c o n t e n t s · c o n t e n t s to begin with ... overview of action plan 15 of beps project -...

Ahmedabad Chartered Accountants Journal July, 2015 197

Volume : 39 Par t : 04 July, 2015

E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

MananamWho am I ?.........................................................................................CA. Pradip Modi.........................199

Editor ialVyapam - A Big Scar...........................................................................CA. Ashok Kataria .................... 200

From the President............................................................................CA. Yamal A. Vyas.........................201

Ar ticles

Research and Development Expense - Taxation and OtherRelated Issues......................................................................................CA. Chandrakant K. Thakkar.....202

Analysis of Draft Scheme of proposed Rules for Computationof Arm's Length Price......................................................................... CA. Kush Paresh Desai...............212

Section 14A Disal lowance...................................................................CA. Hersh Jani...........................218

Direct Taxes

Glimpses of Supreme Court Rulings................................................... Adv. Samir N. Divatia................222

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 223

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 226

Controversies...................................................................................... CA. Kaushik D. Shah..................230

Judicial Analysis..................................................................................Adv. Tushar P. Hemani................234

FEMA & International Taxation

Overview of Action Plan 15 of BEPS Project - Developing a CA. Dhinal A. Shah &

Multilateral Instrument to modify Bilateral Tax Treaties...........................CA. Sagar Shah.............................236

FEMA Updates................................................................................... CA. Savan Godiawala................239

Indirect Taxes

Service Tax

Service Tax Decoded..........................................................................CA. Punit R. Prajapati................242Recent Judgements............................................................................. CA. Ashwin H. Shah...................245

Value Added Tax

From the Cour ts..................................................................................CA. Priyam R. Shah................... 248Updates and Tribunal Judgements......................................................CA. Bihari B. Shah.....................250

Corporate Law & OthersCorporate Law Update.......................................................................CA. Naveen Mandovara..............253All ied Law Corner.............................................................................. Adv. Ankit Talsani........................260From Published Accounts ................................................................ CA. Pamil H. Shah..................... 263From the Government ......................................................................CA. Kunal A. Shah..................... 265Association News.............................................................................. CA. Nirav R. Choksi &

CA. Dil ip U. Jodhani..................267ACAJ Crossword Contest....................................................................................................................268

- caaahmedabad

Ahmedabad Chartered Accountants Journal July, 2015198

AttentionMembers / Subscr ibers / Authors / Contr ibutors1. Journals are carefully posted. If not received, you are requested to write to the Association's

Office within one month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to intimate change of address to the Association's Office.3. Please mention your membership number in all your correspondence.4. While sending Articles for this Journal, please confirm that the same are not published / not

even meant for publishing elsewhere. No correspondence wil l be made in respect of Articlesnot accepted for publication, nor will they be sent back.

5. The opinions, views, statements, results published in this Journal are of the respective authors/ contributors and Chartered Accountants Association, Ahmedabad is neither responsible for thesame nor does i t necessarily concur with the authors / contributors.

6. Membership Fees :Amount in `

Basic S-Tax TotalLife Membership 7500/- 1050/- 8550/-Entrance Fees 500/- 70/- 570/-Ordinary Membership Fees for the year 2015-16In case of Membership (of ICAI) for a period of less than 600/- 84/- 684/-or equal to five years,In case of Membership of (ICAI) for a period of more than five years, 750/- 105/- 855/-Financial Year : April to March

Published ByCA. Ashok Katar ia,on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers, NearGujarat Vidhyapith, Ashram Road, Ahmedabad - 380 014.Phone: 91 79 27544232No part of this Publication shall be reproduced or transmitted in any form or by any meanswithout the permission in writing from the Chartered Accountants Association, Ahmedabad.While every effort has been made to ensure accuracy of information contained in this Journal,the Publisher is not responsible for any error that may have arisen.

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andAuditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certi ficates of Appreciationafter being vetted by experts in the profession.Articles and reading literatures are invited from members as well as from other professional colleagues.

Printed : Pratiksha Pr interM-2 Hasubhai Chambers, Near Town Hall, Ellisbridge, Ahmedabad - 380 006.

Mobile : 98252 62512 E-mail : [email protected]

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

CA. Gaurang Choksi CA. Jayesh SharedalalCA. Rajni Shah CA. Shailesh Shah

Ex-officioCA. Yamal Vyas CA. Nirav Choksi


“Talk to yourself once in a day. Otherwise you maymiss meeting an excellent person in the world” –Swami Vivekanand

When we wake up in the morning, first thing welook at the smart phone for messages, whatsappand email even before we hold toothbrush in hand.This is reality of life. We have hardly any time toremember our parents and ancestors, who havegiven us this beautiful life in this ever pleasantuniverse. I am not writing about any orthodox beliefor rituals but certainly emphasizing the rich legacyof our nation. If we think for a while how eachorgan of your body is vital to make a complete body,similarly one needs to introspect on daily basis thathow he is connected to the universe? I am a firmbeliever of theory that universe is well connectedto each other and some Mighty strength has createdit. It is not an outcome of Big Bang theory, whichexplains that universe has come up out of explosionetc.

It is noticed that everything has a reason to exist,and not just exist but with balance. One cannot findout any imperfection in the universal existence.Everyone is connected to one another andeverything is happening for a reason. We are a smallmolecule of the universe interwoven to nature.Listen carefully and with patience to yourself, youwill realize that you are a part of sequential chainof this universe.

There is enough revelation in nature for selfrealization but we are not focused or we are ignoringthe fact of life under the garb of materialistic lifestyle. Look at the species of ocean creatures, birds,

MananaM

Who am I ? small insects, animals etc. Each and every creatureis a creation of fathomless forces. Everything is intandem. Look at the birth and death cycle. In wholeof universe soul comes from unknown place andphysical body gets developed over a period of timein each creature. Body remains on this earth andsoul goes off to unknown place. Why can’t wethink on this? We are human beings and in a betterposition to think upon.

One should ask repetitively to himself, who am I?Your body is not you. Beyond body is mind andintellect. Are we making any effort to think beyondthis body, mind and intellect to reach up to our trueidentity? Ignorance is the biggest hurdle in selfrealization. Therefore, when someone is performingany action without knowledge, he is afraid of theresult. Hence knowledge is a powerful axe to cutthe ignorance. Ignorance is the root cause of fearand unhappiness .Once it is known who I am,through actions as a duty without depending on thefruits of my action, own self merges into SupremePower for eternal happiness. One should lovenature, animal, birds, wind and sun. In the presentmaterialistic life, I think we have lost the importanceof knowing who am I? We are running after money,luxury and comfort and with less importance to blisswithin us. Money can be an instrument of achievingcomfort or pleasure but not permanent happiness.When someone has earned enormous money, hismind is still working for what is next? But whensomeone has discovered who is he, he stopsthinking beyond this. Knowing who am I, isSupreme. Love nature, birds, animals and leavecruelty .In a busy life one needs to spare some timeto introspect daily to discover his true identity tilldual existence is not vanished.

CA. Pradip [email protected]


It has been a little over a year when centre ofpower shi f ted f rom Congress led UPAgovernment to the BJP led NDA governmentat New Delhi. One of the considerable reasonsfor the downfall of the UPA regime was thenumber of scams unearthed during its tenurecoupled with complete inability of the centralleadership to properly handle it by holdingthe culpri t accountable. Af ter a series ofscams, the people of the country saw a ray ofhope in the leadership of Narendra Modi andelected him as the Prime Minister of thecountry.

In the ini tial period of one year, the newgovernment has been performing wel l ,speci f ical ly i n some of the areas l ikecontrol l ing inf lation, f oreign pol icy andinternal securi ty. However, the recentdevelopment i n case of Lal i t Modi andVayapam Scam is definitely not helping thereputati on of the government or theconf idence reposed by the publ ic in theleadership of the Prime Minister. The ChiefMinister of a state and the foreign minister ofthe country have been allegedly associatedwith Lalit Modi, a person wanted for violatingthe law in the country. When two big namesviz. Ms. Sushma Swaraj and Vasundara Rajeare involved, propriety demands whether thesepeople be occupying thei r posts?Unfortunately, the prime minister who wasoften seen vocal before being voted to poweron such issues seems to be a mute spectator.Whether his si lence is making him anydifferent from his predecessor?

Vyapam is a huge scam in the state of MadhyaPradesh and a scar on the standing of thegovernment, centre and state. The scam is anadmission and recruitment scam involving

Editor ialVyapam - A Big Scar

politicians, senior officials and businessmen.Madhya Pradesh Professional ExaminationBoard (MPPEB), popularly known by its Hindiacronym “Vyapam” (Vyavsayik ParikshaMandal ) is responsible f or conductingseveral entrance tests in the state. The tricksused by those invol ved i n the scam arenothing short of Bollywood Masala movie thatincluded, impersonation of exam candidates,copying, manipulation of records & answersheets and leaking of answer keys. Themagnitude and the after effect of unearthingof the scam are so grave that it has resulted inmysterious deaths of about 50 people duringthe course of investigation. Calling Vyapam‘A Deadly Scam’ would be proper phrase thanjust referring it like any other scam. The scaminvolving collusion among exam candidates,government officials and middlemen whereundeserving candidates have been offeredhigh marks in the exams, in exchange forkickbacks has reached up to the office of theGovernor and Chief Minsiter of the state.Where on one hand the STF has foundevidence against the state Governor, theopposi ti on party is al leging that theinvestigators are shielding the Chief Ministerof the state.

As a citizen one wonders, is this the reasonwhy governments are elected? In the largestdemocracy of the world things do not appearto be in order where people are dying ofunnatural death during the course ofinvestigation. Scams like Vyapam are a bigblot on the nation, not just af fecting theconf idence and integri ty of people butcausing threat to their life. Governments arechanging but the scenario around!!

Namaste,CA. Ashok Kataria

[email protected]


From the PresidentCA. Yamal A. Vyas

[email protected]

This year 2015 has been unique in one way. Andnot in a very pleasant way. This year CBDT has notbeen able to bring out the relevant forms for filingof Income Tax returns by various entities ti ll themiddle of July as, I write this.

The time limit for filing returns due in July has beenextended, and there are expectations that the timel imi t for completing Tax Audi ts may also beextended. Now this has created unnecessarypressure on the business community and in turnthe Chartered Accountants.

One hopes that such avoidable delays - the UnionBudget is presented in Parliament in end of Februaryso the Forms can be ready by April every year - donot happen in future.

The unpleasant part aside, there are a lot of positivedevelopments in the economy. Constant fal l incrude prices, inflation coming under control, stockmarket in a buoyant phase, all point to the fact that'Achhe din ' are in fact here.

There are all indications that the economy is on anuptrend, and with China facing serious issues onthe economic front India will surely emerge as thefastest growing large economy globally this yearand for many years to come.

As we CAs are an integral and important part ofthe economy we al l can look forward to rapidgrowth in our professional endeavours also. My bestwishes to you all for good days ahead.

CAA is also gearing up to help our young membersgrow professionally. Recently we have initiated asix part series of interactive programmes especiallyfor the members who have entered the professionin last few years.

In this programme, our young but relatively seniorand experienced facul ti es interact wi th theparticipants on very basic and practical issuesgenerally encountered by new professionals in theirPractice.The programme is only mid way as I writethis, but I can say with confidence that it is a hit,and we are already planning a second series .

The members who parti cipate in the AnnualResidential Refresher Course ( RRC) every yearknow that the RRC is a unique combination of workand play, if I may say so. There are serious studysessions, taken by Senior Faculties, where there aredetai l ed discussions on various i ssues ofprofessional importance. Along with that we alsohave fun, frolic and camaraderie. This year the RRCis at Devigarh, near Udaipur, and we all are lookingforward to the same.

Those of you who are not participating this year, orthose members who have not attended any RRC, Istrongly recommend to them that they must attendnext year's RRC. I wi l l venture to say wi thconfidence that if they do it once, they will becomeregular parti cipants. Especial l y the youngmembers.

The May 2015 CA Final Examination results areout, and as per one estimate, more than 100youngsters from Ahmedabad and surrounding areashave become CAs. I earnestly request our membersthat if someone in their circle- Articled Assistant,family member, acquaintance- has qualified in May,kindly make him /her a member of the Association.I assure them through your medium that they willnever regret the decision. Not only that, they willhugely benefit from their CAA membership in theirprofessional career at every stage.

I am happy to announce that there has been a goodresponse from members about out save paperproject, as about 300 out of more than 1500members have opted for the paper copy. Wepresume that the rest want to opt for the e journal.Let me clarify that we shall indeed be equally happyto send you a paper copy whenever you wish toopt for it. So if you opt for an e copy today, yourright and prerogative to get the paper copy wil lalways remain with you. Just send an email or makea phone call and the mode of delivery of the Journalshall be changed for you.

CA. Yamal A. VyasPresident


1. Introduction:

Research and development activity is verymuch necessary for survival of any industry inthe era of fast changing world and hence, it issaid that R & D is an investment in a Company’sfuture. R & D is nothing but thinking out ofbox. Companies those do not spend efficientlyand sufficiently on R & D in this phase are oftensaid to be “eating the seed corn”- that is, whentheir current product lines become outdated andovertaken by their competitors, they will nothave viable successors in the pipeline. We havewitnessed the position of company like Nokiain hand set industry. A number one companyhad to go for sell when survival was a questionmark due to introduction of smart phones inthe market. It is not that industries only spenton R & D activity, Indian Government andalmost all state governments are also spendingon R & D activity. Indian Government intendsto spend double the amount on R & D byspending 2% of GDP by 2017 from presentlevel of spending of 1% of GDP. Even stategovernments give grants, subsidies etc. for R& D activi ty carried out by industrialorganizations and Research Institutes. If we seethe list of ten best R & D companies, then listincludes names like IBM, General Electr ic,DuPont , 3M , Toyoto, Google, Apple,Microsoft, Genetech and Dow Chemicals.If we see the list of 10 companies spendinghighest on R & D, none of the Indian companycomes in the said l i st. Enti re businesscommunity, law makers, bureaucrats , IITs,IIMs, Research Institutes etc. should thinkseriously to find out the reasons for such lowspending by Indian industry on R & D and tobring sea change on mentality of industrialists,law makers and all other agencies/Institutesinvolved with R & D activities. In my humble

opinion the reasons include mind set of not tospend on R & D, Not treating said expenses asan investment, non availability of funds frombanks/financial institutions for R & D activities,fear of failure, instinct to think out of box,absence of private equity funding for R & Dwhich recently has started by TATAs, Infosysfounder promoters etc. How much i sreasonable amount to spend on R & D activitiesis dependent on the technology area and howfast the market is moving. Industries l ikePharmaceutical, I. T, Telecommunication,space, automobile and automobile components,FMCG, defense, aviation etc. requires hugeexpense on R & D. If we see the amount ofspending by good companies on R & D by suchindustries, range is between 2 %to 15% of thegross revenue and not profits.

2. M inistr ies and Depar tment involved ingiving approvals for Benefits, Deductions,Exemptions under Dir ect and I ndi r ectTaxes for R & D Expense/Activity.· Ministry of Finance.

· Ministry of Chemicals.

· Ministry of Commerce.

· Ministry of Science and Technology.

· Ministry of Heavy Industries.

· Ministry of Shipping, Road transport,Highways.

· M inistry of Stati sti cs and ProgramImplementation.

· Ministry of Steel.

· Ministry of Environment.

· Department of Industrial Development.

· Department of Telecommunication.

· Department of Bio Technology.

· Department of Food processing.

Research and DevelopmentExpense - Taxation and OtherRelated Issues CA. Chandrakant K. Thakkar

[email protected]


Research and Development Expense - Taxation and Other Related Issues

· Indian Council of Agriculture Research.

· Counci l of Scienti f ic and IndustrialResearch.

· Indian Council of Medical Research.

· Defence Research & DevelopmentOrganisation.

· Department of Atomic Energy.

· Department of Space.

All departments and all ministries are notinvolved for each type of product or industry.All depends on product and industry involvedand accordingly some ministries and somedepartments are involved in approval ofexemptions, deductions etc. under direct taxand indirect taxes and also for deciding grantsand subsidies.

3. Benefits avai lable for R & D Expense/Activity

· 200% of expense of revenue nature orcapi tal nature (Excluding Land &Building) available as deduction underIncome tax Act for approved in house R& D for industries like Bio Technology,Manufacturing of Drugs, Pharmaceuticals,Electronic Equipment, Computers,Telecommunication Equipments,Chemicals, Ai rcraf ts & Hel icopters,Automobiles, Automobile Componentsetc.

· Duty free import of specified goods.

· Commercial R & D Companies eligible for10 years of tax holiday.

· Excise duty waiver for 3 years, custom dutyexemption, state subsidy etc.

· Weighted deduction of 200% to the sponsorof sponsored Research programs inUniversities, IITs and approved nationallaboratories. (S. 35(2AA))

· Exemption from price control of drugs fordrugs developed through indigenoustechnology.

· Soft loans, Grants, subsidy etc.

4. Deductions under Income Tax Act for R &D Expense:

We as Chartered Accountants are moreinterested in knowing deductions availableunder Income Tax Act for R & D expenseincurred by the assessee. As I do not have muchknowledge of Indirect taxes like Excise Duty,Custom Duty, VAT, Service tax etc. I havediscussed the deductions available underIncome Tax Act for R & D Expenses incurredby the assessee.

S.35 Expenditure on Scientific Research:

i. The provisions of section 35(1)(i) aresummar ized as under.· Expendi ture i s avai lable to any

assessee.

· Expenditure should not be capital innature.

· The expenditure should be incurredbefore the commencement of business.

· The expenditure should be in the formof salary to an employee engaged insuch scientific research or

· The expendi ture on purchase ofmaterials used in such scienti f icresearch.

· The expenditure should have beenincurred within three years immediatelypreceding the commencement ofbusiness.

· The expenditure shall be allowed to theextent it is certified by the prescribedauthority to have been laid out orexpended on such scientific research.

· It will be deemed to be expenditure ofprevious year though spent beforecommencement of business in lastthree years.

ii. The provisions of section 35(1)(ii) aresummar ized as under.

· Expendi ture i s avai lable to anyassessee.


· The deduction shall be 175% of anysum paid to a scienti f ic researchassociation which has as its object theundertaking of scientific research or toa university, college or other institutionto be used for scientific research.

· Such association or a university, collegeor other institution should be approved,in accordance with the guidelines, inthe manner and subject to suchconditions as may be prescribed.

· Such association or a university, collegeor other institution is specified bynotification in the official Gazette, bythe Central Government.

iii. The provisions of section 35(1)(iia) aresummar ized as under.· Expendi ture i s avai lable to any

assessee.

· The deduction shall be 125% of anysum paid to a company to be used by itfor scientific research.

· Such company should be registered inIndia, it has main object being scientificresearch and development and

· Such company is approved by theprescribed authority in the prescribedmanner.

iv. The provisions of section 35(1)(iii) aresummar ized as under.· Expendi ture i s avai lable to any

assessee.

· The deduction shall be 125% of anysum paid to a research associationwhich has as its object undertaking ofresearch for social science or statisticalresearch or to a university, college orother institution to be used for socialscience or statistical research.

· Such association, university, college orother institution should be approved inaccordance with the guidelines, in themanner and subject to conditions asmay be prescribed.

· Such association or a university, collegeor other institution is specified bynotification in the official Gazette, bythe Central Government.

v. Explanation to section 35(1)(iii) states thatany deduction to which assessee is entitledfor sum paid to Such association or auniversity, college or other institution towhich clause (ii) or clause (iii) of section35 applies, shall not be denied merely onthe ground that the approval granted to suchassociation, university, college or otherinstitution referred to in clause (ii) or clause(iii) of section 35 has been withdrawn.

vi. Research association, university, college orother institution referred to in section35(1)(i i) or 35(1)(i i i) has to make anapplication in form no. 3CF as per rule 6(2)to Central Government for grant ofapproval. Central Government beforegranting approval may call for suchdocuments including audited accounts orother information as it thinks necessary tosatisfy the genuineness of the activities ofthe association, university, college or otherinstitution and the Central Governmentmay make such inquiries as it deem fit.

vii. The notification issued by the CentralGovernment for section 35(1)(i i) and35(1)(iii) shall not have effect for more than3 assessment years.

viii. The application made for approval u/s35(1)(ii) or 35(1)(iii) shall be issued or anorder rejecting the application shall bepassed within 12 months from the end ofthe month in which an application wasreceived by the Central Government.

ix. The provisions of section 35(2) aresummar ized as under.

· The deduction is avai lable to anyassessee for capi tal expendi tureincurred on scientific research relatedto business carried on by the assessee.



· The deductibi l i ty of expense i sprovided in section 35(1)(iv) subject toprovisions of section 35(2) of I T Act,1961.

· The enti re capi tal expendi ture isallowed as deduction u/s 35(2)(ia) of IT Act, 1961.

· I t is to be noted that for capi talexpenditure incurred on acquisition ofland is not deductible expense underthis section.

· Vide Explanation to section 35(2), ithas been provided that such capitalexpendi ture incurred before thecommencement of business, theaggregate of the expendi ture soincurred wi thin the three yearsimmediately preceding thecommencement of the business shall betreated as expenditure incurred in theprevious year by deeming provision.

· I t i s al so to be noted that whendeduction of capital expense is madeunder this section, depreciation u/s 32will not be allowed.

x. The provisions of section 35(2AA) aresummar ized as under.

· The deduction is avai lable to anyassessee.

· The deduction is available for sum paidto National Laboratory or a universityor an IIT or a specified person with aspecific direction that the said sum shallbe used for scienti f i c researchundertaken under a programmeapproved in thi s behal f by theprescribed authority.

· The deduction shall be 200% of thesum paid.

· When deduction is claimed under thissection, claim should not be made forsuch expense under any other sectionof Income Tax Act.

· Such deduction shall not be deniedmerely on the ground that subsequentto payment of such sum by theassessee, the approval granted to suchlaboratory or specified person has beenwithdrawn.

· Similarly such deduction shall not bedenied merely on the ground thatsubsequent to payment of such sum bythe assessee, the programmeundertaken by the National Laboratory,University, IIT or specified person hasbeen withdrawn.

· National Laboratory has been definedin Explanation 2 to Section 35(2AA)of I T Act, 1961.

· For this section, University shall havesame meaning as is in Explanation toclause (ix) of section 47.

· For this section IIT shall have samemeaning as “Institute” in clause (g) ofsection 3 of the Insti tutes ofTechnology Act, 1961.

· For this section “Specified person”means person as is approved by theprescribed authority.

xi. The provisions of section 35(2AB) aresummar ized as under.

· The deduction is available to companyassessee only.

· The deduction i s avai lable to acompany engaged in the business ofmanufacturing or production of anyarti cle or thing which are notenumerated in the list of the eleventhschedule.

· The expenditure should be incurred onscienti f i c research where suchexpenditure should not include cost ofany land or building.

· The expenses should have beenincurred on in house research anddevelopment facility of the company.



· Such facility should be approved by theprescribed authority.

· The deduction shall be 200% of theexpenses incurred on scientific researchand development expenses both ofrevenue and capital nature but capitalexpenditure should not include expensefor land or building.

· It is clarified by Explanation to saidsection that for the purpose of thisclause, “expendi ture on scientif icresearch and development”, in relationto drugs and pharmaceuticals, theexpenditure incurred for clinical trialsof drugs, obtaining approval from anyregulatory authority under the Central,State or Provincial Act and filing anapplication for a patent under thePatents Act, 1970.

· If deduction is claimed U/s 35(2AB)no deduction shall be claimed underany other section of the Income tax Actincluding depreciation on fixed assets.

· Such deduction would be availableonly i f company enters into anagreement with the prescribed authorityfor co-operation in such research anddevelopment facility and for audit ofaccounts maintained for said facility.

· As per current provisions, thededuction under said section shall beallowed for expenses incurred till 31-03-2017.

· The deduction shall not be allowed toa company approved under section35(1)(iia)(C) of IT Act, 1961 in respectof expenditure referred to in clause (1)which is incurred after 31-03-2008.

xii. L ist of I tems included in EleventhSchedule:

The items included in Eleventh scheduleon research and development facility of

such items the expense u/s 35(2AB) is notallowed consists items as:

· Beer, wine and other alcoholic spirits.

· Tobacco and tobacco preparationssuch as Cigars, cheroots, Cigarettes,biris, smoking mixtures for pipes andcigarettes, chewing tobacco and snuff

· Cosmetic and toilet preparations

· Tooth paste, dental cream, toothpowder and soap

· Aerated water in the manufacturing ofwhich blended flavoring concentratesin any form are used where blendedflavoring concentrates shall includesynthetic essences in any form.

· Confectionery and chocolates

· Gramophones, record players andgramophone records

· Projectors

· Photographic apparatus and goods.

· Office machines and apparatus such astype writers, calculating machines, cashregistering machines, cheque writingmachines, intercom machines andteleprinters. Here office machines andapparatus include all machines andapparatus used in off ices, shops,factories, workshops, educationalinstitutions, railway stations, hotels andrestaurants for doing office work butdoes not include computers.

· Steel furniture whether made partly orwholly of steel.

· Safes, strong boxes, cash and deedboxes and strong room doors.

· Latex foam sponge and polyurethanefoam.

· Crown corks or other fittings of corkrubber, polyethylene or any othermaterial.



· Pilfer-proof caps for packaging orother f i tti ngs of cork, rubber,polyethylene or any other material.

xiii. Other Compliances to be made to getdeduction u/s 35(2AB):

· Separate set of books of accounts arerequired to be maintained for Researchand Development facility.

· Such books are required to be auditedby CA and said CA has to includefollowing major items in the certificateto be issued by him.

· The separate accounts for the R & Dcentre approved by DSIR u/s 35(2AB)should be maintained.

· The accounts should be satisfactorilymaintained.

· The expenditure certified by CA shouldbe in accordance wi th DSIRguidelines.

· The entity should extend ful l co-operation in carrying out the audit ofthe accounts of R & D centre.

· “X “amount of capital expenditure and“Y” amount of revenue expenditurehas been incurred for R & D Facility.

· Expenditure certified in this certificateshould tally with Note on ScientificResearch and Development expensescertified in Notes on Accounts ofaudited Balance sheet and Profit andloss account.

· It is also to be certified that the amountof research and development expenseas certified in certificate does notinclude following expenses.

- Expenditure on outsourced R & DActivities.

- Expenditure purely related to marketresearch, sales promotion, and qualitycontrol , Testing, commercial

production, style changes, routine datacollection or activities of like nature.

- Lease rent for research farms orresearch labs.

- Capitalized expenditure of intangiblenature.

- Expendi ture on fountain seedsmultiplication, demonstration crops andgrow out tests etc. beyond breeder seeddevelopment.

- Foreign patent filing expenditure.

- Consultancy expenditure, retainer ship,contract manpower/labor.

- Building maintenance, municipal taxesand rental charges paid.

- Any interest component on loans forR & D.

- Clinical trial activities carried outoutside the approved facilities.

- Contract research expenses dulycertified by chartered accountant.

- Expenditure on any payments made tomembers of the Board of directors orany other part time employees workingfor R & D.

xiv. DSIR (Depar tment of Scientific andIndustr ial Research) Guidelines forApproval in Form 3CM :

To avail the deduction u/s 35(2AB), theCompany is supposed to fol low theguidelines issued by DSIR from time totime. Most of the items of allow ability ofexpense u/s 35(2AB) as enumerated in saidguidelines are part of certificate of CAwherein he certifies that the figure ofexpenditure for R & D Certified does notinclude some of the expenses, the list ofwhich has been given in Para herein aboveand most of the conditions as enumeratedin section 35(2AB) also forms part ofDSIR guidelines and hence, said issueshave not been discussed in this Para to



avoid duplication. The other issues formingpart of guidelines are as under.

· Secretary, DSIR has been designated as theprescribed authority for approval of facilityu/s 35(2AB).

· The company should have well defined R& D program.

· The in house R & D centre is located in aseparate earmarked area/building and hasexclusive R & D manpower of its own.

· The company should have valid permits/licenses, if these are required from statutoryauthorities for operations and for setting R& D centre in-house and said permits/licenses should be renewed from time totime.

· The accounts of the R & D Centre shouldbe audited by statutory auditors of thecompany.

· The accounts duly audited by statutoryauditors for R & D Centre should befurnished to The Secretary, DSIR on orbefore 31st October of the succeeding year.

· Assets acquired and products i f anyemanating out of R & D work done inapproved facility, shall not be disposed offwithout approval of Secretary DSIR.

· To the extent of sale of product or fixedasset of R & D Centre, the deductionclaimed should be reduced from R & DExpenditure claimed u/s 35(2AB) in theyear in which sales realization accrues.

· Expenditure which is directly identifiablewith approved R & D facility shall beeligible for the weighted deduction.

· However, expenditure in R &D facility onutilities which are supplied from a commonsource may be admissible, provided theyare metered/ measured and are certified byCA.

· Expenditure on manpower from other thanR & D centre, such as manufacturing,

quality control, tool room etc shall not beeligible for weighted deduction.

· Capital expenditure on R & D, eligible forweighted deduction will include only plantand equipment or any other tangible itemother than land & bui lding. Capi talexpenditure of intangible nature will notbe eligible for deduction.

· Grants/ Gifts, donations, presents andpayments obtained by the company forsponsored research in the approved inhouse R & D Centre shall be shown ascredit of R & D accounts for claimingdeduction u/s 35(2AB).

· The expendi ture el igible should benecessarily reported in the audited financialstatement prepared for the purpose ofpublished annual report.

· Approval is considered from the date ofapproval.

xv. Controversies for Deduction Allowableu/s. 35(2AB):

In view of the number of restrictions onallow ability of deduction u/s 35(2AB) ofI T Act,1961, it was difficult to get thededuction for genuine expenditure incurredfor research and development and somecompanies had claimed the deductionthough it was ineligible either under sectionor in DSIR guidelines or under both.However, Honorable courts and HonorableITATs in few cases have taken lenient andpragmatic view and have allowed thededuction though the same is not allowableas per provisions of section 35(2AB) orDSIR guidel ines or both. Few suchdecisions for few of such expenses havebeen discussed herein below on perusal ofthe same, we can derive some principlesand can get claim of weighted deductionfor expenditure though not allowable as perparameters discussed herein above but stillcan be claimed from principles emergingout of decisions enumerated herein below.



(A)Clinical Tr ials Activity Car r ied outoutside the approved facility.

As per Section 35(2AB) and DSIRguidelines, the expenditure in thenature of clinical trials carried outoutside approved R & D facility is noteligible for deduction u/s 35(2AB).However, i n the case of Cadi laHealthcare Ltd. Vs Addl. CIT, Range-1, Ahmedabad as reported in (2013) 29taxmann.com 229 (AhmedabadTribunal), it was held that i t is notpossible to have all clinical trials withinapproved R & D Facility and hence,such expenses would be eligible forweighted deduction u/s 35(2AB). Thesaid decision was challenged by thedepartment in Gujarat High Court.Honorable Gujarat High court affirmedthe view of Ahmedabad Tribunal. Thedecision of Honorable Gujarat HighCourt in the case of Cadila HealthcareLtd. i s reported in (2013) 31Taxmann.com 300(Gujarat). Hence,principle which emerges out of thisdecision is possibil ity of doing allclinical trials in approved facility. TheHonorable Gujarat High court hastaken pragmatic view and hasconsidered the genuine difficulty facedby the pharmaceutical industry and hasgiven a verdict in favor of assessee.

(B)Professional Fees, Registration Feesand Other Charges for Filing andRegistr at ion of Patents outsideIndia.

As per Section 35(2AB) and DSIRguidelines, the expenditure in thenature of professional fees, registrationfees and other charges for filing andregistration of patents outside India isnot eligible for deduction u/s 35(2AB).However, Honorable Income TaxTribunal Mumbai, in the case of USVLtd. Vs DCIT Central Circle -32,Mumbai in ITA No. 4517 & 5582 as

reported in 24 Taxmann.com 218 hasheld that such expense is eligible fordeduction u/s 35(2AB) of I T Act,1961.The Hon. Mumbai ITAT again tookpragmatic view and al lowed suchexpense as weighted deduction U/s35(2AB) though section itself andDSIR guidel ines does not al lowdeduction u/s 35(2AB).

Considering the above two decisions,I am of the strong opinion that even infol lowing type of expenses, thededuction u/s 35(2AB) should beclaimed even though the same may notbe eligible either as per said section oras per DSIR guidelines or as per both.

(C)Remuner ation paid to Dir ector sdirectly involved with Research &Development Activity.

It is to be noted that the Director of thecompany who is technically qualifiedhaving vast experience in the field ofResearch and development, havingvarious patents to his/their names,genuinely involved into Research anddevelopment activity, whose names arewritten in application filed with DSIR,without whose knowledge, guidanceand vision it is not possible to run R &D department or facility then why suchexpense should not be allowed. At themost department can veri fy timedevoted for R & D Activity through arecord maintained for devotion of timeand cost al located based on timedevoted, then there should not be anyissue in allowance of said expenseeligible for deduction u/s 35(2AB) ofI. T. Act, 1961. It is also to be notedthat reasonableness of di rectorsremuneration is always viewed fromreasonableness of expense vide section40A(2)(b) of I. T. Act, 1961 and bycompany law where provisions ofcompany law decides the



reasonableness of remunerationpayable to directors of the companyand hence, there is no room thatil legitimate claim will be made fordirectors remuneration u/s 35(2AB) ofI. T. Act, 1961. Secondly section35(2AB) does not restri ct saidexpenses and it is nowhere mentionedin the said section that the allow abilityof expenditure u/s 35(2AB) shall be asper DSIR guidelines. Under suchcircumstances, in my humble opinion,DSIR guidelines cannot override theprovisions of law and hence, saidexpense should be el igible fordeduction u/s 35(2AB) of I. T. Act,1961.

(D)Capi tal i zed Expendi tur e ofIntangible Nature.

It is to be noted that as per AS-26, theexpenses incurred on R & D which isof revenue nature l i ke patentregistration fees, consultancy fees forpatents etc. are to be capitalized asexpenses of Intangible nature. In thiscase, though I do not want saidexpenses to be capitalized, I have tocapital ize the same as per AS-26.However, such expenses are claimedas revenue expenses in Return ofincome filed but as DSIR guidelinessay that capi tal ized expenses ofintangible nature will not be eligible forweighted deduction, i t will lead tounnecessary litigation. In my humbleopinion, in this case, contention shouldbe taken that though as per books, saidexpense is of capi tal nature, i t isclaimed as revenue expense underIncome Tax Act and hence, the sameshould be eligible for deduction u/s35(2AB) of I T Act,1961.

(E)Salary paid to Staff directly involvedwith R & D not possessing Diploma/degr ee in Engineer ing/ ScienceDiscipline.

As per DSIR guidelines, salary paid tostaff directly involved with R &Dactivity but who does not possessDiploma or Degree in Engineering ordegree in science discipline. In myhumble opinion, to expect that R & Dactivity can be carried on by staffpossessing such degrees only is insultto people l ike promoter director ofcompanies like IBM, Face book, Appleetc. where the promoter directors hadinnovated product l ike applicationsoftware Microsoft office, software likeface book and handset like Apple andsuch people i f employed in anycompany then salary paid to suchemployees are not el igible fordeduction u/s 35(2AB) of I. T. Act,1961. To assume that degree of anyparticular branch can only be involvedin R & D Activity and others cannothave capacity to involve in R & Dactivity is injustice to people who havedevoted their major life in R & D, havepatents to their name but salary paid tothem is not el igible for deductioncannot be the intention of legislatureand hence, section is silent on non allowability of such expense u/s 35(2AB)and in my humble opinion, DSIRguidel ines cannot override theprovisions of law. Such stand can betaken for some other expenses whichare restricted for eligibility of deductionu/s 35(2AB) vide DSIR guidelines.

5. Expectat ions of I ndust r y for R & DExpenses :

As such spending on R & D by Indianindustries is very less as compared to companiesin developed countries. There are certaingenuine reasons for less spending on R & Dalso. The industry expects that:

· Funds should be easily and speedi lyavailable for Research and developmentactivity.



· Funds should be available at cheaper rates.

· As research and development activity doesnot yield fast, gestation period should beconsidered for repayment of loan and longperiod’s moratorium should be allowed incase of loans given for R & D activity.

· Funding should be available for purchaseof technical knowhow also in the samemanner as stated herein above.

· Grants/ subsidies should be availablewithout delay and with least hassles.

· Private equity fund should play active rolein funding the research oriented companiesmore specif ical ly to fi rst generationentrepreneurs.

· More incubation centers should beavailable so as to provide funds, guidanceand facilities for R & D to first generationentrepreneurs.

· Laws relating to IPR should be stringentand justice should be available quickly forinfringement of IPRs.

· Fees for registration of IPR should bereasonable and process of registrationshould be fast.

· Funding for registration of IPRs should beavailable at cheaper rates with least hassles.

· Guidance for registration of IPRsdomestically and internationally should beavailable so that the same can be registeredat least cost as professional fees forregistration of IPRs in foreign countries arevery high.

· When such companies which spends highon R & D but do not get eligible deductionunder direct taxes and indirect taxes forwhich they are entitled due to guidelinesof DSIR as discussed herein above or dueto bureaucrati c approach and notunderstanding of difficulties placed bypersons involved in R & D activities. Suchpersons have to devote more time in

compliance of lengthy and complicatedprocedures which take away their timewhich they were supposed to devote for R& D activities.

6. Conclusion :

The Research and development activity is keyfor growth of any economy. It saves spendingof foreign currency by reducing imports,spending less on technical knowhow fees,royalty payments etc. I t adds to GDP ofeconomy by producing more in country andleads to higher employment generation. It alsogives better realization of products due to lesscompetition for innovative products. It alsogenerates earning in foreign currency which ishelpful in improving balance of paymentposition of country. What are the expectationsof people involved in R & D activities areenumerated herein above and al l stategovernments and Central Government shoulddo their best to encourage R & D Activitieswhich is going to give more revenue by wayof direct and indirect taxes in future due toinnovation of new products. It is noticed thatdue to non availability of such facilities asexpected by people involved in R & Dactivities, most of the people who have expertiseand passion for research go to developedcountries where they get better facilities, cheapand immediate funding by way of equity and/or borrowings and better environment by wayof less procedures and more facilities. Ourministers speak more on research anddevelopment but do very less to solve theirproblems. If more attention is not given toovercome some of the problems faced by peopleengaged in research and development activities,our imports wil l increase, our balance ofpayment position would be adversely affected,unemployment would increase and GDPgrowth would also be affected adversely.

❉ ❉ ❉



CA. Kush Paresh [email protected]

Introduction

Since introduction of the concept “Transfer Pricing”in the year 2001, many controversial legal issueshave been raised every year mainly due tosubjective nature of provisions. Computation ofArm’s length price (ALP) is subjective matter andthe same can be changed drastically based onselection or non-selection of one or the other factors.This has led to numerous disputes, impactingforeign investors’ sentiments and extra ordinary risein compl iance costs to the assessees andadministrative cost to the government. Aftersubstantial capital investments in infrastructure,availability of cheap labour, allowance of ForeignDi rect Investments in many areas andannouncement of “Make in India” drive, India iswitnessing an increasing trend in foreign investmentsand in such circumstances taxpayers and investorshave expressed the need for some mechanism toreduce long lasting litigations and thereby enhancestability in transfer pricing legislations. Hence,introduction of range concept and use of multipleyear data through announcement by Hon’ble theFinance Minister while presenting budget in theYear 2014 and subsequent release of draft rules arerevolutionary steps to reduce long lasting litigationsand to bring the Indian Transfer Pricing regime inline with the best practices followed by developedcountries. These steps of the government and theCentral Board of Direct Taxes (“CBDT” or “theboard”) are welcomed by the taxpayers as theypromote more transparency and provide certaintyin computation of ALP.

Computation of Alp-existing Provisions

Existing provisions of Section 92C of the IncomeTax Act, 1961 (Before amendment by the FinanceAct (No.2) 2014) provide for computation of ALPin relation to an international transaction or aspecified domestic transaction by any of the

following methods being the most appropriatemethod having regard to the nature of transactionor class of transaction or class of associated personsor functions performed by such persons or suchother relevant factors as the Board may prescribednamely.

- Comparable Uncontrolled Price Method (CUP)

- Resale Price Method (RSP)*

- Cost Plus Method (RPM)*

- Profit Split Method (PSM)

- Transactional Net Margin Method (TNMM)*

- Such other method as may be prescribed by theBoard

(* Methods linked with profit margin)

Where more than one price is determined by themost appropriate method, the ALP shall be takento be the arithmetical mean of such prices.

In addition, if the variation between the ALP sodetermined as above and price at which theinternational transaction or a specified domestictransaction has actually been undertaken does notexceed such percentage, (not exceeding 3%) of thelater, as may be notified by the government in theOfficial Gazette, the price at which the transactionhas actually taken place shall be deemed to be theALP.

Chal lenges faced in Computation of AL Pthrough Existing Provisions

Usage of Ar i thmet ical M ean Concept inComparable:

Existing provisions relating to arithmetical meanare”too mean to be good” as rightly quoted byMr.Rahul K Mitra and Mr.Soumitra K Chakrabortyin their article written on “Fundamental reformsneeded for Indian Transfer Pricing Regulations”.

Analysis of Draft Scheme ofproposed Rules for Computationof Arm's Length Pr ice


Concept of adopting arithmetical mean has beencriticized heavi ly by industry and tax payerworldwide mainly due to its lack of statistical andeconomic rationale. If we look at the statisticalcharacteristics, arithmetical mean is prone toextreme values or outl i ers, which are notrepresentative of the rest of the data and suchextreme value or outl ier may be because ofabnormal business conditions in that particularoutlier which distorts average of the whole data set.Arithmetical mean does not eliminate any abnormalfluctuations of any one of comparable and dilutestransfer pricing policy followed by a taxpayer.There are chances that some comparables haveundue fluctuations as business conditions are prettydifferent all over the world.

Let us understand the same with the followingexample.

X Ltd has entered into international transactionswith X Inc., the associated enterprise, during theyear. It has computed ALP as per Transactional NetMargin Method, being the most appropriate Methodin its case. It has earned net profit margin from salestransactions entered into with X Inc. at 11%. Forcomputation of ALP, data of the following fourcomparable companies are available, which dealwith the similar product as of X Ltd and operateunder similar business conditions.

Enterpr ise A L td B L td C L td D L td

Net Profit 10% 10.25% 12.60% 25.55%MarginEarned

As per existing provisions, if more than one priceis determined by the most appropriate method,arithmetic mean of such price needs to be taken.Hence, arithmetic mean of the above margins is asbelow.

Arithmetic Mean = 10+10.25+12.60+25.55 4

= 14.60%

All the above companies are Indian concerns whodeal with independent sales distributors and salesare made on short term contracts, while sale

transactions made by X Ltd wi th X Inc. anassociated enterprise are based on long term contractwith the focus of capturing international market.Thus there is a difference in transactional structureand hence it is appropriate to give comparabilityadjustment on account of such difference at 1%based on available facts and details.

Hence the adjusted ALP would be 14.60%-1%=13.60% and after reducing 3% as per secondproviso to section 92C, Arm’s length Net Margincomes to 13.19%. Since, the net margin earned withthe associated enterprise i s only 11%, thetransactions are not entered into at Arm’s lengthprice and accordingly adjustment in ALP needs tobe made.

From the above example, it can be concluded thatdue to unduly high net profit margin of D Ltd, thearm’s length margin has increased substantially. Ifwe ignore such comparable, arm’s length margincomes to 10.95% ({ 10+10.25+12.60} /3) which islower net margin earned from transactions with theassociated enterprise.

Use of Single Year Data

Another big challenge in existing transfer pricingprovisions can be traced to the insistence on usingonly single year data thereby discouraging usageof multiple year data in computing ALP. As thisregard, currentprovisions of Sub-rule 4 of Rule 10Bare stated as below.

The data to be used in analyzing the comparabilityof an uncontrolled transaction with an internationaltransaction or specified domestic transaction shallbe the data relating to the financial year in whichthe international transaction or specified domestictransaction entered into.

Provided that data relating to a period not beingmore than two years prior to such financial yearmay also be considered if such data reveals factswhich could have an influence on the determinationof transfer price in relation to the transactions beingcompared.

From reading of above line, it is very clear thatexisting intention of legislature was to use only the

Analysis of Draft Scheme of proposed Rules for Computation of Arm's Length Pr ice


data relating to current financial year. However,there are practical difficulties in getting current yeardata from comparable entities while computationof ALP. In addition such difficulties get amplifiedat the time of assessment, when an assessing officerpossesses enough and accurate comparable data tocompute ALP himself.

In addition, it is not even fair to take only singleyear data for comparison. Every business passesthrough an Economic Business Cycle which isgenerally of 3 to 5 years depending upon natureand type of a business. There are chances thatcomparable entities are passing through a stage ofa business cycle where there may be unduefluctuations in their financial performances. Takingsuch data for comparison and computing ALPwould completely distort Transfer Pricing policyfollowed by an assessee.

Amendments made by the Finance Act (No. 2)2014

To mitigate such challenges, praiseworthy reformsare made in transfer pricing regulations throughFinance Act (No. 2) of 2014. Honorable theFinance M inister, Shri Arun Jai tl ey whi lepresenting the Finance Bill (No.2) of 2014 on 10th

July, 2014 has conveyed following lines in relationwith transfer pricing reforms.

14. Transfer Pricing is a major area of litigationfor both resident and nonresident taxpayers. Ihave proposed certain changes in the TransferPricing regulations, which I would spell outin Part-B of my speech.

204. In order to reduce litigation on transfer pricingissues, I propose to make certain changes inTransfer Pricing regulations.

(1) An Advance Pri cing Agreement (APA)scheme… … …

(2) In order to align Transfer Pricing regulationsin India with the best available practices, Ipropose to introduce range concept fordetermination of arm’s length price. However,the arithmetic mean concept will continue toapply where number of comparable is

inadequate. The relevant data is under analysisand appropriate rules will be prescribed.

(3) As per existing provisions of Transfer PricingRegulations, only one year data is allowed tobe used for comparable analysis with someexception. I propose to amend the regulationsto allow use of multiple year data.

Necessary legislative amendments to give effect tothe above proposals including those relating to theAuthority for Advance Rulings and Income-taxSettlement Commission will be moved in the currentsession of the Parliament.

Pursuant to above announcements, the amendmentwas also made in Section 92C of the Income Tax,1961 by inserting 3rd proviso mentioned as below.

Provided also that where more than one price isdetermined by the most appropriate method, thearm’s length price in relation to an internationaltransaction or specified domestic transactionundertaken on or after the 1st day of April, 2014shall be computed in such a manner as may beprescribed and accordingly the first and secondproviso shall not apply.

New Draft Scheme of the Proposed Rules forComputation of ALP

In line with announcements made in the budgetspeech and consequential amendments made in theIncome Tax Act, 1961, Central Board of DirectTaxes has come out with Draft scheme of theproposed Rules for computation of Arm’s LengthPrice (ALP)on 21st May, 2015. CBDT intends tointroduce the mechanism through the amendmentof Income Tax Rules.

Provisions contained in such scheme are enumeratedbelow.

A. Adoption of the Range Concept

i. The “Range” concept shall be used onlyin case the method used for determinationof ALP is Transactional Net MarginMethod (TNMM), Resale Price Method(RPM) or Cost Plus Method (CPM).



ii. The following steps would be required toconstruct the range: -

a) A minimum of 9 entities are requiredto be selected as comparable entities ofthe tested party, based on the similarityof their functions, assets and risks(FAR) with that of the tested party;

b) 3-year data of these 9 entities (or more)would be considered and the weightedaverage of such 3-year data of eachcompany would be used to constructthe data set. In certain circumstances,data of 2 out of 3 years could also beused. Thus, the data set or series wouldhave a minimum of 9 data points;

c) For calculating the weighted average,the numerator and denominator of thechosen Profit Level Indicator (PLI)would be aggregated for all the yearsfor every comparable entity and themargin would be computed thereafter;and

d) The data points lying within the 40thto 60th percentile of the data set ofseries would constitute the range.

iii. If the transfer price of the tested party fallsoutside the range as constructed above, themedian of the range would be taken as ALPand adjustment to transfer price shall bemade. If the transfer price is within therange no adjustment shall be made. Thereshall not be two different data sets – onefor testing and one for making adjustments.

B. Use of Multiple Year Data

i. The multiple year data would be used onlyin case determination of ALP is byTransactional Net Margin Method(TNMM), Resale Price Method (RPM) orCost Plus Method (CPM);

ii. The multiple year data should comprisethree years including the current year i.e.(year in which transaction has been

undertaken) and i ts use for abovementioned methods shall be mandatory;

iii. In case of non-availability of data for 3years for any of the following reasons: -

· Data of the current year of thecomparables may not be available onthe databases at the time of filing ofreturns of income by taxpayers;

· A comparable may fai l to clear aquantitative filter in any one out of thethree years; and

· A comparable may have commencedoperations only in the last two years ormay have closed down operationsduring the current year.

the use of data of two out of relevant threeyears shall be permitted.

iv. The data of the current year, however, canbe used during the transfer pricing auditby both the taxpayer and the department ifit becomes available at the time of audit.

C. Continued use of Ar ithmetic Mean

In cases where the “range” concept does notapply, the arithmetic mean concept shallcontinue to apply in the same manner as itapplied before the amendment to section 92C(2) by the Finance (No. 2) Act 2014 along withbenefit of tolerance range. Further, in caseswhere multiple year data is to be used, the samewould apply whether “range” concept is usedor arithmetic mean is used for determining theALP. Therefore, in such cases the arithmeticmean of the multiple year data of comparablewill be considered for computation of ALP.

Analysis of the Scheme

· The ‘range’ concept shall be used only in casethe method used for determination of ALP isTransactional Net Margin Method (TNMM),Resale Price Method (RSM) or Cost PlusMethod (CPM). Those are the methods inwhich profit margin earned by an assessee istaken into account. Such concept cannot be



used if the method used in computation of ALPis Comparable Uncontrolled Price Method(CUP) or Profit Split Method (PSM). In future,the Government should introduce methodologyto apply ‘range’ concept to these methods aswell.

· Minimum 9 entities are required to be selectedfor using ‘range’ concept. If there are notsufficient comparable data available then‘range’ concept cannot be applied and ALP hasto be computed by the arithmetic mean.

· Following is an example to understand themethod prescribed for computation of ALPusing ‘range’ concept.

X Ltd, the pharmaceutical company has entered intointernational transaction of sale of drugs with theassociated enterprise X Inc. during Financial Year2014-15 on which it has earned profit margin of11%

Profit margin data of 3 years of following ninecomparable pharmaceutical companies sell ingsimilar drugs and having similar functions, assetsand risks as of X Ltd is tabulated below.

Comparable Enterpr ises A Ltd B Ltd C Ltd D Ltd E Ltd F Ltd G Ltd H Ltd I Ltd

Profit Margins in %

Year 2012-13 9.90 9.00 10.15 10.85 11.10 9.95 11.15 8.85 10.30

Year 2013-14 10.15 9.95 12.00 11.15 11.25 10.58 12.45 10.07 11.78

Year 2014-15 10.50 9.70 11.90 13.10 11.18 10.90 14.00 10.63 12.90

Since how weight is to be given is not expressly mentioned, for simplicity weight 1 is given to profitmargin of the financial Year 2012-13, 2 to the financial Year 2013-14 and 3 to the financial year 2014-15and then weighted average profit margin of 3 years of each company is calculated below. (Thoughpractically, weight is given based on total profit and total sales incurred for all the years in foreign countries)

Profit Margin*Weight A Ltd B Ltd C Ltd D Ltd E Ltd F Ltd G Ltd H Ltd I Ltd

Year 2012-13* Weight 1 9.90 9.00 10.15 10.85 11.10 9.95 11.15 8.85 10.30

Year 2013-14* Weight 2 20.30 19.90 24.00 22.30 22.50 21.16 24.90 20.14 23.56

Year 2014-15* Weight 3 31.50 29.10 35.70 39.30 33.54 32.70 42.00 31.89 38.70

Total 61.70 58.00 69.85 72.45 67.14 63.81 78.05 60.88 72.56

Weight 6 6 6 6 6 6 6 6 6

Data Set=Total/Weight 10.28 9.67 11.64 12.08 11.19 10.64 13.01 10.15 12.09

Data points lying within 40th to 60th percentile of data set would constitute the range.

Hence 40th Percentile of above Data set is P40

= 10.746% &

60th Percentile of above Data set is P60

= 11.551%

Hence the range constituted is 10.746% to 11.551%.



Since profi t margin earned by X L td f rominternational sales transactions entered into with theassociated enterprise X Inc. is 11%, it falls in therange and hence the profit margin is at Arm’s lengthand no adjustments need to be made in transfer price.

If we compute ALP as per old provisions takinginto account prof i t margins of comparablecompanies only for the Year 2014-15, the arithmeticmean of profit margins for the Year 2014-15 ofabove nine comparable companies comes to11.65%.Considering existing +/- 3% adjustmentcriteria, the range comes to 11.30% to 11.99%, sincenet profit margin of X Ltd is 11%, the transfer priceis not Arm’s length price and adjustment needs tobe made in transaction price.

(Author’s Note: The above example is to understandthe method prescribed in the draft scheme basedinterpretation, however the CBDT should clarifythe method prescribed with detailed guidelines andexamples so as to remove possible ambiguitieswhich may be created due to di fferentinterpretations)

Thus it is evident from the above calculation thatintroduction of ‘range’ concept is indeed beneficialin computation of ALP. Instead of 40th to 60th

percentile, the government can also introduce interquartile range concept which is the internationallyaccepted principle and which is also supported byOECD transfer pricing guidelines.

In addition, there may be practical difficulties ingetting data of 9 comparable entities having similarfunctions, assets and risks. Requirement of numberof comparables can be somewhat reduced to 5 or 3or different minimum number of comparables canbe prescribed for different industries based onavailability of data.

· It has also been mentioned that if the transferprice of the entity falls outside the range asconstructed above, the median of the rangewould be taken as ALP and adjustment totransfer price shall be made. There shall not betwo different data sets- one for testing and onefor making adjustments. This line suggests thatbasic data used in computation of ALP and forconstruction of the range should only be used

in making adjustment to transfer price if it fallsoutside the range. Adjustment cannot be madeusing different sets of data.

· The scheme permits usage of 3 years dataincluding current year if methods used incalculation of ALP is TNMM, RPM or CPM.Hence, multiple year data cannot be used ifmethod adopted is either CUP or PSM. Thoughthe government has encouraged using multipleyear data in the draft scheme, it still has limitedthe same only to 3 years. As mentioned above,general business cycle of any business is of 5to 7 years and hence to remove any unduefluctuations; usage of at least 5 years data shouldbe encouraged.

Conclusion

Introduced in 2001, Indian Transfer Pricing was untilnow called “a new born baby”, but with proactivereforms suggested recently, it seems to be enteringits “teen” phase. The new government has very wellunderstood that unlike other laws, laws relating totransfer pricing by passes geographical limits andhave global impact. We have very well observed inthe recent past that any undue harassment to taxpayers by amendments including retrospectiveamendments in the Act involving internationaltransactions leave very harmful impact on sentimentsof foreign investors and flow of Foreign DirectInvestment in India gets terribly impaired. The IndianIncome Tax authorities usually take an aggressivestand on transfer pricing issues due to which foreigninvestors feel lack of legal stability and businessfriendly environment in India. In such situation, newamendments and mechanism proposed by thegovernment in transfer pricing laws regarding useof ‘range’ concept, use of multiple year data and rollback mechanism in Advance Pricing Agreementstruly symbolize the government’s trustworthyintentions to reduce long lasting litigations and toprovide certainty. It is just the beginning and if thegovernment takes into account valuable suggestionsreceived by stake holders from all the over the worldand to align the Indian transfer pricing regime as perthe best practices available in the World, definitely,“Achhe Din” would follow.

❉ ❉ ❉



CA. Hersh [email protected]

Introduction:Section 14A has been inserted by the Finance Act,2001 w.e.f 1.4.1962. The rationale behind insertionof this section was, expenditure which has a bearingon exempt income should not be considered in thecomputation of total income as otherwise this wouldresult in double advantage to the assessee. Forexample when agricultural income itself is exemptfrom taxation, there is no justification to considerexpenditure on agricul tural activi ties in thecomputation of total income. The scope of section14A has always been a mystery and subject matterof litigation between the tax payers and the taxcollectors. Controversy has always emerged bydecisions of various Tribunal Benches on thissubject. In order to resolve those controversies,special benches of the Tribunal were constitutedwhich resolved certain disputes between the parties.Subsequently, High Courts were also a part insolving such controversies and disputes. An attempthas been made to point out in this article few of thedisputes and the actions taken by the honorablejudges in this regards.

Section 14A:

Let us first go through the provisions of this section.Section 14A provides that in computing the totalincome of an assessee, no deduction shall beallowed in respect of expenditure incurred by theassessee in relation to income which does not formpart of total income under the Act. Subsequently, aproviso was added by Finance Act 2002 withretrospective effect from 11.5.2001. It provides thatthis section shall not empower the Assessing Officer(AO) either to reassess or pass an order enhancingthe assessment or reducing the refund already madeor otherwise increasing the liability of the assesseefor any assessment year beginning on or before 1stday of April 2001. Sub sections 2 & 3 were insertedby Finance Act 2006 w.e.f. 1.4.2007. Sub section(2) empowers the AO to determine the amount of

expenditure incurred in relation to such incomewhich does not form part of total income inaccordance with the method as may be prescribed.Such power is to be exercised if the AO, havingregard to the accounts of the assessee, is not satisfiedwith the correctness of the claim of the assessee inrespect of the expenditure mentioned in sub section(1). Sub section (3) provides that provisions of subsection (2) shall also apply where assessee claimsthat no expenditure had been incurred in relation toincome not forming part of total income. By virtueof the powers conferred under sub section (2), Rule8D was inserted by gazette notification dated24.3.2008 which prescribes the method forcomputing the expenditure incurred in relation tothe income not forming part of total income.

Rule 8D:

This rule was inserted by the IT ( Fifth Amdt) Rules,2008, w.e.f 24-03-2008. This rule provides an aidto the AO to find out the correct expenditure inconnection to the exempt income where, he is notsatisfied with the correctness of the claim ofexpenditure made by the assessee or where noexpenditure has been claimed to be related to theexempt income. The rule provides a condition foraggregation of all the three type of expendituresmentioned below:

a. Whole of the expenditure directly related to theincome which does not form part of totalincome.

b. Apportionment of expenditure by way ofinterest which is not directly attributable to anyparticular income or receipt.

c. An amount equal to one-half percent of theaverage of the value of investment, incomefrom which does not form part of the totalincome, as appearing in the balance sheet ofthe assessee, on the first and the last day of theprevious year.

Section 14A Disallowance



Applicability of Section in absence of ExemptIncome:

It is to be understood that for disallowance ofexpenses the existence of income is not necessary.Merely because no income was received during theyear from investments, it cannot be a ground forclaiming exclusion from the provisions of section14A when the income even if received is not taxableat all.[Insaallah Investments L td. Vs. ITO (2008)23 SOT 130 (Del)]. Also refer to the Circular No.5/2014 Dt. 11/02/2014.

If the expenditure is incurred in relation to incomewhich does not form part of total income, it has tosuffer disallowance irrespective of the fact whetherany income is earned by the assessee or not. Section14A does not envisage any such exception. Whenprior to introduction of Sec 14A, an expenditureboth under sections 36 and 57 was allowable to anassessee without any requirement of earning orreceipt of income, such condition cannot beimported when it comes for disallowance of thesame expenditure u/s 14A.

All expenses connected with the exempt incomehave to be disallowed under section 14A regardlessof whether they are direct or indirect, fixed orvariable and managerial or financial in accordancewith law

Where the assessing officer wants to disallowexpenditure incurred for earning the exemptedincome, he has to pin-point the particularexpenditure, which he alleged to be incurred forearning such exempted income. He has no authorityto artificially attribute or apportion a part of theexpenditure which is otherwise incurred for thepurpose of the assessee’s business. Not onlyincurring of the expense but also its relationshipwith the exempted income must be clear andcapable of being ascertained.

In case of Karnavati Petrochem Pvt Ltd ( ITA No:2228/AHD/2012) Ahmedabad Bench has taken aview that when no nexus is proved between theamounts incurred and tax free income earned, thedisallowance as per the Rule 8D is not justified.Addition on account of estimated administrativeexpenses can be done. Also refer ITA No:305/

MDS/2013, DCIT Vs. M/s.All ied InvestmentsHousing Pvt Ltd.

However very recently a contrary view has beentaken by Delhi High Court in case of CI TVs.Holcim India P.Ltd ( 2014 90 CCH 0081 Del),Income exempt under Section 10 in a particularassessment year, may not have been exempt earlierand can become taxable in future years. Further,whether income earned in a subsequent year wouldor would not be taxable, may depend upon the

nature of transaction entered into in the subsequentassessment year. It is an undisputed position thatrespondent assessee is an investment company andhad invested by purchasing a substantial numberof shares and thereby securing right to management.Possibility of sale of shares by private placementetc. cannot be ruled out and is not an improbability.Dividend may or may not be declared. Dividend isdeclared by the company and strictly in legal sense,a shareholder has no control and cannot insist onpayment of dividend. Hence Where no dividendincome was earned by assessee , disallowance u/s14A is not warranted.

ITAT bench Bangalore, in an unreported judgementhas held that section 14A disallowance cannot beinvoked when there was no exempt income inprevious year. Hon. judges declines to acceptRevenue’s reliance on CBDT circular No. 5 of 2014dtd Feb 11,2014 and held that “The Board circularwhich is contrary to the Hon’ble High Court’sdecisions cannot therefore be the basis to sustainthe disallowance made by the Revenue authorities”;

A favorable view has been taken by Mumbai Highcourt in case of Reliance Industr ies L td, [2010]8 TAXMANN.COM 218 (BOM) that incurrenceof administrative expenditure is not at all requiredfor earning dividend income. The AO has to findout from the fact of the case that actually certainexpenditure has been incurred

Section 14A vis a vis Section 36

Disallowance would be justified u/s 14A even ifthe expenditure incurred in relation to income notforming part of total income is otherwise allowableu/s 36(1)(iii)/57(iii). In case where expenditure isincurred by the assessee as an investor in shares,


the disallowance under this section would bejustified since the income arising in form ofdividend would not form of total income.

It can be stated that where the assessee is in thebusiness of purchase and sale of shares, once thepurchase and sale of shares is held to be a businessactivity, the interest paid thereon has to be treatedas business expenses and no disallowance can bemade u/s.14A . Zaver i Vi r j ibhai M andal iaVs.ACIT [(2012) 33 CCH 592 AhdTr ib]

It was held that, the expression “in relation to” insub section (1) would encompass direct as well asindirect expenditure and therefore disallowance inrespect of both the expenditure would be justified.

[I .T.O V. Daga Capital Management (P) Ltd 117ITD 169 (SB)]

Godrej & Boyce vs. DCI T (Bombay HighCourt)(2010)

This is an important decision on the validity of theprovisions and the retrospective applicability ofsection 14A (2), section 14A (3) of the Act andRule 8D. While on the constitutional validity ofsection 14A(2), section 14A(3) and Rule 8D, theBombay HC has ruled against the taxpayer, it hasnevertheless held that the power of the AO to applyRule 8D is not automatic and the AO is bound togive an opportunity to the taxpayer to prove thecorrectness of his claim. It is only where the AO isnot satisfied with the claim of the taxpayer can heapply Rule 8D after recording reasons. This decisionis welcome in so far as retrospective applicabilityof Rule 8D is concerned as it overrides the decisionof the Special Bench of the Tribunal in the case ofDaga Capital Management Private Limited, whichheld that Rule 8D was applicable retrospectively.The same conclusion is also applied in case Bir laCor por at ion L td. 43 Taxmann.com 276(Calcutta) [2014]

Even prior to Assessment Year 2008-09, when Rule8D was not applicable, the Assessing Officer hasto enforce the provisions of sub section (1) ofSection 14A. For that purpose, the AssessingOfficer is duty bound to determine the expenditurewhich has been incurred in relation to income which

does not form part of the total income under theAct. The Assessing Officer must adopt a reasonablebasis or method consistent with all the relevant factsand circumstances after furnishing a reasonableopportunity to the assessee to place all germanematerial on the record.

Section 10(2A)

By virtue of sec 10 (2A) shares income is notincluded /includible in total income of the assesseepartner. In other words it does not form part of totalincome of partner and therefore expenditureincurred in earning that income would not beallowable. However, i f a partner gets bonus,commission, remuneration, interest from the firmwhich is allowed as deduction and the partner hasa source of income under the head ‘business’ againstwhich expenditure incurred by the partner, i .einterest paid on borrowed capital can be claimed asdeduction.

[A.H.Baldota V. Asstt. CIT (2007) 103 TTJ(Mum Tr ib) 517]

When capital contribution is made by the partner forthe purpose of earning interest and share income boththe payment of interest would be allowable asdeduction u/s. 36 and section 14A would not comein to play since interest income is taxed as BusinessIncome by virtue of section 28 (v). But if it was solelyfor earning share income from the firm or if there isno interest income from capital contribution made tofirm than the same would be disallowed u/s. 14A.

This was laid down by the Kerala High Court inthe case of CIT v. Popular Vehicles & ServicesLtd. 228 CTR 346 where a corporate assessee waspartner in a firm exclusively to earn share of profitwith no interest income and it had paid interest onborrowings for investment as capital the payment ofinterest was held not allowable under section 14A.

In the case Reliance Utilities & Power L td (ITANo 1398 of 2008-order dated 9.1.2009 of Hon’bleBombay High Court), the assessee made investmentof Rs.389.60 crs in shares on which tax freedividend income was received. It was the case ofthe assessee that there were sufficient fundsavailable in the form of share capital (180crs),



reserve & surplus (215crs) for making investmentin shares. On the other hand, case of revenue wasthat share capital and reserves etc. had already beeninvested in acquiring in fixed assets. The Tribunalfound force in the contention of assessee. Onappeal, the Hon’ble high court observed that therewas no evidence to show that share capital, reservesetc. were invested in fixed assets and thereforefinding of fact recorded by tribunal was to beaccepted. However, i t is pertinent to note theobservations of the Hon’ble court in para 10

“If there be interest free funds available to anassessee sufficient to meet its investments and atthe same time the assessee had raised a loan it canbe presumed that the investments were from theinterest free funds available.”

Similar view has been taken by the Hon’bleCalcutta High Court in the case of Br itanniaIndustr ies 280 ITR 525

In case of CIT V Hero Cycles, 323 ITR 518Punjab & Haryana High court has held that thecontention of the revenue that directly or indirectlysome expenditure is always incurred which mustbe disal lowed u/s 14A cannot be accepted.Disallowance u/s 14A requires a f inding ofincurring of expenditure. If it is found that forearning exempted income no expenditure has beenincurred, disallowance u/s 14A cannot stand.Hence nexus for incurrence of expenditure with theexempted income has to be primarily proved. Basedon the above decision a similar view was taken byITAT Mumbai in case of PawankumarParmeshwar lal vs. ACIT and DCIT vs. JindalPhoto L td. ( ITAT Delhi)

The jurisdictional high court has very recently incase of Gujarat Power Corporation L td [2014]44 taxmann.com 359 held that where assessee didnot invest borrowed funds for earning tax-freeincome, no part of interest paid on borrowed fundscould be disallowed under section 14A. The onusto prove that borrowed funds have not been investedshall be on the assessee.

Applicability in case of Shares held as Stock InTrade:

When assessee had not retained shares as stock withintention of earning dividend income but suchincome was incidental to business of sale of shares,no notional expenditure could be deducted byinvoking section 14A. ( ITA No: 848/Ahd/2012).(ITA No: 2449/Ahd/2008). However contrary hasbeen taken by many tribunals.

Important Issues:

1. Disallowing expenditure by ½% of the averageof the value of investment as per Rule 8D seemsarbitrary and not equitable. In a case where thereis no income at all but only loss is incurred,this ad hoc addition to income by way ofdisallowance under the notification wouldcause unwarranted hardship.

2. AO not to have suo motto right to resort to Rule8D.

3. Prescribed method i s retrospecti ve orProspective: The “Prescribed method” wasannounced by notification dated 24-3-2008,hence applicable from A.Y 08-09. Provisionsof sub section (2) & (3) being in the nature ofprocedural law are applicable retrospectively.

4. Rule extends to disallowing other expenses orindirect expenses except in case of interest.

5. Whether addition on account of applyingsection 14A attracts penalty under section 271(1)(c) : Only when there is concealment ofincome or the particulars of income furnishedare inaccurate, the provisions of this section isattracted.

6. Depreciation is not expendi ture but anallowance and hence not to be considered forcalculation under rule 8D.

7. Incurrence of expenditure is not at all requiredfor earning exempt income.

As could be seen from the above discussions a fewissues need to be addressed by the law makers toavoid litigation. The disallowance of assumedindirect expenses on a percentage basis wouldnull ify the exemption itself. I hope the abovediscussion has covered all the major issues and thereaders would be satisfied and appreciate the effortsput in preparing the article.

❉ ❉ ❉



Right to disclaim depreciation in itsentirety:

It has been the consistent view of the Courts thatunabsorbed depreciation allowance should beal lowed before the unabsorbed investmental lowance. To put i t differently, unabsorbeddepreciation is to be given precedence and isallowed to be set off first. Some of the High Courtshad earlier taken the view that this would be soeven if the assessee had not claimed the unabsorbeddepreciation. It is the necessary consequence of thescheme of various provisions of the Act. Section32A, which deals with investment allowance, wasinserted by the Finance Act, 1976 with effect from1-4-1976. According to Circular No. 202 dated 5-7-1976 issued by CBDT [(1976) 105 ITR St 17],the combined effect of the provisions of sections32, 32A, 33, 33A and 72 is that in a case wherethere are allowances in the nature of depreciationallowance, investment allowance, developmentrebate, development allowance and losses, suchallowances and losses would be deductible in theorder given below, in cases where the profits areinsufficient to absorb all of them:(i) Current depreciation (section 32(1))(ii) Carried forward losses of earlier years (section

72(1))(iii) Unabsorbed depreciation of earl ier years

(section 32(2))(iv) Unabsorbed development rebate of earlier

years (section 33(2)(ii)(v) Current development rebate (section 33(2)(i))(vi) Unabsorbed development allowance of earlier

years (section 3A(2)(ii))(vii)Current development al lowance (section

33A(2)(ii))(viii) Unabsorbed investment allowance of earlier

years (section 32A(3)(ii))(ix) Current investment al lowance (section

33A(3)(i))

Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

10 It emerges from sub-section (3) of section 32A thatunabsorbed investment allowance takes precedenceover current investment allowance. [Para 15]

There is no provision by which depreciation couldbe fictionally deemed to have been claimed andgranted and it is to be specifically claimed by theassessee. Further, when claiming of depreciation isa privilege given to the assessee, it cannot be turnedinto a disadvantage even when the assessee doesnot claim the depreciation. Therefore, option in thisbehalf rests with the assessee.[Para 16]

In the instant case, the assessee in fact claimed thedepreciation allowance insofar as it pertained to thecurrent year. At the same time, it did not want toclaim the set off of the unabsorbed depreciationallowance of the previous years. In such situation,the question is as to whether it is open to the assesseeto invoke the provisions of section 32 by claimingdepreciation of the current year, but at the same timechoose not to make a claim of set off of unabsorbeddepreciation allowance of the previous years. Bylegal fiction unabsorbed depreciation becomesdepreciation of the year in question and gets addedto the depreciation of the current year. If that be so,is it the right of the assessee to partly invoke theprovisions of section 32 when i t comes todepreciation of the current year and still claim thatit has right not to claim unabsorbed depreciationallowance? On a plain reading of section 32, it doesnot appear to be the position. Once the entiredepreciation, namely, unabsorbed depreciationallowance of the previous year gets merged intothe depreciation of the current year, it would becomean integral part thereof. Legal fiction makes it onewhole thereby making it possible to the assessee toclaim set off of unabsorbed carried forwarddepreciation as well. A fortiorari, bifurcation thereofwith option to claim depreciation of current year

contd. on page no. 225


Disallowance of interest u/s. 14 A

C.I .T. V/s. L akhani M ar ket ingIndustr ies (2014) 272 CTR 215 (P& H) :111 DTR 0149 ( P & H)

Issue :

Whether interest can be disallowed u/s. 14A whenthere is no tax free income?

Held :

Question was whether CIT (A) and ITAT wereright in allowing deduction of interest liability outof other income and the claim of the revenue todisallow u/s. 14A was not correct.

C.I.T. (A) held as under :-

It was incumbant on the A.O. to establish a nexusbetween the expenditure incurred and the incomewhich was exempt under the Act.

On appeal by Revenue, ITAT held that :

From the reading of Sec. 14A of the Act, it is clearthat before any disal lowance the fol lowingconditions are to exist:-

(a) There must be income taxable under the Act.

(b) This income must not form part of the totalincome under the Act.

(c) There must be expenditure incurred by theassessee.

(d) The expenditure must have a relation to theincome which does not form part of the totalincome under the Act.

High Court held in favour of the assessee byobserving that:

Disallowance u/s.14A requires finding of incurringof expenditure, when it is found that for earningexempted income no expenditure has been incurred,disallowance u/s. 14A cannot be made.

CA. C. R. [email protected]

Also See. :

(1) CIT V/s. Holcim India (P) Ltd. (2014) 272CTR 282 (Del.)

(2) CIT V/s. Shivam Motors (P) Ltd. (2014) 272CTR 277(All).

(3) CIT V/s. Torrent Power Ltd. (2014) 272 CTR270 (Guj.)

(4) CIT V.s. Corrtech Energy (P) Ltd. (2014) 272CTR 262 (Guj.) : 223 Taxman 0130

Power to allow claim not made in theReturn of Income.

C.I .T. V/s. Sam Global Secur ities L td.(2014) 272 CTR 290 (Del) : 360 ITR 0682(Del)

Issue :

Can an assessee claim reduction of incomeotherwise than a revised return?

Held :

Assessee had not claimed exemption under Sec.10(35) and the business loss in its return. Duringthe course of the assessment proceedings, assesseefiled revised computation of income claiming thatdividend from the units of the mutual fund wasexempt u/s.10(35), and loss on sale of units was abusiness loss and not speculation loss. A.O. rejectedthe said claims, interalia, on the ground that theassessee had not filed a revised return within thetime allowed u/s. 139(5).

On appeal CIT(A) held that though the dividendwas exempt and it was not speculation loss, theassessee had not filed revised return & hence theclaim was not allowable.

Tribunal allowed the claim of the assessee.

High Court held that :

Tribunal was justified in reversing the said findingafter referring to the factual matrix. Tribunal has

From the Courts

CA. Jayesh C. [email protected]

22

23


power to allow a claim which is not made in thereturn. Hence no interference is warranted withorder passed by the Tribunal.

Sec. 179 when can be invoked ?:

Suresh Narain Bhatnagar V/s. I .T.O.(2014) 227 Taxman 193 (Guj .) (Mag.) :367 ITR 0254(Guj)

Issue :

What procedure the ITO is required to follow beforeissuing notice to Director u/s. 179?

Held :

Provisions of Sec.179 can be invoked when anytax due from private company cannot be recoveredfrom such company and, therefore, where A.O. didnot make any efforts for recovery of tax dues fromcompany, question of inquiring with petitioner as adirector of company to pay up said amount wouldnot arise.

Effect of i ncome of imper missibledeposits of a Char itable Trust : C.I .T.V/s. Fr. Mullers Char itable Institution.(2014) 227 Taxman 369 (SC)

Issue :

When a Charitable Trust has earned income fromimpermissible deposits, whether total denial ofexemption would be permissible?

Held :

Karnataka High Court held that in case of acharitable trust, it was only income from investmentor deposit which had been made in violation of Sec.11(5) that was liable to be taxed and that violationu/s.13(1) (d) does not tantamount to denial ofexemption u/s. 11 on total income of assessee trust.

Special leave petition filed by the Departmentagainst the order of the High Court was dismissedby the Supreme Court.

Levy of I nterest u/s. 234A, 234B and234C: Requirement

C.I .T. V/s. Oswal Expor ts (2014) 369ITR 630 (All)

Issue :

What is the pre-requisite when interest u/s. 234A,234B and 234C is levied?

Held :

If the interest is leviable u/s. 234-A, 234-B orSection 234-C of the Act, such levy of interest ismandatory and compensatory in nature but in orderto levy interest under these sections, the A.O. isspecifically required to mention the specific sectionof charging interest, failing which, no interest couldbe levied under those sections.

(Ranchi Club V/s. C.I.T. (1996) 222 ITR 44 (SC)followed)

State as litigant : Duty thereof

CIT V/s. Larsen & Toubro L td. (2014)272 CTR 336 (Bom) : 366 ITR 0502(Bom)

Issue :

How the State should act as a litigant to file appealsbefore High Court?

Held :

The State is expected to act as a model litigant. Itmust set the example for the public to follow andwe hope that this order acts as a reminder for allconcerned to at least now take remedial steps andmeasures. It is therefore that despite the persuasiveskills of Mr. Sureshkumar who fervently pleadednot to pass any order imposing costs, that we areconstrained to impose costs.

The Revenue Officers must realize that just like otherpowers an executive power conferred in them is inthe nature of trust. They hold office as trustees ofthe public at large. They deal with public revenueand that cannot be wasted in such frivolous litigation.We, therefore dismiss these appeals with costsquantified at Rs.1,00,000/- each. Costs shall be paidto the Maharashtra State Legal Services Authority,Mumbai, within a period of four weeks from today.

It would be open for the superior/competent authorityto recover the costs personally from the officerresponsible and equally take disciplinary actionagainst him if the power to decide about filing such

From the Cour ts

24

25

26

27


appeals is abused or the decision making authorityis utilized to harass innocent assesses. Every casemust be dealt with on its merit and no routine exerciseought to be undertaken merely because the revenueimpact is higher or the status of financial position ofthe assessee is influential and strong. That cannot bethe only yardstick or criteria.

Reopening after four years: Sanction ofHigher Officer is mandatory

C.I .T. V/s. H.M. Constructions (2014)227 Taxman 229 (Karnataka) (Mag).

Issue :

For reopening of an assessment after four yearswhether sanction of higher officer is mandatory?

Held :

Having regard to the scheme of the provisionscontained in Section 147 and 151, it is clear as

crystal that if the assessment is reopened after expiryof the four years from the end of relevantassessment year, no notice under Section 148 shallbe issued unless the Chief CIT. or C.I.T. is satisfiedon the reasons recorded by the A.O. that it is a fitcase for issuance of such notice.

The provisions contained in Section 151 areindubi tably mandatory in nature and sincecompliance thereof was either not made or couldbe established by the revenue, benefit will have tobe given to the assessee. Thus there is no reason tointerfere with the finding recorded by the Tribunal.

In the result Revenue’s appeal fai ls and is adismissed as such.

❉ ❉ ❉

28

From the Cour ts

only and contending at the same time that portionof unabsorbed carried forward depreciation is notto be thrusted upon him as it is not claimed, wouldnot be permissible.[Para 19]

[Seshasayee Paper & Boards L td. v. Dy. CIT(374 ITR 619) (2015)]

Wr it – Scope of inter ference by Cour t:

That the High Court was wrong in saying that whenthe satisfaction recorded is justiciable, the documentspertaining to such satisfaction may not be immuneand if appropriate prayer is made, the inspection ofsuch documents may be required to be allowed.The High Court had committed a serious error inreproducing in great detail the contents of thesatisfaction notes containing the reasons for thesatisfaction arrived at by the authorities under theAct. This was highly premature having the potentialof conferring an undue advantage to the assesseethereby frustrating the endeavor of the Department,even if the High Court were eventually not tointervene in favour of the assessee.

[Director General of Income-tax (Investigation)and others V/s Spacewood furnishers Pvt. L td.and others (374 ITR 595)(2015)

Wr i t – Scope of i nter fer ence incontractual matters:

There is no absolute bar to the maintainability ofthe writ petition even in contractual matters or wherethere are disputed questions of fact or even when amonetary claim is raised. At the same time, adiscretion lies with the High Court which undercertain circumstances, it can refuse to exercise.Under the following circumstances, 'normally', thecourt would not exercise such a discretion : (a) thecourt may not examine the issue unless the actionhas some public law character attached to it ;(b)whenever a particular mode of settlement of disputeis provided in the contract, the High Court wouldrefuse to exercise its discretion under article 226 ofthe Constitution and relegate the party to the saidmode of settlement, particularly when settlementof disputes is to be resorted to through the meansof arbitration; (c) if there are very serious disputedquestions of fact which are of complex nature andrequire oral evidence for their determination ; and(d) money claims per se particularly arising out ofcontractual obligations are normally not to beentertained except in exceptional circumstances.[Joshi Technologies International Inc. Vs. UOI

(374 ITR 322) (2015)]❉ ❉ ❉

11

contd. from page 222 Glimpses of Supreme Cour t Rulings

12


Cr it ical Ar t & M edia Pr actices vs.DIT(Exemption) 170 TTJ 401 (Mum)Assessment Year : 2012-13 Order dated:11th March, 2015

Basic FactsThe DIT(E) had rejected the application forregistration under section 12A of the Income tax Actof the assessee on the ground that the assessee trusthas charitable as well as non-charitable objects suchas hosting of artists-in-residence programmes forinternational artists and raising funds for organizingtrips, seminars and conferences within and outsidethe country etc. The objects of the assessee trust werenot merely confined to the territories comprising inIndia but also extended to and encompass the wholeworld. According to him any activities carried outby the applicant trust in pursuit of aforesaid objectswould involve application of funds of the trust outsideIndia which renders it ineligible for exemption.Hetherefore held that the objects of the trust contravenethe provisions of section 11 of the Act wherein it hasbeen specifically provided that the application ofincome of the trust has to be within India, therefore,the applicant trust would not be entitled to registrationunder section 12AA of the Act. Aggrieved by theorder of the Learned DIT(E), the assessee is in appealbefore Hon’ble ITAT.

IssueWhether though as per provisions of section 11,income which is applied towards char itableactivi ties in India only wil l be el igible forexemption, as per provisions of section 11(1)(c)income applied outside India is also eligible forexempt ion, i f act ivi t ies tend to pr omoteinternational welfare in which India is interestedand approval has been granted by CBDT forsuch application of income?

HeldA careful reading of the main provision of Section2(15) reveals that for the purpose or activity to be

charitable in nature, there is no condition that such anactivity should be performed ‘in India’ only. Hence,the charity as per the provisions of the Act is notconfined or limited to the boundaries of India only. Ifthe activities of a trust fall within the domain ofdefinition e.g. relief to the poor, education, medicalrelief or advancement of any other object of generalpublic utility etc., then it is to be treated as a charitabletrust. As per the provision of the clause (c) of Section11(1), the income applied outside India for the purposeof promoting the international welfare in which Indiais interested is also exempt, subject to the condition ofapproval by the Board.For the purpose of grant ofregistration, the application of income in India is not apre-condition, if its activities otherwise fall in thedefinition of ‘charitable activities’. However, so far asthe computation of income or the relief under theIncome-tax Act is concerned, the Act has restrictedthe exemption from inclusion in total income to theextent such an income is applied in India.In the presentcase, the objects of the trust suggest that the trust hasbeen formed to promote art and culture of India withinIndia and globally which fall in the definition of ‘anyother object of general public utility’ and, hence,included in the definition of ‘charitable purposes’.However, so far as the application of income outsideIndia, as claimed to have been applied to promoteinternational welfare in which India is interested isconcerned, it is to be proved with necessary evidencesand also subject to approval of the Board for entitlementof exemption from tax on such income. However, theregistration cannot be refused on the ground that theincome is applied for charitable purposes outside India.

Johnson & Johnson L td. vs. ACIT170TTJ 422 (Mum)Assessment Year : 2009-10 Order dated:31st October, 2014

Basic Facts

The assessee filed the stay application seeking stayfrom collection of outstanding demand. Upon

CA. Yogesh G. [email protected]

Tribunal News

CA. Aparna [email protected]

19

20


hearing the submissions of both the parties theTribunal noticed that most of the issues as statedbefore the Tribunal have been decided in favour ofthe assessee in the orders passed by the Tribunal inassessee’s own cases for earlier years and thereforeit was a fit case for granting stay. Accordingly, thedemand was stayed till the disposal of the appealby the Tribunal and the AO was directed not to makeany adjustment. Despite a specific direction by theBench the AO decided to adopt an innovativemethod of collecting the revenue by utter disregardof the Tribunal order and obtained a consent letterfrom the assessee and collected taxes during thesubsistence of the said order.

IssueWhether neither the assessee nor the revenuehas the r ight to flout the decision of the Tr ibunaland whether being an officer functioning underthe Government of India it is AO’s obligation tofollow the directions of the super ior author ity?

HeldThe AO has followed an innovative method ofcollecting taxes despite specific directions of theBench. The AO was called upon by the Tribunaland he tendered an unconditional apology for hisconduct and submitted that it was collected withthe consent given by the assessee. Thereupon theRepresentative of the assessee had no otheralternative but to admit that he has given the consentletter. The tribunal clarified that neither the assesseenor the Revenue has the right to flout the decisionof the Tribunal and being an officer functioningunder the Government of India it is his obligationto follow the directions of the superior authorityand even if there is consent he should not havecollected the amount. The Hon’ble ITAT held thatthis practice of AO was not acceptable and it directedthe Chief CIT to issue a letter to all the concernedAOs not to adopt this kind of approach of obtainingconsent letters and to respect the order passed bythe Tribunal as otherwise the Tribunal would beconstrained to view the conduct of the Departmentadversely. Thus,with these observations the assesseewas granted stay of collection of outstandingdemand for a further period of six months and theAO was directed to refund the amount with interest.

Honda Motors & Scooters India (P) Ltd.v. ACIT 170 TTJ 273 (Del)Assessment year: 2006-07 Order dated:13th Apr il, 2015

Basic FactsThe assessee was a deemed public limited companywhich was incorporated in India as a subsidiary ofHonda, Japan. It was engaged in the business ofmanufacture and sale of motorcycles and scootersin India.The assessee had made internationaltransaction of purchase of fixed asset from its AE.The same was shown as ALP under the TNMM.The TPO proposed the transfer pricing adjustmenton this score by considering the value of thetransaction and then applying the differential profitrate of 7.12% on such value. In other words, theaddition has been made on the value of internationaltransaction of the purchase of fixed assets.Theassessee contended that the TPO was not justifiedin proposing the transfer pricing adjusting withrespect to the value of purchase of fixed assets. Itwas argued that only the depreciation element ofsuch adjusted value of the international transactionof purchase of fixed assets would call for adjustmentto the operating profits.

IssueWhether an increase in value of fixed assets afterapplication of ALP, being a capital transactionin itself, will not give r ise to any addition towardstransfer pr icing adjustment, but depreciation onsuch assets, being a revenue offshoot of capitaltransaction, will be required to be recomputedon such revised value?

HeldOn perusal of the meaning of an ‘internationaltransaction’ as per Section 92B read with itsexplanation, it is abundantly clear that the purchaseof fixed asset is also an international transaction. TheTribunal held that there cannot be any transfer pricingadjustment for the difference in the value of suchinternational transaction and its ALP since section92 is not a charging but a procedural provision forrecomputing the income arising from an internationaltransaction having regard to its ALP. Before applyingthe mandate of this provision, i t is of utmostimportance that there should be some existing income

Tr ibunal News

21


chargeable to tax, which is sought to be recomputedhaving regard to i ts ALP. But i f there is aninternational transaction in the capital field, whichdoes not otherwise give rise to any income in itself,then even though its ALP may be computed inconsonance with the provisions, no adjustment canbe made for the difference between the declaredvalue and the ALP of such international transaction.The computation of ALP is necessary because ofthe impact of such a transaction of capital nature onthe transactions of its revenue offshoots. In the presentcontext, the international transaction of purchase offixed assets is required to be benchmarked as per themost appropriate method. The application of the ALP,if required, will give rise to the recomputation of therevised value of the purchase of fixed assets. Suchan increase in the value of the fixed assets, being acapital transaction in itself, will not give rise to anyaddition towards transfer pricing adjustment, but thedepreciation on such assets, being a revenue offshootof the capital transaction, will be required to berecomputed on such revised value.Thus, the matterwas set aside to TPO for the determination of theALP of the international transaction of purchase offixed assets and was directed that the depreciationon such fixed assets be computed on the adjustedvalue, if permissible, as per the relevant provisions.

M ahindr a For gings L td. Vs. ADI T(International Taxation) 153 ITD 388(Pune)Assessment Year : 2008-09 Order dated:27th February, 2014

Basic Facts

The assessee-company was engaged inmanufacturing of forgings for the automotiveindustry. It bought forge and similar machines fromvarious parties located abroad. The assessee intendedthat heavy machinery needed to be properly erected,considering technical aspects of installation. Theassessee thus agreed for separate consideration fortransport/travel of the machines. The assessee alsoordered the parties to supervise erection/installationof the heavy machines. For said purpose the assesseeagreed to pay separate consideration for thetechnicians assigned by supplier. The AssessingOfficer held that the assessee ought to have made

TDS u/s 195 on the payments other than machinerycost considering the same to be covered under section9(1)(vii). The CIT(A) confirmed the order of theAssessing Officer.

IssueWhether so far as installation charges wereconcerned, since said charges formed integralpar t of pur chase pr ice i tsel f , was i t notobligatory on par t of assessee to deduct tax atsource while making said payments?

HeldThe supervision of installation/erection of machineryis an activity which relates to sale of machinery andis of specific nature, i.e., hyper technical and itssupervision of installation/erection of machinerywas also hyper technical. The machines purchasedare complex equipments and hence, could not beinstalled by any ordinary technical person. This isthe reason the only machinery seller was given thecontract of erection and installation supervision inthese transactions. Such erection/installation ofhighly complex machines is not comparable toordinary transactions of sale of modular furniturejust because two separate agreements are reached,one for purchase-sale transaction and another forinstallation/erection and other related services. Theprinciple of ‘inextricable nexus’ does not change.In this view, it is opined that supervision ofinstallation/erection of machinery activity carriedby non-resident relates to sale of machinery in suchlarge contract. The installation charges form integralpart of purchase price of machinery. In such asituation, it remains unaffected as to whether theseinstallation charges are embedded in the cost ofpurchase price or, are charged separately. Thus, itwas not obligatory on the part of assessee to deductthe tax at source.

DCIT Vs. Gupta Overseas 153 ITD 357(Agra) Assessment Year : 2008-09 Order dated:4th February, 2014

Basic Facts

During the year under consideration, the assesseecompany made payment for ‘design anddevelopment’ to a concern owned by a Belgium

Tr ibunal News

22

23


national/resident of Belgium. She had been paidfor providing assessee samples and sketches, etc.to enable assessee to get information in respect offashion trends in Europe.The AO held that theassessee was under an obligation to deduct tax atsource from these payments, as required undersection 195 r.w.s. 9(1)(vii) of the Act, and that theassessee having failed to comply with these taxwithholding requirements, these payments wererendered ineligible for business deduction in viewof the provisions of Section 40(a)(i) of the Act. Onappeal to CIT (A), it held that payments made bythe assessee in the nature of design and developmentcharges is nothing but payments made on purchasesof commercial information, by way of sample,drawing, photograph, design of shoes etc., fromforeign parties outside India, and hence thesepayments are not taxable in India as not being inthe nature of Fess for Technical Services, and,therefore, there is no obligation on the assessee todeduct tax at source on such payments.

IssueWhether services for which payment in questionhad been made, were also clear ly in nature ofconsul tancy, even if not technical ser vices,amount paid was very well covered by scope ofar ticle 12(3)(b) of India Belgian tax treaty, andassessee ought to have deducted tax from same?

HeldIn this matter, the tribunal referred to Article 12-Royalties and Fees for Technical Services,of theIndo Belgian Tax Treaty according to whichpayment of any kind made to any person, “otherthan … … .any individual for independent personalservices as mentioned in Article 14 of the Treaty, inconsideration for services of a managerial, technicalor consultancy nature” is covered by the scope offees for technical services. In the present case, thepayment is not made to an individual. The fact thatthe entity to which payment has been made is ownedby an individual, even if that be so, does not, takethat outside the ambit of article 12(3)(b). Theservices, for which the payment in question has beenmade, are also clearly in the nature of consultancy,even if not technical, services. On these facts, itwas held that the amount paid was very well covered

by the scope of article 12(3)(b) of India Belgiantax treaty, and the assessee ought to have deductedtax from the same.

Rajya Kr ishi Utpadan Mandi Par ishadVs. ITO 153 ITD 101 (Lucknow)Assessment Year: 2001-02 to 2003-04 &2006-07 Order dated: 22ndApril, 2014

Basic Facts

The assessee filed its return claiming income asexempt by virtue of it being a local authority undersection 10(20). The AO rejected the assessee’sclaim and raised certain amount of tax. Againstassessment order, the assessee filed appeal beforethe CIT(A). During pendency of appeal, assesseefiled an application for stay of demand. The CIT(A)rejected assessee’s application. The assessee filedappeal to the Tribunal against the CIT(A)’s orderrejecting stay of demand. In view of difference ofopinion between the Members of the Tribunal thematter was referred to the TM.

Issue

Whether or der passed by Commissioner(Appeals) on appl ication seeking stay ofdemand is appealable before Tr ibunal?

Held

The power to grant stay of collection of tax is aninherent and incidental power of the appellateauthority for the effective exercise of appellatepowers. In the instant case, the regular appeal of theassessee is pending before the CIT(A), i.e., the firstappellate authority at the time of passing of order onstay petitions so, he has the power to grant stay.However, no appeal is pending before the Tribunaland there is no specific express power with theTribunal to entertain and dispose of such appeals, sothe Tribunal cannot grant the stay of collection oftax by entertaining the appeals against orders of theCIT(A) for stay of recovery. In other words, theTribunal cannot interfere with the order passed bythe CIT(A) in his inherent and incidental power ofits appellate jurisdiction. Accordingly it was held thatappeal filed by the assessee against the order of theCIT(A) rejecting stay of demand is not maintainable.

❉ ❉ ❉

Tr ibunal News

24


up of the business as there may be an intervalbetween setting up of business andcommencement of business.

(b) The question as to when the business can besaid to have been set up and commenced willdepend of facts and circumstances of each caseand not on the accounting treatment of booksof accounts of the assessee.

(c) It is only when the unit has been put into sucha shape that i t can start functioning as abusiness or a manufacturing organization thatit can be said that the unit has been set up.

(d) The assessee can be said to have set up itsbusiness from the date when one of the essentialcategories of its business activities is started andit is not necessary that all categories of itsbusiness acti vi ti es must start ei thersimultaneously or that the last stage must startbefore it can be said that the business was setup.

(e) Expenses incurred during the preparatory stageprior to setting up of business would not qualifyfor deduction. However the expenses incurredduring the intervening period between settingup of the business and the commencement ofthe business would be permissible deductionhowever, long the intervening period may be.

In the case of Breeze Construction (P) Ltd Vs. ITO,Ward 3(1) – Delhi Bench ‘A’ [ 2012] 21Taxmann.com 114 (Delhi) it is held that Section36(1)(iii) of the Income-tax Act, 1961 – Interest onborrowed capital – Assessment year 2001-08 –Assessee company took on lease a plot of land forrunning hotel business – For taking that plot of land,assessee took loan from its holding company andclaimed deduction of interest paid – Whether sinceduring relevant assessment year assessee companyhad merely taken land on lease, by no stretch ofimagination it could be treated as commencement/

CA. Kaushik D. [email protected].

Controversies

Set-up of business vs. Commencement ofbusiness and deduction of expenses.

Issue:X ltd. is a company engaged in the business ofdevelopment of industrial park. It has obtainedcerti f i cate of i ncorporation, certi f i cate ofcommencement of business, acquired land andappl ied for necessary permission f rom theGovernment Authorities. It has claimed that itsbusiness is set up and hence it is entitled to deductionof all expenses. The AO is of the view that sincethe industrial park is not developed, business is notset up and hence the expenses cannot be allowedas deduction.

Proposition:I t i s proposed that when land i s acqui red,compound wall is constructed, project report isprepared, applications are made to appropriateauthorities and competent directors are appointed.Business is set up and is ready to commence andhence expenses will be allowed as deduction. It isnot necessary that actual business of developmentof industrial park should have commenced.

View Against the Proposition:

It is submitted that merely taking land on lease,obtaining certificate of commencement of businesscannot be treated as setting up business/commencement of business. Let me now refer tovery useful and important decisions with regard tosetting up of business vs. commencement ofbusiness.

In the case of joint commissioner of Income-tax vs.Sardar Sarovar Narmada Nigam Ltd, ITATAhmedabad Bench ‘B’ [2005] 96 Itd 321 (Ahd),the Hon’ble ITAT laid following principles for thedetermination of setting up of business:

(a) There i s a clear distinction betweencommencement of a business and the setting


setting up of its hotel business – Held yes – whether,therefore, Assessing officer was justified in rejectingassessee’s claim in view of proviso to section36(1)(iii) – Held, yes.

In the case of Interlink Petroleum Ltd. V. DCIT –Ahmedabad Bench ‘c’ [2004] 4 SOT 802 (Ahd)the Hon’ble ITAT Ahmedabad laid down variousprinciples as under:

(a) There is a clear distinction between a personcommencing and person setting up of thebusiness. There may be an interval betweensetting up of business and the commencementof the business.

(b) When a business is established and is ready tocommence then it would be said that thebusiness is set up.

(c) The expenses incurred during the interveningperiod between setting up of business andcommencement of business would bepermissible as deduction. However, expensesincurred during the preparatory stage prior tosetting up of business would not qualify fordeduction

(d) The assessee can be said to have set up itsbusiness from the date when one of the essentialcategorizes of its business activities is startedand it is not necessary that all categories of itsbusiness acti vi ti es must start ei thersimultaneously or that the last stage must startbefore it can be said that the business was setup.

(e) The question as to when business can be saidto have been commenced will depend uponfacts and circumstances of each case. The testto be applied is as to when a businessmanwould regard a businessman as being setupand/or commenced and the approach must befrom a common sense point of view.

In case of Maharashtra Airport Development Co.Ltd. vs. Maharashtra Airport Development Co. Ltd.[2013] 35 Taxmann.com 591 (Mumbai –Trib.) it washeld that Section 37(1) of the Income-tax Act, 1961– Business expendi ture – Al lowabi l i ty of[Commencement of Business operations] –Assessment year 2005-06 – whether, where assessee

had only acquired land and appointed consultantsfor various business purposes, but had neitherobtained environmental clearance nor favorablefeasibility reports nor obtained approved plans ofdevelopment, it could not held as ‘Set up’ andcommencement of business operations with respectto business of development of airport infrastructure.

Section 56 of the Income-tax Act, 1961 – Incomefrom other sources – Chargeable as [Interest] –Assessment year 2005-06 – whether Interestincome, arising out of surplus funds not requiredimmediately for business purpose and deposited inbank for short period is assessable as income fromother sources and not business income.

In the case of ALD Automotive (P.) Ltd V. DCITCircle 15(1) Mumbai (2014) 45 taxmann.com 530(Mumbai – Trib, it was held that Section 37(1) ofthe Income-tax Act, 1961 – Business expenditure– Allowabi l i ty of [Setting up of business] –Assessment year 2005-06 – whether, where stateof preparedness of company was clearly in settingup stage – Held, yes – whether, where expenseswere incurred by assessee prior to setting up ofbusiness, assessee’s claim of allowance of business,assessee’s claim of allowance of business lossduring said period was not maintainable.

Thus, from the above referred case laws it is veryclear that set up before the set up of business cannotbe treated as business is ready to commence andhence the expenses will not be allowed as deduction.

View in Favour of the Proposition:

I t i s submi tted that when certi f i cate ofcommencement of business is obtained, land isacquired, resolution is passed by the BOD,applications/license has been applied from theGovernment Authorities and when MOU is alsoentered into by the company, the business is set up.It has been held by the Hon. Bombay High Courtin the case of Vegetable products of India ltd. thatwhen business is set up, it is ready to commenceand actual commencement is not necessary for thepurpose of deduction of expenses.

It is submitted that it is important to consider thedecisions regarding the concept of ready to

Controversies


commence business vs. actual commencement ofbusiness. This distinction is clearly spelt out in thefollowing decisions.

In case of E-Funds International DHC 162Taxman 1, Assessee was engaged in the businessof development of software and IT enabledservices. It was claimed by the assessee that sincenecessary infrastructure was set and technicalemployees to render IT services were employedhence business is set up. The claim of the assesseewas accepted. In this case also, land is acquired,compound wall is constructed and competent expertdirectors are appointed for the purpose of the projectand hence business is set up.

In case of Neil Automation 120 Taxman 205,Assessee was engaged in the business ofdistribution of software. The Hon. ITAT held thatbusiness is set up when assessee started approachingprospective customers and supplied quotations ofsoftware. In our case assessee approachedGovernment of Gujarat, obtained leasehold landand entered into MOU with Government of Gujaratand hence business is set up.

In case of Hughes Escorts FHC-213 CTR 45 &DEL ITAT – 106 TTJ 1065, Assessee was engagedin Telecommunication Business (where VSATequipment was necessarily required for effectivecommunication). The assessee claimed that businessis set up when letter of intent from prospectivecustomer Bank of America for VSAT purchase wasobtained (July 1994). The claim of the assessee wasaccepted. In our case also the company entered intoMOU with state authorities of Government and alsothe project development agreement which goes toconclusively show that the intent of the companyis established and hence business is set up.

In case of Western India Sea Products Guj HC –199 ITR 777, Assessee was engaged in the Businessof marine processing industry. The Hon.Jurisdictional High Court of Gujarat held thatacquiring a godown in the month of August inanticipation of arrival of fish in October held to bedate of setting up.

In case of Mad HC in club Resorts 287 ITR 552,the assessee was engaged in project execution and

opened a project office in India. The assessee arguedthat business is set up when letter of intent wasreceived though RBI approval was not received.The claim of the assessee was accepted by theirlordships of Madras High Court. In this case it issubmitted that business is set up when MOU isentered into with the Government of and leaseagreement with GIDC for possession of land.

Let me refer the case of Gujarat HC in HotelAlankar 133 ITR 866, the assessee was engaged inboarding and lodging house and assessee claimedthat the business is set up when hotel building wasacquired. The claim of the assessee was acceptedby their lordships of High Court of Gujarat. In ourcase also the business is set up when land isacquired, compound wall is constructed, and projectagreement is entered into.

In case of Bang ITAT in Swire Holdings 6 SOT 621,assessee was engaged into real estate business.Assessee claimed that business is set up whenmoney was advanced for purchase of property. TheHonorable ITAT upheld assessee’s contention.

Summation:It is submitted that, the company is awaiting variousapprovals from State Authorities for constructingvarious units/incubation centers etc. for IndustrialParks.

The company got incorporated and further, thereare following evidences to prove that the businessis set up.

1. Resolution of BOD regarding commencementof business.

2. A certificate of Commencement of business.

3. MOU with Government.

Hence the company has set up its business whichcan be seen from the facts that the company hasconstructed compound wall for the project and hasapplied for various approvals from the StateGovernment Authorities.

Recently, the Delhi High Court in the case ofDhoomketu Builders & Development PrivateLimited1 (the taxpayer) upheld the decision of DelhiBench of Income-tax Appellate Tribunal which hasacknowledged the distinction between thecommencement of a business and setting up of a

Controversies


business and applied the test laid down by theBombay High Court in the case of Western IndiaVegetable Products Ltd.

1. Issue before the High Cour tWhether the act of depositing earnest moneywhile participating in the tender and the act ofborrowing monies be construed as actsconstituting setting up of the business of realestate development?

2. Tax depar tment’s contentionUntil the taxpayer actually acquires any landfor the purpose of carrying on its business asper the objects clause of memorandum ofassociation, the business cannot be said to havebeen set up within the meaning of Section3 of the Act.

3. Taxpayer’s contentionsThe business was set up the moment thetaxpayer took steps to participate in the tenderon 29 November 2005 and deposited theearnest money and it is irrelevant that it wasnot successful in acquiring the land.

The setting up of the business could be eithersimul taneous wi th or anterior to thecommencement of the business and in this casethe moment the taxpayer borrowed money anddeposited them with NGEF Ltd. and thusparticipated in the tender, it had taken the stepsthat constitute the setting up of the business.

4. High Cour t’s rulingThe decision of the Tribunal is based on therelevant tests that have been handed downjudicially for the purpose of ascertaining as towhen a business can be said to have been set-up.

The question as to when a business can be said tohave been set-up is a question of fact to beascertained on the facts and circumstances of eachcase and considering the nature and type of theparticular business and no universal test or formulaapplicable to all types of business can be laid down.

The tax department’s contention that the tax auditorsof the taxpayer have pointed out that the taxpayeris yet to commence its business is irrelevant because

of the distinction between the commencement ofthe business and setting-up of business as laid downby various judicial precedents, more so by BombayHigh Court.

Since the Tribunal has taken the note of thedistinction between the commencements of abusiness and setting up of a business and appliedthe test laid down by the Bombay High Court, thereis no substantial question of law arises out of theorder of the Tribunal.

Further I would like to submit that in the case ofCIT vs. ESPN Software India (P) Ltd. ref no. ITANo. 516/2007, their lordships of Delhi High Courtheld as under:

A finding regarding the date when a business wasset up is a finding of fact. Here in the present case,there is a finding of fact given by two statutoryauthorities below that Assessee was ready tocommence its business on 15th August, 1995 whenit acquired license to distribute in India throughCable Television Systems, Satellite Master AntennaSystem and DTH etc. The relevant findings of theTribunal in this regard as under :- “The Assessee inthe present case as one of its business activitydistribution of T.V. programmes in the area ofsports, entertainment etc. in furtherance of thisobjects referred to above it obtained the license fromESPN Inc. to distribute ESPN Channel Services.This was rightly held by the commissioner ofIncome Tax (A) to be the point of time when thebusiness of the Assessee has been set up. By virtueof the license it could discharge one of its objectsas set out in the Memorandum of Association ofthe Company. This was the activity, which was firstin point of time and which must necessarily precedeall other activities and on this activity being done,the business of the Assessee, would be deemed tohave been set up.”

Thus, when there is reference to object clause ofMemorandum of Association for starting industrialpark, assessee acquired land, applied for variousapprovals from Government Authorities and enteredinto MOU with Govt. the business of the companyis set up and hence ready to commence and I submitthat all the expenses must be allowed as deduction.

❉ ❉ ❉

Controversies


Reassessment or der wi thout passing aseparate speaking order disposing off theobjections, is bad in law and required to bequashed.

General Motors India L td. Vs DCIT (354 ITR244)(Guj)

From the aforesaid discussion, we are of theconsidered opinion that the writ petition underArticle 226 of the Consti tution of India ismaintainable where no order has been passed bythe Assessing Officer deciding the objection filedby the assessee under section148 of the Act andassessment order has been passed or the orderdeciding an objection under section 148 of the Acthas not been communicated to the assessee andassessment order has been passed or the objectionfiled under section 148 has been decided along withthe assessment order. If the objection under section148 has been rejected without there being anytangible material available with the AssessingOfficer to form an opinion that there is escapementof income from assessment and in the absence ofreasons having direct link with the formation ofthe belief, the writ court under article 226 can quashthe notice issued under section 148 of the Act. Thewrit petition filed by the petitioner is maintainable.The Assessing Officer is mandated to decide theobjection to the notice under section 148 and supplyor communicate it to the assessee. The assessee getsan opportunity to challenge the order in a writpetition. Thereafter, the Assessing Officer may passthe reassessment order. We hold that it was not opento the Assessing Officer to decide the objection tonotice under section 148 by a composite assessmentorder. The Assessing Officer was required to, firstdecide the objection of the assessee filed undersection 148 and serve a copy of the order on theassessee. And after giving some reasonable time tothe assessee for challenging his order, it was opento him to pass an assessment order. This was notdone by the Assessing Officer, therefore, the orderon the objection to the notice under section 148and the assessment order passed under the Actdeserves to be quashed.

Advocate Tushar [email protected]

Judicial Analysis

Darshan Associated vs. ACIT – ITA 1221/Ahd/2011

We find that, in the instant case, it is not in disputethat the assessee filed his objections against theissuance of notice u/s 148 of the Act vide his letterdated 11.11.2009 which was received by the officeof the Assessing Officer on 16.11.2009. Thereafter,the Assessing Officer passed the impugned re-assessment order on 19.11.2009, disposing off theobjections to re-assessment proceedings of theassessee in the order itself. Thus, these facts showthat the objections raised by the assessee againstthe issuance of notice u/s 148 of the Act were notdisposed off by the Assessing Officer by passing aspeaking order thereon and allowing reasonabletime to the assessee after communicating the fate ofthe objections before proceeding wi th thereassessment. The Hon’ble Gujarat High Court inthe case of General Motors India P. Ltd v. DCIT(supra) has held as under:-

xxx..

Therefore, respectfully following the above decisionof the Hon’ble Jurisdictional High Court, we are ofthe considered view that the impugned order of re-assessment passed by the Assessing Officer withoutdisposing off the objections raised by the assesseeagainst the issuance of notice u/s 148 by a separateorder is liable to be quashed. We order accordingly.Thus, this ground of appeal of the assessee isallowed.

Bharuch Enviro Infrastructure L td. Vs. DCIT– ITA 731-2/Ahd/2007

We have heard the rival submissions and perusedthe material on record.It is an undisputed fact thatthe reasons for re-opening of assessment u/s.147 ofthe Act was recorded on 31.03.2005 and the samewere communicated to the Assessee by ACIT videletter dated 09.01.2006. In response to the noticefor reopening, Assessee vide i ts letter dated11.01.2006 had objected to ini tiation of re-assessment. Before us, ld.A.R. submitted that thatthe Assessee’s objection to reassessmentproceedings were not passed by a separate order


but were disposed by the A.O in the assessmentorder dated 22.03.2006 passed u/s. 143(3) r.w.s.147of the Act and this fact has not been controvertedby Revenue. We find that the Hon’ble Gujarat HighCourt in the case of General Motors India Pvt. Ltd.(supra) has held as under:-

xxx…

Before us, Revenue has not brought any contrarybinding decision of Hon’ble Apex Court or Hon’blejurisdictional High Court in support of its contentionthat the order disposing of the objections of theAssessee to reassessment proceedings along withthe assessment order is in order and therefore validas per law. We therefore, respect fully followingthe aforesaid decision of Hon’ble Gujarat HighCourt in the case of General Motor India Pvt. Ltd.(supra) quash the assessment order dated22.03.2006. Since the re-assessment itself has beenquashed, the grounds raised on merits are notdecided. In the result, the appeal of Assessee isallowed.

ACIT vs. M/s. Sagar Developers – ITA No.1538/Ahd/2011

We have heard the rival submissions and perusedthe orders of the lower authorities and materialavailable on record. In the instant case, therespondent assessee in terms of Rule 27 of theIncome Tax Appel late Tribunal Rules, 1963supported the order of CIT(A) on the ground thatthe impugned assessment order was bad in law asthe reassessment was made without disposing offthe objections raised by the assessee against theinitiation of reassessment proceedings by a separateorder. We find that, in the instant case, it is not indispute that the assessee filed his objections againstthe issuance of notice u/s 148 of the Act vide hisletter dated 11.11.2009 which was received by theoffice of the Assessing Officer on 16.11.2009.Thereafter, the Assessing Officer passed theimpugned re-assessment order on 20.11.2009,disposing off the objections to re-assessmentproceedings of the assessee in the order itself. Thus,these facts show that the objections raised by theassessee against the issuance of notice u/s 148 ofthe Act were not disposed off by the AssessingOfficer by passing a speaking order thereon andallowing reasonable time to the assessee aftercommunicating the fate of the objections beforeproceeding with the re-assessment. The Hon’ble

Gujarat High Court in the case of General MotorsIndia P. Ltd v. DCIT (supra) has held as under:-

xxx…

8. Therefore, respectfully following the abovedecision of the Hon’ble Jurisdictional HighCourt, we are of the considered view that theimpugned order of re-assessment passed by theAssessing Officer without disposing off theobjections raised by the assessee against theissuance of notice u/s 148 by a separate orderis liable to be quashed. We order accordingly.Thus, this ground of appeal of the Revenue isdismissed.

ACI T vs. Shr iRaj nikant B. Desai – I TANo.1567/Ahd/2011

After considering the rival submissions and goingthrough the material available on record carefully,we find that the AO has made the reassessmentwithout disposing of the objections of the assessee.An identical issue came up before the Tribunal andthe Tribunal, in a recent decision in the case of ACIT,Cen.Cir.-2,

Baroda vs. M/s Sagar Developers vide order dated10/04/2015 in ITA No.1538/Ahd/2011 for AY2002-03 the Tribunal has decided the issue byobserving as under :-

xxx…

Nothing contrary has been brought to ourknowledge on behalf of Revenue. Facts beingsimilar so, respectfully following the above orderof the Tribunal and in view of the decision of theHon’ble Gujarat High Court in the case GeneralMotors India P. Ltd. vs.DCIT 354 ITR 0244 (Guj),and in view of the decision of Hon’ble SupremeCourt in the case of CIT vs. Kelvinator of IndiaLtd.(supra) we are of the view that ld. CIT(A) hasrightly annulled the assessment order. We find noinfirmity in the order of ld. CIT(A). Therefore, thegrounds raised by the Revenue in this appeal, havebecome in fructuous and hence dismissed. Theappeal filed by the Revenue is dismissed. Since weare deciding the matter on preliminary issue we arerefraining to comment on merit of the issue at hand.However, revenue is at liberty to raise the issue onmerit as and when required to do so.

❉ ❉ ❉

Judicial Analysis


In continuation to our series of detailed analysis ofAction Plans of Base Erosion and Profit Shifting(‘BEPS’) project, in this article, we now havedetailed below analysis of Action Plan 15 ie.Develop a multilateral instrument for amendingbilateral treaties.

A. Background

Action Plan 15 has been initiated primarily tocall for a report to “Analyse the tax and publicinternational l aw issues related to thedevelopment of a multilateral instrument toenable jurisdictions that wish to do so toimplement measures developed in the courseof the work on BEPS and amend bilateral taxtreaties.”

Basis output of the report, interested countrieswill develop a multilateral instrument designedto provide an innovati ve approach tointernational tax matters, reflecting the rapidlyevolving nature of the global economy and theneed to adapt quickly to this evolution.

B. Overview of the Report

The report states that, the main objective of amultilateral instrument is to modify existingbilateral tax treaties which have revealedweaknesses that create opportunity of doublenon-taxation. These bilateral tax treaties areproposed to be modified in a synchronised andefficient manner to implement the tax treatymeasures developed during the BEPS project,by recognizing the practical l imitations ofbilateral tax treaties.

The report not only explores the technicalfeasibility of a multilateral hard law approach

CA. Dhinal A. [email protected]

and its consequences on the current tax treatysystem but also identifies the issues arising fromthe development of such an instrument andprovides an analysis of the international tax,public international law, and political issues thatarise from such an approach. For reader’sunderstanding, we have given below detailedanalysis of the report:

(i) Desirability of a Multilateral Instrument

The Report begins with an examination ofthe desirability of a multilateral instrumentand have identified below key reasons forwhich a multilateral instrument is desirable:

• It facilitates ease in implementation ofthe treaty-related BEPS output giventhe long process for individual bilateraltreaty negotiations;

• It allow developing countries that facehardships in concluding orrenegotiating treaties to fully benefitfrom the BEPS Action Plan 15;

• It resul t in easier way to addressmultilateral issues compared to bilateraltreaties;

• Treaty negotiators will be focused ona single document therefore increasingconsistency and continuing thereliability of the international tax treatynetwork; and

• It provides assurance that all countriesare simultaneously determined to tackleBEPS issue.

Overview of Action Plan 15 ofBEPS Project - Developing aMultilateral Instrumentto modify BilateralTax Treaties

CA. Sagar [email protected]


For all the aforementioned reasons, theReport considers that such an instrumentis desirable but that, in order to create alevel playing field, broad participation tothe multilateral instrument needs to beachieved.

(ii) Feasibility of a Multilateral Instrument

The Report goes on to examine feasibilityof a multi lateral instrument and haveidentified the fol lowing obstacles andsolutions for such obstacles.

The key obstacle which report hasidentif ied is selection of one of thefollowing three alternatives for executingmultilateral instrument:

(i) a “self-standing instrument” whichwould whol ly supersede existingtreaties;

(ii) an instrument that would merelyoperates a set of protocols amendingeach of the existing bilateral treatiesspecifically, and

(iii)an instrument that would coexist withbilateral treaties,

The report states that only the third optionappeared to preserve tax sovereignty andachieve an efficient outcome as it wouldamend a limited number of provisionscommonly found in bilateral tax treatiesand, where not already included in thosetreaties, would add new anti -BEPSmeasures.

(iii) Technical challenges

The report further recognizes technicalchallenges that may arise on interactionbetween a multi lateral instrument and

bilateral tax treaties. It provides followingpossible solutions to such technicalchallenges:

• Potential confl icts that may arisebetween new multi laterally agreedprovisions and simi lar provisionsincluded in existing bilateral tax treatiescould be resolved through the inclusionon specific “compatibility” clause inthe multilateral instrument;

• Variations in the wording of similarprovisions of existing bilateral treatiescan be addressed through explanatoryreport providing interpretati veguidance

• Express mechanisms and procedurescould be developed into the instrumentto ensure expeditious amendment in thefuture

• Other technical issues such as languageand translation can be easily addressedthrough careful draf ti ng of theinstrument

The Report notes that these challenges maybe resolved by the application of currentbest practices in treaty-making. Further,countries can be provided liberty to opt-out, opt-in or choose between thealternative provisions with respect to otheri ssues covered by the mul ti l ateralinstrument.

(iv) Scope of the Multilateral Instrument

The Report lists some of the treaty relatedmeasures to be developed in the BEPSproject that are multilateral in nature andwould be more effective if implementedby a multilateral instrument. Few of thesetreaty related measures include:

International Taxation


i. addressing mul ti l ateral mutualagreement procedure;

ii. dual resident structures;

iii. hybrid mismatch arrangements;

iv. triangular cases involving a permanentestablishment (PE) in third states; and

v. treaty abuse.

The Report suggests that some or all of theabove could be part of a set of core provisionsto which all parties to the multilateral instrumentshould adhere. Other outputs of the BEPSproject that are more bilateral in nature wouldrequire that more flexibil ity be granted tocontracting parties in order to tailor their levelof commitment towards other parties.

Finally, the Report indicates that the instrumentcould also be used for a wider range of BEPSrelated issues, such as rules regarding theconfidentiality of information obtained by taxadministrations (thereby facil i tating theimplementation of the country by countryreporting template developed under Action 13for example), a multilateral interest expenseallocation agreement, or new dispute resolutionmechanisms to avoid the potential for unilateraland uncoordinated responses to BEPS resultingin double taxation.

While the precise content of a multilateralinstrument can only be defined once outputsof the BEPS project have been finalized, theReport concludes that the scope of themultilateral instrument should at this stage onlyinclude agreed treat based outputs of the BEPSproject in order to ensure that it can be put inplace within a reasonable timeframe. Theinstrument could then be used to host additionalmultilaterally agreed provisions in the futureand should thus be viewed as dynamic.

International Taxation

C. International Conference

The Report recommends convening anInternational Conference to develop andnegotiate the multilateral instrument in 2015.Once the recommendations for BEPS relatedtreaty measures are finalized, they can beconsidered by the International Conference andincluded in the Multilateral Instrument.

In addition to implementing BEPS-relatedtreaty measures, the International Conferencewould reflect on whether further protocols orsimilar multilateral instrument could be used inthe future to foster a more effective internationaltax environment.

D. Conclusion

The multilateral instrument contemplated underAction Plan 15 is likely to be an importantelement of the OECD’s efforts to maintainmomentum and to achieve success in a timelymanner. However, as a practical matter, role ofany multilateral instrument and the impact suchan instrument may have on businesses areunclear at this stage. Moreover, the appetite ofcountries to sign up to a multilateral instrumentapproach also is unclear.

Important to note that development of amultilateral instrument is a novel approach tointernational taxation that can potentiallyaccelerate the implementation of a number ofBEPS treaty measures. However, with thedevelopment of any new instrument, successor failure will depend largely on the number ofsignatory countries that will participate in thedevelopment of the multilateral instrument andthe potential impact it will have on businesses.

Considering the importance of this Action Plan,Global businesses will want to continue tomonitor developments for the same.

❉ ❉ ❉


CA. Savan [email protected]

Rupee Drawing Arrangement - Increasein trade related remittance limit

The Reserve Bank of India has decided to increasethe limit of trade transactions of Rupee/ForeignCurrency Vostro Accounts of Non-residentExchange Houses from the existing Rs. 5,00,000/-(Rupees Five Lakh only) per transaction to Rs.15,00,000/- (Rupees Fi fteen Lakh only) pertransaction, with immediate effect. Further more,AD banks can now regularize payments exceedingthe prescribed limit under RDA if they are satisfiedwith the bonafide of the transaction, and complywith the prescribed requirements

For Full Text refer to A.P. (DIR Series) CircularNo. 102

https://www.rbi .org.in/Scripts/BS_Ci rcularIndexDisplay.aspx?Id=9730

Exter nal Commer cial Bor r owings(ECB) denominated in Indian Rupees(INR) – Mobilization of INR

Recognized non-resident ECB lenders may extendloans in Indian Rupees subject to, inter alia, thelender mobilizing Indian Rupees through a swapundertaken with an AD Cat-I bank in India. Tofacilitate ECB lending denominated in INR byoverseas lenders, such lenders may enter into swaptransactions with their overseas bank which shall,in turn, enter into a back-to-back swap transactionwith any AD Cat-I bank in India as per theprocedure prescribed.



Rationalisation under LRS for Cur rentand Capital Account Transactions

I. Liberalised Remittance Scheme (LRS) forresident individuals- increase in the limit fromUSD 125,000 to USD 250,000 andrationalisation of current account transactions

II. Remittance facilities for persons other thanindividuals Limit and Facilities under LRS

AD banks may now allow remittances by aresident individual up to USD 250,000 perfinancial year for any permitted current orcapital account transaction or a combination ofboth. If an individual has already remitted anyamount under the LRS, then the applicable limitfor such an individual would be reduced fromthe present limit of USD 250,000 for thefinancial year by the amount already remitted.The permissible capital account transactions byan individual under LRS are:

i) opening of foreign currency accountabroad with a bank;

ii) purchase of property abroad;

iii) making investments abroad;

iv) setting up Wholly owned subsidiaries andJoint Ventures abroad;

v) extending loans including loans in IndianRupees to Non-resident Indians (NRIs)who are relatives as defined in CompaniesAct, 2013.

Further, to facilitate ease of transactions, all thefacilities (including private/business visits) forrelease of exchange/remittances for current accounttransactions available to resident individuals underPara 1 of Schedule III to the Foreign Exchange

FEMA Updates

20

21

22


Management (Current Account Transactions)Rules, 2000, as amended from time to time, shallnow be subsumed under the overall limit of USD250,000. However, for item numbers as mentionedat (iv)[ emigration], (vii)[expenses in connectionwith medical treatment abroad] and (viii)[studiesabroad] in Para 1 of Schedule III provided at Annex1, individuals may avail of exchange facility for anamount in excess of the overall limit prescribedunder the LRS, if it is so required by a country ofemigration, medical institute offering treatment orthe university respectively.

As hitherto, the Scheme cannot be made use formaking remittances for any prohibited or illegalactivities such as margin trading, lottery, etc.

Remittance Procedure

Requirements to be complied with by the remitter

The resident individual seeking to make theremittances should furnish an application cumdeclaration in the format indicated in Annex 2 tothe AD/ ful l fledged money changer (FFMC)concerned regarding the purpose of the remittancesand declaration to the effect that the funds belongto the remitter and will not be used for the prohibitedpurposes referred to in Para 4 above. Residentindividuals can also purchase foreign exchangefrom a full fledged money changer (FFMC) forprivate/business visits. Foreign exchange thuspurchased from an FFMC should also be reckonedwithin the overall LRS limit USD 250,000 anddeclared accordingly in the application-cum-declaration form submitted to the AD bank.

Requi rements to be compl ied wi th by theAuthorised Persons

5.2 Whi le al lowing the faci l i ty to residentindividuals, Authorised Persons, including ADCategory II and FFMCs, are required to ensurethat the; ‘Know Your Customer’; guidelinesand the Anti-Money Laundering Rules in forcehave been complied with while allowing thetransactions.

FEMA Updates

Requi rements to be compl ied wi th by theAuthorised Dealers

It is clarified that banks should not extend any kindof funded and non-funded facilities to residentindividuals to facilitate capital account remittancesunder the Scheme.

The applicants should have maintained the bankaccount with the bank for a minimum period of oneyear prior to the remittance for capital accounttransactions. If the applicant seeking to make theremittances is a new customer of the bank,Authorised Dealers should carry out due diligenceon the operations and maintenance of the account.

No part of the foreign exchange of USD 250,000shall be used for remittance directly or indirectly tocountries notified as non-cooperative countries andterritories by the Financial Action Task Force(FATF) from time to time and communicated bythe Reserve Bank of India to all concerned.

Reporting of the transactions

Authorised Dealers may arrange to furnish on amonthly basis information on the number ofapplicants and total amount remitted under LRS tothe Chief General Manager, External PaymentDivision, Foreign Exchange Department, ReserveBank of India, Central Office, Mumbai - 400001through Online Return Filing System (ORFS) only.

Facilities for persons other than individuals

Persons other than individuals can make remittancesfor

i. Donations for educational institutions;

ii. Commissions to agents abroad for sale ofresidential flats/commercial plots in India;

iii. Remittances for consultancy services and

iv. Remittances for reimbursement of pre-incorporation expenses within the limit andconditions laid down therein.

While making the above remittances, such personsshal l submit to the concerned AD branch a


declaration to the effect that the limits and conditionsrelating to the remittances have been complied with.


h t t p s : / / w w w . r b i . o r g . i n / Sc r i p t s /BS_CircularIndexDisplay.aspx?Id=9756

Subscr iption to chit funds by Non-Resident I ndian on non-repatr iationbasis

The following revised terms and conditions arerequired to be complied with for a Non-ResidentIndian to subscribe to chit funds, without limit, onnon-repatriation basis:

i. The Registrar of Chits or an officer authorizedby the State Government in accordance withthe provisions of the Chi t Fund Act inconsultation wi th the State Governmentconcerned, may permit any chit fund to acceptsubscription from Non-Resident Indians onnon-repatriation basis;

ii. The subscription to the chit funds shall bebrought in through normal banking channels,including through an account maintained witha bank in India.



Exter nal Commer cial Bor r owings(ECB) for low cost affordable housingprojects

Eligible borrowers can now continue using ExternalCommercial Borrowings (ECB) for low costaffordable housing proects, under the approvalroute, subject to conditions initially stipulated in toA.P. (DIR Series) Circular No. 61 dated December17, 2012 and A.P. (DIR Series) Circular No. 113dated June 24, 2013 for the financial year 2015-16. The directions contained in this circular have

been issued under Sections 10(4) and 11(1) of theForeign Exchange Management Act, 1999 (42 of1999) and are without prejudice to permissions /approvals required, if any, under any other law.

For Full Text refer to A.P. (DIR Series) CircularNo.108

h t t p s : / / w w w . r b i . o r g . i n / Sc r i p t s /BS_CircularIndexDisplay.aspx?Id=9781

Exter nal Commer cial Bor r owings(ECB) for Civil Aviation Sector

Airl ine companies can now continue raisingworking capital through External CommercialBorrowings (ECB) as a permissible end-use, underthe approval route, subject to conditions initiallystipulated in A.P. (DIR Series) Circular No. 113dated April 24, 2012 till March 31, 2016. Thedirections contained in this circular have been issuedunder Sections 10(4) and 11(1) of the ForeignExchange Management Act, 1999 (42 of 1999) andare without prejudice to permissions / approvalsrequired, if any, under any other law.



❉ ❉ ❉

24

2523

Say, “I can do everything.”“Even if poison of a snake ispowerless if you can firmly denyit.�

Swami Vivekananda

FEMA Updates


CA. Punit R. [email protected]

Service Tax Decoded

From the time of independence of India, taxationof a composite contract, comprising supply ofgoods and services, is subject to disputes and anissue, prone to l i tigation. India is a FederalDemocracy, where two governments (CentralGovernment and State Government) functionsimultaneously. The Constitution of India hassegregated duties of each Government and alsosegregated powers of each Government and hencepower to collect tax is also bifurcated between eachGovernment. Central Government or a Parliamentis not empowered to levy tax on items where StateGovernment has power to levy tax. StateGovernment is empowered to levy tax on sale ofgoods. Central Government has power to levy taxon any item on which State Government has noexclusive power to levy tax and thus CentralGovernment can levy tax on services. However, ina Works Contract, both elements namely supply ofgoods and provision of service, are involved andboth Governments can levy taxes on such contract.As none of the Government is ready to let go hisslightest share of revenue, valuation of the workscontract has become complex. Frequent changesin law and various changes in interpretation bycourts, including Supreme Court, has made it verydifficult to ascertain the tax liability.

Taxation of service tax on services involved in suchcontract is depended on taxation of local ValueAdded Tax/Sales Tax (VAT) involved in. Further,each State has different law for VAT and as taxationof service tax is depended on taxation of local VAT.It may happen that the same transaction may betaxed or valued for service tax purpose differentlyin different States.

Further, valuation of such contracts is also not easy.Many a time, it is practically impossible to separatethe value of goods and services or keep records forgoods and services. In such case, assessee ends uppaying taxes (VAT and Service Tax) on valuewhich is more than the value of contract itself. Insuch cases, it is necessary to understand the basicprovisions related to works contract provided inservice tax related law.

Following issues are discussed here below fordiscussing intricacies of service tax related law.

1. M/s. LNT Infrastructure Ltd. (LNT) is awardeda contract from National Highway Authority(NHA) for construction of a public road forRs. 100 Cror which includes material andlabour. Activities to be performed are broadlyas under.

(Rs. in Crores)

Sr. Activity Value of Services Material + Service Probable Total Costing

1 Surveying 1.00 1.00

2 Site Formation and Clearance 5.00 5.00

3 Leveling of Land 10.00 10.00

4 Laying of Stones for Base 8.00 8.00

5 Supplying Miscellaneous Labour 8.00 8.00

6 Supply of Crane/Heavy Machinery 7.50 7.50

7 Internal Audit for Project 0.50 0.50

8 Marking on Road 6.00 6.00

9 Signboards Alongside a Road 4.00 4.00

10 Laying of Final Layer of Road 40.00 40.00

Total Costing 40.00 50.00 90.00


Service Tax Decoded

M/s. LNT is going to award sub-contracts for aboveactivities to different sub-contractors. Activity No.1 to 7 (Service only contracts) are being awardedto M/s. ABC Engineering, internal audit (Activityat Sr. No. 7) to be performed by Mr. BIG CA andActivity No. 8 to 10 (Works contracts) are beingawarded to M/s. XYZ Engineering. Please discuss.

I. Is M/s. XYZ Engineering required to payservice tax or can claim any exemption?

II. Can Mr. BIG CA ask for the exemption as hisservices are being exclusively for constructionof road i.e. exempt services?

III. Is M/s. ABC Engineering required to payservice tax or can claim any exemption?

IV. What is the liability of service tax M/s. LNT ispractically paying on exempt services ofconstruction of road?

Ans.:

I. In terms of Entry No. 13(a) of the NotificationNo. 25/2012-ST, services provided by way ofconstruction, erection, commissioning,installation, completion, fi tting out, repair,maintenance, renovation, or alteration of a roadis exempt from service tax. Hence, servicesprovided by main contractor, M/s LNTInfrastructure Ltd. (LNT) is exempt service tax.Further, in terms of Entry No. 29(h) of theNotification No. 25/2012-ST service by a sub-contractor, in his capacity as sub-contractor,providing services by way of works contractto another contractor providing works contractservices which are exempt. M/s. XYZEngineering (XYZ) i s working as sub-contractor of LNT, contract between LNT andXYZ is a works contract, contract betweenLNT and NHA is also a works contracts andservices provided by LNT to NHA is exempt.As all conditions specified in Entry No. 29(h)of the Noti f ication No. 25/2012-ST aresatisfied, services provided by XYZ to LNT isexempt from service tax.

II. Services provided by Big CA is not coveredunder works contract and hence can’t becovered Entry No. 29(h) of the Notification No.25/2012-ST. Even if services are exclusively

used by the principal contractor for providingexempt services, such input services do notbecome exempt automatically.

III. M/s. ABC Engineering (ABC) has undertakenvarious activities which are integral part of theconstruction of road. However, contractbetween ABC and LNT is not a works contractas transfer of property in goods is not involvedand hence services provided by ABC is notexempt under Entry No. 29(h) of theNotification No. 25/2012-ST.

In terms of Section 65F(1) of the Finance Act,1994 reference to a service (main service) shallnot include reference to a service which is usedfor providing main service. Thus, servicesprovided by ABC are to be classi f i edindependently without reference to main servicei.e. construction of road. Services provided byABC may be classified under Survey Service,Site Formation Service, Manpower Servicesetc. and not exemption is provided to suchservices. However, if looking at the terms ofthe contract, if services provided by ABC canbe classified as construction of road, ABC canclaim the exemption under Entry No. 13(a) ofthe Notification No. 25/2012-ST.

IV. Even if Government intends to exempt theconstruction of road, major amount (40% inthis case) is subject to service tax by way taxon services provided by sub-contractor to maincontractor. Main contractor, i.e. LNT is notrequired to pay service tax and hence can’t takecredit of tax paid by ABC and can’t pass onthe burden of tax to final consumer and hencesuch tax becomes it cost and has to considerthis amount as cost while quoting rates for thecontract.

2. M/s. Metal Craft is engaged in supply, erectionand installation of Aluminum windows. For aworks contract of Rs. 300 Lakhs, they have paidlocal VAT on Rs. 250.00 Lakhs i.e. on actualvalue of property in Aluminum Panels and Glasstransferred in execution of works contract andhas paid service tax @ 14% on rest of Rs. 50Lakhs for installation. Based on the cost sheet,Central Excise Officer is having opinion that at


around 40% of total contract is pertaining toservices and M/s. Metal Craft should pay servicetax on Rs. 120 Lakh. Is contention of the CentralExcise Officer correct?

Ans.:

In terms of Explanation (c) to Clause (i) of Rule2A of The Service Tax (Determination ofValue) Rules, 2006, if value added tax or salestax is paid on actual value, that value is to beadopted as value of goods involved inexecution of works contract for the purpose ofpayment of service tax also. There is nocondition that such goods should be valued atmarket value. As M/s. Metal Craft has paidvalue added tax or sales tax on actual value ofgoods i.e. on Rs. 250 Lakh, that value is alsoto be adopted for valuation of works contractfor service tax purpose. Thus, contention of theCentral Excise Officer is not correct.

3. In the above example, suppose, local VAT ispaid on Rs. 150 Lakh only, in this case, doesM/s. Metal Craft has option to pay service taxon 40% of the value as provided under Rule2A(ii) of the Service Tax (Determination ofValue) Rules, 2006?

Ans:

In terms of Rule 2A(ii) of the Service Tax(Determination of Value) Rules, 2006, theperson liable to pay tax on the service portioninvolved in the execution of the works contractshall determine the service tax payable, in caseof original works, on forty per cent of the totalamount charged for the works contract.However, reference to Rule 2A(ii) can be madewhere separate value as prescribed under Rule2A(i) is not determined. In this case, as M/s.Metal Craft has determined the separate valuefor the property involved in execution of workscontract, they do not have an option to payservice tax on 40% of total value of the contractas provided under Rule 2A(ii).

4. M/s. Everest Cooling Company is providingservices of supply, installation and erection ofCentral Air Conditioning Systems with material.They have maintained proper records from

which they can ascertain proper value of thematerial involved in the execution of the workscontract. They have opted to pay local VAT oncomposition scheme and paying VAT at reducedrate on entire value of the contract. However,for payment of service tax, they want to opt forseparate value and pay service tax only on theservice portion of the contract which will bedetermined after deducting the actual value ofthe material as per records they have maintained.Is M/s. Everest Cooling Company has option togo for such valuation or they are bound adoptcomposition rate for service tax as providedunder Rule 2A(i i ) of the Service Tax(Determination of Value) Rules, 2006?

Ans.:

In terms of Rule 2A(ii) of the Service Tax(Determination of Value) Rules, 2006, wherethe separate value has not been determined asprovided under clause (i) of Rule 2A, the personliable to pay tax on the service portion involvedin the execution of the works contract shalldetermine the service tax payable as providedin Rule 2A(ii) i.e. 40%/70% of total value ofthe contract. In terms of Rule 2A(i), separatevalue is to be determined may be based onvaluation adopted for value added tax/sales taxor may be based on records maintained by theperson liable to pay service tax. Rule 2A(i) doesnot stipulate that separate valuation to be arrivedonly from valuation adopted for value addedtax/sales tax (VAT).

Explanation (c) to Rule 2A(i) reads that if actualvalue is offered for VAT, the same value shouldbe adopted for service tax also. It doesn’tstipulate that if VAT is not paid on actual value,pay service tax on composition scheme.

CBEC has vide Para 9.2 of the Circular Dated22-05-2007 from F. No. B1/16/2007-TRU,clarified that wherever the service providermaintains records, the value of services shall bethe gross amount charged for the works contractless the value of transfer of property in goodsinvolved in the execution of the works contract.

Service Tax Decoded



CA. Ashwin H. [email protected]

Ser vices pr ovided by char i tableor ganisat ions to thei r r espect i vemembers would not be liable to servicetax owing to pr inciple of mutuali ty[2014] 47 taxmann.com 6 (New Delhi -CESTAT) CESTAT, NEW DEL HIBENCH Feder at ion of I ndianChambers of Commerce & Industry vs.CST, Delhi 2015 (38) STR 529 (Tr i-Del)

Facts:- Services provided by FICCI & ECSEPCto their non-members is not covered by Club orAssociation’s Services prior to amendment byFinance Act, 2011 and for period thereafter,demand cannot be enforced, as show-cause noticedid not list out charge in view of amendment inlaw FICCI & ECSEPC, who are engaged in publicservice, are ‘charitable’ in nature and, therefore, theirservices will not fall under Club or Association’sServices

Held:- I t was held by ITAT that FICCI andECSEPC are institutions having public serviceobjectives and of a charitable nature - Hence, FICCIand ECSEPC are outside scope of club orassociation services . It was further held that in viewof decision in Ranchi Club Ltd. v. Chief CCE &ST [2012] 36 STT 64/22 taxmann.com 217(Jharkhand), on appl ication of principle ofmutuality, services provided by assessee (FICCI andECSEPC) to their respective members would notfal l under Club or Association service norconsideration by way of subscription/fee orotherwise received therefore be liable to service tax.

Whether ser vices r elat ing toconceptualizing, devising, development,modification etc. liable to service taxunder the categor y of ManagementConsultancy Service

[2015] 38 STR 625 Jubiliant Enpro (P)L td. vs. CCE, Noida 2015 (Tr i.-Del.)

Service Tax -Recent Judgements

Facts:- The appellant in this case provided advicesrelating to conceptualising, devising, development,modification, rectification or upgradation ofworking system of companies and also oncommercial aspects, current developments, importand export policy of India, potential problems andsolutions, marketing strategies, alter about potentialmisuse of IPRs, economic and political scenarios.

Held:- It was held by the Tribunal that theseservices are predominantly advisory and executoryand di rectly connected wi th and useful formanagement of companies, hence liable to servicetax as Management Consultancy Service.

Business Suppor t Service [2015] 38 STR606 Mettur Thermal Power Station vs.CCE(ST) Salem (Tr i- Chennai)

Facts:- Here in this case the department soughtdemand of service tax on service charges collectedfrom cement and asbestos sheet companies fordisposal of fly ash on the ground that the said servicecharges are for providing infrastructure, water,lightning, road maintenance etc.

Held:- It was held that activity of collection andremoval of fly ash as per rate of Tamil NaduGovernment does not constitute infrastructuralsupport service under business support service. Theconsideration is received for sale of fly ash and notfor any services provided notwithstanding nameunder which it is collected.

Reverse Charge – Input of service[2015] 37 STR 358 Kingfisher Air linesP. L td. vs. CST (Tr i.-Mum.)

Facts:-

Appellant and Indian company received loan fromoverseas lender. Insurance guarantee fee was paidby the overseas lender in respect of loan granted.Department argued that the service tax will becharged under reverse charge mechanism.

15

16

17

18


Held:- It was held that lender is the recipient ofservice and not the appellant though he may be thebeneficiary. Hence reverse charge not applicableto the appellant as he is not the recipient of service.

Market Research Service - Cenvat Credit[2015] 38 STR 488 Kir loskar EnbaraPumps L td vs. CCE, Kolhapur 2015

Facts:- Appellant provided market research servicesto companies abroad and claimed refund of amountdebited in cenvat credit account.

Held:- It was held that market research servicesprovided to companies abroad is to be treated asexport of service. In respect of refund claimed ofamount paid through debit in CENVAT creditaccount it is held that, the question of unjustenrichment does not arise in case of export of service.

[2015] 56 taxmann.com 259 (Karnataka)High Court of Karnataka Commissionerof Central Excise and Service Tax v/s.Jacobs Engineer ing UK. L td.

A foreign company having no businessestablishment or operations in India,cannot be asked to pay service tax onservices provided by it to Indian recipientmerely because of a visit of its officers inIndia in course of providing service

Facts:- Assessee was situated in United Kingdomand having no office or branch in India. Assesseeprovided consultancy services to MCFL of India.Department argued that since officers of assessee-company had visited MCFL’s Plant at Mangalore(India), hence, assessee was liable to service tax inIndia. Assessee argued that : (a) services providedfrom outside India and received in India could betaxed under section 66A only in hands of servicerecipient from 18-4-2006; (b) since assessee hadno branch or establishment in India, it could not beliable to service tax

Held:- It was held that Service tax extends to wholeof India (except State of Jammu and Kashmir);hence, tax liability cannot be imposed on a personor company situated outside India and having nobusiness establishment or operations in India. Merevisit of officers of assessee-company at MCFL’s

plant at Mangalore (India) cannot lead to servicetax, in view of fact that assessee has no branch oroffice in India.

Where there was practice of contractorsto pay service tax on full value, separateconfirmation of demand against sub-contractors would be unjustified, eveni f Cenvat credi t r ules may requir eotherwise; any such demand would bebar r ed by pr inciple of r evenueneutrality [2015] 58 taxmann.com 154(New Delhi - CESTAT) CESTAT, NEWDEL HI BENCH DNS Contractor v.Commissioner of Central Excise, Delhi-I

Facts:- Assessee, a sub-contractor, did not payservice tax on services provided to main contractor,as full service tax had been paid by main contractor.Department argued that after introduction ofCENVAT Credit Rules, 2004, all persons are liableto pay service tax on services provided by themwith Cenvat credit benefit, if any.

Department argued that Tribunal cannot set asidedemand on sub-contractors contrary to mandate ofCENVAT Credit Rules, 2004 and cannot takeawaypowers of Legislation

Held:- During relevant period, there was practiceof contractors to pay service tax on full value; hence,separate confirmation of demand against sub-contractors would be unjustified, even if Cenvatcredit rules may require otherwise - Where : (a)principal contractor has paid tax on entire value,(b) Revenue has already earned its share of taxwhether coming from main contractor or from sub-contractor; (c) earlier clarifications of Board andjudgments of Tribunal al so favoured sub-contractors; (d) concept of service tax was still notclear; (e) this was a general practice/pattern inindustry; (f) ex-chequer cannot be enriched onaccount of double taxation and (g) entire situationis revenue neutral; hence, demand was set aside.Matter was remanded to verify whether maincontractor had paid tax on full value

No provisions of rules stand introduced by Tribunalin Cenvat Credi t Rules. Only based uponinterpretation of provisions of Cenvat Credit Rules

Service Tax - Recent Judgements

19

20

21


as also equity in tax as also on issue of revenueneutrality, demand was set aside.

Mar r iage is a social institution thatexisted much before religions came intobeing; hence, mar r iage i s a socialfunct ion and cannot be held as areligious function and services relatingto thereto are taxable under MandapKeeper’s services

[2015] 57 taxmann.com 170 (Mumbai -CESTAT) - Commissioner of CentralExcise, Pune-I I v. Central Panchayat.

Facts:- Assessee rented out its hall for conductingmarriages. Department argued that since marriageis a ‘social function’, it amounted to ‘MandapKeeper Services’ Assessee argued that : (a) marriageis a religious function and not social function andtherefore, activi ty was not taxable; and (b)Explanation added by Finance Act, 2007 providing

Service Tax - Recent Judgements

22

Thus, even i f assessee has opted forcomposition scheme for payment of VAT,assessee may keep proper records and find outthe separate values of goods and services andhe is not forced to go for the compositionvaluation (40%/70%) for payment of servicetax as provided under Rule 2A(ii) of the ServiceTax (Determination of Value) Rules, 2006.

5. Shri Shamji Damji is a land owner and ShamjiDevelopment Pvt. Ltd. (SDPL) is a companydeveloping residential construction on the landowned by Shri Shamji Damji. Separate valuefor land and construction is decided. ShouldSDPL opt to pay service tax under constructionservices if;

I. Value of land is required to be paid directly bythe buyers to Land Owner and only value ofconstruction is to be paid to SDPL?

II. SDPL is authorized to collect the moneypertaining to Land, from buyer, in terms ofDevelopment Agreement between Shri ShamjiDamji and SDPL?

that ‘marriage’ is a social function cannot beconsidered as retrospective.

Held:- I t was held that Marriage is a socialinstitution that existed much before religions cameinto being and, therefore, marriage cannot be heldas a religious function. Law itself recognizesregistered marriage as a legally valid form ofmarriage and there is no religious sanctity attachedto such registered marriages. Therefore, mode ofconducting marriages either by following religiousrituals or otherwise does not make marriage a‘religious function’. Marriage is a ‘social function’and insertion of Explanation by Finance Act, 2007was by way of abundant caution. Therefore, servicewas held payable subject to cum-tax benefit, asservice tax was not collected separately

Where assessee has not collected service taxseparately and service is held to be taxable, assesseeis entitled to cum-tax benefit .

❉ ❉ ❉

Ans.:I. In terms of Entry No. 12 of Notification No. 26/

2012-ST, abatement in value of constructionservice is available only if value of land isincluded in amount charged. As amount chargedby the SDPL does not comprise value of land,abetment of 70%/75% is not available to SDPLand SDPL should not opt for payment of servicetax under Construction Service. In such a case,it will be better if SDPL pays service tax underExecution of Works Contract Services andadopt the valuation as provided in the ServiceTax (Determination of Value) Rules, 2006 andpay service tax on 40% of the value of theconstruction excluding value of land.

II. I f , in terms of Development Agreementbetween Shri Shamji Damji and SDPL, SDPLis authorized to collect the money pertaining toLand, from buyer, SDPL have an option to gofor payment of service tax under ConstructionService. In this case, SDPL can pay servicetax on 30%/25% (after abatement) on total priceof the unit, including value of the land.

❉ ❉ ❉

contd. from page 244 Service Tax Decoded


CA. Pr iyam R. [email protected]

Gener at ion of Elect r i ci ty i sManufactur ing

Odisha Power Generation CorporationL td.V/s. State of Odisha & Anotherrepor ted in (2015) 81 VST 138 (Or issa)

Background of the case:The petitioner – dealer was engaged in business ofgeneration of electricity and distribution thereof inthe State of Odisha. It used coal as its primary oronly raw material in its thermal power plant formanufacture of electricity and its certificate ofregistration under the Orissa Value Added Tax Act,2004 and the Orissa Entry Tax Act, 1999 authorisedit to purchase coal as raw material for generation ofelectricity. The dealer brought coal into the localarea for manufacture of electricity and furnisheddeclaration in form E-15 to its seller and paid entrytax thereon at the rate of 0.5 percent. On that basis,it was entitled to the benefit of concessional levy ofentry tax in terms of rule 3 of the Orissa Entry TaxRules, 1999. The assessing authority denied theconcessional rate of entry tax on coal, distinguishingthe decision of the court in Bhusan Power & SteelLimited Vs. State of Orissa (2012) 56 VST 50(Orissa) holding that coal is a raw material for thepurpose of generating electricity on the ground thatsuch finding of the court was obiter dicta and thejudgment having been challenged before theSupreme Court, the ratio decided in that case hadno application to the present case. On a writ petition:

Held, allowing the petition, (i) that in view of thedefinition of “manufacture” as provided in Sec. 2(28)of the 2004 Act read with rule 2(1)(c ) of the 1999Rules and section 2(1) of the 1999 Act, the activityof generating electricity in a thermal power plant byusing coal would qualify as a manufacturing activity.

Whether hydr aul i c excavator i smachiner y or motor vehicle ?Interpretation of taxing statute.Commissioner of Commercial Tax V/sANAND TYRES (2015) 81 VST 183 (A11)

Background of the case:

The dealer, imported “hydraulic excavator” andclaimed that the said item is not a machinery underentry 2 of the schedule , but is a motor vehicle underentry 13. The claim of the dealer was rejected byAssistant Commissioner holding that disputed itemis a machinery, hence is taxable at two per cent,imposed entry tax. The dealer preferred appealbefore Joint Commissioner and in ordercommissioner held that the disputed item isgoverned by entry “ motor vehicle of all kinds”.The Revenue preferred second appeal which hasbeen dismissed by Tribunal.

The term “machinery” is a wide term. It derives itsmeaning no doubt from the term “machine” but itsscope is wider than the term “machine”. The term“Machinery” includes something more than“machines” and in general it can be said to include: (i) machines of a particular kind or machines ingeneral (ii) the working parts of a machine, and(iii) the means or system by which something iskept in action or a desired result is obtained. Thegeneral consensus in the context of “machinery” isthat it is a device used for a particular purpose orresult which takes energy in any form but results incombined functioning to achieve the work whichotherwise may not be possible by human physicalefforts or power, i.e. without help of such devices.The supply of power could be either by naturalforces or human or animal energy or electronicenergy or any other type of energy.

A “hydraulic excavator” would satisfy the meaningof term “machinery” in the wider sense and,therefore, it would be a machinery. However, wherethe Legislature in its wisdom has used or classifiedmore items which though in a wider sense, arewithin the ambit of term “machinery” have beenmentioned separately, and if that particular item,even if machinery, is governed by the separatenarrower entry, then that specific separate entry shallprevail. In other words “machinery” is a general

VAT - From the Courts

8

9


i tem and when some kinds of machinery areseparately mentioned, they would become “specialentry” and shall prevail over the general one.

The term “Machinery” is a genus and “motorvehicle” is a species. Motor vehicle in the widersense may speci fy the term “machine” and“machinery” but when a special entry is providedin the same salute differently then, the items whichwould specify the definition of “motor vehicle” willhave governed by that entry and not by “machine”and “machinery”.

A “hydraulic excavator” is a “machine” but since itis used for carrying goods like stone boulders, fromone place to another and also for excavation, despitebeing a machine in the wider sense, it also satisfiedthe term “motor vehicle”. It would be governed byentry 13 of the Schedule to the Uttar Pradesh Tax onEntry of Goods into Local Areas Act, 2007 for thereason that the Legislature has provided that motorVehicles of all kinds are included there in excludingspecifically only a tractor which otherwise wouldhave been included in the term. An excavator wouldbe governed by the entry and cannot transported bythe excavator would make no difference for thereason that Legislature has used the term “motorVehicle” in a very wide manner by providing that allkind of motor vehicles would be governed by entry13 of the Schedule attached to the Act.

Whether discount is r equir ed to bededucted from Sale pr ice for calculationof VAT liability?

MRF Limited V.s. Commissioner of Tradeand Taxes (2015) 81 VST 461 (Delhi).

Background of the case:

While admitting these appeals, the fol lowingquestions of law were formulated for consideration:

1) Whether the VAT Tribunal fel l into error inholding that the discounts on sales were notdeductible?

The appellant dealer was engaged in the businessof manufacture and sale of tyres and tubes andmarketed its products through various dealers. Asa part of the marketing strategy for businesspromotion, the dealer adopted the policy of givingdiscounts to its dealer. One such discount was the“turnover discount”, which was equal to one per

cent of the product value in the invoice raised. Thesale invoices issued invariably bore an endorsement“entitlement for one per cent Discount”. Suchdiscount, however, was given to the dealers oncein a quarter, through “credit notes”. The dealer’sclaim of deduction of “turnover discount” from thetaxable turnover was rejected by the assessingauthority primarily on the ground that revised returnshad not been filed. The Additional Commissioner,on appeals, rejected the claims on the ground thatthe amount of discount was not known at the timeof issuing the invoice, also observing that thediscount allowed by the dealer did not result in thesale price being reduced and that such discount wassimilar to “bonus discount”. The appeals preferredbefore the Tribunal were rejected, On appeals :

“Held , that the fact that the provision contained insec. 2(m) of the Delhi Sales Tax Act does notconceive of any deduction other than “cashdiscount” from the sale price on which the turnoveris to be computed is of no consequence, in as muchas the effect of turnover discount, which is in thenature of a trade discount in accord with theprevail ing practices of the trade, enters thecalculation anterior to the computation of the saleprice collected or collectible from the purchasers.In the scheme of turnover discount applied by thedealer each of its dealers would be entitled to oneper cent rebate in the sale price irrespective of anyparticular sales target. It made no difference thatthe discount was calculated at quarterly basis andaccorded through “credit notes”. The credit notesissued pursuant to the understanding in the saleinvoices declaring upfront the entitlement of thepurchaser for such trade discount, would geteffectuated by suitable adjustment in the paymentof the sales price collected in their wake. The netef fect apparentl y was of the pri ce beingcorrespondingly varied, the amount received orreceivable, thus, not being inclusive of the discountallowed. Thus, the turnover for the assessment yearsin question was correctly computed by the dealerafter deducting the turnover discount granted to itsdealers and rightly so declared in the returns. Theassessing authorities had unjustly denied the benefitof deduction on such account.

❉ ❉ ❉

VAT - From the Cour ts

10


CA. Bihar i B. [email protected].

Statute Updates

[I] Important Notifications/Circulars:

[A] Relief Scheme to Builders & Developersunder the const r uct ion indust r y,extended upto 11th Aug. 2015:

Vide Notification dated 26th May 2015 forthe unregistered dealers or the dealers whohave not paid the tax of their constructionbusiness, a relief scheme was announcedon 14.10.2014 till 11th April 2015. Afterthe date of relief is over, the departmenthas started coercive steps on some buildersthrough raid at their premises and collectedsome amount under the tax and penalty.On account of representation from civilworks contractors and developers throughtheir Association, the government hasconsidered their request and the time ofscheme is extended up to 11th August 2015.The main conditions are as under.

[i] Period of Extension is from 12.4.2014to 11.8.2015.

[ii] Under the scheme, the dealer has to paythe total tax with interest on or before11.8.2015 along with the application.

[iii]The conditions of remission of Interestand Penalty are as under.

[a] The interest will be levied @ 18%from 14.10.2014 till the date ofpayment and no remission will begiven of the interest paid.

[b] The unregistered dealers who takethe benefit of the scheme, theycould not pay the interest as per thelaw. Under the circumstances, theinterest is to be calculated @ 18%from 14.10.2014 ands that interestwi l l be remi tted against the

proposed penalty i.e. the amount ofpenalty wi l l be reduced to theextent of interest payable.

It is advisable that the benefit of schemeshould be taken by the dealer who have notregistered till date and thereafter option maybe exercised for the composition scheme.

[B] New Registration will be given within24 Hours:Vide Notification dated 3.6.2015 issued bythe Commissioner of Commercial Tax thatfor the dealer who has submitted requireddocuments and papers with the applicationand complied with other terms, like depositof challans etc., a registration certificatewil l be given wi thin 24 hours of theverification of documents and spot visit ofthe place of business etc.

The Commercial Tax of GujaratGovernment issued the guidelines for theregistration on the website as under. Thetotal guide line is reproduced hereunder fornew registration with a view that the dealerprepared an application with all documents.The procedure of the registration is simpleand easy.

Supporting Documents:

Form No. 101 is a format for applicationand available on web-site.

Dealer is required to fil l in this FormNo.101 along wi th photocopy ofsupporting documents.

List of supporting documents mandatoryfor submission.

[1] In case of Proprietorship:

[a] Proof of Ownership of Place ofBusiness.

[b] Copy of Passport of Owner.

VAT - Updates andTr ibunal Judgements


[c] Copy of Election Card of Owner.

[d] Copy of Registration Certificateissued by Custom and CentralExcise Authority.

[e] Copy of Driving License of owner.

[f] Copy of last electricity bill of placeof business.

[g] Copy of last bill of Property Taxof place of business or

[h] Copy of last telephone bill of placeof business.

[2] In case of Private Limited or PublicLimited Companies:

[a] Copy of the Registration Certificateissued by Registrar of Companies.

[b] Copy of Passport of a director.

[c] Copy of Election Card of adirector.

[d] Copy of registration certificateissued by Custom and CentralExcise Authority.

[e] Copy of driving l icense of adirector.


[g] Copy of last bill of Property Taxof place of business; or

[h] Copy of last Telephone Bil l ofplace of business.

[3] In case of Partnership Firm, HinduUndivided Family or in any other case:

[a] Copy of agreement.

[b] Copy of Passport of a Partner.

[c] Copy of Election Card of a Partner.

[d] Copy of Registration certificateissued by Custom and CentralExcise Authority.

[e] Copy of driving license of a partner.


[g] Copy of last bill of Property Taxof place of business or

VAT - Updates and Tr ibunal Judgements

[h] Copy of last Telephone Bil l ofplace of business.

Registering authority will verify thedocuments and finding them satisfactorywill generate Provisional Tin.

Registering authority will call dealer forphysical verification of documents andorder spot visit of business place.

After getting satisfactory spot-visitreport, dealer shal l be i ssued aregistration certi f icate which theapplicants’ dealer can download at theirend.

Registration authority is bound toapprove or reject the application within30 days.

If registration authority fails to decideon application within 30 days from thedate of application, dealer shall getdeemed registration automatically.

[II] Important Judgment:

[A] GVAT Tr ibunal in case of Gunj anTimes.

Issue:

As per section 26(1)(d) of the Vat Act, ifthe dealer transferred the business fromProprietorship to Private Limited Co.whether new registration is to be taken oronly amendment in the registrationcertificate is required?

Facts:

As per GVAT Tribunal in the abovereferred case only amendment in theRegistration Certificate is required. Thegist of the case is as under.

The appellant was a Proprietorship firmnamely M/s. Gunjan Times engaged in thebusiness of trading of watches and goggles.The appellant on dated 21.03.2012 alongwith other two persons incorporated a Pvt.Ltd. Co. in the name of M/s. Gunjan TimesPvt. L td. under the certi f i cate ofincorporation. The appellant as per the


provision contained in section 26(1)(a)made an application dated 30.04.13 fornecessary amendment in the registrationcerti f i cate. The appel lant made anapplication as per Rule 8(1)(a) of theGujarat Vat Rules in relation to the changein the ownership of the business along withthe copies of Memorandum of Articles ofAssociation of M/s. Gunjan Times Pvt.Ltd. However, the application for makingamendment in the registration certificateswas rejected by the Ld. Commercial TaxOfficer. Accordingly, the appellant filed anappeal which was dismissed on the groundthat M/s. Gunjan Times and M/s. GunjanTimes Pvt. Ltd. are separate legal entity andhence the amendment in the registrationcertificate cannot be granted. The appellantin the second appeal preferred against theorder of the Appellate Authori ty andcontended that the sub-clause (a) and (b)of section 26 very categorically providesthat in case where registered dealer effectsany change in ownership of business, shallgive intimation of said change in theownership to the assessing officer within30 days. The appellant further submittedthat the Appellate Authority has wronglyrelied on the provision of section 51(2)which provides for fixing of liability ofpayment of tax in case of transfer of thebusiness. The Hon’ble Tribunal afterconsidering the facts of the case andsubmission made by both the parties hasheld that the appellant has not applied forcancellation of registration as neither theappellant has discounted its business norabsolutely transferred the business to thePvt. Ltd. Co. The appellant has kept hisinterest in the business so transferred to thePvt. Ltd. Co. and is also one of theDirectors. Accordingly, the order of theAssessing Officer and Appellate Authorityrejecting the application of amendment inthe registration certificates are set aside.

[B] GVAT Tr ibunal in case of M/s. ShyamPlastic Machinery:

Issue:

Whether is it mandatory to produce the Billof Lading for the claim of Form ‘H’?

Facts:

Merely the absence of Bill of Lading, claimof Form ‘H’ cannot be rejected. TheHon’ble Tribunal in case of Shyam PlasticMachinery has decided that if the dealerhas proved the export through variousevidences, the claim of Form ‘H’ shouldnot be rejected.

The gist of the judgment is as under.

The appellant was carrying the businessof manufacturing and marketing ofmachinery and spares. The appellant wasassessed for the period 1997-98 under theGST as well as CST Act. So far as theassessment under the CST Act i sconcerned, the appellant had sold goodsin the course of interstate trade andcommerce against form ‘C’ to the tune ofRs. 15,84,818/-. However, the appellantcould not produce the C form of Rs.1,56,000/-. The Ld. Assessing Officerwithout giving any reason, disallowed theclaim of C form to the tune of Rs, 3,12,000/-The appellant has also sold the goodsagainst Form H to the tune of Rs. 7,81,242/- and produced Form H along with thedocuments like transport receipts, invoices,packing verification report etc. The Ld.Assessing Officer has disallowed the claimof export against Form H wi thoutobserving anything about the documentsproduced by the appellant. The first appealwas preferred in the office of the Ld. Dy.Commissioner of Commercial Tax, Appeal(2), Ahmedabad. The Ld. Appel lateAuthority has also not allowed the claimof export against Form H, as the appellantdid not submit Bill of Lading. The claim

VAT - Updates and Tr ibunal Judgements



CA. Naveen [email protected]

Corporate Law Update

MCA Updates:

1. Companies (Registration Offices and Fees)Second Amendment Rules, 2015:Fol lowing Proviso in Rule 15 has beeninserted:‘Provided that no person shall be entitled undersection 399 to inspect or obtain copies ofresolutions referred to in clause (g) of sub-section (3) of section 117 of the Act.”[F. No. 1/16/2013-CL-V dated 29th May,2015]

2. Companies (Registr at ion of Char ges)Amendment Rules, 2015:

In rule 3, in sub-rule (4), in clause (a), for thewords “under the seal of the company”, thewords “under the seal, if any, of the company”shall be substituted.

[F. No. 1/10/2013-CL-V dated 29th May,2015]

3. Companies (I ncor por at ion) SecondAmendment Rules, 2015:

Following changes have been made:

Rule 12 Provided that in case pursuing of(Inserted) any of the objects of a company

requires registration or approvalfrom sectoral regulators such asReserve Bank of India, SEBI,registration or approval, as the casemay be, from such regulator shallbe obtained by the company beforepursuing such objects and adeclaration in this behalf shall besubmi tted at the stage ofincorporation of the company.

Rule 24 Omitted

Annexure Existing e-form INC-13 (MOA forSection 8 Company) and INC-16

(Licence for Section 8 Company)have been replaced by the newINC-13 and INC-16.

[F. No. 1/13/2013-CL-V dated 29th May,2015]

4. Companies (Declaration and Payment ofDividend) Second Amendment Rules, 2015:

In Rule 3, sub rule (5) shall be omitted.

[F. No. 1/31/2013-CL-V-Part dated 29th May,2015]

5. Companies (Share Capital and Debentures)Second Amendment Rules, 2015:

Rule 5 For the words “issued under thesub-rule seal” of the company, the words(3) “issued under the seal, if any, of the

company” shall be substituted.

Rule 5 The secretary or any personsub-rule authorised by the Board for the(3) [clausepurpose:Provided that in case a(b) sub- company does not have astituted] common seat, the share certificate

shall be signed by two directors orby a director and the CompanySecretary, wherever the companyhas appointed a CompanySecretary;Provided further that, ifthe composi tion of the Boardpermits of it, at least one of theaforesaid two directors shall be aperson other than a managingdi rector or a whole-timedirector;Provided also that, in caseof a One Person Company, everyshare certificate shall be issuedunder the seal , i f any, of thecompany, which shall be affixed inthe presence of and signed by onedirector or a person authorised by



the Board of Directors of thecompany for the purpose and theCompany Secretary, or any otherperson authorised by the Board forthe purpose, and in case the OnePerson Company does not have acommon seal, the share CertificateShall be signed by the persons inthe presence of whom the seal isrequired to be aff ixed in thisproviso.

[F. No. 1/4/2013-CL-V dated 29th May, 2015]

6. Exemptions to Government Companiesunder section 462 of Companies Act, 2013:

Various exemptions have been provided to theGovernment Companies and subsidiary ofGovernment Companies.

For details please refer the following link:

http:/ /www.mca.gov.i n/M i ni st ry/pdf /Exemptions_to_govt_companies_05062015.pdf

[F. No. 1/2/2014-CL .V dated 05th June,2015]

7. Exemptions to Nidhi Companies undersection 462 of Companies Act, 2013:

Various exemptions have been provided to theNidhi Companies.

For details please refer the following link:

http:/ /www.mca.gov.i n/M i ni st ry/pdf /Exemptions_to_nidhis_companies_05062015.pdf

[F. No. 2/11/2014-CL.V dated 05th June,2015]

8. Exemptions to Pr ivate Companies undersection 462 of Companies Act, 2013:

Following exemptions have been provided tothe Private Companies.

Sr.No.

1

2

3

Chapt er /Sect i on /Sub-Section of Companies Act,2013

Chapter I, sub- clause (viii)of clause 76 of section 2.

Chapter IV. Section 43 andsection 47.

Chapter IV, sub-clause (i) ofclause (a) of sub-section (1)and sub-section (2) of section62.

E x cep t i on s/ M od i f i ca t i o n s/Adaptations

Shall not apply w. r. t. section 188.

Shall not apply where Memorandumor Articles ofAssociation of the PrivateCompany so provides.

Shal l apply wi th f ol lowingmodif ications:-

In clause (a), in sub-clause

(i) The following proviso shall beinserted, namely:

Provided that notwi thstandinganything contained in this sub-clauseand sub section (2) of this section, incase ninety per cent. of the members ofa private company have given theirconsent in writing or in electronicmode, the periods lesser than thosespecified in the said sub clause or sub-section shall apply

Effect of the amendment

Following shall not be treated as the RelatedParty:Any Company which is-

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

b) A subsidiary of a holding company towhich it is also a subsidiary.

Provisions of section 43, i.e. Kinds of ShareCapital and section 47, i.e. Voting Rights,shall not apply to Private Companies, if soprovided by MOA & AOA of the Company.

For further issue of share capital , theprescribed time frame of 15 to 30 days forduration of Offer Period and dispatching ofnotice at least three days before opening ofissue, can be reduced if 90% of the membersof the company give their consent in writingor in electronic mode.



4

5

6

7

8

Chapter IV, clause (b) of sub-section (1) of section 62.

Chapter IV, section 67

Chapter V, clauses (a) to (e)of subsection(2) of section73.

Chapter VII, sections 101 to107 and section 109.

Chapter VII, clause (g) of sub-section (3) of section 117.

In clause (b), for the words”specialresolution”, thewords “ordinaryresolution”shall be substituted

Shall not apply to privatecompanies -(a) in whose share capital no otherbody corporate has invested anymoney;

(b) if the borrowings of such a companyfrom banks or financial institutions oranybody corporate is less than twiceits paid up share capital or fif ty crorerupees, whichever is lower; and

(c) such a company is not in default inrepayment of such borrowingssubsisting at the time of makingtransactions under this section.

Shall not apply to a privatecompanywhich accepts from its members moniesnot exceeding one hundred per cent ofaggregate of thepaid up share capitaland free reserves, and such companyshal l f ile the detai ls of monies soaccepted to the Registrar in suchmanner as may be specified.

Shall apply unless otherwise specif iedin respective sections or the articles ofthe company provide otherwise.

Shall not apply

For issuing further shares under the schemeof Employee Stock Option, an ordinaryresolution will be a sufficient compliance.

A private limited company having a sharecapital can buy i ts own shares withouthaving consequent reduction of sharecapital, if the prescribed conditions arefulf il led.

The Private Company can accept depositsf rom i ts members up to 100% of theaggregate of the paid up share capital plusfree reserves, and has to file such detailswith the Registrar in the prescribed manner.

Provisions relating to:· Notice of Meeting,· Statement to be annexed to notice,· Quorum for Meetings,· Chairman of Meetings,· Proxies,· Restriction on Voting Rights,· Voting by show of hands and· Demand for Poll, shall apply unless otherwisespecified in respective sections or the articlesof the company provide otherwise.

No need to f i le the fol lowing BoardResolutions by a Private Company :· To make calls on shareholders in respectof money unpaid on their shares.· To authorize buy-back of securities undersection 68.· To issue securities, including debentures,whether in or outside India.· To borrow monies.· To invest the funds of the company.· To grant loans or give guarantee or providesecurity in respect of loans.· To approve financial statement and theBoard’s report.· To diversify the business of the company.· To approve amalgamation, merger orreconstruction.· To take over a company or acquire acontrolling or substantial stake in anothercompany.



9

10

11

12

13

14

Chapter X, Clause (g) of sub-section (3) of section 141.

Section 160, 162 and 180

Chapter XII, sub-section (2)of section184.

Chapter XII, section 185

Chapter XII, second provisoto sub section (1) of section188.

Chapter XIII, sub-sections (4)and (5) of section 196.

Shall apply with themodification thatthe words “other than one personcompanies, dormant companies,smallcompanies and private companieshaving paid-upshare capital less thanoneHundred crore rupees” shal l beinserted af ter the words “twentycompanies”.

Shall not apply.

Shall apply with the exception thatinterested director may participate insuch meeting after disclosure of hisinterest.

Shall not apply to a privatecompany -(a) in whose share capital no otherbody corporate has invested anymoney;

(b) i f the borrowings of such acompany f rom banks or f inancialinstitutions or any Body Corporate isless than twice of its paid up sharecapital or fifty crore rupees, whicheveris lower; and

(c) Such a company has no default inrepayment of such borrowingssubsisting at the time of makingtransactions under this section.

Shall not apply

Shall not apply

· To make political contributions.

· To appoint or remove KMP.

· To appoint internal auditors and secretarialauditor.

Following types of companies shall not becounted in the limit of 20 companies forappointment of auditors:

· One Person Companies,

· Dormant Companies,

· Small Companies and

· Private Companies having paid up sharecapital less than One Hundred Crore Rupees.

Provisions relating to:·Right of persons other than reti r ingdirectors to stand for directorship,

· Appointment of directors to be votedindividually and

· Restrictions on power of Board, shall notapply to Private Companies.

Any interested Director can participate inthe Board meeting after disclosing hisinterests in the meeting.

Private Companies can give Loan toDirectors under section 185, if the companyfulfils the conditions stated herein.

Any member who is a related party with respectto any contract or arrangement can vote toapprove such contract or arrangement.

The terms and conditions for appointment andremuneration of Managing Director, Managerand Whole Time Director and approval ofsuch appointment at the ensuing AGM andfiling of return of appointment within 60 daysshall not apply to private companies.

· The private companies, while complying with such exceptions, modif ications and adaptations shall ensure that theinterests of their shareholders are protected.

· These amendments shall be effective from the date of notification in the Off icial Gazette of India. [F. No. 1/1/2014-CL.V dated 05th June, 2015]



9. Exemptions to Section 8 (Non-Profit) Companies under section 462 of Companies Act, 2013:Following exemptions have been provided to the Section 8 (Non-Profit) Companies.

S r .No.

1

2

3

4

5

6

7

8

9

Chapt er /Sect i on /Sub-Section of Companies Act,2013

Clause (24) of section 2



Sub-section (2) of section 96

Sub-section (1) of section101

Section 118.

Sub-section (1) of section136.

Sub-section (1) of section149 and the first proviso tosub section (1)

Sub-sections (4), (5),(6), (7),(8), (9), (10), (11), clause (i)

E x cep t i on s/ M od i f i ca t i o n s/Adaptations

Shall not apply

The requirement of minimum paid upshare capital shall not apply

The requirement of minimum paid upshare capital shall not apply

In sub section (2), after the proviso andbefore explanation, the fol lowingproviso shall be inserted, namely:-

Provided further that the time, date andplace of each annual general meetingare decided upon before-hand by theboard of directors having regard to thedirections, if any, given in this regardby the company in its general meeting.

In sub-section (1), f or the words“twenty one days”, the words “fourteendays” shall be substituted.

The section shall not apply as a wholeexcept that minutes may be recordedwithin thirty days of the conclusion ofevery meeting in case of companieswhere the arti cles of associationprovide for confirmation of minutes bycirculation.

In sub-section (1), f or the words“twenty one days”, the words “fourteendays” shall be substituted.

Shall not apply.

Shall not apply.

Effect of the amendment

Section 2 (24), defining the meaning ofCompany Secretary or Secretary shall notapply.

The private limited section 8 companieswil l not need to comply with therequirement of minimum paid up sharecapital.

The public limited section 8 companies willnot need to comply with the requirement ofminimum paid up share capital.

The following proviso has been added tosection 96(2), i.e. Annual General Meeting:

Provided further that the time, date andplace of each annual general meeting aredecided upon before-hand by the board ofdirectors having regard to the directions, ifany, given in this regard by the company inits general meeting.

The notice of general meeting of Section 8company will need minimum clear four teendays notice rather than clear twenty onedays.

Section 8 company will not need to complywi th the section 118, i .e. minutes ofproceedings of general meeting, boardmeetings and other meeting and resolutionspassed by postal bal lot, except for thefollowing provision-

Minutes may be recorded within 30 days ofthe conclusion of every meeting in case ofcompanies where the articles of associationprovide for confirmation of minutes bycirculation.

The copies of Audited financial statement,which are to be laid before a company in itsgeneral meeting shal l be sent to all thepersons having the right to receive, shallbe sent to them 14 days before the date ofthe meeting, instead of 21 days.

Company will not need to comply with theregulations in section 149(1) regardingminimum and maximum no. of directors inthe board, however, if applicable, they willhave to appoint the Woman Director.

Section 149- Company to have Board ofDirectors, following sub sections shall not



10

11

12

13

14

15

16

of subsection (12) and subsection (13) of section 149.

Section 150.

Proviso to sub-section (5) ofsection 152.

Section 160.





Shall not apply.

Shall not apply.

Shall not apply to companies whosearti cles provide f or election ofdirectors by ballot.

Shall not apply.

Shall apply only to the extent that theBoard of Directors, of such Companiesshall hold at least one meeting withinevery six calendar months.

In sub-section (1),—

(a) for the words “one-third of its totalstrength or two directors, whichever ishigher”, the words “ei ther eightmembers or twenty five per cent. of itstotalstrength whichever is less” shallbe substituted;

(b) the fol lowing proviso shall beinserted, namely:-”

Provided that the quorum shall not beless than two members”.

The words “with independent directorsforming a majority” shall be omitted.

apply to a section 8 company-149(4)-149(5) -149(6)-149(7)-149(8)-149(9)-149(10)-149(11)-149(12 (i)-149(13)

Section 150, i.e. Manner of selection ofIndependent director and maintenance ofdatabank of independent directors, shall notapply to section 8 companies.

The opinion of the board that theindependent director ful f i ls conditionsspecified in the act for his appointment,which is required to be annexed to theexplanatory statement of notice of generalmeeting, shall not apply to the section 8companies.

The procedure given in section 160, i.e. Theright of persons other than retiring directorsto stand for directorship, shall not apply tothose section 8 companies whose articlesprovide for election of directors by ballot.

The ceiling to the number of directorshipsa director can hold, i.e. 20, shall not applyto the section 8 companies.

The requirement of board of directors tohold first board meeting within 30 days ofi ts incorporation and minimum fourmeetings in every year in the mannerprescribed shall not apply to the section 8companies, except holding at least onemeeting within every six calendar months

The requirement of quorum for meeting ofBoard, in section 174(1), the quorum shallbe lower of 8 members or 25% of the totalstrength of directors, but in any case it shallnot be less than 2 members.

In the composition of Audit committee therequirement of independent directorsforming majority has been done away.



17

18

19

20

Section 178.

Section 179.


Section 189.

Shall not apply.

Matters referred to in clauses (d), (e)and (f) of sub-section (3) may bedecided by the Board by circulationinstead of at a meeting.

Shall apply only if the transaction withreference to section 188 on the basis ofterms and conditions of the contract orarrangement exceeds one lakh rupees.

Shall apply only if the transaction withreference to section 188 on the basis ofterms and conditions of the contract orarrangement exceeds one lakh rupees.

The section 8 companies are not requiredto consti tute the Nomination andRemuneration Committee and StakeholdersRelationship Committee.

The board can decide the following mattersby way of circulation instead of at ameeting:

- To borrow monies.

- To invest the funds of the companies.

- To grant loans or give guarantee or providesecurity in respect of loans.

Directors are required to disclose the natureof concern or Interests in case of RelatedParty Transactions (with reference to section188) of an amount exceeding One LakhRupees only.

Entry in register maintained for particularsof contracts and arrangements withreference to section 188 is required to bedone only i f the amount involved isexceeding One Lakh Rupees.

· These amendments shall be effective from the date of notification in the Official Gazette of India. [F. No. 1/2/2014-CL.I dated 05th June, 2015]

10. Extension of time for fi ling of Notice ofappointment of the Cost Auditor for theF.Y, 2015-16 in Form CRA-2 and filing ofCost Audit report to the Central Governmentfor the F.Y, 2014-15 in Form CRA-4.

· The additional fee on account of any delaybeyond the prescribed period of 30 days fromthe date of Board Meeting, in which theappointment of the Auditor was made for filingof CRA-2 for the financial year starting on orafter 1st April , 2015 is waived for al l suchfilings till 30th June, 2015.

· Additional fees on delayed filing of form CRA-4 beyond the prescribed period of 30 days fromthe date of receipt of a copy of Cost AuditReport from the Cost Auditor for the FinancialYear starting on or after 1st April, 2014 is alsowaived for all such filings till 31st August, 2015.

[File No./1/40/2013/CL-V, dated 12th June,2015]

11. Clar ification on repayment of depositsaccepted by the companies befor e thecommencement of the Companies Act, 2013under section 74 of the said Act

· The Ministry has clarified that vide Removal ofDifficulties (Second) Order [S.O. 1428 (E)]dated 2nd June, 2014 and Removal of Difficulties(Fourth) Order [S.O. 146O (E)] dated 6th June,2014, the Company Law Board has been

empowered to exercise the powers of NationalCompany taw Tribunal under sub-section (4) ofsection 73 and subsection (2) of section 74 ofthe said Act, till the latter’s constitution.

· Thus, a depositor is free to file an applicationunder section 73(4) of the said Act, with theCompany Law Board if the company fails tomake repayment of deposits accepted by it.

· Further the company may also file applicationunder section 74(2) of the said Act with theCompany Law Board seeking extension oftime in making the repayment of depositsaccepted by it before the commencement of theprovisions of the said Act

· Ministry has further clarified that the conditionssubject to which a company would be deemedto have complied with the requirements laiddown in Section 74(1)(b) of the CompaniesAct, 2013. Companies can repay depositsaccepted prior to 1st April, 2014 in accordancewith terms and condi tions for which thedeposits had been accepted. However, there isno bar on the Registrar of Companies for filingof prosecution against a company if suchcompany fails to make repayment of depositsaccepted by it under the provisions of theCompanies Act, 1956 or Companies Act, 2013.

[File No./1/8/2013/CL-V, dated 18th June, 2015]❉ ❉ ❉


Adv. Ankit [email protected]

Allied Laws Corner

insufficiency, etc., of funds in the drawer’s accounton which the cheque is drawn for the discharge ofany legally enforceable debt or other liability. Asper S.138 of the NI Act, such person shall bedeemed to have committed an offence and shallwithout prejudice to other provisions of the NI Actshall be punished with imprisonment for a termwhich may extend to two years or with fine whichmay extend to twice the amount of the cheque orwith both.

Dashrath Rupsingh Rathod v. State ofMaharashtra, (2014) 9 SCC 129 (SupremeCour t) : The Three Judges Bench of the ApexCourt had held that a case relating to dishonour ofcheque can be filed only in a Court which has theterritorial jurisdiction over the place where thecheque is dishonoured by the bank on which it isdrawn. Therefore, where a cheque is drawn by acompany on its bank account situated at Chennai,and the cheque i s bounced on account ofinsufficiency of funds, etc., the case can be filedonly in a Chennai Court within whose jurisdictionthe said bank is situated, even if the payee haspresented the said cheque in his bank located inAhmedabad.

Representation of issues ar ising out of decisionof the Supreme Cour t in the case of DashrathRupsingh Rathod v. State of Maharashtra, (2014)9 SCC 129: In pursuant to the said decision of theSupreme Court, representations were made to theGovernment by various stakeholders, includingindustry associations and financial institutions,expressing concerns about the wide impact thisdecision would have on the business interests as itwill offer undue protection to defaulters at the

S.138 of the Negotiable Instrument Act, 1881– Dishonour of cheque for insufficiency, etc.of funds in the accounts – Ter r i tor ialJur isdiction Amendments.

Recently the President of India promulgated theNegotiable Instruments (Amendment) Ordinance,2015 on 15th June, 2015. The objective of theOrdinance is to amend the provisions of NegotiableInstruments Act, 1881 (hereinafter referred to as the“NI Act”), for speedy disposal of cases relating todishonour of cheque. As per the provisionsamended by such Ordinance now a chequedishonour case under Section 138 of the NI Actwill have to be filed in a court at a place as per theprovisions of Section 142(2) of the NegotiableInstruments Act, which has been inserted by thisnew Ordinance, and even all pending chequebouncing cases will also be transferred to the courtsas per this new provision. This Ordinance hasoverruled the Apex Court decision in the case ofDashrath Rupsingh Rathod v. State ofMaharashtra, (2014) 9 SCC 129.

Background :

The NI Act was amended by the Banking, PublicFinancial Institutions and Negotiable InstrumentsLaws (Amendment) Act, 1988 wherein a newChapter XVII was incorporated for penalties in caseof dishonour of cheques due to insufficiency offunds in the account of the drawer of the cheque.These provisions were incorporated with a view toencourage the culture of use of cheques andenhancing the credibility of the instrument.

Provisions of S.138 of the NI Act provides for theoffence pertaining to dishonour of cheque for


expense of the aggrieved complainant; will giverise to multiplicity of cases covering several chequesdrawn on bank(s) at different places; and adheringto it is impracticable for a single window agencywith customers spread all over India. For the simplereason that the payee of the cheque has to file thecase at the place where the drawer of the chequehas a bank account. Thus, if the payee’s registeredoffice is at Ahmedabad and have a bank account inAhmedabad, and it gets a cheque from differentpersons from their respective bank account atChennai, Mumbai and Delhi, the payee will haveto go to Chennai, Mumbai and Delhi to file the casein case of dishonour of cheques, even though thefault for cheque dishonour is that of the payers /drawers of the cheques.

Negot iable I nst r uments (Amendment)Ordinance, 2015 (6 of 2015) has now changedthe Legal Position regarding Jur isdiction ofCour t in case of dishonour of cheque :

To address the difficulties faced by the payee orthe lender of the money in filing the cases underSection 138 of the NI Act, because of which largenumber of cases were stuck, the jurisdiction foroffence under Section 138 has been proposed tobe clearly defined. Accordingly, the NegotiableInstruments (Amendment) Bill, 2015 (“the Bill”)in Parliament was introduced in Lok Sabha on 6thMay, 2015 and considered and passed by Lok Sabhaon 13th May, 2015. However, since the RajyaSabha was adjourned sine die on 13th May, 2015,the Bill could not be discussed and passed by thatHouse and the Bill could not be enacted.

In view of the urgency to create a suitable legalframework for determination of the place ofjurisdiction for trying cases of dishonour of chequesunder section 138 of the NI Act, the Governmentdecided to amend the law through the Negotiableinstruments (Amendment) Ordinance, 2015.

On 15.06.2015, the President of India promulgatedthe Negotiable Instruments (Amendment)Ordinance, 2015.

The Supreme Court decision in the case ofDashrath Rupsingh Rathod v. State ofMaharashtra, (2014) 9 SCC 129 is overruled andnow of no consequence on account of thisOrdinance.

The Ordinance has made following amendmentsto the NI Act.

(a) A new sub-section (2) has been inserted inSection 142, which now lays down as under:

“(2) The offence under section 138 shall beinquired into and tried only by a courtwithin whose local jurisdiction,—

(a) if the cheque is delivered for collectionthrough an account, the branch of thebank where the payee or holder in duecourse, as the case may be, maintainsthe account, is situated; or

(b) if the cheque is presented for paymentby the payee or holder in due courseotherwise through an account, thebranch of the drawee bank where thedrawer maintains the account, issituated.

Explanation.— For the purposes of clause (a),where a cheque is delivered for collection atany branch of the bank of the payee or holderin due course, then, the cheque shall be deemedto have been delivered to the branch of the bankin which the payee or holder in due course, asthe case may be, maintains the account.”

(b) A new Section 142A has been inserted in theNegotiable Instruments Act, 1881, has beeninserted, which lays down as under:

All ied Laws Corner


“142A. (1) Notwi thstanding anythingcontained in the Code of Criminal Procedure,1973 or any judgment, decree, order ordirections of any court, all cases arising out ofsection 138 which were pending in any court,whether filed before it, or transferred to it,before the commencement of the NegotiableInstruments (Amendment) Ordinance, 2015shall be transferred to the court havingjurisdiction under sub-section (2) of section 142as if that sub-section had been in force at allmaterial times.

(2) Notwithstanding anything contained in sub-section (2) of section 142 or sub-section (1),where the payee or the holder in due course,as the case may be, has filed a complaintagainst the drawer of a cheque in the courthaving jurisdiction under sub-section (2) ofsection 142 or the case has been transferred tothat court under sub-section (1), and suchcomplaint i s pending in that court, al lsubsequent complaints arising out of section138 against the same drawer shall be filedbefore the same court irrespective of whetherthose cheques were delivered for collection orpresented for payment within the territorialjurisdiction of that court.

(3) If, on the date of the commencement of theNegotiable Instruments (Amendment)Ordinance, 2015, more than one prosecutionfiled by the same payee or holder in due course,as the case may be, against the same drawerof cheques is pending before different courts,upon the said fact having been brought to thenotice of the court, such court shall transferthe case to the court having jurisdiction undersub-section (2) of section 142 before which thefirst case was filed and is pending, as if thatsub-section had been in force at all materialtimes.”

As per this Ordinance, now a cheque dishonourcase can be filed only in the court at the place wherethe bank in which the payee has account is located.Therefore, if the payee’s registered office is atAhmedabad and have a bank account inAhmedabad, and it gets a cheque from differentpersons from their respective bank account atChennai, Mumbai and Delhi, the payee will haveto f i le a case in Ahmedabad Court havingjurisdiction over the payee’s bank located inAhmedabad, instead of going to Chennai, Mumbaiand Delhi to file the case in case of dishonour ofcheques as per the overruled decision of theSupreme Court in the case of Dashrath RupsinghRathod v. State of Maharashtra, (2014) 9 SCC129.

It is further provided that where a complaint hasbeen filed against the drawer of a cheque in theCourt having jurisdiction under the new scheme ofjurisdiction, all subsequent complaints arising outof S.138 of the NI Act against the same drawershall be filed before the same court, irrespective ofwhether those cheques were presented for paymentwithin the territorial jurisdiction of that court. Thisamendment is made to ensure that the drawer ofcheques is not harassed by filing multiple chequedishonoured cases at different locations.

Conclusion:

These amendments in NI Act would help inensuring that a fair trial of cases u/s 138 of the NIAct is conducted keeping in view of the interestsof the complainant by clarifying the territorialjurisdiction for trying the cases for dishonour ofcheques. The clarification of jurisdictional issues isdesirable from the equity point of view as this wouldbe in the interests of the complainant and wouldalso ensure a fair trial. This would increase thecredibility of the cheque as a financial instrument.

❉ ❉ ❉

All ied Laws Corner


CA. Pamil H. [email protected]

From Published Accounts

Allsec Technologies L imited

The earnings considered in ascertaining theCompany’s earnings per share comprise the netprofit or loss after tax attributable to equity shareholders. The number of shares used in computingbasic earnings per share is the weighted averagenumber of shares outstanding during the year.

The number of shares used in computing dilutedearnings per share comprises the weighted averagenumber of shares considered for deriving basicearnings per share and also the weighted averagenumber of shares, if any, which would have beenissued on the conversion of all dilutive potentialequity shares.

Kolte-Patil Developers L imited

The Company reports basic and diluted earningsper share in accordance with Accounting Standard– 20 ‘Earnings Per Share’ issued by the Institute ofChartered Accountants of India on basic earningsper share is computed by dividing the net profit orloss for the period by the weighted average numberof Equity shares outstanding during the period.Diluted earnings per share is computed by dividingthe net profit or loss for the period by the weightedaverage number of equity shares outstanding duringthe period as adjusted for the effects of all dilutedpotential equity shares except where the results areanti-dilutive.

Reliance Communications L imited

In determining Earning per Share, the Companyconsiders the net profit after tax and includes thepost tax effect of any extraordinary/ exceptionalitem. The number of shares used in computing Basic

AS – 20 Earnings Per Share –

Notes to Financial Statements for the year ended31st March, 2013

Infinite Computer Solutions (India) L imited

Basic earnings per share are calculated by dividing

the net profit or loss for the quarter attributable to

equity shareholders by the weighted average

number of equity shares outstanding during the

quarter.

For calculating diluted earnings per share, the net

profit or loss for the quarter attributable to equity

shareholders and the weighted average number of

shares outstanding during the quarter are adjusted

for the effects of all dilutive potential equity shares.

Godawar i Power & Ispat

Basic earnings per share are calculated by dividing

the net profit or loss for the period attributable to

equity shareholders by weighted average number

of equity shares outstanding during the period. The

weighted average number of equi ty shares

outstanding during the period are adjusted for events

of bonus issue; bonus element in a right issue to

existing shareholders.

For the purpose of calculating diluted earnings per

share, the net profit or loss for the year attributable

to equity shareholders and the weighted average

number of shares outstanding during the year are

adjusted for the effects of all dilutive potential equity

shares.


Earning per Share is the weighted average numberof shares outstanding during the period. Thenumber of shares used in computing DilutedEarning per Share comprises the weighted averageshares considered for deriving Basic Earnings perShare and also the weighted average number ofshares that could have been i ssued on theconversion of all dilutive potential equity sharesunless the results would be anti - dilutive. Dilutivepotential equity shares are deemed converted as ofthe beginning of the period, unless issued at a laterdate.

K.P.R. Mill L imited

Basic earnings per share is computed by dividingthe profit / (loss) for the year by the weightedaverage number of equity shares outstanding duringthe year. Diluted earnings per share is computedby dividing the profit / (loss) for the year as adjustedfor dividend, interest and other charges to expenseor income (net of any attributable taxes) relating tothe dilutive potential equity shares, by the weightedaverage number of equity shares considered forderiving basic earnings per share and the weightedaverage number of equity shares which could havebeen issued on the conversion of al l di lutivepotential equity shares. Potential equity shares aredeemed to be dilutive only if their conversion toequity shares would decrease the net profit per sharefrom continuing ordinary operations. Potentialdilutive equity shares are deemed to be convertedas at the beginning of the period, unless they havebeen issued at a later date. The dilutive potentialequity shares are adjusted for the proceedsreceivable had the shares been actually issued atfai r value (i .e. average market value of theoutstanding shares). Dilutive potential equity sharesare determined independently for each periodpresented. The number of equity shares andpotentially dilutive equity shares are adjusted for

From Published Accounts

share splits / reverse share splits and bonus shares,as appropriate.

R.P.P. Infra Projects L imited

The Company reports basic and diluted earningsper share in accordance with Accounting Standard(AS20). Earnings per Share noti f ied by theCompanies (Accounting Standards) Rules, 2006.Basic earnings per equity shares are computed bydividing the net profit for the year attributable tothe Equity Shareholders by the weighted averagenumber of equity shares outstanding during the year.Diluted earnings per share is computed by dividingthe net profit for the year adjusting for the effectsof dilutive potential equity shares attributable to theEquity

Shareholders by the weighted average number ofthe equity shares and dilutive potential equity sharesoutstanding during the year except where the resultsare anti dilutive.

Oberoi Realty L imited

Basic earnings per share is calculated by dividingthe net profit / (loss) for the year attributable toequity shareholders (after deducting preferencedividends and attributable taxes) by weightedaverage number of equity shares outstanding duringthe year.

For the purpose of calculating diluted earnings pershare, the net profit / (loss) for the year attributableto equity shareholders and the weighted averagenumbers of shares outstanding during the year areadjusted for the effects of all dilutive potential equityshares.

❉ ❉ ❉


CA. Kunal A. [email protected]

From the Government

Income Tax

1) Not i f i cat ion r egar ding Elect r onicVer ification Code (EVC) for electronicallyfiled Income Tax Return

CBDT has notified the procedures and modesof f i l i ng of return through ElectronicVerification Code (EVC) ie. All the taxpayersin such case shall not be required to send thesigned copy of ITR-V to CPC, Bengaluruexcept in case of persons whose accounts arerequired to be audited u/s 44AB; Politicalparties filing their return of income in ITR-7and in case of Companies.

The taxpayers can generate EVC by any ofthe four modes specified as under:-

a) Through Net Banking;

b) Through Aadhaar Number;

c) Through ATM;

d) Through E-filing website of Income TaxDept.

Note:- The EVC generated via Adhaar Cardwill be valid only for 10 minutes and in anyother case , it will be valid for 72 hours.

(For full text refer Notification No.2, dated13/07/2015)

2) Circular regarding clar ifications on TaxCompl iance for Undisclosed For eignIncome and Assets

With reference to the ‘The Black Money(Undisclosed Foreign Income and Assets) andImposition of Tax Act, 2015 (Hereinafterreferred to as ‘the Act’), the board has vide thiscircular issued clarification on scope andprocedure of the scheme in the form of questionand answers.

(For full text refer Circular No. 13, dated 06/07/2015)

3) Notification regarding Imposition of BlackMoney (Undisclosed Foreign Income andAssets) and Imposition of Tax Rules,2015The CBDT with the approval of CentralGovernment and vide this notification makesthe rules relating to Black Money .

(For full text refer Notification No. 58, dated02/07/2015)

4) Notification regarding different due datesunder the Black Money and Imposition ofTax Act, 2015In pursuance of section 59 of the said act ,thecentral government hereby appoints :-

i) the 30th day of September,2015 as the dateon or before which a person may make adeclaration in respect of an undisclosedasset located outside India;

ii) the 31st day of December,2015 as the dateon or before which a person shall pay thetax and penalty in respect of the undisclosedasset located outside India so declared(Notification No.57, dated 01/07/2015)

5) Notification regarding new ITR formsCBDT hereby notifies new ITR 1,2,2A and4S forms for AY 2015-16 and accordinglyamends rule 12. These forms will substitute thepreviously notified ITR 1, 2 and 4S forms.

(For full text refer Notification no.49 dated22nd June, 2015)

6) Inser tion of rule 51A in the Income TaxRules – Nature of business relationshipCBDT hereby amends the rules by insertingrule 51A after rule 51 , which reads as under:-

For the purposes of sub-clause (vi i i )of Explanation below sub-section (2) of section288, the term “business relationship” shall beconstrued as any transaction entered into for acommercial purpose, other than,—


(i) commercial transactions which are in thenature of professional services permittedto be rendered by an auditor or audit firmunder the Act and the CharteredAccountants Act, 1949 (38 of 1949) andthe rules or the regulations made underthose Acts;

(ii) commercial transactions which are in theordinary course of business of the companyat arm’s length price - like sale of productsor services to the auditor, as customer, inthe ordinary course of business, bycompanies engaged in the business oftelecommunications, airlines, hospitals,hotels and such other similar businesses.(Notification no. 50 dated 22nd June,2015)

Service Tax

1) Circular regarding detailed manual scrutinyof service tax returns

The Board vide this circular laid down theprocedure and the manner for carrying out thedetailed scrutiny of ST-3 returns w.e.f. 01/08/2015. The detailed manual scrutiny of returns

contd. from page 252 VAT - Updates and Tr ibunal Judgements

of interstate sale against Form C was notal lowed because of the defect in theregistration certificate of the purchaser whohas issued Form C. The appellant producedcopy of amended copy of registrationcertificate and assessment order of thepurchasing dealer in respect of which theclaim of interstate sale against Form C wasnot allowed. However, the appellant wasdismissed by the Appellate Authority andhence the appellant has fi led a secondappeal before the Hon’ble Tribunal. Theappellant contended that the assessmentorder passed is well beyond the time limitspecified in section 42 of the Act whichrequires to be set aside. The appellant alsosubmitted that the Form H and othersupporting documents l ike transportreceipts, quality check report, packing

is to ensure the correctness of the assessmentmade by the assessee including checking oftaxability of the service, the correctness of thevalue of taxable service in terms of section 67of the Finance Act, 1994 and the effective rateof tax after taking into account the admissibilityof an exemption notification, abatement, orexports, if any ensuring the correct availment/utilization of Cenvat Credit on inputs, capitalgoods, and input services in terms of the CenvatCredit Rules,2004 etc.

(For full text refer Circular No. 185, dated30/06/2015)

2) Noti ficat ion r egarding digi tal ly signedinvoices in Central Excise & Service TaxThe Central Board of Excise and Customs videthis notification specifies the conditions,safeguards and procedures for issue of invoices,preserving records in electronic form andauthentication of records and invoices by digitalsignatures.

(For full text refer Notification No. 18, dated06/07/2015)

❉ ❉ ❉

record, invoices etc. were submitted andthe appellant has also produced the copyof assessment order of the exporter inwhich the claim of export was accepted.The Hon’ble Tribunal considering the rivalsubmissions made by the parties has heldthat the claim of export against Form H isadmissible as per Rule 12(1) whichprovides for production Form H and othersupporting documents. It is not mentionedin the said rule that the bill of lading isrequi red to be produced. I f uponproduction of other supporting documentswhich proves that the export has takenplace, then the claim of export against FormH cannot be rejected merely in absence ofBill of Lading.

❉ ❉ ❉

From the Government


Association News

CA. Nirav R. ChoksiHon. Secretary

CA. Dilip U. JodhaniHon. Secretary

For thcoming Programmes

Date/Day Time Programmes Speaker Venue

13/07/2015 4.30 pm to Lecture Series (LS) on following CA C R Sharedalal CA Association Office7 pm topics Excelling in Profession &

CA Sunil H Talati

15/07/2015 4.30 pm to LS - Art of Business Development CA Saumya Sheth CA Association Office7 pm

20/07/2015 4.30 pm to LS - Income tax Assessments CA Shivang Chokshi CA Association Office7 pm

22/07/2015 4.30 pm to LS - Company Incorporation & CA Vikas Jain CA Association Office7 pm Annual Compliances

27/07/2015 4.30 pm to LS - Service tax aspects - CA Punit Prajapati CA Association Office7 pm Skill required and

opprtunities available

29/07/2015 4.30 pm to LS - Intricacies of CA Nesal Shah CA Association Office7 pm Detailed Project Report

30/07/2015 5 pm to The Black Money (Undisclosed CA Jayesh C Sharedalal ATMA Hall,7 pm Foreign Income And Assets) Ashram Road

and Imposition ofTax Act, 2015

Various Dates 4.30 pm to Lecture Series on various topics Various Speakers CA Association Officein August 7 pm such as Tax Audit Report,

TDS Returns, Business Valuation,Audit Documentation and

Advance Excel

01.08.2015 - 42nd Residential CA Sunil Talati, Devigarh, By Lebua,to Refresher Course CA Mukesh Khandwala, Udaipur04.08.2015 CA Rajni Shah,

CA Jignesh Shah andCA Vikas Jain

18.08.2015 8 pm Musical Programme - Tagore Hall, PaldiOnwards

❉ ❉ ❉

CA. Yamal Vyas, President of the Association has been nominated as a

Central Council Member at the Institute of Company Secretaries of India

and also as a Director on Board of Gujarat State Seeds Corporation Limited.

Congratulations


Across1. Service tax interest payment is ____________

in nature and it does not partake the characterof penalty.

2. W.e.f. 01-06-2014, Service Tax rate i s________ percent which is inclusive ofEducation cess and Secondary and HigherEducation Cess.

3. We do not get what we do not _______.

Down4. The expression _______ means something

which is due to a person, but which is paid tohim ahead of time when it is due to be paid.

5. ________ includes any trade, commerce ormanufacture or any adventure or concern in thenature of trade, commerce or manufacture.

6. Centre will compensate States for loss ofrevenue arising on account of implementationof the GST for a period up to ____ years.

ACAJ Crossword Contest # 15

Notes:

1. The Crossword puzzle is based on previousissue of ACA Journal.

2. Two lucky winners on the basis of a draw willbe awarded prizes.

3. The contest is open only for the members ofChartered Accountants Association and nomember is allowed to submit more than oneentry.

ACAJ Crossword Contest # 14 - SolutionAcross1. Transfer 2. Manufacture3. Unconstitutional

Down4. Escapement 5. Better6. Deductee

❉ ❉ ❉

Winners of ACAJ Crossword Contest # 14

1. CA. Arun Kothari

2. CA. Dharmendra Bharwad

4. Members may submit thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 05/08/2015.

5. The decision of Journal Committee shall be finaland binding.