volume : 40 | part 6 | september, 2016 · nalin thakkar ca. rajni shah ca. shailesh shah executive...

Volume : 40 | Part 6 | September, 2016

Swami Chinmayananda

Ahmedabad Chartered Accountants Journal September, 2016 365

Volume : 40 Part : 6 September, 2016

Ahmedabad Chartered Accountants JournalE-mail : [email protected] Website : www.caa-ahm.org

C O N T E N T S To Begin with

- Friendship for Principles...................................................CA. Arvind Gaudana..................367

Editorial - India First......................................................................... CA. Ashok Kataria .................... 368

From the President.............................................................................CA. Raju Shah..............................369

Articles

Changing Face of Insolvency Laws in India........................................Dr. (CA.) Rajkumar S. Adukia.......370

Service Tax Impact on Services provided by ...................................... CA. Karan ShahGovernment/Local Authority CA. Chintan Shah.........................374

Direct Taxes

Glimpses of Supreme Court Rulings....................................................Adv. Samir N. Divatia...................379

From the Courts.................................................................................. CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 380

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 383

Controversies.......................................................................................CA. Kaushik D. Shah....................389

Indirect Taxes

Service Tax

Recent Judgements..............................................................................CA. Ashwin H. Shah.....................392

Value Added Tax

From the Courts..................................................................................CA. Priyam R. Shah................... 394

Judgements and Updates ................................................................... CA. Bihari B. Shah.....................396

Corporate Law & Others

Mergers and Acquisition Corner..........................................................CA. Kush Desai.............................398

Corporate Law Update....................................................................... CA. Naveen Mandovara...............402

Allied Laws Corner..............................................................................Adv. Ankit Talsania.......................404

From Published Accounts .................................................................CA. Pamil H. Shah..................... 412

From the Government ......................................................................CA. Kunal A. Shah.......................414

Association News................................................................................CA. Dilip U. Jodhani &CA. Riken J Patel........................415

ACAJ Crossword Contest......................................................................................................................416

- caaahmedabad

Ahmedabad Chartered Accountants Journal September, 2016366

AttentionMembers / Subscribers / Authors / Contributors1. 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 will 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 it necessarily concur with the authors / contributors.

Published ByCA. Ashok Kataria,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,

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law and

the Publisher is not responsible for any error that may have arisen.

Auditing' and 'Allied Laws and Others' will be awarded the Trophies/ Certificates 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 PrinterM-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. Nalin Thakkar CA. Rajni Shah CA. Shailesh Shah

Executive CommitteeCA. Raju Shah CA. Dilip Jodhani

President Hon. SecretaryCA. Kunal A. Shah CA. Riken J. Patel

Vice - President Hon. SecretaryMembers

CA. Jayesh M.Shah CA. Jignesh J. Shah CA. Malav K. MehtaCA. Mihir H. Pujara CA. Nalin K. Thakkar CA. Naveen R. MandovaraCA. Pradeep G. Tulsian CA. Rakesh B. Lahoti CA. Umang B. Saraf

Imm. Past President - CA. Yamal A. Vyas


Friends,

I am thankful for being invited to contribute to‘Mananam’

As soon as I address you friends, I am remindedthe words of a great thinker, “kinds of friendshipare three, (1) Friendship for Profit (like businesstransactions where friendship is developed), (2)Friendship for Pleasure (different people enjoy fromvarious activities like music, dance, drama and sportetc. and in that journey friendship is developed) and(3) Friendship for Principles”. Some thoughts areshared with you on Friendship for Principles.

What is the meaning of Principle? Principle meansa "moral rule or standard of good Behavior". Inour day to day work, when we see any up-rightand a straightforward man, a clean and a lawabiding person, a blameless gentleman, a spotlesspersonality, a non-corrupt officer, thenimmediately we say wow; he is a man ofprinciple and integrity and rightly we longfriendship with him and that is the ‘Friendshipfor Principle’.

When we find that morals are compromised, thetroubles in life start. Being amidst Navratri andDushera, there cannot be a better example thanRavana. He was a mighty king but when he fellfrom the values of life, he and his entire kingdomwas destroyed by Rama. Similarly friends, whenthis ‘Friendship for Principle” is broken it bringsalong the downfall of a human being and destroysall relationships which then become irreparable.Being a civilized citizen of this great nation, weshould try and make sincere efforts where ourstandards and moral values are not compromised.

Let us take a simple example and classify people

Friendship for Principles

symbolically into following three categories.

CA. Arvind [email protected]

(1) Beggars around us who don’t get work anddon’t get their piece of chapatti.

(2) The second category of people who arefortunate to have the opportunity, capable ofworking somehow not working, but still needtheir piece of share in the chapatti.

(3) The third category of people are the oneswho have their chapatti in their plates but stillwant to snatch a laddu from someone else’splate.

The first category deserves sympathy and mercyand society should provide enough work to themso that they don’t have to beg for their share inchapattis. But the second and third categories ofpeople neither deserve any sympathy nor mercy.These people need to rise from their petty andselfish motives and get into this Friendship forPrinciples where life is lived with values and notjust giving importance to valuables.

In a life of Chartered accountants, as a professionthere are accounting standards, auditingstandards, ethics and code of conduct. Till thetime these codes and ethics are in the books andnot part of our life, it has no meaning. Thesevalues are to be lived rather than restricting it tojust a study. It is time to learn that once we deviatefrom these values, Dharma, life, though mayappear pleasurable, it indeed becomes verysorrowful. So friends, never compromise withprinciples. Whenever you see people of thesecond and third category around you, get unitedwith this Friendship for Principles so that WOWmoment remains as a part of our life and also theprofession.

Let us have a Friendship for Principle andcelebrate Diwali and new year with right spirit.


The political scenario and the publicsentiments in the country have completelychanged after the Uri attack where nineteensoldiers were killed in a militant attack lastmonth. The entire country has stood up andshown solidarity with the Indian ArmedForces who have been guarding us againstterrorism being exported by the neighbouringnation, Pakistan.

It has been the first time since last so manyyears that we have seen a political will tocounter terrorism. The aggression with whichPrime Minster spoke in Kerala after the Uriattack gave a clue of what would follow next.He slammed Pakistan saying that the countrywants Kashmir when they cannot handle PoK,Gilgit and Balochistan, which are alreadyunder its control. The important aspect ofmentioning this point in this piece of editorialis hardly we have had any leader who hasbeen so strong in criticizing Pakistan andmore so talking on the internal matters of thecountry that has caused great harm on theIndian soil.

Soon after these statements, we found thatIndia carried most comprehensive surgicalstrikes in Pakistan occupied Kashmir,crossing the Line of Control (LOC). It isbelieved that Indian army successfullyeliminated more than 50 to 60 militants acrossthe LOC who were waiting at their launch-padto infiltrate into India during this winterseason. These surgical strikes are reported tobe one of its kind, carried out precisely andwas great achievement of the armed forces.

Of-late, we find discussions and debates onvarious news channels as to whom the creditshould go for the success of these surgical

[email protected] First

strikes. Can there be two opinions? It is armedforces and the leadership of the country. Butmore amusement came when these mediahouses wanted Pakistani celebrities to have asay and take a call on the terror attacks andunfortunately nothing came from them, notjust against their nation but not even a wordagainst terrorism. It is regrettable that somepeople from the film fraternity support theseartists forgetting the idea of “India First” justbecause some of their economic ventures areat stake. More shameful is, we as a citizen arehappy to watch these movies without evensympathising with the armed forces and notrealising the fact why only they should be ina state of confrontation with the enemycountry and we continue enjoying with ourentertainment shows be it Aman ki Asha,movies and literary festivals.

We as an Indian citizen need to take a calland stand with the country and atleast boycottthese leisure events to give a message that wesupport Indian armed forces and they are notalone as they fight with the enemy nation. Asa chartered accountant, we in cross-bordereconomic transactions, be it with any country,should bring this idea of “India First” wherewe provide the consultation which is not justlegal (permissible within the four corners oflaw) but also moral and ethical where mycountry does not lose its share of revenue.

If you become aware of how many livingbeings are giving their lives to sustain yours,you will eat with enormous gratitude.Sadguru.

Jai Hind!

CA. Ashok Kataria


From the PresidentCA. Raju Shah

[email protected]

Respected seniors and dear professional colleagues,

“No worldly success can compensate for failure inthe home”- David O. McKay. Many of us wereworking at a frenzied pace last month in order tomeet the deadline of tax audits and filing returns.Though our heart longed to be with our dear onesat home our mind and attention was at work andoffice. Now with the due dates behind us we are allset to enjoy Diwali with both our hearts and mindsat home.

You would be receiving this Journal nearing ofDIWALI celebrations. On behalf of CharteredAccountants Association Ahmedabad, I take theopportunity to wish all of you and your family avery Happy Diwali and an exciting and challengingyear ahead.

“None of us can buy goodwill; we must earn it”-William Feather. It’s possible to earn goodwill withthe dedicated hard work. At the Association we havecontinued to organize quality programme for themembers. Brain Trust cum workshop meeting on“GST-New vistas for professionals….grab it” wasorganized which was led by CA Sandesh Mundra.

It’s really a matter of great pride that we couldarrange a second Residential Refresher Course(RRC) at Mumbai Jointly with BOMBAYCHARTERED ACCOUNTANTS SOCIETY,

st nd(BCAS) on 21 & 22 October, 2016 at KohinoorHotel. The members will have benefit of qualitylearning with experienced and expert faculties fromMumbai. Our special thanks to CA Uday Sathey,Mumbai and CA Chetan Shah-President BCAS forarranging everything including all the faculties.

Consider how hard it is to change yourself and youwill understand what little chance you have tochange others. As GST is now reality we areorganizing a class room study- 8 study lecture on

thGST starting from 15 November, 2016. We willsend the details very soon.

The team finalized the International Study tour fromth th5 January, 2017 to 13 January, 2017 at “Magical

Thailand-Krabi (2N), Phuket (3N) and Bangkok

(2N), total 7 nights for total cost of Rs.70,700/-.Detailed circular mailed.

Mutual Benefit Scheme (MBS) :

Main objective of MBS is to provide a lump sumex-gratia payment to the family of a member of ascheme, upon his death. It is observed that out of1450+ members of the association approximately700+ members are not the members of MBS. It ismy earnest request to members who are not themembers of Scheme to become the member andstrengthen the membership base which will helpus to increase the ex-gratia amount to the family ofthe deceased members.

At the last executive meeting we have reconsideredthe onetime adhoc contribution for new membersjoining as under :-

Age group Adhoc Contibution(Rs.)

Below 30 years 500/-

Between 30 and 50 years 1000/-

Above 50 years 1500/-

Further the committee has revised the contributionto be made by the Mutual benefit scheme membersas under:-

Age group Contibution(Rs.)

Below 30 years 250/

Between 30 and 50 years 500/-

Above 50 years 750/-

With increase in the contribution amount now it ispossible to give ex-gratia payment of approximatelyRs.5.00 lac to the family member of the deceased.This can be further increased with the increase inmutual benefit scheme members.

We are in the process of preparing the Post-BudgetMemorandum and expect our members to activelycontribute to it by sending their inputs.

Looking forward to your support and participationin future activities of the Association.

With best regards,

CA. Raju ShahPresident


Changing Face of InsolvencyLaws in India

Introduction

Much needed and welcomed refurbishing offramework for dealing with issues related toinsolvency and bankruptcy has been done byenactment of THE INSOLVENCY ANDBANKRUPTCY CODE, 2016. Prior to theenactment of the CODE, the legislative frameworkon the subject was scattered in multiple overlappinglaws like:

- Chapter XIX & Chapter XX of Companies Act,2013

- Recovery of Debts due to Banks and FinancialInstitutions Act (RDDBFI), 1993

- Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest(SARFAESI) Act, 2002

- Sick Industrial Companies (Special Provisions)Act (SICA), 1985

- The Presidency Towns Insolvency Act, 1909

- The Provincial Insolvency Act, 1920

- Chapter XIII of the LLP Act, 2008

Besides, the erstwhile legislature had multipleadjudicating forums and mechanisms essentiallycomprising aspects of recovery, revival,reconstruction and winding up. With no separateunified insolvency code covering all the aboveaspects in one place, the process was complicated,time consuming and ineffective.The Code enactedon May 28, 2016 will not only provide a uniform,comprehensive insolvency legislationencompassing all companies, partnerships andindividuals but will also shift focus tocreditordriven insolvency resolution.

Institutional Structure under New Code:

To facilitate a formal and time bound insolvencyresolution and liquidation process, it proposes to

create a revamped institutional structure,comprising of the following:

- Insolvency and Bankruptcy Board of India(IBB): It will be the chief regulator establishedunder section 188(1) of the Code as apex bodyfor promoting transparency & governance inthe administration of the Code will be involvedin setting up the infrastructure and accreditingInsolvency professional agencies &Information Utilities.

- Insolvency Professional Agencies (registeredwith the Board under section 201): It will enrollInsolvency Professionals and monitor theirfunctioning.

- Insolvency Professionals (person enrolledwith an insolvency professional agency andregistered with the Board under section 207):They will be enrolled with Insolvencyprofessional agencies and regulated by Board.They will be appointed by creditors and canoverride the powers of board of directors andwill take over the management of companyfrom the time they are appointed. They mayact as Liquidator/ bankruptcy trustee in casethe liquidation proceeding is initiated.

- Information Utilities (registered with theBoard under section 210): It will be centralizedrepository of financial and credit informationof borrowers. It will accept, store, authenticateand provide access to financial data providedby creditors.

- Adjudicating Authorit ies : NationalCorporate Law Tribunal (NCLT) and DebtRecovery Tribunal will act as adjudicatoryauthority for corporate insolvency and noncorporate insolvency respectively. They willentertain or dispose any insolvency application,approve or reject resolution plans, decide in

Dr. (CA.) Rajkumar S. [email protected]


respect of claims or matters of law orfacts.Appeals from NCLT orders lie to theNational Company Law Appellate Tribunal andthereafter to the Supreme Court of India whereas appeals from DRT orders lie to the DebtRecovery Appellate Tribunal and thereafter tothe Supreme Court.

A. Corporate Insolvency Resolution Process

The Code prescribes two independent stagesin the process Insolvency ResolutionProcess (IRP) and Liquidation. During IPR,financial creditors assess whether the debtor’sbusiness is viable to continue and the optionsfor its rescue and revival; and if theinsolvency resolution process fails orfinancial creditors decide to wind down anddistribute the assets of the debtor it moves tothe Liquidation stage.

Let’s see the important stages involvedbriefly:

a) Application for insolvency proceedings:

The Code categorizes creditors into thosefor financial debts and those for operationaldebts. Financial Debts are debts extendedagainst consideration for time value ofmoney like term loan, financial guaranteecontracts, etc whereas operational debtmeans debt incurred against the provisionof good, services, employment orgovernment dues. Any financial oroperational creditor can apply forinsolvency on default of debt or interestpayment exceeding INR 1,00,000. This isa significant departure from erstwhilepractice where net worth assessment wasthe basis for insolvency proceedings. Suchcash flow based assessment will lead toearly detection of impending financialcrises. The entity itself can also apply forinsolvency proceedings suo motto.

IRP may be triggered by a financialcreditor (s) by application to NCLT onoccurrence of default whereas operationalcreditors can initiate IRP only if it has notbeen replayed or existence of somedispute has been demonstrated by thedebtor within 10 days of receiving a noticeof default from the operational creditor.Once initiated the whole IPR process mustbe completed within 180 days which maybe extended to maximum 270 days by theNCLT on an application made by at least75% of creditors.

b) Moratorium

The NCLT orders a moratorium on thedebtor’s operations for the period of theIRP during which no action can be takenagainst the company or the assets of thecompany. This operates as a ‘calm period’during which no judicial proceedings forrecovery, enforcement of securityinterest, sale or transfer of assets, ortermination of essential contracts can takeplace against the debtor.

c) Appointment of Insolvency Professional(IP):

Next step is appointment of IP by theBoard and approved by the creditorcommittee. IP will take over the day to daymanagement of the Company. From dateof appointment of IP, power of Board ofdirectors will be suspended and vested inthe IP. IP will have immunity from criminalprosecution and any other liability foranything done in good faith.

d) Constitution of Creditors Committeeand Revival Plan

The IP will then identify the financialcreditors and constitute a creditorscommittee. Related party should beexcluded from committee. Operationalcreditors above a certain threshold wouldbe allowed to attend meetings of thecommittee but will not have voting

Changing Face of Insolvency Laws in India


power. Each decision of the creditorscommittee will require a 75% majorityvote and will be binding on the corporatedebtor and all its creditors.

The creditors committee will considerproposals for the revival of the debtor andmust decide whether to proceed with arevival plan or liquidation within aperiod of 180 days (subject to a one-timeextension by 90 days). Anyone cansubmit a revival proposal, but it mustnecessarily provide for payment ofoperational debts to the extent of theliquidation waterfall. If the plan forrevival is approved by minimum 75% ofcreditors, it would be implementedotherwise liquidation proceedings wouldbe initiated.

e) Liquidation:

Liquidation process can be initiated onoccurrence of following:

- The creditor’s committee resolveswith 75% majority voting to liquidatethe corporate debtor at any timeduring the IRP;

- The creditor’s committee does notapprove a resolution plan within 180days or such extended period asapproved by the NCLT;

- The NCLT rejects the resolution plansubmitted to it by the creditor’scommittee on technical grounds; or

- The debtor contravenes the agreedresolution plan and an affectedperson makes an application to theNCLT to liquidate the corporatedebtor.

- Debtor can also opt for voluntaryliquidation by a special resolution in aGeneral Meeting.

When NCLT passes an order of liquidation,IP may act as the liquidator. A moratorium isimposed on the pending legal proceedingsagainst the entity. The liquidator shall form an

estate of the assets and consolidate, verify, admitand determine value of creditors’ claims.andall the entities assets including the proceedsof liquidation will then vest in the liquidationestate.

Order of priority for distribution of assets

The Code has made a clearly defined order ofpriority of claims on assets under liquidation(also known as waterfall mechanism). A majorchange in this respect is in case of dues to thegovernment which now will come below mostother debts including outstanding dues tounsecured creditors. The order is as follows:

• Insolvency related costs

• Secured creditors and workmen dues upto24 months

• Other employee’s salaries/dues up to 12months

• Financial debts (unsecured creditors)

• Government dues (up to 2 years)

• Any remaining debts and dues

• Equity

Rights of Secured Creditor duringLiquidation Process

It should be noted that upon liquidation, asecured creditor may choose to realise hissecurity and receive proceeds from the saleof the secured assets in first priority. If thesecured creditor enforces his claims outsidethe liquidation, he must contribute any excessproceeds to the liquidation trust and in caseof any shortfall, the secured creditors will bebelow unsecured creditors to the extent ofthe shortfall.

Avoidance Transaction

Liquidator has right to cancel or modify termsof certain transactions entered into bydefaulting entity within one year of theinitiation of IRP with third parties or withintwo years of initiation with related parties,which in his opinion are of preferential natureprimarily entered into to benefit a particularclass of people.



Fast Track Corporate Insolvency

The Insolvency Code further prescribes a fasttrack corporate insolvency process for theentities with less complex structuring orbusinesses where the whole insolvency processwill be required to be completed within a periodof 90 days or an extended period of further 90days at most. The Central Government willprescribe the classes of entities based on theassets and liabilities, amount of debt and othercriteria, which will be subject to the fast trackprocess.

B. Insolvency Resolution Process for Non-Corporate

Part III of the Code deals with the provisionsrelating to insolvency resolution andbankruptcy for individuals and partnershipfirms. Before heading to a bankruptcy process,the Insolvency Code prescribes two distinctprocesses which are the Fresh Start andInsolvency Resolution.

Fresh Start

This option is for defaults where amountinvolved are petty. This process can be initiatedby the individuals with income and assets lesserthan ‘specified thresholds’ which are an annualgross income not exceeding Rs. 60,000 andaggregate value of assets not exceeding Rs.20,000. Such individuals can apply to DRT fora discharge from their ‘qualifying debts’ of upto Rs. 35,000 and make fresh start. Theresolution (insolvency) professional willinvestigate and prepare a final list of allqualifying debts within 180 days from the dateof application. On the expiry of this period, theDRT may pass an order discharging debtorfrom the qualifying debts and accord anopportunity to the debtor to start afresh,financially.

Insolvency Resolution Process

In case of individuals and partnership firms aninsolvency resolution process may be initiatedby the creditor or the debtor personally orthrough a resolution professional. However in

case of partnership firms, the application canbe made by all or majority of the partners.Further in case of application by creditors ofpartnership firm application can be made forinsolvency proceedings against a single partneror the firm. An interim moratorium commenceson the date of application till the date ofadmission of application during which no legalaction can proceed or initiated in respect to anydebts. Within seven days of receipt ofapplication, DRT will either nominate aresolution professional or in case application isfilled through a resolution professional, confirmthat there are no disciplinary proceedingspending against such resolution professional tothe Board. Board will in next seven days eitherconfirm or reject the appointment. Theresolution professional so appointed willexamine and submit a report to the AdjudicatingAuthority recommending for approval orrejection of the application within 10 days ofappointment. The Adjudicating Authority willthen within fourteen days from the date ofsubmission of the report, either admit or rejectthe application.

If the application is accepted, a moratorium of180 days will begin where no legal action ondebts and assets would be permissible. In theInsolvency Resolution Process, the creditorsand the debtor will engage in negotiations toarrive at an agreeable repayment plan forcomposition of the debts and affairs of thedebtor, supervised by a resolution professional.The repayment plan will require approval of athree-fourth majority of creditors in value.

The repayment plan may authorize or requirethe resolution professional to:(a) carry on the debtor’s business or trade on

his behalf or in his name; or(b) realize the assets of the debtor; or(c) administer or dispose of any funds of the

debtor.

The repayment plan will be implemented insupervision of the insolvency professional.

contd. to page 379



Service Tax Impact onServices provided byGovernment / LocalAuthority

Generally, any person / assessee makes thefollowing type of payments to government / localauthority for various services.

- Taxes like Excise, Custom, Service Tax, ValueAdded Tax / Central State Tax, Income Tax,Works Contract Tax, Stamp Duty, Luxury Tax,Appeal filling fees.

- Late filing fees, fines, penalties

- Additional fees paid to ROC

- Fees for Driving license, passport, visa, birth /death certificate, overtime charges

- Damages or fine paid

- N.A. Charges

- Shop Act and other legal regulatory

In this article, we will discuss various amendmentmade in relation to service by Government / Localauthority through Finance Act, 2016. The same hasbeen explained as under with the help of questionand answer format.

1. Whether service provided by local authority/ government is taxable under service taxregime?

Reply: Generally, services provided byGovernment / Local Authority are coveredunder Negative list (i.e. 66D of Finance Act),1994. Please note that, only following servicesprovided by local authority / government weretaxable under service tax regime till March2016.

a) Service by the department of post by wayof speed post, express parcel post, and lifeinsurance and agency services provided toother than government.

CA. Chintan [email protected]

b) Services in relation to an aircraft or vessel,

inside or outside the precincts of a part oran airport

c) Transport of goods or passengers

d) Support services other than servicecovered under clause (i) to (iii) aboveprovided to business entities.

Firstly, we will discuss meaning of some of thephrases / words.

(i) Support services means infrastructural,operational, administrative, logistic,marketing or any other support of any kindcomprising functions that entities carry outin ordinary course of operationsthemselves but may obtain as services byoutsourcing from others for any reasonwhatsoever and shall include advertisementand promotion, construction or workscontract, renting of immovable property,security, testing and analysis.

However, through Finance Act 2016,Finance minister has replaced the word“support services” by “any services”. Hence,after 1st April 2016, any service providedby government / local authorities to businessentities will fall under ambit of service taxregime.

2. Who will be liable for the payment of servicetax in case of service provided bygovernment / local authorities?

Reply:

As per Rule 2(1)(d) of service tax rules, 1994,service provided by government / localauthority except

(i) Renting of immovable property

(ii) Services specified in sub clause (i), (ii), (iii)

CA. Karan [email protected]

of the section 66D of finance act, 1994


Service Tax Impact on Services provided by Government / Local Authority

To Any Business Entity located in taxableterritory then person liable to pay will beRecipient of Services.

In nutshell and with effect from 1st April 2016“Any service provided by government / localauthority other than specified above servicesto the Business Entity will be covered underambit of full Reverse Charge Mechanism(RCM).

Here, Business Entity means any personordinarily carrying out any activity relating toindustry, commerce or any other business orprofession. Hence, any person whetherindividual or company or trust / AOP / BOI orany other person engaging in activity relatingto commerce or business or profession, industrywill be covered under definition of BusinessEntity.

Here Government means

- Departments of the Central Government,

- A State Government and its Departmentsand

- A Union territory and its Departments,

- But shall not include any entity, whethercreated by a statute or otherwise, theaccounts of which are not required to bekept in accordance with article 150 of the

Constitution or the rules made thereunder.

Here local authority means

a. Panchayatas referred to in clause (d) ofarticle 243 of the Constitution

b. Municipality as referred to in clause (e) ofarticle 243P of the Constitution ;

c. Municipal Committee and a District Board,legally entitled to, or entrusted by theGovernment with, the control ormanagement of a municipal or local fund

d. A Cantonment Boards defined in section3 of the Cantonments Act, 2006 (41 of2006);

e. A regional council or a district councilconstituted under the Sixth Schedule to theConstitution ;

f. A development board constituted underarticle 371 of the Constitution; or

g. A regional council constituted under article371A of the Constitution

3. Whether any Exemption has been granted/ given to service provided by local authority/ government?

Reply: CBEC vide various notifications hasprovided exemption to services provided bylocal authority / government.

Sr. Service provided by Government Applicability of Service TaxNo. or local Authority by way of -

1 Activity in relation to any function No Service tax is payable as same has beenentrusted to a municipality under article exempted vide Notification No.243 W of the Constitution 25/2012 – ST dated 20.6.2012 as amended by

Notification No. 22/2016 – ST dated 13.4.2016(Serial no. 39 of Notification).

2 Services provided by Government or a Such services have been exempted vide Notificationlocal authority to another Government or No. 25/2012 – ST dated 20.6.2012 as amended bylocal authority Notification No. 22/2016 – ST dated 13.4.2016

[Entry 54 Refers]. However, the said exemptiondoes not cover services specified in subclauses (i),(ii) and (iii) of clause (a) of section 66D of theFinance Act, 1994.


3 by way of issuance of passport, visa, No Service tax is payable as same has beendriving license, birth certificate or death exempted vide in Notification No. 25/2012 – STcertificate dated 20.6.2012 as amended by Notification No.

22/2016 – ST dated 13.4.2016 (Serial no. 55 ofNotification). However this exemption isrestricted to only for Passport, Visa, Drivinglicense, Birth / death Certificate and not anyother charges.

4 Where the gross amount charged for such No Service tax is payable as same has beenservices does not exceed Rs. 5000/- per exempted vide in Notification No. 25/2012 – STfinancial year to the individual who may dated 20.6.2012 as amended by Notification No.be carrying out a profession or business. 22/2016 – ST dated 13.4.2016 (Serial no. 56 of

Notification).

5 by way of tolerating non-performance of a No Service tax is payable as same has beencontract for which consideration in the exempted vide in Notification No. 25/2012 – STform of fines or liquidated damages is dated 20.6.2012 as amended by Notification No.payable to the Government or the local 22/2016 – ST dated 13.4.2016 (Serial no. 57 ofauthority under such contract Notification).

6 by way of-(a) registration required under any law No Service tax is payable as same has been for the time being in force; exempted vide in Notification No. 25/2012 – ST(b) testing, calibration, safety check or dated 20.6.2012 as amended by Notification No.

certification relating to protection or 22/2016 –ST dated 13.4.2016 (Serial no. 58 of safety of workers, consumers or Notification). public at large, required under any law for the time being in force;

7 assignment of right to use natural No Service tax is payable as same has beenresources to an individual farmer for the exempted vide in Notification No. 25/2012 – STpurposes of agriculture dated 20.6.2012 as amended by Notification No.

22/2016 – ST dated 13.4.2016 (Serial no. 59 ofNotification).

8 by way of any activity in relation to any No Service tax is payable as same has beenfunction entrusted to a Panchayat under exempted vide in Notification No. 25/2012 – STarticle 243G of the Constitution dated 20.6.2012 as amended by Notification No.

22/2016 – ST dated 13.4.2016 (Serial no. 60 ofNotification).

9 by way of deputing officers after office No Service tax is payable as same has beenhours or on holidays for inspection or exempted vide in Notification No. 25/2012 – STcontainer stuffing or such other duties in dated 20.6.2012 as amended by Notification No.relation to import export cargo on payment 22/2016 – ST dated 13.4.2016 (Serial no. 63 ofof Merchant Overtime charges(MOT).”. Notification).

10 Service Tax on taxes, cesses or duties. Taxes, cesses or duties levied are not considerationfor any particular service as such and hence not



leviable to Service Tax. These taxes, cesses or dutiesinclude excise duty, customs duty, Service Tax, StateVAT, CST, income tax, wealth tax, stamp duty, taxeson professions, trades, callings or employment,octroi, entertainment tax, luxury tax and propertytax.

11 Service Tax on fines and penalties It is clarified that fines and penalty chargeable byGovernment or a local authority imposed forviolation of a statute, bye-laws, rules or regulationsare not leviable to Service Tax.

12 Services in the nature of change of land Regulation of land-use, construction of buildings anduse, commercial building approval, utility other services listed in the Twelfth Schedule to theservices provided by Government or a Constitution which have been entrusted tolocal authority. Municipalities under Article 243W of the

Constitution, when provided by governmentalauthority are already exempt under Notification No.25/2012 – ST dated 20.6.2012. The said serviceswhen provided by Government or a local authorityhave also been exempted from Service Tax videNotification No. 25/2012 – ST dated 20.6.2012 asamended by Notification No. 22/2016 – ST dated13.4.2016 [Entry 39 refers].

13 Whether Service Tax is payable on yearly No Service tax is payable as same has beeninstallments due after 1.4.2016 in respect exempted vide in Notification No. 25/2012 – STof spectrum assigned before 1.4.2016. dated 20.6.2012 as amended by Notification No.

22/2016 – ST dated 13.4.2016 (Serial no. 61 ofNotification). However this exemption is only forthe rights issued before 1st April 2016 irrespectiveof mode of payment.

4. After the analysis of various exemptionprovided to government, another questionwill be raised that what would be value ofservice tax provided by government?

Reply:

As per section 67 of Finance act, 1994 readwith service tax (Determination of value) Rules,2006, Value of Services means “Amounts paidor payable for services provided or to beprovided”. Hence whatever amount paid togovernment will be considered as Value ofServices.

Further if any amount is paid in installmentsalong with interest to government / local

authority against any services provided / to beprovided then whether interest portion will alsoinclude in value of services or not?

In this respect, as per the Rule 6(2)(iv) of theService Tax (Determination of Value) Rules,“The value of any taxable service shall NOTinclude Interest on delayed payment of anyconsideration for the provision of services orsale of property, whether movable orimmovable”.

However, above clause will not be applicablein case of service provided by government.

CBEC vide Notification no. 23/2016 dated13th April 2016, inserted following proviso.



“Provided that this clause shall not apply toany service provided by Government or a localauthority to a business entity where paymentfor such service is allowed to be deferred onpayment of interest or any otherconsideration.”

Hence form the above it is clear that, value ofservice in case of service provided bygovernment / local authority would be asfollow.

5. What will be the Point of Taxation Rules,2011?

Reply: As the service tax liability is on servicereceiver, hence Rule 7 of Point of TaxationRules is applicable in the case of serviceprovided by government / local authorities.Further CBEC vide notification no. 24/2016 –ST dated 13-04-2016, has amend Rule 7 ofPOTR, 2011 in relation to service provided bygovernment / local authority.

Point of Taxation will (POTR) will beEARLIER of the following.

- Any payment whether part or full becomesdue as specified in the invoice, bill, andchallan or as case may be (i.e. Date ofdemand order / demand notice forpayment). OR

- Date of payment.

6. When and how will the allotee of the rightto use natural resource be entitled to takeCENVAT Credit of Service Tax paid forsuch assignment of right?

Reply: As per rule 4(7) of Cenvat credit rules,2004, Cenvat Credit of service tax paid on

One time charges (whether paid upfront orinstallments) for the service of assignmentof the right to use any natural resources bythe government, local authority or any otherperson shall be allowed evenly over periodof 3 years.

However, the Service Tax paid on spectrumuser charges, license fee, transfer fee chargedby the Government on trading of spectrumwould be available in the year Page 8 of 13 inwhich the same is paid. Likewise, Service Taxpaid on royalty in respect of natural resourcesand any periodic payments shall be availableas credit in the year in which the same is paid.

Further, when the right assigned to person bygovernment or any other person in any financialyear is assigned to another person againstconsideration balance amount of cenvat creditavailable in respect of such assignment shallbe allowed in the year in which such right istransferred.

7. On the basis of which documents canCENVAT Credit be availed in respect ofservices provided by Government or a localauthority?

Reply: CENVAT Credit may be availed on thebasis of challan evidencing payment of ServiceTax by the Service recipient. (As per clause (e)of sub-rule (1) of Rule 9 of CCR, 2004).

8. Whether limitation period of One year isapplicable in this case?

Reply: Limitation period of one year is notapplicable in this case.

We hope that above will be helpful to all.

❉ ❉ ❉

GrossAmountpaid to

government /Local

+Authorities

=

Amountpaid asInterestor other

considerationon Deferred

paymentSystem

Value OfServices



Capital Gain – Depreciable Asset :

The assessee had sold its loading platform on whichit had claimed depreciation. The asset was almost17 years old. The assessee had also claimed that itwas entitled for exemption under section 54 E of theIncome Tax Act. The assessing officer rejected theclaim for exemption under section 54 E of the Acton the ground that the assessee had claimeddepreciation on this asset and, therefore, theprovisions of section 50 were applicable. Section 50of the Act which is the special provision forcomputing the capital gains in the case of depreciableassets is not only restricted for the purpose of section48 or section 49 of the Act as specifically statedtherein and the said fiction created in sub-section (1)& (2) of section 50 has limited application only inthe context of mode of computation of capital gainscontained in section 48 and 49 and would havenothing to do with the exemption that is provided ina totally different provision i.e. Section 54E of theAct. The High Court of Gujarat has also approvedthis ratio in case of CIT vs. Polestar Industries [(2013)(SCC Online Gu 5517)].

[CIT vs. V. S. Dempo Company Ltd. (CivilAppeal No.(S). 4797/2008) (dtd.05.09.2016)]

Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

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13

Section 153A - Seized material :

SLP granted against High Court’s ruling that whereseized material was destroyed in fire that took placeat revenue’s office and was not available withAssessing Officer while framing assessment undersection 153A, assessment so framed on basis of saidinformation which was not unearthed duringsearch, was to be set aside

[CIT vs. MGF Automobiles Ltd. ( 241 taxman440)(2016) ]

Permanent Establishment :

SLP dismissed against High Court’s ruling thatunless rig owned by assessee was actually used fora period of 120 days in India, same could not beconsidered as PE under article 5(2)(j) of India –USA DTAA

[DIT (International Taxation-II) Vs. R & BFalcon Offshore Co. (241 Taxman 358 (2016)]

❉ ❉ ❉

12

Bankruptcy Process

The bankruptcy of an individual can be initiatedonly after the failure of the resolution process ornon-implementation of repayment plan. Thebankruptcy trustee is responsible for administrationof the estate of the bankrupt and for distribution ofthe proceeds on the basis of the priority.

Conclusion

The Code if implemented as desired would bringa positive effect on corporate environment. It willimprove India’s ranking in ease of doing

business. It will bring down the average time toresolve insolvency in India from 4.5 years tomaximum 1 year. But without the infrastructuremachinery required for implementation of theCode, it is like a bare plan waiting to be executed.One of the main bottlenecks in this respect wouldbe the lack of information utilities and insolvencyprofessional which might take some time toresolve. Hopefully the Code will becomeoperational by financial year 2017-18.

❉ ❉ ❉

contd. from page 373 Article : Changing Face of Involvency Laws in India


Penalty u/s 271(1)(c) and Expln. B toSec. 271(1)(c) : CIT v/s. Pilani Investmentand Industries Corp. Ltd. (2016) 284CTR 272 (Cal), 383 ITR 0635 (Cal)

Issue :

What is the effect of Expln. B to Sec. 271(1)(c) inpenalty proceedings?

Held :

In order to bring the case within Expln. (B) to s.271(1)(c) following conditions have to be fulfilled: (a) the assessee offers an explanation which he isnot able to substantiate, (b) the assessee fails to provethat such explanation is bone fide, and (c) theassessee fails to prove that all the facts relating toand material to the computation of his total incomehave been disclosed by him. It may be true that theAO did not accept the explanation offered by theassessee and made additions which the later didnot challenge in appeal but it is also true that theTribunal opined that “since the matter is sub judiceit is not a realized or realizable income in the handsof the assessee”. In that view of the matter even thefirst condition was not satisfied. As regards thesecond condition there is concurrent finding of theCIT(A) and the Tribunal that the explanation wasbonafide. This finding is not under challenge. It isnot even alleged that the assessee failed to provethat all the facts relating to and material to thecomputation of his total income were not disclosedby him. Thus, the requirements appearing from theExplanation remain unfulfilled. As a result S.271(1)(c) cannot operate against the assessee. Theassessee cannot be held to have furnished inaccurateparticulars or concealed particulars of his income.Hence, the imposition of penalty under s. 271(1)(c)was rightly set aside both by CIT(A) and the

CA. C. R. [email protected]

Tribunal.

Deduction u/s 54F : Co-ownership insecond SO property is not relevant toclaim relief by purchase of new SOproperty. CIT v/s. Kapil Nagpal (2015)235 Taxman 539 (Delhi), 385 ITR 0381(Del)

Issue :

Is relief u/s 54 F available when assessee is alreadyowner of one residential house and also a co-ownerof second residential house ?

Held :

Assessee filed his return claiming deduction undersection 54F. AO denied exemption on ground thatassessee already owned two residential properties.It was found that at time of sale of asset, assesseewas only a co-owner holding 15 per cent share inone residential property apart from owning anotherresidential house. Further, said house was in factpurchased within time allowed under section 54 Fwhich was supported by documents placed onrecord by assessee. On facts assesee duly satisfiedconditions prescribed under section 54F and, thus,his claim for deduction was to be allowed.

RTI Act : Information in I.T. Return ispersonal

Vinubhai Haribhai Patel v/s. ACIT(2015) 235 Taxman 467 (Guj)

Issue :

Whether information in personal Income TaxReturn is liable to be disclosed under RTI Act?

Held :

Petitioner filed an application under RTI Act beforePublic Information Officer of office ofCommissioner of Income tax seeking certaininformation which included copies of Income Tax

From the Courts

CA. Jayesh C. [email protected]

returns of five private parties. He demanded

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44


information on plea that above parties had acquiredstatus of agriculturists for themselves on basis of aWill of one ‘L’ which was not genuine anddisclosure of information demanded would help toascertain whether those parties had shown anyagriculture income in their Income tax returns andthereby avoided paying income tax. InformationAuthorities denied information. Informationdemanded by petitioner was personal informationand was clearly exempted information undersection 8(1)(j). In disclosing said information, therewas no element of public interest to be sub-served.

Sec. 14-A Exemption v/s. Deduction :CIT v/s. Banaskantha District Co.Op.Milk Producers’ Union Ltd. (2015) 280CTR 609 (Guj)

Issue :

What is the difference between exempted incomeand deductions for the purpose of sec. 14A?

Held :

(1) Provision of s. 14A when examined, it operatesin respect of the income not forming part of thetotal income. It could be noted that provisionsof Chapter VI-A (ss. 80A to 80U) refer todeductions to be made in computing the totalincome. Such deductions, in no manner, canbe compared with the exempted income, whichdoes not form part of the total income asprovided in ss. 10 to 13A under Chapter III.There is a clear absence of any reference ofdeduction to be made in computing the totalincome as per provision of Chapter IV-A in s.14A. Undoubtedly, as provided under ChapterVI-A while computing the total income of theassessee from his gross total income inaccordance with and subject to the provisionof this chapter, the deductions specified arepermissible. As a resultant effect, the taxableincome of the assessee would surely getreduced and yet there is marked differencebetween the exempted income and thededuction provided under Chapter VI-A. Theinvestment in shares made by the assesseewhich earned him dividend was from his own

From the Courts

income. Moreover, from the very provision ofs. 14A, the same would have no application inrespect of the income not being taxable onaccount of deduction under s. 80P(2)(d). Boththe authorities have rightly held that there isno application of s. 14A as far as the deductionsunder s. 80A to 80U under Chapter VI-A areconcerned.

(2) Deductions under Chapter VI-A in no manner,can be compared with the exempted incomewhich does not form part of the total income asprovided in ss. 10 to 13A under Chapter-IIIand therefore, s. 14A has no application as faras deduction under ss. 80A to 80U falling underChapter VI-A are concerned.

Retrospective effect of CBDT circular inrespect of low tax effect and appeals :CIT v/s. Sunny Sounds Pvt. Ltd. (2016)381 ITR 443 (Bom)

Issue :

Whether CBDT circular in respect of non filing ofappeals is applicable to pending appeals(references) also ?

Held :

The Circular would apply to pending referencesunder section 256 of the Income Tax Act, 1961because the entire objective of the circular havingbeen made retrospective was that the court shouldconcern itself with grievances of the Departmenthaving substantial financial stake in terms of thetax involved and the decision of the Tribunal up tothe value of Rs. 20 lakhs even if it was adverse tothe Department should be accepted. A pendingappeal under section 260A of the Act was notdifferent from a pending reference, since in the caseof a reference, the Tribunal was of the view that asubstantial question of law arose either on its ownor as directed by court which required the opinionof the court, while in a pending appeal under section260A of the Act, the court was of the view that asubstantial question of law arose which requireddue consideration by the court. Therefore, thecircular dated December 10, 2015 was applicableeven to pending references in the same manner they

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46


apply to pending appeals. Since the tax effect ofthe reference was less than Rs. 20 laks, it was to bereturned unanswered.

Note : Also see :

CIT v/s. Computer Point (I) Ltd. (2016) 381 ITR441 (Bom)

Reopening : Failure of Assessee :Importance of Reasons Recorded :Nirmal Bang Securities (P) Ltd. v/s. Asst.CIT (2016) 284 CTR 244 (Bom)

Issue :

Whether assessment can be reopened when thereis no failure on the part of the assessee to discloserequired facts AND what is the importance ofrecording of reasons?

Held :

A bare reading of the reasons would ex facie showthat there was not even an allegation in the saidreasons that there was any failure on the part of theassessee to disclose any material fact, let alone thedetails thereof, which led to any income escapingassessment. Moreover, even on a holistic readingof the reasons it cannot be said that it suggests anyfailure on the part of the assessee to disclose trulyand fully all material facts necessary for assessment.It is now well-settled that the reasons which arerecorded by the AO for reopening an assessmentare the only reasons which could be considered.No substitution or deletion is permissible. Noaddition can be made to those reasons and noinference can be allowed to be drawn based onreasons not recorded. The reasons which arerecorded by the A.O. for reopening the assessmentare the only reasons which could be consideredwhen the formation of the belief is impugned. Therequirement of recording reasons is a check againstarbitrary exercise of power, for it is on the basis ofthe reasons recorded and those reasons alone thatthe validity of the notice for reopening an assessmentcan be sustained. The reasons cannot be allowedto grow with age and ingenuity by devising and/orsupplementing additional reasons in replies andaffidavits not envisaged in the reasons recorded forreopening the assessment. To put it simply, the

validity of a notice under s. 148 has to be tested onthe basis of the reasons recorded for initiating thereassessment proceedings. The reasons recordedcannot be supplemented by affidavits and othermaterial.

(1) Belated Return and UnabsorbedDepreciation (2) Department’s duty toguide Assessee for their relief.Rajeshwari Cotton Gng. and PressIndustries Ltd. v/s. Asstt. CIT (2016) 284CTR 300 (Kar), 382 ITR 0093 (Bom)

Issue :

Whether assessee is entitled to claim unabsorbeddepreciation of a belated return and what is the dutyof the Department to guide the assessee for hisrelief?

Held :

It is an undisputed fact that the return of incomefor the asst. yr. 1986-87 was filed by the assesseebelatedly. However, filing of belated returns itselfwould not restrain the assessee from claiming setoff of unabsorbed depreciation, investmentallowance and Sec. 80J exemption. Unabsorbeddepreciation and investment allowance standdifferently than that of the business loss. Belatedfiling of the return of income would not curtail theright of the assessee to claim unabsorbeddepreciation, investment allowance and s. 80Jexemption. Tribunal has proceeded hyper-technically in rejecting the claim of the assessee onthe ground that rectification application was filedby the assessee before the AO after giving effect tothe order of the CIT(A). It is significant to note thatin the circular issued by the CBDT No. 14(XL-35)

thof 1955, dt. 11 April, 1955, it has dealt with“Administrative instructions” in regard to theattitude of the Department in matters affecting theassessee’s interest. It has categorically held that theofficers of the Department must not take advantageof the ignorance of an assessee as to his rights. It isone of their duties to assist a taxpayer (assessee) inevery reasonable way, particularly in the matter ofclaiming and securing reliefs and in this regard the

From the Courts

47 48

contd. to page 388


ITO Vs. Excel Chemicals India Ltd. 72taxmann.com 284 (Ahmedabad)Assessment Year: 2012-13 Order Dated:29 July 2016

Basic Facts

The assessee is a resident company engaged in thebusiness of trading in chemicals. The assessee hasclaimed deduction in respect of the commissionpaid, to non-resident entities. The assessee had notwithheld any tax on this payment. The assesseecontended that the said payment must not bedisallowed u/s 40(a)(i) as the sale commission waspaid in respect of services rendered abroad, and, assuch, no tax was deductible at source. The AOhowever, disallowed the said payments as accordingto him under section 5(2)(b) of the Act, a non-resident assessee is taxable in India in respect of allhis incomes accruing or arising in India or deemedto accrue or arise in India. Further by the virtue ofdeeming fiction under section 9(1)(i), this incomeis accruing or arising in India, directly or indirectlythrough any business connection in India or throughany source of income in India. Aggrieved, theassessee preferred an appeal with the CIT(A) whodeleted the disallowance.

Issue

Whether non-resident commission agents werenot taxable in India in respect of theircommission earnings from orders procuredabroad?

Whether for application of section 195, it is sinequa non that payment to non-resident must havean element of income liable to be taxed underIndian Income-tax Act?

Held

The AO, in the present case, did not take intoaccount the scope of Explanation 1 to Section

9(1)(i) which states that in the case of a business ofwhich all the operations are not carried out in India,the income of the business deemed under this clauseto accrue or arise in India shall be only such part ofthe income as is reasonably attributable to theoperations carried out in India. In the given factsthat no part of operations of the non-residentcommission agent were carried out in India.Therefore, the conclusion drawn by the AO isfallacious. It is also now well settled in law thatwhen the payment made to a non-resident does nothave an element of income, withholdingrequirements under section 195(2) do not come intoplay at all. Therefore, as per the facts in the presentcase, the assessee was not under any obligation todeduct any tax at source from the commissionpayments to the non-residents. Since there was noobligation to deduct tax at source, the veryfoundation of impugned disallowance under section40(a)(i) ceases to hold good in law.

Sparkle Diam Pvt. Ltd. Vs. Dept. ofIncome TaxITA No. 3971/Ahd/2008(Ahmedabad)Assessment Year: 2004-05 OrderDated: 26July 2016

Basic Facts

The Assessee company is engaged in the businessof manufacturing and export of Diamond studdedjewellery. During year, assessee has entered intotwo international transactions with its associatedenterprises. To compute the Arm’s Length Price forboth the transactions the assessee used TransactionNet Margin Method (TNMM). The TPO made anupward adjustment to the total income of theassessee. This was because he used the Cost PlusMethod (CPM) instead of agreeing with TNMMused by the assessee. He reasoned that the assesseehad incurred loss due to non-recovery of fixed

Tribunal News

CA. Yogesh G. Shah CA. Aparna [email protected] [email protected]

assets and therefore, it would be appropriate to take

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31


gross profit for benchmarking. Aggrieved, theassessee preferred an appeal with the CIT(A). TheCIT(A) allowed the appeal of the assessee.

Issue

Whether AO/TPO can decide the method ofcomputing the Arm’s Length Price withoutfollowing the procedure laid down in Section92C r.w.r. 10B and 10C?

Whether TPO was justified in computing Arm’sLength Price as per CPM merely on the groundthat the assessee has suffered a loss in the year?

Held

The Tribunal held that the only reason given foradopting CPM and for rejecting TNMM of assesseewas that assessee has incurred loss during the year.The TPO stated that assessee has incurred loss dueto non-recovery of fixed assets and therefore, itwould be appropriate to take gross profit as benchmarking. The TPO has not discussed in his orderas to how he has arrived at CPM as the mostappropriate method and TNMM is not the mostappropriate method. As per the provisions ofSection 92C, AO has to follow certain steps, asprescribed in the section, before making adjustmentsto the income shown by assessee in respect oftransfer pricing. Further, Rule 10B prescribesvarious methods and gives various conditionswhereby the TPO/A.O. is required to adhere to fordetermining the most appropriate method. This rulegives various conditions as per which either CPMor RPM or TNMM would be the most appropriatemethod. Rule 10C laid down various factors whichthe A.O. should take into account for selecting themost appropriate method. In the present case,neither the AO nor the TPO was justified in theirobservations. In fact, they had not followed theprocedures laid down in Section 92C of the Actand in Rules 10B & 10C. The TPO has not madeany attempt in showing why the results of DeepDiamond India Ltd., Moon Diamonds Ltd., ShantiVijay Jewels Ltd. and Sovereign Diamonds Ltd.are comparable for calculating the gross profitmargin. The assessee has, on the other hand,provided detailed submissions as to why the TPOwas not justified in using CPM based on the Gross

Profits of the 4 companies stated above. Therefore,the order of the CIT(A) is upheld and the matter isdecided in favour of the assessee.

Damodar Valley Corporation Vs. ACIT[2016] 180 TTJ 82 (Kolkata)Assessment Year: 2008-09 & 2009-10

thOrder Dated: 13 January, 2016

Basic Facts

The assessee was a statutory corporation establishedunder the Act of Parliament namely Damodar ValleyCorporation (DVC) Act, 1948. It was engaged inthe business of generation of electricity.The assesseefiled its return computing its income under normalprovisions of the Act as well as under section 115JB.However, during assessment proceedings, by wayof a letter the assessee sought to withdraw theapplicability of section 115JB. The AssessingOfficer held that the provisions of section 115JBwere applicable to the assessee-corporation. TheCIT(A)upheld the order of AO.

Issue

Whether provisions of section 115JB areapplicable to the assessee being Corporationestablished under a separate Act.

Held

When section 43 of DVC Act, 1948 was enacted,the provisions of section 115J/115JA/115JB werenot there in the Act. Section 43 of DVC Act, 1948,only states that the Corporation shall pay taxes onany income. The book profit contemplated undersection 115JB is only deemed income. The bookprofit is an alien to the basic concept of ‘income’.The form of Balance Sheet of the Corporation isprescribed in Annexure II of the Damodar Valleycorporation Rules. It is found from the provisionsof DVC Act, 1948, the assessee corporation doesnot conduct any annual general meeting. In section115JB section, the term ‘company’ referred toshould be construed as company as defined underCompanies Act, 1956 only. Section 115JB clearlystates that the accounts are to be prepared inaccordance with Part II of Schedule VI ofCompanies Act, 1956. There is lot of force in the

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32


argument of the assessee that the computationprovision states that ‘Net profit as per Profit andLoss Account prepared as per Part II of ScheduleVI of Companies Act, 1956.’ The assesseecorporation is not a company under the CompaniesAct, 1956. Only for income tax assessmentpurposes, the assessee Corporation is given thestatus of a company. When the computationprovision could not be applied in a particular case,it is indicative of the fact that the charging sectionalso would not apply. Explanation 3 to section115JB has been inserted by the Finance Act, 2012to clarify that only assessees being companies andto whom provisions of the Companies Act, 1956,are applicable, come within the ambit of section115JB. In other words, unless an assessee comeswithin the ambit of section 211 of the CompaniesAct, 1956, it was not covered by the Explanation 3to section 115JB and as a necessary corollarysection 115JB was not applicable to it. Theamendment is brought only from 1-4-2013 andhence is not retrospective. The expression ‘for theremoval of doubts, it is hereby clarified’ used inExplanation 3 to section 115JB should not beconstrued as clarificatory in nature and therebygiving retrospective effect. In view of the above, itwas held that in view of the legislative changebrought about by the introduction of Explanation 3in section 115JB by the Finance Act, 2012, theassessee’s contention in fact stands more fortified.Since the assessee is not a company within themeaning of Companies Act, 1956, section 211(2)and proviso thereon is not applicable and, therefore,provisions of section 115JB are also notapplicable.The intention of MAT is that thecompanies were declaring huge profits as per theCompanies Act and declaring dividends to itsshareholders but paying nil tax or lesser tax underthe Act due to various exemptions/deductions.Theassessee corporation does not declare any dividendsto shareholders and also paying huge tax under Act.Applying this to the background of introducing theprovisions of section 115JB it can safely beconcluded that it was never the intention of thelegislature to impose MAT on corporations enactedby an Act of Parliament like assessee herein.

Accordingly the ground raised by the assessee isallowed.

Basic Facts

The assessee earned certain exempt income in formof interest on tax free bonds of RBI. The assesseedisallowed 20 per cent of said income under section14A.The Assessing Officer having invokedprovisions of Rule 8D(2)(ii) and Rule 8D(2)(iii) of1962 Rules, made disallowance under section 14Aof higher amount.The CIT(A) confirmed order ofAO.

Issue

Whether AO can directly invoke rule 8D(2)without recording satisfaction in terms of rule8D(1)?

Held

It was found from records that the assessee has gotsufficient own funds to make investments and theAO has not brought any nexus between theborrowed funds vis a vis the investments made bythe assessee. Without doing the same, he cannotdirectly presume that the investments were madeout of borrowed funds. If the action of the AO andCIT(A) was to be upheld, then no assessee couldmake any investments when there is a interestbearing loan to be repaid. The fact of making theinvestments has to be viewed from the point ofcommercial expediency and from the point of viewof businessman and not from the viewpoint of therevenue. It is well settled that businessman knowshis interest best. If the own funds are available withthe assessee and if the same are more than theinvestments made by the assessee, then it has to bepresumed that the investments were made out ofown funds and not out of borrowed funds. Hencethe provisions of Rule 8D(2)(ii) cannot be invokedin these circumstances. The action of the AO indirectly embarking on rule 8D(2) of the 1962 Ruleswithout recording any satisfaction as mandated inrule 8D(1) of the 1962 Rules was not appreciatedand hence no disallowance under section 14A byapplying rule 8D(2) of the 1962 Rules could bemade in the facts of the instant case. The assesseeCorporation had disallowed certain sum and no

Tribunal News


adverse inference has been brought on record andno satisfaction has been recorded with cogentreasons by the AO as to why the said figurecomputed by the assessee is incorrect. Withoutsatisfying the requirement contemplated in rule8D(1), the AO had directly proceeded to apply rule8D(2) in the instant case. Hence, the disallowancemade under section 14A was not sustained.

Gujarat Pipavav Port Limited Vs. ITO[2016] 180 TTJ 354 (Mumbai)Assessment Year: 2008-09 Order Dated:

rd23 March, 2016

Basic Facts

The assessee had entered into a Main PurchaseAgreement (MPA) with ZPMC, a ChineseCompany, for supply of cranes to its affiliates.Consequent to MPA, it also entered into a separateService Contracts with ZPMC for rendering theinstallation and commissioning services in relationto such cranes. It engaged Liftech, a USA basedentity, for rendering of engineering services toreview of pre-determined design and constructionaudit, which got its part of contract executedthrough a sub-contractor, namely, Leader whichwas a resident of China. The assessee paid a certainsum to Liftech for the services availed. ZPMC hadprovided installation and commissioning servicesof the cranes and it also provided after sales servicesand spare parts and the assessee had paid ZPMCfor installation and commissioning of crane. TheAO held that the services performed by Liftechwere technical/consultancy and managerialservices, that same were utilized in assessee’sbusiness being carried on in India, and that paymentwas chargeable as Fees for technical Services (FTS)as per Explanation to section 9(2) and as explainedin CBDT Circular, dated 12-3-2008. He opined thatsuch services might also fall under ‘Royalty’ underthe India-USA DTAA as those involved impartingof information concerning their industrialcommercial or scientific experience in the field ofquality checking of cranes. He also held thatZPMC had PE in India under Article 5(2)(j); as perArticle 5(2) of the Tax Treaty installation andassembly project which continued for a period of

more than 183 days would constitute a PE in India.He treated the assessee as an ‘Assessee-In Default’for not deducting tax from such payments. As aresult, a demand was raised upon the assessee. TheCIT(A) upheld the order passed by the A.O.

Issue

Whether amount paid in relation to installationand commissioning as well as engineeringservices for audit could be treated as fees forincluded services or fees for technical services?

Held

All the services related with audit and constructionof cranes were availed out of India. Liftech hadappointed Leader as its sub-contractor, and theassessee was not party to that contract. Therefore,there was not any transfer of technical plan/designby Liftech to assessee and that nothing was ‘madeavailable’ to the assessee in India. Once it is heldthat provisions of article 12 of the DTAA are notapplicable, the next step is to determine as towhether the disputed amount can be taxed asbusiness income of Liftech. The AO or the CIT(A)has not proved that Liftech had any PE includingfunctional PE in India. So, in absence of PE, therewould not be business income to Liftech and theassessee would not be required to deduct tax fromthe payments made to Liftech. Accordingly it washeld that the payment made to Liftech was notroyalty or FIS or FTS and the assessee was notsupposed to deduct tax at source for making thepayment to Lifetech and therefore cannot be treatedas assessee in default. The Tribunal held that therewas no justification in holding that the servicesprovided under the basic agreement were akin toservices rendered by specific services agreement-rather they were part and parcel of the servicecontracts dated 26-5-2006 and 9-12-2006. Theproject started on 30-10-2007 and wascommissioned on 15-1-2008. Thus,the installationjob took 78 days and the employees of ZMPCstayed in India for 21 days commissioning tookplace. In these circumstances, the effective stay ofthe employees in India was 99 days only. If theactual period of after sales service is excluded from

Tribunal News

33


the total period then the stay of the employees ofZMPC would be less than 183 days, there wouldnot be any PE of ZPMC in India as per article-5(2)(j) of the DTAA. One of the issues before theTribunal was to determine the method of calculatingthe period of stay for PE purposes. It was held thatthreshold limit of 183 days under article 5(3) wouldbe calculated from date of actual activity forinstallation purpose and not from the date of signingof contract. The letter of ZMPC has confirmed thatnone of its employees were present in India after24-3-2008. Details of employees visiting for aftersales services are also available. These documentsclearly prove that actual number of days of theemployees of ZMPC were less than183 days.Thebasic principle, in this regard, lays down therule that when there is a specific PE clause inrelation to a particular type of service (construction/installation/assembly) and where such services arealso covered within the scope of article 12, theprovisions of that article will not be applicable. Itwas found that UBCB was sub-contractor ofZPMC, but it had no authority to conclude anycontract on behalf of ZPMC, that it had renderedservices relating to the installation andcommissioning of crane not only to assessee but toother parties also. Therefore was no agency PE inIndia under article-5(4) of the India China DTAAof the non-resident entity-i.e. ZPMC consideringthe above, the said issues were decided in favourof assessee.

ACIT Vs. Majmudar & Co. 73Taxmann.com 77 (Mumbai)Assessment Year: 2004-05 to 2009-10Order Dated: 19 August 2016

Basic Facts

The appellant is a firm of Advocates and Solicitorsengaged in providing legal services to its foreignclients by using legal database compiled by it viaelectronic media via emails and internet facilities.It claimed deduction under section 10B.The AOdisallowed the claim on the ground that renderingof legal services by the assessee to the foreign clientscould not be termed as export of legal database from

Issue

India. The CIT(A) upheld the assessee’s contention.

Whether in light of Explanation 2(i)(b) of section10B and Notification No. S.O. 890(E), dated 26-9-2000, assessee was eligible for deduction undersection 10B?

Held

ITAT observed that Explanation 2(i)(b) definescomputer software to mean any customizedelectronic data or any product or service of similarnature as may be specified by the CBDT which istransmitted or exported from India to any placeoutside India by any means. Over and above,CBDT in Notification No. S.O. 890(E), dated 26-9-2000 notified ‘the product or services of legaldatabase’ as an eligible information technologyenabled product or service. Hence, the notificationapplies to both legal database products and servicesrendered through the use of legal database and thusallowed in favour of the appellant.

Pragyaraj Power Generation CompanyLimited Vs. ITO 69 Taxmann.com 380(Lucknow)Assessment Year: 2010-11 and 2011-12Order Dated: 26 February 2016

Basic Facts

The assesse company wanted to enter in to the newbusiness of generation of power for which the plantand machinery was in process of installation. Thefunds available with the company were deployedtemporarily in Fixed Deposit. The revenueauthorities contended that since land was acquiredand advances were given for plant & machinery,etc.; and source of interest income was generated,the business has commenced in relevant PreviousYear.

Issue

Whether for a new business or for a new sourceof income which has come into existence,previous year would start from date of settingup of new business or from date when newsource of income has come into existence?

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35


Whether interest income was to be reduced fromcapital cost of project instead of taxing same asincome from other sources

Held

It was seen that only land was acquired andadvances are given for plant & machinery etc. andunder these facts, it cannot be said that the businesswas set up .The source of income of the assessee inthe instant case is the industrial undertaking forgeneration of power. Till the year underConsideration, the assessee has arranged total fundsof certain amount and the same was used forpurchasing land, machinery etc.. and only excess

fund were utilized to earn income. Thus in thepresent case only a head of income has arisen andnot source of income. Moerover interest incomefrom the FD is not an independent source of incomede horse the business undertaking because theearning of interest income is not the object of theassessee-company and the funds were not arrangedby the assessee-company for earning interestincome. Therefore it was held that the head ofincome should not be mixed with source of incomeand therefore it should be allowed to reduce fromthe cost of project and not taxed since the businesshas not commenced.

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Tribunal News

contd. from page 382 From the Courts

49

officers should take the initiative in guiding ataxpayer where proceedings or other particularsbefore them indicate whether some refund or reliefis due to the assessee, which would benefit theDepartment and it would inspire confidence in theassessee. In such view of the matter the Tribunalought to have taken a wider look in allowing theclaim of the assessee even if the return for the asst.yr. 1986-87 is belatedly filed, which would notrestrict the rights of the assessee to claim the benefitof unabsorbed depreciation, investment allowanceand s. 80J exemption.

Sec. 54F : Whether sale considerationitself is to be invested in New Asset?CIT v/s. Kapilkumar Agarwal382 ITR 56 (P & H)

Issue :

Is it mandatory to utilise the sale considerationreceived on sale of original asset in new asset?

Held :

In order to avail of the benefit under section 54F ofthe Income-Tax Act, 1961, the assessee is requiredto either purchase a residential house within a periodof one year before or two years after the date onwhich transfer takes place or construct a residential

house within a period of three years after that date.Section 54F of the Act nowhere envisages that thesale consideration obtained by the assessee fromthe original capital asset is mandatorily required tobe utilised for the purchase or construction of ahouse property. No provision has been made bythe statute that in order to avail of the benefit ofsection 54F of the Act, the assessee has to utilisethe amount received by him on sale of originalcapital asset for the purposes of meeting the costof the new asset.

For the assessment year 2009-10, the assesseeclaimed benefit under section 54F of the IncomeTax Act, 1961. The Assessing Officer disallowedit on the ground that the assessee had not entirelysourced the amount invested in his new asset fromthe capital gains receipts. The Commissioner(Appeals) confirmed this. The Tribunal allowedthe claim of the assessee. On appeals by theDepartment:

Held, dismissing the appeal, that the investmentmade by the assessee was within the stipulated time.Therefore, the assessee was entitled to the benefitunder section 54F of the Act.

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View against the Proposition:

It is well settled law that initial onus is on the personwho claimed the deduction. It is for the assessee toprove that borrowed funds have been utilized forthe purpose of business. The assessee cannot makea general claim that non-interest bearing funds havebeen utilized for the purpose of making investmentsin shares. It is for the assessee to prove precisely,by referring to the Bank and cash balance availableon the date when interest free loan is given, and atbest the benefit of doubt would be given to theassessee when in the common pool account thereis sufficient balance which would cover the interestfree loan.

Further, the Hon’ble Culcutta HC in the case ofDhandhuka & Sons vs. CIT reported in 339 ITR319 has held as under:

“The object of section 14A of the Act is to disallowthe direct and indirect expenditure incurred inrelation to income which does not form part of thetotal income.

In the case before us, there is no dispute that part ofthe income of the assessee from its business is fromdividend which is exempt from tax whereas theassessee was unable to produce any material beforethe authorities below showing the source fromwhich such shares were acquired. Mr. Khaitanstrenuously contended before us that for the lastfew years before the relevant previous year, no newshare has been acquired and thus, the loan that wastaken and for which the interest is payable by theassessee was not for acquisition of those old sharesand therefore, the authorities below erred in law ingiving benefit of proportionate deduction.

In our opinion, the mere fact that those shares were

ControversiesCA. Kaushik D. Shah

[email protected].

old ones and not acquired recently is immaterial. It

When no expenditure is incurred for earningdividend income, whether disallowance canbe made u/s. 14A read with Rule 8D?

Issue:

Mr. X has earned dividend income of Rs. 3 Lakhson investments in shares. Mr. X claims that noexpenditure is incurred for earning the dividendincome except D-mat charges of Rs. 1,500/-Investments in shares is made out of internal accrualsand not out of any borrowings. No administrativeexpenditure has been incurred by Mr. X. Accordingto Mr. X no disallowance can be made u/s. 14A inhis case except D-mat charges of Rs. 1,500/-.

According to AO, the general explanation of theassessee is not acceptable. Assessee has taken loanbut assessee’s claim that the loan has been utilizedfor the purpose of business only is not acceptable.Assessee has not submitted any proof or specificexplanation other than the said general explanation.No day to day fund flow has been submitted. Inabsence of such fund flow the assessee’s claim thatno interest bearing funds were diverted for theinvestment in said shares/securities remainsunsubstantiated.

Proposition:

It is submitted that when assessee has not incurredany expenditure other than the D-mat charges nodisallowance is called for u/s. 14A of the Act readwith Rule 8D. It is a duty of assessing officer to pinpoint any expenditure which the assessee hasincurred for earning the exempt income. For earningexempt dividend income no expenditure is requiredto be incurred.

It is proposed that when no expenditure is incurredfor earning exempt income no disallowance can bemade u/s. 14A read with Rule 8D.


Controversies

is for the assessee to show the source of acquisitionof those shares by production of materials that thosewere acquired from the funds available in the handsof the assessee at the relevant point of time withouttaking benefit of any loan. If those shares werepurchased from the amount taken in loan, even forinstance, five or ten years ago, it is for the assesseeto show by the production of documentary evidencethat such loaned amount had already been paid backand for the relevant assessment year, no interest ispayable by the assessee for acquiring those oldshares. In the absence of any such material placedby the assessee, in our opinion, the authorities belowrightly held that proportionate amount should bedisallowed having regard to the total income andthe income from the exempt source. In the absenceof any material disclosing the source of acquisitionof shares which is within the special knowledge ofthe assessee, the assessing authority took a mostreasonable approach in assessment.

View in favour of Proposition:

Law appears to be well settled that if no expenditureis incurred disallowance cannot be made u/s. 14Aof the I.T. Act 1961. It is useful to refer to decisionof P & H High Court in CIT Vs. Hero Cycles Ltd.323 ITR 518. Where it has been held that unlessthere is evidence to show that interest bearing fundshave been invested in the investments which havegenerated Tax Exempt Dividend Income, Nodisallowance can be made, revenue has to establishnexus in this regard. On the basis of merepresumption provisions of section 14A cannot beapplied. Revenue is not permitted to presume thatsome administrative expenditure must have beenincurred for the purpose of earning the exemptincome.

The Assessing Officer cannot apply provisions ofSection 14A of the Act read with Rule 8D of theRules automatically or mechanically withoutrendering any opinion on the correctness of the claimof the assessee regarding incurring of anyexpenditure or non-incurring of any expenditure toearn exempt income. The Hon’ble Delhi High

Court in the case of Maxopp Investment Ltd.reported in 347 ITR 272 has held as under:

“The condition precedent for the Assessing Officerto himself determine the amount of expenditure isthat he must record his dissatisfaction with thecorrectness of the claim of expenditure made bythe assessee that no expenditure has been incurred.It is only when this condition precedent is satisfied,that the AO is required to determine the amount ofexpenditure in relation to income not includable intotal income in the manner indicated in sub-rule (2)of Rule 8D.”

The Pune Tribunal in the case of ACIT Vs.Magarpatta Township Development &Construction Co. Ltd. in 46 taxmann.com 284,following the decisions of the Bombay High Courtin the case of Godrej & Boyce Mfg. Co. Ltd. Vs.DCIT 328 ITR 81 and the decision of Delhi HighCourt in the case of Maxopp Investment Ltd. 203Taxmann 364, has held that where the AO has notrecorded satisfaction as required by Section 14A(2)of the Act, disallowance u/s. 14A invoking Rule8D is unjustified.

Summation:

It is submitted that the onus is on the revenue toestablish that assessee has incurred someexpenditure for the purpose of earning the exemptincome. However, AO as well as CIT(A) insist onnegative onus so to say according to them assesseehas to establish that no expenditure is incurred forthe purpose of earning exempt income.

In view of the decision of ITAT Delhi Bench inDCM Ltd. Vs. DCIT the AO must give reasonsbefore rejecting assessee’s claim. He must establishnexus between the expenditure and the exemptincome.

It is respectfully submitted that the case of Mr. X issquarely covered by the decision of the jurisdictionalhigh court of Gujarat in the case of CIT Vs. TorrentPower Ltd. (Guj.) reported in 363 ITR 478. Theirlordships of Gujarat High Court held as under:


“The Assessing Officer has not pin pointed anyexpenditure which the assessee had incurred forearning the exempt income. We also find supportto our reasoning by the ratio laid down by the Hon.Delhi High court in case of Maxopp InvestmentsLtd. Vs. CIT (2012) 347 ITR 272 (Delhi).”

I further invite kind attention to another decision ofJurisdictional High Court of Gujarat in the case ofCIT Vs. Gujarat State Fertilizer And Chemicals Ltd.(Guj.) 358 ITR 331. Their lordships of Gujarat HighCourt held as under:

“Had the revenue been successful in establishingthat the assessee had incurred the expenses to earnthe dividend income from the borrowed funds, theentire discussion of application of section 14A ofthe Act could be understood.”

I respectfully rely on the following judicialauthorities to submit that when no expenditure isincurred for earning exempt income nodisallowance can be made u/s. 14A of the I.T. Act1961.

1. CIT Vs. Deepak Mittal (2014) 361 ITR 131(P&H)

In this case their lordships of P & H High Courtheld that in a case where no expenditure hasbeen incurred by the assessee in earning theexempt income. There cannot be anydisallowance of expenditure u/s. 14A r.w.r. 8Dof the I.T. Rules 1962.

2. Canara Bank Vs. ACIT (2014) 99 DTR 36(Karn)

In this case, income was derived by way ofdividends exempt u/s. 10(33), interest on tax-free bonds exempt u/s. 10(15)(h) and intereston long term finance to infrastructurecompanies exempt u/s. 10(23G) of the Act. Thepersons with whom the aforesaid investment

was made by the assessee were crediting theaforesaid income to the assessee’s account byway of a bank transfer.

It was held by the Hon. High Court that therewas no human agency involved in collectingthese dividends and interest for which theassessee had to incur any expenditure. This isthe consequence of computerization, onlinetransaction through NEFT, RTGS and also D-mat account. The AO should take note of thesedevelopments in deciding, whether anyexpenditure is incurred in earning the saidincome.

3. CIT Vs. Hero Cycles Ltd. 323 ITR 518 (P &H)

Unless there is evidence to show that suchinterest bearing funds have been invested in theinvestments which have generated the “taxexempt dividend income”. There is no nexusestablished by the Revenue in this regard andtherefore, on a mere presumption, the provisionsof Section 14A cannot be applied.

4. CCI Ltd. Vs. JCIT (2012) 206 taxmann 563(Karn.) (HC)

When no expenditure is incurred by theassessee in earning the dividend income, nonotional expenditure could be deducted fromthe said income.

In view of the above it is submitted that whenno expenditure is incurred for earning exemptincome disallowance u/s. 14A read with Rule8D cannot be made.

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Controversies


CA. Ashwin H. [email protected]

[2016] 43 STR 110 (Tri Mumbai)Sumeet C. Tholle and Prathima S.Tholle vs. C.C.E.&C., Aurangabad.

Facts:-

Assessee jointly purchased a house wherein servicetax and VAT collected from them. Even though thetransaction between the assessee and its vendor wasof transfer of immovable property, the vendorcharged service tax. On understanding the facts,the assessee filed a refund claim with the departmentsince tax was levied and collected without authorityof law. The refund claim got rejected on the groundthe assessee had not provided any proof of depositof service tax by the service provider with theGovernment.

Held:-

Since the transaction of transfer of immovableproperty is covered in exclusion part of definition,the activity of transfer of immovable property isnot a taxable activity. Service recipient cannot bemade liable to prove that the service tax paid byhim to the service provider has been credited tothe service provider has been credited to theGovernment or not. Refund can be granted to therecipient on the basis of invoices held by themwherein service tax has been charged. Whetherservice tax has been deposited to the Governmentor not is to be looked by the department and notthe service recipient. Service recipient havingborne the incidence of tax can challenge taxabilityby claiming authority.

Service tax collected and deposited withoutauthority of law by the service provider can berefunded to service receiver.

Service Tax -Recent Judgements

[2016] 43 STR 301 (Tri.- Bang.) KirthiConstructions vs. CCE. & ST.,Mangalore

Facts:-

Refund of service tax paid on construction serviceswas claimed as it was not leviable to service tax.Assessee contested that since service tax was paidby mistake of law and it was not collected frombuyers, refund claim cannot be held as time barred.Revenue demanded service tax as it was not a caseof self service, service tax was collected frombuyers and in any case, the refund was time barred.

Held:-

Since the typical arrangement was that the assesseewas first selling plot of land and then the buyerwas appointing the assessee for constructionservices. Accordingly, no service tax was payable.Relying on Hon’ble Supreme Court’s decision incase of Mafatlal Industries Ltd. Vs. UOI (1997 (89)ELT 247 (SC)), it was held that all refund claimsexcept unconditional levies have to pass the test oflimitation of one year (time bar) and non-passingof service tax burden to buyers (unjust enrichment)

Even if refund of service tax is on account ofmistake of law, provision of “time bar” and ‘unjustenrichment’ would apply.

[2016] 73 taxmann.com 31 (Delhi) HighCourt of Delhi Makemytrip (India) (P.)Ltd. vs. Union of India

Facts:

In this case, without even an SCN being issuedand without there being any determination of theamount of service tax arrears, the resort to theextreme coercive measure of arrest followed by thedetention of Vice-President of assessee - companywas impermissible in law. Hence, search, arrests

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and collections were set aside and department wasdirected to refund amounts.

Held:

It was held that before making arrest under servicetax, department must prima facie adjudicate demadand also grant hearing to assessee as to materialscollected; It was further held that in case of habitualtax-evaders, arrests may be made straightaway, butsubject to review of past conduct and only afterrecording prima facie view as to how assessee ishabitual tax-evader.

[2016] 43 STR 545 (Tri.- Mumbai)Emrald System Engg. Ltd. vs. CST,Mumbai

Facts:

In this case the assessee was engaged in the activityof arranging of entire transportation, dispatching ofthe goods, supervising the loading and unloadingof goods. Whether such activities are covered underBusiness Support Service or Business AuxiliaryService?

Held:

The Tribunal in this case held that, the activity ofarranging of entire transportation, dispatching of thegoods, supervising the loading and unloading ofgoods is covered under Business Support Servicenot under Business Auxiliary Service. It is furtherheld that activity of organizing orders from variousstockiest, distribution of goods and collecting themfrom stockiest is liable under Business AuxiliaryService.

[2016] 43 STR 482 (High Court - Cal.)Sourav Ganguly vs. UOI

Facts:

In this case the assessee is providing services ofwriting of articles for newspapers, sports magazinesor for any other form of media, anchoring of TVshows, brand promotion & playing IPL matches?Whether the theses activities are liable to service

Held:

The Calcutta High Court has quashed Show-cause

tax under Business Auxiliary Service?

cum demand notice demanding Service Tax fromformer Indian Cricket Team captain, Ganguly.

Further it was held that that mere failure to disclosea transaction or activity and pay tax thereon or amere misstatement is not sufficient for invocationof the extended period of limitation, which has beendone in this case. The Court also held that theremuneration received by the former Skipper forwriting articles and anchoring TV shows would notattract service tax. The court also observed that“brand endorsement” was not a taxable serviceduring the period of time for which the tax demandwas raised, and hence such demand cannot besustained.

The Court also said that Ganguly while he playedfor Indian Premier League (IPL) was not renderingany service which could be classified as businesssupport service.

[2016] 43 STR 507 (Mumbai) D. P. Jain& Co. Infrastructure Pvt. Ltd. vs. UOI

Facts:

In this case the assessee is doing activity of repairsof roads and airports. Whether the assessee isproviding taxable service?

Held:

The High Court held that repair of road and airportsexcluded from construction services does not meanthat it cannot form part of other taxable service. TheLegislature thought it fit to bring it withinmanagement, maintenance or repair service.

It is further held that, retrospective exemption toactivity of management, maintenance or repair ofroad w.e.f. 16/06/2005 does not include runwaysin airport which are specifically prepared alongwhich aircraft take off and lands. It is not how it ismade and surfaced but what it is utilised for whichis relevant. Hence, road cannot be said to be genusof which runway is specie.

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Service Tax - Recent Judgements


CA. Priyam R. [email protected]

Burden of Proof tax collected by sellingdealers remitted to Government is onpurchaser of goods.

Nav Bharat Steel v. State of Karnataka reported in93 VST page 240 (Kar)

Background of the case:

The prescribed authority exercising the powersunder the Karnataka Value Added Tax Act, 2003,concluded reassessment proceedings on thepetitioner by disallowing the input-tax credit inrespect of the purchases of iron and steel claimedto have been made from selling dealer, since theselling dealers were absconding and were involvedin bill trading. Penalty was also levied. Thepetitioner filed appeal before the JointCommissioner and filed xerox copies of the taxinvoices but it was dismissed. The second appealfiled before the Tribunal was also dismissed. Onrevision petitions:

Held, dismissing the petitions, that the burden layon the petitioner to establish that the dealers fromwhom the petitioner had purchased the goods hadremitted the tax collected to the Government. Mereobtaining the registration number of the sellingdealers would not suffice to claim input-tax creditunless the petitioner discharged the burden of proofin support of the input tax claimed. No input-taxcredit could be allowed on the basis of the photostatcopies of tax invoices. It was noticed that theprescribed authority had visited the businesspremises of the petitioner and no books of accountsand tax invoices were produced before the assessingauthority despite sufficient opportunity provided.It was also noticed that in an inspection report ofthe Joint Commissioner it was categorically stated

that the petitioner had purchased the goods from Hand that the dealers were involved in bill tradingand were absconding. When the investigationsprovided that the selling dealers were non-existing,availing of input-tax credit on photostat tax invoices/bogus invoices in the absence of selling dealerremitting the taxes to the Government amounted toviolation of the provisions of the Act attracting levyof penalty under section 72(2) of the Act. Therefore,the order passed by the Tribunal was justifiable anddid not call for any interference.

Comment from Columnist:

With reference to similar facts of bogus purchases,as per Judgement of Gujarat VAT Tribunal, if taxand interest is paid then penalty is removedcompletely as held in case of :

1) Mahendra iron traders v/s State of Gujarat S.Ano: 204 to 206 of 2013 order dtd: 9-1-2014.

2) Hari Dye Chem S.A No: 1002 of 2014 Orderdtd: 19-02-2015

Construction of taxing statutes—Common parlance meaning—When notapplied. Change of opinion

Ravi Prakash Refineries P. Ltd v. State of Karnatakareported in 93 VST page 441 (SC)


The dealer, engaged in manufacture of refinededible oil by solvent extraction process, soldsunflower de-oiled cake in the course of inter-Statetrade. The assessing authority passed the assessmentorder under section 9(2) of the Central Sales Tax

VAT - From the Courts

12

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Act, 1956 granting the dealer concessional rate oftwo per cent. tax in terms of Notification No. FD119 CSL 2002(2), dated May 31, 2002 issuedunder section 8(5) of the 1956 Act on productionof C form. After the order of assessment was passed,the succeeding assessing officer, forming an opinionthat turnover had escaped assessment to tax becauseinter-State sale of sunflower de-oiled cake was liableto tax at four per cent. and not at two per cent.,levied tax at four per cent. on the inter-State salesof sunflower de-oiled cake. The JointCommissioner of Commercial Taxes (Appeals), setaside the order of reassessment on the ground thatthe change of opinion could not have been a groundfor reopening of assessment in exercise of powerunder section 12A of the Karnataka Sales Tax Act,1957. The dealer, though having succeeded in firstappeal, filed an appeal before the Tribunal on theground that the first appellate authority did notexpress any opinion with regard to rate of tax onoil-cake and de-oiled cake. The Tribunal set asidethe reassessment order holding that the expression“oil-cake” in entry 6 of Notification No. FD 119CSL 2002(2), dated May 31, 2002 would includealso de-oiled cake. It also held that the reopeningof assessment by change of opinion was notpermissible. The High Court on a revision petitionheld that there was a distinction between oil-cakeand de-oiled cake and they were two differentcommodities and not one and the same. On appealby the dealer:

Held, (i) that the assessing authority had expressedthe opinion with regard to the rate of tax on the de-oiled cake while scrutinising C forms which is anexpression of opinion on the available materialsbrought on record and, therefore, the first appellateauthority and the Tribunal were justified inconcurring with that order. The Revenue had notchallenged the order passed by the JointCommissioner. The High Court had not expressedany opinion on this score. Considering thecumulative effect of the facts and law, it must be

held that there should not have been reopening ofassessment.

(ii) That it was evident from the notification datedMay 31, 2002, that the competent authority whileexercising power under sub-section (5) of section8 of the 1956 Act, had kept out the reduction of taxqua de-oiled cake from the purview of notificationand had only provided oil-cake to be taxed at thereduced rate of tax. In view of the decision of theSupreme Court in Agricultural Produce MarketCommittee v. Biotor Industries Ltd. [2014] 73 VST1 (SC) whereby the court concluded that therewas a distinction between oil-cake and de-oiledcake and they were two different commercialproducts, the dealer could not be allowed toadvance a plea that that test should not beapplied, but the commercial parlance test shouldbe adopted to determine the goods for thepurposes of the Central Sales Tax Act.

Benefit of credit notes for turnoverdiscount, in which year to grant. i.e.year for discount or year of accounting.

State of Gujarat v Ambuja Cement Ltd. Reportedin 93 VST 436 (Guj)


For the assessment year 2007-08, the respondent-dealer engaged in manufacture and sale of cement,sold cement to various customers, finalized in thelast quarter the discount to be given to suchcustomers on the sales during that year and gavecredit notes to customers discounting the valueadded tax already collected from them on the basisof the original price. Since this event took placeduring the financial year 2008-09, the dealer claimedcredit of such discounted sale price and theconsequential reduced tax collected from theconsumers in such year. The assessing officeraccepted the formula and framed the assessment


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contd. to page 413


CA. Bihari B. [email protected].

GST, VAT Judgments and Updates

Dear Readers,

Now it is a right time for the introduction of GSTto Chartered Accountant faternity. With this article,I am starting the basic concept of GST as Part – Iof my article and the Vat Updates will be in Part –II, hence forth.

[I] Key Points from Model GST Law:

[1] Threshold limit for registration & ControlJurisdiction:

[i] Threshold Limit for Exemption:

[a] North Eastern States : Rs. 10 Lakhs

[b] Other States : Rs. 20 Lakhs

[ii] Control Jurisdiction:

[a] Services : Central Authorities

[b] Goods : Based on Turnover

[i] Turnover below Rs. 1.5 Crores : States

[ii] Turnover above Rs. 1.5 Crores : BothCentre and States

[2] Place of Registration:

The dealer has to get registered in the State fromwhere taxable goods or services are supplied.

[3] Migration of existing taxpayers to GST:

Every person already registered under extantlaw will be issued a certificate of registrationon a provisional basis. This certificate shall bevalid for period of 6 months. Such person willhave to furnish the requisite information within6 months and on furnishing of suchinformation, final registration certificate shallbe granted by the Central/State Government.

[4] GST compliance rating score:

VAT - Judgementsand Updates

Every taxable person shall be assigned a GSTcompliance rating score based on his record ofcompliance with the provisions of this Act. TheGST compliance rating score shall be updatedat periodic intervals and intimated to the taxableperson and will also be placed in the publicdomain.

[5] Levy of Tax:

The person registered under this law is liableto pay tax if his aggregate turnover in a financialyear exceeds Rs. 20 lakhs. However, a dealerconducting business in any of the North EasternStates is required to pay tax if his aggregateturnover exceeds Rs. 10 lakhs. A negative listhas also been prescribed for transactions andactivities of Government and local authoritieswhich shall be exempt from GST levy, likeactivities of issuance of passport, visa, drivinglicense, birth certificate or death certificate etc.

[6] Taxable Event:

The taxable event under GST regime will besupply of goods or services. Supply includesall forms of supply of goods and/or servicessuch as sale, transfer, barter, exchange, license,rental, lease or disposal made or agreed to bemade for a consideration. It also includesimportation of service, whether or not for aconsideration.

[7] Point of Taxation:

CGST/SGST shall be payable at the earliest ofthe following dates, namely:

[i] Date on which the goods are removed forsupply to the recipient (in case of moveablegoods);

[ii] Date on which the goods are madeavailable to the recipient (in case ofimmovable goods);


VAT - Judgements and Updates

[iii] Date of issuing invoice by supplier; or

[iv] Date of receipt of payment by supplier; or

[v] Date on which recipient shows the receiptof the goods in his books of account.

[8] TCS on online sales of goods or services

Every E-Commerce operator engaged infacilitating the supply of any goods and/orservices (like Amazon, Flipkart etc) shall collecttax at source at the time of credit or at the timeof payment whichever is earlier.

[9] Valuation Rules

Such Rules shall apply to the supply of goodsand/or services under the IGST/CGST/SGSTBill. Some of the methods prescribed forvaluation are given hereunder.

[a] Transaction Value: As per this method thevalue of goods and/or services shall be thetransaction value.

[b] Transaction value of goods or services oflike kind: Where value of supply cannotbe determined under previous method [i.e.point a], the value shall be determined onthe basis of transaction value of goods and/or services of like kind and quality suppliedat or about the same time to customers.

[c] Computed Value Method: Where valuecannot be determined under previousmethod [ i.e. point b], it shall be based oncomputed value which shall include costof production, manufacture or processingof the goods or the cost of provision ofservices, the charges, if any, for design andbrand and amount towards profit andgeneral expenses.

[d] Residual Method: Where the value cannotbe determined under the computed valuemethod, the value shall be determinedusing reasonable means consistent withthe principles and general provisions ofthese rules.

[10]Utilization of IGST: The amount of input taxcredit on account of IGST available in the

electronic credit ledger of dealer shall first beutilized towards payment of IGST and theamount remaining, if any, may be utilizedtowards the payment of CGST and SGST, inthat order.

Utilization of SGST: The amount of input taxcredit on account of SGST available in theelectronic credit ledger of dealer shall first beutilized towards payment of SGST and theamount remaining, if any, may be utilizedtowards the payment of IGST.

Utilization of CGST: The amount of input taxcredit on account of CGST available in theelectronic credit ledger of dealer shall first beutilized towards payment of CGST and theamount remaining, if any, may be utilizedtowards the payment of IGST.

Note: The input tax credit on account of CGSTshall not be available for payment of SGST.

[II] Important Judgment:

Hon. Gujarat High Court in case of BhailalAmin General Hospital vs. State of Gujaratdeciding that in case of Charitable Trustrunning a Hospital and Medical Store is nota dealer.

Facts of the case:

The assessee is a Charitable Trust runninghospital and medical store. The assessee appliedto the Commissioner under section 80 of theAct for determination of a question whetherthe assessee who is a charitable trust runninghospital/medical store for achieving its objectsis a dealer as defined under section 2(10) ofthe Act. It was contended by the assessee beforethe Commissioner that in view of the exceptionscontained in the impugned definition, it wasnot a dealer as defined under the Act. TheCommissioner rejected the contention of theassessee by holding that the activity of sellingmedicines, though without profit, was businessactivity of trust and the assessee was a dealerunder the Act. The impugned determination

contd. to page 401


CA. Kush [email protected]

Mergers andAcquisition Corner

1. With RCom, Aircel merger; Ambani1brothers all set to rule telecom market

The Ambani brothers are all set to rule thetelecom market. Less than a fortnight after elderbrother Mukesh Ambani’s Reliance JioInfocomm Ltd (RJIL) sent the older playersreeling from the impact of aggressive pricingfor his fourth generation (4G) long termevolution (LTE) data and voice services,younger brother Anil Ambani created aformidable entity by merging his RelianceCommunications (Rcom) with Malaysia-basedMaxis Communications Berhad’s (MCB)Aircel Ltd. The merged entity will have asubscriber base of 186.7 million (9.87 millionof RCom and 8.80 million of Aircel),catapulting it to the third position after BhartiAirtel (251 million) and Vodafone (198 million)and before Idea Cellular (175 million). The twocompanies will hold 50% share each with equalrepresentation on board and committees. Themerger transaction, which will be completedin 2017, will prune RCom’s debt by Rs 20,000crore or 40% of the total debt whileAircel willcut its debt by Rs 4,000 crore. The wirelessbusinesses of both the telecom service providerwill be combined through a process ofdemerger approved by the court.Sources inRCom, who did not want to be named, saidRCom’s wireless business will be demergedfor a merger with Aircel and the new entitywill be renamed and rebranded. He said theactual formal merger would take around sixmonths and approvals from Securities andExchange Board of India (Sebi), stockexchanges, Competition Commission of India(CCI), Department of Telecom (DoT), andcourts would be sought during that period. Astatement issued by two operators claimed themerger deal made the new entity the second-

largest spectrum holder in the country at 451mega Hertz (MHz) across 850 MHz, 900 MHz,1800 MHz and 2100 MHz frequency bandsand would be among the top four players interms of customer base and revenues.

“We expect with this combination to createsubstantial long-term value for shareholders ofboth RComand MCB, given the benefits of thewide-ranging spectrum portfolio and significantrevenue and cost synergies,” said Ambani,chairman of Reliance Group in a statementissued by the company. RCom had earlierbought out the wireless business of SistemaShyam Telecom Ltd (SSTL). MCB, which hasinvested over Rs 35,000 crore since it acquiredAircel in 2006, said the deal and further equitycommitment “underpinned” its belief in thelong-term growth potential of “India and India’stelecom sector”. A statement issued by both thecompanies said; “On consummation of themerger, RCom and MCB are committed toadditional equity infusion into the MergerCo(merged entity) to further strengthen the balancesheet, fund future growth plans and enhancefinancial flexibility. Both parties are already intalks with leading international investors in thisregard”. Post-merger, the entity will have anasset base of Rs 65,000 crore and net worth ofRs 35,000 crore. A telecom analyst with aleading financial consultancy firm, who did notwant to be named as his company policy doesnot permit him to speak on any specificcompany, said if the Ambani brothers haveaccess to each other’s network then the mergeris likely to give Reliance Jio further advantagein terms of a voice platform. “RCom has pooledspectrum with Reliance Jio. I don’t know whatthe condition for the access to that will be forthe new (merged) company but if that is thecase then theoretically the two companies have


a lot of advantages because they will have their2G and 3G networks and we know that Jio issuffering on account of having no voiceplatform. If it has access RCom’s network thentheoretically they (Reliance Jio, RCom andAircel) will be the only player with 2G, 3Gand a nationwide 4G LTE network. Plus, it hasa good market share (10%), so it should be ableto do a very good market play,” he said. GKrishna Kumar, Bangalore based telecomexecutives, expects only 4-5 operators tosurvive in the Indian market while the restwould either merge with larger players or sellout.

2. Naspers owned PayU buys rival Citrus for2$130 m in all-cash deal

The Netherlands-based global online paymentsservice provider PayU has acquired Citrus Payin an all-cash deal, valuing the Indian startupat $130 million (around Rs 830 crore). PayUis part of South African internet and mediaconglomerate Naspers, which is one of thelargest technology investors in the world. TOIfirst reported about Naspers buying Citrus Payon August 8 .The freshly merged entity willoperate under the PayU brand in India and willhave a customer base of more than 30 millionwith over 200,000 merchants. The deal willstrengthen Naspers’ payments division and isexpected to support its strategy to grow itsfinancial services footprint across emergingmarkets, said PayUglobal’s CEO Laurent leMoal. Citrus and PayU focus on providingpayments solutions to a growing tribe ofmerchants who operate online and will togethertake on the likes of Paytm, backed by Alibaba,as well as players like Snapdeal-ownedFreecharge.

Venture capital fund Sequoia Capital, an earlyinvestor in Citrus, holds around 25-30% in theMumbai based company, and is expected tomake healthy returns on its investment. Thefive-year-old Citrus has in all raised around $32million in risk capital, from the likes of Japaneseinvestors Beenos and EContext. Investors

collectively own around 50% in the company.Less than a year ago, the payments startup hadpicked up $25 million from Sequoia and AscentCapital and had been in talks with potentialinvestors to raise more capital before theacquisition was finalised. Citrus will drivePayU’s fin tech foray into lending through itsplatformLazypay , while PayU cofounderShailaz Nag will focus on new areas of growththrough bank alliances. Amrish Rau, currentlyCitrus Pay managing director, will becomeCEO of PayU in India after the takeover.Founded in 2011 by Jitendra Gupta and SatyenKothari, Citrus acts as a bridge between bankaccounts of merchants and banks and creditcard companies. While Rau, who came onboard in 2014, and Gupta are both managingdirectors at Citrus, Kothari carved out theconsumer-facing app business into a separatecompany -Cube, which he controls currently -earlier this year.

PayU-Citrus collectively processed 150 milliontransactions in 2016 worth a combined $4.2billion, and will grow at 50% plus year on year,Moal said. He added that the group would liketo tie up with banks in the near future to giveservices in the digital banking and wealthmanagement to retail customers. The Indiangovernment backed Unified PaymentsInterface, where money can be transferred fromone bank account to another through smartphones using an app, would not affect thepayment service providers’ businesses as theywill act as collecting agents for merchants.NitinGupta, PayU cofounder, will help complete thetransition to the new leadership team beforedeparting the company to pursue hisentrepreneurial ambitions. The Indian onlinepayments industry is rapidly growing, attributedto the rise in smartphone use and an activepolicy push to drive financial inclusion. A recentBoston Consulting Group report estimateddigital transactions will hit $500 billion by2020, ten times its current level.

Mergers and Acquisition Corner


33. Zee sales Ten Sports to Sony for $385 mn

Marking the second largest deal in media andentertainment in recent times, Sony PicturesNetworks India (SPN) has bought media firmZee Entertainment Enterprises (ZEEL)-ownedTen Sports bouquet of channels for $385 million(approximately Rs 2,600 crore) in an all-cashdeal. With this, SPN has cemented itself as astrong competitor to Star India, increasing itsbouquet strength to nine channels in thecountry. Star India operates eight sportschannels under the Star Sports brand. “Theboard of directors of the company approvedthe sale and transfer of the ‘sports broadcastingbusiness’ of the company to SPN and itsaffiliates at an aggregate all-cash considerationof $385 million,” ZEEL said. Sportsbroadcasting business accounted for Rs 631crore revenue in the company’s consolidatedrevenue and net loss of Rs 37.20 crore forFY16. ZEEL had bought Ten Sports fromDubai-based Abdul Rahman Bukhatir’sTajGroup in 2006. “We have maintained that sportsis one of the three pillars of our business andwe have been investing significantly inacquiring properties that support this strategy.The sports properties that Ten has – whetherit’s the five cricket boards, World WrestlingEntertainment (WWE) or the various tennisevents — complement our strategy and so, theacquisition made perfect sense to us,” says N PSingh, chief executive officer, SPN India. InIndia, SPN now has access to Ten 1, Ten 1HD, Ten 2, Ten 3, and Ten Golf HD from theacquired bouquet, in addition to four channelsfrom its own bouquet – Sony Six, Sony SixHD, Sony ESPN, and Sony ESPN HD. AndyKaplan, president, Worldwide Networks, SonyPictures Television, added, “India has been astrong driver of Sony Pictures’ growingnetworks business for two decades, and sportscontinue to play a significant role in that growth.The acquisition of Ten Sports, following thelaunch of Sony ESPN channels, will mean thatour Indian networks would reach over 800million viewers and broadcast many of the most

popular and prestigious sporting events in theworld.”

With all eyes on the media rights for the IndianPremier League (IPL), which may be up forgrabs next year, SPN would want to beef upthe sports portfolio. The five sports channelscan be easily rebranded and repackaged in timefor the 2017 edition of the Twenty20 league.Withthese, the SPN sports cluster will have atleast nine channels across standard and highdefinition feeds, giving competition to and, infact, surpassing Star India’s bouquet of eightchannels. More channels will not only meanmore advertising inventory on a big-ticketproperty like the IPL, it will also give SPN thebandwidth to experiment with multi-languagefeeds, a strategy the network started with theFIFA World Cup in 2014. Also, the acquisitionmeans that SPN India will be able to enterinternational markets like Maldives, Singapore,Hong Kong, West Asia and the Caribbean insports broadcasting. These are markets whereTen enjoys a strong presence. ZEEL had beenpresent in the sports broadcast business foralmost a decade before it decided to pull theplug on the business. It had bought 50 per centstake in Ten Sports at an enterprise value of$114 million (Rs 800 crore) in 2006 andcompletely acquired it in 2010. The companyhas lost around Rs 660 crore in sports businessfrom FY10-16, according to analyst reports.

Among its marquee sports properties are WWEand cricket rights of West Indies, South Africa,Pakistan, Sri Lanka and Zimbabwe. “The non-compete clause is for four years. So, for now,we have exited the sports business. The focuswill be to develop verticals across broadcast,live events, digital, films and internationalbusiness. Part of the process will be deployedtowards growing the digital business as of now.We will continue to make investments andwhen the time comes,” says Punit Goenka,managing director & CEO, ZEEL. He adds,“Exiting the sports business will not have muchimpact on our presence in the international



markets where Ten had a strong presence. Thechannels are not bundled there and we haveother channels in those markets.” VinitKarnik,head, business, ESP Properties, says, “TheSony Pictures Networks India and Ten Sportsdeal will surely boost Sony’s domestic andinternational sports portfolio. This is great newsfrom a sporting industry standpoint in India.The acquisition will strengthen SPN’s offeringfor viewers of cricket, football, WWE etc,complementing their existing portfolio.Additionally, the deal will also bring excitingsporting action such as English Football LeagueCup, Moto GP, Tour de France, GolfingTournaments and rights to major sportingevents such as the Commonwealth Games and


Asian Games to Sony. This will help them builda robust distribution network base as well!”

1. http://www.dnaindia.com/money/report-rcom-aircel-merge-to-become-third-largest-telco-2255242

2. http://timesofindia.indiatimes.com/deals/-ma/Naspers-owned-PayU-buys-rival-Citrus-for-130m- i n-a l l - c ash -dea l / a r t i c l e sho w/54321658.cms

3. http://www.business-standard.com/article/companies/zee-sells-ten-sports-to-sony-for-385-mn-116083100446_1.html

❉ ❉ ❉

contd. from page 397 VAT - Judgements and Updates

order came to be confirmed by the Tribunal.Being aggrieved, the assessee filed present TaxAppeal before the Hon. Gujarat High Court.

Held:

Submissions of the assessee before theGujarat High Court:

The learned counsel for the assessee submittedbefore the Hon. Gujarat High Court that theexplanation to definition of ‘dealer’ providesexclusions for a charitable, religious oreducational institution, carrying on the activityof manufacturing, buying, selling or supplyinggoods, in performance of its functions, forachieving its avowed objects, which are not inthe nature of business. It was, therefore,contended that the assessee being a charitabletrust is not engaged in businesses and not adealer as defined in section 2(10) of the Act. Insupport of this contention, the counsel reliedon the decision of the Apex Court in case ofCommissioner of Sales Tax v. Sai Publication

Submissions of Revenue before the Gujarat

Fund reported in (2002) 4 SCC 57.

High Court:

The learned counsel for the revenue submittedbefore the Gujarat High Court that the trust,doing the activity of buying, selling andsupplying of medicines to the patients will fallwithin the definition of ‘dealer’.

Therefore, the Tribunal has rightly held that theassessee is a dealer within the definition ofsection 2(10) of the Act and no interference iscalled for with the same.

Decision of the Hon. Gujarat High Court:

The Hon. Gujarat High Court held that sincethe assessee being a charitable trust, is doingthe activity of purchasing, selling and supplyingmedicines to patients in order to achieve itsavowed objects, it is not engaged in businessactivity and therefore, the assessee is not adealer within the meaning of Exception (iii) tosection 2(10) of the Act. The Tax Appeal filedby the assessee came to be allowed and theTribunal order came to be set aside accordingly.

❉ ❉ ❉


CA. Naveen [email protected]

Corporate Law Update

MCA Updates:

1. Special courts under section 435 of theCompanies Act, 2013:

The Central Government has designated thefollowing Courts as Special Courts for thepurposes of providing speedy trial of offencespunishable with imprisonment of two years ormore under the Companies Act, 2013, namely:-

Sl. Existing Court Jurisdiction asNo. Special Court

1 Sessions Judge, Bilaspur State ofChhattisgarh

2 Court of Special Judge, State of Rajasthan(Sati Niwaran), Jaipur

3 Court of Sessions Judge State of Punjaband 2nd Additional SessionsJudge, S.A.S. Nagar

4 Court of Sessions Judge State of Haryanaand 2nd AdditionalSessions Judge, Gurgaon

5 Court of Sessions Judge Union Territory ofand 2nd Additional ChandigarhSessions Judge, Chandigarh

6 I Additional District and Districts ofSessions Court, Coimbatore Coimbatore,

Dharmapuri,Dindigul, Erode,Krishnagiri,Namakkal,Nilgiris, Salemand Tiruppur.

7 II Additional District Union Territory ofand Sessions Court, PuducherryPuducherry

8 Sessions Judge, Imphal East State of Manipur

[F. No. 01/12/2009-CL-I (Vol-IV) dated01.09.2016]

2. Date of Notification of Section 124 and 125:

thThe Central Government has appointed the 7September, 2016 as the date on which theprovisions of section 124, sub-sections (1) to(4), (6) [with respect to the manner ofadministration of the Investor Education andProtection Fund] and (8) to (11) of section 125of the said Act shall come into force.

[F. No. 5/27/2013-IEPF (Part) dated05.09.2016]

3. The Investor Education and ProtectionFund Authority (Appointment ofChairperson and Members, holding ofmeetings and Provision for offices andofficers) Amendment Rules, 2016

After Rule 3, the following rule shall beinserted, namely:

3A “The Authority shall be a body corporateby the name aforesaid having perpetualsuccession and a common seal with power toacquire, hold and dispose of property, bothmovable and immovable, and to contract andshall name, sue or be sued.”

[F. No. 05/27/2013-IEPF dated 05.09.2016]

4. The Investor Education and ProtectionFund Authority (Accounting, Audit,Transfer and Refund) Rules, 2016:

The Central Government has made the InvestorEducation and Protection Fund Authority(Accounting, Audit, Transfer and Refund)Rules, 2016 which shall be effective from07.09.2016.


Corporate Law Update

For details of such rules, please refer the link ath t t p : / / w w w. i e p f . g o v. i n / I E P F / p d f /Rules_06092016.pdf

[F. No. 05/27/2013-IEPF dated 06.09.2016]

5. Relaxation of additional fees for filing FormIEPF-1:

The Ministry has clarified that the Companiesthat have not filed the requisite information inForm 1INV can now file the information inForm IEPF-1. Further, as a onetime measure,for Companies with due date for filing of the

thForm 1-INV falling between the period 25thMarch, 2016 to 06 September, 2016, the

Companies may file Form IEPF-1 withoutadditional Fees on or before 06.10.2016.

[General Circular No. 10/2016 dated07.09.2016]

6. Commencement of applicability of certainsections of Companies Act, 2013:

thThe Central Government has appointed 9September, 2016, as the date on which theprovisions of section 227, clause (b) of sub-section (1) of section 242, clauses (c) and (g)of sub-section (2) of section 242, section 246and sections 337 to 341 (to the extent of theirapplicability for section 246), of the said Actshall come into force.

[F. No. A-45011/14/2016-Ad-IV dated09.09.2016]

7. Companies (Mediation and Conciliation)Rules, 2016:

The Central Government has made Companies(Mediation and Conciliation) Rules, 2016.

For details please refer the link at http://w w w. m c a . g o v . i n / M i n i s t r y / p d f /

CompaniesMediationandConciliationRules_10092016.pdf

th[F. No.1/36/2013-CL. V dated 09September, 2016]

8. Notice for inviting applications forempanelling experts as Mediators orConciliators:

The Ministry of Corporate Affairs (MCA) hasempowered the Regional Director(s) to prepareand maintain/update the Mediation andConciliation Panel of eligible experts inpursuance of Rule 3(1) of Section 442 of theCompanies Act, 2013, who are willing to beappointed as mediator or conciliator in thespecified Regions.

Application can be sent in the Form MDC-1(annexed to the Companies (Mediation andConciliation) Rules, 2016 to the respective

thRegional Directors on or before 08 November,2016.

9. Constitution of Expert Group to look intoissues related to Audit Firms:

The Ministry has constituted an Expert Group,which shall examine the about the adverseimpacts on the Indian Audit Firms due to thestructuring of certain audit firms leading tocircumvention of various regulations, mannerin which auditor’s rotation requirements is beingimplemented by Companies, and imposition ofrestrictive conditions by foreign investors withregard to the auditor’s appointment byCompanies.

The Group shall submit its report within twomonths of this order.

[F. No. 17/112/2016-CL-V dated 30.09.2016]

❉ ❉ ❉


Allied Laws Corner

Adv. Ankit [email protected]

Gupta, Director, V. K. Rathee, Director andR.K. Pramanik, Director. All the directorswere charged for said contraventions interms of Section 42 of the FEMA, 1999.

2. Investigation was initiated on the basis ofinformation received from RBI regardingnon-realization of export bills of M/s.Aviquipo of India Ltd. and its sistercompanies, which were negotiated throughdifferent banks. It is said that since theManaging Director of the company failedto respond to various summons, the detailsof outstanding export bills were demandedfrom the authorized dealer, Oriental Bankof Commerce on behalf of erstwhileGlobal Trust Bank Ltd. The authorizeddealer submitted 10 copies of pending GRsin respect of M/s. Aviquipo of India Ltd.vide their letter dated 24.02.2005.Documents furnished by the bank showedthat the company had failed to realize anamount of US $ 44,91,685.68 against 10GR forms. It is contended that RaisAhmed, authorized representative of thecompany was examined and his statementwas recorded under Section 37 of FEMAon 15.04.2014 and 03.08.2015 in whichhe is stated to have admitted the totaloutstanding amount in respect of noticeecompany. The company also vide its letterdated 21.04.2004 confirmed theoutstanding amount of export bills for thevalue alleged, on this basis it appeared thatthe company had failed to realize the fullexport value of the goods within thespecified time limit and had failed to takereasonable steps for its realization and

Director is not guilty of violating Section 8 ofthe FEMA on failure of company to realizeexport proceeds within stipulated period asthe said Director was not in-charge of day today affairs of the company.

Recently, the Appellate Tribunal for ForeignExchange, New Delhi in the case of Samir Guptavs. Special Director, Enforcement Directorate,Mumbai reported in 73 taxmann.com 9 held thefinding of ED as erroneous in levying penalty ondirector for violation of S.8 of the FEMA on failureof the company to realize the export proceedswithin the stipulated period as admittedly the allegedDirector was not in-charge of the day to day affairsof the company. The Appellate Tribunal further heldthat no SCN was served upon him and no personalhearing was granted to him and thereforeadjudicating order passed without giving appellantopportunity of being heard was in gross violationof principles of natural justice.

A. Facts of the Case :

1. M/s. Aviquipo of India Limited (thecompany) had exported goods abroad buthad failed to take necessary steps to realizethe export proceeds to the extent of US$44,91,685.68 (approx. Rs. 20,21,25,870)within the stipulated period incontravention of the provisions of Section8 of Foreign Exchange Management Act,1999 read with Regulation 9 and 13 of theForeign Exchange Management (Exportof Goods and Services) Regulation, 2000.It was alleged that the Appellant was aDirector of the company along with otherdirectors Rajat Gupta, Executive Director,R.K.T. Dass, Executive Director, Sanjay


repatriation without the general or specialpermission of the RBI.

3. Show-cause notice was issued, however,no replies were filed by the company andits directors, therefore, it was decided toproceed with the adjudication and noticeswere issued for personal hearing on01.02.2006, 03.02.2006, 13.03.2007,07.11.2007 and 16.12.2008, but no noticeeturned up. Show-cause notice was issuedto six noticees apart from M/s. Aviquipoof India Ltd. It is contended that thecompany vide its letter dated 12.03.2007had filed reply to the show-cause notice.Noticee, R.K.T. Das also filed his replyagainst the show-cause notice dated12.03.2007, however no response from theAppellant and other Directors wasreceived, therefore, the proceedings wereheld exparte.

4. The Adjudicating Authority recorded thatthe company has failed to furnish anydetails of efforts made by it to realize theexport proceeds, though it has been statedthat one of the buyers in U.K. had goneinto liquidation. In view of the above, theAdjudicating Authority held that thecompany M/s. Aviquipo of India Ltd. hasfailed to take necessary steps to realize theexport proceeds and thus has contravenedthe provisions of Section 8 of FEMA, 1999read with regulation 9 and 13 of ForeignExchange Management (Export of Goodsand Services) Regulation, 2000 and hasheld the company guilty for the aforesaidcontraventions.

5. In respect of directors the AdjudicatingAuthority has held that they were directorsat the relevant time as per the documentsfurnished by the company as well as bythe bank concerned. He has further heldthat out of all the directors only R.K.T. Das

Allied Laws Corner

has filed his reply to SCN in which he hasstated that he was only Non-ExecutiveDirector and was not involved in the daytoday working of the company and hadalso not attended any board meeting of thecompany. In view of the above theAdjudicating Authority dropped theproceedings against R.K.T. Das andfurther held that rest of the Directorscannot escape their responsibilities,therefore he held them guilty forcontravention of Section 8 of FEMA readwith regulation 9 and 13 of ForeignExchange Management (Export of Goodsand Services) Regulation, 2000 also readwith section 42(1) and (2) of FEMA, 1999and imposed a penalty or Rs. 2 croresagainst the company and a penalty of Rs.20 lakhs against the five directors includingthe Appellant.

6. In Appeal NO. 21/2011 it is alleged thatM/s. Tirumala Impex Pvt. Ltd. hadexported goods abroad but had failed totake necessary steps to realize the exportproceeds within the stipulated period incontravention of the provisions of Section8 of FEMA, 1999 read with regulation No.9 and 13 of the Foreign ExchangeManagement (Export of Goods andServices) Regulation, 2000. Apart from thecompany, nine directors of the companyincluding the Appellant were charged forthe said contraventions in terms of Section42 of FEMA, 1999. Facts of the matterbereft of details are that investigations wereinitiated on the basis of informationreceived from RBI regarding non-realization of export bills by M/s. TirumalaImpex Pvt. Ltd and its sister companies,which were negotiated through differentbanks. Since the Managing Director failedto respond to the summons, the requiredinformation was gathered from the


Allied Laws Corner

authorized dealer, Oriental Bank ofCommerce, formerly known as GlobalTrust Bank, which informed that theexports were made through 25 GR formsfor a value totaling US$ 20399661.43equivalent to Rs. 91,79,84,745 approx.

7. Rais Ahmed was examined and hisstatement under Section 37 of FEMA wasrecorded on 15.4.2004 and 3.8.2005 inwhich he admitted that the sale proceedscould not be realized and were outstandingas per the details furnished by theauthorized dealer. The company alsoconfirmed the information supplied by thebank. In view of the above, it appeared thatthe company had failed to realize the fullexport value of the goods exported and hadfailed to realize the export proceedswithout any general or special permissionof RBI. Show-cause notice wasacknowledged by the company, however,no reply was filed by it and only RaisAhmed and Bhupender Patel filed theirreplies. The matter was posted for personalhearing. It was found that Noticee MukeshPatel had died during the continuance ofthe proceedings, therefore, theAdjudicating Authority in view of the factthat nobody had turned up in response tothe summons and call notices, decided toproceed exparte against the noticees andon the basis of evidence available held thecompany liable for contravention underSection 8 of FEMA and regulation 9 & 13of the Foreign Exchange Management(Export of Goods and Services)Regulation, 2000. With regard to thedirectors the Adjudicating Authority wasof the view that only Bhupesh Patel hasfiled his reply denying his involvement inthe day to day affairs of the company andalso stating that he had hardly attended anyboard meeting of the company, therefore,

he decided to drop the proceedings againstBhupesh Patel, but held the other directorsexcluding Mukesh Patel, who died duringthe pendency of the proceedings, guilty forthe alleged contraventions and imposed apenalty of Rs. 7 crores against the companyand a penalty of Rs. 70 lakhs each againstremaining directors including the Appellantindividually.

B. Arguments of the Counsel for the Appellant:

1. Ld. Counsel for the Appellant contendedthat the Appellant after completingengineering degree in MechanicalEngineering in 1994 joined M/s. Aviquipoof India Limited as an employee on the postof Manger (Technical Services) for lookingafter the production of plastic injectionfactory of M/s. Aviquipo of India Limitedsituated in Kolkata. It has also beensubmitted that M/s. Aviquipo of IndiaLimited was a research, design andstandard organization - approved company(approved vendor for Indian Railways forsupply of plastic Nilon Liners). It iscontended that due to technical knowledge,commitment and dedication, the Appellantwas appointed as Executive Director of thecompany in the year 1996 for looking afterKolkata operations of the company,however, the Appellant resigned from thepost of Executive Director on 12.08.2002.He was during his association with thecompany on pay rolls of the companyand never held shares. Furthersubmission is that the Appellant had noinvolvement in the export activities of thecompany and had never remained in-charge of day to day affairs of thecompany or had any involvement in thebusiness of the company in any way. TheAppellant was not in the knowledge ofthe questioned transactions.


2. It is contended that a show-cause noticewas allegedly issued to the company andto all directors at Mumbai address and notat the registered office of the company inKolkata, based on a complaint. TheAppellant had no knowledge of theshow-cause notice and regarding theproceedings held by the AdjudicatingAuthority, neither the company, nor theED served copy of show-cause notice tohim. It was only when the Appellant visitedthe office of the Directorate of Enforcementin connection with another show-causenotice in M/s. Geekey Exim matters thathe learnt about the impugned order andthereafter immediately applied on 7thOctober, 2010 for obtaining copies throughhis lawyers. Ld. Counsel for the Appellanthas further submitted that the Appellantalong with his counsel appeared in M/s.Geekey Exim matter on 22.10.2010 beforethe Enforcement Directorate and fileddetailed reply bringing the factual positionbefore the Adjudicating Authority whichvide its order dated 28.10.2010 exoneratedthe Appellant of all the charges. Copy ofthe order has been annexed as Annexure-III to the memo of appeal. It is contendedthat the case of the Appellant is similar inthe instant matter to that which he pleadedin the M/s. Geekey Exim mater and wasexonerated.

3. Ld. Counsel for the Appellant hassubmitted in Appeal No. 21/2011 that theAppellant had joined as an Engineer in M/s. Tirumala Impex Pvt. Ltd., Mumbai anddue to his technical acumen, commitmentand dedication was appointed as Non-Executive Independent Director of thecompany but was not responsible forthe day to day working of the companyand was not involved in the exports bythe company and had never remained

in-charge or responsible to the companyfor the conduct of the business. He alsohad no knowledge of any of thetransactions of the company in question.He was neither a shareholder of thecompany nor a shareholder of the groupof companies and had also not attendedany Board Meetings. The Appellant hadbeen residing in Kolkata and was neverposted in Mumbai. Submission is that on10th October, 2005 a show-cause noticeis alleged to have been issued to thecompany and its directors for allegedcontraventions under Section 8 of FEMAread with regulations 9 and 13 of theForeign Exchange Management (Exportof Goods and Services) Regulation, 2000read with Section 42(1) and (2) of FEMA,1999, based on a complaint, however noshow-cause notice or call notice wasserved upon the Appellant and he had noknowledge about the proceedings. It wasonly when he visited the Office ofEnforcement Directorate in connectionwith another show-cause notice relating toM/s. Geekay Exim matter, which was alsoon the similar lines as the instant matter forfiling the reply, he learnt about theproceedings of this matter. The Appellanthas been exonerated and proceedings havebeen dropped against him in the GeekayExim matter.

4. Submission is that in both the appeals theimpugned orders are erroneous, violativeof principles of natural justice and arearbitrary in nature. The AdjudicatingAuthority before proceeding exparte didnot ensure that the show-cause notices weredispatched at the correct address of theAppellant and was duly served upon theAppellant. Similarly, the alleged personalhearing notices were not received at theAppellant, but still the proceedings were

Allied Laws Corner


held exparte. Submission is that theAdjudicating Authority failed to take intoaccount that the Appellant was a Non-Executive Director and had no role in theday to day management of the companyand was not associated with the export ofthe two companies. There was no specificallegation against the Appellant in thecomplaint and the impugned order is silentregarding the role of the Appellant. Hadthe Appellant got an opportunity to defendhimself in the two adjudication proceedingsheld exparte against him and placed correctfacts about his non-involvement in theexports or day to day affairs of thecompanies, the Appellant would have beenexonerated, as he already been exoneratedin the M/s. Geekey Exim matter. Similarlysituated co-noticee Bhupesh Patel has alsobeen exonerated. The appellant cannot beheld vicariously liable under provisions ofSection 42 of the FEMA. The amount ofpenalties imposed are exorbitant, irrationaland arbitrary. The Appellant has beendeprived of his fundamental right to get fairjustice, as due opportunity to defendhimself was not afforded to him. It has alsobeen submitted that an extension wasprovided by the RBI initially for a periodof one year ending on 31.12.2001 and theAppellant had resigned on 03.11.2001. Ithas also been argued that in the statementof Rais Ahmed recorded on 03.08.2005,copy of which has been filed, it has comethat the Appellant had resigned on03.11.2001, thus it is established that hewas not under the employment of thecompany at the relevant time and theextension for realization granted by the RBIwas continuing when he left the company.

5. Ms. Natasha Sarkar, Ld. Legal Consultantfor the ED defended the impugned ordersand has submitted that the proceedings in

both the appeals were held exparte, becausedespite knowledge of the Adjudicationproceedings and issuance of show-causenotices and notices for personal hearing,the Appellant did not turn up in AppealNO. 20/2011. Noticee Rais Ahmed whowas the authorized representative of M/s.Aviquipo of India Ltd, was the ManagingDirector of the Company and wasexamined by the Enforcement Authorities.His statements were recorded on15.04.2004 and 03.08.2005 wherein heconfirmed that a total amount ofUS$4491685.68 was outstanding forrealization in respect of the company. Thisfact was also confirmed by the companyvide its letter dated 21.04.2004. No effortsby the company or its Managing Directorand other Directors including the Appellantwho was also a director and was thusassociated with the management of thecompany and had knowledge of theexports were made for non-realisation ofthe amount of sale proceeds. The Appellantfailed to make any efforts for realizationand repatriation of the amount of saleproceeds. The impugned order is areasoned and speaking order and theliability of the company and the ManagingDirector and Directors has been rightlyfixed and the amount of penalties imposedare reasonable, therefore, the impugnedorder is liable to be affirmed. Thecontention of the respondent that he hadno concern with the day to day affairs ofthe company or had no knowledge andcould learn about the proceedings whenhe went to the office of ED and came toknow about the proceedings is anafterthought.

6. Similarly in Appeal NO. 21/2011, theAppellant was the Director of M/s.Tirumala Impex Pvt. Ltd. in which also

Allied Laws Corner


being a Director his involvement in day today affairs including in the exports inquestion cannot be ruled out. The order isperfectly legal, reasoned and speaking andcannot be set aside. The AdjudicatingAuthority has specifically dealt the rolesof each director in both the appeals andhas held that they were the Directors ofthe company at the relevant period as perdocuments furnished by the noticeecompany as well as the bank concerned.Submission is that the Adjudication Orderin the matter of M/s. Geekay Exim (I) Ltdand Others, which was decided on28.10.2010 cannot be cited as an exemplarby the Appellant in the instant cases copyof which has been filed by the appellant.The appellant in Geekay Exim matter hadput in his appearance and contended thathe was looking after the work at Kolkataand was not looking after the affairs of thecompany i.e. M/s. Geekay Exim (I) Ltd.in Bombay. Relying on his version, theproceedings against the Appellant, weredropped. Submission is that the contentionsof the Appellant in the Appeal No. 20/2011that he had resigned during the period ofextension granted by the RBI and wasposted at Kolkata and was on the pay rollsof the company and had never held shares,has not been substantiated by anydocumentary evidence. Likewise in thematter of M/s. Tirumala Impex Pvt. Ltd.,the argument that the Appellant had beenresiding in Kolkata and was never postedin Mumbai and therefore had noknowledge of the affairs of the companyor the Appellant was a Non-ExecutiveDirector has also not been substantiated byany documentary proof. It has beensubmitted that the responsibility to provethat he was not in-charge or was notassociated lies squarely on the person who

wants to take advantage on the basis of thisplea.

8. The Counsel for the ED further relied uponthe decision in Maganbhai HansarajbhaiPatel v. Asstt. CIT [2013] 353 ITR 567/[2012] 211 Taxman 386/26 taxmann.com226 (Guj.) Hon’ble Gujarat High Court inparagraph 20 of judgment has observedthat it is of course true that the responsibilityof establishing such facts is cast upon thedirectors. Therefore, once it is shown thatthere is a private company whose tax dueshave remained outstanding and samecannot be recovered, any person who wasa director of such a company at the relevanttime would be liable to pay such dues.Further submission is that in the matter ofBriji Gopala Dada (supra), the Hon’bleKerala High Court in paragraph 16 of thejudgment has held that merely because theAppellants were non-executive directors orindependent directors, is not a ground tocome to a conclusion that they have no rolein the day to day administration of thecompany. Though there is a ManagingDirector, who is normally responsible forthe conduct of the company, the companymay also include other directors who in theday to day administration of the companymay be associated along with the managingdirector and this fact be known only to thedirectors and need not be known to others,therefore, the Appellant cannot be absolvedof the liability by claiming that he was aNon-Executive Director. Further in thematter of ANZ Grindlays Bank v.Directorate of Enforcement MANU/MH/0036/1999, the Hon’ble Bombay HighCourt has held in para 40 of the judgmentthat once it is found that there has been acontravention of any of the provisions ofthe Foreign Exchange Regulation Act readwith CSE Customs Act by a firm, the

Allied Laws Corner


partners of which who are in-charge of itsbusiness are responsible for the conduct ofthe same and cannot escape liability, unlessit is proved by them that the contraventiontook place without their knowledge or theyexercised all due diligence to prevent suchcontravention.

C. Findings of the Appellate Tribunal :

1. We have considered the submissions ofLd. Counsel for the Appellant as well asLd. Legal Consultant and have alsoperused the case laws relied upon by theparties. In our view, the case laws reliedupon by the Ld. Legal Consultant donot help the Respondents in the instantappeals as it has neither been contendedby the Enforcement that the Appellantwas in-charge of the export business orresponsible for day to day affairs of thecompany or had played any specific rolein the export of the goods or in thematter of realization of the exportproceeds. Had there been such anallegation then the onus would haveshifted upon the Appellant to prove thathe was not associated with the disputedtransactions and was not responsible forthem. Only on his failure to establish hisinnocence in such eventuality his liabilitycould have been fastened. The Appellanthas specifically pleaded that he was aqualified engineer and was associated onlywith the production of the goods and hadno concern with the business activities ofthe company. The Appellant has claimedthat he was posted in Kolkata and was notposted in Bombay and his role was limitedto the production of the goods which wereto be exported. It has also not come in theevidence that the Appellant was in anymanner associated with the administrationof the company along with the managing

Allied Laws Corner

director of the company. There is no suchallegation either in the complaint or inthe show-cause notice that the Appellantwas in-charge of day to day affairs ofthe company. The appellant has not beenstated to be a partner of the firm/companyand there is no evidence on record to provethat he was in-charge of the business,therefore, the case laws relied upon by Ld.Legal Consultant are not applicable.

2. In Puja Ravinder Devidasani (supra), theHon’ble Supreme Court in para-17 ofthe judgment has held that non-executive director is no doubt acustodian of the governance of thecompany, but is not involved in day today affairs of the running of its businessand only monitors the executive activity.It has been further held that to fastenvicarious liability under Section 141 ofthe Act (Negotiable Instruments Act) ona person at the material time that personshall have been at the helm of the affairsof the company, one who actively looksafter the day to day activities of thecompany and is particularly responsiblefor the conduct of its business. InBhupendra V. Shah (supra) relied upon byLd. Counsel for the Appellant in para-22of the judgment, the Hon’ble Delhi HighCourt has held that Section 42(1) of FEMAextends the liability by a deeming fictiononly to such directors who were at therelevant point in time in-charge, wereresponsible to the company for the conductof its business. The Hon’ble Court in thisparagraph has also observed that moreover,there is nothing in the complaint to explainhow they could said to be in-charge of theaffairs of and responsible for conduct ofits business at the time of contravention.In the matter of Ajay Bagaria (supra)relied upon by the Ld. Counsel for the


Appellant in para-14 of the Judgment, theHon’ble Delhi High Court has analyzedSection 68 of FERA which is parimateriato Section 42 of FEMA, the Hon’ble HighCourt has held that averments imposedmust contain the two mandatoryelements i.e. it would state the personsought to be arraigned as an accusedapart from the company was a personin-charge of the affairs of the companyand responsible for the conduct of itsbusiness and further that such personwas in that capacity at the time ofcommission of offence. Since there is noallegation at all that the appellant wasresponsible in any way with themanagement or business activities or theexports relating to disputed transactions inany way, the finding of AdjudicatingAuthority wherein he has fastened theliability upon all the directors, presumingtheir involvement merely on the basis thatthey were directors of the company at therelevant period, as per documents furnishedby the company as well as the banksconcerned, is erroneous. Further the sameAdjudicating Authority has absolved co-noticee R. K.T. Das in the Orderchallenged through Appeal NO. 20/2011on his plea that he was only a non-executive director and was not involved inthe day to day working of the companyand had not attended any board meetingof the company also. Similar is the plea ofthe Appellant, but since the proceedingswere held exparte there was no occasionfor him to take such plea. Likewise inappeal NO. 21/2011, the AdjudicatingAuthority has dropped the proceedingsagainst the co-noticee Bhupender Patel onthe same grounds and has also dropped theproceedings against the Appellant in the

Adjudicating Order of M/s. Geekay Exim(India) Ltd. dated 28.10.2010.

3. It may be pointed that by merely issuingnotices to a party does not mean thatnotice was duly served upon that party.Sufficient service of notice as per rulesis necessary before the AdjudicatingAuthority can decide to proceed exparteagainst such persons. In the instantappeals the case of the Appellant is that hehad left his service during the period whenthe extension granted by the RBI to thecompany for realization was continuing,no service upon him of the SCN or callnotice for personal hearing was effected,has substance because had the appellantknowledge of the proceedings he couldhave appeared before the AdjudicatingAuthority and taken the same case/pleaupon which proceedings were droppedagainst the Appellant in the matter of M/s.Geekay Exim (India) Ltd. The impugnedAdjudication Orders, in our view arenot in consonance of law and smacks ofarbitrariness on the part of theAdjudicating Authority, resulting ingross violation of principles of naturaljustice. Therefore, in view of the above,we find merit of the appeals, which deserveto be allowed.

4. Consequently, both the appeals are allowedand both the Adjudication Orderschallenged are set aside. No order as tocosts. Pre-deposit amount if any by theAppellant shall be refunded by theRespondents after the expiry of the periodof limitation for appeal.

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Allied Laws Corner


CA. Pamil H. [email protected]

From Published Accounts

AS 13 InvestmentsSignificant Accounting Policies

Teamlease Services Ltd.

a. Current Investments:

Investments that are readily realisable andare intended to be held for not more than oneyear from the date, are classified as currentinvestments. Current investments are carried atcost or fair value, whichever is lower.

b. Long Term Investments:

All other investments are classified as long terminvestments. Long term investments are carriedat cost. However, provision for diminution ismade to recognize a decline, other thantemporary, in the value of investments, suchreduction being determined and made foreach investment individually. In case ofinvestments in units of a mutual fund, the assetvalue of units is considered at the market / fairvalue.

IFB Industries Ltd.

Non-current investments are stated at cost lessdiminution in value, if any other than temporary ,determined on specific identification basis.

Current investments are stated at lower of costand fair value . The comparison of cost and fairvalue is carried out separately for each investment.

Profit or loss on sale of investment is determined asthe difference between the sale price and carryingvalue of investment, determined individually foreach investment.

HOV Sevices Limited

Investments are classified into long – terminvestments and current investments. Long-term

investments are carried at cost and provision is madeto recognize any decline, other than temporary, inthe value of such investments. Current investmentsare carried at the lower of the cost and fair valueand provision is made to recognize any decline inthe value of investment. Profit or loss on sale ofinvestment is determined as the difference betweenthe sale price and carrying value of investment,determined individually for each investment.

Cairn India Limited

Investment that are readily realisable and intendedto be held for not more than a year from the date onwhich such investments are made, are classified ascurrent investments. All other investments areclassified as long –term investments. Currentinvestments are measured at cost or market value,whichever is lower, determined on an individualinvestment basis. Long term investments aremeasured at cost. However , provision fordiminution in value as made to recognise a declineother than temporary in the long term investments.

BGR Energy Systems Limited

Investments are classified into long-term and currentinvestments based on the intention of themanagement at the time of acquisition.

Long –term investment are stated at cost lessprovision for diminution in value other thantemporary, if any current investments are carried atcost or fair value whichever is lower.

NBCC (India) Limited

a) Current Investments are valued at Lower ofCost or Net Realizable Value.

b) Long Term Investment are stated at cost.Provision for diminution in the value of longterm investments is made only if, such declineis other than temporary in the opinion of themanagement.


From Published Accounts

Motilal Oswal Financial Services

Investments are classified into long term investmentsand current investments. Investments that areintended to be held for one year or more areclassified as long-term investments and investmentsthat are intended to be held for less than one yearare classified as current investments.

Long term investments are valued at cost. Provisionfor diminution in value of long term is made if inthe opinion of management such a decline is otherthan temporary.

contd. from page 395

Current investments are valued at cost or market/


fair value, whichever is lower.

On disposal of investments, the different betweenits carrying amount and net disposal proceeds ischarged or credited to the statement of profit andloss.

Investment property

An investment is building which is not intended tooccupy substantially for use by, or in the operationof the company, is classified as investment property.Investment property are started at cost, net ofaccumulated depreciation and accumulatedimpairment losses, if any.

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accordingly, but the Commissioner in exercise ofsuo moto revision power disallowed the adjustmentsand raised the revised tax demand on the groundthat for the sale transactions which took place inthe year 2007-08 for which the credit notes wereissued, the benefit of reduced tax could be grantedonly during such period and not during thesubsequent year. On a revision petition the Tribunalheld that the procedure adopted by the dealer waslegal and proper. The Tribunal observed that sincethe discount of each customer was crystallized onlyon March 31, 2008, the final price payable for thegoods sold to the customers could be ascertainedonly after April 1, 2008. The credit notes were,therefore, prepared and accounted for in the booksof the dealer in the first quarter of financial year2008-09. On an application:

Held, dismissing the petition, that in terms ofsections 60 and 61 of the Gujarat Value Added TaxAct, 2003, the dealer was entitled to issue credit

notes once the amount of tax shown as charged inthe tax invoice exceeded the actual tax charged inrespect of the sale concerned. This was preciselywhat the dealer had done and claimed benefit ofreduced tax collected from the purchasers. Evensection 8 permitted adjustment of tax which wasfound to be in excess of what was payable duringthe period when it had become apparent that thetax paid was incorrect. In essence what the dealerdid, was to reduce the total turnover of theassessment year 2008-09 to the extent its value afterdiscount during the previous year had come downwhich would have a direct relation to the tax payableby the dealer. Therefore, the order of the Tribunalupholding the device adopted by dealer was valid.

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From the Government

CA. Kunal A. [email protected]

Income Tax

1) Notification on Income Computation andDisclosure Standards

The Central Government hereby notifies theincome computation and disclosure standardsas specified in the Annexure to this notificationto be followed by all assessees (other than anindividual or a Hindu undivided family who isnot required to get his accounts of the previousyear audited in accordance with the provisionsof section 44AB of the said Act) following themercantile system of accounting, for thepurposes of computation of income chargeableto income-tax under the head “Profits and gainsof business or profession” or “Income fromother sources”.

This notification shall apply to the assessmentyear 2017-18 and subsequent assessmentyears.

(For Annexure in detail refer Notification No.87, dated 29/09/2016)

2) Amendment in Income tax rules and form3CD

The Central Board of Direct Taxes herebyamends the Income-tax Rules, 1962 and form3CD by substituting the clause 13 for sub-clause (d) in Part B of Form 3CD w.e.f. 01/04/2017 to incorporate compliance of ICDS.

(For full text refer Notification No. 88, dated29/09/2016)

3) Notification regarding insertion of rule 129and form no. 68 – Immunity from penaltyfor underreporting and misreporting ofincome

The Central Board of Direct Taxes herebymakes the following rules further to amend theIncome-tax Rules, 1962, namely:—

1. (1) These rules may be called the Income-tax (25th Amendment) Rules, 2016.

(2) They shall come into force on the 1stday of April, 2017.

2. In the Income-tax Rules, 1962 (hereinafterreferred to as the said rules), after rule 128,following rule shall be inserted, namely:—

“129. Form of application under section270AA.— An application to the AssessingOfficer to grant immunity from impositionof penalty under section 270A and frominitiation of proceedings under section276C or section 276CC shall be made inForm No.68.”.

(For full text and form 68 for applicationunder section 270AA(2) of the Income-taxAct, 1961 refer Notification No. 90, dated05/10/2016)

Service Tax

1) Amendment in Service tax return FormST3

The Central Government hereby makes therules further to amend the Service Tax Rules,1994, by amending the form ST3 form

(For Full text refer Notification No. 43, dated28/09/2016)

2) Guidelines for arrest in relation to the offencespunishable under the Finance Act, 1994 andCentral Excise Act , 1944.

(For full text refer Circular No. 201, dated30/09/2016)

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1 Forthcoming Programmes

Date/Day Time Topic Speaker Venue

12.11.2016 7.00 p.m. to Diwali Get Together Navdeep Hall,Saturday 9.00 p.m. Near Navrang Hall,

Naranpura,Ahmedabad

10.12.2016 8.30 a.m. Cricket Match President XI Sardar Patel Stadium,Saturday v/s Secretary XI Navrangpura,

Ahmedabad

31.12.2016 8.30 a.m. Cricket Match Sardar Patel Stadium,Saturday Navrangpura,

Association News

CA. Dilip U. JodhaniHon. Secretary

Ahmedabad

CA. Riken J. PatelHon. Secretary

Glimpses of Past Events

CA. Balmukund T. Nagori, very senior member of the Association

left for Heavenly Abode on 07/09/2016. May the departed soul rest in

eternal peace.

OBITUARY

3rd Brain Trust Meeting on GST CA. Sandesh Mundra -delivering Lecture on GST


Across1. The second joint program of CAA with BCAS

is going to be held at ________.2. Mind is everything, as you ________ so you

become.3. Newly inserted section 44ADA applies to an

assessee being a resident, engaged in

Down4. P & H High Court in case of CIT v/s Health

_________.

Life Sciences Pvt. Ltd. has held that income ofdoctors is not ______ but professional charges.

5. There can be no disallowance u/s 43B wherethe amount is taken to the _____________without any charge to Profit and Loss account.

6. Where the business of the company is to leaseits property and earn rent, the income so earned

ACAJ Crossword Contest # 29

is to be taxed as ____________ Income.

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.

4. Members may submit their reply eitherphysically at the office of the Association orby email at [email protected] on orbefore 25/10/2016.

5. The decision of Journal Committee shall be final

ACAJ Crossword Contest # 28 - Solution

and binding.

Across1. Marriage2. Pholosophy 3. Company

Down4. Application 5. Four

Winners of ACAJ Crossword Contest # 28

1.

6. GST

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CA. Raj Shah

2. CA. Manan Vyas

1 5

4 6

2

3