Business Advisor - December 25, 2012 - Preview Copy
Transcript of Business Advisor - December 25, 2012 - Preview Copy
Volume I Part 5 December 25, 2012 1 Business Advisor
Business
Advisor (Fortnightly inputs for professionals and executives)
Volume I Part 5 December 25, 2012
Volume I Part 5 December 25, 2012 2 Business Advisor
Contents
Residence Certificate Rules - T. N. Pandey
Secretarial Standards - Dr S. Chandrasekaran
Vegetables on EMI - Bimbadhar Mishra
Service tax on reimbursements ultra vires - Dr Sanjiv Agarwal
Cooperative governance - Dr B. Yerram Raju
Corporate Social Responsibility (CSR)
Rahul Pillai, Country Manager India, Interem
Year-end observations
Manish Garg, President, Everest Industries Ltd
Ankur Bhatia, Executive Director, Bird Group
Abhijita Kulshrestha, Gemstone Universe
Sudarshan Boosupalli, GM-India, Ruckus Wireless Inc.
Bijay Agarwal, Managing Director, Salarpuria Sattva
Preenand Premachandran, CEO, Hebron Properties
Suraj H. Asrani, COO, Cornerstone Properties
Asif Upadhye, CFO, Never Grow Up
Information - Section 80CCG
Case laws update - V. K. Subramani
(Cover image: Toshiba Satellite laptop keyboard)
Disclaimer: "Management and editors do not necessarily agree with the
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and of the query editors in their replies. The editors, authors and / or
publishers shall not be responsible for any kind of result generated out
of any action taken on the basis of suggestions, etc., made in any of the
write ups, interviews contained in any part of the magazine or for any
error, omission, commission to any person, whether subscriber or
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articles, queries and replies etc., rests with the publishers".
Volume I Part 5 December 25, 2012 3 Business Advisor
Tax Residence Certificate Rules are half-
baked response to treaty-shopping
T. N. Pandey
The object of Double Taxation Avoidance Agreements
(‘Treaties’ for short) is to eliminate the double taxation of
certain incomes where residents of one country derive income
from a source in another country and also aim to ensure
facilitating international trade and commerce, flow of
investments as also equitable collection of revenue. Obviously,
benefits of such treaties can legitimately be availed of by the
residents of the contracting States. However, the residents of other (third)
States misuse the bilateral tax treaties through treaty-shopping which is
done through the establishment of base
companies solely for enjoying the benefits of tax
treaty rules without being a party to these.
Indo-Mauritius tax treaty
Indo-Mauritius tax treaty is a classical example
to illustrate how treaties are abused. Treaty-
shoppers have made Mauritius a preferred
destination for investments in India. Because of
loopholes in the treaty, 40% of FDI comes to India
through Mauritius! One major abuse of this
treaty is that a mere certificate of residence from
Mauritius, which cannot be questioned by the AO, confers tax exemption in
respect of capital gains! Umpteen instances from the decisions of Courts
and Rulings from Authority for Advance Rulings (AAR) have demonstrated
misuse of the treaty. One instance of abuse can be seen from the recent
ruling of AAR in SmithKline Beecham Port Louis Ltd., in re (2012) 209
Taxman 596. The company before the AAR claimed to be a tax resident of
Mauritius. It is a part of ‘G’ group of companies. Its shares are held by a
Company ‘S’ of United Kingdom. The applicant holds 99.9 per cent shares of
an Indian company ‘GS’ which is also a part of ‘G;’ group. The applicant
proposed to transfer its shares in ‘GS’ to ‘K’ a Singapore based company. It
is also a part of ‘G’ group of company. The claim before the AAR was that
the income derived by the proposed sale would be capital gains and though
it is taxable in India under the Income-tax Act, it is not taxable in India in
view of Article 13 of Double Taxation Avoidance Convention between India
and Mauritius. On these facts and issues raised, the AAR held in favour of
Treaty-shoppers
have made
Mauritius a
preferred
destination for
investments in
India.
Volume I Part 5 December 25, 2012 4 Business Advisor
applicant deciding that since there is no material to rebut the presumption
of tax residency of the applicant it is eligible for claiming the benefit of the
India-Mauritius DTAC by invoking section 90(2). If so, it has to be ruled that
article 13 is attracted and going by paragraph 4 thereof, the capital gains is
not chargeable to tax in India.
CBDT’s blessings to misuse of Mauritius treaty
The CBDT issued Circular No. 789 dated 13.4.2000 to the effect that
wherever a certificate of residence is issued by the Mauritius authorities,
such certificate is to constitute sufficient evidence for accepting the status of
residence as well as beneficial ownership for applying the Convention
(Treaty). This test of residence is also to be applied in respect of income from
capital gains on sale of shares. Accordingly, FIIs, etc., which are resident in
Mauritius will not be taxable in India on income from capital gains arising
in India on sale of shares as per paragraph 4
of article 13 of the Convention of tax treaty
between India and Mauritius on production of
residence certificate.
Delhi HC’s decision
The Delhi High Court in the case of Shiva Kant
Jha (2002) 256 ITR 563(Del) did not consider
CBDT’s circular valid. It observed that the
function of an ITO is quasi-judicial in nature.
It is for the purpose of finding out as to
whether an assessee can take shelter under
double taxation avoidance treaty or not; he is
entitled to make such enquiries, which are
permissible in law. For that purpose, it not only is entitled to lift the
corporate veil but also is entitled to find that not only as to whether a
company is actually a resident of Mauritius or not, and or whether it is
paying income-tax in Mauritius or not, or in fact the company is not a
resident of Mauritius at all. Conclusiveness of a certificate of residence
granted by the Mauritius tax authorities is not contemplated under the
treaty or under the Act. Taking undue advantage of a scheme only for the
purpose of avoidance of tax cannot but be deprecated and this treaty-
shopping, which amounts to abuse of Indo-Mauritius bilateral treaty, may
amount to fraudulent practice and cannot be encouraged. Unfortunately,
this decision of the HC was contested by Government of India and the
Circular was considered valid by the apex court not on merits but on
technical ground that the CBDT is competent to issue such circular.
Conclusiveness of a
certificate of
residence granted
by the Mauritius
tax authorities is
not contemplated
under the treaty or
under the Act.
Volume I Part 5 December 25, 2012 5 Business Advisor
Nonetheless, the Delhi HC’s decision indicates that the CBDT’s circular is
not well-conceived.
Such abuses have been continuing for years with the Government’s
connivance. However, the FM took note of (or was forced to do so by adverse
criticism) such practices only in the Finance Act, 2012 when sub-sections
(4) [identically worded] were introduced in sections 90 and 90A of the
Income-tax Act, 1961, barring availing of tax benefits under tax treaties
without Tax Residence Certificate.
The objective behind such provisions has been explained in the Explanatory
Memorandum to Finance Bill, 2012 thus:
“….It is noticed that in many instances the taxpayers who are not tax resident
of a contracting country do claim benefit under the DTAA entered into by the
Government with that country. Thereby, even third-party residents claim
unintended treaty benefits… Therefore, it is proposed to amend Section 90
and Section 90A of the Act to make submission of
Tax Residency Certificate containing prescribed
particulars, as a necessary but not sufficient
condition for availing benefits of the agreements
referred to in these Sections.”
These tax provisions have been supplemented by
Rules and forms by promulgation of Income Tax
(12th Amendment) Rules, 2012. These changes
prescribe the furnishing of information for
getting TRCs by non-resident and resident
taxpayers and are intended to prevent third-party residents from taking
unintended tax benefits. These, however, leave much to be desired.
Certain issues concerning issue of TRCs need deliberation
(A) In case of non-residents
Such assessees need to give information regarding their activities.
Without such information, the system can be misused by fly-by-night
operators as is happening in the context of Mauritius treaty.
The format in which certificate is to be given (in cases of non-
residents) to ensure uniformity and completeness, should be a part of
tax treaties (DTAAs).
It should be clarified that the AO getting the TRC can question the
information given in it and its genuineness unlike as in the case of
Mauritius where the CBDT has specifically barred any enquiry by its
The Delhi HC’s
decision indicates
that the CBDT’s
circular is not
well-conceived.
Volume I Part 5 December 25, 2012 6 Business Advisor
circular no. 789. The observation concerning TRC that “it is a
necessary but not sufficient condition for availing benefits of the
agreements” shows that the AO is not barred from making scrutiny.
Clarity needs to be brought in this regard.
Whether new TRCs would differ from those that are being issued by
Mauritius? There is no case for making any discrimination in this
regard?
In view of new TRCs CBDT’s circular No. 789 loses its relevance and
needs to be withdrawn.
With the scheme of new TRCs coming into operation, the Shome
Committee’s recommendation that (a) GAAR provisions should not
apply where circular No. 789 is applicable; and (b) that circular no.
789 should continue to apply in cases of Mauritius taxpayers, become
redundant. It may be so stated.
(B) TRC in the case of residents
The format for application for TRC and certificate should be necessary
only in cases of new taxpayers, as in the case of existing taxpayers,
whether a person is resident or not is already available with the AO in
the return filed. The existing taxpayers should not be burdened for
applying for TRCs in an elaborate way. A simple application should
do.
A time limit should be
fixed within which TRC would
be issued after receipt of
application in cases of
resident taxpayers.
Application fee needs to
be charged for issuing TRCs to
avoid infructuous work.
The Government seems to
have moved halfway
reluctantly. To make the
scheme to succeed, it needs to
be fine-tuned on the lines
indicated.
(T. N. Pandey is former
Chairman, Central Board of
Direct Taxes)
Volume I Part 5 December 25, 2012 7 Business Advisor
Secretarial Standards strengthen
corporate governance
Dr S. Chandrasekaran
The clearance of the Companies Bill by Parliament on the
night of 18th December, 2012, is a welcome move. The
objectives of the Bill, inter alia, are enhanced disclosure and
transparency, protection of interest of all stakeholders for
good corporate governance, and at the same time omitting
unwanted and obsolete compliance requirements. On its
enactment, it would be corporate-friendly for proper
compliance and at the same time have
better regulation of corporate India.
It is also interesting that the Government
has felt the importance of introducing non-
financial standards besides financial
standards and has given due statutory
recognition to Secretarial Standards. The
Act provides broad parameters for proper
compliance, but companies in the absence
of clear-cut information follow divergent
secretarial practices and compel the
Government to issue circulars and
clarifications from time to time.
Secretarial Standards issued by ICSI
In the changing economic and commercial climate, nationally as well as
internationally, modern methods of convening meetings including audio and
video visuals safeguard the interest of investors’ fraternity and all
stakeholders, but divergent methods and practices are being followed by
corporate professionals. In recognition of the practical difficulties being
faced by professional members, the Institute of Company Secretaries of
India (ICSI) constituted Secretarial Standards Board with the aim of
preparing secretarial standards. The basic aim is to integrate, harmonise
and standardise all diverse secretarial practices for better corporate
governance and it was left to the corporate sector to adopt such secretarial
standards voluntarily. Many of the listed companies follow the secretarial
standards in letter and spirit for better corporate governance. The
Standards are common for both listed and unlisted companies.
The basic aim of
Secretarial Standards
is to integrate,
harmonise and
standardise all diverse
secretarial practices
for better corporate
governance.
Volume I Part 5 December 25, 2012 8 Business Advisor
Acceptance of suggested standards by Government
Some of the recommendations made in the Standards has been given due
importance by the Government and find place in the Companies Bill.
Gap between two board meetings: The Act requires to have a proper board
meeting once in a quarter thereby leaving a change to corporate to have a
gap between two board meetings to the extent of just a few days short of six
months. However, listed companies have to ensure that the gap between two
board meetings does not go beyond 120 days. Secretarial Standards suggest
that there should not be a gap of more than 120 days and in the Bill the
same has been introduced.
Length of Notice of Board Meeting: There being no mention about the length
of notice for convening a board meeting, companies follow diverse practices
and small companies tend to misuse such freedom. The suggestion of 15
days notice for convening a board meeting in the Standard has been
considered and now it is kept that a minimum of seven days notice is to be
given for convening a board meetings.
Gifts at AGM: The recommendation made in the Standard for General
Meeting that no gifts shall be given at the annual general meeting has
already been considered by the Government and it has issued a draft
circular in this regard.
Recording of general meeting proceedings: Elaborate information on
preparation and maintenance of general meeting’s proceedings has been
provided in the Standard. The Government has now given a thought and
introduced that a Report of all Annual General Meetings has to be filed with
the Registrar of Companies. This would further strengthen the investors’
confidence and at the same time available in a public portal for their
information.
A place in the Companies Bill
The ICSI has so far come out with following ten Secretarial Standards which
are recommendatory in nature:
SS-1 in relation to meetings of Board of Directors;
SS-2 in relation to general meetings;
SS-3 in relation to dividend;
SS-4 in relation to registers and records;
Volume I Part 5 December 25, 2012 9 Business Advisor
SS-5 in relation to minutes;
SS-6 in relation to transmission of shares and debentures;
SS-7 in relation to passing of resolutions by circulation;
SS-8 in relation to affixing common seal;
SS-9 in relation to forfeiture of shares;
SS-10 in relation to Board’s report.
The Secretarial Standards Board (SSB) was constituted with the objective of
formulating Secretarial Standards with eminent and senior members of the
profession as its members. Besides, SSB is represented by the Ministry of
Corporate Affairs, the Securities and Exchange Board of India, Chambers of
Commerce and by both professional bodies viz. the Institute of Chartered
Accountants of India and the Institute of Cost Accountants of India.
The Government, having considered the merits of Secretarial Standards,
which would further strengthen the corporate governance, has now made it
mandatory for the first two standards on Meetings of Board of Directors and
General Meetings for compliance by the corporate India. No doubt, such an
initiative would play a positive role and sooner or later all Secretarial
Standards would be made mandatory as in the case of financial standards.
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates,
Company Secretaries, Delhi www.cacsindia.com)
Volume I Part 5 December 25, 2012 10 Business Advisor
Service tax on reimbursements is now
ultra vires
Dr Sanjiv Agarwal
Prologue
Service providers and professionals are aware that Service
Tax is payable @ 12.36 per cent on the value to taxable
services which implies gross amount charged by the service
provider for such service provided or agreed to be provided.
The valuation of services is further governed by valuation
rules wherein it has been provided that if some expenses or costs are
incurred by the service provider in the course of provision of service, all
such costs shall be treated as a part of the consideration and be included in
the value for the purpose of Service Tax. However, if such expenses are
incurred as a pure agent of the service receiver, they
are excluded from the value, subject to seven
stringent conditions so much so that even where it is
a case of reimbursement, in most of the cases, it may
not get excluded.
Recent court verdict
As a major relief to all the service providers, the
Delhi High Court in Intercontinental Consultants and Technocrats Pvt Ltd v.
Union of India (2012) 12 TMI 150(Delhi); TIOL – 966- HC-DEL-ST has
overruled this provision stating that imposing Service Tax on
reimbursements is not in the scheme of law and such a provision is ultra
vires (illegal) the Finance Act, 1994 itself.
In this judgment, the court has held that what is to be taxed is the gross
amount charged by the service provider ‘for such service’. The words ‘such
service’ are important for taxation. It is only the value of ‘such service’ which
can be taxed and nothing else. The value of service, to be taxed, can,
therefore, never exceed the gross amount charged by the service provider for
such service provided. Thus, there can be no Service Tax on
reimbursements as such reimbursements (say, travelling, accommodation
etc.) as it would amount to double taxation.
The court has upheld that Service Tax cannot be levied on reimbursement of
expenses, that too a case of consulting engineer’s services. It would also
The words
‘such service’
are important
for taxation.
Volume I Part 5 December 25, 2012 11 Business Advisor
imply that such reimbursements cannot be taxed in case of other service
providers also which may include architects, management consultants,
chartered accountants, company secretaries, cost accountants, advocates,
scientists or even a beautician.
The issue of imposing Service Tax on reimbursement of expenses has always
been a issue of debate and dispute both in pre- and post-2006 era when
Service Tax (Determination of Value) Rules, 2006, were notified, and concept
of ‘pure agent’ was brought in. ‘Pure agent’ in the rules has been so defined
that service provider can never be called a pure agent so long as he utilises
or consumes the services, for which reimbursement is sought in rendering
of output taxable service. Such a rule defeats the very purpose of
reimbursement and such amounts are subjected to double taxation: one,
when original service provider provides such service; and, two, when
reimbursement is sought, even on actuals without any mark-up or profit
element.
Other relevant pronouncements
Earlier in CCE & C, Rajkot v. Reliance
Industries Ltd (2012) 37 STT 359 (Supreme
Court), where Department was in appeal,
the apex court held that expenses incurred
on account of reimbursable expenses do not
form part of value of taxable services. Hence
reimbursable charges incurred by assessee
for travelling allowances to consulting
engineers are not required to be included in
the fees for services so paid by them for the
purpose of Service Tax. But the Supreme Court did not hold that Rule 5(1)
is ultra vires the provisions of section 67 of the Finance Act, 1994 which
provides for provisions on valuation of taxable services.
However, contrary to a clear stand taken by Delhi High Court and Supreme
Court, a Larger Bench of CESTAT in Shri Bhagavathy Traders v. CCE (2011)
33 STT 1 (Cestat, Bangalore), earlier held that the cost of inputs or input
services which go into the manufacture or output services cannot be
considered as reimbursements for service provider. The reimbursement will
arise only when the person actually paying was under no obligation to pay
the amount and he pays the amount on behalf of the buyer of the goods and
recovers the said amount from the buyer of the goods. Only when the
service recipient has an obligation legal or contractual to pay certain
amount to any third party and the said amount is paid by the service
The apex court held
that expenses
incurred on account
of reimbursable
expenses do not form
part of value of
taxable services.
Volume I Part 5 December 25, 2012 12 Business Advisor
provider on behalf of the service recipient, the question of reimbursing the
expenses incurred on behalf of the recipient shall arise. The claim for
reimbursement towards rent for premises, telephone charges, stationery
charges, etc., amounts to a claim by the service providers that they can
render such services in vacuum. What are cost for inputs services and
inputs used in rendering services cannot be treated as reimbursable costs.
There is no justification or legal authority to artificially split the cost
towards providing services partly as cost of services and the rest as
reimbursable expenses.
In such cases, effectively, double taxation takes place as in the first place,
the original service provider charges tax and then when reimbursement is
claimed, even without any margin or profit on actuals only, then also
Service Tax is leviable. This interpretation is a major relief to the service
providers but it may be short-lived as the Government is most likely to
challenge the same.
Epilogue
Now that the Delhi High Court has announced its judgment, the ball lies in
the court of the Government of India. Since this judgment is likely to have a
major impact on Revenue and will also unsettle the settled position on
interpretation of law on reimbursement of expenses, it will create a lot of
confusion in the minds of assessees as well as service providers. The
judgment is most likely to be appealed against and may also get stayed. If
not or if it takes time, the Government has one more weapon in its armoury;
i.e., to amend the law in the ensuing Budget and it may be pleased to do so
retrospectively for which it is known for.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Chartered
Accountants, Jaipur www.ascoca.org)
Volume I Part 5 December 25, 2012 13 Business Advisor
Cooperative governance
Dr B. Yerram Raju
The Constitution 97th Amendment Act 2012, one of the
very progressive legislations of the UPA Government,
aims to correct mis-governance of cooperative societies
in the country, among other important provisions, at a
time when speaking of good governance is akin to
smelling jasmine in fish and fowl market. The Act itself
specified that the States shall amend their respective
cooperative Acts before February 14, 2013, one year from the date of
notification of the Act in line with the provisions of this Act. If the States do
not amend their Acts as above, the 97th Amendment Act shall govern the
State Cooperatives.
Article 19(4) defined Cooperative Society as one that is promoted, managed
and controlled by members. This would mean that the control of the
Cooperative Societies to whatever extent it rested with the Registrar of the
Cooperative Societies shall be unconstitutional. All such provisions in the
existing Acts shall be removed from the modified Acts.
It also specified in section 243ZO that such member to participate in
elections should be actively availing the services of the Society and should
be attending its meetings with certain regularity. This called for defining the
Active Member in the new Act of the States.
This Act under article 243ZK also specified that the States shall also set up
a State Election Authority to conduct elections to the Cooperative Societies
in the State and these should be conducted once every five years. If the
State Government so chooses, it can entrust the responsibility to the State
Election Commission, but with specific mention in the newly amended
Cooperative Act. It has also mentioned that such elections should be
conducted in a manner that the new Board should assume charge
immediately after the first Board concludes its term. There are around six
lakh cooperatives in the country with estimated 23 million members. It has
become a habit with the States conducting such elections irrespective of the
party in power to go in for enrolment of members just before elections as
anybody paying a small share capital of ten rupees can become a member.
To prevent such malpractice the Act, in section 243ZO, specifies the
eligibility of members who can participate in voting.
Volume I Part 5 December 25, 2012 14 Business Advisor
The Act clearly defines Board as the ‘Board of Directors or the Governing
Body of the Society, or whatever name called, to which the direction and
control of the management of the affairs of a society is entrusted.’ There is
brazen violation of the Constitution by even the UPA-ruled State like Andhra
Pradesh. The 97th Constitution Amendment Act 2012 dealing with
Cooperative legal reforms and governance statutorily seeks a State Election
Authority to conduct elections to cooperatives and the States are to carry
out all the amendments required before February 14, 2013. The State that
has been postponing elections to cooperatives for the last two years
announced them hurriedly to have the last laugh on their subversive
methods of winning the elections. The new Act would not allow non-active
members to cast their vote. The ruling party is afraid of losing hold on the
cooperative societies that hitherto formed the bedrock of State politics.
States like Tamil Nadu and Karnataka issued ordinances repeating the
Central Act that were returned promptly.
The Board shall have maximum 21 members and
provided for reservation of SC/ST and women not
exceeding three provided the Society base itself
does not have such constituency. General Body has
been given supreme authority thus conferring
autonomy in the Society. The rights of members
have also been defined along with the information
the society should provide to the members and the
regulator. The Board shall have three independent
professional directors but would not have voting
rights. These directors should submit to the
General Body their statement of assets and liabilities and shall not be
defaulters to the society in terms of their obligations.
No Board can be superseded by the Government for more than six months
with the exception of cooperative banks where the supersession can be for
one year under the direction of the RBI.
Governance of cooperatives through this Act provides for better participation
in its management and control and has prospect of superior governance
over the existing Companies, where the shareholders of the Company have
to understand the company only from their half-yearly and annual reports.
Cooperatives as body corporate managed and controlled by members could
compete on their own terms effectively with other forms of business
organisations.
(Dr B. Yerram Raju is Regional Director, PRMIA-Hyderabad www.prmia.org)
The new Act
would not allow
non-active
members to
cast their vote.
Volume I Part 5 December 25, 2012 15 Business Advisor
Corporate Social Responsibility (CSR):
Business leader’s views
Interem
Rahul Pillai, Country Manager India
Save the Children India (STCI), located in Sarai Kale
Khan, New Delhi, was established eight years ago. It
has grown from a handful of children to 525 children
and women who benefit from STCI. This NGO provides
preschool, computer literacy, academic assistance,
vocational training, health/ nutritional education,
anti-trafficking and community awareness. The
American Women Association (AWA) has been
sponsoring the Christmas party in total or in
partnership with other organisations for the past six
years. The party has grown to be the highlight of the
year for the children and women of STCI. Over the years, gifts have been
household goods, toys, sweaters, jackets, school-bags and ladies handbags.
There have been many wonderful volunteers, assisting with gift-giving and
playing Santa (even an Ambassador’s son). The Christmas party is held in a
Hindu Temple for the benefit of a predominantly Muslim community,
sharing a Christian Holiday. It is a unique and wonderful gathering that
celebrates the true essence of the season, peace and goodwill to all.
Transporting 525 gifts usually entailed a well-coordinated caravan of cars.
This year, the NGO was blessed with a helping hand from Interem. The
Interem team helped to load, transport and unload 36 boxes filled with gifts
absolutely free of cost.
(Interem is a part of the Freight Systems Group, a Dubai-based MNC with
business interests in shipping, freight forwarding, supply chain,
warehousing, BPO and relocation services, with presence in 18 countries
and a turnover exceeding $350 million.)
Volume I Part 5 December 25, 2012 16 Business Advisor
Year-end observations
Building solutions
Manish Garg, President, Everest Industries Ltd
How has been 2012 for the industry/ sector/ domain
– what has changed during the year and also what
has not, both in tune and contrary to expectations?
The year 2012 was a mixed lot for the Indian
building solution; domestic business did well, and
private sector demand remained robust. However,
slowdown in infrastructure projects affected the
market a little bit. We at Everest Industries Ltd are a
building solutions company. Our order bookings
went up by 25% as compared to previous year, and sales went up by about
10%, the progress has been heartening on account of repeat business from
our major customers. We have done various projects during last one year,
such as a 5-storey building for IIT in Mumbai, 60,000 sq ft.; a
manufacturing facility for Parle Agro, in Banaras, 1,20,000 sq ft.; a factory
for a German multinational in filter business Mann and Hummel Filters at
Bawal, Haryana, 95,000 sq ft.; buildings for Ranbaxy, Wockhardt, Godrej,
Cadbury, Jeumont, Kalpana Industries; actually we completed over 200
projects last year. Acute shortage of trained manpower for design and
execution is a big challenge, everyone wants readymade engineers, no one is
interested in creating them. Everest is doing a lot in this field by training
raw talent under its unique GET/ DET programme wherein fresh engineers
go through a rigorous classroom and practical training in the concerned
domain, before being absorbed as engineers.
Outlook for 2013 in the specific industry/ sector/ domain, with reasoning.
Our target is to double our business in next one year, and we plan to
achieve this through organic growth, better utilisation of our capacities, and
increase in productivity. We also are working upon to increase our
penetration in the market place to be deepest penetrated. We are starting a
roofing factory in Orissa which will be the biggest in the Eastern zone.
Volume I Part 5 December 25, 2012 17 Business Advisor
Aviation
Ankur Bhatia, Executive Director, Bird Group – and Chairman of CII’s
Core Committee on growth potential of civil aviation and airports
The year 2012 saw Indian aviation industry going
through some prominent challenges, which hindered its
projected growth. The downfall of Kingfisher Airlines has
left a negative impact on the Indian aviation industry.
Additionally, the increasing oil prices, decline in
passenger traffic, and liquidity constraints, have
completely jeopardised the economics of some airlines
and continued to strain and drain the limited financial
resources of the airlines.
To address the concerns surrounding the operating viability of Indian
carriers, the Government has initiated a series of measures including FDI in
aviation, direct import of ATF, lifting the freeze on international expansions
of private airlines and financial assistance to the national carrier. Looking at
these changes, 2013 looks bright, as growth is projected with the increase
expected in the passenger demand and traffic. Further with the FDI coming,
the Indian aviation sector is capable of growing 120-130 per cent as more
international carriers will look to invest in domestic airlines. Therefore,
there is an urgent need to have a strong regional infrastructure, as foreign
airlines will look at a strong infrastructure base first, before investing.
Volume I Part 5 December 25, 2012 18 Business Advisor
Gems and jewellery
Abhijita Kulshrestha, Senior Gemmologist and Consultant, Gemstone
Universe
The gems and jewellery industry has definitely been
affected by the economic downturn and the emergence
of better business environment elsewhere (read
China), where there is a decline of 13.19 per cent in
exports as revealed by GJEPC. However, the industry
is hopeful about the coming year.
While the ‘plain vanilla’ yellow gold and diamonds
continue their scintillating hypnotic grip on the Indian
consumer psyche, the Indian markets are fast growing
adventurous about experimenting with coloured gemstones. Precious gems
are fast emerging as the new fashion statement as well as an attractive
avenue of investment.
When the stocks, bullion, dollar, commodities…all continue to remain
uninspiring, precious gemstones are fast emerging as the sound and solid
investment option. The industry is now looking at greater interest from
investors rather than just retail sales.
Volume I Part 5 December 25, 2012 19 Business Advisor
Enterprise IT
Sudarshan Boosupalli, GM-India & SAARC Operations, Ruckus Wireless
How has been 2012 for the enterprise IT space – what has changed during
the year, and also what has not, both in tune and contrary to expectations?
In 2012, the adoption of tablets and smartphones
continued to grow at a fast pace making way for the
players of those segments, but IT managers are no longer
able to stop the mobile devices being used in their
corporate wireless networks. The demand for BYOD (bring-
your-own-device) intensified across all enterprises; it
became a top priority for enterprise to embrace both staff
and visitors.
For successful implementation of BYOD, the wireless
infrastructure must be ready to handle the unique challenges of a mobile
environment – secure, easy on-boarding, and offering IT managers the
visibilities of these devices. Most important of all, their wireless networks
must be able to handle 2x - 3x the device density.
Outlook for 2013, in the enterprise IT space, with reasoning.
As a part of the technologically-
progressive users are constantly on the
go, there is a strong need to manage
the multiple mobile devices. In 2013,
the focus would be on management
solutions for mobile device.
What remains unchanged is the need
to have pervasive performance – a
combination of intelligence features
that help IT managers to automatically
optimise their wireless networks to
offer super reliable, consistent
performance all the time. Ruckus’
BeamFlex has been the proven choice
in many of today’s largest and most
complicated wireless networks in many
major universities, hotels, hospitals
and retail outlets across India.
Volume I Part 5 December 25, 2012 20 Business Advisor
Real estate
Bijay Agarwal, Managing Director, Salarpuria Sattva Group
How was the year 2012 for the real estate industry?
The growth of the real estate sector in Bangalore has
been good this year. There was an overall
appreciation of 10-12% in the real estate market
which was very realistic. Bangalore has today evolved
into a mature real estate market. Residential property
sales in Bangalore, compared to other cities in the
South have been stable and consistent this year. It
was genuine demand from owner occupiers which
made the market very healthy.
What are your expectations from the year 2013?
The real estate market will continue to grow in 2013. We expect a rise in
prices of up to 15%; however, it is in 2014 that we expect the market to be
bullish.
Salarpuria Sattva has up to 30 million sq ft space in different stages of
development in Bangalore, Hyderabad, Vizag, Pune, Kolkata, Jaipur, Goa
and Chennai.
In Bangalore we have three new residential projects that will be launched in
2013. We are also focused on Hyderabad where we have just launched a 1.6
million sq ft mixed-use development with the work, live and play concept.
Preenand Premachandran, CEO, Hebron Properties
How was the year 2012 for the real estate industry?
The year 2012 was a good year for North and East Bangalore with the
growth being largely driven by the Bangalore International Airport and the
IT sector respectively. These areas are also seeing a
good growth in terms of commercial, retail, and
social infrastructure.
There was a good growth in real estate resulting
from the investments in IT projects and the
Aerospace SEZ, which the government plans to set
up in the next few years. North and East
Bangalore have been witnessing increased real
estate activity over the past few years and with
Volume I Part 5 December 25, 2012 21 Business Advisor
residential projects booming in these areas, retail interests will also perk up
here.
What are your expectations from the year 2013?
Bangalore will continue to retain its sheen in the year 2012 in the real
estate domain, thanks to the good potential that it offers for investors in
terms of appreciation. Hebbal would see at least 20-30 per cent appreciation
in property values. Another area to watch out for is Old Madras Road, where
a lot of projects are now coming up. In 2013, we could see property prices
appreciating by 20 per cent in this location. Similarly, Sarjapur Road and
Whitefield too would see good appreciation and growth thanks to their
proximity to the IT hub. Over the next three years, we can expect a 100 per
cent growth in capital appreciation. The mid-scale apartment projects will
continue to be the driver in 2013 too.
Suraj H. Asrani, COO, Cornerstone Properties
How was the year 2012 for the real estate
industry?
The passing year (2012) has seen Bangalore
emerge as the most stable destination for realty
across the country. Bangalore saw healthy
absorption levels across commercial and
residential markets with a healthy increase in
capital values.
In terms of geographical spread, the North, East and South East regions
remained the most preferred destinations for IT, commercial and residential
in Bangalore. Increased infrastructure, better connectivity and good office
space absorption have seen values considerably appreciating. The city
continued to be the preferred destination for IT/ITES companies, with a
total absorption of around 9-9.5 million sq ft in 2012.
Whitefield and the ORR have seen the maximum absorption of office space;
residential demand in these areas along with Varthur and Sarjapur Road
are robust and have seen successful launches and increased demand.
What are your expectations from the year 2013?
We expect Bangalore to retain its “preferred choice” title. This would be due
to a host of positive factors like reduced interest rates, policy changes and
improved infrastructure. The Cabinet approval of the PRR would be a game
Volume I Part 5 December 25, 2012 22 Business Advisor
changer as access and connectivity to outlying/fringe areas would be rapid
and easier.
In terms of infrastructure development the projects slated to progress
include the PRR, Elevated Expressway to BIAL, the High Speed Rail Link to
BIAL and the Signal Free ORR Corridor.
2013 will be an exciting year for retail development. The announcement of
FDI in this space would result in MNC retailers evincing closer interest in
India. Bangalore has remained a preferred destination for retailers and with
more brands entering the fray, we expect developers to launch larger malls
with more interesting tenant mixes and as the infrastructure (Metro and
PRR) expands footprints, concepts like strip malls and large format malls
would find favour.
The commercial real estate outlook for 2013 is optimistic, with Whitefield,
Varthur, Sarjapur Road and the ORR being the preferred options for
occupiers. The long-awaited go ahead to the PRR would be a defining factor
in further accelerating
growth in commercial
realty.
In terms of residential an
interesting array of projects
ranging from integrated
townships, condominiums,
villas/ villaments,
affordable housing etc.,
have been announced with
higher anticipated demand
across geographies.
Prices are on an upswing
and the customer has
access to a wider array of
offerings. Another
encouraging trend is the
vibrant end user market.
This trend would continue
in 2013, and with RBI
easing liquidity, we expect
an exciting year ahead.
Volume I Part 5 December 25, 2012 23 Business Advisor
Employee engagement and people management
Asif Upadhye, CFO, Never Grow Up
While the job market is blooming for the ‘right
candidate,’ one of the key challenges that human
resource managers have faced across industries is
‘engaging talent’ once on board. Another challenge
that remains is ‘building effective and transparent’
dialogue between the core management team and
everyone else. While there is no dearth of talent
with the sheer number of employable ‘Gen Y’
candidates coming from colleges and B-Schools
across the country, recruiting people who ‘fit the
company culture’ needs to take precedence before their pedigree. Only then
can we have the right task force.
With a fresh batch of employees joining each year, a clear cut strategy on
their career progression during their stint needs to be in place and this
needs to be communicated regularly and effectively.
Especially since this new and diverse breed of employees also comes with a
different set of expectations as compared to the predecessors. Managing
these expectations in an attempt to curb attrition seems to be one of the
biggest challenges HR professionals face today. Attrition numbers in the
first year or 1.5 years across companies or industries are an indicator of the
amount of work that is needed in the space of active employee engagement.
While companies remain open to caring for their employees and paying
‘attention’ to engagement scores, organisations need to truly start looking at
employees as their greatest asset (not necessarily just a cost centre) and
undertake initiatives and prove this belief on a consistent basis. This can be
either by rewarding emotional
intelligence or taking steps to
build the right ‘top down’ culture
across the company by
ingraining company values while
remembering that this is not a
one-time task. Also see a lot of
focus on the ‘softer’ aspects of
building and managing teams
gaining prominence in the next
two years.
Volume I Part 5 December 25, 2012 24 Business Advisor
Information
Section 80CCG
Section 80CCG was inserted by the Finance Act, 2012 to be effective from
the assessment year 2013-14 onwards. The key points of the legal provision
are given below:
In the case of resident individuals investment in listed equity shares notified
by the Central Government is eligible for deduction from gross total income.
The quantum of deduction is 50% of the amount invested in such equity
shares and the amount of deduction shall not exceed Rs 25,000.
It is a one-time deduction for the investment made and where an assessee
has claimed deduction for any assessment year, the assessee shall not be
eligible for deduction under this section for any subsequent assessment
year.
The following conditions are to be satisfied:
The gross total income of the assessee should not exceed Rs 10 lakh
for the relevant assessment year.
The assessee must be a new retail investor specified under the
scheme notified by the Central Government.
The investment must be in listed equity shares as specified under the
scheme.
The lock-in period is three years
from the date of acquisition; and
Such other condition as may be
prescribed in the scheme notified by the
Central Government.
Where the assessee fails to comply with
any condition specified above, the
deduction originally allowed shall be
deemed to the income of the assessee of
the previous year and liable to tax for the
assessment year relevant to the previous
year in which the violation of condition or
conditions takes place.
Rajiv Gandhi Equity Savings Scheme,
2012 notified on 23.11.2012
Volume I Part 5 December 25, 2012 25 Business Advisor
Case laws update: Capital gains
V. K. Subramani
Agricultural land beyond municipal limit
In CIT v. Madhukumar .N (HUF) 78 DTR 391 (Karn) it was held
that an agricultural land is not a capital asset unless it falls
within the exception given in section 2(14)(iii) which covers
two categories. An agricultural land within the jurisdiction of
a municipality is a capital asset regardless of whether it is a
notified municipality. However, where the agricultural land is
situated beyond the municipal limits then, only when it is
notified it is chargeable to capital gains upon transfer of the same. Where
the agricultural land is situated beyond the municipal limit and such
distance is not covered by the notification issued by the Central Government
the transfer of agricultural land is not liable to tax.
Capital gain for charitable trusts
A wholly charitable entity eligible for the benefits of section 11 always faces
the dilemma of deciding whether the capital gain is chargeable to tax or not.
Where the capital asset say, cost Rs 2 lakh is sold for Rs 5 lakh there will be
a resultant capital gain of Rs 3 lakh. This capital gain would be eligible for
tax relief to the extent the sale consideration is deployed towards acquisition
of yet another capital asset by the institution. For example, if the trust given
above deploys Rs 4 lakh in acquiring a capital asset, the excess of the
amount utilised over the cost of the transferred asset is eligible for tax relief.
Thus the excess of Rs 2 lakh more than the cost of the originally transferred
capital asset deployed in new asset acquisition is exempt from tax and the
balance of Rs 1 lakh is only chargeable to tax. A charitable organisation
even if keeps the sale consideration in the form of fixed deposit in a bank it
is eligible for tax relief since the fixed deposit is to be treated as capital asset
as per Circular No.883 dated 24.09.1995.
A further liberal interpretation could be found in Asst. DIT v. Murugappa
Chettiar Trust (303 ITR 360 (Mad)) where it was held that amount lying in
current account satisfies the requirement of section 11(5)(iii) and hence the
capital gain parked in current account is also eligible for tax relief.
Splitting of consideration on sale of building
A building when transferred is chargeable to tax as capital gain. When such
building was owned for more than 36 months before the date of transfer it is
Volume I Part 5 December 25, 2012 26 Business Advisor
taxable as long-term capital gain. A building could be a depreciable asset
(example factory building) or a capital asset simpliciter say a residential
building. However, the land beneath the building is not a depreciable asset
as held by the apex court in CIT v. Alps Theatre 65 ITR 377 and hence when
transferred it is either short-term or long-term capital asset. Section 50
meant for depreciable assets will not apply to capital gain arising from
transfer of land. Reference could be made to CIT v. I. K. International (P) Ltd
72 DTR 70 (Del.). While transferring a building it is possible to split the
consideration attributable to land and a portion attributable to a building to
optimise the capital gains tax. Such splitting of consideration could be
found in CIT v. Dr D. L. Ramachandra Rao 236 ITR 51.
Section 50C for stock in trade
When a capital asset being a land or building or both is transferred the sale
consideration would be compared with the value adopted by stamp
valuation authority for the purpose of computing capital gains. If the stamp
valuation authority fixes the value which is higher than the value disclosed
in the conveyance deed, the taxpayer can contest the valuation and a
reference could be made to other authorities of the State government for
fixing the value. Where such value is not contested before the valuation
authority the taxpayer can contest the value for income-tax assessment
before the Assessing Officer. On such occasion, the Assessing Officer will
make a reference to the departmental Valuation Officer who may fix the
value more than or less than the value fixed by the stamp valuation
authority. If the value fixed by the Valuation Officer is more than the value
fixed by the stamp valuation authority then the value fixed by the stamp
valuation authority will be adopted. If the value fixed by the valuation officer
is less than the value fixed by the stamp valuation authority, then such
reduced value will be adopted for capital gain computation.
Since the section uses the word ‘capital asset’ an immovable property being
land or building or both, if does not fall within the expression “capital asset”
then it is not governed by section 50C. Thus the value adopted by valuation
authority will not have any binding value for the purpose of determining the
income from the transaction which is prima facie income from business.
Reference could be made to CIT v. Kan Constructions & Colonizers (P) Ltd 70
DTR 169 (All).
Indexation for inherited assets
Where a capital asset is inherited by the taxpayer the period of holding of
the previous owner is also to be included for determining the character of
capital asset, viz. long-term or short-term. However, the controversy with
Volume I Part 5 December 25, 2012 27 Business Advisor
regard to indexation is because of clause (iii) of the Explanation to section
48 which uses the expression ‘for the first year in which the asset was held
by the assessee or for the year beginning on the first day of April, 1981,
whichever is later’. The Bombay High Court in CIT v. Manjula J. Shah 68
DTR 269 has held that the indexation benefit must be given from the date in
which the previous owner obtained ownership of the asset.
A further liberal interpretation could be found in CIT v. Ms Janhavi S. Desai
75 DTR 1 (Bom) where the assessee inherited the property from her mother
who had inherited the property from her late husband (father of the
assessee). The court held though a fraction of ownership was inherited from
her mother the date of indexation must relate to the date on which the
original owner acquired the property and from whom the property had
travelled by means of a transaction or transactions not being regarded as
transfer.
Residential house outside India and section 54F
When a long-term capital asset is transferred and the assessee opts to
invest in a residential house to avail the benefit of exemption under section
54F, the issue arises as to whether the residential house must be in India or
whether could be located outside India. In Vinay Mishra v. Asst. CIT 20 ITR
(Trib) 129 (Bang) the assessee sold shares and had chargeable long-term
capital gains. He acquired a residential house outside India and claimed the
benefit of exemption under section 54F. The tribunal held that on prima
facie drafting of the section there is no requirement that the residential
house must be located within India. Following the precedent in Prema P.
Shah & Sanjiv P. Shah v. ITO 282 ITR (Trib) 211 (Mum) the claim of the
assessee was upheld.
Shifting of industrial undertaking
An industrial undertaking could be shifted from an urban area to any area
and in the process when the capital assets are transferred, the capital gain
arising therefrom is eligible for exemption if it is utilised in acquisition of
plant and machinery for re-establishing the undertaking or acquisition or
construction of building for the purposes of his business. In Dy. CIT v.
Enpro Finance 77 DTR 297 (Mum)(Trib) the assessee while shifting the
industrial undertaking acquired a building for a business and not for re-
establishing the undertaking. The claim of the assessee was that acquisition
or construction of building can be for any business purpose and not
necessarily for re-establishing the industrial undertaking shifted from the
urban area.
Volume I Part 5 December 25, 2012 28 Business Advisor
A comparative study with section 54D dealing with capital gain arising from
compulsory acquisition of land and building forming part of an industrial
undertaking would show that the section mandates construction or
acquisition of building for the purpose of re-establishing the said
undertaking or setting up of another industrial undertaking. This kind of
condition is not found in section 54G(1), hence acquisition of building for
any other business of the assessee on shifting of industrial undertaking is
also advantageous.
Excess amount received by retiring partner
When a partner retires from the partnership firm and receives a sum more
than the amount standing to his credit in the books of account of the firm,
it is always fraught with controversy. There is a very old court decision in
the case of CIT v. Raghukumar .L 141 ITR 674 (AP) which was contested with
regard to its validity consequent to omission of section 47(ii).
The Andhra Pradesh High Court in Chalasani Venkateswara Rao v. ITO 349
ITR 423 (AP) has held that section 45(4) meant to tax only the partnership
firms and could not be applied for taxing a retiring partner even if he
receives a sum more than what was standing to his credit at the time of
retirement. This decision taking into account the present position of law
might prove to be a shot in the arm for the taxpayers.
Depreciation whether rate specific or unit specific
Section 50 dealing with capital gain in respect of depreciable asset comes in
the chapter ‘capital gains’ but it is chargeable to tax only in respect of
taxpayers having income from business/ profession or income under the
head ‘other sources’.
Where a taxpayer has multiple businesses and closes down one such
business, the tax implication of the transfer of depreciable assets of the
closed down business unit/ division was discussed in CIT v. Ansal
Properties & Infrastructure Ltd 73 DTR 131 (Del). The court held the concept
of block of asset is rate specific and not unit or division specific. Even if a
division is closed down but before the end of the year the assets of the block
or class are acquired, any surplus in the interregnum is not to be
considered. The court was categorical to hold that the opening block value
and all additions during the year have to be added and transfers/ sale have
to be reduced therefrom to decide the short-term capital gain or loss.
Cessation of block during the year at any point of time during the year
cannot be considered for the purpose of applying section 50.
(V. K. Subramani is a Chartered Accountant, Erode)
Volume I Part 5 December 25, 2012 29 Business Advisor
List of contributors to this issue
T. N. Pandey, Former Chairman, Central Board of Direct
Taxes, Noida
Dr S. Chandrasekaran, Chandrasekaran Associates,
Delhi
V. K. Subramani, Chartered Accountant, Erode
Bimbadhar Mishra, Andhra Bank, Hyderabad
Dr Sanjiv Agarwal, Agarwal Sanjiv & Company, Jaipur
Dr B. Yerram Raju, Regional Director, PRMIA, Hyderabad
Rahul Pillai, Country Manager India, Interem
Manish Garg, President, Everest Industries Ltd
Bijay Agarwal, Managing Director, Salarpuria Sattva
Ankur Bhatia, Executive Director, Bird Group
Abhijita Kulshrestha, Gemstone Universe
Sudarshan Boosupalli, GM-India, Ruckus Wireless Inc.
Preenand Premachandran, CEO, Hebron Properties
Suraj H. Asrani, COO, Cornerstone Properties
Asif Upadhye, CFO, Never Grow Up
Volume I Part 5 December 25, 2012 30 Business Advisor
Published by: Shrinikethan, Chennai http://bit.ly/ShriMap
Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk
December 25, 2012
Business Advisor
On finance,
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