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Category: Lectures Meeting

Lecture Meetings

Meeting addressed by Delnaz Mistry, Manager NSDL on Government’s Initiatives on Electronic Credit for Income Tax payments on 26-8-2009 at IMC was well received and appreciated by alL

The Power Point presentation covered all practical issues dealing with TIN, E-payments, Challan Status Enquiry key points for preparation and submission of E-TDS statements,  Quarterly  Statement  Status, Refund  Status, Registration  for view of Form 26AS and benefits  of Form 26 AS.    
        
She brought  out the common errors/inconsistencies and gave practical  hints to overcome  the same and also informed  of new initiatives  planned  which are likely  to be introduced   in near  future.  Members resolved  their  queries  and pointed  out difficulties faced in the question-answer   session.

Vispi Patel, Chartered  Accountant,  addressed  members on Transfer  Pricing Audit  – Documentation and  Benchmarking   in the background   of Recent Assessments/Decisions. He started with  some important  provisions,  and  then  dealt  in detail  with documentation  and Benchmarking  of international transactions   with  associated  enterprises.   He not only covered  important  decisions  on the topic but also dealt with interesting  case study,  so as to have a better  understanding   of the subject, in his inimitable  style,’ which  was  appreciated   by  all those present  in the meeting.        

Accounting & Auditing Committee:

Seminar on Audit of NBFCs on 21-8-2009:

Non-Banking Financial Companies (NBFCs) are highly regulated entities and have many statutory /reporting compliances to be adhered to, especially if they are accepting deposits from the public. It is a specialised area of operations and the domain knowledge of the functions, operations, regulations and statutory compliances of NBFCs is necessary for handling matters relating to NBFCs.

NBFCs are fast emerging as an important segment of Indian financial system, performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI)within the framework of the Reserve Bank of India Act, 1934, and the directions issued by it under the Act.

To make the members and professionals in industry aware about the overall working of the NBFCs, BCAS under its Accounting & Auditing Committee, had organised this full day seminar at Hotel Marine Plaza. It was addressed by four eminent speakers having expert knowledge of the areas covered by each of them. The seminar was well attended by 80 participants and more than half of the participants were from industry, reflecting the importance of the subject.

The seminar was inaugurated by President of BCAS, Ameet Patel who emphasised the need to understand the regulations and compliances for NBFCs properly, so that their audit can be carried out in a meaningful manner.

Later, Chairman of the Accounting & Auditing Committee Himanshu Kishnadwala, touched upon the concept and the importance of topics chosen for the seminar.

The first session was addressed by Archana Mangalagiri, GM, Department of Non-Banking Supervision, RBI. She spoke on the topic of ‘Classification and Regulation for Deposit Acceptance’. Before going into the nitty-gritty of the classification and regulation, she took the participants through the history and build-up of regulatory mechanism over the years, which gave them an in-side view of the purpose of the classification and its regulatory requirements. She also dealt with the supervisory framework undertaken by RBI in the form of on-site inspection, off-site inspection and market intelligence. She further highlighted the importance attached to the role of auditors in the supervisory framework.

The second session was addressed by Jayant Thakur. He dealt with the topic ‘Some Regulatory Aspects for Auditors’. He touched upon the perspectives in NBFCs which are very relevant for the auditors and also shared his knowledge on the working of minimum NOF, what receipts are termed as public deposits, etc.

The third session was addressed by Manish Gujral. He gave a presentation on the topic’ Audit

Procedures and Reporting for NBFCs’. He briefly highlighted the Circulars and Guidelines issued by RBIwhich have to be taken into consideration while preparing financial statements of NBFCs as well as while auditing the same. He very methodically explained the disclosures to be made in the financial statements and also explained the procedures to be performed by the auditors to check the compliances and adequacy of the disclosures.

The last session was addressed by Yogesh Thar. He dealt with the ‘Typical Tax Issues in NBFCs’. He elaborately explained the controversies as to the compliance of Prudential Norms while provisioning of interest and bad debts vis-a-vis the allow ability of those expenses in Income Tax. He also shared his experience on the controversies relating to applica-bility of S. 14A and explanation to S. 73.

Overall, the seminar was a success as the participants got good insight into the important aspects of NBFCs which needs to be complied to have smooth functioning of the NBFCs as well as to carry out a quality audit of NBFCs.

Taxation  Committee:

Seminar on Direct Tax Code:

The Taxation Committee of BCAS had conducted a Special Seminar on Direct Tax Code (DTC) on 28th and 29th August 2009 at Y. B. Chavan Pratishthan, Nariman Point. The seminar received very good response. The total enrolment was 470 participants which included members from the industry and from different parts of the country. The seminar was addressed by prominent speakers namely; Kishor Karia, Pinakin Desai, Gautam Doshi, Rajan Vora, Gautam Nayak, Yogesh Thar and Amrish Shah. The speakers highlighted many of the important aspects of the Direct Tax Code and gave suggestions for making proper representations to the Government on certain contentious and far reaching conse-quences that the DTC may have.

Taxation Committee:

Workshop on ‘How to conduct a Tax Audit’:

The Taxation Committee of BCAS had also conducted a half-day workshop on ‘How to conduct a Tax Audit’ on 4th September 2009 at Wa1chand Hirachand Hall of IMC. The workshop was conducted by CA Himanshu Kishnadwala and CA Anil Sathe, both past presidents of the Society. The speakers covered all the related aspects of tax audit and the participants were immensely benefited with the interactive session. About 270 members benefitted from the workshop. The audience included articled students, tax audit assistants and fresh chartered accountants.

Accounting & Auditing Committee:

Seminar on ‘Implementation of Standard on Quality Control’

A half-day seminar on SQC 1 (Quality Control for Firms that Perform Audits & Related reviews of Historical Financial Information, and Other Assurance & Related Services Engagements) was held on Saturday 5th September 2009 at the premises of the Society. It was attended by 55 participants and addressed by 2 Chartered Accountants in practice, Govind Ahuja and Ramchandran Vasudevan.

The seminar was interactive and covered various nuances of this new Standard on Quality Control which was issued to align quality aspects of Indian Audit practices with the rest of the world. The speakers dealt with important clauses of the standard and in particular covered documentation, monitoring audit assignments, and how a practice can establish quality control mechanism within a medium-sized practice. The participants not only benefitted from the insights of the speakers but received answers to their questions as well.

Lecture Meetings

Subject : Taxation of Real Estate — Some Important Aspects including PCM, Development & Redevelopment, S. 50C and S. 80IB(10)

Speaker : Pradip Kapasi, Chartered Accountant

Date    : 20-10-2010

After a brief introduction of the topic for the evening, the learned speaker took up the Completed Contract Method (CCM) as the first issue to be discussed. The Supreme Court in the case of Bilahari Investment (299 ITR 1) held that the CCM which was acceptable in accountancy was also acceptable in the case of income tax. The propositions laid down by the Supreme Court in this decision were that the CCM was an accepted method of accounting, it was an objective method and it was a revenue-neutral method. Based on the observations of the Supreme Court, the speaker opined that the CCM would be acceptable provided that there was no accounting standard in force prohibiting use of the CCM.

The speaker then proceeded to discuss certain recent developments in accountancy which have a bearing on the topic. It was noted that AS-7 was revised to provide that the revenue for all contracts entered into on or after 1-4-2003 would have to be recognised for on a Percentage Completion Method (PCM) only?: the option to use CCM has been withdrawn. Further, the revised AS-7 is not applicable to builders and developers but only to contractors. The speaker referred to the opinion of the Expert Advisory Committee of ICAI which has opined that the revenue recognition of builders and developers would be in accordance with AS-9 read with AS-2. Reference was made to the Exposure Draft of ASI which had clarified that the revenue was required to be recognised in cases of builders and developers only at the time of parting with the possession of the premises and not at the time of mere execution of the agreement for sale. However, the Draft was not finalised and instead, the Guidance Note 23 was issued, which states that it would be reasonable to assume that the property in goods passes on the execution of agreement and therefore, revenue recognition should occur at that stage provided work had commenced. Attention was drawn to the GN which provided that in cases where substantial work is yet to be performed at the time of execution of the agreement, one would have to recognise the revenue in stages by reverting to AS-7 for following the PCM. Thereafter, the speaker discussed some important aspects of relevant IFRS on this topic, viz., IAS 11, IAS 18, IAS 40 and IFRIC 15.

Thereafter, the learned speaker addressed the issue of how the taxation of real estate industry would be affected by the various accounting changes that have or will take place. The speaker opined that given all the accounting changes, in view of S. 145 and S. 145A and the tribunal decisions in the case of Greater Ashoka LDC. (P) Ltd. (89 TTJ 281) and Growth Techno Projects Ltd. (29 SOT 59), following the CCM would not be difficult.

The speaker then highlighted that the cost of acquisition of land is to be ignored in considering the value of the work completed and also in determining the stage of completion of work. He explained that the base unit for computing the work completion can be w.r.t. — area, cost, time or sales value. He expressed that the time of passing the effective control and management by the builder-developer was crucial in deciding the time for recognition of revenue. The speaker opined that the revenue may be recognised once the stage of completion of work reached 25% of the total work to be done. He also referred to some pertinent issues arising in valuation of stock/land/WIP.

The next point of discussion was whether the borrowing cost incurred (being in the nature of period cost) was allowable as deduction in computing the income for tax purposes?? It was explained that the Bombay High Court in the case of Lokhandwala Constructions (260 ITR 579) held that the interest should be allowed as a deduction as it was in the nature of business expense u/s. 36(1)(iii). On the topic of ‘Borrowing Cost’, the speaker also discussed the cases of Wallstreet Constructions [101 ITD 156 (Mum.) (SB)], K. Raheja [102 ITD 414 (Mum.)], Thakkar Developers [115 TTJ 841 (Pune)].

The next question was whether sharing of land or real estate of any kind, in any manner, would by default lead to formation of a joint venture?? If yes, another question would be whether this JV would then be an AOP and taxable as a separate entity?? He highlighted the acute controversy prevailing on account of the conflicting decisions of the AAR in the cases of Van Ord 248 ITR 399, and Geo Consult GmbH (304 ITR 283). In the opinion of the speaker, the arrangement of land sharing without sharing the profit does not amount to joint venture.

In the area of indirect taxation and allied laws, the speaker discussed the developments in the following areas?:

  •   Service tax on sale of flats — Harekrishna Developers AIT, 2008 128 (AAR), Magus Constructions P. Ltd., 2008 TIOL 321 (Gau.).
  •     Consumer Protection Act — Fakirchand Gulati v. Uppal, (SC), ITAT Online.
  •     VAT on sale of flats — Review of K. Raheja’s decision by larger Bench of SC in L&T’s case, Amendment of 2006 w.e.f. 20-6-2006, Trade Cir-cular dated 7-2-2007 and Amendment of 2010.
  •     Stamp Duty — Development agreements and tenancy transfers.

Thereafter, the speaker discussed whether a development agreement results into a transfer in the hands of the landlord and if yes, at what point of time does the liability to pay tax arise?? The decision of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (260 ITR 491) was discussed and debated and the serious consequences following this decision were highlighted.

Next, in the cases redevelopment of tenanted properties, the speaker said that in case the land-lord himself develops the property, there would be no transfer in his hands. However, in case the landlord does not develop the property himself, in such cases, the above decision of the Bombay High Court would be applicable.

Other situations and alternatives arising from the decision of Chaturbhuj Dwarkadas Kapadia such as development pending the approval, willingness to perform, deferred possessions, piecemeal transfers, partial retention, need for written agreement, etc. were discussed.

Next point was redevelopment. In case of redevelopment of tenanted property, there could be three situations in respect of the tenant on redevelopment?:

  •   The tenant of old property becomes tenant of new property after the redevelopment — Would this result in capital gains in the hands of the tenant?? There is a transfer, however, capital gains would arise only if there is a full value of consideration.
  •     Tenant remains a tenant immediately after the redevelopment, but after a while, he becomes the owner — There are two views on transfer when tenancy is converted to ownership. One view, to which the speaker subscribed, is that there is a new right in place of the old right and thus, there is transfer. The other view is that tenancy provides an occupancy right and upon conversion to ownership, there is a merger of an inferior interest to superior interest but no transfer.
  •     Tenancy is converted to ownership immediately on redevelopment — Whether when such ownership property is transferred shortly after conversion to ownership, would it be long-term or short-term?? Courts have held that this is short-term capital asset as what was transferred was the ownership right which was acquired only in the short term.

In case of redevelopment of society property, issue is whether there is any liability to tax when the society and owners transfer the development rights to developers. If yes, the issue would be that since the transferable development rights (TDR) have no cost of acquisition, there would be no capital gains tax. In this regard, the decision in the case of Shakti Insulated Wires Ltd. (87 ITD 56), should be noted which stated that the cost of acquisition was to be determined by pro-rating the cost of acquisition of the land. However, later there were decisions in the cases of Jethalal D. Mehta (2 SOT 422) and Om Shanti CHS Ltd. (41-B BCAJ 265) which held that since TDR and additional FSI have no cost of acquisition, there was no capital gains tax. However, in case of transfer of unutilised FSI, there would be capital gains tax.

Another issue in this case would be whether taxability would be in the hands of the society or members. In case of Auroville CHS Ltd., the Mumbai Tribunal has taken a view that the taxability should be in the hands of the members. However, at present, this issue has not been examined in detail by any court of law.

The meeting ended with the vote of thanks.

Subject : Important Practical and Legal Issues arising out of first and second appeal and relevant amendments related to appeals in DTC

Speaker : Dr. K. Shivram, Advocate

Date    : 24-11-2010

Dr. K. Shivram, Advocate, addressed the members on the subject of “Important Practical and Legal Issues arising out of first and second appeal and relevant amendments related to appeals in DTC” on November 24, 2010 at IMC. The speaker in his exhaustive style covered various issues with regard to procedures and legal concepts in relation to appeals. He discussed not only the main legal and procedural issues in relation to appeals, but also the practical issues in representation and documentation which can cause damage unless not observed diligently.

The speaker started with appeals at the first appellate stage. He covered in detail the fundamental procedural requirements of grounds of appeal and the statement of facts required for every appeal. He stressed on the importance of each document and the ramifications if irregularities crop up in the same. He also dealt with reassessment proceedings and instances where an assessee can ask for squashing of the proceedings.

The speaker ably covered significant issues including that of making a claim in the course of assessment proceedings, inclusion of additional grounds for the first time before the appellate authority, raising of the jurisdictional issue at a later point of time, production of additional evidence, etc.

In the same vein, he brought out the finer points in germane topics like who can file or sign an appeal by alerting the participants to the risk of an assessment by consent, the consultant’s limited role, etc. He briefly covered the powers of the CIT(Appeals) as also the rights available with the appellant including those with respect to stay of recovery proceedings.

For the benefit of participants, he listed out various instances in which defects in an appeal can be cured under the maxim of judicial propriety. He also gave a list of judicial precedents to support each instance.

  •     In the later part of his speech, Dr. K. Shivram elaborated on the various issues regarding appeals to the Income-tax Appellate Tribunal.

He highlighted specific points in relation to filing of appeal, service of order, etc. He detailed various rules in relation to rights of respondent, rectification of mistake, presentation of paper book, filing fees, etc.

  •     For each major issue, he provided anecdotes from his vast personal experience to drive home the point. Further, his speech was bolstered by a gamut of legal precedents which found immense favour with all participants. He also gave an insight on important aspects of the Direct Tax Code wherever relvant.
  •     At the end, he provided a detailed referencer on various guidelines and regulations. It is said that for every legal argument, the presentation of the argument is as important as the content. To that end, Dr. K. Shivram capped his exhaustive presentation by providing resources for the participants on the art of representation.
  •     The participants also got a chance to get their queries answered from the learned speaker. His enthusiasm coupled with his deep knowledge of the subject was well appreciated by all the participants.

Subject : Recent Developments in IFRS – Globally and in India

Speaker : Mr. N. P. Sarda, Chartered Accountant

Date    : 08-12-2010

Mr. N.P. Sarda, started his lecture by briefing about the journey of the formation of Accounting Standards. In 1977, India had to decide whether to adopt the International Accounting Standards in totality or to formulate its own Accounting Standards. The Accounting Standards Committee decided to formulate its own standards; accordingly Indian Accounting Standards came into existence. The Indian Accounting Standards are being followed since last three decades.

In 2007, again a debate arose whether to follow the International Financial Reporting Standards (IFRS) and adopt the same in totality or to bridge the gap between Indian Accounting Standards and IFRS by converging the standards. The decision was taken to adopt the convergence process.

The journey of IFRS was explained. Initially, there were 41 International Accounting Standards (IAS) as they were termed prior to being termed as IFRS. Out of these 41 IAS, 12 standards were withdrawn or superseded by new standards, leaving 29 IAS. Presently, there are nine IFRS and 16 interpretations on IFRS known as IFRICs. Finally there are 11 interpretations on IAS also. To sum up, at present IFRS has total of 65 documents to be referred.

To be at the level where all the accounting standards are accepted by the world at large, a country has to pass through three stages, namely:

  •     Harmonisation;
  •     Convergence; and
  •    Adoption

India, has successfully harmonised its Accounting Standards to suit the local needs of stakeholders. It has decided not to directly adopt the IFRS, but will be passing through the second stage of convergence of Indian Accounting Standards with the IFRS. In convergence, there is right to ‘carve out’ i.e. right to differ from IFRS.

Section 211 of the Companies Act, 1956 will have to deal with two categories of Financial Statements.

  •     Financial Statements prepared as per IFRS Converged Accounting Standards for the entities where the adoption of IFRS Converged Accounting Standards is mandatory; and
  •     Financial Statements prepared by other entities, where they will continue to prepare them as per the Indian Accounting Standards.

The two main challenges for convergence are:

  •     Fair Value; and
  •     Tax Implications.

The above two challenges are of a very great concern and they are considered to be major barriers to the smooth implementation of IFRS.

The ideal decision is to have the applicability of IFRS only for the Consolidated Financial Statements (CFS) and allowing individual subsidiaries and also holding company to continue to follow Indian Accounting Standards. This will mitigate the issues relating to tax, Schedule VI, Schedule XIV and other corporate compliances. In fact, listed companies of 27 countries of Europe have only CFS prepared as per IFRS.

There will have to be legislative changes to the provisions of Sections 78, 100, 205, etc, taking into consideration the treatment given under IFRS. For example:

  •     Redeemable Preference Capital which is part of Equity as per Indian AS, will have to be treated as debt as per IFRS;
  •    Fully Convertible Debentures, which till the time of conversion is treated as debt, will have to be segregated and the element of Equity will have to be shown under Equity.

There will have to be a separate Schedule VI for Financial Statements under IFRS. Even Schedule XIV will also have to be amended for IFRS compliant Financial Statements, in view of the fact that as per IFRS, depreciation on assets has to be pro-vided as per the actual useful life of the asset. The existing Schedule XIV prescribes standard rates of depreciation for various categories of fixed assets, irrespective of its useful life.

There have to be rules of the game for convergence, which are covered in IFRS 1 – First Time Adoption of IFRS.

There are five items where the effect of the changes due to adoption of IFRS is to be ignored for the past years and the effect has to be considered from the year of adoption only. It means there will not be retrospective changes required to be made to the Financial Statements in such cases.

There are 17 items, wherein an option is given to the entity to apply treatment prescribed under IFRS with effect from a particular date in past on adoption of IFRS.

Regarding the change in Accounting Policy, as per the Indian AS, the difference due to the change is taken to the current year’s profit and loss account and the impact on the profit/loss of the current year due to such change is quantified.

As per the IFRS, instead of working on the current year for the impact, the change has to be carried out in the previous year figures, which are part of the comparative figures with the current year.

Further, there is an additional statement in IFRS known as Other Comprehensive Income (OCI) Statement, which deals with the unrealised gains/ losses on fair valuing the assets and liabilities. As IFRS follows a Balance Sheet approach to the Financial Statements, it requires that all the assets and liabilities are reflected at their fair values. In view of the same, wherever there are adjustments to the assets and liabilities, which are only on account of fair valuing the same, such adjustments are taken to OCI.

A conceptual difference between IFRS and Indian GAAPs is that the IFRS follows Fair Value Accounting which is relevant in today’s context, whereas Indian GAAPs follows Historical Cost concept which is a reliable concept but may not be relevant in today’s context.

Another Conceptual difference between IFRS and Indian GAAPs is that of Substance over Form.

  •     Indian GAAP gives more importance to the legal aspect of the transaction than the beneficial aspect;
  •     IFRS believes in beneficial aspect than the legal aspect and hence judgment plays a vital role in the preparation of accounts under IFRS.

Mr. Sarda concluded by stating that the User should know from the Financial Statements what the Pre-parer of Financial Statements knows.

The learned speaker thereafter replied questions raised by audience.

The meeting terminated with a vote of thanks to the speaker.

Lecture Meeting

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Subject : Finance Bill, 2012
Speaker : S. E. Dastur, Senior Advocate
Date : 20th March 2012
Venue : Yogi Sabhagraha, Dadar, Mumbai

1. On 16th
March 2012, Indian Finance Minister, Pranab Mukherjee presented the
Indian Budget for the Fiscal Year 2012-13.

“The life of a finance
minister is not easy and I must be cruel only to be kind” Mr. Mukherjee
lamented in his 8th budget speech. The tax provisions contained therein
have indeed proved him right. A few days after the Bill was announced,
Mr. S. E. Dastur, ‘the’ Senior Tax Counsel shared his views on the
implications and the fine print of the Finance Bill, 2012.

 2. Vodafone —
Wherever you go, the tax net(work) follows!

The budget this year seems
focussed on garnering as much revenue as possible by way of various
retrospective amendments. While the budget took care of several issues,
plugged many loopholes and gave a few benefits to the taxpayer, the most
discussed aspect of the Finance Bill was the Vodafone case.

The issue
in the Vodafone case was that the Tax Department had issued a notice to
Vodafone for not withholding tax while making payment to Hutchison for
purchasing 1 share of a Cayman Island Company. The Supreme Court (‘SC’)
held that the tax officer did not have jurisdiction in matters relating
to tax withholding in case of offshore transaction of sale of shares of a
foreign company between two non-residents as it was not chargeable to
tax in India. To counter this decision, the Government retrospectively
amended sections 2, 9 and 195 of the Income-tax Act, 1961 (‘Act’).

The
question which arises now is whether the Government is justified in
making these retrospective amendments and what is the consequence of
these retrospective amendments?

Mr. Dastur opined that there was no bar
on making retrospective amendments. However, whether the Government
could rely on this amendment, which was made after the decision in
Vodafone’s case was pronounced to collect taxes from Vodafone itself?
The review petition filed by the Government challenging the Vodafone
decision was dismissed by the SC. This was rightly so, as on the date of
dismissal, there was no enactment on the basis of which the SC could
accept it.

A review lies because of the change in law, while presently,
the amendments are still at the Bill stage. The question now is whether,
once the provisions are enacted into a law, the Government could once
again approach the SC to review its Vodafone decision in light of the
change in law? If the answer to this is yes, would it mean that two
review petitions could be filed to the SC against the same decision?
Perhaps the better course of action for the Government would have been
to wait till the provisions were enacted and then to file the review
petition asking for condonation of delay.

3. Retrospective perspective

 It is possible to take a view that if a retrospective amendment is
passed, it means that there is an error in the Court’s judgment and
hence, the judgment could be reviewed by the Court. However, in the case
of Kauvery Water Disputes Tribunal [1993 SCC Supl. (1) 96], the SC has
held that a change of law cannot per se set aside a SC decision.

In the
case of Raja Shatrunji v. Mohammad Azmat Azim Khan, (2 SCC 200), the SC
held that a review was possible when there was a change in the law.
However, Mr. Dastur observed that it would be unjust and contrary to the
principle of equity to ask Vodafone to deduct tax at source, after the
SC has decided in favour of Vodafone on the issue, only in view of the
retrospective amendment to law. The liability of deducting tax at source
on Vodafone is only as a statutory agent of the Government. The
Government cannot say that Vodafone, having acted as per the law then
existing, ought to now deduct tax at source and pay it to the Government
only on the basis of the retrospective amendment of law. It would be
contrary to Article 14 of the Constitution of India as harsh,
unreasonable and arbitrary.

4. Curing the Vodafone indigestion

There are
two actions that the Government has undertaken to overcome the effects
of the Vodafone decision of the SC:

(i) Amendment to sections 2(14) and
2(47) which now provide that if rights in India are transferred owing to
a transfer of shares of a company registered or incorporated outside
India, then those rights are deemed to be a capital asset giving rise to
capital gains. However, if the asset is confined to rights such as
transfer of ‘right to vote’, ‘right to control’, etc., the question
arises as to how to determine the value of the ‘right’. These rights are
as a result of the shares in the offshore entity held and it is not
possible to apportion the cost of such rights from the cost of the
shares. In the case of B. C. Srinivasa Setty (128 ITR 294), the SC held
that if the cost of acquisition of the asset cannot be determined, there
cannot be a capital gains tax liability.

(ii) However, Explanations 4
& 5 to section 9(1) (i) resolve the above by deeming that if any
right in India is transferred on account of transfer of shares of an
offshore company, the shares of offshore company would be an asset
situated in India and section 9(1)(i) would apply to income arising from
its transfer.

5. Loyalty to royalty

In the case of Ericsson, the Delhi
High Court (‘HC’) held that a copyrighted article is different from the
use of a copyright. Explanation 4 is inserted in section 9(1)(vi) to
include as Royalty, the use of a computer software, thereby overcoming
the above HC decision.

In the Asia Satellite’s case (332 ITR 340), the
Delhi HC took a view that use of space on transponder for beaming
programmes to India would not amount to use of a process and thus,
consideration paid for the same is not royalty. This decision is now
brought to a naught by insertion of Explanation 6 to section 9(1)(vi).

6. The domestic transfer pricing bomb

Shielding itself by the SC remark
in the case of CIT v. GlaxoSmithKline Asia (P) Ltd., the Finance Bill
has introduced the concept of transfer pricing in relation specified
domestic related party transactions. The transfer pricing provisions
till now applicable to specified international transactions would be now
made applicable to domestic transactions as well by amendment to
section 92CA. The arm’s-length price (‘ALP’) would be determined in
accordance with the most appropriate method laid down in section 92C.
Further, these domestic entities will be required to maintain adequate
documentation supporting the transfer price on an annual basis as per
Rule 10D of the Income Tax Rules.

The sections of the Act affected by
domestic transfer pricing are:

(i) Section 40A(2) — In case of an entity
making a payment to another related entity, especially where paying
entity is posting a loss and thereby, paying lower taxes. However,
proviso to section 40A(2)(a) states that no adjustment would be made on
account of the expenditure being excessive having regard to the fair
market value (‘FMV’), if such expenditure is at ALP, thereby making a
distinction between the FMV and the ALP.

(ii) Sections 80A/80IA — if an
assessee has an 80A/80IA eligible unit and a transaction is effected
between the 80A/80IA unit and an 80A/80IA ineligible unit belonging to
the same assessee, transfer pricing provisions would be attracted. No
distinction is made between the FMV and the ALP.

(iii) Section 10AA —
Similar applicability as for sections 80A/80IA.

 7. Penalising the
honest?

Section 92CA(1) states that a reference to a Transfer Pricing Officer to determine the fair value of a transaction should be made only after consent of the Commissioner of Income-tax and if he feels that it is necessary or expedient to make the reference. However, it seems that today, reference is made only based on the monetary value of the transaction. Mr. Dastur said that such an action can be taken to the Courts by the assessee, if there appears to be no valid reason for the reference. The Bombay HC in the case of Coca Cola has favoured this position.

8.    GAAR — General Anti-Assessee Rules!

Till date, the view taken by the Courts was that there is no duty on the assessee to pay the maximum tax so far as he stays within the four corners of the law. Mr. Dastur remarked that while the GAAR provisions were introduced in the Direct Tax Code, the Code is put on hold as there were certain ambiguities in it. Nevertheless, the Finance Bill, 2012 has proposed to implement what was perhaps the most obnoxious part of the Code!

The GAAR defines ‘impermissible avoidance arrangements’ as arrangements which meet certain criteria laid down in the provisions and provide tax benefits to the assessee. In such a case, the tax officer has been given powers to disregard/ignore the transaction or steps in the transaction and rewrite the entire transaction and foist tax liability on the transaction.

Mr. Dastur opined that these are perhaps the widest and unguided powers given to tax officers and that despite the Supreme Court holding that a transaction could only be looked at and not looked through, the GAAR seeks to do just that.

Some examples of the likely consequences of the GAAR provisions pointed out by Mr. Dastur are:

  •     Setting up industries/units in backward areas to avail the tax benefits/exemptions granted to such areas could result in GAAR being invoked on the basis that no rational person would set up industry in backward areas except to obtain tax benefit.

  •     Investing of capital gains in low return securities granting exemption to the capital gains u/s.54EC of the Act could be characterised as an impermissible avoidance arrangement as it provides tax benefit to the assessee and no rational person would have invested in such low-return securities in normal circumstances.

  •     A demerger transaction could be disregarded and GAAR invoked by the tax officer claiming that the main intention of the demerger was to sell the undertaking and demerger route, which was commercially unnecessary, was adopted only to avail tax benefit.

  •     Sale and lease back transactions could be ignored stating that these were only for tax purposes.

All these consequences would be contrary to all the Supreme Court decisions till date.

9. Safeguards

The safeguards introduced to prevent misuse of the GAAR provisions by the tax officers are approval of the Commissioner of Income-tax and of a three-member Approving Panel consisting of three Income-tax Officials.

Attention was drawn to a letter from the Chairman of the Central Board of Direct Taxes dated 17th February 2012 sent out to tax officials sought to give the highest weightage to the tax revenue collections while deciding on the promotions and postings of the Commissioners.

Mr. Dastur expressed serious doubts on the independence of the Commissioner and the Approving Panel and questioned the adequacy of the safeguards.

10.    Implications on DTAAs

New section 98 gives the tax officer the power to deny DTAA benefits or modify the DTAA applicability including the power to decide which treaty should apply to the case, irrespective of the actual place of residence of the assessee. Mr. Dastur observed that while it may be permissible by a section in the Act to override a treaty, which is an agreement between two countries, GAAR gives the tax officer the power to override that treaty.

Circular 789, dated 13th April 2000 states that if an assessee provides a Tax Residency Certificate (TRC) issued by the Mauritian Government stating that he is a Mauritian resident, he shall be treated as such, and benefits for the Indo-Mauritian DTAA would be available to him. Now, in view of the above provisions, the validity of the Circular is also in question.

Mr. Dastur pointed out that the Explanatory Memo-randum to the Bill states that while obtaining the TRC is now a necessary condition u/s.90(4) for avail-ing treaty benefit, it is not the only condition.

Explanation 3 inserted in section 90 gives the Tax Department the power to retrospectively define a ‘term’ for the purposes of the DTAAs.

11.    Dispute Resolution Panel (DRP)

The DRP is now given powers to enhance the additions made by the Assessing Officer. Further, the Order of the DRP is made appealable by the Tax Department. These amendments defeat the purpose of the Panel which was to reduce the amount of tax litigation.

12.    Other amendments
Mr. Dastur, briefly dwelled upon taxation of charitable institutions, introduction of alternate minimum tax for all assessees, amendments relating to taxability of share application money u/s.68, amendments to section 2(19AA) dealing with demerger, new section 50D, extension of time limits for re-opening of assessments.

Mr. Dastur, concluded the session with the remark that the Finance Bill, 2012 has inserted approximately 31 Explanations of which 22 are with retrospective effect with most Explanations using the words ‘for removal of doubts’! Mr. Dastur, with his vast knowledge and wit, kept the audience hanging on to his every word.

Lecture Meetings

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Subject : Recent Amendments in Schedule VI of the Companies Act, 1956

Speaker : P. R. Ramesh, Chartered Accountant

Date : 4-5-2011

P. R. Ramesh, Chartered Accountant addressed the members of the Society and public at large on the subject of ‘Recent Amendments in Schedule VI of the Companies Act, 1956’ on 4th May, 2011 at IMC. The learned speaker made a threadbare and systematic analysis of the recent amendments in Schedule VI of the Companies Act with and reference to context and by highlighting important issues. The speaker commenced his presentation with the history and applicability of Schedule VI. He explained in depth how Schedule VI came into the Companies Act, formulation of NACS (National Advisory Committee on Accounting Standard), etc. He also gave information about the procedure followed for bringing about these amendments.

The speaker then resolved the issue regarding the date from which the amendments in Schedule VI would apply. He explained that the applicability date would be 1st April, 2011 and not 1st April, 2010. The confusion was created because the Ministry’s website initially showed the applicability date as 1st April, 2010, which was later changed to 1st April, 2011.

The speaker then gave an overview of the revised format of Schedule VI before discussing each specific amendment. He explained to the audience the advantages and problems associated with each and every amendment like removal of ‘Appropriations’ part from the Profit & Loss account, etc.

For the benefit of participants, he individually listed out major highlights from the amendments. He elaborated on the various issues that may crop up like keeping a track of the debtors from the date they become due and not from the date of sale; classification of current and non-current items, absence of the head ‘Net working capital’ in the balance sheet, etc. He also gave an insight on important aspects of IFRS wherever relevant.

Mr. Ramesh encapsulated his analysis by presenting a tabular comparison between the old Schedule VI and revised Schedule VI for clear understanding of the changes. It provided exhaustive information on degree of changes made as compared to the old Schedule.

At the end, he presented important issues to ponder, which arose out of these amendments. Some of these issues were regarding the reclassification of the previous year’s figures into the revised format, whether proposed dividend is to be provided for or not, etc. He also touched upon the implementation issues of Schedule VI, voluminous disclosure requirements; lack of clarity vis-à-vis long-term borrowings, etc.

He concluded by convincing the participants that a change in mindset will be required by everyone dealing with the new Schedule VI.

After his presentation the learned speaker answered all queries raised by members in the audience. His enthusiasm coupled with his deep knowledge of the subject was well appreciated by all the gathering.

The speaker’s presentation is available on the BCAS website. Further, his speech is also available on BCAS Web TV.

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Lecture Meetings

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Subject : Developments in Accounting Standards—In India and Globally

Speaker : Shri Narendra P. Sarda
Day and Date : Wednesday, 4th September, 2013
Venue : K. C. College, Mumbai

Objective of the lecture: To take participants through a journey of the world of accounting developments internationally and in India.

The speaker first dealt broadly with the journey of Accounting Standards formation in India:

Year 1973 – IASC was formed

Year 1977 – ICAI issued the Preface to Accounting Standards.

Year 1977-1993 – 15 Accounting Standards were notified. The pace was slow as India was an insulated economy.

Year 1993-2000 – This was a period of lull, when there were no new AS notified.

Year 2000 – There was a pressure from regulators to keep pace with the international developments in the accounting world, as India had liberalised its policies and there was expectation from the international community to have financial statements prepared at par with international best practices.

Year 2000-2007 – New Accounting Standards formulated included standards on Consolidation, Segment Reporting, Related Parties, etc. There were not only recognition standards, but also standards on disclosures.

Year 2007 – As India was moving fast towards raising resources from foreign countries and there was a flow of foreign companies setting up operations in India, there was a debate as to whether IFRS should be adopted in totality or whether there should be convergence with IFRS. India decided to converge with IFRS.

The speaker highlighted that 95% of countries have decided to converge with IFRS. He also detailed the difference of adoption and convergence with IFRS.

Adoption – Adopt IFRS in totality.

Convergence – Formulate these as such that they are almost on par with IFRS, with some departures considering local business and legal requirements.

Most of the countries in Europe apply IFRS only for Consolidated Financial Statements (CFS), whereas Standalone Financial Statements (SFS) are allowed to be prepared as per local GAAP.

The speaker was of the opinion that India should have done the same; however, India took a decision of applying converged Indian Accounting Standards to CFS as well as SFS.

A set of 35 converged Accounting Standards was prepared and NACAS reviewed the same and these have been put up on MCA’s website. However, the applicability of the same has not yet been announced.

The speaker informed that at present there are three sets of Accounting Standards in India.

• Converged Accounting Standards (IndAS), which are not yet applicable;

• Mandatory Accounting Standards, which are applicable as per the Companies Act, 1956; and

• ICAI-promulgated Accounting Standards, which are applicable to all the other entities.

The speaker then discussed the carve-outs in converged Accounting Standards (IndAS) which are not part of IFRS.

He listed and discussed in detail the carve-outs on the following standards:

• IndAS 21 – The Effects of Changes in Foreign Exchange Rates;

• IndAS103 – Business Combinations;

• IndAS 19 – Employee Benefits;

• IndAS 11 – Construction Contracts;

• IndAS101 – First Time Adoption of Indian Accounting Standards;

• IndAS 27 – Consolidated and Separate Financial Statements;

• IndAS 20 – Accounting for Government Grants and Disclosure of Government Assistance;

The speaker also informed the participants about the Revised Schedule VI which is based on IAS 1 and IndAS 1 – Presentation of Financial Statements. As per Revised Schedule VI, Accounting Standards are supreme and if there is any variance between the Revised Schedule VI and Accounting Standards, the Accounting Standards will have to be followed. In view of the same, AS-1 which was based on the Old Schedule VI has been under revision to fall in line with the reporting requirements as prescribed in Revised Schedule VI.

While dealing with the Financial Instruments standards, he brought out an interesting fact that IndAS 39–Financial Instruments–Recognition and Measurement is promulgated but not yet applicable. Similarly AS 30, 31 & 32 dealing with Financial Instruments are also not applicable. Hence at present only AS 13–Accounting for Investments is mandatory and there are no applicable standards for Derivative Contracts. However, on the concept of prudence, ICAI came out with an announcement for accounting and recognising losses on Derivative Contracts though there is no standard made applicable.

The speaker then dealt with the conceptual differences between IFRS and Indian Accounting Standards. He highlighted the main differences as follows:

• IFRS is more focused on Fair Value Accounting;

• Under IFRS, more importance is attached to the balance sheet, whereas in India, importance is to assess the profitability;

• IFRS provides importance to Time Value of Money and hence there is discounting approach;

• IFRS gives more importance to the substance of the transaction than to the form of the same; and

• IFRS is based more on judgments.

He also briefly discussed the draft Tax Accounting Standards (TAS) proposed by the Indian tax authorities. He said that the committee formed to prepare draft TAS, has identified 14 AS where there is a requirement to have separate TAS.

After discussing specifics of the Accounting Standards, the speaker dealt with global developments. He elaborated that earlier there was a competition in drafting Accounting Standards between US GAAP and IASB. However, of late, the approach is that of coordination. There are five specific areas where both the organisations are working on joint projects. The same are as follows:

• Financial Instruments;

• FV Measurement;

• Revenue Recognition;

• Lease Accounting; and

• Insurance Contracts.

He also dealt with the economic crisis of the year 2008, which made all the accounting bodies to accept the fact that there is a need for globally accepted Accounting Standards. There has to be more clarity and guidance for accounting and disclosure of Complex Financial Instruments and Off-Balance Sheet items should be examined thoroughly and to the maximum extent avoided.

Before concluding, he also provided an overview of the developments and progress on various joint projects between FASB and IASB.

The lecture was very well appreciated by the audience and concluded with a well deserved vote of thanks to the speaker.

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LECTURE METING

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Subject : India@2030
Speaker : Mohandas Pai, CA, former Whole-time Director, Infosys Ltd.
Date : 29th June 2011

Mohandas Pai, a fellow member of the ICAI and ex-Member of the Board of Directors at Infosys, delivered the annual Dilip Dalal Oration Lecture on 29th June 2011. The subject was ‘India @ 2030’. The experienced speaker covered a snapshot of the Indian economy before going into the details of the mega trends which are changing the world and the specific challenges which are faced by India.

Shri Pai commenced his speech with an analysis of the positive factors of the Indian economy with the support of global and domestic statistics. He pointed out how the world is changing with countries like India and China expected to contribute more to the world economy than US, Europe and Japan by 2020 in terms of GDP.

He then elaborated on the three major reasons which are changing the world. According to him, globalisation, though an age-old concept, is accelerating due to factors like reduction in time for travel, communication efficiency, social networking tools, etc. Easy capital flows and reduced trade barriers were the main driving forces behind globalisation. The main impact would be the increase in competition for highly skilled and educated people and resultant brain drain. New regulatory systems would be required to be in place to avoid unfair competition and dumping of goods. However, there was no doubt that globalisation has led to improved living conditions of people. Skilled people of India and China have taken benefit of this globalisation leading to rise of these countries in the world economy. Globalisation is an unstoppable force and should be embraced.

The next big trend which is changing the world according to him is technology. His moot point was that innovation cycles are becoming much shorter. For example, the PC replaced the typewriter and soon the smartphone may well replace the PC! Technology has also led to a much democratised society. Telecommunication and the worldwide web have resulted in breaking barriers. Access to knowledge has empowered the general public. Similarly, ideas can come from any part of the world and can be implemented anywhere. There is free flow of capital, ideas and implementation.

The third mega trend according to Shri Pai is the demographic transition and the aging of population in developed countries. He gave several examples of countries where either the population has declined or there is a rise in number of aged people. In contrast, Asian, African and Islamic countries are witnessing a population growth; and immigrant population in western countries is also rising. By 2030 India will have the youngest population in the world! This represents a tremendous opportunity for India.

All these factors are leading to India’s growth. Shri Pai enumerated several estimates pointing towards a significant growth in the next 20 years. However, there are quite a few issues that India needs to resolve for it to achieve this level of growth. The primary challenges are: Poverty alleviation, healthcare for all, investment in education, and generation of employment opportunities.

For tackling poverty, Shri Pai suggested a major revamping of the subsidy regime. It has not provided the impact it should have, as proved over the last 60 years. The NREGA scheme, while giving more purchasing power to the landless and marginalised, has not given the returns in line with the investments made. Shri Pai has therefore advocated replacement of the current subsidy system by a cash transfer system which would alleviate the present problems.

Healthcare or the lack of it is the second major challenge India faces. Shri Pai suggested a national health insurance scheme for the BPL sector. This would empower the people to choose the best service provider.

While talking about Education, Shri Pai pointed out that the present system cannot decide between quantity and quality. He gave the example of IITs and IIMs where more money is spent in clearing the entrance exams than the fees for the course. He mentioned that large-scale expansion of the education sector is required to give everyone an equal chance for education. While quality in education is essential, it should not become a block. He called for liberalisation with privatisation in the education sector. Mr. Pai felt that there was no harm in having a for-profit sector in education, if access to education was available to all youngsters.

The participants also got a chance to get their queries answered from the learned speaker. The queries covered varied subjects from education problems to corruption. The participants were witness to passionate and well-considered replies from Mr. Pai to their questions.

Subject : Taxation of Cross-Border Transactions — Recent Trend in India
Speaker : Pinakin Desai, CA, Past President, BCAS
Date : 13th July 2011

The meeting began with a warm welcome from the President who introduced the speaker, Pinakin Desai and the topic for the day. The learned speaker covered the various aspects of cross- border transactions in the international tax scenario. Some of the major issues discussed by him are as follows:

Permanent Establishment (PE)

Provisions for creating the following types of PEs were explained:

Service PE: After explaining the requirement for creating a Service PE in India, the following issue related to Service PE was discussed:

ABC Canada provides support services to XYZ India and outsources part of the service function to PQR India, an independent service provider. Contract between ABC Canada and XYZ India and between ABC Canada and PQR India are independent and at a fair price.

Issue involved: Whether period of service rendered by PQR India on behalf of ABC Canada to XYZ India would need to be taken into account for determining threshold of service PE?

Decision of the Delhi ITAT in the case of Lucent Technologies International Inc v. DCIT, (2009 TIOL 161 ITAT-Del.) was referred to and the speaker opined that to aggregate the time spent by personnel of PQR India with the time spent by the personnel of ABC Canada, the personnel of PQR should be under the command and control of ABC Canada, i.e., only the time spent by dependent non-employees of a company can be considered for computing the threshold for constituting Service PE.

Construction PE: The same issue as for Service PE would also arise for a Construction PE.

ICO-1 enters into a contract with FCO for installation of equipment, work being of long duration. FCO sub-contracts part of physical execution to an independent Indian sub-contractor ICO-2. ICO-2 is remunerated by FCO on a fair basis. FCO remains contractually liable to ICO-1, but also has a back to back indemnity from ICO-2.

Issue involved: Whether time spent by ICO-2 needs to be aggregated for determining emergence of Construction PE for FCO?

The speaker opined that same view as Service PE cannot be held in this case as the language in Construction PE article is different from the Service PE article. For a Construction PE, different views are possible, depending on the facts of the case. While there is an AAR Ruling in the case of Pintsch Bamag (318 ITR 190) favouring the view that aggregation is not required when part of the work is outsourced; the commentaries for Skaar, OECD and US appear to suggest that the time of sub-contractor needs to be aggregated.


Agency PE: An Agency PE may get ignited when services are provided by a dependent agent to its principal. An agent is a dependent agent when he has authority and/or habitually exercises authority to conclude contracts on behalf of his principal. A person may be regarded as a dependent agent even if he does not have such authority, but has authority to secure contracts and works almost exclusively for one principal/group.

Issue involved: What kind of work carried on by a person will be said to satisfy ‘securing orders’ criteria and thereby giving rise to a dependent agent?

Reference was made to the US treaty which offered a strict meaning to the term ‘securing an order’ and to Switzerland treaty which gave a very general meaning to the term. The speaker opined that if the matter arose in the case of a neutral treaty which follows neither US nor Swiss Protocol, the courts are more likely to uphold the interpretation of the Swiss Protocol.

The speaker opined an Agency PE from the services of a dependent agent could be avoided if the agent is remunerated at an arm’s-length price.

Section 9(1)(vii) of Income-tax Act, 1961 (Act)

The above section defines the term ‘technical services’. Explanation 2 to the section carves out certain exclusions to what would constitute fees for technical services (FTS). Accordingly, FTS would not include, inter alia, consideration for any construction, assembly, mining or like project undertaken by the recipient. The following observations were made by the speaker:

(a)    Pure services/identifiable independent services are not covered by exception of section 9(1)(vii).

(b)    When an independent service provider is providing services which require him to engage man, material and equipments within India, he could be said to be carrying on a business in India and hence, would not be covered by section 9(1)(vii).

Source Rule Exception
India-Finland DTAA: Would remote technical services provided by a Finland company to an Indian company be liable to tax in India merely because the fees are payable by an Indian resident on account of the conditions laid down in section 9(1)(vii)?

  •     Article 12(5) of India-Finland DTAA provides that FTS shall be deemed to arise in India, when the payer is a resident of India. Where, however, FTS relate to services performed, within a Contracting State (Finland), then such FTS shall be deemed to arise in the State (Finland) in which the services are performed.

  •     In the present case, FTS arise in Finland as services are performed in Finland and hence, not taxable in India.

India-China DTAA: Would services performed by a Chinese company in China but used for a business in India be taxable in India? Would the same analogy as for the Finland company apply?

  •     Article 12(4) provides that FTS means any payment for provision of services of managerial, technical or consultancy nature by a resident of a Contracting State (China) in the other Contracting State (India).

  •     Article 12(6) provides that FTS shall be deemed to arise in India when the payer is a resident of India.

  •     Mumbai ITAT in the case of Ashapura Minichem has held that in view of the deeming fiction of article 12(6) of the India-China DTAA, it was not necessary to consider the merits of the argument on the scope of Article 12(4).

Technology-driven services
Can the payment made by an Indian telecom company to a foreign telecom company for roaming services be characterised as rent? The decision of the Mumbai ITAT in the case of Vodafone Essar has looked on cellular mobile telephone as service and not rent.

Would the payment made by the Indian service provider to an overseas service provider for roaming/ interconnect services provided to customers require withholding tax? The Delhi HC in the case of Bharti Cellular Ltd. (319 ITR 139) has held that ‘technical service’ would have reference to only technical services rendered by a human. Interconnect services were regarded by the HC as not requiring human intervention and hence, were not technical services and hence, there would be no withholding tax liability.

The SC observations in the case of Bharati Cellular (330 ITR 239) were also discussed. The CBDT Instruction No. 5/2011 issued as a consequence of the above decision was also analysed. The open issues of consideration from this were identified as:

  •     Fate of technology-driven services

  •     Extent and depth of human intervention

  •     HC understanding: reference only to technical service rendered by a human

  •     Likely attitude of tax department in pending telecom cases

  •     Likely attitude of tax department in complex telecom cases

  •     Extension of the attitude in other proceedings

  •     Litigation involving cross examination of experts.

Secondment
If an employee is seconded by a foreign company to an Indian company such that the Indian company is the economic employer while the foreign company is the legal employer, then it was an accepted conclusion that it would not amount to rendering any service by the foreign company other than seconding the employee to the Indian company.

AAR Ruling in the case of Verizon Data Services India Limited (AAR No. 865 of 2010) was discussed in this context. The AAR held contrary view as in that case the foreign company reserved rights over the termination and hiring of seconded employees. The speaker emphasised the need to exercise caution in drafting the secondment agreements to avoid such views.

The observations of the AAR in treating the secondment transaction as Fees for Technical Services were discussed and the speaker opined that the judgment may have curious ramifications if upheld ultimately.

Place of Effective Management (POEM)

The concept of POEM has been introduced by the Direct Tax Code (DTC). After explaining in brief the meaning, application and importance of POEM, the learned speaker shared with the audience his view on the judgment of the Supreme Court in the case of Subbayya Chettaiar v. CIT, (19 ITR 168) which dealt with the concepts of control and management.

Vodafone and related controversy

The facts, issues and the judgment in the case of Vodafone where it was held that when there is transfer of shares of a foreign company by a foreign company to a foreign company, it would still be taxable in India, if the ultimate underlying assets which were being controlled by those shares were located in India. The speaker opined that the facts of the Vodafone case are peculiar in nature and would not necessarily apply to all similar transactions.

Supreme Court axe on black money

The Hassan Ali case relating to black money and the future outlook of India to black money were briefly discussed by the speaker.

The meeting concluded with a hearty vote of thanks and a loud round of applause to the speaker.

LECTURE METING

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Subject : Nurturing Relationships
Speaker : Sister Shivani
Date : 21-12-2011

‘Brahma Kumari’ Shivani addressed the members of the Society and public at large on the subject ‘Nurturing Relationships’ on 21st December, 2011 at K. C. College, Churchgate. She presented her in-depth understanding of the human psychology and relationships.

The speaker started the meeting with a two-minute silence. During that silence she made the audience concentrate on those relationships which are experiencing a tough time. This was something unique on her part which made the audience think.

Then she asked the audience their opinions on why relationships are spoilt. She took the responses of the audience and analysed those responses. It was a very interactive session in that sense.

She got varied responses from the audience. anger, ego, jealousy, hypocrisy, age difference, generation gap, frustration, boredom, etc. are some of the reasons. She came to each of them one after the other. One of the important things that she stressed upon is that the problem is created by only one factor, rest are all chained. If you break the first one, the rest will automatically be broken. She clarified that if we learn to accept things and people around us as they are, without trying to make modifications in them, then our relationships will never be spoilt. In a nutshell we should not expect anything from anyone. If expectations break, then that chain will start to pop up.

To illustrate, if we accept people as they are and do not expect them to behave according to our expectations, then we will not be angry with them, because their actions will not have any power to disturb our mental state. If anger is not there, then ego automatically gets cancelled out. If there is no ego, then jealousy does not come into the picture! Similarly, hypocrisy, age difference, boredom, etc. will all be rendered powerless to create strain in our relationships if we apply the above golden principle in our day-to-day life.

Sister Shivani enlightened everyone that we should have respect for the other soul. The basic problem associated with everyone is that people are always quick to react! We should always learn to respect other people’s acts rather than reacting on them. This will create a win-win situation for us. It will not disturb our mental peace and at the same time our relationships will not get spoiled.

She then explained to the audience that relationships are always maintained by ‘thoughts’ and ‘thinking’. ‘Actions’ play a very minor role in nurturing relationships. In fact, it is well accepted that our actions are guided by our thinking only! So to maintain good relationships we need to always think positive. Our thoughts will determine our relationships. Further, she mentioned that all the negative feelings like anger, ego, hatred, jealousy, etc. pollute our soul, and hence one should keep away from them. She acknowledged that it is not easy and one can always take the help of meditation. Meditation can help one to be nearer to the Almighty. It can give eternal peace and satisfaction.

To conclude, let the relation be of any nature – brother-sister, husband-wife, parent-child and professional-client, but acceptance is the key for successful relations. Accept and do not expect!

Sister Shivani concluded her beautiful session after taking a promise from everyone that they will try to mend their relationships and nurture them. The softness and beauty of her speech was very well acknowledged and appreciated by the audience, which was in large numbers.

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Lecture Meeting

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Topic : I mportant Income-tax decisions of 2014
Speaker : H iro Rai, Advocate
Date : 29th January 2015
Venue : Walchand Hirachand Hall, Indian
Merchants Chamberr

The Speaker started with Supreme Court decisions, dealing first with the case of Sanjeev Lal vs. CIT 365 ITR 389 wherein exemption u/s. 54F was denied by the AO on the grounds that the final sale was delayed and purchase of new house was more than one year prior to date of actual sale. The Court held that certain rights passed even on agreement for sale, and on a liberal interpretation of the exemption provision, the sale could have been regarded as having taken place at the time of agreement to sell. The circumstances of litigation which caused the delay in completion of sale were beyond the assessee’s control, and could not be the basis for denying the eligibility of exemption u/s. 54F to the assessee if the assessee fulfilled the other conditions specified in section 54F. This principle can also be applied for claiming benefit u/s. 54.

The speaker then threw light on a wealth tax decision in Amrit Banaspati Co. Ltd. vs. CWT 365 ITR 515 (SC). The Assessing Officer (AO) found that the valuation declared by the assessee on the basis of capitalisation of municipal rateable value was very low compared to the market value of the property; so also the sale value as per agreement was much higher than value as per municipal rateable value. The Supreme Court held that it was a case where it was not practicable to apply rule 3, due to the very low valuation as compared to the fair market value. The valuation of property was, therefore, held proper under rule 8(a) i.e. as per fair market value.

In the case of CIT vs. Tip Top Typography 368 ITR 330 (Bom HC) the Assessing Officer (AO) noticed that the rent received by the assessee on letting out commercial premises along with car parking was nominal and the circumstantial evidence indicated that the fair market value was higher. Therefore, AO obtained instances of the rental amount prevailing in the market in the area and confirmed that the property was not covered by the Rent Control Act. On the basis of such comparable instances, the annual letting value as provided u/s. 23(1)(a) was determined at a much higher figure.

The Bombay High Court held that the market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful, that he can resort to enquire about the prevailing rate in the locality. The municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. AO cannot brush aside the rent control legislation if it is applicable to the premises in question. Accordingly, the AO had to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. Further the court held that if AO desires to undertake the determination himself, he would have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the AO.

Due to the above two decisions of Amrit Banaspati Co. Ltd. and Tip Top Typography, assessees owning more than one house could face problems in assessment if the assessing officer has reason to believe that the value adopted by assessee is very low or absurd, resulting in the assessing officer adopt the fair market value of the property for the wealth tax or of the rent for income tax purpose.

The Supreme Court in the case of Himatsingka Seide Ltd.,(2014) 266 CTR 141 gave a four liner decision affirming the decision of Karnataka High Court [CIT vs. Himatsingka Seide Ltd. (2006) 286 ITR 255] wherein the High Court held that unabsorbed depreciation should be adjusted against income of export oriented business, and the taxpayer cannot adjust unabsorbed depreciation against other income, so as to take exemption from payment of tax even for other income, as section 10B is an exemption section and not a deduction section.

On a similar issue, the Bombay High Court in the case of CIT vs. Black & Veatch Consulting (P.) Ltd. (2012)348 ITR 72 held that the brought forward unabsorbed depreciation and losses of the unit, the income of which is not eligible for deduction u/s. 10A, cannot be set off against the current profit of the eligible unit for computing the deduction u/s. 10A. It may be noted that the said decision of the Bombay High Court was cited before the apex court in the case of Himatsingka Seide Ltd.,(2014) 266 CTR 141.

However, the department has started taking the view that deduction u/s. 10A or 10B should be availed by the assessee only after setting off unabsorbed depreciation and unabsorbed business loss, if any, incurred by assessee.

In Vodafone India Services Private Limited vs. UOI & Others 368 ITR 1, the Bombay High Court held that issue of shares at a premium by Vodafone India in favour of its AE did not give rise to any “income” from an International Transaction, as income would not include capital receipts unless specifically stated in the income tax act, and therefore, there was no need to invoke Transfer Pricing provisions. A decision has been taken by the Government not to challenge this decision further before the Supreme Court, and this decision has therefore attained finality.

In the case of CIT vs. Nayan Builders 368 ITR 722, Bombay High Court upheld the decision of tribunal wherein tribunal held that since the High Court admitted the appeal filed by assessee, substantial questions of law were involved. Accordingly penalty u/s. 271(1)(c) of the Incometax Act, 1961 imposed by the Assessing Officer was cancelled. Based on the said decision, if an assessee finds any appeal admitted by the high court covering similar issue as that of assessee, then relying on the decision of Nayan Builders, the assessee can plead that penalty u/s. 271(1)(c) cannot be levied.

The next issue was whether a foreign company deductee can claim that since tax was deductible at source, even though no tax was actually deducted at source, no interest u/s 234B can be levied. In the case of DIT (IT) vs. Alcatel Lucent USA, Inc (264 CTR 240), the Delhi High Court held that it seems inequitable that an assessee, who accepted the tax liability at first appellate stage after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after leading them to believe that no tax was deductible. Further, it held that the assessee must take responsibility for its volte face and once the liability to tax is accepted, all consequences follow and same cannot be avoided. It also held that the present case is one where equitable considerations should prevail in the interpretation of section 234B otherwise, it would not merely result in injustice and the purpose of the provision would also not have been achieved.

However, in the case of DIT (IT) vs. NGC Network Asia LLC [2009] 313 ITR 187, where the revenue preferred an appeal contending that the assessee was liable to pay advance tax even on the amount which had not been deducted at source u/s. 195. The Bombay High Court relying on the decision of CIT vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal) held that where the deductor has failed to deduct tax, the shortfall attributable to non-deduction of tax at source cannot be the deductee’s fault, so as to be the subject matter of interest u/s. 234B.

Given both opposite decisions i.e. favourable and unfa- vourable to assessee, in case the Supreme Court upholds the decision of delhi high Court in case of alcatel Lucent, USA, which was unfavorable to the assessee, then this would result into a large number of litigations, as there are many cases pending with huge amounts involved in similar matters.

The next interesting issue discussed by the speaker was whether there could be disallowance of payments u/s. 40(a)(ia) of the income-tax act on account of short deduction of TDS. In such cases, there are different views, one being that the deduction not being in accordance with law, the entire payment could be disallowed. The second view is that disallowance should be proportionate to short deduction. The third view is that there need be no disallowance when there is short deduction. It was this third view, which was adopted by the high Court in CIT vs. S. K. Tekriwal [2014] 361 ITR 432 (Calcutta high Court). The high Court had not given its detailed reasoning, but reproduced the tribunal order, which took the view that though the short deduction may attract proceedings under section 201, disallowance u/s. 40(a)(ia) is not possible, when there is a bona fide short deduction. However the matter is not free from doubt, and one should probably await finality either from the Supreme Court or by way of clarification on the disallowance in such situations.

In the case of Mitsubishi Corporation India Pvt. Ltd vs. DCIT 166 TTJ 385 (2014), the assessee made certain payments to its associated enterprise. Such payments were disallowed by the ao u/s. 40(a)(i). the delhi tribunal, applying the non-discrimination clause, held that Second proviso to section 40(a)(ia) is also required to be read into section 40(a)(i), in cases where related payments are made to the tax residents of japan, as long as the japanese tax residents have taken into account the payments made to them by indian residents without deduction of tax at source in their computation of income, paid interest thereon and have filed the related income tax returns u/s. 139(1) in india, the payments so made by the indian enterprise cannot be disallowed in the hands of indian enterprise.

W.e.f. a.y. 2015-16, disallowance u/s. 40a(ia) is reduced to only 30% instead of previous 100% disallowance. according to the Speaker, since section 40a(i) has not been amended on similar lines, the non discrimination clause could be invoked as in the case of mitsubishi Corporation.

Dealing with a few tribunal decisions, in the case of Zaveri & Co. (P.) Ltd. vs. CIT 32 ITR (T) 50, ITAT Ahmedabad held that fixed deposit receipts taken for obtaining Letter of Credit for purchases, on which interest was earned by the assessee, an SEZ unit, were business assets of the assessee acquired in the course and for the purposes of its business. Hence, interest income earned on fixed deposit had to be assessed as business income of the assessee while calculating benefit u/s. 10AA of the Income tax act.

The last decision quoted by the speaker was on the current issue of bogus purchases. itat mumbai, in the case of Shri Rajeev G. Kalathil vs. DCIT 67 SOT 52, held that Purchases cannot be termed as bogus by the ao merely because the supplier was listed as a hawala dealer by the VAT authorities. In the said case, CIT(A) held that the transactions were supported by proper documentary evi- dences, that the payments made to the parties by the assessee were in confirmation with bank certificate, and the mere fact that the supplier was shown as defaulter under the Maharashtra VAT Act could not be sufficient evidence to  hold  that  the  purchases  were  non-genuine.  The ao had not brought any independent and reliable evidence against the assessee to prove the non-genuineness of the purchases, and there was no evidence regarding cash received back from the suppliers. The addition made by the ao was deleted by the CIT(a). On further appeal by department, hon’ble mumbai tribunal upheld the order of CIT(a).

The    meeting    ended    with    a    vote    of    thanks    to the Speaker.

Penalties under Income Tax Act – Recent Developments

Topic:      Penalties under
Income Tax Act – Recent Developments

Speaker:   Mr. Hiro Rai, Advocate

Date:         22nd
March 2017

Venue:     Walchand Hirachand Hall,  Indian Merchants Chamber

The speaker commenced the lecture
meeting, by dealing with the penalty u/s. 
271(1)(c) of the Income-tax Act, 1961 (‘The Act’). Section 271(1)(c) has
two limbs, concealment of particulars of income and furnishing of inaccurate
particulars of income. The very first argument to be taken, in a penalty u/s.
271(1)(c) is of whether the penalty that has been levied is on the concealment
of income or furnishing inaccurate particulars of income, provided the facts
and circumstances of the case permit such an argument. It is an established
proposition that penalty provisions should be strictly construed. Therefore, if
the show-cause notice is in the printed form where the AO has not ticked the
relevant provisions or has not marked what he wants the assessee to respond to,
then the inference can be drawn that there is failure on the part of the AO to
apply his mind. In such a scenario, the assessee is deprived of knowing what
charge he is required to answer to. The courts have taken the position that, in
such cases, the penalty proceeding itself is bad in law.

In this regard, the speaker
referred to two rulings given by the Karnataka High Court (‘HC’) viz., CIT
vs. Manjunatha Cotton & Ginning Factory (359 ITR 565) and CIT vs.
SSA’s Emerald Meadows (73 taxmann.com 241). In SSA’s Emerald Meadows case,
the Karnataka HC followed the decision of Manjunatha Cotton & Ginning
Factory (supra), and the Supreme Court (‘SC’) dismissed the Special
Leave Petition (‘SLP’) filed by the department. However, mere dismissal of an
SLP, in the absence of a speaking order does not mean that the SC has given the
stamp of approval to the decision of the Karnataka High Court.  The speaker mentioned that, the SC decision
in case of T. Ashok Pai vs. CIT (245 ITR 360) also discusses the above
proposition.

In a recent case, Mumbai Income
Tax Appellate Tribunal (‘ITAT’) followed the above mentioned 2 decisions of the
Karnataka High Court and observed that “If penalty is initiated on one limb
of the section 271(1)(c) of the Act and levied on another limb, then the
penalty is bad in law.” In a recent case, reported in 392 ITR 4, the Bombay
HC noted the fact that since the notice did not strike out irrelevant portion,
the AO had not applied his mind.

As regards penalty u/s. 270A, the
memorandum explaining the Finance Bill as well as the circular on the Finance
Act both include the words “In order to rationalise provisions relating to
penalty and bring clarity, certainty …”. However, the speaker was of the
view that it was doubtful whether there would be clarity and certainty.

Sub-section (1) of section 270A
lists down the authorities who may impose penalty in case of an under reporting
of income. The inclusion of the words “… may, … direct that..” indicates
that the levy is not mandatory. The speaker suggested that, when an opportunity
of being heard is given to the assessee, he should completely bring out all the
relevant facts.

Sub-section (2) to section 270A
lays down the 7 situations where a person can be considered to have
under-reported the income. In all the situations, the AO has to prove that
there is under-reporting of income. The first 3 clauses of sub-section (2) to
section 270A i.e. (a) to (c), deal with non – MAT additions. In case of clause
(a), there must be processing of return of income u/s. 143(1) of the Act. No
return case is mentioned in clause (b), where the income assessed is greater
than maximum amount not chargeable to tax. Clause (c) covers the cases relating
to reassessment. Clauses (d) to (f) deal with additions to MAT profits. The
speaker mentioned that, at bill stage, clause (f) was not present. At the Act
stage, clause (f) was inserted and the earlier proposed clause (f) was shifted
to clause (g). However, the lawmakers failed to amend clause (d), while
inserting clause (f). Clause (g) covers a situation where loss is reported in
the return of income and the assessment or reassessment has effect of
converting such loss into income. A Loss to Loss situation is not covered in
clause (g) as it contains the words “the income assessed …”.

Section 270A(3) provides for the
computation of under-reported income. The speaker was of the view that, in 90%
of the cases the AO would sustain penalty in case of addition to the income,
causing a lot of harassment to the assessee. In case the difference between
returned and assessed income is on account of the income as per normal
provisions of the Act and not on account of book profits computed u/s. 115JB,
then section 270A(3)(ii) will not apply. Then, the speaker threw light on the
formula (A–B) + (C–D) mentioned in the proviso to section 270A(3). The proviso
is applicable where under-reporting of income arises out of determination of
book profits as per MAT provisions. However, in the formula, ‘A’ is the total
income assessed as per normal provisions of the Act. But, when book profits are
deemed to be total income, then there is no assessment of income as per normal
provisions, but mere computation of such income. Therefore, in the view of the
speaker, the formula (A–B) + (C–D) fails, and hence no penalty could be levied
in such a situation.

Section 270A(6) provides the
exclusions from under reporting of income. Clause (a) states that, no penalty
is to be levied in case of under-reporting of income on the legal issues. The
speaker suggested that in case of a legal claim made by the assessee, the facts
should be disclosed properly by the assessee. On clause (c), the speaker gave
an example of disallowance u/s. 14A and disallowance to the extent of say, 25%
of expenses by the AO in the assessment order, where the assessee has suo-moto
disallowed 10% of the expenses. Clause (d) talks about Transfer Pricing
adjustments. As per clause (e), no penalty u/s. 270A can be levied in search
cases.

Section 270A(7) quantifies the
amount of penalty payable on under-reported income i.e. 50% of the amount of
tax payable on under-reported income.

Then, the speaker discussed s/s.
(8), which quantifies the penalty at 200% of the tax payable on under-reported
income, which is as a consequence of misreporting. The speaker clarified that
misreporting of income is a sub-set of under-reporting. Further, the saving
clauses of sub-section (6) to section 270A do not apply in cases of
misreporting of income.

S/s. (9) gives an exhaustive list
of misreporting of income. The speaker gave examples on each clause of the sub-section.

Clause (q) to Section 246A(1)
gives a right to the assessee to appeal before the Commissioner of Income Tax
(Appeals) against an order imposing penalty under Chapter XXI.

U/s. 273A, penalty can be reduced
or waived on satisfaction or certain conditions mentioned therein.

U/s. 270AA(1), where the assessee
pays the tax and interest payable as per the order, the AO may grant immunity
from imposition of penalty for misreporting or under-reporting. In the
speaker’s view, the AO may reject the immunity as mentioned above, stating that
the income is misreported and not under-reported.

As regards section 270AA(2), the
speaker categorically mentioned that the application to the AO to grant
immunity from imposition of penalty u/s. 270A should be made immediately on
receipt of the assessment order u/s. 143(3) or reassessment order u/s. 147, as
the case may be, and one should not wait for the last date i.e. one month from
the end of the month in which the order is received. This is because the period
of limitation as mentioned in section 249 is not adequate.

The inclusion of the word “shall”
in sub-section (3) of section 270AA binds the AO to grant immunity on the
conditions specified in sub-section (1) to section 270AA being satisfied.
However, there will be no benefit granted in case of misreporting of income.
Clause 3 is available only in case of under-reporting of income.

As per section 270AA(4), the AO
should give an opportunity of being heard to the assessee, before rejecting the
application to grant immunity from imposition of penalty u/s. 270A. The speaker
mentioned that in case of mis-reporting of income, when the opportunity of
being heard is given, the assessee should bring out the fact that, the assessee
does not accept that his case is one of misreporting.

In case the application to grant
immunity from imposition of penalty u/s. 270A is rejected, then an appeal
should be filed before the Commissioner of Income Tax (Appeals) against such
rejection.

Later, the speaker threw light on the saving provisions
contained in the section 249 of the Act that, for the purpose of computing the
period of limitation for filing of an appeal to the Commissioner (Appeals),
where an application has been made u/s. 270AA(1). The period beginning from the
date on which application is made, to the date on which the order rejecting the
application is served on the assessee, is to be excluded.

Section 271AAB speaks about the
penalty in cases where search has been initiated. As per clause (a) to s/s.
(1), in case of search initiated on or after 1st July, 2012 but
before 15th December, 2016, the assessee shall pay by way of penalty
at the rate of 10 % of the undisclosed income of the specified previous year on
satisfaction of the conditions mentioned therein.

As per section 271AAB(1A)(a), in
case of search initiated on or after 15th December, 2016, the
assessee shall pay by way of penalty at the rate of 30 % of the undisclosed
income of the specified previous year on satisfaction of the conditions
mentioned therein. As per clause (b) the, assessee shall pay by way of penalty
at the rate of 60 % of the undisclosed income of the specified previous year.
Clause (b) covers the situations which are not covered in clause (a).

Later, the speaker dealt with the
amendment in section 115BBE by the Taxation Laws (Second Amendment) Act, 2016
w. e. f. 1st April, 2017. Section 115BBE prescribes tax at the rate
of 60% on the income referred in sections 68, 69, 69A, 69B, 69C or 69D included
in total income of the assessee computed in return of income or determined by
the Assessing Officer. Section 271AAC of the Act prescribes penalty at the rate
of 10% of the tax payable u/s. 115BBE. The silver lining here is that, the rate
of income tax as per section 115BBE is 60% and as per section 271AAC, the
penalty is computed at the rate of 10% of the tax payable u/s. 115BBE.
Therefore, the total liability towards tax and penalty together amounts to 66%
of the income referred in sections 68, 69, 69A, 69B, 69C or 69D of the Act.

The
meeting ended with a vote of thanks to the speaker.

PUBLIC LECTURE MEETING ON DIRECT TAX PROVISIONS ON THE FINANCE BILL, 2016

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Dear Members,

The wait for most awaited economic event of the country, Union Budget 2016 will be over on 29th February, 2016. The entire country is eager to know how the “Ease of doing business” unfolds. Will the Easwar Committee recommendations be accepted? Whether there will be any guidance on the GST applicability? Will this budget bring in more transperancy and accountability? How will the “Guiding Principles” of POEM take shape?. The Indian businesses are looking forward to long term measures on policy front which provides stability on tax front and enables proper planning. They envisage substantial scalable operations with support of qualitative direction from Modi Government to capitalise on opportunities for emerging markets like India. Whether the Modi Government will go that extra mile and deliver some path breaking measures in the forthcoming Budget, is looked upon with eagerness and anxiety. The future is promising and the pace has to be provided by the Finance Minister through his ultimate accelerator, Union Budget, 2016. The country awaits to see its future…..

In its endeavour to spread the knowledge far and wide, Shri S E. Dastur, Senior Advocate, will present his masterly analysis of the Direct Tax provisions of the Finance Bill, 2016. Details are as follows:

DAY & DATE : Friday, 4th March 2016

TIME    : 6.15 p.m.

VENUE    : Yogi Sabhagruha, Shree SwaminarayanMandir, Dadar (East), Mumbai – 400014

SPEAKER    : Shri S. E. Dastur, Senior Advocate

FEES : Free for all and open to anyone interested on the subject. Seats will be available on first come first served basis.

We trust you will attend this lecture meeting along with your Colleagues, Students & Friends.

Recent Developments in International Taxation

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Topic : Recent Developments in International Taxation

Speaker : M r. Pinakin Desai, Chartered Accountant

Date : 15th July, 2015

Venue : Jai Hind College Auditorium, Churchgate

Mr. Pinakin Desai commenced his talk by referring to the India-Mauritius DTAA and the fact that Mauritius has been quite popular among the Foreign Investors investing in India on account of the favourable provisions in the treaty. He mentioned that negotiations on India-Mauritius DTAA are under process and the renegotiated Treaty should be out in a couple of weeks’ time. There has been a lot of speculation around the changes which would be incorporated in the revised DTAA and looking at the same, he pointed out to a few provisions which could be a part of the new treaty. One such provision could be the insertion of LOB clause in the treaty. Other amendments could be on the lines of the India-Singapore DTAA which provides for an expenditure test for demonstrating commercial substance, a provision for insertion of a grandfather clause in regard to investments made prior to 2017. He then invited the attention to a news article which mentioned that under the revised DTAA , short term capital gains would be subject to capital gains tax under Income-tax Act, 1961.

The Speaker then commented upon the cumbersome reporting requirements contained in the amended section 195(6) of the ITA . Section 195(1) contains tax withholding obligations in case of payments made to a non-resident, provided the sum is chargeable to tax under ITA , whereas section 195(6) states that, irrespective of the sum being chargeable to tax, the person responsible for paying to a non-resident should furnish information about the same. The Speaker stressed upon the intention of the Income Tax Department of the amended section 195(6) which was to secure information about every remittance made outside India. The Speaker mentioned that though section 195(6) talks about all payments, whether chargeable to tax or not, provisions contained in Rule 37BB, the relevant rule for section 195(6), continues to talk about furnishing of information only relating to payments which are chargeable to tax under ITA . This has led to an anomalous situation and different views are taken by remitters. He mentioned that till new Rules are notified in this regard, problems would continue. However in his view, Form 15CB need to be obtained only in cases where income was chargeable to tax as mentioned in Rule 37BB and not for all remittances.

Mr. Pinakin Desai then dwelt on the provisions of the new Black Money Act and its far reaching implications. He cited a simple illustration wherein Mr. Kumar, an NRI, who was away for 5 years, comes back to India, and is now a Resident and Ordinarily Resident. While a non-resident, he claims to have acquired significant assets outside India and from FY 2015-16, Kumar will offer income from overseas assets to tax in India. Provisions of the Black Money Act empower an Assessing Officer to bring an undisclosed foreign asset to tax on the basis of FMV valuation in the year in which he receives information as to the ownership of the asset. Now in such a scenario, Mr. Kumar can have serious difficulties, if he has no records or evidence to correlate the source of investment with the items of investment.

The speaker then raised concerns about the impact of the Black Money Act on discretionary trusts set up outside India. In case of non-resident discretionary trusts where either the settlor or the trustees or the beneficiary is a Resident & Ordinarily Resident, provisions of BMA could apply. In case the Settlor is Resident in India, a question could arise as to whether he is under an obligation to make disclosures in his tax returns in relation to assets settled upon the discretionary trust set up outside India.The answer to this is possibly a ‘yes’. However, the Speaker further raised a question that, would the disclosure be required merely in the first year in which the Settlor is settling the property upon the trust or would the disclosure be required on a recurring basis in subsequent years? The Speaker discussed another scenario wherein the trustee of the discretionary trust is a ROR whereas the Settlor and the beneficiaries are non-residents. In this case too, the Speaker was of the view that the Trustee would be under an obligation to make disclosures in the tax returns since he is the holder of the assets on behalf of the beneficiaries. The speaker then referred to a person being ROR in India and is a beneficiary of the discretionary trust set up outside India. Highlighting the definition of the term ‘beneficiary’ as a person deriving benefit during the year, the Speaker commented that the beneficiary may not be required to make disclosure in this regard if he has not derived any benefit from the trust during the year.

The Speaker then drew attention to the disclosure requirements in the tax returns in case of an assessee holding a financial interest in an entity outside India. The Speaker raised a concern as to whether a beneficiary of a discretionary trust set up outside India, could be said to have a financial interest in that trust. In this regard, the Speaker was of the view that a beneficiary of a trust is merely a chance beneficiary depending upon the discretion of the trustees, and his right to the benefits of the trusts are not enforceable, and thus he may not be said to have a financial interest in the trust.

Thereafter, the Speaker commented upon applicability of BMA Act to expatriates in India. Referring to the FA Qs released by CBDT on Clarifications on Tax Compliance for Undisclosed Foreign Income and Assets, he mentioned that the expatriates who have come to India on a Student Visa, Business Visa or an Employment Visa, have been given a concession from reporting requirements in regard to assets situated outside India which do not yield any income, for example, a residential house which is not let out. However, no concession is granted to assets located outside India which yield income which is taxable under the ITA , for example, bank account or any other security yielding interest income. The Speaker raised a concern that if the spouse or the children accompany the expatriate to India, who do not come on a Student Visa or a Business Visa or an Employment Visa, theoretically no concession is available to them.

Thereafter, the Speaker discussed a few case studies relating to indirect transfers of capital assets read in conjunction with Circular 04/2015 issued by CBDT. By referring to the case studies, the Speaker conveyed that declaration of dividend by a foreign company outside India does not have the effect of transfer of any underlying assets located in India. The Circular 04/2015 has clarified that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of section 9(1)(i) of ITA . The Speaker also cited an illustration highlighting the intricacies on determining the ‘Specified Date’ on which the value of a share deriving its value from assets located in India is computed.

The Speaker threw light upon deemed international transactions u/s. 92B(2). Referring to an illustration, the Speaker explained the provisions contained in section 92B(2) whereby a transaction between an enterprise with a person other than an associated enterprise would be deemed to be an international transaction if the terms and conditions of such a transaction are settled by the enterprise with its Associated Enterprise, where the enterprise or the associated enterprise or both of them are non-residents, irrespective of whether such other person is a non-resident or not.

The Speaker then shared his views on Corporate Residency in view of the amendment made by the Finance Act 2015. He mentioned that since many years, the test to determine the residential status of a Company in India was quite liberal and hence if some management decisions were taken outside India or if some directors were situated outside India, the Company was classified as a Non Resident. This had facilitated formation of shell companies which were effectively managed from India, however classified as Non Resident. To put an end to such practices, the Income Tax department has introduced the concept of ‘Place of Effective Management’ (POEM) as the test to determine the residential status of a Company. He mentioned that POEM is situated at the place where key commercial and management decisions of the Company are taken. He further mentioned that for a decision to be a key commercial or management, one would really have to look into the substance of the decision, the regularity at which the decisions are taken and the persons who are effectively making the decisions.

The Speaker then threw light on the various consequences which a Company might face if its POEM is in India. This would include taxation of its global income at the higher tax rate of 40% plus surcharge and education cess, obligation to withhold taxes u/s. 195 in respect of chargeable amounts, applicability of transfer pricing provisions, non-applicability of beneficial provisions u/ss. 44BB, 44BBB, 44BBA, since they apply only in case of non-residents, applicability of provisions of Black Money Act, etc.

The Speaker commented that in case of a US Company becoming a resident of India on account of POEM being situated in India, then the benefits under India USA DTAA will be lost, since the tie breaker test in such a situation cannot be invoked under the treaty and further there could be questions as to whether foreign tax credit would be available in respect of the transactions of the Company.

He mentioned that exchange of information is likely to be very active and relevant in the days to come and the BEPS provisions would also be having an impact. Exchange of information, multi-lateral treaty, and awareness on the part of all the foreign governments with regard to curbing of tax avoidance is going to be the order of the day.

The meeting ended with a vote of thanks to the speaker.

Lectures Meeting

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Topic : I nternational & Domestic Transfer
Pricing Recent Developments
Speaker : T. P. Ostwal, Chartered Accountant
Date : 5th November 2014
Venue : Walchand Hirachand Hall, Indian
Merchants Chamber

Mr. T. P. Ostwal gave a brief introduction about the evolution of transfer pricing regulations. TP provisions, as introduced in India in the year 2001, have their origin in OECD Guidelines issued in 2001. Though the 1922 Act had certain transfer pricing provisions, it has gained importance only after introduction of section 92 by the Finance Act, 2001.

Highlighting the recent trends, he mentioned that the Income Tax department made transfer pricing adjustments of Rs. 70,000 crore in 2012-13, which reduced to Rs. 65,000 crore in 2012-13. The speaker expressed a hope that with the new government coming in, the scenario would change for the better.

The speaker welcomed the recent Vodafone transfer pricing decision by the Bombay High Court. In his view, the $ 490 Million tax dispute was based on a stand which was illegal from the beginning i.e. application of transfer pricing provisions relating to computation of income to issue of equity share capital, which is a capital transaction. This was a case of issue of equity shares by an Indian subsidiary to its holding company at a premium as per DCF valuation methodology prescribed under FEMA.

However, as per the TPO and DRP, the equity shares ought to have been valued at a much higher value. As per the tax authorities, the consequence of issue of shares by Vodafone India to its holding company at a lower premium resulted in subsidising the price payable by the holding company, which difference was sought to be taxed. Besides, this deficit was treated as a loan extended by Vodafone India to its holding company and periodical interest thereon was sought to be charged to tax as interest income as a secondary adjustment.

The speaker reiterated the fact that transfer pricing provisions cannot apply to issue of equity shares. Bombay High Court rightly held that Chapter X is a machinery provision to arrive at ALP of a transaction and not a computation provision. Since the issue of shares at a premium by Vodafone India to its nonresident holding company did not give rise to any income from an International Transaction, there could be no occasion to apply the transfer pricing provisions to adjust the income. Many other such cases, including Shell India, are pending. He hoped that the Government would accept the Bombay High Court order.

The speaker also referred to another case of Tops Security, wherein a similar stand has been taken by the tax authorities in a reverse situation, in respect of shares subscribed to by an Indian company in an overseas subsidiary, where the shortfall in valuation of shares of the subsidiary subscribed to has been sought to be taxed as income, besides being treated as a loan, and interest thereon sought to be taxed.

Mr. Ostwal was of the view that the secondary adjustments made by the Transfer Pricing Officers are not permissible, as there is no provision for such secondary adjustments under the law.

Thereafter, the learned speaker invited the attention to the amendments to section 92B(2), has deeming certain domestic transactions as international transactions. A transaction entered into by an enterprise with a person other than an AE will be deemed to be an international transaction if there exists a prior agreement in relation to the relevant transaction between such other person and the AE or the terms of the relevant transaction are determined in substance between them. For an international transaction, section 92B(1) provides that at least one of the parties has to be a non-resident. The amendment provides that section 92B(2) would irrespective of whether such other person, with whom the transaction takes place, is a non-resident or not. This amendment has overridden the decisions of the Mumbai Tribunal in the case of Kodak India Pvt. Ltd. andthe Hyderabad Tribunal in the case of Swarnadhara IJMII Integrated Township Development Co. Pvt Ltd.

The speaker referred to the Finance Minister’s speech proposing to permit use of multiple year data and interquartile range. The law had not yet been amended in this regard. This had the potential to reduce more than half of the transfer pricing litigation. He explained the logic in considering multiple year data while benchmarking and the issues faced at the time of assessments. The Tax department has been of the view that an average of multiple year data cannot be taken, and the determination of ALP should be based on single year data. Further, he explained the practice followed by other countries wherein inter quartile range is accepted by the respective countries.

He mentioned that even Advanced Pricing Agreement (‘APA’) has not been a success on account of various imperfections. There are 2 types of APAs – (1) Unilateral (2) Bilateral. Till now, only 4 to 5 APAs have been cleared by the department and all of them have been Unilateral APAs. Bilateral APAs would be more beneficial to the taxpayer as that would be approved by competent authorities of both the countries, with full tax credit in relation to the income in the other country. The new amendment in regard to rollback mechanisms in APA looks interesting and beneficial to the tax payer; however there is no clarity as to how it would practically work. What would be its effect on the existing litigation matters pending before the Tribunal or the DRP or the AO or on completed assessments?

The speaker commented that Safe Harbour Rules have been ineffective as the profit margins notified by the department in this regard are too high.

The learned speaker highlighted an important issue as to whether corporate guarantee qualify as an international transaction for transfer pricing purposes. Whether guarantees include letter of credit? In this regard, he pointed out to an important ruling of Delhi Tribunal in the case of Bharti Airtel, wherein it was held that corporate guarantee would have no bearing on profits, incomes, losses or assets and is hence not an international transaction. Provision of corporate guarantee is a shareholders function, and would therefore be on capital account.

The speaker touched upon certain amendments hoped for in the field of Domestic Transfer Pricing. He informed that safe harbour rules are expected for DTP. Besides, payments made by one company to another wherein both the companies are paying taxes at the same rates might be exempted from the regulations. This would certainly relax the rigours of domestic transfer pricing provisions.

In conclusion, the speaker pointed out that transfer pricing provisions have also now crept into the Companies Act 2013 (section 188) and Clause 49 of the Listing Regulations, in respect of related party transactions, which are required to be on an arms length basis.

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Recent Controversies in Cross Border Taxation

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Subject : Recent Controversies in Cross Border Taxation

Speaker : Pinakin Desai, Chartered Accountant

Date : 11-7-2012

Venue : Indian Merchant Chambers, Mumbai

 The first Lecture Meeting of BCAS for the year 2012- 13 was addressed by Pinakin Desai on the topic ‘Issues in Cross-Border Taxation’ on 11th July 2012. Deepak Shah, Society’s newly elected President, welcomed everyone on behalf of BCAS. He shared with the august gathering the focus areas of BCAS for the upcoming year — to expand and enrich membership experience, to enhance and strengthen relationships and to provide mentorship — and invited whole-hearted involvement and participation of all BCAS members.

After an overwhelming introduction by the President, Mr. Desai took the stage to do full justice to it. Given the recent upheaval in the tax world, many new controversies have added themselves to an already long list. Mr. Desai, in his talk, discussed some of the most controversial ones. These are briefly discussed below:

1. Overview of General Anti-Avoidance Rules (‘GAAR’)

As per the current GAAR provisions, an arrangement would be termed as ‘impermissible avoidance agreement’ if its main purpose is obtaining tax benefit and it satisfies any of the four conditions specified in section 96(1) of the Income-tax Act, 1961 (‘Act’). The speaker opined that the condition that the main purpose be obtaining tax benefit was necessary to be provided and is provided by most countries globally. However, presently, the term tax benefit is very loosely worded and could lead to unreasonable conclusions.

Section 96(2) provides that while the objective of an arrangement as a whole may not be to obtain tax benefit, if a step in or a part of the arrangement has been inserted only to obtain tax benefit, the entire arrangement shall be presumed to obtain tax benefit.

GAAR can be used in addition to or in conjunction with other specified anti-avoidance rules already forming part of the Act. Benefit of the tax treaties would be subject to GAAR applicability.

2. Consequences of GAAR

Consequences of invoking GAAR have been laid down in section 98. Draft guidelines on GAAR have been released on 28th June 2012 giving examples of cases where GAAR is invoked. The speaker opined that there appeared to be no co-relation between the transactions and the consequences that followed. There were no principles laid down in the draft guidelines for reading the transactions and applying the appropriate consequence to it.

Further, the consequences per section 98 are not exhaustive; the Assessing Officers have been given wide powers to take appropriate actions where GAAR gets invoked. This is a dangerous tool in the hands of the officers as there is no saying as to how it will be used.
Lastly, it is not clear as to who will GAAR apply to — would it be limited to the parties carrying out the impermissible arrangement or could it be extended to a person who may be only liable to deduct tax at source?

3. Draft GAAR Guidelines:

 Examples The draft guidelines on GAAR have been released for public consultation. The speaker urged all present to actively contribute to the same.

The guidelines would have the same force as the statute to the extent that they are not inconsistent with the statute. The guidelines lay down monetary thresholds for invoking GAAR. GAAR is made effective to income accruing or arising on or after 1st April 2013, which is in sync with international practices. However, there are no grandfathering provisions for existing structures/transactions which may result in income accruing or arising post GAAR becoming applicable.
Key take-away of guidelines:
  •  GAAR provisions codify substance over form doctrine.
  •  Onus of proof is on tax authority.
  •  Special Anti-Avoidance Rules (‘SAAR’) usually override GAAR; exception being abusive behaviour that defeats a SAAR.
  •  If arrangement is only partly impermissible, GAAR is applicable to the part, not the whole.
The speaker, thereafter, briefly dealt with examples in the guidelines which seek to clarify the applicability of GAAR.
He observed that while the guidelines explained tax evasion and tax planning, they failed to bring out the distinction between tax evasion and tax mitigation, thereby leaving ambiguity for borderline cases. Thus, the guidelines still leave ambiguity on what qualifies as tax avoidance. Further, the examples are not exhaustive in any case and do not address the various peculiar transactions.
With respect to FIIs, the guidelines clarify that GAAR will not be applicable to FIIs if the FII opts not to claim treaty benefits. GAAR would also not extend to non-resident investors in FIIs. However, presently, there is no legal provision for this, but only the guidelines.
While SAAR overrides GAAR, one of the questions left open by the guidelines was whether the limitation of benefit clause in a double tax avoidance treaty would qualify as SAAR? Likewise, while guidelines gave examples demonstrating that treaty shopping is impermissible if without commercial substance, they also opened a Pandora’s Box of unaddressed challenges. Some of these issues were discussed by the learned speaker.
The guidelines have recognised the ‘choice principle’ in some examples, i.e., if a person undertakes a transaction purely as a matter of commercial choice, without the motive of tax evasion, GAAR would not apply. However, the speaker opined, that a number of other examples in the guidelines are inconsistent with this principle.
The guidelines should further clarify the following:
  •  GAAR is not a revenue earning measure; GAAR deals with abuse. l Respect business decisions and choice principle.
  •  Notional taxation is not permitted. l Claim of expenses to be evaluated on tax provisions. GAAR covers only artificial claims; not real expenditure.
  •  Co-relative adjustment: a natural hedge to protect reasonable business choice?
  •  Citing of a counterfactual (alternative/nonabusive) arrangement by the tax officer should be required.


4. Indirect transfer of assets in India — Section 9

Transfer outside India of shares of a company set up outside India by a non-resident of India to another non-resident have been made taxable in India of the company whose shares are being transferred derives its value substantially from Indian assets.

Meaning of the term ‘deriving value substantially’ used in the statute is not clear. This has thrown up a variety of issues. For example, say, A holds shares of Company X listed on the New York Stock Exchange (‘NYSE’). Company X holds Company Y which is located outside India and has operations in India and China. In this case, would sale of shares of Company X by A on the NYSE attract capital gains tax in India?
Some of the effects, perhaps intended, of these provisions are:
  • Merger of a foreign company having operations in India with its sister concern located outside India could now lead to capital gains tax in India for the holding company of the merging entities. Such transactions were till date outside the scope of Indian tax laws.
  •  Issues with respect to what would be the cost of acquisition and what would be the period of holding of the ‘deemed Indian assets’ in some situations are as yet unanswered.
  •  Indirect transfers may get treaty protection if the actual asset being transferred is located in a beneficial treaty country.
Reassessment of income for foreign assets
Whether the extended time limit of 16 years for assessees having undisclosed foreign assets would apply to cases of indirect transfer of Indian assets? Likewise, the time limit for reassessment of representative assessees has been extended to 6 years. While ideally, these limits should not apply to indirect transfers; it is difficult to be confident of this under the reigns of the Indian Tax Department.

5.    Other provisions

(i)    Software payments: The purpose of amendment to section 9(1)(vi) appears to bring into tax net ‘shrinkwrapped software’. However, there is no change in treaty position and hence, if treaty provisions made a transaction non-taxable, it will continue to be not taxable. The amendment will, however, apply to non-treaty and domestic transactions.

(ii)    Domestic transfer pricing: While international transfer pricing applies to foreign company holding more than 26% shares of Indian company, domestic transfer pricing may apply to foreign company holding more than 20% shares of Indian company. Disconnect in domestic transfer pricing provision could capture director’s fees, managerial remuneration allocated to Indian PE of a foreign company and paid by the foreign company.

(iii)    Taxation of foreign dividends at concessional rate (section 115BBD): This section does not cover deemed dividend u/s.2(22)(e). Further, section 115BBD does not allow deduction of expenses incurred. In many cases, the expenditure incurred, which is disallowed by section 115BBD, may be higher than the benefit offered by the concessional tax rate of section 115BBD. Further, MAT provisions still apply to this income.

(iv)    Foreign currency borrowings (section 115A r.w.s. 194LC): If loan agreement is executed prior to 1st July 2012 but monies are actually borrowed after that date, section 115A benefits would apply. While section 115A requires approval of Central Government, External Commercial Borrowing (‘ECB’) is permitted under general FEMA approval and does not require a specific Central Government approval. Clarifications/instructions clarifying this issue may be expected.

(v)    Issues arising out of amendments to section 195(7), concessional tax rate on LTCG from sale of unlisted securities by non-residents, requirement of tax residency certificate, section 90(3), annual statement requirement in respect of Liaison Offices were also lightly touched upon.