that Shri Tripathi, the learned standing
counsel, was unable to draw its attention to any provision or machinery under
the 2008 Act which may have conferred or clothed the assessing authority with
the jurisdiction to undertake such an exercise. It is pertinent to note that the
only category of composite contracts which stand encapsulated under the 2008
Act are works contract and hire purchase agreements. The other part of Article
366 (29-A) which stands engrafted is with respect to the transfer of a right to
use. The composite contracts which arise from the sale of a composite package
are not dealt with under the 2008 Act. The Act also does not put in place or
engraft any provision which may empower the assessing authority to severe or
bifurcate the assessable value of articles comprising a purchase and sale of
composite packages. This is more so in the absence of a specific, independent
and identifiable element to sell. In the absence of any procedure or provision
in the 2008 Act conferring such authority, the Court concludes that in the case
of a sale of composite packages bearing a singular MRP, the authorities under
the 2008 Act cannot possibly assess the components of such a composite package
separately. Such an exercise, if undertaken, would also fall foul of the
principles enunciated by the Supreme Court in Commissioner of Commercial Tax
vs. Larsen & Toubro14 and CIT vs. BC Srinivasa Shetty15.”

Thus,
after analysing position very minutely, Hon. High Court held that in given
facts there is sale only of mobile phone and not of charger and no separate tax
on charger is permissible. The judgements of Tribunal were set aside.

Conclusion

The
judgement is very important in light of fact that it distinguishes the
judgement of Hon. Supreme Court in Nokia, with reference to facts and
ratio application, relying upon almost all important case laws. This judgement
will also settle down unexpected and unintended result for dealers.

It is
expected that the law laid down will be well followed as amongst others, it is
also held that if there are no provision to bifurcate value, no bifurcation can
be done by revenue authorities.

We
hope above will be a guiding judgement for deciding similar cases.

shailesh.kwebmaker

Place Of Supply Of Services – Part III

Introduction

As discussed in the previous article,
generally, the place of supply is determined on the basis of the location of
the recipient except in cases where the recipient is unregistered and his
address on record is not available, in which case location of supplier is
treated as the POS. This general rule is subject to various exceptions where
the POS is to be determined in a different manner.

While in the previous article we discussed
at length the exception rule in case of services relating to immovable property,
in this article, we shall specifically deal with the following exceptions:

– Certain Performance based services (restaurants, catering services,
personal grooming, health services, etc.)

– Service relating to
training & performance appraisal

– Services relating to events
(admission as well as organisation)

– Transportation services
(goods, passengers, as well as services on board a conveyance)

– Telecommunication services

– Banking & other
financial services

– Insurance services

– Advertising services
provided to Government.

We will now discuss each of the above
exceptions as well as specific issues surrounding the same.

Certain Performance based services:

This exception to the general rule, covered
u/s. 12 (4) of the IGST Act provides that the Place of Supply in case of
services of restaurant & catering, personal grooming, fitness, beauty
treatment, health service including cosmetic and plastic surgery shall be the
location where services are actually performed.

While this rule is not expected to have any
interpretational issues, the same has probable issues on credit front, in case
of B2B transactions. Let us try to understand with the help of following example:

ABC is a film production house operating out
of Mumbai. They have a film titled “###” under production, which is to be shot
extensively in Chandigarh. The local production activities are being managed
in-house by ABC. They have hired a catering company to supply food for their
employees as well as other people involved in the production activity. In
addition, they have make up artists who travel from Mumbai, Delhi as well as
outside India to Chandigarh for the said activity. The entire revenue from this
project will be earned in Mumbai. On account of this exception, in all cases
(including where Reverse charge applies), the Place of Supply will be taken as
Chandigarh while the Location of Recipient of Service is Maharashtra, thus
making the taxes attached with the services as ineligible for credit and thus
increasing the costs.

While admittedly, the performance of the
service is in Chandigarh, owing to the fact that the transaction is a B2B
transaction, the ultimate benefit / consumption of the said service takes place
in Mumbai where the recipient is located and hence, a hybrid rule for the
industry would have been beneficial.

Training & Performance Appraisal:

This exception to the general rule, covered
u/s. 12 (5) of the IGST Act provides for a hybrid rule for determination of
place of supply in case of services in relation to training & performance
appraisal as under:

– If services are provided to
registered person – place of supply shall be the location of such registered
person i.e. the recipient.

– If services are provided to
a person other than a registered person – place of supply shall be the location
where services are actually performed.

The important issue that needs to be
considered here is whether the “and” between training and performance appraisal
has to be read as “and” only or should it be read as “or”? The reason behind
this is if the word “and” is actually read as “and”, it will restrict the scope
of this particular section, as “and” is normally conjunctive.

For example, ABC Limited is a company
engaged in the business of providing education support services. They have
entered into an agreement with CBSE to evaluate the papers of all the students
of HSC / SSC. The papers are located at various locations across the country and
ABC shall send its’ evaluators at all those locations. The issue that needs
consideration is whether these services of performance appraisal will be
classified under this exception rule, since the services provided by ABC
Limited are only of performance appraisal and no element of training is
involved? Similarly, if PQR Limited undertakes training courses and does not
undertake any activity of performance appraisal, will it get covered under this
clause?

It is in this context that the need to
analyse whether “and”, which is normally conjunctive in nature has to be read
as “or”, i.e., give it a disjunctive interpretation or not for the purpose of
interpreting this exception. In this context, reference to the Supreme Court
decision in Union of India vs. Ind-Swift Laboratories Limited [(2011) 4 SCC
635] is made. The case was in the context of Rule 14 of the erstwhile
CENVAT Credit rules which provided for levy of interest in cases where credit
was taken or utilised wrongly or erroneously refunded. The issue in the
case was whether the or had to be read as and necessitating the
satisfaction of both the conditions, i.e., taking as well as utilisation of
credit for invocation of these rules or occurrence of either of the event would
suffice? The Supreme Court, relying on the decision of Commissioner of Sales
Tax, UP vs. Modi Sugar Mills Limited in (1961) 2 SCR 189 held that a taxing
statute must be interpreted in the light of what is clearly expressed and it is
not permissible to import provisions so as to supply any assumed deficiency.

Similarly, in A.G vs. Beauchamp (1920) 1
KB 650, it was held that the words “and” and “or” can be interchangeably
used if the literal reading produces an unintelligible or absurd result even if
the result of such interchange is less favourable to the subject provided that
the intention of the legislature is otherwise quite clear. For instance,
section 7 of the Official Secrets Act, 1920 reads:

“Any person who attempts to commit any
offence under the principal Act or this Act, or solicits or incites or
endeavours to persuade another person to commit an offence, or aids or abets
and does any act preparatory to the commission of an offence”.

The word “and” was read as “or”, for by
reading “and” as “and”, the result produced was unintelligible and absurd and
against the clear intention of the Legislature. (R v. Oakes (1959) 2 All ER 92)

However, in one particular case involving
the use of expression “sports and pastimes” in Common Regulation Act, 1965, it
was held that sports and pastimes are not two classes of activities but a
single composite class which uses two words in order to avoid arguments over
whether an activity is a sport or pastime. As long as the activity can properly
be called a sport or a pastime, it falls within the composite class (R vs.
Oxfordshire County Council (1999) 3 All ER).

It is felt that the test of purposive
interpretation will permit the reading of “and” as “or” and standalone
activities of training or performance appraisal may be covered under this exception
rule.

Event based services – admission &
organisation

There are two different exceptions to be
discussed here, which are covered u/s. 12 (6) & 12 (7) of the IGST Act. The
relevant provisions are reproduced below for ready reference:

(6) The place of supply of
services provided by way of admission to a cultural, artistic, sporting,
scientific, educational, entertainment event or amusement park or any other
place and services ancillary thereto, shall be the place where the event is
actually held or where the park or such other place is located.

(7) The place of supply of services
provided by way of ,—

(a) organisation of a cultural, artistic,
sporting, scientific, educational or entertainment event including supply of
services in relation to a conference, fair, exhibition, celebration or similar
events; or

(b) services ancillary to organisation of
any of the events or services referred toin clause (a), or assigning of
sponsorship to such events,––

(i) to a registered person, shall be the
location of such person;

(ii) to a person other than a registered
person, shall be the place wherethe event is actually held and if the event is
held outside India, the place of supply shall be the location of the recipient.

Explanation.––Where the event is held in
more than one State or Union territory and a consolidated amount is charged for
supply of services relating to such event, the place of supply of such services
shall be taken as being in each of the respective States or Union territories
in proportion to the value for services separately collected or determined in
terms of the contract or agreement entered into in this regard or, in the
absence of such contract or agreement, on such other basis as may be
prescribed.

It is important to note that section 12 (6)
deals with services provided by way of admission to events while section 12 (7)
deals with services of organisation of event as well as services ancillary to
the organisation of such event.

However, the scope of services to be covered
u/s 12 (6) is limited. It is important to note that the said section does not
cover within its’ scope one specific class of events, i.e., business events,
being conferences, seminars, etc. wherein company sponsors delegates for
attending the events. This distinction is also evident from the fact that while
section 12 (6) does not specifically mention the services of admission to
conference, in the context of services classifiable u/s. 13 (5), i.e., cases
where location of supplier or recipient is outside India, the services of
admission to conferences is specifically covered. In fact, it can be said that
the intention of the law is to ensure free flow of credits in case services are
provided to registered persons, which is evident from the example taken in the
next paragraph.

Let us now try to understand the interplay
of operations of sub-sections (4), (6) & (7) with the help of an example in
the context of a charitable institution (XYZ) conducting a Residential
Refresher Course (RRC) for its’ members. The institution may have an inhouse
team which manages the logistics for the organisation of the event. They enter
into a contract with a hotel to provide accommodation, conference and catering
facilities during the course of the RRC. The issue that needs to be determined
is whether the services provided by XYZ to its’ members will get covered under
sub-section (4), (5) or (6) of Section 12?

Before analysing the probable answer to this
query, let us first decide on the nature of supply, i.e., whether the supply
will have to be treated as composite supply or mixed supply considering the
fact that there is only a single consideration charged for the entire RRC
without any breakup? In our view, it would be safe to conclude that this is a
composite supply with the principal supply being the participation in
conference. Having concluded so, let us now proceed to analyse the exception
rule in which the services provided by XYZ to its’ members will be covered.

Section analysed

Conclusion

Basis for conclusion

12 (4)

Since multiple services are provided to the members and
principal supply is that of conference services, this exception will have to
be ruled out

12 (6)

As already discussed above, admission to conference as a
service is not covered under this rule. Hence, this exception will also have
to be ruled out.

12 (7)

XYZ does not provide services in relation to organisation of
the event. The access to participation in a conference cannot be considered
as services in relation to organisation of event. Services of event managers
are in relation to organisation of the event.

Therefore, it can be argued that the
services rendered by XYZ do not fall under any of the exception rules mentioned
above and would be classifiable under the general rule.

Another issue that arises in the context of
Explanation provided in section 12 (7) is whether the explanation will have to
be read in the context of services provided to both, registered as well as
unregistered persons? This is because the explanation is silent with regards to
its’ applicability. However, one can apply the intention theory behind the said
explanation and say that this covers only services supplied to unregistered
persons, as in case of registered persons, the intention of the law is to provide
free flow of credit. Providing for multiple place of supplies would defeat the
said intention.

Therefore, in cases where the events are
held in multiple states, in cases where the agreement identifies consideration
for each event, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of
services where the agreement is silent with regards to division of contract
state wise. Notwithstanding the same, even if the manner for determination of
POS is prescribed, even then it has to be noted that there is no provision
under the GST law for splitting of value / supply itself. The provisions exist
only for splitting of POS. Therefore, the question that needs consideration is
whether the levy will sustain in the absence of proper provision for
determination of value of supply, even if the notifications are issued in this
regard? In this context, reference can be made to the decision of the Supreme
Court in the case of CIT vs. B C Srinivasa Shetty wherein it was held
that the charging sections and the computation provisions together constitute
an integrated code and the transaction to which the computation provisions
cannot be applied must be regarded as never intended to be subjected to charge
of tax.

Services
relating to transportation of goods

This exception is contained u/s. 12 (8) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(8) The place of supply of services by
way of transportation of goods, including by mail or courier to,––

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the location at which suchgoods are handed over for their
transportation.

One important shift in policy is that while
under the service tax regime, in case of service of transportation of goods
outside India, as per Rule 10 of Place of Provision of Service Rules, 2012, the
destination of goods was the place of supply, the GST law provides for the
place of supply to be the origin of goods. In other words, export cargo was not
liable to service tax. The same applied even for services provided by shipping
companies / airlines. However, in view of the above provisions, the position
changed under GST and the tax was imposed on service of transportation of goods
outside India as well. It is however important to note that w.e.f 25.01.2018,
an exemption has been provided for services of transportation of goods by an
aircraft / vessel from customs station of clearance in India to a place outside
India. However, the said exemption is not applicable in case the services are
provided by a supplier located in India for transportation of goods or arranging
for transportation of goods where the origin and destination, both is outside
India.

Services relating to transportation of
passengers

This exception is contained u/s. 12 (9) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(9) The place of supply of passenger
transportation service to,—

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the place where the passenger embarks on the conveyance for a
continuous journey:

Provided that where the right to passage
is given for future use and the point of embarkation is not known at the time
of issue of right to passage, the place of supply of such service shall be
determined in accordance with the provisions of sub-section (2).

Explanation––For the purposes of this
sub-section, the return journey shall be treated as a separate journey, even if
the right to passage for onward and return journey is issued at the same time.

One critical
issue under this entry for determination of place of supply is in the context
of structuring of transactions as principal to principal basis vis-à-vis principal
to agent. Let us take the example of an air travel agent, who books tickets on
behalf of passengers with the airlines. The issue that arises here is whether
the airline will have to treat the agent as the recipient of service or the
passenger, considering the definition of supply of service? This will be
important because if the transaction is structured as P2P, the agent will have
issues in claiming credit since the condition u/s. 16 (2)(b) regarding receipt
of services may not be satisfied. However, the second option of treating the
transaction as P2A will also have its’ own set of operational difficulties,
especially in case of B2B transactions. This is because each airline operating
from multiple states would be issuing invoice in the name of recipient, in
which case each of the invoice would have to be accounted separately by the company
for each ticket as against single invoice for multiple tickets that were issued
under the service tax regime. This can also have issues on the credit matching
front as well as the agent might have mentioned wrong GST details of the
company in which case communication with the airline would be required to be
initiated which in itself would be a long drawn out process.

Telecommunication Services

This exception
is contained u/s. 12 (10) of the IGST Act and prescribes different place of
supply provisions depending on the transaction entered into, which is tabulated
below:

Nature of service supplied	Place of Supply
Services by way of fixed telecommunication line, leased circuits, internet leased circuit, cable or dish antenna	Place where the line / leased circuit / cable or dish is installed
Post-paid mobile connection for telecom services / internet / DTH services	Location of billing address of the recipient of services on record
Pre-paid mobile connection for telecom services / internet / DTH services through a voucher or any other means	u If service provided through a selling agent or a re-seller or a distributor of subscriber identity module card or re-charge voucher, the address of the selling agentor re-seller or distributor as per the record of the supplier at the time of supply u If service supplied to the final subscriber, location where such prepaymentis received or such vouchers are sold
In any other case	Address of recipient on record of supplier of service If not available, the location of supplier of service

Nature of service supplied

Place of Supply

Services by way of fixed telecommunication line, leased
circuits, internet leased circuit, cable or dish antenna

Place where the line / leased circuit / cable or dish is
installed

Post-paid mobile connection for telecom services / internet /
DTH services

Location of billing address of the recipient of services on
record

Pre-paid mobile connection for telecom services / internet /
DTH services through a voucher or any other means

u
If service provided through a selling agent or a re-seller or a distributor
of subscriber identity module card or re-charge voucher, the address of the
selling agentor re-seller or distributor as per the record of the supplier at
the time of supply

u
If service supplied to the final subscriber, location where such prepaymentis
received or such vouchers are sold

In any other case

Address of recipient on record of supplier of service

If not available, the location of supplier of service

Further, this sub-section has two provisos,
which read as under:

Provided that where the address of the
recipient as per the records of the supplier of services is not available, the
place of supply shall be location of the supplier of services:

Provided further that if such pre-paid
service is availed or the recharge is made through internet banking or other
electronic mode of payment, the location of the recipient of services on the
record of the supplier of services shall be the place of supply of such
services.

In addition, there is also an explanation
for cases where the place of supply is determined to be in multiple states
(similar to the explanation provided for immovable properties/event related
services and hence not reproduced for the sake of repetition).

Let us now try to understand some peculiar
issues faced in the above set of supplies for which provisions for determining
place of supply have been prescribed.

Example: ABC Limited is a e-education
service provider wherein it does live streaming of lectures provided by its
faculties from its head office located in Mumbai to various franchise
locations, spread across the country. The responsibility for arranging the
internet services to enable live streaming is on ABC. Accordingly, ABC has
entered into an arrangement subsequent to which, the vendor has agreed to
provide dedicated lines for enabling unhindered connection between the Head
Office and the franchise locations and a single invoice is issued for these
services. The issue that arises is that there are multiple Place of Supplies
and therefore, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of services
where the agreement is silent with regards to division of contract state-wise.
Notwithstanding the same, even if the manner for determination of POS is
prescribed, even then the issues discussed in the context of events, where the
POS is spread across multiple states will continue to persist here as well.

In the context of online recharges, at the
time of selling the online vouchers to the portal, the supplier would charge
tax as per the location of the online portal. However, when the online portal
further sells the recharge to the end customer, the place of supply has to be
taken as per the address on record of the supplier. In other words, a telecommunication company/DTH company will have to open up its customer
database to each of the online portals to enable the sale of vouchers for
provision of service.

Similarly, even in the context of post-paid
services, there can be instances wherein between the billing cycle, there is a
change in the billing address of the service recipient after having provided
service for a specified number of days. In such a case, the question that
arises is whether the billing address has to be considered as applicable at the
start of billing cycle or end of the cycle or will there be a need to actually
do split billing, i.e., one invoice for the service provided before change in
the billing address and second invoice for service provided after change in
billing address.

Banking & Other Financial Services

This exception is covered u/s 12 (12) of the
IGST Act which provides that in general cases, the place of supply shall be the
location of recipient of service on record of the supplier of service, except
in cases where the location of recipient of service is not available on record
of the supplier.

The exception will generally apply in cases
of a walk-in customer who avails services for which KYC facilities may not be
mandatory, for instance availing demand draft facilities, money changing
services, etc. In all other cases, the place of supply will have to be taken as
per the address available on records.

The aspect of change in the location of
recipient of service cannot be ruled out in the context of banking & other
financial services as well as between two billing cycles and hence, proper
strategy will need to be developed to deal with such instances.

Insurance Services

This exception is covered u/s. 12 (13) of
the IGST Act, which is similar to the general rule for determination of place
of supply of services. The section provides as under:

– In case of services provided
to registered persons – the place of supply shall be the location of such
person.

– In case of services provided
to other than registered persons – location of recipient of services on the
records of the supplier.

Conclusion:

In the context of other services for which
exceptions for determination have been carved out, there are various important
aspects that needs to be considered, right from the stage of classification of
supply to the contractual treatment (P2P vs. P2A) to the contractual arrangement
(bifurcation of consideration in case of multiple place of supplies) and the
need to take care of minor issues (like change of address between the billing
cycle in case of telecom/banking services) and may also have credit impacts.
Therefore, businesses will have to be careful while determining the applicable
POS for their activities.

shailesh.kwebmaker

4 Section 80P – Interest earned by a co-operative society from deposits kept with co-operative bank is deductible u/s. 80P.

Marathon Era Co-operative Housing Society Ltd. vs. ITO
Members : B. R. Baskaran, AM and Pawan Singh, JM
ITA No. : 6966/Mum/2017
A.Y.: 2014-15 Dated: 06.03.2018
Counsel for assessee / revenue: Ajay Singh /
V. Justin

FACTS

The assessee, a co-operative housing
society, derives income from subscription, service charges, etc. from
members and interest income from savings and fixed deposits kept with various
banks. In the return of income filed,
the assessee claimed that interest of Rs. 88,70,070, earned on fixed deposits
with co-operative banks as deductible u/s. 80P(2)(d) of the Act. The Assessing
Officer (AO) while assessing the total income of the assessee denied the claim
for deduction of Rs. 88,70,070 made u/s. 80P of the Act on the ground that
section 80P(4) has withdrawn deduction u/s. 80P to co-operative banks.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that an identical
issue was considered in the case of ITO vs. Citiscape Co-operative Housing
Society Ltd. (ITA No. 5435 & 5436/Mum/2017 dated 8.12.2017). In the
said case the Tribunal has noted that there are divergent views on this
matter. The Karnataka High Court has in
the case of Pr. CIT vs. The Totagars Co-operative Sale Society & Others
(ITA No. 100066 of 2016 dated 16.6.2017)
has held that interest income earned by a co-operative society from a
co-operative bank is not deductible u/s. 80P(2)(d) of the Act. The
Himachal Pradesh High
Court has in the case of CIT vs. Kangra Co-operative Bank
(2009)(309 ITR 106)(HP) has held that interest
income from investments made in any co-operative society would also be entitled
for deduction u/s. 80P. Having noted the divergent decisions, the Tribunal in
the case of ITO vs. Citiscape Co-operative Housing Society Ltd. (supra)
held that if two reasonable constructions of a taxing statute are possible that
construction which favors the assessee must be adopted. The Tribunal held that
interest income earned by assessee from co-operative banks, which are basically
co-operative societies carrying on banking business, is deductible u/s.
80P(2)(d) of the Act.

Consistent with the view taken by the
co-ordinate bench in ITO vs. Citiscape Co-operative Housing Society (supra),
the Tribunal set aside the order passed by CIT(A) and directed the AO to allow
deduction of interest earned by the asseessee from co-operative banks u/s.
80P(2)(d) of the Act.

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

3 Section 69C – There is subtle but very important difference in issuing bogus bills and issuing accommodation bills to a particular party. The difference becomes very important when a supplier in his affidavit admits supply of goods. In a case where the assessee has proved the genuineness of the transactions and the suppliers had not only appeared before the AO but they had also filed affidavits confirming the sale of goods, addition cannot be sustained.

Shantivijay Jewels Ltd. vs. DCIT (Mumbai)

Members : Rajendra, AM and Ram Lal Negi, JM

ITA No. : 1045 (Mum) of 2016

A.Y.: 2011-12 Dated:
13.04.2018

Counsel for assessee / revenue: R. Murlidhar
/

V. Justin

FACTS

Assessee company, engaged in the business of
manufacturing of jewellery, filed its return of income declaring the total
income of Rs.60.56 lakh. During the assessment proceedings, the AO called for
details / evidences of purchases from three parties namely (i) M/s. Aadi Impex;
(ii) M/s. Kalash Enterprises and (iii) M/s. Maniprabha Impex Pvt Ltd, which all
essentially were controlled and managed by Rajesh Jain Group. He observed that
Dharmichand Jain (DJ) had admitted during the search and seizure proceedings
carried out u/s. 132 of the Act, that the group was merely providing
accommodation entries. He invoked the provisions of section 133(6) of the Act.
All the three suppliers relied on the book entries, bills, bank statements in
support of their claim of genuine sales made to the assessee. However, the AO rejected the said explanation
and proceeded to make addition of Rs. 14.00 Crore to the income of the
assessee.

Aggrieved, the assessee preferred an appeal
to the CIT(A) and during the appellate proceedings, the assessee filed copies
of the affidavits of the suppliers and relied on various decisions against the
said additions on account of bogus purchases. After obtaining the remand report
of the AO on the said affidavits, the CIT (A) held that the addition of entire
purchases is not sustainable and relied on the jurisdictional High Court
judgment in the case of Nikunj Eximp Enterprises (372 ITR 619). Relying on the decision of the Gujarat High
Court in the case of Simit P Sheth (356 ITR 451), he restricted the addition to
12.5% of the said purchases. Thus, he
confirmed the addition of Rs. 1,75,04,222/- being 12.5% of Rs. 14,00,33,775/-
and deleted the balance of Rs. 12,25,29,553/-.

Aggrieved with the said decision of CIT(A),
the assessee filed appeal before the Tribunal with regard to bogus purchases. While
deciding the appeal the Tribunal restored back the issue of bogus purchase to
the file of the AO for fresh adjudication. In an order u/s. 254 of the Act, the
Tribunal held as under.

HELD

The Tribunal noted that the assessee engaged
in the business of manufacturing of studded gold jewellery and plain gold
jewellery, had during the year under consideration exported its manufactured
goods, it did not sell goods locally, the AO had not doubted the sales, the
suppliers had appeared before the AO and admitted that they had sold the goods
to the assessee, and they had filed affidavits in that regard. The Tribunal found that DJ had admitted of
issuing bogus bills. But, nowhere he had
admitted that he had issued accommodation bills to assessee. The Tribunal held that in its opinion, there
is a subtle but very important difference in issuing bogus bills and issuing
accommodation bills to a particular party.
The difference becomes very important when a supplier in his affidavit
admits supply of goods.

The Tribunal noted that the assessee had
made no local sales and goods were exported.
There is no doubt about the genuineness of the sales. It is also a fact that suppliers were paying
VAT and were filing their returns of income.
In response to the notices issued by the AO, u/s. 133(6) of the Act, the
supplier had admitted the genuineness of the transaction. The Tribunal referred to the order in the
case of Smt. Romila M. Nagpal (ITA/6388/Mumbai/2016-AY.2009-10, dated
17/03/17), wherein in similar circumstances, addition confirmed by the first
appellate authority were deleted. It observed that in that order, the Tribunal
had referred to the case of M/s. Imperial Imp & Exp.(ITA No.5427/Mum/2015
A.Y.2009-10) in which case also the assessee was exporting goods. After referring to the portions of the
decision of the Tribunal in Imperial Imp & Exp., the Tribunal held that the
CIT(A) was not justified in partially confirming the addition. It held that the assessee has proved the
genuineness of the transactions and the parties suppliers had not only appeared
before the AO but they had also filed affidavits confirming the sale of
goods. The Tribunal reversed the
decision of the CIT(A) and decided this ground in favour of the assessee.

This ground of appeal filed by the assessee
was allowed.

shailesh.kwebmaker

2 Section 80IB(10) – Amendments made to s. 80IB(10) w.e.f. 1.4.2005 cannot be made applicable to a housing project which has obtained approval before 1.4.2005. Accordingly, time limit prescribed for completion of project and production of completion certificate have to be treated as applicable prospectively to projects approved on or after 1.4.2005.

Mavani & Sons vs. ITO (Mumbai)

Members : B. R. Baskaran, AM and Pawan
Singh, JM

ITA No. 1374/Mum/2017

A.Y.: 2007-08. Dated: 16.03.2018.

Counsel for assessee / revenue: Ajay Singh /

V. Justin

FACTS

During the previous year relevant to the
assessment year under consideration, assessee filed its return of income
claiming a deduction of Rs. 52,91,537 u/s. 80IB(10) of the Act, in respect of a
housing project, known as Maruti Mahadev Nagar. The housing project undertaken
by the assessee was approved by the local authority on 9.1.2003 but the project
commenced in October 2003. As per sanctioned plans, the project consisted of
four wings – Wing Nos. 1 to 3 consisted of Blocks A to G and Wing No. 4
consisted of blocks H to K. The first
phase of completion certificate was issued vide occupation certificate dated
14.3.2007 and second completion certificate was issued on 26.3.2009. The
deduction of Rs. 52,91,537 was in respect of Blocks F and G under Building (sic Wing) No. 3.

The Assessing Officer (AO) while assessing
the total income u/s. 143(3) r.w.s. 147 of the Act denied the claim for
deduction u/s. 80IB(10) on the ground that the project was not completed within
a period of five years from the date of approval of the project and for this
purpose the period of five years has to commence with the date of approval of
the project and not from the date of commencement of work on the project. The project was partially completed on
14.3.2007 and was finally completed on 26.3.2009. According to the AO, partial completion was
not final completion as per provisions of section 80IB(10).

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where it was contended, on behalf of the assessee, for grant of
deduction u/s. 80IB(10), the conditions prevalent at the time of commencement
of the project need to be satisfied.

HELD

The Tribunal noted that the Madras High
Court has in the case of CIT vs. Jain Housing Construction Co [2013] 30
taxmann.com 131 (Mad.) while considering similar issues held that
furnishing of completion certificate to be produced as a condition for grant of
deduction u/s. 80IB(10) was introduced by Finance Act, 2004 w.e.f. 1.4.2005 and
prior thereto there was no such requirement and in the absence of any requirement
u/s. 80IB(10)(a) of the Act and going by the proviso as it stood during the
relevant year 2004-05, it is difficult to accept the contention of revenue that
claim for deduction rested on production of completion certificate. It also noted that the Delhi High Court has
in the case of CIT vs. CHD Developers Ltd. 362 ITR 177 (Del.) held that
when approval related to the project was granted prior to 2005 i.e. before
amendment, the assessee was not required to produce the completion certificate
to avail deduction u/s. 80IB. Similarly,
Hyderabad Bench of the Tribunal has in the case of ITO vs. Kura Homes (P.)
Ltd. [2004] 47 taxmann.com 161 held that furnishing of completion
certificate in respect of housing project was brought into statute only w.e.f.
1.4.2005 and would apply prospectively. The Apex Corut in CIT vs. Akash
Nidhi Builders & Developers [2016] 76 taxmann.com 86 (SC) has held that
assessee was entitled for proportionate profit in respect of different wings of
the project.

Considering the ratio of the decisions of
the Delhi High Court in CHD Developers (supra), Madras high Court in
Jain Housing & Construction Ltd. (supra) and Hyderabad Bench in
ITO vs. Kural Homes (P.) Ltd. (supra), the Tribunal held that condition
precedent for grant of deduction for seeking completion within the time
prescribed has to be treated as applicable prospectively and accordingly, the
assessee is not required to produce completion certificate as the project was
approved before the amendment to section 80IB(10).

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

7 Sections 71, 72, 73 and Circular No. 23D dated 12.9.1960 issued by the Board – Business losses brought forward from earlier years can be adjusted against speculation profits of the current year after the speculation losses of the current year and also speculation losses brought forward from earlier years have been duly adjusted.

[2018] 92 taxmann.com 133 (Mumbai-Trib.)

Edel Commodities Ltd. vs. DCIT

ITA Nos. : 3426 AND 356 (Mum) OF 2016

A.Y.: 2011-12 Dated:
06.04.2018

FACTS

The assesse company engaged in the business
of trading in securities, physical commodities and derivative instruments filed
its return of income wherein against the speculation profit of Rs. 4,77,37,754
brought forward business loss of AY 2010-11 of Rs. 1,92,98,587 was set
off. The Assessing Officer (AO) on
examination of clause 25 of the Tax Audit Report and also the relevant schedule
of the return of income as also the assessment record of AY 2010-11 observed
that the loss of AY 2010-11 which has been set off against speculation profit
of the current year was not a speculation loss but was a business loss other
than loss from speculation business. The
AO denied the set off of non-speculation business loss brought forward from
earlier years against speculation profit of the current year.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal where relying on the provisions of sections 71 and 72 of the
Act relating to carry forward of losses. it was submitted that there is no bar
in the Act for adjustment of brought forward non-speculation losses against the
speculation profit of the current year.
Reliance was placed on CBDT Circular No. 23D dated 12.9.1960 and also on
the decisions of the Calcutta High Court in the case of CIT vs. New India
Investment Corporation Ltd. 205 ITR 618 (Cal); and of Allahabad High Court
in the case of CIT vs. Ramshree Steels Pvt. Ltd. 400 ITR 61 (All.).

HELD

The Tribunal noted that the Allahabad High
Court has in the case of Ramshree Steels Pvt. Ltd. (supra) held that
loss of current year and brought forward
losses of earlier year from non-speculation income can be set off against
profit of speculation business of current year.
It also noted that the Calcutta High Court in the case of New India
Investment Corporation Ltd. (supra) referred to the Bombay High court
decision in the case of Navnitlal Ambalal vs. CIT [1976] 105 ITR 735 (Bom.)
and also to the CBDT Circular which has held that if speculation losses for
earlier years are carried forward and if in the year under consideration speculation profit is earned by the assessee
then such speculation profits for the year under consideration should be
adjusted against the brought forward speculation loss of the previous year
before allowing any other loss to be adjusted against these profits.

The Tribunal held that a reading of sections
71, 72 and 73, Circular and case laws makes it clear that there is no blanket
bar as such on adjustment of brough forward non-speculation business loss
against current years speculation profit.
These provisions provide that loss in speculation business can neither
be set off against income under the head “Business or profession” nor against
income under any other head, but it can be set off only against profits, if
any, of another speculation business. Section 73 effects complete segregation
of speculation losses, which stand distinct and separate and can be mixed for
set off purpose, only with speculation profits.
The said circular of the Board (which has been held by the Hon’ble
Bombay High Court to be still holding the field) provide that if speculation
losses for earlier years are carried forward and if in the year of account a
speculation profit is earned by the assessee, then such speculation profits for
the current accounting year should be adjusted against brought forward speculation losses of the earlier year,
before allowing any other losses to be adjusted against these profits. Hence, it is clear that there is no bar in
adjustment of unabsorbed business losses against speculation profit of current
year provided the speculation losses for the year and earlier has been first
adjusted from speculation profit.

The Tribunal noted that in the present case
no case has been made out by the revenue that the current or earlier
speculation losses have not been adjusted from the speculation profit. In view of the aforesaid decision of Hon’ble jurisdictional High Court and CBDT
Circular mentioned above, the Tribunal set aside the order of lower authorities
and decided the issue in favour of the assessee.

shailesh.kwebmaker

6 Sections 200, 201 – Since no retrospective effect was given by the legislature while amending sub-section (3) by Finance Act, 2014, it has to be construed that the legislature intended the amendment made to sub-section (3) to take effect from 1st October, 2014 only and not prior to that.

[2018] 92 taxmann.com 260 (Mumbai-Trib.)
Sodexo SVC India (P.) Ltd. vs. DCIT
ITA No. : 980 (Mum) OF 2018
A.Y.: 2012-13 Dated: 28.03.2018

FACTS

The assessee, an Indian company, is engaged
in the business of issuing meal, gift vouchers, smart cards, to its clients who
wish to make benefit in kind for their employees. The employees use these
vouchers / smart cards at affiliates of the assessee company across India and
who are engaged in different business sectors such as restaurants, eating
places, caterers, super markets. For this purpose, the assessee has entered
into an agreement with the affiliates who accept the vouchers/smart cards
towards payment for goods or services provided by them. Further, the assessee also
enters into agreement with its clients/customers for issuance of vouchers/cards
for which it charges in addition to face value certain amount towards service
and delivery charges. The entire amount
paid by client/customer is deposited in an escrow account of the assessee kept
with Reserve Bank of India as per guidelines of Payment and Settlement Systems
Act, 2007 and Revised Consolidated Guidelines 2014. The assessee, in turn, after deducting
certain amounts as service charges and applicable taxes makes payments to
affiliates as per the terms and conditions of agreement towards cost of
goods/services provided by them.

In the course of a survey, u/s. 133(2A) of
the Act, conducted in the business premises of the assessee on 21.01.2016, it
was found that assessee was deducting tax at source only in respect of payments
made to caterers whereas no tax was deducted at source on payments made to
other affiliates. Therefore, the AO issued a notice to assessee directing it to
show cause why it should not be treated as assessee in default u/s. 201(1) for
non-deduction of tax at source on such payment. The assessee responded by
stating that the provisions of section 194C are not applicable in respect of
payments made by it to other affiliates (other than caterers). The AO did not agree with the submissions made
by the assessee. He held the assessee to
be an assessee in default for not having deducted tax at source and accordingly
passed an order u/s. 201(1) and 201(1A) raising demand of Rs. 36,97,34,000
towards tax and Rs. 20,09,04,420 towards interest.

Aggrieved, the assessee preferred an appeal
to the CIT(A) interalia on the ground that the order passed u/s. 201(1)
and 201(1A) is barred by limitation as per section 201(3) as was applicable for
the relevant period. The CIT(A) held
that the amendment to section 201(3) being clarificatory in nature will apply
retrospectively.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that Finance Act, 2009
with a view to provide time limit for passing an order u/s. 201(1) introduced
sub-section (3) of section 201. The time
limit was two years for passing an order u/s. 201(1) from the end of the
financial year in which the statement of TDS is filed by the deductor and in a
case where no statement is filed the limitation was extended to before expiry
of four years from the end of financial year in which the payment was made or
credit given.

Subsequently, the Finance Act, 2012 amended
section 201(3) with retrospective effect from 1.4.2010 and the time period of
four years was extended to six years in case where no statement is filed. However, the time period of two years, in
case where statement is filed, remained unchanged.

Finance Act, 2014 once again amended
sub-section (3) with effect from 1.10.2014 to provide for a uniform limitation
of seven years from the end of the financial year in which the payment was made
or credit given. The distinction between
cases where statement has been filed or not was done away with.

The issue before the Tribunal was whether
the un-amended sub-section (3) which existed before the amendment by the
Finance Act, 2014 applies to the case of the assessee. The Tribunal noted that by the time the
amended provisions of sub-section (3) was introduced by the Finance Act, 2014,
the limitation period of two years as per clause (i) of sub-section (3) of
section 201 (the unamended provision) has already expired.

The Tribunal held that on a careful perusal
of the objects for introduction of the amended provision of sub-section (3) it
does not find any material to hold that the legislature intended to bring such
amendment with retrospective effect. If
the legislature intended to apply the amended provision of sub-section (3)
retrospectively it would definitely have provided such retrospective effect
expressing in clear terms while making such amendment. It observed that this view gets support from
the fact that while amending sub-section (3) of section 201 by the Finance Act,
2012, by extending the period of
limitation under sub-clause (ii) to six years, the legislature has given
retrospective effect from 1^stApril, 2010. Since, no such retrospective effect was given
by the legislature while amending sub-section (3) by Finance Act, 2014, it has
to be construed that the legislature intended the amendment made to sub-section
(3) to take effect from 1^stOctober, 2014, only and not prior to
that.

The Tribunal noted that the principles
concerning retrospective applicability of an amendment have been examined by
the Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. [2014]
367 ITR 466 (SC). It observed that the decision of the Gujarat High Court
in the case of Tata Teleservices Ltd. vs. Union of India [2016] 385 ITR 497
(Guj.) is directly on the issue of retrospective application of amended
sub-section (3) of section 201. The
court in this case has held that the amendment to sub-section (3) of section
201 is not retrospective. Following the
decision in the case of Tata Teleservices (supra), the Gujarat High
Court in the case of Troykaa Pharmaceuticals Ltd. vs. Union of India [2016]
68 taxmann.com 229(Guj.) once again expressed the same view.

Considering the principle laid down by the
Supreme Court as well as the ratio laid down by the Gujarat High Court in the
decisions referred to above which are directly on the issue, the Tribunal held
that the order passed u/s. 201(1) and 201(1A) having been passed after expiry
of two years from the financial year wherein TDS statements were filed by the
assessee u/s. 200 of the Act, is barred by limitation, hence, has to be
declared as null and void.

The Tribunal kept the question of
applicability of section 194C of the Act open.

This ground of appeal filed by the assessee
was allowed.

shailesh.kwebmaker

5 Section 56(2)(viia), Rule 11UA – As per Rule 11UA, for the purposes of section 56(2)(viia), fair market value of shares of a company in which public are not substantially interested, is to be computed with reference to the book value and not market value of the assets.

[2018] 92 taxmann.com 29 (Delhi-Trib.)
Minda S. M. Technocast Pvt. Ltd. vs. ACIT
ITA No.: 6964/Del/2014
A.Y.: 2014-15. Dated: 07.03.2018.

FACTS

During the previous year relevant to the
assessment year under consideration, the assessee, a private limited company,
having rental income and interest income acquired 48% of the issued and paid up
equity share capital of Tuff Engineering Private Limited from 3 private limited
companies for a consideration of Rs. 5 per share. The assessee supported the consideration paid
by contending that the purchase was at a price determined in accordance with
Rule 11UA. The assessee produced valuation report of Aggrawal Nikhil & Co.,
Chartered Accountants, valuing the share of Tuff Engineering Private Limited
(TEPL) @ Rs. 4.96 per share.

The Assessing Officer (AO) in the course of
assessment proceedings observed that while valuing the shares of TEPL the
assets were considered at book value. He was of the view that the land
reflected in the balance sheet of TEPL should have been considered at circle
rate prevailing on the date of valuation and not at book value as has been done
in arriving at the value of Rs. 4.96 per share. The AO substituted the book
value of land by the circle rate and arrived at a value of Rs. 45.72 per equity
share. He, accordingly, added a sum of Rs. 11,84,46,336 to the income of the
assessee on account of undervaluation of shares. The amount added was arrived
at Rs. 40.72 (Rs. 45.72 – Rs. 5) per share for 29,08,800 shares acquired by the
assessee.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the issue for its
consideration is as to whether the land shown by the TEPL should be taken as
per the book value or as per the market value while valuing its shares. The
Tribunal having noted the provisions of section 56(2)(viia) and the definition
of “fair market value” in Explanation to section 56(2)(viia) and Rule 11UA
observed that on the plain reading of Rule 11UA, it is revealed that while
valuing the shares the book value of the assets and liabilities declared by the
TEPL should be taken into consideration. There is no whisper under the
provision of 11UA of the Rules to refer the fair market value of the land as
taken by the Assessing Officer as applicable to the year under consideration.

The Tribunal relying on and finding support
from the decision of the Bombay High Court in the case of Shahrukh Khan vs.
DCIT reported in 90 taxmann.com 284 held that the share price calculated by
the assessee of TEPL for Rs. 5 per share has been determined in accordance with
the provision of Rule 11UA. The Tribunal reversed the orders of the lower
authorities and allowed the appeal filed by the assessee.

The Tribunal decided the appeal in favour of
the assessee.

Please note: The provision of law has
since changed.

shailesh.kwebmaker

8 Method of accounting – Section 145(3) – AO cannot reject the accounts on the basis that the goods are sold at the prices lower than the market price or purchase price – the law does not oblige/compel a trader to make or maximise its profits

The
Pr. CIT vs. Yes Power and Infrastructure. Pvt. Ltd. [AY 2005-06] [Income tax
Appeal no. 813 of 2015 dated:20/02/2018 (Bombay High Court)]. [ACIT vs. Yes Power and Infrastructure. Pvt.
Ltd.[ITA No.7026/Mum/2012; dated 17/12/2014 ; Mum. ITAT ]

The assessee is engaged in
trading of steel and other engineering items. The A.O during year found that
the assessee had sales of Rs. 52.17 crore while gross profit was only Rs. 26.08
lakh. This led the A.O. to call for an explanation for such low profits from
the Assessee.

In response, the Assessee
pointed out that the company, is a concern mainly engaged in trading of steel
& engineering products. The company
purchase and sale these goods on very competitive low margin but our
volume are very high. Normally, company purchases the goods and resale them at
the minimum time gap. It is a known fact that rates of steel keep fluctuating
and it is a very volatile item. To avoid any risk due to market price
fluctuation, company has to take the
fast decision to sell at the available rate received from the market, some time
it may be sold on a low price or some times at a higher price. During the year,
some of the transactions are sold at lower price because of the expectation of
the rate of steel going lower and lower. Moreover, due to fact that assessee
works with a very small capital and no borrowing from banks, assessee does not
have capacity to hold stock for longer periods. Hence, company has to take
decision to sell and purchase, keeping the time gap at the minimum.

However, the A.O. did not
accept the explanation for low profits and rejected the books of accounts. This
on the ground that the purchase price of goods was much higher than the selling
price of those very items. On rejection of the books of accounts, the A.O.
estimated the gross profit on the basis of 2 percent of the sales. This
resulted in enhancement of gross profits from Rs. 26.08 lakh to Rs. 1.18 crore.

Being aggrieved with the
order, the assessee filed an Appeal to the CIT(A). The CIT(A) dismissed the
assessee’s appeal.

On further Appeal, the
Tribunal allowed the assessee’s Appeal. This inter alia on the ground
that it found that the assessee had along with return of income filed audited
accounts along with audit report for the subject assessment year. Moreover,
during the course of scrutiny, complete books of accounts with item-wise and
month-wise purchase and sales in quantitative details were also furnished. It
found that the A.O. did not find any defect in the books of accounts nor with
regard to quantity details furnished by the assessee. In the above
circumstances, it held that merely because the assessee being a trader has sold
goods at prices lower than the purchase price and/or the prevailing market
price would not warrant rejection of the books of accounts.

Being aggrieved with the
order, the revenue filed an Appeal to the High Court. The grievance of the
Revenue with the impugned order is that the assessee has sold goods at price
lower than its purchase price. Therefore, the books of accounts cannot be relied
upon. Thus, the rejection of the books of accounts and estimation of profits in
these facts should not have been interfered with.

The High Court held that it is not the case of the Revenue that
the amounts reflected as sale price and/or purchase price in the books do not
correctly reflect the sale and/or purchase prices. In terms of section 145(3)
of the Act, the A.O. is entitled to reject the books of accounts only on any of
the following condition being satisfied.

(i) Whether he is not
satisfied about the correctness or completeness of accounts; or

(ii) Whether the method of
accounting has not been regularly followed by the Assessee; or

(iii) The income has been
determined not in accordance with notified income and disclosure standard.

It is not the case of the Revenue that
any of the above circumstances specified in section 145(3) of the Act are
satisfied. The rejection of accounts is justified on the basis that it is not
possible for the assessee who is a trader to sell goods at the prices lower
than the market price or purchase price. In fact, as observed by the Apex
Court, Commissioner of Income Tax, Gujarat vs. A. Raman & Co. and in
S.A. Builders vs. Commissioner of Income Tax – 2, the law does not
oblige/compel a trader to make or maximise its profits. Accordingly, the
revenue Appeal was dismissed.

shailesh.kwebmaker

7 Unexplained expenditure – Section 69C – payment made to parties – the assessee filed details of all parties with their PAN numbers, TDS deducted, details of the bank – assessee could not be held responsible for the parties not appearing in person – No disallowance

The Pr. CIT vs. Chawla Interbild Construction Co. Pvt.
Ltd. [AY: 2009-10] [Income tax
Appeal no. 1103 of 2015 dated:28/02/2018 (Bombay High Court)]. [ACIT, Circle-9(1) vs. Chawla
Interbild Construction Co. Pvt. Ltd.[ITA No.7026/Mum/2012; Bench:C ; dated 11/03/2015 ; Mum. ITAT]

The assessee is a firm
engaged in Civil Engineering and execution of the contracts. During the course
of the assessment proceedings, the A.O doubted the genuineness of payments made
to 13 parties and claimed as expenditure. The notices issued to 13 parties by
the A.O were returned by the postal authorities. Consequently, on the above
ground, the A.O made adhoc disallowance of 40% on the total payment made i.e.
Rs. 4.88 crore out of Rs.12.20 crore and added the same to the assessee’s
income.

Being aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). In appeal, the assessee
filed details of all 13 parties with their PAN numbers, addresses, TDS
deducted, date of bill, date of cheque and its number, details of the bank etc.
The CIT(A) after taking the additional evidence on record sought a remand
report from the A.O. The A.O in his remand report submitted that out of 13
parties, 8 parties had appeared before him and the payments made to them stood
satisfactorily explained. However, the remand report indicates that out of 13
parties, 5 parties had not appeared before him. On the basis of the remand
report and the evidence before it, the CIT(A) while allowing the assessee
appeal held that the assessee had done all that was possible to do by giving
particulars of the parties and their PAN numbers. In these circumstances, the
CIT(A) held that the assessee could not
be held responsible for the parties not appearing in person and allowed the
appeal. Thus, holding that the payments made to all 13 parties were genuine and
the addition on account of disallowance was deleted.

Being aggrieved by the
order, the Revenue carried the issue in appeal to the Tribunal. In appeal, the
Tribunal observed that all the details
including the dates of payments, net amounts paid, cheque numbers, details of
the bank branches, amount of TDS deducted, details of the bills, including the
details of the TDS made etc. have been furnished in the tabular form
before the CIT(A). Thus, the assessee discharged the initial onus cast upon him
in respect of the payments made to all 13 parties. The order further records
that thereafter, the responsibility was cast upon the A.O if he still doubted
the genuineness of the payments made to those 13 parties. In the aforesaid
circumstances, the appeal of the Revenue was dismissed.

Being aggrieved by the ITAT
order, the Revenue preferred an appeal
to the High Court. The Court held that the A.O while passing the assessment
order has disallowed 40% of the total payments made on the basis of the
payments made to 13 parties, who were not produced before him during the
assessment proceedings. This on the ground that payments are not genuine. The
court observed that the assessee had done everything to produce necessary
evidence, which would indicate that the payments have been made to the parties
concerned. The details furnished by the assessee were sufficient for the A.O to
take further steps if he still doubted the genuineness of the payments to
examine whether or not the payments were genuine. The A.O on receipt of further
information did not carry out the necessary enquiries on the basis of the PAN
numbers, which were available with him to find out the genuineness of the
parties. The CIT(A) as well as the Tribunal have correctly held that it is not
possible for the assessee to compel the appearance of the parties before the
A.O. In the above circumstances, the view taken by the Tribunal is a reasonable
and possible view. Consequently, the
appeal of revenue was dismissed.

shailesh.kwebmaker

6 Business Expenses – Section 37 – loss/ liability arising on account of fluctuation in rate of exchange in case of loans utilised for working capital of the business – allowable as an expenditure

The Pr. CIT-20 vs. Aloka Exports.
[ AY 2009-10] [Income tax Appeal no. 806 of 2015 dated: 26/02/2018 (Bombay High Court)].
[ACIT, Circle-17(2) vs. Aloka Exports.[ITA No. 4771/Mum/2012; Bench : A ; dated 27/08/2014 ; Mum. ITAT ]

The assessee is engaged in
the business of manufacture and export of readymade garments, imitation
jewellery, handicrafts etc. The AO noticed that the assessee claimed deduction
of expenses relating to foreign exchange rate difference.

The assessee submitted that
the term loan was availed for working
capital purposes. At the year end, the assessee worked out the foreign exchange
difference and claimed the loss arising thereon as deduction.

The AO noticed that the
EEFC account is maintained in foreign currency and accordingly held that the
assessee could not have incurred loss on account of foreign exchange difference.
The assessee explained before the AO about the method of accounting of “foreign
exchange loss/gain”. However, the assessing officer took the view that the loss
accounted by the assessee is against the accounting principles. Accordingly he
disallowed the foreign exchange difference loss claimed by the assessee.

The Ld CIT(A) deleted the
disallowance of loss arising on foreign exchange difference by following the
decisions rendered by Hon’ble Supreme Court in the followingcases:-

(a) Sutlej
Cotton Mills Ltd vs. CIT (116 ITR 1)(SC)

(b) CIT
vs. Woodward Governor India Pvt Ltd (312 ITR 254)(SC).

On further appeal by the
Revenue, the Tribunal upheld the order of the CIT(A). It held that the foreign
exchange term loan was utilised for working capital requirements. Thus, the
loss on account of foreign exchange difference is allowable as a revenue loss.

The Hon. High Court
observed that both the CIT(A) as well as
the Tribunal have on perusal of the record, come to a conclusion that the loan
taken was utilised only for working capital requirements. Therefore, loss on
account of foreign exchange variation would be allowable as a trading loss. In
fact, even the Assessing Officer has held that term loan was not utilised for
purchase of plant and machinery.

The Court held that this
issue stands covered by the decisions of the Supreme Court in Sutlej Cotton
Mills Ltd., vs. CIT 116 ITR 1 (SC) that loss arising during the process of
conversion of foreign currency is a part of its trading asset i.e. circulating
capital, it would be a trading loss. Further, as held by the Apex Court in CIT
vs.Woodward Governor India Pvt. Ltd., 312 ITR 254 – that loss/liability
arising on account of fluctuation in rate of exchange in case of loans utilised
for revenue purposes, is allowable as an expenditure. Accordingly, the question
of law raised in the appeal of revenue
was dismissed.

shailesh.kwebmaker

Sales Return – Scope

Introduction

Under VAT laws, tax can be
levied on sale of ‘goods’. Completed
sale is liable to tax. However, there may be a situation where the goods sold
are returned by the buyer. Since the transaction of sale is already complete,
even if subsequently there is sales return (which is also referred to as ‘goods
return’) the liability will still remain on the same. However, the legislature
gave some latitude by giving facility of deduction of sales return from taxable
turnover, if such return is within the stipulated time limit.

There are provisions under
Maharashtra Vat Act (MVAT Act) and Central Sales Tax Act (CST Act) explaining
that if the goods sold are returned back within six months from the date of
sale, then such return should be given deduction and no tax should be payable
on such goods return portion. If the return is beyond the prescribed period of
six months, then the deduction is not allowable and tax is payable on the full
sale value.

Sales
Return – Scope

The issue arises as to when
the goods returned are eligible for deduction as sales return? An important
judgement has come on the same from Hon. Bombay High Court. The judgement is in
case of Reliance Industries Ltd. vs. State of Maharashtra (50 GSTR 1)(Bom).
The facts in this case, as narrated by High Court are as under:

“3. In Writ Petition No. 2217
of 2015, the Petitioner is Reliance Industries Limited (for short
“RIL”) which is a public limited company inter alia engaged in
the manufacture of petrochemicals. Respondent No.1 is the State of Maharashtra,
through its Secretary, Ministry of Finance. Respondent No.2 is the MSTT
constituted under the BST Act. Respondent No.3 is Bharat Petroleum Corporation
Limited (for short “BPCL”) which is a public sector undertaking
engaged in the business of refining and selling petroleum products and who is
the supplier of Kerosene to RIL in the present dispute. Respondent No.4 is the
Commissioner of Sales Tax functioning and discharging his duties under the
provisions of the BST Act.

4. It is the case of RIL that
in or around 1992, RIL had established a petrochemical plant in Patalganga for
manufacturing Linear Alkyl Benzenes (“LAB”). RIL required N-Paraffin
as a raw material for the manufacture of LAB. According to RIL, Kerosene (also
known as Paraffin), is a mixture of Hydrocarbons in the range of C-8 to C-18.
Out of such mixture, the Hydrocarbons C-8 and C-9 are known as Light Paraffin.
Hydrocarbons from C-10 to C-13 are known as N-Paraffin (which is required by
RIL). The range of Hydrocarbons from C-14 to C-18 are known as Heavy Paraffin.
According to RIL, N-Paraffin itself is also Kerosene and is one of the many
constituents of Kerosene.

5. According to RIL,
N-Paraffin is easily obtained from kerosene by using a molecular sieve. This,
according to RIL, is only a physical activity not involving any chemical
reaction. The molecular sieve would absorb the N-Paraffin only and the rest of
the Kerosene would simply pass through the said Sieve. Subsequently, the
N-Paraffin is de-absorbed from the molecular Sieve.

6. According to RIL, BPCL is
having a refinery at Mahul for many years prior to 1992. One of the products
produced by BPCL in the said refinery is Kerosene. Kerosene is as such sold by
BPCL through the Public Distribution System (involving a dealer network) to its
final consumers.

7. Be that as it may, an exclusive
pipeline of approximately 56 kms was laid connecting the Mahul refinery and
Petitioner’s factory at Patalganga so as to ensure continuous and constant to
and fro movement of the requisite quantity of Kerosene from BPCL to RIL and
from RIL to BPCL, respectively. It is in these circumstances that RIL entered
into an agreement dated 24^th August, 1992 with BPCL for procurement
of Superior Kerosene Oil. As this Kerosene was required for manufacturing of
LAB as Feed Stock (FS), it was described as KO (LABFS). A copy of this
agreement can be found at Exhibit “C” to the Writ Petition.

8. According to RIL, it was
agreed between itself and BPCL that Kerosene would be delivered to RIL. In
turn, RIL would consume the suitable quantity of Kerosene by taking out N-
Paraffin required by it and send the balance quantity of Kerosene back to BPCL
as a “return stream”. According to RIL, this agreement mandatorily
required the Petitioner (by way of “return stream”) to return the
quantity of Kerosene after extracting the N-Paraffin. According to RIL, this
agreement thus provided for supply of Kerosene solely for the purposes of
consuming the requisite quantity of kerosene. Thereafter, the balance quantity
of Kerosene was to be returned back to BPCL.

9. According to RIL, the
“return stream” is a common phrase used in the petroleum and
petrochemical industry both within India as also internationally. A petroleum
product would be sent by the refinery to a petrochemical complex. The
petrochemical complex would use/consume the required quantity of item and
return the balance petroleum product to the refinery as a “return
stream”.”

In a nutshell, the issue was
that BPCL has to supply kerosene namely KO (LABFS) to RIL. RIL to extract
n-paraffin from the said kerosene and the balance kerosene will be returned
back to BPCL. The issue was whether such return of kerosene by RIL to BPCL will
be purchase by BPCL from RIL or it will simply be a case of sales return by RIL
to BPCL.

There were a number of issues
involved in the case. There were arguments from the both the sides.

Hon. High Court considered
arguments from both the sides and also referred to the relevant provisions
under MVAT Act like definition of manufacture, resale, turnover of sale etc.
After having such reference, Hon. High Court observed about the merits of the
case as under:

“53. What can be discerned
from the aforesaid definitions and as even correctly submitted by Mr.
Venkatraman as well as Mr. Dada is that for there to be a sales return, the
goods originally supplied and the delivery of the return stream should be one
and the same goods. If the goods that are sought to be returned are a product
which is different from the one that was originally supplied, the same can
never be termed as a sales return.

54. In the facts of the
present case, we are clearly of the view that the product that was supplied by
BPCL to RIL in the first leg of the transaction was different from the return
stream that was supplied/returned by RIL to BPCL. As mentioned earlier, the
Kerosene that was supplied by BPCL to RIL was rich in N-Paraffin. It comprises
of Hydrocarbons C9 to C14. The Kerosene that was sought to be returned by RIL
to BPCL was after the extraction of N-Paraffin. In other words, Hydrocarbons C9
to C14 were specifically denuded from the Kerosene that was returned by RIL to
BPCL. In fact, it is not in dispute that the returned Kerosene is denuded by
more than 50% of N-Paraffin. The Kerosene that was supplied by BPCL also known
as SKO (LABFS) which contains N- Paraffins was viable for commercial extraction
of N-Paraffin whereas the product given by the RIL to BPCL after extracting the
N-Paraffin is not viable for extraction of N-Paraffin due to the fact that the
return stream does not contain the extractable quantity. At least to our mind,
therefore, it is clear that the product supplied by the BPCL to RIL is very
different from the product that is returned by RIL to BPCL. To put it in other
words, the Kerosene supplied by the BPCL to RIL is pre-processed and the
Kerosene returned by RIL to BPCL is a processed product and hence are two
different commercial products. It is true that even the returned Kerosene meets
the BIS standards to be termed and used as Kerosene, but that alone cannot be
the test to come to the conclusion that the product returned by RIL is one and
the same as was supplied by BPCL to RIL in the first leg of the transaction. It
is an admitted fact before us, at least across the bar, that the Kerosene
supplied by BPCL to RIL can be used for extraction of N Paraffins whereas the
Kerosene returned by RIL to BPCL cannot be used for the same purpose. The
process of extraction carried out by RIL is thus a manufacture within the
meaning of the said expression as defined in the BST Act and the kerosene is
therefore not returned to BPCL in the same form. In other words, BPCL cannot
use the Kerosene returned by RIL to be supplied to another Petrochemical plant
for extraction of N-Paraffin. This, to our mind, would clearly go to establish
that the Kerosene supplied by BPCL to RIL in the first leg of the transaction
and the product returned by RIL to BPCL in the second leg of the transaction,
at least for the purposes of sales tax, are two different products. It cannot
be disputed that the two products are different in character and use. This
being the case, it is quite clear that the return stream of Kerosene and which
was sought to be returned by RIL to BPCL can never be termed as a sales return
but in fact a sale by RIL to BPCL.”

Thus, Hon. High Court decided
the yard stick about scope of sales return. If the goods sold and returned are
not the same goods but different goods, then there is no scope for claim of
sales return.

Prospective
effect to the liability

One more issue which is
decided in this matter is about prospective effect to the adverse determination
order. Since the dealer was guided earlier by favorable determination order.
Hon. High Court held that even if it is now reversed, still the protection is
required to be given for past liability. The relevant observations of Hon. High
Court are as under:

“70. What is ex-facie
clear from reading the provisions of Section 52 is that the Commissioner, in
the given facts and circumstances of the case, certainly has the power to
exercise his discretion and give prospective effect to the DDQ order passed by
him u/s. 52(1). As correctly submitted by Mr. Venkatraman as well as Mr. Dada,
in the facts of the present case, since the DDQ order dated 11^th
September, 2006 was passed in favour of the assessee, there was no occasion nor
any reason to request the Commissioner to grant prospective effect to his
order. The question of prospective effect would only arise when the order of
the Commissioner was reversed by the Tribunal vide the impugned order dated 20^th
January, 2015. Further, it is not in dispute before us that it is for the first
time in the history of the Bombay Sales Tax Act that the DDQ order passed by
the Commissioner u/s. 52 (1) was challenged by
the State of Maharashtra before the MSTT. From the facts narrated in this
judgement, it is also clear that bonafide litigation between the parties
has gone on right from the year 1992 till 2015. Further, right from the
assessment years 1988-1989 till 2004-2005, the assessments have been allowed in
favour of the assessee, namely RIL on the basis that the return stream of
Kerosene was a “goods return”. If prospective effect is not given to
the order of the Tribunal it would effectively lead to a situation that all
past assessments would have to be reopened and which would be highly unfair and
prejudicial not only to RIL but also to BPCL.”

Conclusion

The judgement has far reaching
effect in understanding the scope of sales return. It is also a guiding
judgement in respect of use of discretionary power of prospective effect in
determination proceedings. The dealers’ community may have good guidance from
the above judgement.

shailesh.kwebmaker

Interesting issues on Interest

Tax laws operate on three fundamental
impositions viz tax, interest and penalties. Each of these recoveries are
designed to meet specific objectives and interest has one striking peculiarity
i.e. it is not static and accumulates
over time.

In common parlance, interest is understood
as a compensation payable to the owner of funds for the usage of money borrowed
from such person. Black’s Law Dictionary defines interest, in the context of
usage of money, as a compensation allowed by law or fixed by parties for the use or forbearance of borrowed money. In
the context of tax laws, the Supreme Court in Associated Cement Co. Ltd. vs.
CTO (1981) 48 STC 466 has explained tax, interest and penalty as follows:

“Tax, interest and penalty are three
different concepts. Tax becomes payable by an assessee by virtue of the
charging provision in a taxing statute. Penalty ordinarily becomes payable when
it is found that an assessee has wilfully violated any of the provisions of the
taxing statute. Interest is ordinarily claimed from an assessee who has
withheld payment of any tax payable by him and it is always calculated at the prescribed
rate on the basis of the actual amount of tax withheld and the extent of delay
in paying it. It may not be wrong to say that such interest is compensatory in
character and not penal.”

The Supreme Court in Prathibha
Processors vs. Union of India (1996) 88 ELT 12 (SC) has held that interest
is compensatory and its levy is mapped to the actual amount of tax withheld
and the extent of delay in payment of tax from the due date.

Settled
principles on interest under fiscal legislations

The well-settled principles of interest
under fiscal legislations have been summarised for guidance while interpreting
the GST scheme:

i. Interest
provisions are part of the substantive law of the fiscal statute and cannot be
imposed by implication. The statute should specifically provide for the
circumstances leading to the imposition of interest.

ii. Imposition
of interest is mandatory in nature and with no scope for any discretion.

iii. Reason
for delay (intentional/ unintentional etc.) in payment of tax is irrelevant
while deciding the imposition.

iv. Interest
should be calculated as per the law prevailing for the period under
consideration.

v. Interest
need not be quantified in the assessment order.

vi. Interest
can be waived only by specific statutory provisions (say VCES scheme, etc).

vii. Interest
would be applicable even if there is an interim stay of recovery by any Court.

viii. Interest
cannot be demanded where the tax recovery itself has become time barred.

Overview
of provisions of interest under GST Law

The provisions of interest under the GST
laws can be categorised as follows – (a) interest on demands; and (b) interest
on refunds. Any interest computation is based on three variables and the GST
law is no different:

(a) Principal
– Tax unpaid

(b) Time
period – Period commencing from due date of tax payment to date of actual
payment

A) Interest
on tax demands

Interest provisions are contained in
Chapter-X : Payment of tax. The circumstances under which interest is
applicable under GST law are:

i. General
Provision – Interest on delayed/ short payment of tax

Section 50(1) applies when a person fails
to pay the tax or any part thereof within the prescribed period. Interest would
be calculated on the principal (being the tax involved) at the rate notified by
the Government, not exceeding 18% per annum (N-13/2017 –Central Tax dt.
28.06.2017 prescribes a rate of 18% p.a). The delta of the following dates is
used for the determination of the time period for which interest applies:

(a) Due date for payment of tax (section 39):
Section 39 provides that tax shall be paid as per the monthly return within the
due date for the said return. Rule 61 requires that every registered person is
required to furnish the monthly return in form GSTR-3 by 20^th of the
succeeding calendar month. The said rule inserted an additional return in Form
GSTR-3B w.e.f. 27.07.2017 in cases where the due date of filing GSTR-3 has been
extended. Notifications have been issued from time to time prescribing the due
date of GSTR-3B as the 20^th day following the relevant tax period.
The said notification also contains a clause that requires the assessee to
discharge its liability of tax, interest and penalty within the due date for
GSTR-3B.

(b) Date of payment of tax (section 49): Tax
liabilities (either self-assessed or otherwise) of a taxable person are
recorded in the electronic liabilities ledger (ELL) of the taxable person on
filing the return. Section 49 provides
for depositing amounts in Government accounts under various heads (major and
minor heads) which would be reported in the electronic cash ledger (ECL). The
amounts available in the electronic cash ledger or electronic credit ledger
(ECrL) would be debited and adjusted towards the outstanding liabilities in the
ELL. Section 49(7) & (8) states that the taxes of a tax period would be discharged
in a particular manner.

Therefore, the due date for payment of
taxes is sought to be fixed by the notification as 20^th of the
succeeding calendar month. Prima-facie, any delay in payment of taxes
after this date would involve payment of interest @ 18% p.a. The assessee would
have to follow the system of reporting the taxes on the GSTN portal and then
discharge its liabilities in the ledger by filing the due return. This position
is subject to further discussion of the interplay between GSTR-3 and GSTR-3B
explained later.

ii. Interest
on undue or excess claim of input tax credit or reduction of output tax

Similarly, section 50(1) also provides for
interest in cases of an undue or excess claim of input tax credit u/s. 42(8) or
an undue or excess reduction in output tax u/s. 43(8).

– Section 42 applies where GSTR-2
(statement of inward supplies) generates a mismatch report on account of
duplication, incorrect data, etc. amounting to excess claim of input tax
credit. Section 42(8) levies interest on the amount so added from the month of
availment of credit till the corresponding addition is made in the return.

– On similar lines, section 43 applies
where the GSTR – 1 (statement of outward supplies) generates
a mismatch report on account of duplication, incorrect data, etc. in
credit notes claimed towards reduction of turnover. Section 43(8) levies
interest from the date of claim of reduction till the corresponding addition is
made in the return.

Time frame for matching – Rule 69 of the
CGST rules provides for matching of the input tax credit claims by the
Government. The said rules do not provide for an outer limit within which input
tax credit matching should be performed by the Government, though it empowers
the Commissioner to extend the date of matching in cases where the filing of
GSTR-1 and 2 are extended. Rule 71 states that the mismatch report would be
communicated to the tax payers on or before the last date of the month in which
the matching is carried out.

The said provisions were originally
intended at matching of input tax credit claims/ output tax reductions by the
end of the calendar month in which returns were filed which effectively
resulted in interest on the mismatch for a period of 1 month, in case of
duplicate claims, and 2 months in the case of erroneous claims. GSTN is yet to
conduct the matching of GSTR-2 and 2A. To the knowledge of the author, none of
the Commissioners have exercised this power of extension on the presumption
that matching is the prerogative of GST Council. In view of the decision of the
GST council to defer matching, this reporting of mismatch has not taken place yet.

While discussions over the mechanism of
matching of input tax credit claims are underway in the GST council meetings,
it is evident that this would be undertaken sooner or later[1]. In the
recently concluded GST Council Meeting, it has been decided that a single
return would be formed for GST compliance with the matching being performed at
the backend. The said return is announced to be operationalised on the GST
portal within 6 months.

Until then, it unfortunately implies that
a mismatch would be recoverable from the recipient and interest provisions
would be invoked for a period more than what was originally envisaged. To add
to this, the supplier may not be in a position to even rectify the mismatch
identified by the GSTN since the same may be beyond the month of September of
the following financial year. The tax
payer may have to bear the brunt of interest for delays attributable to the
Government/ GSTN which may extend to more than one year (one should consider
filing a counter claim from GSTN for such delay!).

iii. Interest
on provisional assessment

Section 60 provides for provisional
assessment in cases where tax is not determinable by the tax payer/ assessing
authority. Section 60(4) imposes interest in respect of any additional tax
payable on closure of such assessment from its original due date to the actual
date of payment of tax, irrespective of the date of conclusion of the
provisional assessment. This issue has experienced intensive litigation under
the Excise law right upto the Supreme Court. With specific provisions under the
GST law, it seems clear that interest liability has to be determined from the
original due date and not from closure of provisional assessment.

iv. Waiver
of interest in case of incorrect classification of supply

Section 77(2) r/w 73/74 of the CGST law
implicitly provides for fresh payment of the appropriate tax in cases where a
taxable person has incorrectly classified an ‘intra-state supply’ as an ‘inter
state supply’. Conversely, IGST law would also be read in a similar manner in
view of section 20 of the said law. However, the section waives the interest
liability on account of the delay in payment of the appropriate tax. This is on
the premise that the tax payer has made the tax payment, albeit under an
incorrect tax type and should not be saddled with an interest liability. This
is the only provision under the statute which waives interest liability on
account of delayed payment of taxes.

v. Other
cases of interest recovery

Other provisions of interest are as follows:

– Reversal of input tax credit where the payment
of the inward supplies has not been made within 180 days from the date of issue
of invoice: interest is applicable from the date of availment of input tax
credit to the payment by way of reversal/ addition to output liability.

– Recovery of irregular input tax credit
distributed by the Input Service Distributor to its recipients : recovery of
tax and interest would be from the recipient of the ISD credit in terms of
sections 73 and 74 of the GST law.

– ITC reversals in respect of any exempted/
non-taxable activity is provisionally arrived at on a monthly basis and finally
adjusted at the year-end at an aggregate level : interest is applicable from 1^st
April following the end of the financial year till the date of payment/
reversal of such excess credit.

– Inputs or capital goods which are supplied to a
job worker without payment of tax and either not returned or supplied therefrom
within 1 year/ 3 years respectively – interest is applicable from the month in
which such goods were original removed to the date of actual payment.

– Rectification of any under-reporting of tax in
view of an omission/ error in any subsequent return (section 39(9)) is liable
for interest.

– Failure/ delay on the part of the deductor to
deposit the taxes deducted to the Government within the prescribed date is
liable for interest in the hands of the deductor.

– Rectification of any under-reporting and taxes
collected at source by an e-commerce operator is subject to interest.

– Interest is applicable in cases where payment
of tax is permitted to be made on instalment basis in terms of section 80.

– Amount demanded by an anti-profiteering body in
cases where the benefit of taxes have not been duly passed on would also be
subject to interest provisions.

– As an exception to the general rule of tax
liability, section 13(6) and 14(6) defers the time of supply in cases where the
value/consideration of a service is enhanced due to inclusion of interest, late
fee or penalty as part of the value of supply in terms of section 15(2)(d).
Consequently, the start point of calculation of interest stands deferred to the
date of its receipt.

– Interest on taxes short paid or not paid are
liable for recovery whether or not the same is stated or quantified in the show
cause notice or assessment order

– Interest computed under the GST law should be
rounded off to the nearest rupee

B) Interest
on delayed refunds due to an applicant

Section 56 grants interest on refunds due
to the applicant if the same has not been paid within sixty days from the date
of refund application. Interest is applicable from the expiry of sixty days to
the date of actual refund at the rate presently notified at 6% p.a.

In cases where the refund is ordered by an
adjudicating authority, appellate authority, court, etc. the assessee is
entitled to an interest of 9% p.a. for the aforesaid period. It also applies to cases where the refund
sanctioning authority orders refund in its order but fails to issue the refund
cheque to the applicant along with the refund order. For the purpose of
computation of interest of 9% p.a., the period has to be reckoned from the date
of application filed consequent to the said order. In cases of appellate
relief, interest would be applicable from the date of payment of the taxes
against the aggrieved order and not from the date of the appellate order
(section 115).

In context of availing refund for
zero-rated supplies u/s. 54, an applicant is not entitled to claim interest in
case the authority fails to grant the provisional refund of 90% (Rule 91 of the CGST
Rules) of the claim of refund of input tax credit.

In the context of section 77 (incorrect
classification of supply), though there is a waiver for interest on delay in
payment of the correct tax type, there is no bar on claiming the interest on
refund of the incorrect taxes paid in cases of any delay in granting such
refund.

Issues
in determination of interest

i. What
is the actual due date of payment of tax? In other words, by deferring the due
date of GSTR-3, has the Government also inadvertently deferred the due date of
payment of tax?

Section 39(7) states that self-assessed
taxes are required to be paid within the due date of filing the return. The GST
scheme originally envisaged the filing of the return in GSTR-3 on a monthly
basis by 20^th of the succeeding month. The Government has however
made multiple changes in the return filing procedures in order to address the
technical challenges in the GSTN portal. GSTR-3B was introduced as an
additional return until the portal was sufficiently equipped for filing GSTR-3[2]. A question arises on whether the due date of
return/ payment of tax should be understood as per the due date prescribed for GSTR-3B or GSTR-3? We may look at the said provisions in detail.

Section 39(1) requires a return to be
filed on a calendar month basis by 20^th of the succeeding month –
the return referred to in section 39(1) is a return of outward/ inward
supplies, input tax credit availed/reversed, tax payable/ paid and other
prescribed particulars. Strictly speaking, GSTR-3B is only an additional return
(recording summary figures) to that originally envisaged u/s. 39(1). As the law stands today, tax payers would
eventually have to file the monthly return in Form GSTR-3.

Can one take a stand that the due date
prescribed for tax payment is vis-à-vis the due date of GSTR-3 and not
GSTR-3B? The thrust of this stand hinges on whether GSTR-3 or 3B is the
‘return’ referred to in section
39(1)/ (7). The arguments in favour of GSTR-3 may be as follows:

– GSTR-1, 2 are statements which are
auto-populated in the monthly return in form GSTR 3 and should be considered as
part of GSTR-3 itself (Instruction 2 & 4 of form GSTR-3). Section 39(1)
refers to a return of inward and outward supplies with other details such as
input tax credit availed, reversed etc. The said section thus envisages
a return detailing the inward and outward supplies and not merely a form
reporting aggregate amounts i.e. GSTR-3.

[1] State officers in
some states have started issuing scrutiny notices for verification of input tax
credit claims by exercising powers u/s. 61.

– Strictly speaking, GSTR-3B is not a return
of inward or outward supplies – attention should be placed on the
preposition ‘of’ which means that the return should be that which records
outward and inward supplies and not merely the turnover at an aggregate level.

– The instructions in GSTR-3 and GSTR-3B conveys
that ECL, ECrl and ELL are updated only on filing the GSTR-3 and not GSTR-3B
(contrary to the functionalities of the GSTN portal) – legally speaking,
GSTR-3B is not a valid document to update the ELL/ ECrL and should not be
considered as the return u/s. 39(1) & (7).

– Section 39 refers to ‘a’ return to be filed for
every calendar month i.e. a singular return. The rules seem to extend beyond
the requirement of a singular return for every calendar month since the filing
of GSTR-3B does not dispense with the requirement of filing GSTR 3. Therefore, GSTR-3B is a document which is
clearly not envisaged in section 39.

– GSTR-3B does not displace GSTR-3 as a return
for inward or outward supplies. The returns seem to parallelly exist and this
requirement exceeds the mandate of section 39(1) of filing a singular
return.

– GSTR-3B can at most be considered as a
provisional document subject to the final return in form GSTR-3. The entries in
the electronic ledgers are merely provisional entries to tide over the
difficulties posed by the common portal until GSTR-3 is fully functional.

– CBEC circular (No. 7/7/2017-GST dt. 01.09.2017)
clarified that any error in GSTR-3B could be rectified while filing GSTR-1/2
and 3. GSTR-3 certainly enjoys a superior status compared to GSTR-3B, and being
so, the due date should be understood with reference to the said document and
not from an inferior document.

– Form GSTR-3, 4, etc. are titled ‘Return’
whereas GSTR-3B does not hone such a title.

– As it is well settled, where there are two
interpretations of law, the one which is beneficial to the tax payer should be
adopted.

Based on the above arguments, one may take
a view that the extension of GSTR-3 has also lead to the extension of the due
date of payment of tax.

However, the said contention may fail if
one applies the purposive interpretation as against a literal interpretation of
law. The intention behind introduction of GSTR-3B was to facilitate the
Government to collect taxes on a monthly basis and overcome the technical
glitches in the common portal. Rule 61(5) term GSTR-3B as a ‘return’ to be
filed in cases where GSTR 3 is extended in special circumstances (also refer Circular
7/7/2017-GST dt. 01.09.2017 & Circular 26/26/2017-GST dt. 29.12.2017). The Circular mentions that any rectification
subsequent to filing the GSTR-3B should be accompanied by interest on delayed
payment, if any. The notification
prescribing due dates of GSTR-3B also requires the tax payer to discharge its
taxes, interest and penalty within the said due dates. Further, Government(s) would be deprived of
its revenue, if taxes are not paid in a timely manner. The taxes which are collected by suppliers
are in the capacity of an agent of the Government and the Government never
intended the tax payer to collect taxes from the consumers and retain this sum
without any outer time limit.

If the amounts are substantial, this would
certainly be a heated issue between the tax payer and the department and
warrant a resolution by the Courts.

ii. Whether
balance available in respective ECL / ECrL can be reduced for ascertaining
taxes unpaid? As a corollary, whether interest is applicable if utilisation
through the return filing mechanism is not undertaken on the common portal?

The overall scheme of reporting and
payment may give pointers on this question.
Section 40 provides for a mechanism of reporting liabilities and payment
of tax through electronic ledgers. Three ledgers have been designed for this
purpose: ECL, ECrl & ELL. The said ledgers have been created separately for
each enactment and cross movement of cash/ funds is not permitted except
through the cross credit utilisation mechanism in section 49(5) of CGST/ SGST
law and 18 of IGST law:

– ECL: Credited with bank remittances and used
for payment of tax, interest, penalties, fees.

– ECrL : Credited with self-assessed input tax
credits and used for payment of tax.

– ELL : Credited with return related and
non-related liabilities and is debited with payments from ECL / ECrL. This ledger is updated only after filing the
statutory return (currently GSTR-3B).

Discharge of tax dues under the GST law
involves a two-step mechanism – (a) a bank payment (involving flow of funds)
into the cash ledgers and (b) an accounting adjustment (an appropriation of
such funds). There have been many
instances where assesse has sufficient ECL/ ECrL balance to set-off the ELL but
has failed to file the GSTR-3B for one reason or another, due to which the
utilisation or discharge of liabilities reported/ due to be reported in the ELL
has not taken place.

In such cases, an issue arises whether
interest is applicable on failure to discharge the ELL / non-filing of return
even-though the tax payer has paid the amounts into Government coffers? Has the law made a distinction between
payment of taxes and discharge of tax liability? Are they co-terminus or independent actions
to be performed by the tax payer?
Whether the double entry accounting adjustment on filing the return
would have any revenue impact for Government?
These questions would certainly come up to address the question of
interest applicability.

While logically, there seems to be no doubt
that the benefit of funds available in ECL/ ECrL should be given to the tax
payer and non-filing of returns should not entail any interest liability, one
should also give cognisance to the literal interpretation of the Statute.

Literal interpretation

Section 60(1) terms the credit into the
ECL as a deposit towards tax, interest, penalty, fee or any other sum
dues. Section 60(3) states that ECL may
be used for payment of tax under the Act. Section 60(7) & 60(8) provide
that all liabilities would be recorded in the ELL and discharged in a
prescribed manner. Rule 85(3) states that all liabilities would be paid by
debiting the ECL/ ECrL as permissible.

ECL in form PMT-05 maintains separate
account heads – minor head (such as Tax, interest, penalty, etc.) under
each tax type – major head (CGST/ SGST/ IGST) for deposits made into such
account. The law does not permit cross transfer of amounts reported in one
account major/ minor head into other account heads.

If one examines the GSTN portal, filing of
GSTR-3B creates a credit entry in the ELL and a simultaneous debit in the ECL/
ECrL as the case may be, as discharge of taxes. The tax dues are said to be
discharged on filing the returns and corresponding utilisation of ECL / ECrL. Therefore, interest seems to be prima-facie
applicable from the due date to the actual date of filing the return.

In the view of the author, even if the
returns are not filed, deposits into the Government accounts should be
considered as payment of tax dues and benefit of such credits be granted for
ascertainment of the taxes unpaid u/s. 50(1). Following arguments can be taken
in support of this stand:

– Section 50 (1) states that interest is
applicable on failure to pay the tax dues.
The failure is with reference to the tax payment and not with reference
to utilisation of the ECL with the ELL (referred to as discharge of tax
liability).

– Section 39(7) requires the assessee to pay the
taxes due as per such return before the due date of filing the return, i.e. the
act of payment should be one which can be performed ‘before’ filing the
return. As stated above, the book
adjustment (credit in ECL and debit in ECrL) takes place only after filing the
return (refer instructions of form GSTR-3). Therefore, payment of taxes is distinct
from discharge of taxes.

– Moreover, the IT framework does not allow one
to file a return unless sufficient balance is available in the appropriate
ledgers. This implies that payment of taxes precedes the adjustment in
ELL. Hence, bank payment in ECL should
be considered as a ‘payment’ u/s. 39(7).

– Principally, interest is collected to
compensate the Government of its rightful revenue. Amounts credited to ECL are
funds received into respective Government accounts and it is free to utilise
this revenue for its functioning.

– The amounts lying in the ECL are not under the
control of the assessee. One has to necessarily follow the procedures
prescribed in GSTR-3B/3 to claim the refund of any excess balance, implying
that the funds are available with the Government.

– Provisions of refund provide for interest @ 6%
if the Government delays in refund of the excess ECL balance also implying that
these funds are being used by the Government and under its control.

– Amounts lying in ECL are akin to amounts lying
in PLA under Excise laws. Where a
manufacturer delays in filing its excise return or carries excess balance in
its PLA, it was considered as amounts paid under the Excise law.

– Similarly, amounts lying in ECrL represents
credit eligible to the assessee – Courts have held that input tax credit
permissible under law is as good as taxes paid.
Though an assessee may not have filed the returns, the liability of such
assessee for a tax period would have to be computed after deduction of amounts
lying in ECrL.

In view of this, one can take a stand that
the Government has not incurred any loss of revenue and hence interest should
not apply where sufficient amounts are lying in the ECL/ ECrL. The CBEC Circular No. 7/7/2017 (supra)
on the contrary states in para 11 & 12 that interest is applicable till the
date of debit in the ECL/ ECrL; i.e. until the return is filed and the
corresponding utilisation in the respective ledgers takes place.

Inter-Government Account Settlement

The flow of funds
between Government accounts are an important factor to ascertain whether the
rightful Government is enjoying funds.
The settlement of accounts of Governments takes place at the back-end
based on the returns filed by the tax payers.
‘Place of supply’ reported in the tax invoices identifies the Government
which is entitled to the revenue in an outward supply. However, these details can be ascertained by
the Government only when accurate and complete returns are filed in GSTR-1, 2
& 3.

Transfer of funds on cross utilisation of
input tax credit and settlement of accounts by the Governments are covered u/s.
53 of the respective CGST/ SGST Acts and Chapter VIII of the IGST Act
(comprising of section 17 and 18). The
settlement of accounts between Governments can be categorised in two broad
types:

a) Input
tax credit Settlement

– Section 53 of the respective CGST/SGST Acts
provide that on utilisation of the credit of CGST/ SGST for payment of IGST,
corresponding amounts would be transferred from the Central Government/ State
Government account to the IGST account.

– Section 18 of the IGST Act provides that on
utilisation of the credit of IGST for payment of CGST/ SGST, corresponding
amounts would be transferred by the Central Government to the Central
Government / State Government account.

– Section 53 and 18 above, convey that cross
utilisation of credits lead to a transfer of funds between Government accounts
in the back end and the Government granting the set-off towards input tax
credit receive its share of revenue. The
section also states that this cross utilisation takes place only at the time of
filing the return and to the extent of the amounts are reported in the
return. Where a return is not filed or
the return filed is erroneous, the cross utilisation to the extent of the error
would not take place and the rightful Government would not receive this
revenue.

b) Cash
Settlement

– Cash payments in the ECL takes place through
electronically generated challan in PMT 06.
Major heads represents each statute under which the collection is being
made and funds cannot be cross-transferred to other major heads; Minor heads
represents the folios under which collection is being made (such as tax,
penalty, interest, etc.) and merely an accounting head of the respective
Government.

– CGST/ SGST-ECL ledgers represents funds
received by the respective Government and hence no further adjustment or
transfers are required. The funds in the ECL can be used for any payment including
tax, interest and penalties.

– IGST-ECL ledger represents the amounts
collected by the Central Government and due to both Central Government and
State Governments as per prescribed formula. Section 17 of the IGST Act
provides for a mechanism of apportionment of IGST collected and settlement of
accounts.

Legally speaking, revenues would accrue to
the State only once the return is filed and the appropriate utilisations are
made in the ECL/ ECrL and ELL. In case
this is not done, revenues would remain un-appropriated and fall into an
apportionment formula. To this extent,
there is every possibility that the Government has not received its rightful
share of revenue. Governments may then
claim that on account of an incorrect return or an omission of filing a correct
return, it has been deprived of the rightful revenue. In that sense, the issue
is not really of the amount being paid and only offset entry not done.

During the last one year, there have been
multiple cases where amount were lying in the ECL/ ECrL, but the assessee was
unable to file the return or failed to file the return within the due date, due
to which the appropriate utilisations could not be made at the back-end by the
Government(s). A matrix of various possibilities has been tabulated and the
compensatory nature of interest can be put to test based on the interpretation
that unless the Government is deprived of funds, interest should not apply.

Sl
No.

Scenarios

ECL

ECrL

ELL

Funds
held by

Funds
due
to

Interest

Major
heads : I/C/S

Sufficient Input Balance
(without considering cross utilisation)

I –
NIL

C –
NIL

S –
NIL

I –
100

C –
100

S –
100

I –
100

C –
100

S –
100

Respective Govts.

NIL

Sufficient Input Balance
(considering cross utilisation)

I –
NIL

C –
NIL

S –
NIL

I –
300

C –
NIL

S –
NIL

I –
100

C –
100

S –
100

Central Govt.

State Govt.

May apply to the extent of
SGST component (sec. 53) since no ITC settlement in favour of State Govt.

-do-

I –
NIL

C –
NIL

S –
NIL

I –
NIL

C –
200

S –
100

I –
100

C –
100

S –
100

Central Govt.

Should not apply since no
loss of revenue to Govt.

-do-

I –
NIL

C –
NIL

S –
NIL

I –
NIL

C –
100

S –
200

I –
100

C –
100

S –
100

State Govt.

Central Govt.

May apply to the extent of
IGST component since no ITC settlement in favour Central Govt.

Sufficient Cash Balance

I –
50

C –
50

S –
50

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

Respective Govts.

NIL

Sufficient Cash Balance (but
different major head of same Government)

I –
100

C –
NIL

S –
50

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

Central Govt.

Should not apply since no
loss of revenue to Central Govt.

Sufficient Cash Balance (but
different Government)

I –
NIL

C –
50

S –
100

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

State Govt.

Central Govt.

May apply to extent of IGST
component since no ITC settlement in favour of Central Govt.

Cash Balance (but different
major head of same Government)

I –
150

C – NIL

S –
50

I –
50

C –
NIL

S –
50

I –
100

C –
100

S –
100

Central Govt.

Should not apply since same
Govt.

Sufficient Cash Balance (but
different Government)

I –
150

C –
50

S –
NIL

I –
50

C –
50

S –
NIL

I –
100

C –
100

S –
100

Central Govt.

State Govt.

Will apply on 50 SGST being
unpaid balance. May apply to the
extent of 50 SGST component since no ITC settlement in favour of State Govt.

In certain cases, interest becomes
applicable and in certain cases, interest should not apply on the fundamental
principle of being compensatory in nature. The above table depicts the
conundrum which one would face if they have to convince a Court that interest
is not applicable per compensatory principles. Though an argument can certainly
be taken that the assesse should not be saddled with an interest merely because
Governments have not settled their accounts internally.

iii. Whether
blocked/ ineligible credit claimed in ECrL and remaining unutilised is subject
to interest at the time of its recovery?

Sections 16, 17 and 18 provide for the
mechanism for granting the benefit of input tax credit to an assessee. Input tax credit eligible under these
sections can be availed by reporting the same in GSTR-2 (currently in GSTR-3B)
and these amounts are credited in the ECrL for further utilisation u/s. 49(4)/
49(5). Under the input tax credit
scheme, eligibility, availment and utilisation have distinct meanings:
Eligibility addresses the qualification of an amount to be termed as input tax
credit; availment involves recording these eligible amounts in ECrL as input
tax credit and utilisation involves making tax payments by way of adjustment
with the output tax liability. Eligibility precedes availment and availment
precedes utilisation.

Section 73 and 74 provide for recovery of
input tax credit erroneously availed or utilised by the assessee. The said section empowers tax officers to
recover the input tax credit at the stage of availment itself and the assessing
officer need not wait for the assessee to utilise the said input tax
credit. Financially speaking, there is
no outflow of revenue from the Government when the assessee avails input tax
credit in its returns. The flow of funds only takes place when the said amounts
are utilised from the said ledger for discharge of liabilities recorded in the
ELL (refer discussion above). The question thus arises on whether interest is
applicable on incorrect availment of input tax credit?

Similar instances came up under the Cenvat
Credit regime. Rule 14 of the Cenvat
Credit Rules (as existed during the period up to 2012) contained a provision
for recovery of Cenvat availed ‘or’ utilised. The Supreme Court in Union of
India vs. Ind-Swift Laboratories ltd 2011 (265) ELT (3) SC held that
revenue is permitted to recover the unutilised Cenvat at the stage of availment
itself. It also held that revenue can impose interest in case of incorrect
availment of Cenvat even though such amounts have not been utilised by the
assessee. However, the High Court of Karnataka and Andhra Pradesh have held to
the contrary in spite of the decision of the Supreme Court. Subsequently, the
law was amended in 2012 to recover Cenvat and interest only after utilisation
of such Cenvat Credit.

In the context of GST, section 73 and 74
direct recovery of Input tax credit at the stage of availment but interest is
applicable in terms of section 50(1). A
question arises on whether availment of input tax credit in ECrL results in
failure of payment of tax to the Government?

Input tax credit is a claim by the
assessee from the Government for taxes in respect of taxes paid to the
supplier. From a recipient’s perspective, it represents amounts due ‘from’ the
Government rather than due ‘to’ the Government.
If this claim is rejected prior to its utilisation, there is no revenue
loss and hence it cannot be said that taxes are ‘unpaid’ to the
Government.

Section 49(4) also states that amounts
lying in the ECrL may be used for payment of taxes. The utilisation of input
tax credit is an option to the tax payer and if the tax payer does not utilise
this amount, it continues as a balance but does not result in ‘taxes unpaid’.
Though recovery provisions may be initiated for incorrectly availed input tax
credit, interest on such incorrect availment cannot be imposed.

From the point of view of settlement and
flow of funds, sections 53 of the CGST/ SGST law and 18 of IGST law require
payment of funds from Centre to State or vice-versa only when the cross
utilisation takes place from the ECrL to the ELL. Until such time the
Government in whose name the Credit stands retains the funds. On these grounds, one can take a stand that
interest is not imposable on incorrect availment if the same is not
utilised.

iv. Whether
interest applicable on payment made through ECrL but later credit held to be
wrongly availed (say blocked credit)?

Section 50 uses the phrase ‘tax unpaid’. This is different from input tax credit
wrongly availed and/or utilised. Though
mathematically speaking, a wrong input tax credit claim results in short
payment of taxes, recovery of short payment of taxes is different from recovery
of erroneous availment and utilisation of input tax credit. To cite an example : short payment of taxes
are cases of under-valuation or lower rate, etc where the error is on the
calculation of output taxes while recovery of input tax credit takes place in
case of an error on the inward supplies to an assessee. This distinction is
highlighted in view of separate phraseology for recovery of input tax credit
wrongly availed and utilised and for short payment of taxes in section 73 and
74. Explanation to section 132 specifically
clarifies that taxes unpaid also includes input tax credit wrongly
availed or utilised. However, the said explanation has been made applicable
only section 132 and not section 50.

Under the Cenvat Credit regime, Rule 14 of
the Rules, made specific provisions for recovery of input tax credit wrongly
availed or refunded. Rule 14(ii) specifically enabled the tax authorities to
recover interest under the Excise/ Service tax law. Section 50 of the GST does
not seem to capture this situation and the recovery of interest in such
scenarios can certainly be challenged by the assessee.

v. Whether
interest is applicable on early claim of input tax credit?

The above analogy would apply in such
cases and interest is not recoverable from the assessee. It may also be
interesting to note that in terms of second proviso to section 16(2), where an
assessee fails to make a payment on inward supplies within 180 days of the date
of invoice, the assessee is specifically required to repay the input tax credit
along with interest. The specific
mention of recovery of interest in such cases makes it clear that section 50
does not capture cases of erroneous input tax credit claims.

vi. How
is interest to be computed in cases of mismatch?

Section 50(1) and (3) provides for imposition of interest in cases where
mismatch reports are generated. Mismatch could arise under various
circumstances:

– Non-reporting of invoice by supplier itself
resulting in short payment of taxes.

– Erroneous reporting of invoice (incorrect
details) by supplier but taxes have been paid (wholly or partly in cases where
value is short reported).

– Duplicate reporting of invoice by recipient.

There seems to emerge some confusion while
reading the provisions of section 42/43 (mismatch reports) and section 50(1)
and 50(3). Section 42/43 provide a tax
payer a minimum of two attempts to claim input tax credit in its return – in
case of an error in the first attempt, the tax payer would be liable for
interest @ 18% for the period of 2 months.
However, if there is an error in the second or any subsequent attempt,
the tax payer would be liable for interest @ 24%.

In such cases, interest is imposed for the
period during which the mismatch continued. It is interesting to note that
interest is imposed on the recipient right from the date of availment even
though taxes are paid along with interest at supplier’s end (wherever
applicable). There may be instances where the liability of interest is thrust
upon the recipient even for delays or errors on the part of the supplier. While
it is just to claim interest in case of duplicate reporting of an invoice, in
other cases, the Government seems to be receiving the interest from both sides
of the transaction.

vii. Whether
transition credit claimed but later reversed through GSTR3B/GSTR-3 liable for
interest?

In the view of the author, though
transition credit is directly credited to the ECrL from the Transition returns,
the answer to this question would remain the same. Interest would not apply till the time the same
has been utilised from the ECrL based on the principles of compensatory
levy. Even in cases where the said
amount has been utilised, interest would not apply in the absence of a specific
provision of recovery of interest u/s. 50 on irregular input tax credit.

An issue also arises whether incorrect
carry forward of transition credit also entails interest under the erstwhile
laws. The savings clause u/s. 174 places the liability of interest on such sums
until the recovery of such incorrect credit. However, the said provisions are
subject to any specific provision under the GST law. GST law does not contain
any specific provision for recovery of interest for incorrect credits in the
ECrL directly.

Therefore, interest may be liable to be
paid under the erstwhile laws on account of the saving provisions, no further
interest should be recovered under the GST law.
One may take a stand that where the recovery provisions are invoked
under the earlier law and sums due to the Government have been paid with interest
till date, the credit brought forward in the GST law should not be disturbed,
else it would result in double jeopardy to the tax payer.

In summary, it
seems evident that the front end portal, back-end settlement mechanism and the
GST laws are at divergence in many instances.
A simple concept of interest will surely throw up unexpected challenges
and we are entering an era where calculation of interest is turning into an
subject by itself. This primarily arises due to the hybrid GST mechanism of bringing
all the States on a common platform.

It is important for the GST Council to
identify all possible permutations to ensure that interest is paid to the right
Government and should be equipped to answer questions on accountability &
propriety of Government funds. At 18%, the stakes are certainly going to be
high for the tax payer as well as the Government!!!

shailesh.kwebmaker

GST @ 1: TAXPAYER REACTIONS

GST was launched with much
fanfare at the midnight of 30^thJune 2017. Touted as the most
important tax reform since independence, the same immediately met with extreme
reactions on both sides. Some course corrections were also carried out in terms
of reduction in tax rates, extension of due dates, filings, suspension of many
of the complex provisions in the law and the like.

Nearly a year since its’
implementation, GST continues to be the talk of the town. Last week, I met a
friend and in casual discussions, I could sense an element of frustration. When
I asked for the reasons, he explained that the deluge of due dates, to a large
extent sponsored by GST, just keep him super-busy and the compliance costs had
increased drastically. During the discussions, another friend joined in and he
had a diametrically opposite version to offer. He was very happy with the
introduction of GST and saw it as an opportunity to streamline his business
processes.

These diametrically opposite
versions, coinciding with the anniversary of GST prompted BCAS to conduct a
survey on the taxpayers’ reactions towards the implementation of GST. The
BCAS survey on GST included a cross section of industry verticals with
constituents of differing scale and complexity of operations. This article
summarises the key takeaways from the said survey. To ensure
confidentiality, as requested by many of the participants, the names are
avoided in this article and reference to the position and industry is provided.

Whether introduction of GST was a step in the right
direction?

The rollback of GST in Malaysia
was the backdrop of the above question in the survey. Surprisingly, not a
single participant responded in the negative. The jury was unanimous. The
country was fed up with a plethora of indirect taxes like sales tax, VAT,
excise duty, service tax, CST, octroi, etc. Therefore, the dual levy of GST,
implemented in a unified manner was hailed by all the participants. To quote
the response of the Global Tax Manager at a large software exports company,
“This kind of reform under Indirect Taxes was the need of the hour I
congratulate the policy makers for that.”

Has GST resulted in ease of doing business?

To the next question on
analysing the impact of GST on the ease of doing business, the mood amongst the
participants was that of cautious optimism. While most of the participants felt
that there was an improvement in the ease of doing business, they felt that the
extent of improvement could have been better. Perhaps the initial teething
troubles resulted in this hesitation in response. The response of the AVP-GST
at a large diversified listed company summarises this mood well, “Over a period
of time once streamlined then it (the ease of doing business) will improve.”

Has GST resulted in reduction of product costs and
prices?

On the question of the impact
of GST on product costs and pricing, again the jury’s view generally was that the costs have reduced due
to lower cascading of taxes and free flow of input tax credit. However, certain
sectors did see an increase in costs due to working capital blockages and
related issues. To quote the response of the Finance Controller at a midsized
pharmaceutical manufacturer, “Working capital requirements have increased and
funds are blocked due to procedure and timelines of refunds for exporters.”

Is the GST tax rate optimal?

Again, most of the
participants were comfortable with the rate of tax and to that extent the
response was not surprising. An astutely managed fitment of rates coupled with
a course correction of rate on many items kept most of the people happy.
However, some pockets were affected. The tax manager at a large public sector
bank responded “W.r.t. Banking sector, GST has really not resulted in cost
efficiencies. In fact tax outgo has
increased. Further, w.r.t. banking services, the GST rate could have been lower”.
Similarly, the Finance Controller at the pharmaceutical manufacturer felt that
instances of inverted rate structure could have been avoided.

Has GST resulted in increase in compliance costs?

On the question of increase in
compliance costs, the general response was that GST did result in increase in
compliance costs. The transaction level uploading and multiple return
obligations perhaps resulted in such increase in costs. The increase in
compliance costs was more felt by small and mid sized organisations. To quote
from the response of the AGM of a small diamond assortment company, “Yes, the
number of returns and details to be provided in return is considerably
increased resulting in additional costs.”

Does the structure of dual GST present an inherent
risk of divergence?

The multiplicity of enactments
and the autonomy provided by the Constitution to both the Centre as well as the
State prompted this question. As of now, all seems well. However, what would
happen once the period of assured compensation for revenue loss is over? Will
some States digress from the uniform GST Structure? In response to this
question, most of the participants felt that a reasonable political consensus
has been achieved on the front of GST and there should really be no reasons to
worry. However, the response of the AVP at a large diversified listed company
was different, “I fear risks in consensus between Centre and States going
forward once there is a coalition based Central Govt.”

Is the allocation of administrative jurisdiction
between Centre and States fair?

The dual GST structure with
allocation of tax administration between the Centre and the State Authorities
has been a unique experiment in the Indian context. In response to a question
in this regard, most participants could not respond since they did not have
first hand experience of interaction with the respective jurisdictions.
However, the response from the public sector bank suggested some discontent on
this front, “Assessees seem to be allocated between Centre and State
Authorities in a random manner. Proper communication has also not been sent
which has led to confusion among assessees.”

Are there challenges in the legal provisions
pertaining to GST?

In various technical sessions,
it is highlighted that the legal provisions of GST present inherent conflict
and could result in litigations. The spate of litigations in the High Courts
and the advance rulings revalidate this aspect. Interestingly, the responses of
the industry on this front appeared to be much more forgiving.

The industry seems to have
reconciled to the expanded definition of supply and taxation of branch
transfers. The General Manager at a large cement manufacturing company
summarises the response, “Earlier also Excise Duty was paid but it was a cost.”
In fact, the Global Tax Manager at a large software exports company sees this
provision as a positive provision. In response to a pointed question on whether
there are difficulties on account of this extended definition of supply, he
responded, “In fact its otherwise the tax on branch transfer allows the credit
chain to remain intact.” GST is an interesting tax, people want to pay the tax!

One common resentment on the
legal provisions pertained to taxation of advances. It was unanimously
criticised by most of the participants. Luckily as a part of course correction,
tax on advances pertaining to supply of goods was kept in abeyance. This
presents another set of challenges. To quote the AVP-GST at a large diversified
listed company, “Its (The obligation is) onerous as at the time of advance the
purpose is not known.”

The place of supply rules not
only determine the nature of the tax but also the Government which effectively
enjoys the tax. In that sense, these rules go to the core of the GST
Implementation. Most of the constituents were reasonably happy with the
drafting of the rules and did not foresee any major risk of interpretation on
this account. With the aggregate tax remaining the same, the approach of the
industry seemed to be to take as conservative a stand as possible. As one of
the respondents stated, “We are taking safe route.”

On the requirement of matching
of input tax credit, the opinion was fairly divided. While some felt that this
requirement was fine, others felts that this resulted in an onerous obligation.
Some suggested a middle route to substitute the invoice level matching to
vendor level matching. There was also a feeling that the restrictions in the
claim of credit should be done away with. To quote tax manager at a large
public sector bank, “Restrictions can be further rationalised. In Banking as it
is 50% ITC is reversed so the list of ineligible items should be further
reduced or done away with.” Similar responses were received to do away with
restriction on claim of credits for employee related costs.

Were you able to use the portal effectively during
non-peak days?

Even the uninitiated would
know by now that the IT System for implementing GST was not totally ready at
the time of implementation and is still a work in progress. In fact, most of
the backlash against the Government was around this aspect of the portal not
supporting a smooth transition into GST[1]. In this
context, the response to the above question was a bit surprising with many
participants suggesting that the portal was fine to use during non-peak days.
However, in case of errors like digital signatures not matching, browser
compatibility issues, etc., it appeared that the industry was left to find its’
own solutions. Most of the responses expressed dissatisfaction about the
response time from the helpdesk. In fact, the response from the public sector
bank was, “(Our issues are) Not yet resolved in spite of repeated follow up and
reminders with GST helpdesk.”

Did the nationwide rollout of eWay Bill System bring about
uniformity, ease of doing business and
transportation?

The first phase of
implementation of eWay Bills resulted in the system crashing on the first day
itself, resulting in postponement of the implementation. Thereafter, the system
has been implemented across the nation. In this context, the above question was
posed and most of the respondents felt that the system did bring about a
uniformity and ease of doing business and transportation. Those from the
service sectors like banking were less impacted. However, an interesting point
of view was presented by the global tax manager at the software company, “when
invoice wise details are reported to GSTN there is no case for eway bills, it
needs to be scrapped.”

Did the outreach programs of the Government help in
transitioning to GST?

Last year, around this time
saw an unprecedented flurry of outreach programmes from the Government. To its’
credit, the Government did try quite a few things to educate the trade and
industry about this gigantic reform. “FAQs, sessions with business/ Chambers
helped” was the crisp response from one of the participants.

Learnings from the Survey

Any legal expert would agree
that the Dual GST Structure along with a half baked law representing an amalgam
of multiple earlier laws does not augur well and can present fundamental
challenges. Things got complicated with confusion on administrative aspects
like portal, eWay Bills and the like. Despite these issues, the responses from
the industry have been positive. While there are issues, which did come out in
the survey as well, on a holistic basis, the industry understands the saying
that one cannot miss the woods for the trees. To summarise in a single line,
“There is a big thumbs up for the GST reform implemented by the Government.”

shailesh.kwebmaker

Ind AS 115 – Revenue From Contracts With Customers

Identifying the customer

Ind AS 115 defines a customer as a
party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for consideration.
Beyond that, Ind AS 115 does not contain any definition of a customer. In many
transactions, a customer is easily identifiable. However, in transactions
involving multiple parties, for example, in the credit card business, it may be
less clear which counterparties are customers of the entity. For some
arrangements, multiple parties could all be considered customers of the entity.
However, for other arrangements, only some of the parties involved are
considered as customers. The identification of the performance obligations in a
contract can also have a significant effect on the determination of which party
is the entity’s customer.

Identifying the customer becomes
very important under Ind AS 115, because depending on who and how many
customers are identified, it will determine, the performance obligations in a
contract, the presentation and accounting of sales incentives, determination
and presentation of negative revenue, etc. The example below shows how the
party considered to be the customer may differ, depending on the specific facts
and circumstances.

Example — Travel Agents

An entity provides internet-based
airline ticket booking services. In any transaction, there are three parties
involved, the airline is the principal, the entity is an agent, and the
end-customer who purchases the ticket on the entity’s website. The entity gets
its majority of the income from the airline, to whom it charges a commission
(say INR 500 per ticket). The entity also receives a small convenience fee from
the end-customer (INR 20). To attract customers, the entity provides a cash
back of INR 120 to each end-customer.

If the entity considers, the
airline and the end-customer as two customers in a transaction, it will
determine revenue to be INR 400 (500+20-120). On the other hand, if the entity
had not received any convenience fees from the end-customer, and reduced the
cash back to INR 100, the entity will determine revenue to be INR 500. The
entity will also present INR 100 paid to third parties (end-customers) as a
selling cost.

Consideration paid to Customers’ Customer

Consideration payable to a customer
includes cash amounts that an entity pays, or expects to pay, to the customer.
Such amounts are reduced from revenue. This requirement also applies to
payments made to other parties that purchase the entity’s goods or services
from the customer. In other words, consideration paid to customers’ customer is
also reduced from revenue. For example, if a lubricant entity pays a
consideration to mechanics that purchases lubricants from the entity’s customer
(distributor), that amount will be reduced from the revenue of the lubricant
entity.

In some cases, entities provide
cash or other incentives to end consumers that are neither their direct
customers nor purchase the entities’ goods or services within the distribution
chain. One such example is depicted below. In such cases, the entity will need
to identify whether the end consumer is the entity’s customer under Ind AS 115.
This assessment could require significant judgment. The management should also
consider whether a payment to an end consumer is contractually required
pursuant to the arrangement between the entity and its customer (e.g., the
merchant in the example below) in the transaction. If this is the case, the
payment to the end consumer is treated as consideration payable to a customer
as it is being made on the customer’s behalf.

Example – Consideration paid to other
than customers

An entity provides internet-based
airline ticket booking services. In any transaction, there are three parties
involved, the airline is the principal, the entity is an agent, and the
end-customer who purchases the ticket on the entity’s website. The entity gets
its income from the airline, to whom it charges a commission (say INR 500 per
ticket). To attract users, the entity provides a cash back of INR 100 to each
end-customer on its own (i.e. without any contractual requirement from the
airline company).

If the entity considers, the
airline and the end-customer as two customers in a transaction, it will
determine revenue to be INR 400 (500-100). On the other hand, if the entity
determines that the end-customer is not its customer (because convenience fee is
not charge to the end-customer), the entity will determine revenue to be INR
500 and present INR 100 paid to third parties (end-customers) as a selling
cost. In case, the cash back to end user is paid because of a contractual
requirement between the airline and the entity, then such cash back paid will
be deducted from revenue, even when it is concluded that the end-user is not a
customer. This is because, the entity is
making a payment on behalf of the customer as per agreement.

Both examples in the article are economically
the same; however, they provide different accounting consequences, based on how
a customer is identified. In the second example, a convenience fee is not paid
to end-customer, and hence it is concluded that the end-customer is not the
customer of the entity.

shailesh.kwebmaker

BCAS MANAGING COMMITTEE 2018-19

In accordance with clause no.18 of the Memorandum of
Association of the Bombay Chartered Accountants’ Society, as the names of
members who had filed their nomination for the Managing Committee for the year
2018-19 equalled to that of the number of posts, no election was necessary.

At the Special Committee Meeting held on 25^th
May, 2018, 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	CA. Sunil B. Gabhawalla
Vice President	CA. Manish P. Sampat
Hon. Joint Secretary	CA. Abhay R. Mehta
Hon. Joint Secretary	CA. Mihir C. Sheth
Treasurer	CA. Suhas S. Paranjpe
Elected Member	CA. Anil D. Doshi
Elected Member	CA. Bhavesh P. Gandhi
Elected Member	CA. Chirag H. Doshi
Elected Member	CA. Divya B. Jokhakar
Elected Member	CA. Kinjal M. Shah
Elected Member	CA. Mayur B. Desai
Elected Member	CA. Rutvik R. Sanghvi
Elected Member	CA. Samir L. Kapadia
Co-opted Member	CA. Anand Bathiya
Co-opted Member	CA. Ganesh Rajgopalan
Co-opted Member	CA. Mandar Telang
Co-opted Member	CA. Pooja Punjabi
Co-opted Member	CA. Shreyas Shah
Co-opted Member	CA. Zubin Billimoria
Ex-Officio Member	CA. Narayan Pasari
Member (Editor and Publisher-BCAJ)	CA. Raman H. Jokhakar

President

CA. Sunil B.
Gabhawalla

Vice President

CA. Manish P.
Sampat

Hon. Joint
Secretary

CA. Abhay R.
Mehta

Hon. Joint
Secretary

CA. Mihir C.
Sheth

Treasurer

CA. Suhas S.
Paranjpe

Elected Member

CA. Anil D.
Doshi

Elected Member

CA. Bhavesh P.
Gandhi

Elected Member

CA. Chirag H.
Doshi

Elected Member

CA. Divya B.
Jokhakar

Elected Member

CA. Kinjal M.
Shah

Elected Member

CA. Mayur B.
Desai

Elected Member

CA. Rutvik R.
Sanghvi

Elected Member

CA. Samir L.
Kapadia

Co-opted Member

CA. Anand
Bathiya

Co-opted Member

CA. Ganesh
Rajgopalan

Co-opted Member

CA. Mandar
Telang

Co-opted Member

CA. Pooja
Punjabi

Co-opted Member

CA. Shreyas
Shah

Co-opted Member

CA. Zubin
Billimoria

Ex-Officio
Member

CA. Narayan
Pasari

Member (Editor
and Publisher-BCAJ)

CA. Raman H.
Jokhakar

The Committee will assume
office at the conclusion of the Annual General Meeting

to
be held on 6^th
July, 2018.

shailesh.kwebmaker

A TAXPAYER’S GST PRAYER

May GST Network never play

with you ‘shy’ ..

And GST Council hear your

desperate ‘ cry’..!

May all your returns go well

in time ….

Your nights are not spent

in ‘ try and sigh’…!

May E-way Bill never block

your way …!

And reverse charge finally

say ‘ Goodbye’…!

May anti profiteering officer

remain at bay …

And you are not accused of

eating the whole ‘pie’ ..!

May TDS , TCS not cause

you headache …

And ‘late fee’ flash never

stare you in the ‘eye’..!

May ‘ Good and Simple Tax’

bless your life ….

And the ‘terror of tax’ remain

a distant cry..!!

– Shailesh Sheth, Advocate –

shailesh.kwebmaker

VAT/GST: A FRIGHTENING BUT FASCINATING FUTUREWORLD….!

“Once a new technology rolls over you, if you’re not
part of the steamroller, you’re part of the road.”
Steward Brand

INTRODUCTION

Taxes are as old as civilization, so the ‘Value Added Tax’
(VAT), hardly 63 years old, may seem to be relatively
young in the history of tax. For India, that embraced this development in taxation over the last half-century. Limited
to fewer than 10 countries in the late 1960s, VAT/GST is a
‘Consumption Tax’ of choice of some 170 countries today.
Presently, all member countries of the Organization of
Economic Cooperation and Development (OECD),
except United States, have VAT systems in place [See
Graph 1]. Significantly, UAE and Saudi Arabia have also fundamental ‘Indirect Tax Reform’ in the form of ‘Goods
and Services Tax’ (GST) only in July, 2017, it may even
resemble a ‘New-born Baby’ that has just arrived in the
world from the mother’s womb!

[The words ‘VAT’ and ‘GST’ are used synonymously
in this article.]

GLOBAL SPREAD OF VAT

The spread of VAT has been the most important implemented VAT from January 1, 2018, whereas, other
Gulf Cooperation Council (GCC) countries – Kuwait,
Qatar, Bahrain and Oman – are expected to levy VAT
from 2019.

In terms of revenue, VAT is now the largest source of
taxes on general consumption in OECD countries on
average. Revenues from VAT as a percentage of GDP
increased from 6.8% in 2012 to 7.0% in 2014 on average; and from 20.05% in 2012 to 20.07% in 2014 as a share of
total taxation. [See Graph 2].

INDIA’S ‘MIDNIGHT TRYST’ WITH GST

Finally, GST was launched from the Central Hall of Parliament
with much gaiety and fanfare in the midnight of June 30, 2017,
marking an opening of a new chapter in the indirect tax history
of the country. What was equally significant was the fact that
with the introduction of GST, a new era of ‘Cooperative
Federalism’ was perceived to have begun!

INDIAN GST – FAULT LINES BECOME VISIBLE

However, the fault lines inherent in the design and structure
of the country’s GST system soon became visible!
Exclusion of several key commodities from GST and
resultant distortion of credit chain, significant restrictions
placed on the entitlement of Input Tax Credit (ITC)
resulting into cascading effect of tax, multiple rates,
long list of exemptions, low threshold and ill-conceived
business processes are but only a few ills that plagued
the Indian GST design from its inception. The biggest
‘let-down’ turned out to be the GSTN Portal! Multiple and
complicated returns, cumbersome Return-filing process,
ill-conceived statutory requirements reflecting revenueoriented,
rigid and ‘i-don’t-trust-you’ attitude coupled with
hopelessly ill-prepared GSTN portal have ensured that
the GST implementation and compliance by ‘more-thanwilling’
taxpayers are anything but smooth! The poorly
drafted, hastily implemented and badly administered GST
laws have only added to the woes of the taxpayers. The
situation has reached such an impasse that the whole system appears to be running on extensions, promises
and assurances!

INDIAN GST DESIGN –WHAT LIES AHEAD?

GST has a potential and the intrinsic characteristics to be ‘a
blessing’ – instead of ‘a curse’ as being perceived by many
today – provided it is designed and structured intelligently
and diligently. The system should be supported by subsystems
such as minimalist number of rates; moderate tax
rate; minimum exemption; high exemption threshold; neatly
defined key expressions; minimal and clear classification;
simple valuation provisions; seamless credit chain; clean
and clutter-free business processes; robust, insightful and
forward-looking ‘dispute redressal machinery’ and many
more. Anything contrary to this would be a humungous
curse for the economy.

TO SUM UP…….

Demonetisation and GST have several common attributes.
The most striking one is the discourse of short-term pain
and long-term gain. However, the latter can be enjoyed
only if one does not succumb to the former. The objective
to plug the informal economy – mainly prevalent in MSME
Sector – into formal set-up may have benefits. But the cost
can outweigh the benefits if done forcefully through radical
reforms. Moreover, the decision to grow competitive should
be a matter of choice and not compulsion. Presently,
lower exemption threshold coupled with cumbersome
compliance can prove to be counter-productive and push
small businesses towards new ways of tax evasion, thereby
breeding corruption.

A mega reform like GST is nothing short of a paradigm
shift. Such reforms often gives rise to two broad categories
of inconveniences, foreseen and unforeseen. Presently,
most of the inconveniences were of ‘foreseen’ category
and could have been avoided. Nevertheless, now is not
the time to cry over ‘what it could have been?’ but, to
concentrate on ‘what it should be’.

It is, indeed, heartening to note that the benevolent and
responsive GST Council has pro-actively undertaken
mid-course corrections. Going by the decisions taken by
the Council in last three meetings, the Council appears
to be determined to ease the woes, particularly that of
compliance load, of the taxpayers and this itself should
‘smoothen the ruffled feathers’ of the taxpayers, at least,
for the time being!

CHANGING GLOBAL TAX HORIZON

Even while the GST Council faces the challenges of
finding ‘elusive design’ that may fit the bill and the right
matrix of the business processes and of building a solid
GST structure, the global tax landscape is going through a
period of fundamental change. The policy-makers and the
tax experts across the world are re-thinking how taxes are
or ought to be levied. Changes have been triggered by the
unimaginable advancement and rapid spread of technology,
digitalisation, new supply chains and an increased scrutiny
of multinational tax practices! These changes will certainly
have destabilising – if not, devastating – impact on the
taxation across the world including India and will inevitably
bring forth its own set of formidable challenges. Obviously,
these changes and challenges can be ignored by one
only at one’s own peril!

In the ensuing paragraphs, these technology-driven
changes and their likely impact on VAT system are briefly
discussed. But before that, it would be advantageous to
understand the meaning of ‘VAT’ and the core principles on
which the foundation of VAT rests.

VAT – MEANING AND ITS CORE PRINCIPLES

International Tax Dialogue, 2005 defines ‘VAT’ as ‘a broad
based tax levied at multiple stages of production (and
distribution) with – crucially – taxes on inputs credited
against taxes on output. That is, while sellers are required
to charge the tax on all their sales, they can also claim
a credit for taxes that they have been charged on their
inputs. The advantage is that revenue is secured by being
collected throughout the process of production (unlike a
retail sales tax) but without distorting production decisions
(as turnover tax does)’.

In November, 2015, OECD published its ‘International
VAT/GST Guidelines’ (Guidelines). 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 the uncertainty and risks
of double taxation and unintended non-taxation that result
from the inconsistencies in the application of VAT in crossborder
context.

The overarching purpose of a VAT is to impose a broadbased
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, 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 “it’s
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”.

It is, thus, evident that the two core principles on which the
VAT system is based are:

◆ Neutrality principle

This is the core principle of VAT design. The Guidelines set
forth the following three specific precepts with respect to
‘basic neutrality principles’ of VAT:

• The burden of VAT themselves should not lie on taxable businesses except where explicitly provided for in
legislation;

• Businesses in similar situations carrying out similar
transactions should be subject to similar level of taxation;

• VAT rules should be framed in such a way that they are
not the primary influence on business decisions.

◆ Destination principle

This principle seeks to achieve neutrality in cross-border
trade.

The Guidelines provides: “For consumption tax purposes,
internationally traded services and intangibles should
be taxed according to the rules of the jurisdiction of
consumption.”

Keeping the above core principles of VAT system in mind,
let us now advert to certain key challenges facing the tax
system.

I. TAX CHALLENGES OF THE DIGITAL
ECONOMY

On March 16, 2018, OECD released ‘Tax Challenges
arising from Digitalisation – Interim Report 2018’. The
Interim Report is a follow-up to the work delivered by the
OECD in October 2015 under Action 1 of the Base Erosion
and Profit Shifting (BEPS) Project, which was focused on
addressing the tax challenges of the digital economy.

The Report states that ‘Digitalisation is transforming many
aspects of our everyday lives, as well as at the macro-level
in terms of the way our economy and society is organized
and functions. The breadth and speed of change have
been often remarked upon, and this is also true when one
considers the implications of this digital transformation on
tax matters’. The Report acknowledges the far-reaching
implications of digitalisation and its disruptive effects,
beyond the international tax rules, on other elements of
the modern tax system, bringing forth opportunities and
challenges. From the design of the tax system through
to tax administration, relevant developments include
the rise of business models facilitating the growth of the
‘gig’ and ‘sharing’ economies as well as an increase in
other peer-to-peer (P2P) transactions, the development
of technologies such as block chain and growing data
collection and matching capacities.

Chapter 7 of the Report titled “Special feature – Beyond
the International Tax Rules” explores some of these
changes including Online platforms and their impact on
the formal and informal economy. There is no denying
the fact that global e-commerce is becoming increasingly
important. The rapid growth of multi-sided online platforms is attributed to digitilisation. The estimates suggests B2C
sales of US$ 2 trillion annually and is registering an annual
growth of 10 to 15 per cent. Based on an average VAT rate
of 15%, this represents US$ 200 billion in tax revenues!
(It may be noted that US operates a sales tax and has
not embraced VAT as yet). Currently, online shoppers are
tagged at 1.6 billion and are estimated to rise to 2.2 billion
in 2022. E-Commerce admittedly creates challenges for
administrations (VAT and Customs) in terms of collection
since non-taxation creates an unlevel playing field.

The Interim Report notes that the opportunities presented
by multi-sided platforms as regards taxation are two-fold:

i. Facilitate integration into the formal economy;

ii. Drive growth and increase revenues

The Report then identifies the following issues that must
be addressed in order to realise the benefits as well as to
address some of the challenges arising from the operation
of online platforms:

• Understanding the tax implications of the changing
nature of work

• Fostering innovation and ensuring equivalent tax
treatment with similar, existing activity

• Improving the effective taxation of activities facilitated
by online platforms

In sum, the digital economy has become increasingly
entwined with our physical world. The Indian digital
economy is expected to be worth about US$ 35 billion
and it is growing at a pace of 24-25 per cent a year. Given
the high disruption that digital economy has brought
about and its blistering growth rate, a few key questions
arise – how should the digital ecosystem be taxed? How
can governments earn revenue from services that span
borders, as some of the world’s most valuable enterprises
like Google, Facebook and Amazon spread their reach in
emerging markets like India? What share of their revenue
can the Indian Government look at taxing? Is Indian GST
system geared up to address the challenges and seize the
opportunities presented by digitisation?

II. BLOCKCHAIN TECHNOLOGY AND ITS
IMPACT ON THE TAXWORLD

In early 2016, construction workers in London unearthed
hundreds of Roman writing tablets, including some of the
earliest known examples of receipts and IOUs. The find
reminded all that, essentially, the way in which we record
the transactions has barely changed in 2000 years. But will
we say the same five or ten years from now?

‘Blockchain’ – a relatively obscure technology until only a few years ago – is about to make the step from the theoretical to
practical. When it does, it will fundamentally change the way
businesses, people and governments operate.

‘Blockchain’, to put it simply, is a ‘secure distributed
ledger that simultaneously records transactions on a
large number of computers in a network’. In this type
of secure, shared database, participants have their own
copies of the stored data. Strong cryptography ensures
that transactions can be initiated only by certified parties,
that changes are validated by participants collectively and
that the outputs of the system are immediate, accurate and
irrevocable.

BLOCKCHAIN AND INDIRECT TAX

Indirect taxes like VAT are ‘transaction-based taxes’ and
often follow chains of transactions and their tax liabilities.
Obligations are often “triggered” by key events that need
to be documented and recorded securely. These events
include the performance of a service or the delivery of
goods, the conclusion of a contract, the manufacture of
a product and by an act of importing or exporting goods
and services.

However, by and large, the indirect tax systems have
their foundations in physical transactions and trade. The
rise of the sharing economy, digital business and new
business models have caused many people to think about
the current tax systems. Blockchain has emerged at a
time when many in the tax world are speculating about
the efficacy and relevance of the current tax system in
the modern, digital era. While the financial and business
world is naturally excited about Blockchain, ‘Tax’ is one
area where this technology could have a profound impact.
Blockchain’s core attributes, namely, Transparency,
Control, Security, Real-time information and ability to detect
fraud and error mean that it has significant potential for use
in tax regime. Naturally, the tax administrations around the
world – including Indian tax administration – have started
considering the adoption of the Blockchain technology.

Some of the likely near-term uses of Blockchain that could
have an impact on indirect taxes are:

a. Blockchain regimes

VAT and customs administrations could create blockchains
for the transmission of tax data and payments between
taxpayers and government portals. These blockchains
could involve taxpayers in a single jurisdiction or they could
cross multiple jurisdictions.

b. Real-time compliance and reporting

Tax administrations around the globe are already
demanding real-time information from businesses in order
to assess and support their VAT liabilities and deductions.
Blockchain could greatly increase the speed, accuracy and
ease of collecting this data, thereby improving the quality
of VAT compliance while reducing the cost of compliance.

c. Tax Invoices

Tax invoice is the most critical VAT document. In a
Blockchain-based regime, it is likely that for a VAT invoice
to be valid, it will require a digital fingerprint, derived through
the VAT blockchain consensus process.

The fingerprint would immediately confirm that the block
under scrutiny is permanently linked to the previous and
subsequent blocks. The entire history of the commercial
chain (forward and backward from this transaction) could
be followed and scrutinised by a tax official in an office, by
a robot or by a customs officer at a border.

d. Customs documentation

Customs declarations and export controls depend on
various detailed and accurate information, often provided
by third parties. The veracity and reliability of this
information is vital.

Blockchain can enable the customs officer to verify, with
complete accuracy, various information and also the origin
and nature of the goods at every stage of the chain.

As this technology would allow them to verify every aspect
of a shipment with certainty, they could maintain supply
chain security with fewer officers who could target their
inspections more accurately.

e. Supporting refunds, reliefs and rebates and
combatting fraud

The use of immediately verifiable information
could allow taxpayers to support claims for VAT
deductions (or ITC) and customs rebates and reliefs.

Blockchain technology could also be useful in tracking if
and when VAT has been paid and in doing so, reduce VAT
fraud. Blockchain could also help to drive behavioural
change because of the risks and consequences of
non-compliance which may even lead to ‘permanent
exclusion’ from the blockchain network. In these ways, it
is likely that blockchain could help reduce the ‘tax gap’ to
some extent.

f. Smart audits

Using blockchain technology, indirect tax administrations
could carry out independent risk analysis facilitated by
artificial intelligence.

To sum up, Blockchain technology has tremendous
potential, not only to transform business, but also the tax
regimes across the world. Blockchain has the potential to
streamline and accelerate business processes, to improve
cybersecurity and to reduce or eliminate the role of trusted
intermediaries in industry after industry. The technology
has already many real-world applications and many more
applications are likely to be adopted in future.

III. 3D PRINTING AND ITS IMPACT ON
TAXATION

In 3D printing, we once again have a new technology that
could upend supply chains, business models, customer
relationships – entrepreneurship itself. 3D printing takes
mass distribution and innovation to the next level, while
realigning the very geography of work and trade.

Any significant technology that emerges impacts different
industries at different times, places and levels of disruption.
It also raises tax, legal and policy implications that can trip
up corporate leaders and global policymakers alike as they
are in full stride toward the future.

3D printing – a process of making solid objects from the
instructions in a digital file – has the potential to be every
bit as revolutionary as the PC was in the 1980s or even as
the factory production line was in the early 20th century. It
is also creating unprecedented opportunities to customise
products and reduce manufacturing costs.

But 3D printing also presents a minefield of challenges for
tax authorities around the world. This is because almost
all of the taxable value for a business selling product to
be 3D printed is contained within its intellectual property
(IP) – namely, the digital file’s ownership and authorisation
of its use, rather than in its manufacture, transport and
point of sale.

a. Disrupting long-standing business models

3D printing brings particularly complex global tax challenges
because it threatens to bypass long-standing protocols
used to set taxes on the movement of goods and supply
of services. 3D printing will absolutely disrupt the existing
model of taxation of goods and services grounded in the
physical movement of things or the provision of services.

The question ‘where value is created’ lies at the centre of
any discussion about the taxation of goods and services.
While VAT applies at the point of consumption, in some
taxing jurisdictions of the world, taxes are levied on raw
materials or intermediate stages where value is created,
such as in a factory and on shipment or warehousing.

3D printing disrupts these assumptions by transferring
manufacturing from factories to printing devices located
nearer the consumer, potentially even in their homes.

b. Intellectual Property takes centre stage

If consumers have 3D printers at home, much of the
taxable value may migrate there, where the supply chain
ends, greatly reducing the potential for supply chain taxes.

IP, as a matter of fact, sets the stage for any discussion
of 3D printing and taxation. Any 3D printing tax strategy
needs to consider that IP ownership and authorisation
will account for much more of a product’s value. With the
anticipated shrinkage in manufacturing, customer support
and sales personnel that will accompany this process, tax
authorities’ focus on IP is expected to intensify.

c. Transfer pricing and geographical challenges

Another tax challenge is the effect of 3D printing on
transfer pricing within multinational companies. Every time
a company changes its supply chain, it needs to change
how it shares costs related to taxable functions. If a local
distributor begins printing replacement parts, it could be
considered a factory, so the related transfer pricing would
change. Under current tax laws, it is unclear how or by how
much.

As we enter a new world of 3D printing, there are few
comparables in the current world of manufacturing.

d. Beware of double taxation

As production costs fall, 3D printing could also affect the
percentage of a product’s value that resides in any given
manufacturing location. In a 3D printing world, the value of
a product becomes more intangible than tangible.

So when tax authorities in different geographical locations
ask where the base of product’s profit is located and who
gets the right to tax it, they could come up with very different
answers, setting the stage for double taxation.

e. Global jurisdictional challenges

Business will also face location-sensitive tax questions
related to globally distributed manufacturing via 3D printing including permanent establishment (PE), exit taxes and
“substantial contribution” provisos.

f. 3D printed products can confound customs

Companies and governments often find themselves
contesting the value of imports, as products are shipped
across borders and through customs controls. Such crossborder
calculations could become a whole new equation,
as the increasing placement of 3D printers in local markets
changes global trade flows. While the raw materials or
components used in 3D printers may still cross borders the
old-fashioned way, more of a product’s value will be defined
by the digital blue prints that invisibly traverse the globe.

3D printing could also change the cross-border tax equation
for the value of raw materials and components. If the value
of raw material declines in relation to parts or products, it
could in turn affect customs duties.

The governments will then be looking to replace lost tax
revenue, and pressure could mount for a product’s digital
blue print to become the taxable item.

To sum up, 3D printing, yet another ‘disruptive technology’
will surely turn the business world upside down and the tax
profile of a business inside out!

IV. ROBOTS AND TAXATION

What happens if a new technology causes men to lose their
jobs in a short period of time, or what if most companies
simply no longer need many human workers? These
gloomy prospects loom large because of the advancement
and wide-scale spread of ‘robotic technology’.

Last year, Bill Gates, the co-founder of Microsoft proposed a
tax on robots to fund government expenditure on cushioning
the potential dislocation of millions of workers by the
widespread introduction of robots, and to limit inequality.

However, the arguments ‘for’ and ‘against’ the ‘Robot Tax’
continue across the world and it is not intended to dwell
into the same here.

What one needs to clearly acknowledge is the fact that
we appear to be at a technological ‘tipping point’ in the
diffusion of robotic technology across commerce, industry,
professions and households. It could spread like wildfire.
This could unleash what the economist Joseph Schumpeter
apocalyptically described as a ‘gale of creative destruction’
and set into motion a ‘process of industrial mutation that
incessantly revolutionises the economic structure from
within, incessantly destroying the old one, incessantly
creating a new one’.

The pace of automation is accelerating. In 2015, global
expenditure on robotics rose to US$ 46 billion. Sales of
industrial robots are growing by around 13% a year,
meaning that the ‘birth rate’ of robots is practically doubling
every five years.

The widespread introduction of robots could substantially
reduce the government’s revenues, while simultaneously
creating an increased demand for its support for displaced
workers until they find alternative employment. The heated
debate on ‘whether to tax robots or not’ revolves around
this central issue. However, even while the issue is being
debated, it is imperative that as a first step in taxing robots,
the legislation clearly defines ‘what a robot is?’.

There is currently no clear or agreed definition of what
constitutes a ‘robot’. The term generally conjures up mental
images of mechanical men or even humanoids like the
laconic Terminator, as portrayed by Arnold Schwarzenegger
in films. But, in practice, it would be challenging to identify
robots by sight. As David Poole has noted, ‘A robot is not a
unit equal to a human. Most are not physical robots, they’re
software robots. It’s no different, really, to a spreadsheet!’.

Given the range and sophistication of robots likely to come
into development, the definition needs to be ‘form neutral’;
i.e. it should include all autonomous robots, bots and similar
smart AI machines. Any proposed definition should be
tested from not just from legal perspectives, but also from
economic, technological and constitutional approaches.

The government, obviously, has a range of possible tax
policy options which include:

• Taxing robots

• Increasing the corporation tax rate

• Lumpsum taxes

• Taxing forms on the imputed notional income of their
robots

• Robot levy

• Imposing a ‘payroll tax’ on computers

• Disallowing relief on the acquisition of robotic
technology

• Increasing the cost of robots

• Increasing the rate of VAT payable on value added by
robots.

To conclude, the governments will be required to urgently
develop a legislative definition and ethical-legal framework
for robots. They should also take steps to introduce
corporate reporting requirements on their deployment, to
gather information that would facilitate remedial action like
the introduction of new taxes. At present, a palpable lack of
leadership in facing up to the substantial risks posed by the rapid diffusion of robotic technologies is on display across
the governments of the world.

VAT: EMERGING GLOBAL TRENDS

Even while the various ‘disruptive technologies’ looming
large on the horizon gear up to wreak havoc with the tax
regimes across the globe, some clear trends or changes
are clearly visible or emerging in the global developments
of indirect taxation. These emerging trends sweeping the
indirect tax landscape are likely to define and reshape the
traditional design and structure of VAT system.
Given that over 60 years have elapsed since first VAT,
serious deliberations are on amongst the tax experts and
policymakers on the need to “reform this revolutionary ‘tax
reform’”, and the contours of such reforms, keeping a close
watch on the emerging global trends.
The discussion in the ensuing paragraphs briefly outlines
these emerging global trends in the field of VAT. The
discussion is based on two independent papers published
by two of the Big 4 Accounting firms. [For reference, see
‘Acknowledgements’]

EMERGING GLOBAL TRENDS IN INDIRECT
TAX

Recently, the Global Indirect Tax Leader at EY published
an article titled ‘Indirect Tax: Five Global Trends’ in the
Bloomberg BNA Indirect Taxes Journal. The article outlines
five key trends sweeping the global indirect tax landscape
which are :

1. VAT and GST rates are stabilizing, but remain high

Following the banking crisis of 2008, VAT and GST rates
increased globally. The average rate of indirect taxes
peaked at 21.5% in the EU and 19% in the OECD. Of
late, these increases have slowed down and may even be
reversing.

2. Reduced VAT and GST rates and exemptions are
making a come back

Related to the post-2008 trend of increased rates, many
countries have broadened their VAT or GST base by
removing exemptions and restricting reduced rates.
However, this trend also seems to be slowing and may be
reversing.

3. The global reach of VAT and GST expands

Globally, VAT and GST have rapidly replaced previousgeneration
single-stage retail sales taxes. Very few
countries do not have a VAT or GST.

4. Digital Tax Measures proliferate

Tax administrations are grappling with the problem of how
to tax cross-border e-commerce and electronic services,
such as, digital downloads, because untaxed online sales
distort competition and reduce tax receipts. Governments
have responded to the growth of digital commerce by
adapting tax laws and using technology to collect tax and
monitor tax information.

5. Tax administrations embrace technology

As well as finding new ways to tax the digital economy, tax
administrations are applying digital technology to administer
indirect taxes more effectively, imposing requirements such
as the electronic submission of VAT or GST declarations,
mandating the use of e-invoicing, and introducing new
reporting standards and real time collection.

While the above trends are, indeed, clearly visible in the
VAT/GST systems around the world, a detailed paper titled
“VAT: A pathway to 2025” published in International Tax
Review in November 2017 by Indirect Tax Team of KPMG
China, seeks to provide a different perspective and insight
in the emerging trends which are likely to sweep indirect
taxes beyond what one can already clearly see.

Starting with a quick snapshot of the ‘here and now’,
the article claims that there has never been a time when
there has been a greater certainty about the future global
direction of indirect taxes, at least over the next few years.
This claim is sought to be buttressed by three propositions:
First, VAT and GST rates throughout the world are at
an all-time high, and there is very little pressure being
brought to bear to either increase or decrease them.
Therefore, any global shift from ‘a rates perspective’ is
unlikely to be seismic, certainly as compared to what
took place globally in the period from 2008 to 2015.
Second, from 2016 through to 2018, we will have seen
several major economies throughout the world implement
a VAT or GST either for the first time or through the
expansion or rationalisation of their existing indirect tax
systems.

Third, in a global context, the period from 2015
through to 2019 (or thereabouts) will be remembered
for the proliferation of digital tax measures – whether
they are measures to tax the cross-border provision
of services that can occur digitally and without the
creation of a permanent establishment, or through a
new measure to tax the business-to-consumer (B2C)
importation of goods through e-commerce platforms.

However, the article asserts that while the OECD’s
recommendations were clearly designed with a view to
implementation in the EU, when applied to countries in
Asia Pacific region, they would be problematic, given
certain fundamental and structural weaknesses of the tax
systems of the countries of this region.

The article then poses a question – ‘Are there bigger
changes afoot with indirect taxes as we move into the
second quarter of the 21st century?’ With a clear intent
to prompt discussion and debate and add some colour
and controversy, while a pathway to 2025 is lighted, the
article posits three key indirect tax trends which are briefly
discussed below:

1. VAT and GST systems will more closely resemble
retail sales taxes

After adverting to the fundamental principles on which VAT
systems are intended to operate, the article states that
under this system, it is an implicit understanding that in a
typical supply chain when there is a flow of goods from say:
a. the manufacturer to the wholesaler;
b. the wholesaler to the retailer; and
c. then from the retailer to the end-consumer,

the only transaction that truly ‘matters’ from a VAT or
GST perspective in the sense that it raises the revenue to
which the tax is directed is transaction (c). The process of
collecting the tax and allowing input credits in transactions
(a) and (b) is merely an administrative mechanism to
reinforce the integrity of tax administration throughout the
wholesale supply chain.

However, from a tax adviser’s perspective, many of the
challenges which one confronts each day are focused on
the problems when the system breaks down in relation
to transactions (a) and (b) – that is, in ensuring the fiscal
neutrality of those transactions, leading to inefficiency,
non-competitiveness and tax cascading through the
supply chain.

The governments may therefore move from VAT system
into a tax system that more closely resembles a single
stage retail sales tax, mainly for three reasons:

First, technology will enable the settlement of tax obligations
between the supplier and the recipient instantaneously,
without the need for any real payment, crediting or refund.

Second, with a view to overcome the problems caused
by fraud – carousel or ‘missing trader’ fraud being the
most prominent -, the governments have resorted to the
reverse charge mechanism in place of VAT and more
recently, a number of EU countries have implemented,
or propose to implement ‘split payment’ methods for VAT
collection, whereby the recipient diverts the VAT included
in the purchase price directly to a bank account held for the
benefit of the tax authorities.

The fraud or evasion is often perpetrated in B2B transactions,
not B2C transactions. So, if there is a recognition already
that by taxing or crediting B2B transactions, the system is
prone to fraud or evasion, then, why do it?

Third, the concept of the supplier accounting for output tax
and recipient claiming input tax in B2B transactions will be
rendered superfluous. What one is left with is a retail sales
tax, that is, a single stage tax that applies to transactions
with end-consumers only.

The article, however, hastens to add that it is not necessarily
suggested that VAT or GST systems will be replaced as a
matter of form with retail sales taxes – rather, it is suggested
that VAT or GST systems will, as a matter of substance,
operate similarly to retail sales taxes.

2. Indirect Taxes to be managed almost exclusively
through technology

While growing automation of indirect tax determination
and administration process, both in government and
business, is clearly on display in last few years, the
technology developments in the broader economy itself will
mean that indirect taxes will be managed exclusively
through technology.

Indirect taxes are, by their very nature transaction-based
taxes. As more and more transactions occur in the digital
world, the logical outcome is that the indirect taxes
whose liabilities flow from these transactions will also be
managed and administered digitally. [See the discussion
on the ‘impact of technology on taxation’ in the preceding
paragraphs].

It is predicted that the role of the indirect tax adviser
will, therefore, be akin to the conductor of an orchestra
– not playing the instruments, but directing the
musicians and ensuring they keep time. The role of the
indirect tax adviser will be to maintain a watch over
the technology, testing the controls, and addressing
problems when they are detected.

The shift to automation will not simply be because the
technology will improve to help manage tax compliance,
but the tax itself will be adapted to fit the technology. The automation will be a function of two forces coming together
– technological advances to help manage tax compliance,
and developments in tax legislation to help the technology
apply in a more automated way.

3. The tax base for indirect taxes will be expanded in
ways not previously contemplated

It is stated that the principles which have, hitherto, defined
or shaped the indirect tax structure over the years may
not hold in 2025. The following developments which
have recently been enacted in China have been cited by
the article as leading a pathway for the rest of the world
to follow:

a. The pre-condition of being a ‘business’ or
‘entrepreneur’ for VAT/GST registration will no
longer apply

Virtually, all VAT systems (including GST system of India)
around the world have a pre-condition for registration and
VAT obligations that supplier is engaged in a business or
commercial or economic activity or is an entrepreneur.
China’s VAT system, by contrast, has no such precondition.
Instead, China’s VAT system imposes registration
and payment obligations on ‘units’ and then imposes
different obligations depending upon turnover thresholds.
The question that arises is whether a profit making
pursuit, coupled with a de minimis exclusion (where the
compliance costs would exceed the tax collected) is all
that is really needed as a precondition for imposing VAT
or GST liabilities. The private consumer/business divide
would then become redundant, in favour of a system that
more closely resembles what one already sees in China.

b. VAT/GST systems will even tax consumer-toconsumer
(C2C) transactions

Digital market places now facilitate trade between private
individuals. These developments in commerce are
commonly labelled as ‘sharing economy’, ‘crowd funding’,
‘crowd sourcing’, and ‘ride sharing’.

The central question is, why should the profit or gains
derived from these activities fall outside the VAT or GST
net? The bigger issue is that VAT or GST systems need to
be adapted to tax the value added, irrespective of whether
it is by a traditional business or a consumer sitting online.

In China, there is no real distinction drawn between
business and non-business activities.

c. Customs duty will need to find a new tax base

Customs duties are inherently narrow in their tax base in
that they typically apply only to goods, nor services. The
question is whether customs duty is at risk of a terminal
decline in its tax base unless changes are made. Is it
possible that customs duties will be expanded to services,
and if so, how would they be collected and administered?

d. VAT/GST will apply to financial services

The traditional reasons cited for not taxing financial services
under VAT or GST was the inability to apply the tax on a
transaction-by-transaction basis. However, that rationale
was conceived in an era when margins were the dominant
model rather than fee-based services.

Early steps to dismantle this were taken in places like
New Zealand (with GST imposed on insurance, through
a cash-based tax), in South Africa (with VAT on fee-based
services), in Australia (with the introduction of the reduced
ITC regime to remove the bias against outsourcing and
to achieve a broadly similar tax outcome to exemption),
in New Zealand again (with B2B zero rating) and more
recently, in China (with a broad-based VAT on financial
services with few exemptions).

The experiments in applying VAT to financial services are
shown to be largely working.

e. The tax base for VAT/GST will be expanded in other
areas too

Even the traditionally exempted areas such as healthcare
and education could potentially be taxed.

The challenge in this area is in balancing the desire for
good policy (which may support the removal of exemptions)
with the political realities of doing so (where taxing the
necessities of life may be seen as politically unpalatable in
some countries).

f. Taxes like a VAT/GST that are founded in
transactions or flows will continue to grow in
importance

The noticeable trend of a decline in the average global
corporate tax rate and increase in the average VAT/GST
rate may continue. In an era of unprecedented dislocation
and disruption to historical business models, what will
emerge is taxes that are imposed on ‘transactions’, or
on ‘cash flows’, and directed to the place where
‘consumption’ occurs.

While not predicting the demise of corporate taxes, it is
predicted that the corporate taxes will transmogrify until they more closely resemble the features of a VAT or GST.

FINAL THOUGHTS

After more than 60 years, VAT may now be at a turning
point in its life. At this juncture, the rapidly changing
climate poses serious challenges for the policymakers,
lawmakers, economists and the tax experts, including
the GST Council in India. The challenge lies in predicting
the intersection of two key developments – the first being
the profound changes we are witnessing to the economy
itself through technological developments that have been
labelled as the ‘fourth industrial revolution’; and the
second being an increasing reliance on indirect taxes
as they mature into a dominant form of taxation in the
21st century.

For Indian GST system, the frequent changes so far made
post-introduction of GST indicate that the government is
learning by its mistakes. In the words of Deng Xiaoping,
it is ‘crossing the river by feeling the stones’. But let
us not lose sight of the above formidable challenges that
lie over the taxation horizon even while we shape (or reshape)
our own GST design and structure! The GST
Council, led by the Union Finance Minister, seems to be
working only on the immediate challenges confronting the
system. However, the world is changing in the way and at
the speed which we cannot comprehend. What, therefore,
is required for the Council is to establish, even while fixing
the short-term challenges, a mechanism that starts working
on identifying the long-term challenges with the aim of
enabling the country’s tax systems to keep pace with the
seismic-level changes sweeping the taxation landscape.

“We must develop a comprehensive and globally
shared view of how technology is affecting our lives
and reshaping our economic, social, cultural, and
human environments. There has never been a time of
greater promise, or greater peril.”

Klaus Schwab, Founder and Executive Chairman,
World Economic Forum

ACKNOWLEDGEMENTS:

1. ASSOCHAM India and Deloitte (2015) – “Goods and
Services Tax (GST) in India – Taking stock and setting
expectations”

2. Banerjee Sudipto and Sonia Prasad – “Small
Businesses in the GST Regime”

3. Black Stefan – “Robots, technological change and
taxation” – Published on Tax Journal; September 14, 2017

4. Bulk Gijsbert, EY – “Indirect Tax: Five Global Trends”
– Published on International Tax Blog; April 13, 2017

5. Bulk Gijsbert and Barr Ros, EY (2017) – “How
blockchain could transform the world of indirect tax”

6. Charlet Alain and Owens Jaffrey – “An International
Perspective on VAT” – Tax Notes International, September
20, 2010; Vol.59, No.12

7. Charlet Alain and Buydens Stephane- “The OECD
International VAT/GST Guidelines: past and future
developments” – World Journal of VAT/GST Law; (2012)
Vol.1 Issue 2

8. EY (2017) – “In a world of 3D printing, how will you be
taxed?”

9. Flynn Channing, EY (2015) – “3D printing taxation –
Issues and impacts”

10. Hellerstein Walter, Professor Emeritus, University of
Georgia School of Law (October 2015) – “A Hitchhiker’s
Guide to the OECD’s International VAT/GST Guidelines”

11. Nicholson Kevin and Lynn Laetitia, PWC, UK – “How
blockchain technology could improve the tax system”

12. OECD – “Consumption Tax Trends (2016); VAT/GST
and Excise Rates, Trends and Administration Issues”

13. OECD/G20 Base Erosion and Profit Shifting Project –
“Tax Challenges Arising From Digitilisation – Interim Report
2018 (Inclusive Framework on BEPS)”

14. Owens Jeffrey, Piet Battiau, Alain Charlet – “VAT’s
next half century: Towards a single-rate system?”

15. O’Sullivan David, Consumption Taxes Unit, OECD
– “Global Developments in VAT/GST – Overview and
Outlook”

16. Poddar Satya and Ahmad Ehtisham – “GST Reforms
and Intergovernmental Considerations in India”.

17. Rao Govinda M. and Rao Kavita R., NIPFP (2005)
–“Trends and Issues in Tax Policy and Reform in India”

18. Rao Govinda M. – “GST Bill; First step, but with birth
defects” – Published in Financial Express, May 05, 2015

19. Shailendra Kumar, TIOL. “GST Roll-out with hiccups;
white paper on Future DESIGN warranted” – TIOL – COB
(WEB) – 561; July 06, 2017

20. Shailendra Kumar, TIOL- “Revamped GST calls
for change in Basic Design!” – TIOL-COB(WEB)- 583;
December 07, 2017

21. Shailendra Kumar, TIOL- “Rebooting of GST – A TIOL
word of caution for the Council” – TIOL-COB(WEB) -589;
January 18, 2018

22. Shailendra Kumar, TIOL – “Dear FM, Let’s not rush
into, India can ill-afford semi-cooked GST laws” – TIOLCOB(
WEB) -513; August 11, 2016

23. Steveni John and Smith Paul, PWC – “Blockchain –
will it revolutionise tax?” – July 01, 2016

24. Walker Jon – “Robot tax – A Summary of Arguments
“For” and “Against” – Last updated on October 14, 2017

25. Wolfers Lachlan, Shen Shirley, Wang John and
Jiang Aileen, KPMG China – “VAT: A pathway to 2025”
– Published on International Tax Review; November
28, 2017

shailesh.kwebmaker

VIEW AND COUNTERVIEW
GST – SHOULD TECHNOLOGY OVERRIDE THE LAW?

GST runs on technology platform.
Often technology and legal provisions are out of sync. Technology (GSTN)
prohibits actions that are specifically permitted by law. Often technology
seems to impede the letter and spirit of law and the tax payer is stranded.
Problems are many: Inability to claim credits if Place of Supply is different
than registered address, inability to upload an invoice where the customer is
wrongly tagged as SEZ Unit/Developer, issues of an erratic portal, mismatches
in Shipping Bill Numbers resulting in blockage of refunds to exporters, Forced
Utilization and Cross Utilization of Credit Balances before cash payment
settlement, Requirement to identify supplies to composition persons separately
in GSTR-3B…This third VIEW and COUNTERVIEW aims to inform the reader of multi
dimensional totality of an issue, and enable him to see a matter from a broad
horizon.

VIEW: Technology is
playing an Important Role in GST Implementation

Govind G. Goyal

Chartered Accountant

In today’s
world, technology is playing plausible role in every sphere of our life. With
speedy internet access, technology has made it possible to accomplish many
things almost instantly. Technological developments in last few years have
changed the way we live our lives. Today, whether it is sharing of news, views,
pictures, messages, knowledge based discussion, buying, selling, travel,
entertainment, research, development, banking, investment, management, and administration
– most of our acts and deeds are guided or assisted by technology.

People, world
over, are using technology and so do the Governments. As far as GST is
concerned, such a mega reform in the field of indirect taxation would not have
been possible to implement without the use of well researched network of
Information Technology (IT).

Introduction
of GST, in India, is certainly a paradigm shift in the field of indirect taxes
which will necessarily change the manner in which the taxes were being administered.
Earlier the Centre as well as the States and Union Territories were having
their own laws and procedures for taxing goods and services whereby there were
multiple taxes, multiple compliances and so the multiple administrations
thereof. But, in GST, all those States, Union Territories as well as the Centre
have come together. Most of the taxes, which were levied separately, were
consolidated under the vision of ‘One Nation One Tax’. Although, legally
speaking there may be separate legislation for Centre and States, the
technological network has made it possible like ‘one registration’, ‘one
challan’, ‘one return’, etc.

India’s dual
GST system also ensures each stake holder (i.e. Centre, States and UTs)
receives their share of revenue in time. At the same time GST, being
destination based tax, it ensures that the tax amount travels simultaneously
with the movement of goods and/or services, as the case may be. The registered
tax payer (recipient of goods/services) has to be ensured every eligible input
tax credit of Central GST (CGST), State GST (SGST) or Integrated GST (IGST).
And there is Cess also on some of the commodities, which has to be accounted
separately. Migration of tax payers (under the earlier laws) to GST was a
tedious job. Nevertheless, all those tax payers (more than 64 lakh in number)
spread over various States and UTs could smoothly migrate to the new system,
thanks to the robust Information technology backbone. In addition, more than 44
lakh new tax payers (spread all over India) have opted for new registration
(July 17 to April 18). Each of these tax payers has been assigned one unique
GSTIN, which is valid for all the taxes i.e. CGST, SGST/UGST and IGST. There is
no separate number needed for Centre and State GST. Presently more than 10
million tax payers are liable to submit data of outward supplies, inward
supplies, tax payable and ITC, etc., through various returns and
formats. There are a large number of commodities and services, out of which
some are nil rated, while others are liable to tax at several different rates.
Some of the transactions are zero rated, while a few are liable for a
concessional rate of taxation. There are about 20 lakh taxpayers, who have
opted for ‘composition schemes’. Such tax payers are discharging their tax
liability differently than other registered tax payers. While dealing with
about 250 to 300 crore B2B invoices per month, one has to keep track of all
such kind of transactions so as to see that correct amount of tax is being paid
by the tax payer/s and instant credit thereof is granted as soon as the payment
is cleared through respective bank.

The law
provides that GSTN (GST Network, which is presently managing IT network)
maintains three types of ledgers (or registers), for each tax payer, (1)
Liability Register – wherein tax payable on supplies made by the tax payer is
recorded (as per periodic data related to supplies uploaded by the tax payer)
(2) Credit Ledger – In which credit of ITC and utilisation thereof is recorded
and (3) Cash Register – wherein all payments made by the tax payer (through
bank challan) and utilisation thereof is recorded. All these ledgers/registers
are instantly updated and available for viewing by the tax payer. To avoid most
of the common mistakes, in preparation of challan for payment of taxes, a
system has been developed whereby a payment challan has to be created through
IT network of GST portal. The system has provided great relief to the tax
payers, bankers as well as the Government Departments.

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. remains with the respective tax departments.

Thus, GSTN 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. The common GST Portal developed by GSTN
is functioning as the front-end of the overall GST IT eco-system. The back end
operations are being looked after by the IT systems of CBEC (Central Board of
Excise and Customs) and State Tax Departments.

Under GST, the
registration of taxpayers is 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 is being 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 thereafter is shared
with respective central and state tax authorities. Query of tax authorities, if
any, and their final decision is communicated to GST portal which in turn
communicates the same to the taxpayer.

The Common GST
Portal, as explained in brief above, is 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.

As far as
filing of returns is concerned, under GST there is one 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.

Although,
there may have been initial hiccups due to various reasons, but learning from
past, adopting appropriate strategies, and constant improvement thereof is the
key to success. The fact remains that the IT network of GSTN, CBEC and that of
respective State Governments, together, are rendering plausible services to all
stake holders in the implementation of GST in our country.

(Thanks to Shri Gajanan Khanande,
Deputy Commissioner of Goods and Services Tax, Maharashtra, for necessary
inputs.)

counterview:
Technology cannot override the provisions of Law

Sushil Solanki, IRS and
Drashti Sejpal

Chartered Accountants

One of the
important features of GST structure, adopted by the policy makers, is the IT
network which is the backbone for almost all the processes like registration,
return filing, tax payment, etc. On the face of it, it promises minimal
human intervention, giving the hope of a robust transparent system which should
have been welcomed by all the stakeholders.

After passing
of more than 10 months, the said hope has belied the expectations and there
have been a lot of hue and cry across the country about helplessness of the
taxpayers in handling the situation arising out of glitches or non-functioning
of the IT network.

Under the
authority of section 146 of the CGST Act, the Central Government has notified
vide Notification no. 4/2017- Central Tax, www.gst.gov.in, as the website
managed by Goods and Service Tax Network (GSTN).

While
operating the GSTN, the taxpayers have faced many situations whereunder, they
could not upload the information in the returns or even file the returns or
applications. Some of the illustrations are the following:

1) In many
cases TRAN-1 return was not uploaded even after it was ‘submitted’. It has
resulted in either not carrying forward the ITC balance available with the
taxpayer to the GST regime or mismatch between GSTR-3B and electronic credit
ledger. It also led to inability to file returns for subsequent months.
Exporters could not get refunds because of non-filing of returns.

2) In the case
of sale of imported bonded goods, the CBIC has clarified vide Circular No.
46/2017- Customs treating the said transaction liable to payment of IGST
irrespective of location of buyer (place of supply). Whenever sale was made to
customer within the same State, the said transactions were not accepted by GSTN
for payment of IGST as the system was classifying those transactions as
intra-state transaction liable to payment of CGST & SGST. The system was
behaving against the provisions of law. In future, GST Officer may allege
payment of wrong taxes and even wrong availment of credit by the buyers.

3) On
introduction of GST, all the existing taxpayers were migrated to GST. A large
number of them had stopped the business or decided to close the business, but
the GST portal did not have facility for cancellation of registration till
November 2017. This has led to imposition of penalties for non-filing of
returns. In one of the States, the GST officers have issued
the best judgement
assessment orders u/s. 62
treating the cases of non-filers and huge demands have been raised against them
because the system was not accepting their cancellation application and there
is no provision in the law to file manual applications.

4) Section 170
of the CGST Act requires rounding off the tax payable amount. On the other
hand, online GSTR-1 facility which calculates the tax payable amount
automatically does not round off the tax payment. It led to mismatch between
GSTR-3B and GSTR-1 return resulting in non-payment of refund to exporters.

There are many
such instances where GSTN portal was not supporting what the GST law has
provided for. The question, therefore, is whether GSTN portal can override the
provisions of law, thus taxpayers be made liable to suffer financial hardship
and penal consequences. The answer is definitely a big NO. Let us analyse this
with legal reasoning.

Section 146
and the Notification issued there under provides that, an electronic portal
would be notified by the Government for “facilitating” the processes like
registration, payment of tax, return filing and for carrying out functions and
purposes under the GST law. The existence of GSTN is only for facilitating the
functions and purposes of the GST law. Therefore, GSTN or the technology, which
is subservient to the law, can never override the provisions of law.

Even though,
to our knowledge, there is no judicial precedent available on the issue as to
whether technology would prevail over law or vice versa, but the courts
have consistently held that in the absence of any machinery provision to
implement a provision of law, the substantive law itself fails because of being
incapable of implementation.

The Supreme
Court has in the case of B. C. Srinavasa Shetty [1981 AIR 972], while
examining whether there arises capital gains liability on goodwill of a new
business, held that there cannot be a levy of tax without existence of a
machinery computation provision. A similar view has also been taken by the High
Court of Orissa in the case of Larsen and Toubro Limited [2008 12 VST 31
(Orissa)], which was later affirmed by the Supreme Court, wherein while
examining whether without a specific provision allowing reduction of the value
of land from the value of service, levy of tax on sale of under construction
flats by a builder is valid, the Court has held that charging provisions as
well as the machinery for its computation has to be provided in the Statute or
the rules framed under the Statute. The Act is unworkable in the absence of
necessary rules.

The Supreme
Court in the case of Govind Saran Ganga Saran (1985) 155 ITR 144, while
examining the validity of CST levy on cotton yarn where the law omitted to
prescribe the single point at which the levy could be imposed, observed that:

“The
components which enter into the concept of a tax are well known. The first
is the character of the imposition known by its nature which prescribes the
taxable event attracting the levy, the second is a clear indication of
the person on whom the levy is imposed and who is obliged to pay the tax, the third
is the rate at which the tax is imposed, and the fourth is the measure
or value to which the rate will be applied for computing the tax liability. If
those components are not clearly and definitely ascertainable, it is difficult
to say that the levy exists in point of law. Any uncertainty or vagueness in
the legislative scheme defining any of those components of the levy will be
fatal to its validity.”(emphasis supplied)

If we adopt
the reasoning given by the courts, it is crystal clear that if the law provides
for certain responsibility to be fulfilled by a taxpayer through a mechanism to
be put in place by Government or any other authority, the failure to provide
such mechanism will absolve the taxpayer from his responsibility and the
consequence thereof. The reason for such views taken by the courts is that in
the absence of any mechanism or facility which was to be provided by law, the
taxpayer cannot be made to suffer. In the case of GST, the non-availability of
certain facilities in the GST portal or inability of GSTN to permit entering of
certain details or filing of return cannot make the taxpayer to suffer its
consequences. The judicial pronouncements discussed above would definitely
support this view.

Because of
various glitches in the GSTN portal, a number of taxpayers have approached High
Courts. The courts, including Allahabad High Court (Continental Pvt. Ltd. and
others) and Bombay High Court (Abicore and Binjel Techno Weld Pvt. Ltd. and
others), have provided relief by allowing them to file manual TRAN-1 return or
to extend the deadline for filing of return/s.

The fact that
technology cannot override the provisions of law has also been admitted by the
Government vide CBIC (Central Board of Indirect Taxes and Customs) Circular
No. 39/13/2018-GST, wherein an IT-Grievance Redressal Mechanism has been
put in place to redress the grievances raised by taxpayers with regards to the
failure to filing a return or form within the time limit prescribed in the law
due to IT related glitches. Para 5.2 of the said Circular clearly states that
the application for redressal has to be made for those glitches due to which
the due process as envisaged in the law could not be completed on the Common
Portal. The circular has also empowered the said committee to provide relief
for past cases.

It is,
therefore, quite clear that GSTN is merely an infrastructural tool which would
assist and facilitate the compliances to be done by a taxpayer and it cannot
override the provisions of the law.

I do realise
that there are possibilities of IT related glitches when a tax reform of this
magnitude for a vast country like India is introduced. It has happened in the
past while implementation of VAT in many States who also adopted technology
based systems.

But, what is
disheartening is that Government has taken considerable period of time to come
out with redressal mechanism. Moreover, the mechanism is very restrictive and
many of genuine grievances presented before the committee may be rejected on
the grounds that a problem relates to individual taxpayer and not large section
of taxpayer or it does not pertain to non-filing of return.

The Government
should have allowed all types of cases to be presented before the said
committee with an assurance that a time-bound solution would be provided. Alternatively,
taxpayer may be allowed to file manual returns or documents in order to help
him in claiming refund or allowing the credit to the buyer.

In fact,
making an omnibus provision in the GST law that no penal action including
interest liability would arise against any taxpayer or his customer due to
non-filing or wrong filing of returns etc. on account of IT glitches,
Government should keep in mind that handholding of taxpayers at the initial
stage of GST reform is one of their prime responsibilities.

shailesh.kwebmaker

GST@1: GOODNESS OF A SIMPLE TAX

If a tax was good and simple it would not be a tax. From the
Indian experience of past 70 years, calling a tax good and simple is mythical
and superfluous. If I had to paint a common taxpayer of pre GST regime in a
vivid visual description, I would choose to make him look like a duck stuck in
an oil spill. The first-year journey of GST left many people feeling like that
duck too. The difference between the two eras is that the oil spill is receding
fast and the promise of fresh waters is more conceivable. That I think is the
goodness of GST as I think of it on its first anniversary.

Much water has flowed since the midnight of 30^th
June 2017 – from rate changes, to law changes, to GSTN changes, to procedural
changes, to return changes, to timeline changes, to body clock changes (of GST
service providers). Amongst such changes, there is one change that cannot be
ignored: the change of opinion of taxpayers about GST. BCAS carried out a dip
stick survey of taxpayers. While many changes are necessary and expected, most
taxpayers remained positive, optimistic and pragmatic about GST.

India is known for its ‘unity in diversity’ and we have
evolved it in a way which grants something for everyone. The interpretation of
this axiom is such that everyone’s demand must be met! Call it states and
centre, rich and poor, forward and backward, farmer and trader and every other
binary. Law making also succumbed to that format. Nevertheless, we paid a price
of multiplicity, clutter, inefficiency, red tape, ambiguity, and all the
interplay between them. GST changed that in a big way. I would like to call it
Uniformity in Diversity in spite of all its shortcomings – a single umbrella to
fit everyone.

Yesterday, I was returning through the Vashi bridge. On my
left, I saw the lonely and desolate board of Octroi check naka (remember the
‘good’ old days?). The entire complex was sealed with tall metal boards. Lines
of trucks waiting at ‘naka’ after ‘naka’ to be ‘checked’ flashed in my mind. As
I was driving – beyond the octroi post and through that thought, I realised
that in effect, the trucks were not halting, but our progress was. What seemed
like checking was actually choking our growth.

GSTN is painful when it so frequently does not work. The same
GSTN also remains the backbone and blood stream of GST law and especially its
future. GSTN brought together humongous spread of geographies and disjointed
tax regimes. With it, the promise of what is possible in the times to come.

My meeting in Vashi was with a French subsidiary. The group
CFO showed me an App that had Optical Character Recognition (OCR). France had
legally barred paper invoices/documents for companies last year. For expenses,
all he had to do was take a photo of the tax invoice through that app and up it
went into the company ERP. The app’s OCR read the vendor name, VAT number,
amount and even the description and it did all the rest from taking credit to
preserving the image for the company. Imagine, a paperless VAT in a country
that sold VAT stationery not too long ago.

A week earlier, I met a trader in Pune. He told me a story
from those ‘good old days’ that were not too long ago. Their trade association,
he said once requested the state finance minister for a VAT / Sales Tax rate
reduction in return for some ‘greasing’.

Reading both these examples
together, the goodness of GST is simple – it holds colossal potential for
future – of making a tax that is both good and simple.

Raman Jokhakar

Editor

FORTHCOMING
EVENTS

COMMITTEE

EVENT NAME

DATE

VENUE

NATURE OF EVENT

June, 2018

Human Development and
Technology Initiatives Committee

The 11^th Jal
Erach Dastur CA Annual Day
TARANG 2K18

Saturday, 9^th June 2018

K C College

Student Annual Day

Human Development and Technology Initiatives Committee

Soulful Trip to Muni Seva
Ashram,
Baroda – Noble Social Cause

Thursday, 14^th
& 15^th June 2018

Dakor – Goraj, Muni Seva
Ashram, Baroda

Others Programme

Human Development and
Technology Initiatives Committee

POWER-UP SUMMIT

REIMAGINING PROFESSIONAL PRACTICE

Saturday, June 16^th,
2018

Orchid Hotel, Mumbai

Others Programme

Indirect Taxation
Committee

12^th
Residential Study Course on GST

Thursday to Sunday 21^st
June to 24^th June 2018

Marriott Hotel, Kochi

RSC/House Full

Managing Committee

Lecture Meeting on “Transforming Mumbai –
Challenges and Opportunities” by Shri. Ajoy Mehta

(Hon. Municipal Commissioner of Mumbai)

Tuesday, 26^th
June 2018

Walchand Hirachand Hall
IMC 4^th Floor Churchgate,
Mumbai-400020

Lecture Meeting

July, 2018

Managing Committee

Lecture Meeting on

“Taxation of Transactions
in Securities”,
by CA. Pinakin Desai

Wednesday,
11^th July 2018

Walchand Hirachand Hall IMC 4^th Floor Churchgate,
Mumbai-400020

Lecture Meeting

August, 2018

International Taxation Committee

International Tax &
Finance

Conference, 2018

Wednesday, 15^th
August 2018 to Saturday, 18^th August 2018

Narayani Heights,
Ahmedabad

ITF

STUDY CIRCLE

June, 2018

Human Development and
Technology Initiatives Committee

“Saptapadi of Family
Happiness”

Monday, 25^th
June, 2018

BCAS Conference Hall, 7,
Jolly Bhavan No. 2, New Marine Lines, Mumbai-400020.

HRD Study Circle

BCAS – E-Learning Platform
(https://bcasonline.courseplay.co/)

Course Name E-Learning Platform

Name of the BCAS Committee

Date, Time and Venue

Course Fees (INR)**

Members

Non – Members

Three Days Workshop On
Advanced
Transfer Pricing

International Taxation
Committee

As per your convenience

5550/-

6350/-

Four Day Orientation
Course on Foreign Exchange
Management Act (FEMA)

International Taxation
Committee

As per your convenience

7080/-

8260/-

Workshop on Provisions
& Issues – Export/ Import/ Deemed Export/ SEZ Supplies

Indirect Taxation
Committee

As per your convenience

1180/-

1475/-

7^th
Residential Study Course On Ind As

Accounting & Auditing
Committee

As per your convenience

2360/-

Full Day Seminar On
Estate Planning, Wills and Family Settlements

Corporate & Allied
Laws Committee

As per your convenience

1180/-

Workshop on “Foreign Tax
Credit”

International Taxation
Committee

As per your convenience

1180/-

1475/-

BCAS Initiative –
Educational Series on GST

Indirect Taxation
Committee

As per your convenience

Free

GST Training program for
Trade, Industry
and Profession

Indirect Taxation
Committee

As per your convenience

Free

**Course Fee is inclusive of 18% GST.

For more details, please contact Javed Siddique at 022
– 61377607 or email to events@bcasonline.org

shailesh.kwebmaker

Do Facebook Friendships Make Parties Co-Conspirators? – SEBI Passes Yet Another Order

SEBI has
passed yet another order* holding
that being ‘friends’ on Facebook is ground enough to allege that the two
parties are connected and thus guilty for insider trading violations. Based on
this, SEBI has passed an interim order requiring such ‘connected person’ to
deposit the allegedly ill-gotten gains and also initiated proceedings for
debarment. About two years back, by an order dated 4^th February
2016, SEBI had made a similar ruling that was discussed in this column.
However, in that case, the social media connection was not the sole connection.
Such orders raise several concerns since people are increasingly connected in
social media to friends, relatives and even strangers.

Summary
of some relevant provisions of law relating to insider trading

Insider
trading is believed to be rampant not just in India but also in other
countries. Proving that there was insider trading the guilty is a difficult
task. In India, it is also perceived that lack of adequate powers with SEBI to
determine “connections” between parties makes Regulators’ job a little more
difficult. Primarily, SEBI has to show that a person is connected with the
company or persons close to it. Further, it has to also show that unpublished
price sensitive information existed that was used to deal in shares and make
profit. In many cases, close insiders like executives, directors, etc. get
access to valuable price sensitive information and fall to temptation of easy
profits. Such cases are easier to investigate, compile sufficient and direct
evidence and punish the wrong doer.

However,
capital markets also attract sophisticated operators who use advanced tools and
techniques to avoid detection. Information can be increasingly shared in a
manner difficult to even detect, much less prove, more so with fast developing
technology, encryption, etc.

The SEBI
(Prohibition of Insider Trading) Regulations, 2015 does use several deeming
provisions that help establish a basic case. Some of these presumptions can be
rebutted by showing facts to the contrary.

To determine
whether there was insider trading in such cases, certain facts/circumstances
would have to be established. Firstly, it would have to be shown that there was
price sensitive information relating to the company that was not yet made available
to the public. Then, it would have to be shown that the suspected person is
‘connected’ to the company or certain insiders. Several categories of persons
are deemed to be connected. Alternatively, if the suspect is an unconnected
person, then he should be shown to have received such information from the
company or a connected person or otherwise. Then it would have to be shown that
such person dealt in the securities of the company while such information was
not yet made public.

Proving
“connection”

As discussed
above, there are some categories of persons that are deemed to be connected.
Directors, employees, auditors, etc. are, for example, deemed to be
connected if their position enables them access to unpublished price sensitive
information (“UPSI”).

Then there
are persons who are in “frequent communication with its officers” which enables
them access to UPSI. And so on.

Proving
contractual connection of directors, auditors, etc. would be relatively
easy. Proving that their position enables them access to UPSI requires
compiling of relevant information such as their nature of duties, their
position in the company, the nature of information that was UPSI, etc.
This information can be compiled with the help of the company.

Difficulty
arises in proving connection of persons who are not so closely associated with
the company. It would have to be proved, for example, that he was in frequent
communication with the officers, etc. of the company. This may be
possible if SEBI is able to establish, for example, a pattern of communication
of such person with the officers, etc. Alternatively, it would have to
be shown that the person was in possession of such UPSI, which is often more
difficult, more considering that parties may use sophisticated
techniques/technology to communicate.

What
happened in the present case?

Before going
into the details of this case, it is emphasised that this is an interim order.
There are no final findings and the statements made therein are allegations,
though after a certain level of investigation and also inquiring and obtaining
information from the parties concerned.

SEBI found
that the Managing Director (“MD”) of the listed company in question had
acquired a significant quantity of shares of the company. These purchases were
made when certain price sensitive information existed but was not published. It
appears that SEBI also found that certain other persons had also dealt in the
shares of the company during this time and made significant profits.

The price
sensitive information concerned certain large contracts received by the
company. SEBI found that, during this period, the company had been awarded
large contracts of hiring of oil drilling rigs through a process of tender. The
process of tendering broadly involved certain stages. The first stage was
invitation of the bids and due submission of bids by the company. The second
stage was, in one case, revision of the bid to satisfy certain requirements. Thereafter,
the bids were opened and the top bidder (termed as L1) was declared. A formal
and final award of the order followed thereafter. SEBI held that declaration as
top bidder made it more or less certain that the contract would be awarded to
such person. Hence, SEBI decided that this was the time when price sensitive
information came into being. Till such information was formally published by
the company, the information remained UPSI and hence, insiders were barred from
dealing in the shares of the company.

It may be
added here that the contracts so awarded constituted a very significant portion
of the turnover of the company and hence, SEBI held that this information was
price sensitive. It also demonstrated that the price of the equity shares of
the company on stock exchanges increased when the information was made public.

The MD and
certain other persons were found to have purchased/dealt in the shares of the
company during this period.

Showing
that the MD was connected and dealt in the shares of the Company

SEBI held
that the MD was closely involved in the bidding process and indeed present at
the time when the bids were opened. The MD was thus held to be `an insider’.

It was then
shown that he had purchased shares of the company during this period and before
the information was made public. SEBI concluded that the MD had engaged in
insider trading.

Showing
that the other persons were connected and that they dealt in the shares of the
Company

SEBI found
that two other persons had dealt in the shares of the company during this same
period and made substantial profits. They had purchased shares of the company
before the UPSI was made public and sold the shares thereafter.

The
individual, Sujay Hamlai, was 50% owner of shares and director of a private
limited company, while his brother held the remaining 50% shares and was also
its director. Sujay and his company had dealt in the shares of the company.

When the MD
and these persons were asked whether they were connected to each other, their
reply, to paraphrase, was that they had no business connection but as
individuals they were socially acquainted.

SEBI checked
the Facebook profiles of such persons and found that the MD was ‘friends’ with
Sujay and his brother/spouse. Further, they had ‘liked’ each other’s photos
that were posted on this social media site. No other connection was found by
SEBI. However, SEBI held that this was sufficient for it to allege and hold for
the purposes of this order that they were connected and thus insiders.

Order
by SEBI

Having held
that the parties were insiders and that they had dealt in the shares of the
company while there was UPSI, it passed certain interim orders. It ordered them
to deposit in an escrow account the profits made with simple interest at 12%
per annum.

The interim
order also doubled up as a show cause notice, since, as mentioned earlier, the
findings of SEBI were meant to be allegations subject to reply/rebuttal by the
parties. Thus, the parties were asked to reply to these allegations and also
why adverse directions should not be passed against them. Such adverse
directions would be three. Firstly, the amount so deposited would be formally
disgorged/forfeited. Secondly, the parties may be debarred from accessing
capital market. Finally, the parties may be prohibited from dealing in
securities for a specified term.

Determination
of profits and total amount to be deposited

The
determination of profits is demonstrative of how working out of profits for
purposes of insider trading follows a particular method and hence worth a
review. SEBI first determined the purchase price of the shares by the parties.

In the MD’s
case, since he had not sold the shares. SEBI thus determined the closing price
of the equity shares immediately after the UPSI was made public. The
difference, the increase, was deemed to be the profit and the value of such
profit for the shares was held to be profits from insider trading.

Sujay and
his company had sold the shares some time after the UPSI was made public.
However, the method of determining profits from insider trading was the same as
for the MD. The difference between the closing price of the shares immediately
after the publishing of the UPSI and the purchase price was deemed to be the
profit from insider trading.

To such
profits, simple interest @ 12% per annum was added till the date of the Order.
Adjustment was also made for dividends received during this period.

The total
amount so arrived, being Rs. 175.58 lakhs for the MD, Rs. 18.20 lakhs for Sujay
and Rs. 47.86 lakhs for Sujay’s company, was ordered to be deposited in escrow
account pending final disposal of the proceedings. The parties were also
ordered not to alienate any of their assets till the amount was deposited.

Conclusion

It is seen
that in this case, the sole basis of alleging ‘connection’ between the MD and
Sujay/his company was their ‘connection’ on social media website Facebook.
There were of course other suspicious circumstances of timing of purchases by
Sujay, other factors listed in the order such as insignificant trades in other
shares, very recent opening of broker/demat account, etc. But the social
media connection seems to be the deciding factor.

Whatever may
be the final outcome in this particular case – whether in the final order of
SEBI after due reply by the parties and/or in appeal – some concerns come to
mind. SEBI uses social media activities and connections of parties to compile
information that it may be useful for its investigations in insider trading. It
is obvious that SEBI may do this also for other investigations where
connections are relevant such as price manipulations, frauds, takeovers, etc.
Even other authorities – regulators, police, etc. – would access social
media profiles of persons.

However, it is also common knowledge that more and
more people are on social media. There are also several other social media
websites apart from Facebook – viz., Twitter, Instagram, Linkedin, etc.
Connections are made not necessarily with persons whom one may know but even
with persons who are totally strangers. One may thus have thousands of
‘connections’. Making a connection is often a mere clicking on the ‘following’
button or ‘send’ or ‘confirm’ friend request and the like. The objective may be
to interact with such persons for online discussions or even to plainly
‘follow’ for knowing their views. It is possible that persons may end up facing
investigation purely on account of the activities of persons whom one may be
having such thin connections. While orders like these may be taken as a lesson
of caution for all of us as to whom we get ‘connected’ with, considering the
reality of social media, it is submitted that SEBI and other
regulators/authorities should come out with reasonable guidelines as to how
such ‘connections’ are treated and what presumptions are drawn.

*Order dated 16^th April 2018,
in the case of Deep Industries Limited

shailesh.kwebmaker

New Construction in Mumbai

Introduction

Real estate development is big
business in a metropolis such as Mumbai. However, what happens if all new real
estate development is abruptly halted by the High Court? A large part of the
economy would come to a grinding halt. However, this is what happened in Mumbai
on account of an Order passed by the Bombay High Court. The Order was passed to
tackle the growing problem of solid waste management in the City and the
inefficiency of the Municipal Corporation of Greater Mumbai (MCGM) in tackling
it. Nevertheless, it caused a great deal of issues and strife for the real
estate community. Now, a Supreme Court Order has given some respite from this.

Bombay
High Court’s Order

A Public Interest Litigation (PIL)
was filed before the Bombay High Court against the inefficient disposal of
solid waste arising during construction of real estate properties in the City
of Mumbai. Based on this, the Bombay High Court passed its Order in the case of
Municipal Corporation of Greater Mumbai vs. Pandurang Patil, CA No.
221/2013 Order dated 29.02.2016.

The Court observed that everyday
the MCGM was illegally dumping over 7,400 metric tonnes of solid waste at its
dumping sites in Mumbai. This figure was expected to significantly increase on
various counts, including the several buildings being constructed in the City.
This illegal dumping would cause increased pollution along with posing fire
hazards. On the other hand, there were a large number of constructions going on
in the city. In fact, the State Government had amended the Development Control
Regulations by providing for grant of more and more Floor Space Index (FSI).
Thus, the Court held that the State Government was encouraging unsustainable
growth.

Further, under earlier PILs, the
High Court had granted time to the MCGM to set up waste disposal and processing
facilities at the dumping grounds which time had also expired and nothing was
done by the MCGM. The Court held that something drastic needed to be done to
improve the situation, such as, to impose some restrictions on the unabated
development in the city. Moreover, it was the duty of the Court to ensure that
the provisions of the Environment Protection Act,1986 and the Municipal Solid
waste (Management and Handling) Rules, 2000 were implemented in as much as the
breach thereof would amount to depriving a large number of citizens of Mumbai a
fundamental right guaranteed under the Constitution of India, which was, the
right to live in a pollution free environment.

Accordingly, the High Court
extended the time granted to the MCGM for installing waste processing
facilities till 30^th June 2017. It noted that neither the said
Municipal Corporation nor the State Government had any solution whatsoever for
ensuring that the quantity of solid waste generated in the city should not
increase. Further, it was of the view, that the State Government was more
worried about the impact of imposing any restraint on the new constructions in
the city on the real estate industry. It felt that on one hand there was no
real possibility of any Authority complying with the Management of Solid Waste
Rules and on the other hand, the development by construction of buildings in
the city continued on a very large scale. There were also proposals for grant
of additional FSI by amending the Regulations. It therefore, was of the view
that, in case of certain development proposals, restrictions had to be imposed.
More so, because neither the State Government nor the Municipal Corporation has
bothered to make a scientific assessment of the impact of large scale
constructions going on in the city on the generation of the solid waste in the
city.

The Court was conscious of the fact
that in the city of Mumbai there were a large number of re-development projects
which were going on and the occupants of the existing premises might have
vacated their respective premises. Therefore, for the time being, it did not
impose any restrictions on the grant approval for proposals/applications for
the re-development projects including the construction of sale component
buildings under schemes sanctioned by the Slum Rehabilitation Authority (SRA).
However, it held that restrictions would have to be imposed on consideration of
fresh proposals/applications submitted for new construction of the buildings
for residential or commercial purposes.

Finally, the Bombay High Court
placed the following curbs on new development/construction in Mumbai:

(a) Development
permissions shall not be granted either by the MCGM or the State Government on
the applications/proposals submitted from 1^st March 2016 for
construction of new buildings for residential or commercial use including
malls, hotels and restaurants. Such applications would be processed, but the
commencement certificate shall not be issued. However, this condition would not
apply to all the redevelopment projects and to the buildings proposed to be
constructed for hospitals or educational institutions. It would also not apply
to proposals for repairs/reconstruction of the existing buildings which do not
involve use of any additional FSI in addition to the FSI already consumed.

(b) Even
if there was an amendment of the Regulations made hereafter providing for grant
of additional FSI in the city, the benefit of the same shall not be extended to
the building proposals/ Applications for development permissions including for
the re-development projects submitted on or after 1^st March 2016.

Supreme
Court’s Order

Aggrieved by this total ban on new
construction, the Maharashtra Chamber of Housing Industry approached the
Supreme Court by filing a Special Leave Petition. The Supreme Court gave its verdict
in Maharashtra Chamber of Housing Industry vs. Municipal Corporation of
Greater Mumbai, SLP(Civil) No. D23708/2017, Order dated 15^th March
2018.

We make it clear that this order is
not intended to set aside or modify the aforesaid impugned judgement. We have
considered the matter only in order to explore the possibility of safe method
of permitting certain constructions in the city of Mumbai for a limited period
to pave the way for further orders that may be passed. We are satisfied that a
total prohibition, though selective, has serious ramifications on housing
sector which is of great significance in a city like Mumbai. It also has a
serious impact on the financial loans which have been obtained by the
developers and builders. Such a ban makes serious inroads into the rights of
citizens under Article 19, 21 and 300A of the Constitution of India. It might
be equally true that the activities and the neglect in disposing of the debris
invades the rights of other citizens under Article 21 etc. That issue is
left open for a proper determination.

The Supreme Court passed an Order
presenting the following solution:

(a) It
directed that any construction that was permitted hereafter for the purpose of
this order would be only after adequate safeguards were employed by the
builders for preventing dispersal of particles through the air. This would be
incorporated in the building permissions.

(b) According
to the MCGM, 10 sites had been located for bringing debris onto such specified
locations which require to be filled with earth. In another words, these sites
require land filling which will be done by this debris.

(c) The
MCGM would permit a builder to carry on construction on its site by imposing
the conditions in the permission, that the construction debris generated from
the site, would be transported and deposited in specific site inspected and
approved by the MCGM.

(d) The
Municipal Corporation shall specify such a site meant for deposit of
construction debris in the building permission. Any breach would entail the
cancellation of the building permission and the work would be stopped
immediately.

(e) The
Municipal Corporation would not permit any construction unless it has first
located a landfill site and has obtained ‘No Objection Certification’ or consent
of the land owner that such debris may be deposited on that particular site.
The Municipal Corporation shall incorporate in the permission the condition
that the construction was being permitted only if such construction debris was
deposited.

(f) For
Small generators of Construction and Demolition Waste, the Waste would be
disposed of in accordance with the ‘Debris On-Call Scheme’ of the MCGM.

(g)
For Large generators of Construction and Demolition Waste, the waste would be
disposed of as per the Waste/Debris Management Plan submitted by the
owner/developer at the time of applying for permissions and as approved by the
BMC.

(h) Builders
applying for permissions would have to give a Bank Guarantee of amount ranging
from Rs.5 lakh to Rs.50 lakh depending upon the size of the project and mode of
development, which bank guarantee shall remain in force solely for the purpose
of ensuing compliance of the Waste Management Plan/Debris Management Plan
approved by the MCGM, till the grant/issuance of the Occupation Certificate.

(i) The
MCGM was instructed to submit a detailed report to the Supreme Court after the
expiry of 6 months from the date of the Order (i.e., 15^th September
2018) and till such time the Supreme Court’s Order would remain in force. It
also ordered that no construction debris would be carried for disposal to the
Deonar and Mulund dumping sites.

Conclusion

While
the High Court’s Order may appear harsh, sometimes desperate situations call
for desperate measures. At the same time, it is laudable that instead of
adopting a very technical or legal approach, the Supreme Court has come out
with a workable solution. One only wishes that the MCGM and the State
Government come out with a concrete action plan to tackle this menace of solid
waste management!

shailesh.kwebmaker

5 Expenses or payments not deductible-Section 40A(3) -the payment is made to producer of meat in cash in excess of Rs.20,000/– Circular issued by the CBDT cannot impose additional condition to the Act and / or Rules adverse to an assessee – No disallowance can be made

Pr. CIT – I, Thane vs. Gee Square
Exports.

[AY
2009-10] [Income tax Appeal no. 1224 of 2015 dated : 13/03/2018 ; (Bombay High
Court)].

[Affirmed
Gee Square Exports vs. I.T.O.

[dated
: 31/10/2014 ; Mum. ITAT ]

The assessee is a
partnership firm engaged in the business of exporting frozen buffalo meat and
veal meat to countries like Oman, Kuwait and Vietnam etc. The assessee
purchases raw meat from various farmers and after processing and packaging in
cartoons, exports the same. The assessee had in the course of its above
activity, made its purchases of meat in cash in excess of Rs.20,000/-. The AO
disallowed payments made in cash for purchases of meat in excess of Rs.20,000/-
i.e. Rs.26.79 crore in the aggregate u/s.
40A(3) of the Act. Thus, the AO rejected
the appellant’s contention that in view of the proviso to sec. 40A(3) of
the Act read with Rule 6DD(e) and (k) of the Income Tax Rules, they would not
be hit by section 40A(3) of the Act. This rejection was primarily on the ground
that in view of CBDT Circular No.8 of 2016, wherein in paragraph 4 thereof, one
of the conditions for grant of benefit of section 6DD of the Income Tax Rules
was certification from a Veterinary Doctor certifying that the person certified
in the certificate is a producer of meat and slaughtering was done under his
supervision.

Being aggrieved by the
order of AO, the assessee filed appeal before CIT(A). The CIT(A) upheld the
Assessment order.

Being aggrieved by the order
of CIT(A), the assessee filed appeal before ITAT. The Tribunal observed that section 40A(3) of the Act provides that
no disallowance thereunder shall be made if the payment in cash has been made
in the manner prescribed i.e. in circumstances provided in Rule 6DD of the
Rules. The Tribunal held that the payment is made to producer of meat in cash
and would satisfy the requirement of Rule 6DD(e) of the Rules, which is as
under :

“(e) Where the payment
is made for the purchase of (i) ……. (ii) the produce of animal husbandry
(including livestock, meat, hides and skins) or dairy or poultry farming; or”

There were no other
conditions to be satisfied in terms of the above Rules. This Tribunal further
helds that neither the Act nor the Rules provides that the benefit of Rule 6DD
of the Rules would be available only if the further conditions / requirements
set out by the board in its Circular are complied with.

The Tribunal also observed
that the power of the board to issue circulars u/s. 119 of the Act is mainly to
remove hardship caused to the assessee. In the above view, it was held by the
Tribunal that the scope of Rule 6DD of the Rules cannot be restricted and/or
fettered by the CBDT Circular No.8 of 2016.

Before the High Court, the
Revenue states that the assessee had failed to satisfy the conditions of CBDT
Circular. Therefore, the order of the
Tribunal could not have allowed the assessee’s appeal.

The Court observed that the
basis of the Revenue seeking to deny the benefit of the proviso to section
40A(3) of the Act and Rule 6DD(e) of the Rules is non satisfaction of the
condition provided in CBDT Circular No.8 of 2016. In particular, non furnishing
of a Certificate from a Veterinary Doctor. The proviso to section 40A(3) of the
Act seeks to exclude certain categories/classes of payments from its net in
circumstances as prescribed. Section 2(33) of the Act defines “prescribed”
means prescribed by the Rules. It does not include CBDT Circulars. It is a
settled position in law that a Circular issued by the CBDT cannot impose
additional condition to the Act and / or Rules adverse to an assessee. In UCO
Bank vs. Commissioner of Income Tax, 237 ITR 889, the Apex Court has
observed “Also a circular cannot impose on the taxpayer a burden higher than
what the Act itself, on a true interpretation, envisages”.

Thus, the view of the
Tribunal that the CBDT Circular cannot put in new conditions for grant of
benefit which are not provided either in the Act or in the Rules framed
thereunder, cannot be faulted. More particularly so as to deprive the assessee
of the benefit to which it is otherwise entitled to under the statutory
provisions. Needless to state, it is beyond the powers of the CBDT to make a
legislation so as to deprive the respondent assessee of the benefits available
under the Act and the Rules. The assessee having satisfied the requirements
under Rule 6DD of the Rules, cannot, to that extent, be subjected to
disallowance u/s. 40A(3) of the Act. Besides, we may in passing point out that
the impugned order of the Tribunal holds that a Certificate of Veterinary
Doctor was rejected by the Authorities under the Act, only because it was not
in proper form. In the above facts, the revenue appeal was dismissed.

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A Chartered Route to International Anti-Corruption Laws

Corruption has been seen as an immoral and unethical practice since biblical times. But, while the Bible condemned corrupt practices, ironically Chanakya in his teachings considered corruption as a sign of positive ambition.1 However, there can be no doubt that in modern business and commerce, corruption has a devastating and crippling effect. According to the Transparency International Corruption Perception Index, India is ranked 76 out of 167 nations. These statistics do not help India’s image as a destination for ease of doing business.

The growth of anti-corruption law can be traced through a number of milestone events that have led to the current state of the law, which has most recently been expanded by the entry into force in December 2005 of the sweeping United Nations International Convention against Corruption (UNAC). Spurred on by a growing number of high-profile enforcement actions, investigative reporting and broad media coverage, ongoing scrutiny by non-governmental organisations and the appearance of a new cottage industry of anti-corruption compliance programmes in multinational corporations, anti-corruption law and practice is rapidly coming of age.

While countries have for long had laws to punish their own corrupt officials and those who pay them bribes, national laws prohibiting a country’s own citizens and corporations from bribing public officials of other nations are a new phenomenon, less than a generation old.

The US Foreign Corrupt Practices Act (FCPA) was the first anti-corruption law that rigorously pursued cross border bribery. For more than 25 years, the United States was the only country in the world that through the extra territorial reach of its FCPA, rigorously investigated bribes paid outside of its own borders.

It was surpassed by The UK Bribery Act enacted by the UK government in 2010 and is arguably the most radical extra-territorial anti-graft law to date. This law was put into place by the UK Parliament after a demand from the Organization for Economic Cooperation and Development (OECD) in 2007 that the UK offer some explanation for its failure to abide by its OECD Anti-Bribery Convention obligations.

The United Kingdom has in 2010 enacted the robust United Kingdom Bribery Act (UKBA), that has created a new anti-corruption compliance regime which is even more powerful than the FCPA in many respects. Failure to adhere to anti-bribery compliance obligations based on these and other new anti-corruption laws can result in substantial and potentially debilitating fines being imposed against companies and their aids.

Both legislation and the business response to anti-corruption are now intensifying. On 11th May 2016, The Law Society of England and Wales; The Institute of Chartered Accountants in England and Wales, The Society of Trust and Estate Practitioners; The Law Society of Northern Ireland; The Law Society of Scotland; The International Federation of Accountants; The Association of Chartered Certified Accountants; The Chartered Institute of Public Finance and Accountancy; The Institute of Chartered Accountants of Scotland; Chartered Accountants Ireland, The Chartered Institute of Management Accountants; The Association of Taxation Technicians; The Association of International Accountants; The Chartered Institute of Taxation; The International Association of Book-Keepers; The Institute of Certified Bookkeepers; The Institute of Financial Accountants; UK200; The Association of Accounting Technicians issued the Anti-Corruption Statement by Professional Bodies – deploring corruption and the significant harm it causes. The statement acknowledges that criminals seek to abuse the services provided by Professional service providers such as Chartered Accountants to launder the proceeds of corruption and we are committed to ensuring the professionals are armed with the tools to thwart this abuse.2

Chartered accountants, either in business or in the profession, have to be well informed of the latest developments to ensure that they play a meaningful role in the prevention of corruption in the organisations which they serve.

THE PREVENTION OF CORRUPTION ACT 1988 (POCA)

In India, the law relating to corruption is broadly governed by the Indian Penal Code, 1860 (‘IPC’) and the Prevention of Corruption Act, 1988 (‘POCA’). Apart from the risk of criminal prosecution under POCA, there is also the risk of being blacklisted, debarred and subject to investigation for anti-competitive practices.

Sections 8, 9 and 10 of the POCA are applicable to arrest the supply side of corruption namely: Taking gratification, in order, by corrupt or illegal means, to influence public servant (Sec.8), Taking gratification for exercise of personal influence with public servant (Sec.9), Punishment for abetment by public servant of offences defined in Section 8 or 9 (Sec.10). Section 11 criminalises various acts of public servants and middlemen seeking to influence public servants.

In the case of H. Naginchand Kincha vs. Superintendent of Police Central Bureau of Investigation 3, the Karnataka High Court has clearly held that the words occurring at section 8 of the Act “Whoever accepts or obtains, or agrees to accept, or attempts to obtain, from any person, for himself or for any other person, any gratification…………”

covers the persons other than the public servants contemplated by definition clause (c) of section 2 of the Act and that does not require much elaboration.4

Unlike laws in some other jurisdictions, POCA makes no distinction between an illegal gratification and a facilitation payment. A payment is legal or illegal. This treatment applies to other laws and regulations in India as well.

PREVENTION OF CORRUPTION (AMENDMENT) BILL 2013–2011 TO 2016

After India ratified the United Nations Convention on Anti-Corruption, the Government of India initiated measures to amend POCA to bring it in line with international standards. Materially, these included –

a. Prosecuting private persons as well for offences, b. Providing time-limits for completing trials, c. Attachment of tainted property,

d. Prosecuting the act of offering a bribe.

In 2013, the Amendment Bill was introduced in Parliament, reviewed by the standing committee and Law commission of India.

One of the significant amendments proposed, to widen the scope of the Act beyond bribery of public servants, provides that irrespective of capacity in which the person performs services for or on behalf of the commercial organisation either as an agent, service provider, employee or subsidiary, the liability under POCA would follow. This places an organisation at considerable risk since illegal acts by employees even at the entry level can expose the organisation to prosecution.

The above proposed amendments are corroborated by the WhistleBlowers Protection Act, 2014 and section 177(9) of the Companies Act 2013 which provides for the establishment of a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.

While the Companies Act, 2013 provides that companies should have a vigil mechanism, the Companies Act does not provide for consequences if a vigil mechanism is in place. In any event, companies may adopt measures provided in international documents like the UNCAC which provides for implementation of preventive anti-corruption policies and practices.

UNCAC provides for liability of legal persons. While commercial organisations and key officers should be prosecuted, there needs to be certainty and clarity in relation to the scope of such provisions. The UNAC further provides for the right of an aggrieved party to seek compensation/ damages for loss caused due to corrupt practices.

In light of the above, most commercial organisations may adopt measures provided in international documents and implement Anti-corruption compliance procedures which would not only be preventive in nature but would also assist in nailing the offender under law and fixing his liability. This would not only reduce the impact of the instance on the organisation by showing the bonafide of the organisation as a whole and bring to book corrupt individuals.

THE UNITEDSTATES FOREIGN CORRUPT PRACTICES ACT OF 1977 (FCPA)

For many years, the FCPA has been the world champion of ethical corporate behaviour on the part of companies registered in, or associated with, the United States (US). The combined determination of the Securities Exchange Commission (SEC) and the Department of Justice (DOJ) requires big business to take rigorous measures to thwart corporate bribery, or face substantial penalties.

The FCPA, which is an US federal law, targets the payment of bribes by businesses linked to the US to foreign government officials. The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments, or foreign political parties, with the intent of obtaining or retaining business. It also requires businesses to keep proper books and records. It also prohibits the payment of bribes indirectly through a third person. For these payments, coverage arises where the payment is made while knowing, that all or a part of the payment will be passed on to a foreign official.

Record penalties for corporate corruption were imposed against Siemens AG when the multi-national company settled FCPA charges with the Department of Justice, the Munich Public Prosecutor’s Office (i.e. in its home country Germany) and the SEC. These included multiple guilty pleas and $1.6 billion in fines and penalties, including $800 million in disgorgement of bribe-tainted profits to the US authorities. This case demonstrates how regulators in different jurisdictions are cooperating with each other more than ever. According to the DOJ, this was the largest monetary sanction ever imposed in an FCPA case.5

As is demonstrated by the Siemens settlement, there is no double-jeopardy defence for offenders, and the same set of facts can give rise to a multitude of prosecutions since the violations generally took place in subsidiaries in remote regions. This is an important factor for local companies, as many Indian corporates are expanding their business operations globally at a rapid rate. They will have to implement stern measures to manage the corruption risk and ensure that management in their remote subsidiaries avoid the payment of bribes or face the wrath of the not just the DOJ and SEC but also local judiciary.The DOJ signalled to companies that it would continue to book corporates on FCPA violations around the globe.

For violating anti-bribery provision, FCPA provides that;

corporations and other business entities are subject to a fine of up to $2 million;

Individuals, including officers, directors, stockholders, and agents of companies, are subject to a fine of up to

$250,000 and imprisonment for up to five years.

For violating accounting provision of the FCPA6

corporations and other business entities are subject to a fine of up to $25 million

Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years.

Under the (US) Alternative Fines Act, courts may impose significantly higher fines than those provided by the FCPA—up to twice the benefit that the defendant obtained by making the corrupt payment, as long as the facts supporting the increased fines are included in the indictment and either proved to the jury beyond a reasonable doubt or admitted in a guilty plea proceeding.

The UK Bribery Act 2010

The Bribery Act 2010 expands its territorial applicability beyond the UK through section 6-Active bribery of a foreign official and section 7 Company failing to prevent bribery (corporate offense) (strict liability). Under section 11, the maximum penalties that can be imposed on an individual convicted of an offence u/s. 1, 2 or 6 is an unlimited fine and imprisonment for up to 10 years.

An organisation that can prove it has adequate procedures in place to prevent persons associated with it from bribing will have a defence to the Section 7 offence.

The guidance, provided u/s. 9 of the Act, will help commercial organisations of all sizes and sectors understand what sorts of procedures they can put in place to prevent bribery, as mentioned in section 7.

An organisation could also be liable where someone who performs services for it – like an employee, consultant or agent – pays a bribe specifically to get business, keep business, or gain a business advantage for the organisation. But the organisation will have a full defence for this particular offence, and can avoid prosecution, if the organisation can show it had adequate procedures in place to prevent bribery.

While under the Act there is no need for extensive written documentation or policies. organisations may have proportionate procedures through existing controls over company expenditure, accounting and commercial or agent/consultant contracts for example. In larger organisations, it will be important to ensure that management in charge of the day to day business is fully aware and committed to the objective of preventing bribery. In micro-businesses, it may be enough for simple oral reminders to keystaff about the organisation’s anti-bribery policies. In addition, although parties to a contract are of course free to agree whatever terms are appropriate, the Act does not require you to comply with the anti-bribery procedures of business partners in order to be able to rely on the defence.7

CONCLUSION

The principal problem in the modern corporation is mainly the separation of ownership and control in organisations, the managers have often different motives from the owners, the management often tries to find ways to conceal corrupt practices and/or any setbacks in the company’s performance. They postpone intimating the shareholders, or even to the board, waiting for things to improve. In these cases, transparency and full disclosure in financial reporting are often sacrificed.

Anti-corruption compliance is the new watch-phrase in global boardrooms, and chartered accountants have a responsibility to not only help organisations to develop meaningful and robust anti-corruption controls, but also to understand compliance obligations applicable to them and keep pace with any changes in the bribery risks and compliance mechanisms put in place by multi-national organisations. These mechanisms are intended to prevent the use of accounting practices to generate funds for bribery or to disguise bribery on a company’s books and records.

Violations of record-keeping requirements can provide a separate basis of liability for companies involved in foreign and domestic bribery. It is here that the Chartered Accountant would play an important role, of not just raising the red flag but refusing to sign the accounts until all questionable payments are explained to their satisfaction by the Company.

The role of Chartered Accountants (CAs) has been seen as promoting transparency and fairness. CAs are national-level watchdog. However, CAs are not specialised anti-corruption agencies: on the whole, they are not expressly charged with detecting or investigating corrupt activity, but they have expertise in auditing and reporting the facts. CAs have traditionally undertaken financial audits of organisations’ accounting procedures and financial statements, and compliance audits reviewing the legality of transactions made by the audited body, and it is this vigilance that is relied upon while bringing to task the bribe givers and takers.

Prevention of Corruption Act 1988, focuses on the legal definitions governing corruption, lacks the suggestive guidance of how best to implement in practice financial and other controls which would be effective to prevent corruption, and bring to light any questionable payments.It is through their detailed study of several financial systems adopted by their various clients that CA’s are equipped with the required information and can suggest best practices that may be incorporated by the Government in a Model anti-corruption vigilance mechanism which may serve as a guidance to various organisations, and a yard stick to assess the ethical quotient of any organisation.

1    Chanakya – His Teachings & Advice, Pundit Ashwani Sharma, Jaico Publishing House, 1998: In the forest, only those trees with curved trunks escape the woodcut-ter’s axe. The trees that stand straight and tall fall to the ground. This only illustrates that it is not too advisable to live in this world as an innocent, modest man.

2    ANTI-CORRUPTION STATEMENT BY PROFESSIONAL BODIES – ISSUED 11th MAY 2016; https://www.icaew.com/-/media/corporate/files/technical/legal-and-regulatory/business-crime-and-misconduct/anti-corruption-statement.ashx?la=en

3    http://judgmenthck.kar.nic.in/judgmentsdsp/bitstream/123456789/183651/1/CRL-RP1040-14-13-09-2017.pdf

4    http://bangaloremirror.indiatimes.com

5    U.S. v. Siemens Aktiengesellschaft, 2008 – Case No. 08-367.

6    Section 78(b) of the FCPA contains certain accounting provisions that are applicable only to issuers. These require issuers to make and keep accurate books and ac-counts as well as certain internal controls

7 https://www.justice.gov.uk/downloads/legislation/bribery-act-2010

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