C O N T E N T S this country the birth in a community is making a person lucky instead of his hard...

Ahmedabad Chartered Accountants Journal August, 2015 269

Volume : 39 Par t : 05 August, 2015

E-mail : caaahmedabad@gmail .com Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

M ananamPower of Prayers................................................................................ CA. Shailesh C. Shah....................271

Editor ialA System beyond Reservations............................................................CA. Ashok Kataria .................... 272

From the President............................................................................CA. Yamal A. Vyas.........................273

Ar t iclesAnalysis of deduction of Interest - Section 36(1)(i ii)..............................CA. Anik Shah...........................274

Withholding Tax in respect of payment to Non-Residents under Section

195 of the Income Tax Act, 1961. - A Br ief Understanding....................Adv. Tej Shah........................... 280

Direct Taxes

Glimpses of Supreme Cour t Rul ings................................................... Adv. Samir N. Divatia................285

From the Courts..................................................................................CA. C.R. Sharedalal &CA. Jayesh Sharedalal ............... 286

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 289

Unreported Judgements......................................................................CA. Sanjay R. Shah....................294

Controversies...................................................................................... CA. Kaushik D. Shah..................297

Judicial Analysis..................................................................................Adv. Tushar P. Hemani................301

FEMA & International Taxation

Overview of Action Plan 8 of BEPS Project - CA. Dhinal A. Shah &

Draft Report on Hard to Value Intengible...........................................CA. Sagar Shah.............................305

FEMA Updates................................................................................... CA. Savan Godiawala................308

I ndirect Taxes

Service Tax

Service Tax Decoded.......................................................................... CA. Punit R. Prajapati................311Recent Judgements............................................................................. CA. Ashwin H. Shah...................315

Value Added Tax

From the Courts..................................................................................CA. Priyam R. Shah................... 316Updates and Tr ibunal Judgements......................................................CA. Bihari B. Shah.....................319

Corporate Law & Others

Business Valuation.............................................................................. CA. Hozefa Natalwala.................322

Corporate Law Update.......................................................................CA. Naveen Mandovara..............323

Allied Laws Corner..............................................................................Adv. Ankit Talsania.......................326

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 331

From the Government ......................................................................CA. Kunal A. Shah..................... 334

ACAJ Crossword Contest....................................................................................................................336

- caaahmedabad

Ahmedabad Chartered Accountants Journal August, 2015270

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

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

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

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

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

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

Professional AwardsThe best articles published in this Journal in the categories of 'Direct Taxes', 'Company Law andAuditing' and 'A llied Laws and Others' wil l 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 Pr interM-2 Hasubhai Chambers, Near Town Hall, Ellisbridge, Ahmedabad - 380 006.

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

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

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

Ex-officioCA. Yamal Vyas CA. Nirav Choksi


‘Pray’ is a Greek word which literally means “togive thanks, to make requests”. Prayer is acommunication with God. We all know that weshould pray but how many actually practice it andthose following, are seen to miss it at first instancein a hectic time schedule. Prayer which ideallyshould be a part of our daily life is somehow ignoredby many, may be because we do not understandthe ‘power of prayers’.

A question often occurs, what we get with praying?I am of the view that through prayers, we getstrength necessary to grow emoti onal ly,intellectually and spiritually. Living a life withoutprayer can make us weak and vulnerable. Prayerbecomes a great source of inspiration. How oftenhave we found that we get motivated for somethingimportant by the people around us but are reluctantand hesitant to pursue the task. It may be anything,personal or professional. The only reason is fear. Ifirmly believe, Prayer allows us to come out of thisfear and grants us that vigor to excel. Everythingis pr ewr i t ten but wi th pr ayer i t can berewr itten.

Prayer helps us to grow emotionally by providingan ability to have an insight of any situation orcircumstances. It enhances concentration of mindmaking us more focused. A small voice one hearsfrom within during or after prayer time becomes atool for inspiration and a wonderful guide in life todeal with any sort of circumstances. Prayers maynot change the situation but it changes the personwho prays.

Prayer makes us humble. We, ‘highly intellectualpeople’ often forget that this four layered personalityas a human being, comprising of Body, Mind,Intellect and Spirit is not just a biological process

MananaM

Power of Prayers but a beautiful gif t bestowed upon by God. Aregular, sincere, faithful prayer allows us to focuson God, the substratum of this four layeredpersonality, rather than ourselves.

We find people praying in different situations.Some pray when faced with difficult circumstances,some pray for their growth, some pray to thank Godfor this beautiful life, without any expectations. Inver se 16 of the 7th chapter of the BhagawadGeeta, Lord says –

“Four kinds of devotees worship me, one inmisery, seeker of knowledge, seeker of wealthand the wise.

For many, prayer is an important part in their lives. The reason for prayer may be different for all, butit is extremely important to have a conversation withGod. Since our childhood we have been taught tooffer prayers as a part of our daily routine. Whetherit is starting the day, having our meals or endingthe day. All would agree that the first and foremostthing taught by our elders, early in our life, is foldour hands and pray.

Prayer is the key that exposes us to that eternalbliss. I t is also a lock that closes the night to keepus safe while asleep. What we need to do is touse this key all the time. Ability to pray is thegreatest gift to mankind disregard of any caste, creedor faith. The path of Bhakti, prayer, is available toall unlike, Karmayoga, Gyanyoga or Sanyasyoga.The only qualification required is, devotion. Ourscr iptur es declar e: Those who constant lyremember the Lord, even out of passion, hatred,fear or enmity, they too attain the Supreme goal.

If one has a doubt, the only advice would be, spendfew minutes a day to say a small and simple prayerand soon experience the world around you in a newlight.

CA. Shailesh C. [email protected]


The last week of August brought Ahmedabadand almost the enitre state of Gujarat to astandstill. Lakhs of Patels trooped into the cityfor one of the biggest ever croud mobilisationagainst the central and the state governmentwith the demand to bring Patels into the OBCquota or reservations. The convenor of PatidarAnamat Andolan Samiti, Hardik Patel becamea Hero overnight. The incidents of disruptionsand damage to public property af ter thismassive rally have once again raised variousfundamental questions. What was the purposefor which these reservations were brought in?Upto what point of time are these reservationsnecessary? Whether reservation is creating adivide and injusti ce instead of bringingequality? Has the country benefitted, not theindividuals, with this system of reservations?And most importantly, can there be a systemof education without reservations?

The unhealthy practice of reservations basedon caste and creed, may be relevant at thetimes it was brought in, was introduced infavour of many castes and communities thathad little share in the administration by theBritish. Measures like these as a part of socialreforms were made part of the system evenbefore India became a free state. IndependentIndia was born with this problem and thelimited poli tical vision of the country, busyin concentrating on votes, cannot even dareto think of doing away with this system whichhas turned obsolete to a large extent in today’stimes.

Amidst all this hulla-gulla of reservations andcomplete understanding that policital systemof the country will not be open for a system

Editor ialA System beyond Reservations

[email protected]

beyond reservations, can there be amechanism, atleast in education, not affectedby reservations? Can there be a system thatal lows equal opportuni ty to everyoneirrespective of caste, creed or rel igion? Aplace where all have an equal opportunity tostudy and those deserving get through.

As a Chartered Accountant, I would say thesystem adopted by the Insitute of CharteredAccoutants of India (ICAI) is one of the finestin the country, f ar beyond the i l l s ofReservation Policy. Here is a system whereeveyone gets an equal opportunity to qualifyand be a part of one of the finest professions.In this unparallel system, one does not qualifyas a chartered accountant based on any caste,creed or relegion. The right to admission isfairly available to one and all and one workinghard finds himself as a chartered accountant.

Beyond doubt, al l educational insti tutionscannot be taken at par with the (ICAI).However efforts should be there to bring inreforms not based on the social demographicsbut a system where each citizen gets equal andf ai r opportuni ty to atleast compete.Reservations have taken away that right tocompete because today a non deservingperson’s success is at the cost of the personwho deserved. After 68 years of independencewhy the political class in not attempting toatleast bring in some kind of consensus tofight this evil that has created a huge unrestamongst the large section of population. Whyin this country the birth in a community ismaking a person lucky instead of his hardwork?

Namaste,CA. Ashok Kataria


From the PresidentCA. Yamal A. Vyas

[email protected]

Normally July is a hectic month for all of us butthis year August and September are more likely tobe so. Finally, as July was drawing to a close, theITR were finally available. This delay has put a lotof work pressure on the assessees as well as on usProfessionals.

We at CAA Ahmedabad have made arepresentation to Hon. Finance Minister to extendthe last date for fil ing of IT Returns and for TaxAudit and we are hopeful that some relief may begranted in this regard. This could solve a lot ofpractical difficulties and hardships.

This month I would like to discuss an issue whichhas been bothering me from the day I took over asthe President.The apathy of members towards allactivities of the Association.In the last three monthsCAA has been hol di ng programmes of al lkinds.Educational,Recreational and more. But themember participation in each has been abysmal.

I have spoken to Past Presidents also and they alsoagree that in recent years members have been largelyinactive as far as the CAA activities are concerned.Our team has been trying to find the reasons andremedies for this malady, and I request you dearmembers, to let me know what we should be doingto increase your level of participation in theAssociation’s activities.

CAA exists for you, dear members, and unless weare able to come up with programmes which interestyou all, at least for me there will be a feeling oflacking some important quality required for theposition of President of CAA. Hence this requestto you to provide us your feedback and suggestionsto help CAA transform into a more member orientedentity.

Some of the activities that CAA used to do in thepast or was planning to undertake in future arenow being conducted by Ahmedabad Branch of

ICAI. Talent Evening, Indoor Sports, etc. are nowconducted by Ahmedabad Branch. This is moreappropriate also, because this would provide aplatform to many young CAs who are not membersof CAA. We welcome the initiatives of AhmedabadBranch in this regard .

This brings me back to the original issue. We arelooking forward to suggestions from you for makingCAA more vibrant, more popular and more usefulto its members.You can send your suggestionsthrough email or telephone or any other means ofcommunication. A big Thank You in advance.

There are some good news on the economic frontwhi ch augur wel l for our professi on. TheGovernment has embarked upon a sustained effortto bring in better compliance and transparency inall aspects of Governance. The use of technologyin taxes has made life much simpler.

It can be argued that there are many glitches in thedigital system, but these are teething troubles and itis only a matter of time before these are sorted out.The black money disclosure scheme and the defunctcompany closure scheme announced recently arealso l ikely to resul t in more business for usprofessionals.

In conclusion, some unsolicited advice for myyoung professional colleagues. Google is a toolwhich makes life easy to some extent, but it can bemost useful and productive only when it is used asa supplement to our knowledge acquired throughreading . Not when it is used as a medium for copyand paste. There is no substitute for the hard workof reading the law, judgements and other relevantliterature. A Professional is never complete withoutreading at least 2 hours a day. If you have stoppeddoing that, please start. Now.

CA. Yamal VyasPresident


Deduction of expenses incurred for earningbusiness income is spelt out in the Sections 30 to36 of Income Tax Act, 1961. Under Section 36 ofIncome Tax Act, 1961, there are number ofdeductions available subject to the conditions laiddown. In this discussion, I would take up Section36(1)(iii) of the Income Tax Act, 1961 and analyzethe provision therein from all facets, which will makeus understand the deduction in a comprehensiveway. In the vortex of legal pronouncements, I willanalyze few case laws as well, which throw lighton the grey areas that are not captured or construedin the tax legislation.

Meaning and Concept

The bare reading of Section 36(1)(iii) is as follows:

“36 (1) the deductions provided for in the followingclauses shall be allowed in respect of the mattersdealt with therein, in computing the income referredto in Section 28

(i) and (ii) * *****

(iii) the amount of the interest paid in respect ofcapital borrowed for the purposes of the businessor profession:-

Provided that any amount of the interest paid, inrespect of capital borrowed for acquisition of anasset for extension of existing business or profession(whether capitalized in the books of account or not)for any period beginning from the date on whichthe capital was borrowed for acquisition of the assettill the date on which such Asset was first put touse, shall not be allowed as deduction.

The sub section has three important words orphrases that are core to understanding of this Sectioni.e. (i) Interest, (i i) Borrowed and, (iii) For thepurpose of business or profession. In the followingparagraphs, I would elucidate the meaning of these

words with reference to this particular section forbetter understanding.

(i) Meaning of “Interest”:

The definition of interest given under Section2(28A) says about “interest payable in anymanner in respect of any moneys borrowed ordebt incurred”. But for Section 36(1)(ii i),“interest is restricted to that on money borrowedand not on debt incurred.

(ii) Concept of “borrowed”:

Provisions of Section 36(1)(iii) talks aboutcapital borrowed and not other debts or liability.A loan of money undoubtedly results in a debt,but every debt does not involve a loan. Liabilityto pay a debt may arise from diverse sourcesand a loan is one of such sources. The legislaturehas, under this clause, permitted as an allowanceinterest paid on capi tal borrowed for thepurposes of the business; and the capital, in thiscontext, means money and not any other assetpurchased on credi t [ Bombay SteamNavigation Co. Pr. L td. v. CIT, 56 ITR 52(SC)]

- Importance of the word “loan”:

To qualify a transaction as loan, there mustbe a settlement / agreement between theparties that particular amount would begiven by one party to other party. The termswould be that it would be refunded orreturned ei ther on demand or on thedirections of the creditors and particularinterest / no interest would be paid on thesaid amount. Thus, for the purpose of loanthere must be interaction between theparties and there must be a concludedcontract. Thus for Section 36(1)(iii) thenecessary precondition is the existence of

Analysis of deduction of Interest -Section 36(1)(iii)

CA. Anik [email protected]


Analysis of deduction of I nter est - Section 36(1)(iii)

a loan transaction or a loan agreementbetween two parties with an establishedrole of creditor and debtor. There is aGujarat High Court judgment in the caseof Arun Family Trust vs. CIT 298 ITR437 (Guj .) which brings out this factclearly.

- Element of refund is must:

An element of refund or repayment is amust in the concept of borrowing. If thereis no obl igation to refund the capi talprovided, interest on such capital is notdeductible under Section 36(1)(iii) –Pepsu Road Tr anspor t Corp. V. CIT130 ITR 18 (P& H).

(iii) Explanation of the term “for the purpose ofbusiness”:

Thi s phrase, as hel d by many legalpronouncements, is the most importantyardstick for the al lowabil ity of deductionUnder Section 36(1)(iii) of Income Tax Act,1961. While explaining the meaning of thisphrase the Hon’ble Supreme Court in the caseof S. A. Bui lder s L td. vs. CIT (A),Chandigarh repor ted in 288 ITR 1 has usedthe word “commercial expediency”. By usingthis phrase Hon’ble Supreme Court has givena new dimension and clarified the conceptfurther. In the judgment the Supreme Court hasdef ined commercial expedi ency as “anexpression of wide imports and includes suchexpenditure as a prudent businessman incursfor the purpose of Business. The expendituremay not have been incurred under any legalobligation, but yet it is allowable as businessexpenditure, if it was incurred on grounds ofcommercial expediency”. Further, followingthis judgment, the High Court of Delhi in thecase of Punjab Stainless Steel Inds. Vs. CIT324 ITR 396, has further elaborated “Thecommercial expediency would include suchpurpose as is expected by the assessee toadvance its business interest and may includemeasures taken for preservation, protection oradvancement of its business interests, which

has to be distinguished from the personal interestof its directors or partners, as the case may be.In other words, there has to be a nexus betweenthe advancing of funds and business interest ofthe assessee firm. The appropriate test in sucha case would be as to whether a reasonableperson stepping into the shoes of the directors/partners of the assessee-firm and working solelyin the interest of the assessee-firm/ company,would have extended such interest f reeadvances. Some business objective should besought to have been achieved by extendingsuch interest free advances when the assessee-firm/company itsel f is borrowing funds forrunning its business.

Thus, for allowance of a claim for deductionof interest under this provision following threeconditions are there:

(i) The money, that is capital, must have beenborrowed by the assessee

(ii) I t must have been borrowed for thepurpose of business

(iii) The assessee must have paid interest onthe borrowed amount which is shown asexpenditure

Proviso to Section 36(1)(iii)

Section 36(1)(iii) provides for deduction of amountof the interest paid in respect of capital borrowedfor the purpose of the business or profession.Proviso to section 36(1)(i ii ) was amended byFinance Act, 2003 w.e.f. 1st April, 2004 relating toA.Y 2004-2005 and subsequent years. This wasinserted to disallow interest on moneys borrowedfor acquiring a capital asset til l the date on whichthe asset was brought to use even if it is for extensionof existing business.

The logic behind provision is only to ensure thatwherever interest is capitalized in the books ofaccounts, it remains capitalized for the purpose ofincome tax. This interest cannot be claimed as adeduction under Section 36(1)(iii) of the Act. Oneis not clear on the import of the expression“extension of existing business or profession.”


Extension is alien to income tax parlance and cannotbe defined in objective and exact terms. In today’sbusiness context, even acquisition of machineryworth a few Lacs may tantamount to extension. Theobjective is to address issues of substantialexpansion of business. If that was the intention, theconcept of “extension of industrial undertaking”,as mentioned and applicable for Section 35D ofthe Act dealing with amortization and preliminaryexpenses, could have been transplanted in Section36(1)(iii) of the Act. This would clearly establishthat the proviso would apply to extension ofindustrial undertaking and not extension of businessper se.

Also, the use of the expression “whether capitalizedin the books of account or not” could raise host ofcontroversies. Interest is capitalized in the books ofaccounts in the present regime in accordance withthe principles laid down in Accounting Standard16 on borrowing costs. The operative portion ofthe standard is as follows:

“Borrowing costs that are directly attributable tothe acquisition, construction or production of aqualifying asset should be capitalized as part of thecost of that asset. The amount of borrowing costseligible for capitalization should be determined inaccordance with this statement. Other borrowingcosts should be recognized as an expense in theperiod in which they are incurred.”

Borrowing costs are capitalized as part of the costof a qualifying asset when it is probable that theywil l result in future economic benefi ts to theenterprise and the costs can be measured reliably.Other borrowing costs are recognized as an expensein the period in which they are incurred. Thismandatory standard has to be applied in respect ofaccounting periods commencing on or after April1, 2000. Also the AS 16, in paragraph 21 ofCessat ion of capi tal izat ion, i t is sai d thatCapitalization of borrowing costs should ceasewhen substantially all the activities necessary toprepare the qualifying asset for its intended use orsale are complete. Whi le in Income Tax Act,Capitalization of borrowing costs should ceasewhen Business will start. It means capitalizationconcept as per accounts and as per IT Act is not

matching so no one can say that this is theconcealment of Income or Inaccurate particular.Proviso itself hints that company may capitalize itor not.

Hence, once interest is capitalized for accountingpurposes, the proviso could have simply stated thatthe treatment given for accounting purposes wouldapply for the purpose of tax computation also. It isalso not clear as to use of the expression “extensionof profession” in the proviso. While extension ofbusiness is normal and part of business activity, onecannot visualize or understand how interest in suchcases would be capitalized. In sum, the amendmenthas been introduced to nullify judicial controversieson the subject and bring the much needed alignmentbetween books and income tax in the matter ofinterest accounting.

v Extent of disallowance when there is time lagbetween disbursement of loan and asset beingput to use

In my opinion, if the time lag is substantiallylong, then only the question of disallowanceof interest arises. As per the mandate ofAccounti ng Standard 16 (AS-16) onAccount ing for Borrowing Cost, i t i sspecif ical ly provided that interest can becapitalized only in respect of “qualifying asset”and it states that a qualifying asset is an assetthat necessarily takes a substantial period oftime to get ready for its intended use. Assetswhich are ready for the intended use whenacquired are not qualifying asset and hence theassessee cannot capitalize interest to the costof qual ifying asset and the same has to bewritten off to the profit and loss account andthe deduction u/s 36(1)(iii) cannot be denied.If it is not done, there would be violation of AS-16 which will make the financial statementsuntrue and unfair. The time lag in our casebetween the loan disbursed and the asset usedis very short and hence it is not possible tocapitalize the cost of interest. It is furthersubmi tted that in my opinion assessee isotherwise entitled to deduction of such interestu/s 37(1) as such situation is not covered by



section 36(1)(iii). As per section 37(1), anyexpenditure incurred wholly and exclusivelyfor the purpose of business is required to beallowed as deduction u/s 37(1).

v Amendment in the Finance Act, 2015

Para 5 of ICDS-IX “Borrowi ng Costs”provides that to the extent the funds areborrowed specif ically for the purposes ofacquisition, construction or production of aqualifying asset, the amount of borrowing coststo be capitalized on that asset shall be the actualborrowing costs incurred during the period.

It can be seen that there is a conflict betweenthe proviso to section 36(1)(iii) and Para 5 ofICDS-IX. Proviso to section 36(1)(iii) envisagescapitalization of interest on capital borrowedfor acquisi ti on of an asset only i f suchacquisition of asset is for extension of existingbusiness or profession whi l e ICDS-IXenvisages capi talization even if there is noextension of existing business or profession, inorder to align the provisions of the proviso tosection 36(1)(iii) with Para 5 of ICDS-IX, theFinance Act, 2015 has omitted the words “forextension of existing business or profession”from the proviso to section 36(1)(iii). Theamendment will be effective from assessment2016-17.

v Asset acquired out of borrowed capital neednot have been used during relevant year andinterest can be allowed unless this asset is notfor extension of existing business.

Asset acquired need not have been used duringrelevant previous year where machinery waspurchased out of borrowed amount for thepurpose of business and i t was treated asbusiness assets, merely because such machineryhad not been actually used in business at thetime when assessment was made, interest paidon amount borrowed could not be disallowedCIT vs. Associated Fibre & Rubber Industries(P.) Ltd. [1999] 102 Taxman 700 (SC)/CIT v.Insotex (P.) Ltd. [1984] 150 ITR 195 (Kar.)/Calico Dyeing & Printing Works v. CIT [1958]

34 ITR 265 (Bom.)/C.T. Desai v. CIT [1979]120 ITR 240 (Kar.). See also Dy. CIT v. CoreHealth Care Ltd. [2008] 167 Taxman 206 (SC)/Jt. CIT vs. United Phosphorus Ltd. [2008] 167Taxman 261 (SC).

In view of Supreme Court’s judgment in caseof Dy. CIT v. Core Health Care Ltd. [2008]167 Taxman 206, it was to be held that interestpaid in respect of borrowing to purchase capitalassets, which are not put to use in concernedfinancial year, can be permitted as an allowablededuction Jt. CIT v. United Phosphorous Ltd.[2008] 167 Taxman 261 (SC). Wheremachinery was purchased out of borrowedamount for purpose of business and it wastreated as business assets merely because suchmachinery had not been actual ly used inbusiness at time when assessment was made,interest paid on amount borrowed could not bedisallowed CIT v. Associated Fibre & RubberIndustries (P.) Ltd. [1999] 102 Taxman 700(SC)/CIT v. Insotex (P.) Ltd. [1984] 150 ITR195 (Kar.)/Calico Dyeing & Printing Works v.CIT [1958] 34 ITR 265 (Bom.)/C.T. Desai v.CIT [1979] 120 ITR 240 (Kar.).

However, this is before the insertion of provisobut it is clear that when it is proved that thecapital is not borrowed after business was setup then this proviso will not be applicable anddecision of above mentioned cases can beapplicable because in the cases above, thecapital was not borrowed after the existingbusiness was started and at the time of capitalborrowed no business existed and all the capitalwas borrowed altogether and not with separatesanctioning of the loan.

Key issues - Section 36(1)(iii)

1) I nter est on bor r owed capi tal used forinterest free loan

The law on this issue is settled after the Hon’bleSupreme Court judgment in the case of S. A.Builders Ltd. v. CIT (Appeals) [2007] 288 ITR1 (SC), in which the concept of “commercialexpediency” was used. Thus, where the fundsof the business are diverted for interest free



loans, the main criteria for permissibility ofinterest on those funds are based on whether itwas for commercial expediency or not. Thephrase “commercial expediency” has followingimportant traits as established by case laws citedsupra:

- Such purpose as is expected by the assesseeto advance its business interest.

- May i nclude measures taken forpreservation, protection or advancement ofits business interests.

- To be distinguished from the personalinterest of its directors or partners, as the casemay be.

- There has to be a nexus between theadvancing of funds and business interest ofthe assessee. Some business objective shouldbe sought to have been achi eved byextending such interest free advances whenthe assessee f i rm/company i tsel f i sborrowing funds for running its business.

The Hon’ble Supreme Court has also reliedupon the case where there would be mixed fundat the disposal of the assessee. It further clarifiesthat under Section 36(1)(iii) the ultimate use ofthe fund is important. It may not be relevant asto whether the advances have been extendedout of the borrowed funds or out of mixed fundswhich include borrowed funds. The test to beapplied in such cases is not the source of thefunds but the purpose for which the advancesare extended.

L et me further gi ve you ref erence ofjurisdictional High Court in CIT vs. RaghuvirSynthetics L td. (354 ITR 222) has held thatwhen interest free funds available with theassessee were far greater than loan advancedto the sister concerns and borrowed money wasnot utilized for the purpose of advance to thesi ster concerns then i nterest was notdi sal lowabl e merely on account of theutilization of funds for non-business purposesand when no evidence is brought on record bythe Department that borrowed money was

utilized for the purpose of advance to sisterconcerns.

2) Interest on bor rowing utilized for earningexempt income

The issue is whether to allow the interest onborrowing utilized for exempt income or nonassessable income. The primary condition foral lowi ng deducti on of interest i n thecomputation of business income is that theinterest was paid on capital borrowed for thepurpose of business or profession. I f theborrowed capital is utilized not in the businesswhose income is assessable, but in earningsome non assessable or exempt income, theinterest paid thereon, is not an allowablededuction under these provisions. This analogyflows from Section 14A inserted in ChapterIV of the Act, by the Finance Act, 2011 withretrospective effect from 01.04.1962, which isintended to safeguard the interest of theRevenue on account of wrong claim ofexpenditure relating to exempt income againsttaxable income. The Section 14A postulatesthat only expendi ture which is relatable totaxable i ncome should be deducted i ncomputi ng the total i ncome. Hence,expenditure which is incurred to earn exemptincome should not be considered in thecomputation of total income as this would resultin double advantage to the assessee.

Direct judgment which covers this issue is H.T.Convi l l e vs. CI T 4 I TR 137. Where aborrowing is specifically meant for use in a newindustrial undertaking covered by Section 10B,such interest would go to reduce the eligiblerelief. It was, therefore, decided in ProconSystems P. L td. V. ITO 296 ITR 636 (Mad)that such interest cannot be reduced fromeligible profits, because it has already beenallowed as a business deduction.

Further, as per the jurisdictional High Cour tin CIT vs. Guj arat State Fer t ili zer s andChemicals L td. (358 ITR 323), CIT vs. UTIBank L td. (215 Taxman 8) & CIT vs.



Hitachi Home and L ife Solutions (I) L td.(221 Taxman, 109) has held that whereassessee’s interest f ree funds far exceedsinvestment made for earning exempteddividend income, and Assessing Officer hadfailed to establish nexus between borrowedfunds and investments made, than nodisallowance u/s 14A could be made since thepresumption is that the interest free funds arefirst utilized for making investment and notinterest bearing funds fol lowing ratio ofHon’ble Bombay High Court judgment of CITvs. Reliance Utilities & Power Ltd. (313 ITR340).

3) Distinction between Section 36(1)(i ii) andSection 37(1)

Section 37(1), which is a residuary generalprovision, may have appl ication to anyexpenditure (including interest) which is notof the nature described in Sections 30 to 36.To an extent, Section 36(1)(iii) and Section37(1), so far as the allowance of interest isconcerned, run parallel to each other. But later,they do differ and it can then be discernedwhether a gi ven case f al ls wi thi n thephraseology of Section 36(1)(iii) or Section37(1). Comparing the two, I may see –

Section 36(1)(iii) Section 37(1)

1. It must be 1. It may be interestinterest on capital even on any debt(moneys) incurredborrowed

2. The borrowing 2. The debt incurredmust be for the must be and“purpose of exclusively for thebusiness” purpose of the

business

3. The borrowed 3. The debt incurredamount may be must not be utilizedutilized for even for procuring aprocuring a capital asset so as tocapital asset fall within the gamutrelated to the of “capitalbusiness expenditure”

4) The extent of disallowance under Section36(1)(iii)

The Assessing Officer is often confronted witha question as to the extent of disallowance whenit is proved that the borrowings were utilizedfor non business purposes. In such situations,there could be two possible scenarios:

i) Where there is only borrowed fund and nocomposite or mixed fund

In such cases, the disallowance is to bemade at the full rate of interest payable onsuch borrowed money. The amount ofinterest, i f any, real i zed from suchutilization is not to be taken into accountf or ascertaining the extent of thedisallowance [CIT vs. India Silk House,152 ITR 79 (Mad)].

ii) Where there is composite or mixed funds

In such a case, the Assessing Officer isrequired to co-relate between the naturesof feeding fund with utilization of suchfund. After this co-relation the AssessingOfficer may devise methods based onfactual analysis of the source of fund withthe utilization of fund to arrive at the figureof part disal lowance of i nterestexpenditure. In this case, there cannot befull disallowance of interest payable by theassessee. Where the funds are mixed up,so that it is not possible to identify theextent of borrowings utilized for such loans,proportionate amount could be disallowedas hel d in K . Somasundar am andBrothers Vs. CIT 238 ITR 939 (MAD).

In this article, I have dealt with important provisionsof Section 36(1)(iii) and number of issues arisingout of the detailed analysis of the section as well asproviso, however still the issues are likely to cropup and I hope this article would help in resolvingthose issues.

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With the ease of new technology and ever growingcompetition, overseas business has become the“need of the hour” for entrepreneurs to survive andgrow in the market. Payments are made for varioustypes of business transactions including purchaseof goods, royalty for use or right to use, acquiringtechnical know-how etc.The Indian Income Tax Act vide Section 195(1)requires the person making such payments (otherthan payment under the head ‘Salaries’) to the Non-Resident (hereinafter referred to as ‘NR’) to deducttax at source either at the time of credit of suchincome to the account of the payee or at the time ofpayment thereof in cash or the issue of a cheque orany other mode, whichever is ear l i er. Forunderstanding the statutory provision, Section 195is reproduced herein:-195.[(1) Any person responsible for paying to a non-

resident, not being a company, or to a foreigncompany, any interest [ (not being interestref erred to in section 194LB or section194LC)] [or section 194LD] or any other sumchargeable under the provisions of this Act (notbeing income chargeable under the head“Salaries”) shall, at the time of credit of suchincome to the account of the payee or at thetime of payment thereof in cash or by the issueof a cheque or draft or by any other mode,whichever is earlier, deduct income-tax thereonat the rates in force :

(2) Where the person responsible for paying anysuch sum chargeable under this Act (otherthan 26[* ** ] 27[* ** ] 28[* ** ] 29[* ** ] salary) to anon-resident considers that the whole of suchsum would not be income chargeable in the caseof the recipient, he may make an application tothe 30[Assessing] Of ficer to determine, 31[bygeneral or special order] , the appropriateproportion of such sum so chargeable, and uponsuch determination, tax shall be deducted undersub-section (1) only on that proportion of thesum which is so chargeable.

(3) Subject to rules34 made under sub-section (5),any person entitled to receive any interest orother sum on which income-tax has to bededucted under sub-section (1) may make anappli cation in the prescribed form tothe 35[Assessing] Off icer for the grant of a

certif icate authorising him to receive suchinterest or other sum without deduction of taxunder that sub-section, and where any suchcertificate is granted, every person responsiblefor paying such interest or other sum to theperson to whom such certificate is grantedshall, so long as the certificate is in force, makepayment of such interest or other sum withoutdeducting tax thereon under sub-section (1).The primary condition for liability to deductsuch tax at source is that the sum payable tothe NR should be chargeable to tax in India inthe hands of such NR. I f the NR is notchargeable to tax in India in respect of suchincome, requi rement u/s 195(1) f ai ls.Therefore the first thing to be established isthat the amount paid is chargeable to tax asper the provisions of the domestic tax laws.The charge is attracted as per S. 5(2) r.w.s. 9of the Income Tax Act.With this background let us move ahead to dealwith the various intricacies involved and howcourts have dealt with the same.

1) Main objective behind introduction of thissection is that firstly cross border transactionsinvolve a greater risk of non payment of taxesby the payee NR as there may be cases wherethe NR may have little or no assets in India.So in order to protect the interest of the revenueand ensure timely collection of taxes, thissection was introduced on all payments (exceptfor salaries) to the NR. Liability to deduct taxis a vicarious liability or substitutionary liabilitywhich presupposes existence of a principal orprimary liability. The said TDS provisions aremeant for tentative deduction of tax subject toregular assessment.

2) Any person – Any person referred to in thissection means any person whether a residentor not, who is making payment to the NR. Soeven if a NR makes payment to another NR,such payment would fall within the parametersof this section if the said payment attracts taxas per the domestic tax laws read with theDTAA.

3) Any Payment - This section includes any kindof payment except for specifically excluded(as mentioned in the definition) Eg. Income

With holding Tax in respect of paymentto Non-Residents under Section 195 ofthe I ncome Tax Act, 1961. – A BriefUnderstanding. Advocate Tej Shah

[email protected]


from business, Capital Gains, Royalty, Fees forTechnical Services etc. The condition is that itshould be chargeable to tax in India domestictax laws read with the DTAA. SC in GETechnology (327 ITR 456).

4) Obligation to deduct tax cannot be changedby a contract – It is deemed that when a personagrees to pay an amount to a NR he was awarethat tax has to be deducted. He cannot opt outof this statutory obligation merely by enteringinto a contract.

5) To a NR – It is mandatory that the payment ismade to a NR within its meaning u/s 2(30). Hemust not only be a NR but also is not ordinarilyresident (NOR) u/s 6 of the act. Since a NORhas been given a separate status under S.6(6),he cannot be considered on the same platformas a NR, so as to attract deduction of tax atsource u/s 195. Primarily such NOR is aresident because during the relevant P.Y. hequalifies the status of a resident. But only for alimited period, he is accorded the status ofNOR, such status being granted only to anindividual or a HUF. However the provisionrelating to deduction of tax at source in respectof payments to a resident will equally apply toa NOR. If the company to whom payment ismade is having its affairs wholly controlled andmanaged in India even though registeredabroad, cannot be said to be a NR. (ITO v/sRaza Textiles 106 ITR 408). The status of aresident in respect of a company needs to beexamined as per the amendment to S. 6(3) ofthe act w.e.f. 1-4-2016.

6) I f PAN of the NR not supplied – If the NRdoes not obtain a PAN or if it does not furnishthe same to the payer for tax deduction, as perS. 206AA, tax is required to be deducted atthe higher of the following rates namely-a) at the rate speci f i ed in the relevant

provisions of the act; orb) at the rate or rates in force; orc) at the rate of twenty per cent.Although if the treaty provisions provide for alesser rate of deduction, the same will prevail.Pune ITAT in Serum Institute of India Ltd. (58SOT 254).

7) Time limit for action for default – If the personfails to deduct tax u/s 195, he is deemed to bean assesse in default. For recovery of such tax,action can be taken against such payer u/s 201of the act. However sub-section (3) to S. 201specifies that no action shall be taken u/s 201(1)after the expiry of 7 years from the end of theF.Y. in which such payment is made or creditis given.

8) Payment r egar dless of the payer and theamount – Unlike other sections governing TDSl ike 194C or others wherein di f f erentguidelines are set as per the payer or wherethe threshold limit is at least thirty thousandrupees; Section 195 requires tax deductionregardless of the payer and of amount ofpayment even if One Rupee.

9) Char ging pr ov isions: Wi thout a chargesubsisting on the amount payable to the NR,tax is not required to be deducted u/s 195.Charge is determined as per Section 5 r.w.s. 9of the act. This must be read in consonancewith the model treaty provisions and the morebeneficial provisions to the assesse must beadopted to determine the charge.

10) Chargeability as per the domest ic laws –Section 5(2) determines the scope of totalincome of a non resident from whatever sourcederived which is:a) Received or is deemed to be received in

India;b) Accrues or arises or is deemed to accrue

or arise in India;Received in India means the receipt of themoney has to be necessarily India. It speaksby itself and requires no explanation but whatis deemed to accrue or arise in India has beenexplained in Section 9.I hereby deal with what are the various typesof income which accrue or deem to accrue orarise in India. Although I shall limit it to the 3major sources namely, Business Income,Royal ty and Fees for Technical/IncludedServices (FTS) as these are mostly in dispute.(i) Business Income: This includes all income

accruing or arising, whether directly orindirectly through or f rom any businessconnection in India, or through or from anyproperty in India, or through or from anyasset or source of income in India, orthrough the transfer of a capital assetsituated in India. Only so much of incomearising through business operations carriedout by a business connection is taxable inIndia.Through Business connection: BusinessConnection has not been defined under theact. Although it has been well elucidatedby the SC in following words in the caseof R.D. Aggarwal & Co. (56 ITR ). “Abusiness connection involves a relationbetween a business carried on by a non-resident which yields profits or gains andsome activity in the taxable territories which

With holding Tax in respect of payment to Non-Residents under Section 195 of the I ncome Tax Act, 1961


contributes directly or indirectly to theearning of those prof i ts or gains. I tpredicates an element of continuitybetween the business of the non-residentand the activity in the taxable territories: astray or isolated transaction is normally notto be regarded as a business connection.”Therefore Business Connection means asource through which the NR carries outhis business in India wholly or partly. Placeof business may mean a physical set whichincludes factory for manufacturing orstorage of goods, equipment, machinesetc. which aid in the carrying on of businessof the NR. It may be owned or rented butshould carry some degree of permanence.The condition precedent should be that thereshould be a direct nexus between thesource and the business activity carried onthrough it.As per Explanation 2 to sec. 9, businessconnection shall include any businessactivity carried out through a person who,acting on behalf of the NR, has andhabituall y exercises, an authori ty toconclude contracts on behalf of the NR,unless his activities are confined to merepurchase of goods or merchandize for theNR.He may not have such authority, buthabitually maintains in India a stock ofgoods or merchandize f rom which heregularly delivers goods or merchandizeon behalf of the NR; orHabitually secures orders in India, mainlyor wholly for the NR or for that NR andother NRs controll ing, controlled by, orsubject to the same common control, as thatNR.The Proviso further mentions that if suchactivity is carried out through an agent ofan independent status i t shal l not beconsidered as Business Connection.

(ii) Royal ty: Royal ty as per S. 9(1)(vi )includes any payment to a NR in respectof any right, property or information usedor services utilized for the purpose of abusiness or profession carried on by suchperson outside India; or similar paymentby a NR for the purpose of business orprofession carried on by such person inIndia.As per clause (b) to S. 9(i)(vi), i f thepayment is made by a Resident to such NRin respect of such business or profession

carried on by such Resident outside India,then such payment do not amount toRoyalty.As per Clause (c) to S. 9(i)(vi), i f thepayment is made by a NR to such NR butin respect of such business or professioncarried on by the payer NR in India, thensuch payment does amount to Royalty.Royalty as per Exp. 2 means the transferof all or any rights (including the grantingof a l i cence) in respect of a patent,invention, model, design, secret formula orprocess or trade mark or similar property(hereinafter referred to as the ‘IPR’) andother ancillary meanings (See clauses (iito vi) to Exp. 2).Before the Finance Act of 2012, Royaltyin case of a computer sof tware and asinterpreted by var ious decisions waspayment for the use of the IntellectualProperty embedded in the property. If theIPR vested with the payee inspite of theproperty getting transferred to the payer, itdid not amount to Royalty. However postthe said act, an amendment was broughtin with retrospective effect from 1976. Asper Explanations 4, right for use or right touse a computer software has been includedin the definition of Royalty. Therefore evenif the rights in the computer software arenot transferred and only the right to usethe software is transferred, it still amountsto Royalty. However it must have to becompared to the definition as mentionedin the Model Treaty which is discussed inthe latter para.Vide Explanation 5 it was clarified that evenif the payer is not in possession or controlof such right, even if he does not use itdirectly, and even if such right is not locatedin India, then also the same amounts toRoyalty. This amendment was brought into over rule a number of decisions infavour of the assessee wherein if the rightwas situated out of India, it could not bemade taxable in India.However, saddling the assessee with anadditional burden merely by way of aretrospective amendment is nothing butarbitrary and penal in nature. Various courtsincluding the P & H High Court in PunjabBusiness & Supply Co. (188 ITR 550) haveheld that the rights of the assessee cannotbe affected by way of such retrospectivelegislation. Hence the position which



remains is the def inition and the lawexisting at the payment i.e. before 1-4-2012still holds field.

(iii)Fees for Technical Services (FTS): As perS. 9(1)(vii) of the act, FTS includes anypayment by any person resident or not toany person whether a resident or not foravailing technical services to be utilized inIndia. The legal position before 1-4-2010was that such services were to be renderedin India apart from being utilized in Indiaas interpreted by various courts. Thereforein order to negate the ef fect of thosedecisions, a clarification was introducedvide the Finance A ct, 2010 withretrospective effect f rom 1976 that suchservices will be held to be FTS regardlessof the NR having a residence or businessconnection in India or the NR has renderedservices in India. Although inspite of suchretrospective amendment, courts havefavoured the assessee where during thedate of payment of FTS, the amendmentwas not in force, i.e. before 1-4-2010.As per clause (b) to S. 9(i)(vii), if thepayment is made by a Resident to such NRin respect of such business or professioncarried on by such Resident outside India,then such payment do not amount to FTS.As per Clause (c) to S. 9(i)(vi i), i f thepayment is made by a NR to such NR butin respect of such business or professioncarried on by the payer NR in India, thensuch payment does amount to FTS.As per Explanation 2, FTS means paymentfor rendering of any managerial, technicalor consultancy services (including theprovision of services of technical or otherpersonnel ) but does not includeconsideration for any construction,assembly, mining or like project undertakenby the recipient or which would becomechargeable under “Salaries”.Although the terms managerial, technical orconsultancy services has not been defined,various judgments have come to the aid ininterpreting the same.Technical services require expertise intechnology and prov iding the clientsuch technical expertise, Managerialservices is used in the context of runningand management of the business of the clientand Consultancy is to be understood asadvisory services wherein necessary adviceand consultation is given to its clients forthe purpose of client’s business.” What

amounts to MTC services depends on thefacts of each case. Mere commission per seor repair services do not amount to FTS.

11) Chargeability as per the treaty provisions:As per the domestic laws, the income of theNR is to be taxed in the state in which thesource of income arises to it. However the stateof residence would also have its right to taxthe NR owing to its residential status. In orderto avoid this situation of double taxation, Indiahas entered into to DTAAs with its tradingcountries. Therefore the next thing to beexamined is even if the income is chargeableto tax in India as per the domestic tax laws,yet whether as per the treaty provisions thecharge subsists or fails.Business Income: The charge as per the modeltreaty in respect of business income i scontained in Article 7. As per Article 7 of themodel treaty if the NR carries out a transactionin India through a Business Connection(known as Permanent Establishment (PE) inmodel treaties), then so much of the incomeaccruing to the NR through the PE is taxablein India. The types of PE differ according tothe nature of business and services renderedby it. Broadly it can be classified in 3 types asunder:(a) Fixed place PE (existence of a fixed place

of business through a continuous anduninterrupted period of time).

(b) Agency PE (existence of principal agencyrelationship, ostensible, economic and legalauthority to the agent).

(c) Service PE (rendering or uti l ization ofservices within the territory).

Royalty: As per the model treaty, Royalty hasbeen defined as payment of any kind receivedas a consideration for the use of, or the right touse, any copyright of l i terary, artistic orscientif ic work including cinematographicf i lms, or f i lms or tapes used for radio ortelevision broadcasting, any patent, trademark,design or model, plan, secret formula orprocess, or for the use of, or the right to use,industrial, commercial or scientific equipmentor for information concerning industrial,commercial or scientific experience.In case of a computer software, the majordifference which prevails in the definition asper the model treaty and the domestic tax lawsis that as per the model treaty, Royalty isattracted only when there is a transfer of use orright to use the copyright embedded in the articleunlike the use or right to use the copyrighted



article as per Explanation 4 to S. 9(1)(vi) of theact. This principle has been applied by theBangalore ITAT in the case of SonataInformation Technology Limited. (106 TTJ 797)and the Delhi HC in the case of DIT v/s InfrasoftLtd. (39 Taxmann.com 88). It was held that tobe taxable as royalty income covered by article12 of the DTAA the income of the assesseeshould have been generated by the “use of orthe right to use of “any copyright. In order toqualify as royalty payment, it is necessary toestablish that there is transfer of all or any rights(including the granting of any licence) in respectof copyright of a literary, artistic or scientificwork. In order to treat the consideration paidby the Licensee as royalty, it is to be establishedthat the licensee, by making such payment,obtains all or any of the copyright rights of suchliterary work. Distinction has to be madebetween the acquisition of a “copyright right”and a “copyrighted article”. Copyright is distinctfrom the material object, copyrighted. Copyrightis an intangible incorporeal right in the natureof a privilege, quite independent of any materialsubstance, such as a manuscript. Just becauseone has the copyrighted article, it does notfollow that one has also the copyright in it. Itdoes not amount to transfer of all or any rightincluding licence in respect of copyright.Copyright or even right to use copyright isdistinguishable from sale consideration paid for‘copyrighted’ article. This sale consideration isfor purchase of goods and is not royalty.However the Karnataka High Court in the caseof Samsung Electronics Co. Ltd. (345 ITR 494)has held that when licence is granted to makeuse of the software by making copy of thesame and to store it in the hard disk of thedesignated computer and to take back-up copyof the software, it is clear that what is transferredis right to use the software, an exclusive right,which the owner of the copyright, i.e., thesupplier owns and what is transferred is onlyright to use copy of the software for the internalbusiness as per the terms and conditions of theagreement. Hence it concluded that the sameamounted to payment of Royalty within themeaning of domestic tax laws as well as thetreaty provisions.The Ahmedabad ITAT in the case of Larsen &Toubro Ltd. (152 ITD 873) after taking bothjudgments into consideration has favoured theassessee by observing that a view favourableto the assessee must be adopted when twodifferent views are taken by non-jurisdictionalHigh Courts.

Fees for Technical Ser vices (FTS): Thedefinition of FTS has to be ultimately lookedinto the one as prescribed under the DTAA.Most of the DTAAs which India has enteredinto, includes the Make Available clause. Itmeans that the services provided by the NRhas to be made available to the recipient ofthose services. The recipient should then,independently of its own, be able to utilize thoseservices without the aid of the provider of thoseservices. It depends f rom case to case as towhether the services are made available or not.But if the answer is in negative, then inspite ofthe services being provided are in the natureof the definition of FTS under the domesticlaw, they cannot be made taxable in India. SeeRaymond’s case by the Mumbai ITAT (36 ITD791).

Conclusion:-The liability of an assessee making payment to aNR arises if the sum is chargeable to tax in India.Section 5(2) r.w.s. 9 determine the charge on suchincome as per the domestic tax laws. If as per thesame, income is chargeable to tax in India, then theassessee has to go a step further and peek into thetreaty provisions with the respective country wherethe NR resides. If as per the treaty provisions, theincome is chargeable to tax in India, then tax isrequired to be deducted at source accordingly.Although if as per the treaty provisions, the incomeis not chargeable to tax but if it so made chargeableas per the domestic laws, treaty provisions willoverride the local act. Similarly if as per the treatyprovisions it is chargeable to tax, but as per thedomestic laws it is not, then domestic laws will bemade applicable. The principle behind it is that theprovisions more beneficial to the assesse shall apply.It is to be kept in mind that in case of businessincome arising to the NR, only so much shall bechargeable as is attributable to the operations carriedby its PE in India. However if the incomechargeable is in the form of Royalty or FTS, it shallbe taxable in India regardless of the existence of aPE.In any case, if the assessee has confusions regardingthe sum on which tax is to be deducted, it isadvisable for him to approach the AO and obtain acertificate u/s 195(2) or S. 197(1) if the assessee isof the opinion that it deserves to be deducted at alower rate.

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Housing Project – Section 80IB(10) :

Before 01.04.2005, the legal position under section80-IB(10) of the income tax Act, 1961, was that oncethe project was sanctioned by the local authority asa ‘housing project’, the extent of area sanctioned forshops and commercial establishments in the housingproject was immaterial and had no bearing. Thus,irrespective of area where shops and commercialestablishments were permitted by the local authorityin a housing project, it was still treated as a housingproject and while granting 100% deduction, the areacovered by shops and commercial establishmentswas also includible. This position changed withinsertion of clause (b) to subsection (10) by theFinance Act, 2004. According to the amendmentcarried out and made effective from 01.04.2005,even if the local authority had sanctioned a largerarea for shops and commercial establishments, thebenefit of section80-IB(10) would not admissible toassessees if the area utilized for shops and commercialestablishments exceeded 5% of the aggregate built-up area of the housing project or 2000 sq. fee,whichever was less. Where in accordance with thepermissible commercial user on which the projectwas sanctioned, assessees started the projects andthe date of commencing such projects is before01.04.2005, once they have arranged their affairs inthis manner, the department cannot deny the benefitof section 80-IB(10) applying the principle ofretroactivity even when the provision has noretrospectivity.

The provisions of section 80-IB(10) mention notonly a particular date before which such a housingProject is to be approved by the local authority, evena date by which the housing project is to becompleted, is fixed. These dates have a specificpurpose, to give developers time to arrange theiraffairs in such a manner that the housing project isstarted and finished within those stipulated dates.

Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

13 This planning, in the context of facts, had to bemuch before 01.04.2005. Therefore, where housingproj ects were sancti oned much before theamendment but have been compl eted after01.04.2005, when the amended provision came intooperation, the assessees would be entitled to thededuct ion under secti on 80-IB(10) and theconditions mentioned in clause (d) would not apply.The cardinal principle of tax law that the law to beapplied has to be the law in force in the assessmentyear is qualified by exception when it is providedotherwise expressly or by necessary implication.That the law which is in force in the assessmentyear would prevail is not an absolute principle andexception can be either express or implied bynecessary implication.

[CIT vs. Sarkar Builders (2015) (375 ITR 392) ]

Section 263 – Review :

When there was no satisfactory explanationregarding source of income on creditor, unsecuredloan was added by assessing officer under head‘business income’. However, the Commissioneropined that it should have been assessed under head‘income from other sources’ and thus revisedassessment. The view taken by assessing officerbeing possible view, review to consider the amountas income from other sources was unjustified.

[CIT vs. P. D. Abraham (232 Taxman 336) ]

Section 54F:

Where assessee on the date of sale of long-termcapital asset owns more than one residential houseeven jointly with another person, benefit undersection 54F in respect of capital gain arising fromsale of asset was to be rejected.

[M. J. Siwani Vs. CIT (232 Taxman 335) ]

14

15

contd. on page no. 288


R.T.I . Act . and infor mati on i n I .T.Records

Nar esh Tr ehan V /s. RakeshkumarGupta (2015) 228 Taxman 119 (Delhi)

Issue :

What information can be disclosed under R.T.I. Actfrom Income Tax records ?

Held :

Information from I.T. records of certain individuals,unincorporated entity and corporate entities wassought under R.T.I. Act.

Income Tax Department refused to divulge anyinformation as they cannot do under Sec.138 of I.T.Act. as well as under RTI Act.

Matter was carri ed to central informationcommission where the applicant was successful anddivulgence of information was directed to be givento the I.T. Department.

On approach to High Court, it is held that :-

(1) Return of Income f i led by assessee andinformation necessary to support same, wouldbe exempt u/s 8(1)(j) of 2005 Act in respect ofindividual and unincorporated assessee.

(2) In case of widely held companies though mostinformation relating to thei r income andexpenditure would be in public domain, yettheir confidential information would be exemptfrom disclosure u/s 8(1) (d) of 2005 Act.

(3) Information furnished by corporate assesseesthat nei ther relates to another party nor isexempt u/s. 8(1)(d) of 2005 Act can bedisclosed.

CA. C. R. [email protected]

See 92-B : Tr ansfer pr icing : Notapplicable when no income ar ises.

Shell India Markets (P) L td. V/s. Asst.C.I .T. (2015) 228 Taxman 99 (Bombay)

Issue :

When shares are issued to an Associate Enterprise,whether provision of Transfer Pricing areapplicable?

Held :

When the share value as per department wasRs.622/- per share and the same were issued at Rs.10/- per share to Associate Enterprise in foreigncountry, when department invoked its powersand proposed to tax that difference under transferpricing provisions, it is held that :-

Jurisdiction to apply Chapter X would occasiononly when income arises out of internationaltransaction and such an income is chargeable to taxunder Act.

In this case it is held that the same is not taxable, asthe transaction of the issue of shares is on capitalaccount not giving rise to any income.

Court took support from the case viz. VodafoneIndia Services (P) Ltd. – v/s. Union of India (2014)50 Taxman.com. 300 (Bom). (368 ITR P.1)

Par tners’ contr ibution of capital : Noliability of the firm to explain.

CIT V/s. Venkateswar a and Other s(2015) 370 ITR 212 (T & AP)

Issue :

Whether firm can be called upon to explain thecapital brought by the partners?

Held :

The amount that was sought to be treated as incomeof the f irm was the contribution made by the

From the Courts

CA. Jayesh C. [email protected]

29 30

31


partners to the capital. In a way, the amount socontributed constitutes the very substructure for thebusiness of the firm. It is difficult to treat the poolingof such capital as credit. It was only when the entrieswere made during the course of business that theycould be subject to scrutiny u/s. 68 of I.T.Act. 1961.Even otherwise, it was evident that the assesseeexplained the amount as the contribution from itpartners. In such a situation, section 68 could nolonger be pressed into service. Inquiry into thesources for the respective partners to make thatcontribution could, at the most, be conductedagainst the individual partners. If the partner wasthe assessee, the concerned A.O. can require himto explain the sources of the money contributed byhim to the firm. If, on the other hand, the partnerwas not an assessee, he can be required to file areturn and explain the source. Undertaking suchan exercise, vis-à-vis firm itself, was imperssible inlaw. Therefore, the view taken by the A.O. that thefirm must explain the source of income for thepartners regarding the amount contributed by themtowards capital of the firm could not be sustainedin law.

Noti ce u/s. 143(2) wi t hi n t i me i smandatoryC.I .T. v/s. Gi tsons Engineer ing Co.(2015) 370 ITR 87 (Mad.)

Issue:

In scrutiny assessment, issue of notice within timeas prescribed u/s. 143(2) is compulsory?

Held:

It is beyond any cavil that the assessee filed returnof income on October 31, 2007. Even though theDepartment claims to have sent a notice u/s.143(2)of the Act on September 17, 2008 the Revenuefailed to produce any records to show that thesaid notice was dispatched and served on theassessee. However, it is stated that the Departmentsubsequently issued another notice u/s.143(2) of theAct, on August 27, 2009, which, on the face of it,is beyond the period of limitation prescribed u/s.143(2) of the Act.

The basic requirement of Section 143(2) of the Acthaving not been satisfied the department’s furtherproceedings, in our considered opinion becomesnon est in law.

Depreciation : No time limit for car ryforward and set off from 01/04/2002

Synbiotics L td. v/s. Asst. CIT. (2015) 370ITR 119 (Guj .)

Issue:

Is there a time limit to avail benefit of carried forwardunabsorbed depreciation?

Held:

Sec.32(2) of the I.T. Act. 1961, was amended byFi nance Act. 2001. As a consequence anyunabsorbed depreciation available to an assesseeon April 1, 2002, (ITAY 2002-03), will be dealtwith in accordance with the provisions of Sec. 32(2)as amended by the Finance Act, 2001. CircularNo.14 of 2001 clarified that the restriction of eightyears for carry forward and set off of unabsorbeddepreciation had been dispensed with.

Busi ness Expendi tur e: Gener alPr inciplesCIT v/s. Discover y Communicat ionIndia (2015) 370 ITR 57 (Delhi)

Issue :

What are the general principles for allowability ofexpenditure?

Held:

The words “wholly and exclusively” though notsynonymous are sufficiently wide and not restrictedto expenditure solely incurred for the purpose ofearning of profits. For an amount to be treated as anadmissible expenditure under section 37(1) of theIncome Tax Act, 1961, the amount should be for thepurpose of business and not for the purpose ofearning income. Whether an expenditure was whollyand exclusively incurred or laid out for the purposeof business or profession must be determined fromthe assessee’s perspective and choice. It is subjective.What one assessee may want to incur, another maynot like to incur. The quantum may also differ and

From the Cour ts

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vary. Section 37(1) does not curtail or prevent anassessee from incurring an expenditure which he feelsand wants to incur for the purpose of business.Expenditure incurred may directly or indirectlybenefit the business in the form of increased turnover,better profit, growth, etc. As long as the expenditureincurred is “wholly and exclusively” for the purposeof business, the Assessing Officer cannot by applyingof his own mind, disallow whole or a part of theexpenditure. The Assessing Officer cannot questionthe reasonableness by putting himself in the arm-chairof the businessman and assume status or characterof the assessee. However, exception can be createdby a statutory provision like section 40A(2), whenthe Revenue as per the statutory mandate may havejurisdicti on to examine the i ssue of price/considerat ion. For incurring adverti sementexpenditure, in the relevant years, there were nostatutory stipulations. When the expendi ture isincurred for the assessee’s own business, the merefact that the expenditure would enure to the benefitof a third party or the third party incidentally obtainssome advantage, would not affect or detract fromthe finding that the expenditure was wholly andexclusively for the assessee’s business. For example,a retail trader may advertise different products whichmay incidentally benefit the manufacturers but thisdoes not mean that the advertisement expenditurefai ls to meet the requi rement of “wholly andexclusively”.

Meaning of Speculative Transaction

CIT v/s. Fir st Secur ities P. L td. (2015)370 ITR 72 (Karn)

Issue :

What is the meaning of Speculative Transactionunder the Income Tax Act ?

Held :

A reading of section 43(5) of the Income Tax Act,1961, makes it clear that a transaction in which acontract for the purchase or sale of any commodityincluding stocks and shares is periodical ly orultimately settled otherwise than by the actualdelivery or transfer of the commodity or scrips,amounts to a speculative transaction. However, thesection culls out certain exceptions. One suchexception is to be found in clause (c) of section43(5) of the Act, which deals with a contract enteredinto by a member of a forward market or a stockexchange in the course of any transaction in thenature of jobbing and arbitrage to guard against losswhich may arise in the ordinary course of hisbusiness of such member. Such a transaction is notto be deemed to be a speculative transaction. Theprohibition under section 73 of the Act is attractedonly to set off the loss in a speculative businessagainst profits from other business.

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From the Cour ts

16contd. from page 285 Glimpses of Supreme Cour t Rulings

Section 80HHC:

Third and fourth provisos to section 80HHC wereinserted by taxation laws (Second Amendment) Act,2005 with retrospective effect from01.04.1998which carved out two categories of exporters vizthose whose export was less than 10 crore and thoseexporters whose export turnover was more than 10crore. I t provided that deduction in respect ofexporters having a turnover of more than 10 crorewould be available only if he had satisfied twoconditions stipulated in third and fourth proviso tosaid amendment. All exporters including assesseecontended that these conditions are severable and

therefore, these conditions should be declared ultrawires. High Court quashed impugned amendmentonly to the extent that operation of said section couldbe given effect from date of amendment and not inrespect of earlier assessment years of assessee. TheHon’bl e Supreme Court hel d that weatherconditions stipulated in third and fourth proviso tosection 80HHC would not operate retrospectivelyand cases of exporters having turnover below 10crore and those above Rs.10 crore would be treatedsimilarly during period prior to amendment.

[CIT vs. Avani Exports (232 Taxman 357) ]❉ ❉ ❉


Blue Star I nfotech Ltd. v. ACIT 154ITD81 (Mum)

Assessment Year : 2003-04 to 2005-06Order dated: 17th Apr il, 2015

Basic Facts

The assessee filed its return of income claimingcredit of foreign tax paid for AY 2003-04& 2004-05.During the course of assessment proceedings,the A.O. did not make any observation with regardto the assessee’s claim nor gave any credit for theforeign tax while issuing demand notice. Since inboth the assessment years there was omission onthe part of the A.O. to consider the assessee’s claimfor credit of foreign tax, the assessee filed applicationu/s 154 of the Act, however, the same was dismissedby the A.O. on the ground that it was a debatableissue, hence, it was not a mistake rectifiable u/s 154of the Act.Further, in AY 2005-06, A.O. allowedcredit of foreign TDS. But thereafter notice u/s 154was issued and it was alleged that credit of foreigntax was wrongly given. The revenue authoritiesrejected assessee’s claim holding that the incomeon which the assessee was charged tax in Japanwas not chargeable to tax in India being exemptunder the provisions of section 10A and, therefore,assessee was not eligible to claim credit for the taxdeducted in Japan.

Issue

Whether in view of amendment made to section10A by Finance Act, 2000 with effect from 1-4-2001, assessee income was not exempt from taxbut a deduction was granted u/s 10A and henceit was entitled to get credit of tax deducted atJapan by vir tue of para (2a) of ar ticle 23 of India-Japan DTAA?

Held

The view taken by the lower authorities is not inconsonance with the provisions of section 10A as

amended by Finance Act 2000 w.e.f. 1-4-2001 anddo not take into account the sea change made inthe provision after the aforesaid amendment. Priorto the amendment by Finance Act 2000, the Actprovided that any profits and gains to which theprovisions of section 10A apply “shall not beincluded in the total income of the assessee”.However, after the amendment w.e.f. A.Y. 2001-02 the profits and gains to which the provisions ofsection 10A apply are not excluded from totalincome and instead “a deduction of such profits andgains… ..” shall be allowed from the total incomeof the assessee”. It means “total income” must firstbe determined from which deduction u/s 10A shallbe allowed. The effect of Section 10A is to allow adeduction from ‘total income’ and therefore it cannotbe said that the profits and gains to which section10A applies are not charged to tax.It thereforefollows that it cannot be said that the assessee’sincome which was charged to tax in Japan has not,by virtue of the provisions of section 10A, beentaxexempted in India. Thus, it leads to a conclusionthat there was charge of tax in India also on theincome that has been subjected to tax in Japan. Thetax liability of the assessee is equal to the tax payablein India at normal rates. Accordingly assesseequalified for tax relief under para (2a) of article 23of Double Tax Avoidance Convention betweenIndia and Japan as applicable to the assessmentyears under consideration. Further, On the one handthe assessee is being discriminated against a residentof Japan to whom the incentive of section 10A isexpressly passed over in the double taxation reliefgranted to him against his tax liability in Japan. Onthe other hand the assessee is being discriminatedagainst an Indian resident who does not earn exportincome and does business in domestic market only.Thus, the treatment sought to be given by revenuein the case of the assessee yields absurd result.Furthermore article 24 of the Convention envisagesparity of tax liability between the residents of India

CA. Yogesh G. [email protected]

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CA. Aparna [email protected]

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and Japan. By virtue of Paragraph (3c) of article23 the resident of Japan obtains tax relief as if theIndian tax has not been reduced by the provisionsof section 10A. On the same logic the tax relief tothe resident of India should be calculated as if theIndian tax has not been reduced in his case by theprovisions of section 10A.Thus, the Hon’ble ITATdirected the AO to allow credit for foreign TDSagainst the tax levied on the corresponding incomeeligible for deduction under section 10A in India.

ACIT v. Kala Genset (P.) L td. 154 ITD73 (Pune)Assessment Year : 2009-10 Order dated:27th March, 2014

Basic Facts

The assessee is engaged in the business ofmanufacturing generator sets under the brand name“Kala”. The assessee company has two units oneat Chakan and one at Si lvassa. The assesseecompany has claimed deduction in respect ofChakan and Si lvassa uni ts u/s 80IB. The AOdisallowed the claim on ground that assessee wasnot engaged in manufacturing of article but wassimply assembling various components of gensets.The Hon’ble CIT(A) allowed the claim of assesseeu/s.80IB(5)(i) by holding that assembling of variouscomponents amounts to manufacturing. Moreover,the Tribunal, on similar facts, for AY 2007-08 andAY 2008-09 had allowed the claim of assesseeunder section 80-IB(5)(i) by holding that assemblingvarious components amounted to manufacturing.

Issue

Whether assembling of components of gensetamounts to manufactur e for sect ion 80-IBrelief?

Held

The Hon’ble ITAT in deciding the matter for theyear under consideration found that various stepsare followed in manufacturing of gensets andvarious items like engines, alternators, batteries,control panel, canopies, etc. are procured by theSilvassa unit. Thereafter, the technical team inspectsthe material received and only after thorough check

up, the i tems are sent for manufacturing. Thevarious engineers assemble the various parts andalso they have to align the engine and the alternator.After final assembly, various tests like vibrationtests, load test, noise test, etc. are carried out. Theissue is whether assembly amounts to manufacture.The Hon’ble Bombay High Court in the case ofTata Locomotive and Engineering Company Ltd.[(1968) 68 ITR 325 (Bom)] held that manufactureincludes assembly of various parts.In assessee’s casethe raw materials were engine, batteries, canopies,alternators, etc. and the final product was generatorset which was totally different product having aseparate name and identity in the market.Furtherthe assessee is paying excise duty on the gensetsmanufactured. Secondly, CIT(A) also accepted thatthe final product i.e. generator set is a new productvis-a-vis the raw material used. Accordingly, he hasaccepted the claim of the assessee and has allowedthe deduction. In view of the above the Hon’bleITAT allowed the claim of the appellant.

Employees Pr ovi dent FundOrganisation v. ACIT 153 ITD 642 (Del)Assessment year : 2011-12 to 2013-14Order dated: 10th Apr il, 2015

Basic Facts

The assessee i.e. the Employees’ Provident FundOrganization was set up under the EmployeesProvident Fund and Miscellaneous Provisions Act,1952. The AO passed an order u/s 201(1) of theIncome tax Act, 1961 (“The Act”) holding theassessee in default for not deducting the tax at sourceon payments made on account of settlement onwithdrawal of accumulated balance under Rule 9,10 of part A of Schedule IV of the I.T. Act, 1961.Aggrieved by the order, an appeal was filed beforethe learned CIT(A) and the same is pendingdisposal. Meanwhi le, the assessee moved stayapplications before the learned CIT(A) praying forstay of the demand in quest ion under theci rcumstances mentioned therein. The learnedCIT(A) disposed of the stay application directingthe assessee to file the stay petition before the AO.Aggrieved by this order, the present appeals werefiled before the Tribunal.

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Issue

Whether CIT(A) has inher ent power to staydemand and whether appeal is maintainableagainst such order?

Held

It is trite law that no appeal is maintainable beforethe appellate forum unless the statute specificallyprovides for it. Section 253 of the Act provides thatfor the kinds of order appealable before this IncomeTax Appellate Tribunal. Clause (a) of sub-section(1) of Section 253 provides that order passed bythe CIT(A) under Section 250 of the Act isappealable before the Income Tax Appel lateTribunal. The question is whether order passed byCIT(A) against the stay application is an orderpassed under Section 250 of the Act or not. Theprovisions of Income Tax Act do not expresslyprovide the power of stay wi th the CIT(A).However, the several Hon’ble High Courtsfollowing the ratio laid down by the Hon’ble ApexCourt in the case of ITO v. M.K. MohammadKunhi [1969] 71 ITR 815 (SC) have held that theCIT(A) has inherent power to stay the demandwhen the appeal is pending for disposal before him.Therefore, the law is well settled that the fi rstappellate authority i.e. CIT(A) has power to grantstay. The CIT(A) has passed the impugned orderobviously, under the provisions of Section 250 ofthe Act since there is no other provision of the Actunder which CIT(A) can pass the order. Therefore,having held that the CIT(A) has passed the orderunder Section 250 of the Act, in Tribunal’s opinion,the appeal was clearly maintainable under clause(a) of sub-section (1) of Section 253 of the Actbefore it.

A. Mohiuddin vs. Additional Director ofIncome (International Taxation) [2015]171 TTJ 138(Bang)

Assessment Year : 2012-13 Order dated:14th November, 2014

Basic Facts

During relevant year, assessee purchased aresidential property from a non-resident. The

assessee’s case was that in respect of paymentsmade by him, the nature of income chargeable totax ought to be embedded, only then he wasrequired to deduct the TDS. The assessee furtherexplained that since non-resident vendor waseligible to claim deduction under section 54 inrespect of capital gain arising from sale of property,he was not required to deduct tax at source whilemaking payment in question. The AO opined thaton sale of the house property, capital gain tax wouldbe chargeable in the hands of the recipient; therefore,the element of income was quite involved in thepayment. It was a different matter that the recipientwas entitled for deduction under section 54. He thusheld the assessee was in default and raised a demandunder section 201. The CIT(A) upheld the AO’sorder.

Issue

Whether assessee can be treated as assessee indefault for not deducting TDS while makingpayment to Non Resident from whom he hadpurchased a proper ty knowing that the gain wasnot taxable in the hands of the non-resident?

Held

The ultimate payments of tax by the recipient maynot be the criteria for arriving at a conclusion;whether the payments involved element of taxes ornot. The ultimate levy of taxes is dependent uponmany circumstances such as exemption, deductionetc. However, in the present case when the assesseehad made payments, they were sure because of thefacts brought to their notice that these payments doesnot involve payment of taxes.The vendors are thefamily members. They have apprised the assesseeabout the investment. They must have pointed outthat no liability of taxes would be there. Therefore,there was no need to deduct the TDS. Further asper Para 3 of Instruction No. 2/ 2014, dated 26/02/2014 the AO shal l determine the appropriateproportion of the sum chargeabl e to tax asmentioned in subsection (1) of section 195 toascertain the tax liability on which the deductor shallbe deemed to be an assessee in default under section201 of the Act, and the appropriate proportion ofthe sum will depend on the facts and circumstances

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of each case taking into account nature ofremittances, income component therein or any otherfact relevant to determine such appropriateproportion. In the present case from the date of thepayment assessee was aware that the amount willqualify for exemption under section 54 because thevendors has already made investment in purchaseof the house property. She has represented thesefacts to the assessee.The facts on record indicatethat from the date of payments, parties were awarethat these payments would not be subject to taxes,because of exemption. Therefore, there was noneed to deduct the taxes. In view of the above, theappeal is allowed by holding that the assesseecannot be treated as assessee in defaul t undersection 201. Consequently, no interest under section201(1A) will be imposable upon them.

A.T. Kearney India (P.) L td. v. ACIT[2015] 153 ITD 693 (Delhi)Assessment Year : 2009-10 Order dated:26th August, 2014

Basic Facts

During the course of assessment proceedings, it wasobserved by the AO that the assessee claimeddeduction u/s 10A of the Act in respect of revenuearising from its oversees Associated Enterprises(AEs). On the perusal of the said Transfer Pricingstudy report, the A.O observed that the assesseehad shown its margin of profit from the eligiblebusiness at many times higher than that shown bythe comparables.It was seen that the arithmeticmean of the margin of comparable as per the TPstudy report was 16.22 per cent as against theassessee’s margin of profit at 101.19%. The AOheld that the provisions of sec. 10A(7) r.w.s 80-IA(10) were applicable. The AO considered profitrate of 20% of the operating cost as reasonable. Thisled to the reduction in the amount of deduction u/s10A. he assessee failed to convince the ld. CIT(A)to its line of reasoning, who echoed the assessmentorder on this point.

Issue

Whether provisions of section 10A r.w.s 80-IA(10) appl i cabl e to an inter nat ional

transaction? Whether since AO had fai led todemonstrate existence of ‘ar rangement’ betweenassessee and its AEs by which transactions wereso ar ranged as to produce more than ordinaryprof its in hands of assessee, deduction undersection 10A was to be allowed as claimed?

Held

The essential requirement for invoking sub-section(10) of section 80-IA is that the course of businessbetween the assessee having eligible business andthe closely connected ‘any other person’ should bearranged. The expression ‘any other person’ hasnot been qualified by the phrase ‘resident in India’.It has no where been provided in any part of thisprovision that such connected person also be aresident of India. This provision is simply concernedwith the increase in the profits of the assessee havingel igible business. To argue that unless three iscorresponding decrease in the profits of the otherassessee, also a resident of India, the mandate ofsubsection 10 is not activated is akin to reading morethan the actual content of the provision. Therefore,section 80-IA(10) applies notwithstanding the factthat the other related person is resident or non-resident.

There is no dispute regarding to the fact that thereis a close connection between the assessee carryingon the eligible business in India and its associatedenterprise, being any other person, carrying onbusiness outside India. What is relevant for invokingsub-section (10) is the situation where the higherprofit has resulted due to ‘arrangement’ betweenthe assessee and i ts closely connected person.Therefore, the higher profit should be the ‘effect’of such an ‘arrangement’ and cannot be a substituteof such ‘arrangement’ itself, which is a ‘cause’, forinvoking sub-section (10) of section 80-IA.It canbe seen from the facts of the instant case that theAO has simply treated high profit earned by theassessee as a reason to summon sub-section (10),without even remotely demonstrating the existenceof any ‘arrangement’ between the assessee and itsAEs aimed at producing extraordinary profits in thehands of the assessee. The conclusion drawn bythe authorities below in such circumstances was notex consequenti sustained.

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The proviso to sub-section (10) inserted by theFinance Act, 2012 wi th effect from 1-4-2013provides that where the ‘arrangement’, referred toin section 80-IA(10), involves a specified domestictransaction under section 92BA, the amount ofprofits from such transaction shall be determinedhaving regard to arm’s length price under section92F(ii).The assessment year under consideration is2009-10. The Tribunal therefore held that neitherthe proviso to sub-section (10) existed at that time,nor such a proviso can be applied as instant casedeals with an international transaction and notspeci f ied domestic transaction. Under thesecircumstances, they held that the impugned orderupholding the invocation of sub-section (10) ofsection 80-IA cannot be countenanced to this extent.

SIBIA Healthcare (P) Ltd. v. DCIT [2015]171 TTJ 145 (Amr itsar )Assessment Year : 2013-14 Order dated:9th June, 2015

Basic Facts

In this case there was admittedly a delay in filing ofthe TDS returns by the assessee.In the course ofthe processing of the TDS return, the AO(TDS)raised a demand, by way of an intimationdated 9th September 2013 issued undersection200A of the Act, for levy of fees under section 234E for delayed filing of TDSstatement. Aggrievedby this levy of fees, assessee carried the matter inappeal before the CIT(A) but without any success.The assessee is not satisfied and went for furtherappeal before Hon’ble ITAT.

Issue

Whether, so far as per iod pr ior to 1st June, 2015is concerned, fees under section 234E of the ITAct, 1961, in respect of defaults in furnishing

TDS statements, could be levied in intimationunder section 200A of the Act?

Held

Prior to 1st June 2015, there was no enablingprovision in section 200A for raising a demandinrespect of levy of fees under section 234E. Section200A, at the relevant point of time, permittedcomputation of amount recoverable from, orpayable to, the tax deductor after making thefollowingadjustments:(a)after making adjustmenton account of “arithmetical errors” and”incorrectclaims apparent f rom any information in thestatement” and (b) after making adjustment for‘interest, if any, computed on the basis ofsumsdeductible as computed in the statement”.No otheradjustments in the amount refundable to, orrecoverable f rom, the tax deductor, werepermissible in accordance with the law as it existedat that point of time.No other provision enablingademand in respect of this levy has been pointedout and it was thus an admittedposition that in theabsence of the enabling provision under section200A, no suchlevy could be effected. As intimationunder section 200A, raising a demand ordirectinga refund to the tax deductor, can only be passedwithin one year from theend of the financial yearwithin which the related TDS statement is filed,and as therelated TDS statement was filed on 19thFebruary 2014, such a levy could only havebeenmade at best within 31st March 2015. That timehas already elapsed and thedefect is thus not curableeven at this stage. Therefore, the Hon’ble ITATupheld the grievance of the assessee anddeleted theimpugned levy of fee under section 234E of theAct.

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In thi s issue we are giving ful l decision ofAhmedabad ITAT in the case of B.A. ResearchIndia Ltd., wherein the Hon’ble ITAT decided theissue whether the sample storage income earnedby the assessee is eligible for deduction u/s 80IB(8A) when the assessee is already an approvedresearch and development company.

I hope the readers would find the same useful.

In the Income Tax Appellate Tr ibunal

Ahmedabad “C” Bench Ahmedabad

Before Shr i Anil Chaturvedi, AccountantMember,

and Shr i S. S. Godara, Judicial Member

ITA. Nos. 2431 & 2432/Ahd/2012

(Assessment Year :2007-08 & 2008-09)

DCIT,

Circle-1, Ahmedabad Appellant

Vs.

B A Research India Ltd.,B A Research House, Opp. PushparajTowers, Nr. Judges Bunglows,Ahmedabad - 380054 Respondent

PAN : AACCB4535A

By Revenue : Shri D. C. Mishra, Sr.D.R

By Assessee : Shri Mukesh M. Patel, A.R.

Date of Hearing : 07.08.2015

Date of Pronouncement : 14.08.2015

ORDER

PER S. S. GODARA, JUDICIAL MEMBER

These Revenue’s appeals for assessment years2007-08 & 2008-09 arise from different orders of

CA. Sanjay R. [email protected]

Unreported Judgements

the CIT (A)-6, Ahmedabad dated 06th & 08thAugust, 2012 in Appeal Nos. CIT(A) - VI/DCIT.Ci r.1 /360 /09-10 & CIT(A) - VI /ACIT.Cir.1/266/10-11 deleting disallowances ofRs.13,45,928/- & 22,82,000/- made by theAssessing Officer by excluding assessee’s samplesstorage incomes from Section 80IB(8A) deduction,in proceedings u/s. 143(3) of the Income Tax Act,1961 (in short ‘the Act’).

2. Both parties state at the outset that the soleissue involved in these two appeals is that ofSection 80IB(8A) deduction i.e. whether theassessee’s sample storage incomes hereinaboveare to be held as derived from the eligiblebusiness for granting the impugned deductionor not. We take up ITA No. 2431/Ahd/2012as the ‘lead’ case.

3. The Assessing Officer in the course of scrutinynoticed assessee’s sample storage income ofRs.13,45,928/- in its P&L account includedfor claiming Section 80IB(8A) deduction. Theassessee is already an approved research anddevelopment company from the competentauthority in the impugned assessment year. Itinter alia pleaded to be providing services inthe field of analyzing clinical samples of bioequivalence, bio availability and clinical trialstudies for pharmaceutical companies, i tscustomers would request it to hold back/ storethe said samples after completing research inlieu of charges sample storage fees in question.The assessee stated that the said sample wouldbe retained pendi ng l icense approvalapplication and inspection procedures. I texplained that these pharmaceutical studiessample required specific storage conditionsinstead of general ones. The Assessing Officerwas not impressed. He observed in assessment


order dated 23.12.2009 that impugned samplestorage income had to be characterized as amiscellaneous one only, there was no materialproduced of pending license approvals, theassessee’s clients had to maintain the samplesand it had merely allowed them to utilize itsstorage facility which in turn would not resultthat the income in question had been derivedfrom the eligible business. He accordinglyexcluded the impugned sample storage incomeof Rs.13,45,928/- f rom being allowed asSection 80IB(8A) deduction.

4. The assessee preferred appeal. The CIT(A) hasaccepted its contentions as under:

“4.5 I have considered the facts of the case;assessment order. AO’s remand report andappel l ant’s submissi on and rej oi nder.Appellant claimed deduction under section 80IB (8A) on profit of business from scientificresearch including sample storage incomebeing integral part of scienti fic research.Assessing Off icer disallowed the claim ofdeduction on sample storage income on theground that this activity is not integral part ofscientific research and that this income wasseparately shown in P&L account. It is not indispute that appellant is approved as R&Dcompany under section 80 IB (8A) by DSIR,government of India. Accordingly, appellantis entitled to deduction in respect of profits andgains of business of scientific research anddevelopment. Profit in respect of any activitywhich is integral and part of scientific researchand development is el igible for deductionunder section 80IB(8A). Appellant submittedthat scientific research and development workundertaken by it involves bioequivalence,bioavailability and clinical trial studies for thepharmaceutical industry. For this purpose, theappellant carried out analysis of cl inicalsamples. Cl inical samples collected arerequi red to be stored as per regulatoryguidel ines unti l the necessary l icensingapproval is granted to the Pharma companies.

This is because re-analysis of the samples maybe necessary to support the research findingsand to resolve the queries raised by regulatoryauthorities. Since storage of the samples forrequired period is to be done under specialconditions, appellant received over and abovebioequivalence study income, sample storageincome. The samples are stored in the processof scientific research and development activity.Appellant did not provide any Sample storagefacilities independent of research project. Sincethis is a part of research agreement, this is notan isolated activity away from scienti ficresearch and development activity. From theverification of agreement for bioavailabilitystudy with Lupin Ltd., it is seen that retentionof records is part of the said agreement.Appellant’s business of scientific research anddevelopment extends till the fulfil lment of allregulatory requirements. During this process,samples col lected are to be stored andpreserved i n speci f ic condi ti ons andenvironment for the required period. Since theperiod of storage is different for differentsamples and regulatory requi rements, thecharges are variable based on the period forwhich samples were preserved. In view of this,the charges for sample storage could not havebeen clubbed with bioequivalence or bioavailability study income. Since the appellantwas not providing the storage facility to anyoneother than those for whom i t conductednecessary study and it was not preserving thesamples which were not used by it in its study,the sample storage cannot be treated anindependent business outside its business ofscientific research and development. Since thesample storage income is generated from theagreement for scient i f ic research anddevelopment, the said profi t is eligible fordeduction under section 80IB(8A). In view ofthis, just by mentioning the sample storageincome separately in P&L account, the samewill not become independent source of income

Unrepor ted Judgements


other than scientific research and development.Appellant relied upon the judicial decisions inwhich it is held that interest from overduedebtors and erection and commissioningcharges are not directly derived from industrialundertaking but the same are integral part ofindustrial undertaking and hence the same areeligible for deduction. In the case of appellantal so, sample storage i ncome (not anindependent activi ty) is integral part ofscientific research and development activityhence profit from the same is eligible fordeduction. Accordingly, assessing officer isdi rected to allow deduction under section80IB(8A) on Sample storage income.”

5. We have heard both the parties and gonethrough the case file. The Revenue relies uponthe case law of Liberty India vs. CIT (2009)183 TAXMAN 349 (SC) and strongly arguesthat the CIT(A) ought to have upheld theAssessing Officer’s action in disallowing thei mpugned cl ai m of Secti on 80IB(8A)deduction qua the sample storage income inquestion. The assessee supports the lowerappellate authority’s order. There is no disputeabout the fact that the assessee is in the researchand development field duly approved by thecompetent authority and already held entitledfor Section 80 IB (8A) deduction. It enters intoMaster Service Agreement with its clients forconducting the above stated clinical studies.The same is a comprehensive document forconducting trial and analysis of cl inicalsamples. This agreement contains a specificclause for samples’ retention in case ofpendency of license approval application. Wefind that such procedures sometimes take yearsto complete. One of such an instance placedon record reveals that the assessee completedresearch study in March 2011, its client appliedfor drug license in USA and the said authorityinspected i ts premises storing samples inquestion in May 2014. This letter issued byDepartment of Health and Human Services,

Publ i c Heal th Servi ce, Food & DrugAdministration, Silver Suffering, MD 20993to this ef fect is dated 01.07.2015. TheRevenue fails to rebut this factual position. Thecase file further reveals that the assessee’scl ients have to exerci se an opti on ofdiscarding, returning and retention of samplesin lieu of paying the impugned storage studies.We put up a specific query to the Revenue asto whether the assessee stores such sampleonly after concluding clinical studies for itsclients or it collects the same from outside aswell. The replies received in favour of the firstoption only. All these discussions lead us toinfer that the assessee conducts its clinical studyand stores the relevant samples at its client’sbehest till the license approval is obtained. Thesame can’t be held to be an activity not formingintrinsic part of its clinical studies conducted.Nor its sample storage income is of such anature which can be held as not ‘derived’ fromthe eligible business. The Revenue’s argumentis accordingly rejected. Now we come to itscase law of Liberty India (supra). Thei rlordships in the said case dealt with a situationwherein profit realized from sale of DEPBl icense was held as not derived from theeligible business u/s. 80 I and 80IA of the Act.We have al ready held on facts that theassessee’s sample storage income is very muchderived from its research and developmentactivity only. Therefore, the above said caselaw does not apply in peculiar facts of this case.Revenue’s appeal ITA No. 2431/Ahd/2012 forA.Y. 2007-08 is dismissed.

6. Same order to follow in ITA No.2432/Ahd/2012 for A.Y. 2008-09.

Revenue’s appeals ITA Nos. 2431 & 2432/Ahd/2012 are dismissed.

Pronounced in the open Court on this the 14thday of August, 2015.

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Unrepor ted Judgements


a) The correctness of the claim of expenditureincurred for earning the exempt incomemade by the assessee or

b) The claim made by the assessee that noexpenditure has been incurred for earningexempt income.

(ii) The method prescribed in the Rule states thatthe expenditure in relation to income whichdoes not form part of the total income shall beaggregate of the following amounts-

a) The amount of expenditure directly relatingto income which does not form part of totalincome.

b) In the case of interest on borrowed fundswhich is not directly attributable to anyparticular income or receipt, the amountcomputed i n accordance wi th thefollowing formula- A*B

C

· A= amount of interest, other than theamount of interest which is directlyattributable to the exempt income statedin (a) above.

· B= The average value of investment,income from which does not or shallnot form part of the total income, asappearing in the balance sheet of theassessee, on the first day and the lastday of the relevant accounting year.

· C= The average of the total assets asappearing in the balance sheet of theassessee, on the first day and the lastday of the relevant accounting year. Theterm “Total Assets” means total assetsas appearing in the balance sheetexcluding the increase on account ofrevaluation of assets but including the

CA. Kaushik D. [email protected].

Controversies

Whether di sal lowance can be made byinvoking provisions of S.14A of the Act evenin those cases wher e no income has beenear ned by an assessee, which has beenclaimed as exempt dur ing the financial year?

Proposition:

It is proposed that where no exempt income isearned disallowance u/s 14A cannot be invoked.

View Against the Proposition:

Section 14A has been inserted in Chapter IV of theIncome Tax Act by the Finance Act, 2001, withretrospective effect from 1-4-1962. This sectionprovides for disallowance of expenditure incurredin relation to income which is not includable in thetotal income of the assessee (i.e., exempt income).The operative part of this section reads as under.“For the purposes of computing the total incomeunder this Chapter, no deduction shall be allowedin respect of expenditure incurred by the assesseein relation to income which does not form part ofthe total income under this Act.

In exercise of the powers given in section 14A(2),C.B.D.T has issued a Notification No. S.O. 547(E)on 24-3-2008 (299 ITR (ST) 88). This notificationamends the Income tax Rules by insertion of Rule8D providing for a “method for determining amountof expenditure in relation to income not includiblein total income”. Reading this Rule it is evident thatthe Rule provides for disallowance of not only directexpenditure incurred for earning the exempt incomebut also for disallowance of proportionate cost ofholding investments. This is clearly contrary to themain objective with which section 14A is enacted.

Broadly stated, Rule 8D provides as under.

(i) The method prescribed in the rule is to beapplied only if the A.O. is not satisfied with-


decrease on account of revaluation ofassets.

(c) An amount equal to ½% of the average ofthe value of investment, income fromwhich does not or shall not form part ofthe total income, as appearing in thebalance sheet of the assesse, on the firstday and the last day of the relevantaccounting year.

The Delhi Tribunal has taken the view in thecase of Insaallah Investments Ltd. v/s ITO [23SOT 130] by holding that the phrase ‘incomewhich does not form part of total income’ usedin s. 14A is not limited to only the cases wheresome income has actually been received. It willalso apply to the cases, where income cannotbe included in the total income whetherreceived or not.

However Special Bench in the case of CheminvestLtd. Vs. I.T.O. 121 I.T.D. 318 decided this issueagainst the assessee.

The only controversy before the special bench waswhether disallowance u/s 14A could be madewhere no dividend is received in the year underconsideration. In this case the assessee hadborrowed monies for acquiring shares as a traderas well as an investor but no dividend was receivedin the concerned year. The contention of assessewas that since no income forming part of totalincome was received, the question of making anydisallowance did not arise. After hearing the parties,it was held that if the expenditure is incurred inrelation to income which does not form part of totalincome, it has to suffer disallowance irrespectiveof the fact whether any income is earned by theassessee or not. Section 14A does not envisage anysuch exception. When prior to introduction ofsection 14A, an expenditure both under sections36 and 57 was allowable to an assessee withoutsuch requirement of earning or receipt of income,such condition cannot be imported when it comesfor disallowance of the same expenditure u/s 14A.In coming to this conclusion, the bench relied onthe decision of the Hon’ble Supreme Court in the

case of CIT vsRajendra Prasad Moody 115 ITR519 SC.

However, CBDT vide its circular No.5/2014, dated11/02/2014 clarified thatRule 8D of the rules readwi th Sect ion 14A of the Act provi des fordisallowance of the expenditure incurred in relationto the exempt incomes even where the taxpayer ina particular year has not earned any exempt income.It is pertinent to note that none of the High Courthas considered the CBDT Circular No.5/2014.

View in Favour the Proposition:

CIT vs. Cor r tech Energy (P.) L td. 223 Taxman130 (Guj )(HC)

Counsel for the Revenue submi tted that theAssessing Officer as well as CIT(Appeals) hadapplied formula of rule 8D of the Income Tax Rules,since this case arose after the assessment year 2009-2010. Since in the present case, we are concernedwith the assessment year 2009-2010, such formulawas correctly applied by the Revenue. We however,notice that sub-section(1) of section 14A providesthat for the purpose of computing total income underchapter IV of the Act, no deduction shall be allowedin respect of expenditure incurred by the assesseein relation to income which does not form part ofthe total income under the Act. In the present case,the tribunal has recorded the finding of fact that theassessee did not make any claim for exemption ofany income from payment of tax. It was on thisbasis that the tribunal held that disallowance undersection 14A of the Act could not be made. In theprocess tribunal relied on the decision of DivisionBench of Punjab and Haryana High Court in caseof CIT v Winsome Textile Industries Ltd. [2009]319 ITR 204 in which also the Court had observedas under :

“We do not find any merit in this submission. Thejudgement of this court in Abhishek Industries Ltd(2006) 286 ITR 1 was on the issue of allowabilityof interest paid on loans given to sister concerns,without interest. It was held that deduction forinterest was permissible when loan was taken forbusiness purpose and not for diverting the same tosister concern without having nexus wi th the

Contr over sies


business. The observations made therein have tobe read in that context. In the present case,admittedly the assessee did not make any claim forexemption. In such a situation section 14A couldhave no application.”

We do not find any question of law arising, TaxAppeal is therefore dismissed.

CIT vs. Shivam Motors Pvt. L td. in ITA No. 88of 2014. (All)(HC)

“As regards the second question, Section 14A ofthe Act provides that for the purposes of computingthe total income under the Chapter, no deductionshall be allowed in respect of expenditure incurredby the assessee in relation to income which doesnot form part of the total income under the Act.Hence, what Section 14A provides is that if thereis any income which does not form part of theincome under the Act, the expenditure which isincurred for earning the income is not an allowablededuction. For the year in question, the finding offact is that the assessee had not earned any tax freeincome. Hence, in the absence of any tax freeincome, the corresponding expenditure could notbe worked out for disallowance. The view of theCIT(A), which has been affirmed by the Tribunal,hence does not give rise to any substantial questionof law. Hence, the deletion of the disallowance ofRs.2,03,752/- made by the Assessing Officer wasin order.

In CIT Vs. Rajendra Prasad Moody 115 ITR 522it was held that Section 14 comes in to play onlywhen the income received or receivable does notform part of total income and not otherwise.

Disallowance cannot be made if there is no exemptincome or if there is a possibility of the gains ontransfer of the shares being taxable.[CIT .v. HolcimIndia P.Ltd.(2014) 272 CTR 282(Delhi)(HC)]

Unless and until , there is receipt of exemptedincome for concerned assessment years, section14A cannot be invoked. [CIT v lakhani MarketingInc. [2014] 49 taxmann.com 257 (Punjab &Haryana)]

Also, CIT vs. Winsome textiles Industries Ltd. 319ITR 204 (P&H)

Disallowance cannot be made if there is no exemptincome. Cheminvest Ltd. Vs. ITO 121 ITD 318(Ahd.)(SB) is not good law.

[Alliancce Infrastructure Projects Pvt. Ltd. V. DCIT(Bang.)(Trib.)]

No disallowance can be made if there is no exemptincome-Special bench judgement in Cheminvest&CBDT Circular 5/2014 are not good law

[ACIT .v. M. Baskaran (Chennai)(Trib.) I.T.A No.1717/Mds/2013]

In the absence of establishment of clear cut nexusbetween the amount advanced to sister concernsand the interest incurred on borrowed amounts,disallowance of notional interest on ground of nonutilization for purpose of business is not justified.[SSPDL L td. V. DCIT (2013) 59 SOT68(URO)(Hyd.)(Trib.)]

Onus is on AO to show how assessee’s claim isincorrect. AO has to show direct nexus betweenexpenditure & exempt income. Disallowance cannotbe made on presumption. [DCIT v. Al l i edInvestment housing P. Ltd.]

Summation:

Section 14A(1) provides that for the purposes ofcomputing the total income under this Chapter, nodeduction shall be allowed in respect of expenditureincurred by the assessee in relation to income whichdoes not form part of the total income under thisAct. Thus section 14A applies if

i) The assessee has earned the income in therelevant assessment year which does not formpart of the total income (exempt income); and

ii) The assessee has incurred expendi ture inrelation to such taxable income; and

iii) Such expenditure is incurred also in relation toexempt income; and

iv) But for section 14A, it is not permissible toapportion such expenditure between the taxableand exempt income and as a result the wholeof such expenditure is allowable against thetaxable income as provided in the otherprovisions of the Act.

Contr over sies


Section 14A provides that even in such cases theAssessing Off icer is bound to apportion suchexpendi ture between the taxable and exemptincome on a reasonable and rational basis or methodconsi stent wi th al l the rel evant facts andcircumstances.

Exempt income

The first and foremost condition for applicabilityof section 14A is that in the relevant assessmentyear, the assessee has earned income which doesnot form part of the total income (exempt income).The basic condition for applicability of section 14Ais that there should be the expendi ture and theexempt income. In the absence of such nexus theprovisions of section 14A will not be applicable.This presupposes the existence of exempt income.Therefore, in the absence of exempt income earnedby the assessee the provisions of section 14A willnot be applicable. Secondly, accrual of exemptincome is essential for computation of such exemptincome. In the absence of such accrual of exemptincome there would be no question of computationof such exempt income and as a result no questionof apportionment of expenditure between taxableincome and exempt income. Thus in the absenceof accrual of exempt income there would be nonexus between the exempt income and theexpenditure and as a result section 14A will not beapplicable in such a case. Thus, when the companyhas not declared the dividend there would be noexempt income and therefore the provisions ofsection 14A will not be applicable. In particularwhen the company is prohibited from declaringdividend there would be no accrual of dividendincome and the provisions of section 14A cannotbe applied.

Let me now refer to some important decisions whereit has been held that if there is no exempt incomeearned during the relevant assessment year then nodisallowance can be made u/s 14A.

(i) CIT vs Shivam Motors Pvt L td ITA No.88/2014, (Order dt.05.05.2014) the AllahabadHigh Cour t has held that “As regards thesecond question, Section 14A of the Actprovides that for the purposes of computing the

total income under the Chapter, no deductionshall be al lowed in respect of expenditureincurred by the assessee in relation to incomewhich does not form part of the total incomeunder the Act. Hence, what Section 14Aprovides is that if there is any income whichdoes not form part of the income under the Act,the expenditure which is incurred for earningthe income is not an allowable deduction. Forthe year in question, the finding of fact is thatthe assessee had not earned any tax free income.Hence, in the absence of any tax free income,the corresponding expenditure could not beworked out for disallowance. The view of theCIT (A), which has been aff irmed by theTribunal , hence does not give rise to anysubstantial question of law.”

(ii) CIT vs Cor r tech Energy Pvt L td [2014] 45taxmann.com 116: The Guj ar at HighCour t has held that where assessee has notsought any exempt income, there cannot be anyexpense to be disallowed.

(iii) CIT vs Lakhani Marketing, I TA No.970/2008 (Order dt.02.04.2014), the Punjab andHaryana High Cour t has held that when therewas no dividend income and in such a situation,provisions of Section 14A of the Act has noapplicability.

(iv) CIT vs Delite Enterprises ITA No.110/2009,the Bombay High Cour t on an issue Whetheron the facts and in the circumstance of the caseand in law the Hon’ble Tribunal was right indelet ing the disal l owance made by theAssessing Off icer of interest paid by theAssessee Company on borrowed fundsamounting to Rs.241.10 lakhs overlooking thefact that the borrowed funds were used by theAssessee Company to invest in the Capital ofanother Partnership Fi rm and since profi tsderived by the Assessee Company from aPartnership fi rm were exempt from tax u/s.10(2A) of the Income-tax Act, the interestexpense related to such tax free profits is to bedisallowed u/s.14A of the Income Tax Act? It

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Some r ecent Judgments on pr ovisions ofS.40A(2)(b) of the Act.

Pr. CIT vs Guj ar at Gas Financial Ser vicesPr ivate L imited (Tax Appeal Nos. 428 to 431 of2015)

xxx..

12 The Gujarat Gas Financial Services Limited(a Government Company), is engaged indistributing gas through pipel ines to i tscustomers, wherein the respondent companyis 100% subsidiary company of the Gujarat GasCompany Ltd. It is accepted fact that the parentas well as assessee company had entered intoan agreement on 25.4.2003 for various works,which are to be undertaken by the assesseecompany. For such works, the assesseecompany would be entitled for service chargesand the charges agreed between the parties isRs. 3,205/per connection. Accordingly, for theassessment year 20042005, the assesseecompany had paid Rs. 5,00,84,000/towardsservice charges which was deducted by theAssessment Officer under the provisions ofSection 37 of the Act. Similar is the case forassessment year 2005-06 to the tune ofRs.7,07,00,028/. The Assessment Officer, whofound such amount as excessive for theassessment Year 2006-07, initiated proceedingsby exercising powers under Section 40A(2) ofthe Act. It was the case of the assessee companythat i t is the company which is providingvarious ki nds of services to the parentscompany and both the companies are payingthe highest tax and, therefore, there was noevasion of tax by the assessee. The AssessmentOfficer could not accept the submissions madeby the company that in past two years the claimmade towards the expenditure was acceptedby the Officer on the ground that there is no

Advocate Tushar [email protected]

Judicial Analysis

question of res judicata, however, has held thatwithout any material, the maximum expenditureof the assessee company towards servicecharges is Rs.10 crores as, i f, the assesseecompany was only received the premiumsbelong to the foreign company, which iscontrary to law laid down by the various courtsand tribunals. As far as this aspect is concerned,the Hon’ble Apex Court in the case ofCommissioner of I ncome Tax vs ExcelIndustr ies Ltd, as repor ted at 295 ITR hasheld in paragraphs 28, 29, 30 and 31 whichreads as under:

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13 As has been found by us in the preceding paraof this judgment that the respondent companyas well as the parent company, both are assessedto income tax at the maximum marginal rateand, therefore it cannot be said that the servicecharge is paid to the respondent company at aunreasonable rate to evade income tax. Eventhe learned Counsel Mr. Bhatt for the revenuedoes not dispute this fact.

14 We are in agreement with the observations madeby the Tribunal as well as the ratio laid downby the coordinate Bench of this Court in thecase of (1) Commissioner of Income TaxvsEnvir o Control Associated (P) L td., asrepor ted at (2014) 43 Taxmann.com 291(Gujarat); (2) Commissioner of Income Taxvs Ashok J Patel, as r epor ted at (2014)43Taxmann. com 227 (Gujar at) and (3)Commissioner Of Income Tax vs Indo SaudiSer vices (Tr avel ) P. L td. as r epor ted as(2009) 310 ITR 306 (Bom).

15 It is pertinent to note that so far as the Circulardated 6.7.1968 is concerned, it makes clear thatthe provisions under Section 40A (2) andparticularly with regard to the transaction


between the rel ati ves and associates isconcerned, the same shall be treated as bonafide case unless the officer finds it that one ofthem is trying to evade payment of tax.

16 Considering the overall facts of the case andthe ratio laid down by the Hon’ble Apex Court,we are of the opinion that the appeals aremeritless and the same deserve to be dismissedand accordingly dismissed.

CIT v. Ashok J. Patel [2014] 43 taxmann.com227 (Gujarat)

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8. That the assessee who is in the business oftransportation claimed disallowance withrespect to motor bus rent paid to various personsfor transportation contracts. The AO was of theview that the assessee has failed to produce anycomparative market price and that the natureof work carried out by the aforesaid persons isgeneral i n nature. The AO disal lowedRs.15,49,163/- f or AY 2005-06 andRs.14,97,668/- for AY 2006-07 out of the totalpayment of bus rent under section 40A(2)(b).With respect to AY 2006-07 AO also madedisallowance of Rs.93,25,426 made undersection 40(a)(ia) of the Act by holding that theamendment carried out by Finance Act, 2010can be held to be retrospective from AY 2005-06.

Now, so far as the disallowance made undersection 40A(2)(b) of the Act on the ground ofmotor bus rent is concerned, it appears that theAO disal lowed 5% of the total paymentstowards motor bus rent by observing that theassessee has failed to reconcile the differencein payments as per tax audi t report and assubmitted during the assessment proceedingsand had also not produced any comparativeprices. The learned CIT(A) deleted the saiddisallowances by observing that the AO hasnot made out any case for excessi ve orunreasonable payments to the related purposetowards the motor bus rent. The learnedCIT(A) also observed that no comparativeprices for similar transport services was cited

by the AO and therefore, was not justified inmaking ad-hoc disal lowance of 5% undersection 40A(2)(b) of the Act and therefore, theCIT(A) as such ri ghtl y deleted thedisallowances made under section 40A(2)(b)of the Act. Considering the provisions ofSection 40A(2)(b) of the Act and the EvidenceAct, if the AO was of the opinion that thepayment for which disallowance is claimed, isexcessive or unreasonable. In that case, it wasfor the AO to assess fair market price and givecomparative instances for payment for similartransport service. I n absence of suchcomparative cases brought on record, as rightlyobserved by the ITAT it was not open for theAO to make disal lowance under section40A(2)(b) of the Act. Whi le del et ingdisallowance made by the AO under section40A(2)(b) of the Act, the learned ITAT hasobserved and held in para 7 as under :—

“7. I t is plain on princi pl e that, so f ar asdi sal lowance under Secti on 40A(2) f orpayment being excessive or unreasonable canonly be made when the payment is made to the“specified persons” under clause 40A(2)(b)and “the Assessing Officer is of the opinionthat such expendi ture is excessi ve orunreasonable having regard to the fair marketprice of the goods, services or facilities forwhich the payment is made”. The opinion ofthe Assessing Officer for the expenditure beingexcessive or unreasonable is to be formed vis-a-vis fair market price of such goods servicesor facilities. It is thus sine qua non for makinga disallowance under section 40(A)(2) that theAssessing Officer has to ascertain the fairmarket price of such goods, services orfacilities, and then make a ‘disallowance forthe amount which is in excess of fair marketvalue of such goods, services or facili ties.Unless there is a categorical finding about the‘fair market value’ and the assessee has anopportunity to be heard on Assessing Officer’sfinding about such ‘fair market value’, therecannot be an occasion to make a disallowanceunder section 40A(2). The very scheme of

Judicial Analysis


Section 40A(2) does not envisage an adhocdisallowance as has been made in the presentcase. For this short reason alone, the impugneddeletion of disallowance must stand confirmed.There is, however, one more reason for doingso. As evident f rom a plain reading of theassessment order, the Assessing Officer, hadcalled upon the assessee to demonstrate thatthe payment made by the assessee to thespeci f ied persons is not unreasonable orexcessive, and it is thus failure of the assesseewhich has resul ted in disal lowance undersection 40A(2). However, proving a negative,as the assessee has been called upon to do inthis case, is an impossible onus to perform. Inany event, this onus is on the Assessing Officerand the AO has failed to discharge the said onus.For this reason also, the disal lowance isunsustainable i n law. As regards thediscrepancy in the figures of the tax audit reportand the assessee, neither such a situation canbe a reason enough to make a disallowanceunder section 40A(2) nor the onus of explainingsuch a variation is on the assessee. A tax auditoris an independent professional and any errorsin his report cannot be put to assessee’sdisadvantage. In view of these discussions, asalso bearing in mind entirety of the case, weapprove the conclusions arrived at by theCIT(A) and decline to interfere in the matter.”

We are in complete agreement with the viewtaken by the ITAT and the observations madeby the learned ITAT whi le del et ingdisallowances made by the AO under section40A(2) (b) of the Act on motor bus rent. Noerror has been committed by the learned ITATwhich calls for interference of this Court. Noquestion of law much less any substantialquestion of law arises.

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CIT v. Envi r o Contr ol Associated (P.) L td.[2014] 43 taxmann.com 291 (Gujarat)

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9. At the outset, it is required to be noted thatAssessi ng Off icer di rected to makedisallowance of 10% of the payment madeunder Section 40A(2)(b) of the Act to M/s.Pollucon Engineers and added to the totalincome of the assessee on ad-hoc basis andsolely on the ground that as M/s. PolluconEngineers whom the payment was made underSection 40A(2)(b) of the Act was a sisterconcern run by the wife of the Director of theassessee company and therefore, element ofexcessive payment cannot be denied. However,it is required to be noted that there was no othermaterial before the Assessing Officer that anyexcessive payment was made to M/s. PolluconEngineers. It is required to be noted that it wasnot the case on behalf of the Assessing Officerand as such there was no f inding by theAssessing Officer that the transaction/contractwith M/s. Pollucon Engineers was not genuineone. As such there was no material before thelearned Assessing Officer such as comparablerates etc. to come to the conclusion thatexcessive payment was made to the aforesaidfi rm which warranted disallowance/ad hocdisallowance.

10. While deleting the observation made by theAssessing Off icer, the learned CIT(A) hasobserved as under:

“4.3.I have considered the submission made by theappel l ant observat ion of the A .O. Thedisallowance made by the A.O. u/s 40A(2)(b)is adhoc and without any basis. Disallowanceu/s 40A(2)(b) by saying that the assessee hasnot followed due diligence and has not floatedtender or obtaining the lowest rate is not correct.Various courts have held that the AO cannotdictate to the assessee as to how the businessshould be done. Hon’ble ITAT in the case ofBinitCorpn. v. ITO [1986] 25 Taxman 238(Ahd.)(Mag.) has after considering variousjudicial pronouncement stated that first of allthe AO has to satisfy himsel f whether theexpenditure itself is genuine or not and if it isgenuine then for the purpose of finding out the

Judicial Analysis


portion of disallowance he shall have to findout the fair market value of the services andthis would presuppose that services arecommonly available for which market valuecan be known. Thereafter, the AO shall haveto evaluate the legitimate needs of the businessat a point of time when the services wererendered and this would involve in inquiry as abusinessman because in times of dire needservices are obtained even at higher cost, theultimate aim being to earn profit or to maintainthe business relations. According to the ITAT,the AO shall have to find out what benefit isderived by the assessee and this would notnecessarily confine to the year in question butshall have to take overall picture dependingupon the facts of each case. Even the benefitaccruing to the assessee shal l have to beevaluated. This again may not be confirmed tothe period of accounting year only and again itwould not be essential that benefit must be inthe revenue field. Thereafter according to theITAT the AO shall have to give reasonableopportunity to the assessee to rebut his finding.If comparable instances of other parties are notavailable at least compare with earlier year,adhoc disallowance cannot stand the test ofappeal. In view of the above, the disallowancemade by the A.O is deleted. Therefore, thisground of appeal is allowed.”

11. The learned ITAT has confirmed the abovedeletion by observing in para 22 is as under:

22. We have heard this issue in the light of thematerial placed before us. The provisions ofSection 40A(2)(b) are to be applied when theAO is of the opinion that an expenditure isexcessive or unreasonable having regard to thefair market value of the services for which thepayment is made. In the present case, thegenuineness of the expenditure has not beendoubted by the A.O. The only reason for theimpugned addition was that the payments wasexcessive in nature. But before arriving to aconclusion that the payment was excessive, theAO was expected to place on record the reason

for holding such opinion. We have noted thatno such comparable instance was quoted bythe AO. Additionally, it has also been arguedbefore us that the payment made to the wife ofthe Director was a business requirement of theassessee and that lady is also subject to tax atthe maximum rate. Hence, it is pleaded thatthere was no intention to save the tax. It hasalso been pleaded that there was no motive todivert the income because the assessee isentitled for the claim of 100% deduction onthe income u/s 80IA(4). Thus, the totality ofthe circumstances demonstrates that there wasno justification on the part of the AO to makesuch an adhoc addition. Resultantly, we herebyconfirm the findings of the CIT(A) and dismissthis ground of the Revenue for the years underconsideration.”

12. We are in complete agreement wi th thereasoning and observations made by the learnedCIT(A) confirmed by the learned ITAT. Inabsence of nay material before the AssessingOff icer, such as comparative chart etc. tosuggest that any excessive payment was madeto M/s. Pollucon Engineers and the 10% adhoc disallowance was made on the paymentmade under Section 40A(2)(b) of the Act toM/s. Pollucon Engineers solely on the groundthat M/s. Pol lucon Engineers to whom thepayment was made, was run by the wife of theDirector of the assessee company and therefore,there was an element of excessive claim, weare of the opinion that the Assessing Officerwas not justified in adopting disallowance tothe extent of 10% payment under Section40A(2)(b) of the Act . Under the circumstances,disallowance made by the Assessing Officer isri ghtl y deleted by the l earned CIT(A)confirmed by the learned ITAT.

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Judicial Analysis


In continuation to our previous articles on overviewof Base Erosion and Prof it Shif ting (‘BEPS’),detailed analysis of Action Plans, in this article, wenow have capsulized below an analysis of recentlyreleased discussion draft on Action Plan 8 ieGuidance on TP Aspects of Intangibles.

While our article issued in June month coversdetailed analysis of September 2014 deliverableissued by OECD on Action Plan 8, in this article,we have covered Draft report issued by OECD on4 June 2015 discussing Hard-to-Value Intangibles.

1. Background

The draft report sets out a transfer pricingapproach for Hard-to-Value Intangibles andproposes revisions to the existing guidance oni t . The proposed guidance explai ns thedif ficulties faced by tax administrations inveri fying the arm’s length basis on whichpricing was determined by taxpayers fortransactions involving a specific category ofintangibles.

I t proposes an approach based on thedetermination of the arm’s length pricingarrangements, including any contingent pricingarrangements that would have been madebetween independent enterprises at the time ofthe transaction. This approach is intended toprotect tax administrations against the negativeeffects of information asymmetry whenspecific conditions are met.

2. Detailed Analysis

2.1 Valuation is highly uncer tain at the time ofthe transaction

The Draft report states that when determiningthe price of a transaction involving intangibles,

CA. Dhinal A. [email protected]

specif ic features of such intangibles maycomplicate the search for “comparables” andin some cases may make it difficult to determinethe value of an intangible at the time thetransaction takes place. The Draft notes thatwhen valuation of an intangible or rights in anintangible at the time of the transaction is highlyuncertain, the question arises as to how arm’slength pricing should be determined.

As a solution, the Draft report suggests that thequestion should be resolved, both by taxpayersand tax administrations, by reference to whatindependent enterprises would have done incomparable circumstances to take account ofthe valuation uncertainty in the pricing of thetransaction.

The Draft report recognise that independententerprises might deal with a high degree ofuncertainty in valuation in different ways ie insome cases, independent enterprises might findthat subsequent developments are sufficientlypredictable to fix the pricing for the transactionat the outset on the basis of those projections,and in other cases they might adopt mechanisms(e.g., price adjustment clauses and milestones-based payment structures) to protect againstsubsequent developments that might not besufficiently predictable.

Recognising the same, the report explains thatif independent enterprises would have insistedon a price adjustment clause, tax administrationsshould be permitted to determine the pricingon the basis of such a clause. Similarly, ifindependent enterprises would have consideredsubsequent developments so fundamental thatthei r occurrence woul d have l ed to aprospective renegotiation of the pricing of a

Overview of Action Plan 8 of BEPSProject – Draft Report on Hard toValue Intangible

CA. Sagar [email protected]


transaction, such developments also shouldlead to a modif ication of the pricing of acomparable controlled transaction betweenassociated enterprises.

Accordi ng to the Draf t report , taxadministrations may find it difficult to establishor verify what developments or events mightbe considered relevant for the pricing of atransaction involving intangibles and the extentto which the occurrence of such developmentsor events might have been reasonabl yforeseeable at the time the transaction wasentered into. It indicates that the generalexperience of tax administrations is that theymay not have the specific business insights oraccess to the information to be able to examinewhether differences between the “ex ante” and“ex post” value of an intangible is due tomispricing by the taxpayer or due to events ordevelopments unforeseeable at the time of thetransaction

2.2 Hard-to-value intangibles

The Draft report states that the term “hard-to-value intangible” or HTVI covers intangiblesor rights in intangibles for which, at the time ofthe transaction,

· no sufficiently reliable comparables exist,and

· there is a lack of reliable projections, orthe assumptions used in valuing theintangible are highly uncertain.

Intangibles falling within the category of HTVImay exhibi t one or more of the followingfeatures:

· Intangibles that are onl y part ial l ydeveloped at the time of the transfer

· Intangibles that are not anticipated to beexploited commercially until several yearsfollowing the transaction

· Intangibles that separately are not HTVIbut that are connected wi th thedevelopment or enhancement of otherintangibles that fall within the category ofHTVI

· Intangibles that are anticipated to beexploited in a manner that is novel at thetime of the transfer

Suggested approach

According to the Draft report, for HTVI,information asymmetry between taxpayer andtax administrations may be acute and mayexacerbate the difficulty encountered by taxadministrations in verifying the arm’s lengthbasis on which pricing was determined. As aresult, it indicates that it will prove difficult fora tax administration to perform a risk assessmentfor transfer pricing purposes to evaluate thereliability of the information on which pricinghas been based by the taxpayer, or to considerwhether the intangible or rights in intangibleshave been transferred at underval ue orovervalue compared to the arm’s length price,until ex post outcomes are known in yearssubsequent to the transfer. I n thesecircumstances, the Draft states that the taxadministration may consider ex post evidenceabout the actual financial outcomes of thetransfer to be necessary in determining theappropriateness of the ex ante pricingarrangements.

In evaluating the ex ante pricing arrangements,the Draft report states that tax administrationsare entitled to use the ex post evidence aboutfinancial outcomes to inform the determinationof the arm’s length pricing arrangements,including any contingent pricing arrangements,that would have been made betweenindependent enterprises at the time of thetransaction. The Draft defines a contingentpri ci ng arrangement as any pricingarrangement in which the quantum or timingof payments or renegotiation provisions are

I nter national Taxation


dependent on contingent events, including theachievement of predetermined f inancialthresholds, such as sales or prof its, or ofpredetermined development stages.

Exceptions

In order to ensure that the above approach isapplied only in situations where the differencebetween ex post outcomes and ex anteprojections is significant, and where such adifference is due to developments or events thatwere or should have been foreseeable at thetime of the transaction, the Draft report statesthat the above approach will not apply in caseswhere the taxpayer both:

· Provi des ful l detai ls of i ts ex anteprojections used at the time of the transferto determine the pricing arrangements,including how risks were accounted for incalculations to determine the price (e.g.,probabi l i ty-wei ghted), and thecomprehensiveness of its consideration ofreasonably foreseeable events and otherrisks

· Provides satisfactory evidence that anysignificant difference between the financialprojections and actual outcomes is due tounforeseeable or extraordinarydevelopments or events occurring after thedetermination of the price that could nothave been anticipated by the associatedenterprises at the time of the transaction

As a result, although the ex post evidence aboutf inanci al outcomes provides rel evantinformation for tax administrations to considerthe appropriateness of the ex ante pricingarrangements, in ci rcumstances where thetaxpayer can satisfactorily demonstrate whatwas foreseeable at the time of the transactionand ref lected in the pricing, and that thedevelopments leading to the difference betweenproj ecti ons and outcomes arose f rom

I nter national Taxation

unforeseeable events, no adjustment to the exante pricing arrangements based on thesespecial considerations would be justified.

Example

The Draft report provides a simple examplewi th respect to the proposed guidance andexceptions. The example states that “i f theevidence of financial outcomes shows that salesof products exploiting the transferred intangiblereached 1000 a year, but the ex ante pricingarrangements were based on projections thatconsidered sales reaching a maximum of only100 a year, then the tax administration shouldconsider the reasons for sales reaching suchhigher volumes. If the higher volumes were dueto for example an exponentially higher demandfor the products incorporating the intangiblecaused by a natural disaster or the unexpectedbankruptcy of a competitor that was clearlyunforeseen at the time of the transaction, thenthe ex ante pricing should be recognised asbeing at arm’s length, unless there is evidenceother than the ex post financial outcomesindicating that price setting did not take placeon an arm’s length basis.”

3. Concluding Thoughts

The Draft report contains proposals that willbe further developed in light of the commentsreceived and the public consul tation. Theproposals in the Draft would have significantimplications for global businesses with regardto arm’s length pricing of certain intangibles.

It is important for companies to continue tomonitor the developments in this area in theOECD and in the countries in which theyoperate, and to consider actively engaging withpolicymakers in this international tax debate.

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CA. Savan [email protected]

Overseas Foreign Cur rency Bor rowingsby Author ized Dealer Bank

a) AD Category- I Banks wi l l now al lowInvestment banks to borrow money from theHead Off ice or overseas branches orcorrespondents outside India or any other entityas permitted by the Reserve Bank up to a limitof hundred percent of their unpaired TierInvestment capital as at the close of the previousquarter or USD 10 million, whichever is higher.

b) AD Category –I Banks may borrow moneyfrom the international/multilateral financialinstitutions without case by case approval fromthe Reserve Bank. These financial institutionsshould be those where the government of Indiais a shareholding member or which have beenestablished by more than one government orhave sharehol di ng by more than onegovernment and other internat ionalorganizations.

For Full Text refer to A.P. (DIR Series) CircularNo. 112

h t t p s : / / w w w . r b i . o r g . i n / s c r i p t s /BS_CircularIndexDisplay.aspx?Id=9801

Re-expor t of unsold rough diamondsfrom Special Notified Zone of Customswi thout Expor t Declar at i on For m(EDF) formality

The Reserve Bank of India has decided to allowthe diamond trading countries to re-export theirrough unsold diamonds without completing thepreviously required SOFTEX/ EDF formality. Thisis an amendment to the earlier rule that any traderor exporter located outside India, other than Nepalor Bhutan, is required to submit declaration of eitherof the above formalities. Trading of the diamondshad been allowed for these companies in Circular116 of April 2014. Additional stipulations state that:

a) In order to facilitate re-export of unsold roughdiamonds imported on free of cost basis at SNZ,it is clarified that the unsold rough diamonds,when re-exported from the SNZ (being an areawithin the Customs) wi thout entering theDomestic Tariff Area (DTA), do not requireany EDF formality.

b) Entry of consignment containing different lotsof rough diamonds into the SNZ should beaccompanied by a declaration of notional valueby way of an invoice and a packing l isti ndicat ing the free cost nature of theconsignment. Under no circumstance, entry ofsuch rough diamonds is permitted into DTA.

c) For the lot/ lots cleared at the Precious CargoCustoms Clearance Centre, Mumbai, Bill ofEntry shall be filed by the buyer. AD bank maypermi t such import payments after beingsatisfied with the bona-fides of the transaction.Further, AD bank shall also maintain a recordof such transactions.

For Ful l Text refer to A.P. (DIR Seri es)CircularNo. 1


I nvestment in companies engaged intobacco related activities

According to previous regulations, the foreign directinvestment was prohibited in the manufacturing ofcigars, cheroots, cigarillos and cigarettes, of tobaccoor of tobacco substitutes. The new and revisedclarifications made notifies that prohibition appliesonly to manufacturing of the products mentionedtherein and foreign direct investment in otheractivities relating to these products includingwholesale cash and carry, retail trading etc. shall

FEMA Updates

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be governed by the sectoral restrictions laid downin the FDI policy.



Issue of shares under Employees StockOptions Scheme and/or sweat equityshares to persons resident outside India

An Indian company can now issue “employeesstock option” and/or “sweat equity shares” to itsemployees/directors or employees/directors of itsholding company or a joint venture or whol lyowned overseas subsidiary who are resident outsideIndia. The following revised terms and conditionsneed to be followed by a non-resident of India:

a) The scheme should have been drawn either interms of regulations issued under the SecuritiesExchange Board of India Act, 1992 or theCompanies (Share Capital and Debentures)Rules, 2014 noti f i ed by the CentralGovernment under the Companies Act 2013,as the case may be.

b) The “employee’s stock option”/ “sweat equityshares” issued to non-resident employees/directors under the applicable rules/regulationsare in compl iance wi th the sectoral capapplicable to the said company.

c) Issue of “employee’s stock option”/ “sweatequity shares” in a company where foreigninvestment is under the approval route shallrequi re prior approval of the ForeignInvestment Promotion Board (FIPB) ofGovernment of India.

d) Issue of “employee’s stock option”/ “sweatequi ty shares” under the applicable rules/regulations to an employee/director who is acitizen of Bangladesh/Pakistan shall requireprior approval of the Foreign InvestmentPromotion Board (FIPB) of Government ofIndia.


FEMA Updates

https://www.rbi.org.in/scripts/BS_Circular IndexDisplay.aspx?Id=9944

Expor t factor ing on non-recourse basis

In order to facilitate exports, Authorized DealerCategory – I (AD Category –I) banks have beenpermitted to provide ‘export factoring’ services toexporters on ‘with recourse’ basis by entering intoarrangements with overseas institutions for thispurpose without prior approval from the ReserveBank of India subject to compliance with guidelinesissued by the Department of Banking Regulation.AD banks have been permitted to factor the exportreceivables on a non-recourse basis, so as to enablethe exporters to improve their cash flow and meettheir working capital requirements subject to thefollowing conditions:

a. AD banks may take thei r own businessdeci si on to enter into export f actori ngarrangement on non-recourse basis. Theyshould ensure that thei r cl ient is not overfinanced. Accordingly, they may determine theworking capital requirement of their clientstaking into account the value of the invoicespurchased for factoring. The invoices purchasedshould represent genuine trade invoices.

b. In case the export financing has not been doneby the Export Factor, the Export Factor maypass on the net value to the financing bank/Institution after realising the export proceeds.

c. AD bank, being the Export Factor, should havean arrangement with the Import Factor for creditevaluation & collection of payment.

d. Notation should be made on the invoice thatimporter has to make payment to the ImportFactor.

e. After factoring, the Export Factor may closethe export bills and report the same in the ExportData Processing and Moni toring System(EDPMS) of the Reserve Bank of India.

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f. In case of single factor, not involving ImportFactor overseas, the Export Factor may obtaincredit evaluation details from the correspondentbank abroad.

g. KYC and due diligence on the exporter shallbe ensured by the Export Factor.

For Full Text refer to A.P. (DIR Series) CircularNo.5 https://www.rbi.org.in/scripts/BS_ CircularIndexDisplay.aspx?Id=9945

Foreign Investment in India by ForeignPor tfolio Investors

Authorized Dealer Category-I (AD Category-I)banks are informed that all future investments by a

FEMA Updates

31

Foreign Portfolio Investment (FPI) within the limitfor investment in corporate bonds shall be requiredto be made in corporate bonds with a minimumresidual maturity of three years. The restriction oninvestments with less than three years residualmaturity shall not be applicable to investment byFPIs in SRs issued by ARCs. However, investmentin SRs shall be within the overall limit prescribedfor corporate debt from time to time. The abovechanges will come into immediate effect and allother existing conditions for investment by FPIs inthe debt market remain unchanged.

For Full Text refer to A.P. (DIR Series) CircularNo. 6 https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=9947

❉ ❉ ❉

has been held that we find that there is no profitfor the relevant assessment year. Hence thequestion as framed would not arise.

(v) Alliance Infrastructure Project Pvt L td vsDCIT ITA Nos.220 & 1043 (Bang)/2013,(Or der dated 12.09.2014) t he I TATBangalore, relying on the decisions of aboveHigh Courts has held that “unless and until,there is receipt of exempted income for theconcerned assessment years, we are of theview, Section 14A of the Act cannot beinvoked”.

(vi) In the case of CIT v. Holcim India P. L td ITANo. 486/2014 & 299/2014, Delhi H i ghCour t held that S. 14A & Rule 8Ddisallowance cannot be made if there is noexempt income or if there is a possibility ofthe gains on transfer of the shar es beingtaxable. HC has held that Income exempt underSection 10 in a particular assessment year, maynot have been exempt earlier and can becometaxable in future years. Further, whether incomeearned in a subsequent year would or wouldnot be taxable, may depend upon the nature oftransaction entered into in the subsequentassessment year. For example, long term capitalgain on sale of shares is presently not taxable

contd. from page 300 Contr over sies

where security transaction tax has been paid,but a private sale of shares in an off markettransaction attracts capital gains tax. It is anundisputed posi tion that assessee is aninvestment company and had invested bypurchasing a substantial number of shares andthereby securing right to management.Possi bi l i ty of sal e of shares by privateplacement etc. cannot be ruled out and is notan improbability. Dividend may or may not bedeclared. Dividend is declared by the companyand strictly in legal sense, a shareholder has nocontrol and cannot insist on payment ofdividend. When declared, it is subjected todividend distribution tax.

(vii)In the case of M indaSai L imited v. ITO (ITANo. 2974/Del/13), ITAT Delhi has been heldthat In the absence of exempt income, s. 14Adisallowance cannot be added to s. 115JBbook profits even if assessee has accepted s.14A disal lowance in t he nor malcomputation.

Finally it is submitted that law appears to be wellsettled that if no exempt income is earned then thereis no question of any disallowance u/s 14A of theIncome Tax Act, 1961.

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CA. Punit R. [email protected]

Service Tax Decoded

Taxation of Ser vices Provided Along withSupply of Goods

Sales Tax/Local VAT is payable on sale of goodsand service tax is payable on supply of service. Oneis being levied and col lected by the StateGovernment and another is being levied andcollected by Union Government. In composi tecontracts, where supply of goods and service bothare involved, taxes are payable to both theGovernments. Unfortunately, none of theGovernment wants to give up his slightest share ofrevenue even if another tax is paid or payable onthe part of the value. Thus, disputes starts forvaluation for levy of each tax. Inclusion of materialand services supplied by the service provider andservice recipient, not included in the agreed priceof the contract is always a matter of dispute forvaluation for levy of service tax.

Constitutional Background

Taxes on the sale or purchase of goods within stateare covered under Entry No. 51 of State List (ListII of Seventh Schedule to the Constitution of India).In terms of Article 246(3) of the Constitution ofIndia, State Governments have exclusive powersto make laws in relation to tax on the sale orpurchase of goods within the state. For, taxes onthe sale or purchase of goods, where such sale orpurchase takes place in the course of inter-state tradeor commerce, Parliament has exclusive power tomake laws (Entry No. 92A of the List I of theSeventh Schedule to the Constitution, read withArticle 246(1). Although, Parliament has exclusivepower to levy tax on inter-state sale of goods,revenue from the levy of Central Sales Tax on inter-state sale is being collected and retained by the StateGovernment only. Thus, revenue from taxes on saleof goods, may be in course of inter-state or intra-

state, is exclusively being collected by the StateGovernment and Parliament (Central Government/Union) has no power to levy and collect the tax onsale or purchase of goods.

Service Tax is a Union levy and Union has noconstitutional power to levy tax on sale of goods.Union being a creature of the Constitution and anylaw or tax which is against the provision ofConstitution will be ultra-vires and Union can’t levytax on sale of goods even indirectly by addition ofvalue of goods sold in the value of servicesprovided.

Sect i on 67, Tr ansact ion Value and Gr ossAmount Charged

In terms of Section 67 of the Finance Act, 1994,where provision of service is for a consideration inmoney that is gross amount charged by the serviceprovider for such service, then such a value shallbe adopted for the levy of service tax. Thus, servicetax is a levy on the transaction value and not on itsmarket value or cost or any other value. What isimportant is the value on which service providerand service recipient is agreed upon i.e. a value forwhich a transaction is taking place. To elaboratethe concept, we can go through the followingexample.

Suppose, Mr. X provides his services to Mr. Y andcharges Rs. 100/-, than service tax will be leviedon Rs. 100/-. Suppose, i f Mr. X charges Rs.1,00,000/- to Mr. Z, for the identical and similarservice, at the same time, service tax will be leviedon Rs. 1,00,000/-.

Thus, for levy of service tax, what is important isthe “gross amount charged” by service provider forsuch service. Anything, over and above this valueis not subject to service tax and even the Parliament


Service Tax Decoded

has not given power to Central Government(through provision of the Finance Act, 1994) to levyService Tax on any amount over and above the“gross amount charged”.

Naturally, if consideration for gross amount chargedis flowing from service provider to service recipient,in form other than money, such other considerationis required to be added to arrive at gross amountcharged. But, in any case service tax can’t be leviedover and above the gross amount charged for suchservice.

Works Contracts -Contracts Compr ising Saleof Goods as well as Rendition Services

Levy of tax on sale of goods is matter of StateGovernment and levy of service tax is matter ofUnion/Central Government. Generally, a compositecontract comprising goods and services can’t bevivisected artificially and tax can’t be levied by eachGovernment on each component [as held by theSupreme Court in classic case of GannonDunkerley & Co., (Madras) Ltd. — AIR 1958 SC560]. However, in terms of Article 366(29A) of theConstitution, transfer of property in goods (whetheras goods or in some other form) involved in theexecution of works contract is a deemed sale andthus, State Government can artificially vivisect aworks contract and levy sales tax (i.e. Local VAT)on material portion of the contract.

Thus, f irst, as State Government has exclusivepower to levy sales tax, Union can’t levy servicetax on material portion of the contract and secondly,Central Government can levy service tax on serviceportion of the contract as service portion is notsubject to tax by State Government. This is sobecause, in terms of Article 248 of the Constitution,Parliament has exclusive power to make rules ifthe matter is not subject to State List or subject toConcurrent List (List II and List III of SeventhSchedule to the Constitution respectively).

Thus, works contract can be subject to levy of salestax as well as service tax but only material portionis subject to sales tax and only service portion is

subject to service tax. Neither Sales Tax/Local VATis payable on total contract value nor service tax ispayabl e on total contract value. However,bifurcation and valuation thereof is not easy andmany a time subject matter of litigation.

Now, in this background, can a supply of material,by a service provider to service recipient or byservice recipient to service provider can be addedto the value of service is the question.

Goods Supplied by the Service Provider toService Recipient

If the goods supplied by the service provider toservice recipient is under totally independentcontract, which has no relationship with contractof provision of service, then there is no question ofaddition of value of goods in the value of service.

Now, even if supply of goods is connected withsupply of service, but there is two different contractor value of goods and service is separatelydetermined, then also value of goods can’t be addedto value of service for levy of service tax. This isbecause of the fact that the Parliament has no powerto levy any tax on sales of goods.

In many cases, Goods is being sold but service isalso provided to buyer. Such service is providedon the goods even before delivery of goods.Generally, such service is service provided to selfand there is no question of payment of service taxthereon. Value of such service is required to beadded in the value of goods for levy of sales tax/local VAT. It may not make any difference, whetherseparate charges are collected for such service ornot.

Case of Handl i ng Char ges in Automobi leIndustry

In automobile industry, it is common that dealerscharges Handl ing Charges from buyer ofAutomobile or Spare Parts thereof. Invoice for saleof goods and service rendered is being issued. Suchservice (Handling) is provided before the delivery


of the goods i.e. before completion of sale. Dealersare liable to pay sales tax/local VAT not only onvalue of goods but also for services. As such valueis subject to levy by State Government exclusively,Union can’t levy any tax thereon and there is noliability to pay service tax. In the case of AutomotiveManufacturers P. Ltd. V. CCE, Nagpur, Hon’bleCESTAT [2015 (38) S.T.R. 1191 (Tri. - Mumbai)]has held that such handling charges are not subjectto service tax if it is collected as part of value ofgoods in composite activity of sale and services.

In many cases, it happen that property in the goodspasses on to the buyer/service recipient beforeinitiation of the provision of service. Suppose, Mr.VERYHOT has purchased an Air Condition fromMr. VERYCOOL who is also required to installthe same on the charges over and above the cost ofAir Condition. Now, suppose, Air Condi tions isdelivered at residence of Mr. VERYHOT who haschecked the goods and accepted the delivery andrisk and reward of the same is passed on to thebuyer. After, one week, installation of Air Conditionsgets started and completed. Now, even beforeinstallation is started, risk and reward is transferred,del ivery of goods is compl eted and sale iscompleted and hence, there is no question ofaddition of the value of the goods to the value ofservice.

In some cases, property in goods transfers duringthe provision of service and not before or afterprovision of service. Suppose, in the case ofcontract for painting, during the execution ofpainting, property in the paint passes to the servicerecipient. Valuation for levy of service tax for sucha contract is complex.

Goods Suppl ied by Ser vi ce Pr ovi der andSeparate Values are Determined

Now, if values for goods and service are separatelydetermined, there is no need to add the value ofgoods to the value of service. This is broadlybecause:

1) Parliament doesn’t have power to levy tax onsale goods as State Government has exclusivepower to do so as provided under Article 246(3) ofthe Constitution;

2) In terms of Section 66E(h), only service portionin the execution of the works contract is a declaredservice and not the entire works contract is subjectto levy of service tax;

3) In terms of Section 65B(44)(a)(i), an activitywhich constitutes merely a transfer of title in goodsor immovable property, by way of sale, gift or inany other manner is not a “service” at all andquestion of levy of service tax thereon doesn’t arise.

4) In terms of Section 65B(44)(a)(ii), such transfer,delivery or supply of any goods which is deemedto be a sale within the meaning of clause (29A) ofthe Article 366 of the Constitution is also not a“service”.

5) Value of Goods doesn’t form part of the “grossamount charged for service” as required underSection 67 of the Finance Act, 1994 if it is for saleof goods;

6) In terms of Rule 2A(i ) of the Service Tax(Determination of Value) Rules, 2006, serviceportion in the works contract shall be equivalent tothe gross amount charged for the works contractless the value of property in goods transferred inthe execution of works contract.

Consumables Charged Separately

General ly Consumables are requi red for theprovision of the service and without consumablesit is not possible to provide the service and it seemsthat it should form part of assessable value for levyof service tax. However, if it is considered that thetransfer of property in goods is also taking place tothe service recipient, such value can also not subjectto service tax and there is no need to add the valueof consumables in the value of services for levy ofservice tax. This may be seems correct due to tworeasons. Fi rst of all , Article 366(29A) doesn’t

Service Tax Decoded


differentiate between consumables and other goods.Secondly, Article 366(29A) clearly states thattransfer of property in goods, “whether as goodsor in some other form” is also deemed sales andhence only State Governments have power to levytax on it.

In the case of CCCE V. J. P. Transformers, [2014(36) STR 961] hon’ble Allahabad High Court hasheld that if consumables are separately disclosed inthe agreement and separately charged in the invoiceand sales tax/local VAT is also paid on that thenvalue of such consumables can’t be added to thevalue of service. Similar view is also taken againby the Allahabad High Court in the case of CCE,Lucknow V. Mahendra Engineering Ltd. [2015(38) STR 233].

Goods Suppl ied by Ser vice Pr ovider butSeparate Values are Not Determined

Now, suppose, separate values of goods andservices are not determined. This will not make anydifference as far as levy of tax on sale of goods byUnion/Central Government is concerned. Even,Section 66E(h) and Section 67 will not authorisegovernment to levy tax on sale of goods merelybased on the fact that values are not separatelydetermined or not determinable. However, i fseparate values are not determined, mechanism tocollect the service tax is provided in Rule 2A(ii) ofthe Service Tax (Determination of Value) Rules,2006.

Rule 2A(ii) assumes certain percentage of the totalamount charged for the works contract (goods andservices both) as value of the service in executionof works contract. Thus, to determine thispercentage, value of goods is also required to beadded to value of service so that total value of thecontract may be arrived at.

Now, is it amount to levy a tax on sale of goods byParl iament/Union/Central Government whichcontradictory to Article 246(3) of the Constitution?The answer is no, it is not ultra-vi res for theParliament.

The Supreme Court, in State of Kerala & Anotherv. Builders Association of India and Others [(1997)2 SCC 183] has held validity of such scheme underlocal sales tax law. Supreme Court has held thatsuch composi t ion schemes have evol ved aconvenient, hassle-free and simple method ofassessment and by opting to this alternate method,the contractor saves himself from the botherationof book-keeping, assessment, appeals and all thati t means. I t is not necessary to enqui re anddetermine the extent or value of goods which havebeen transferred in the course of execution of aworks contract, the rate applicable to them and soon. Hence, such a valuation method can’t beconsidered to be contradictory to charging sectionof the tax law.

Hence, presumptive taxation is a facility and not acompulsion on the assessee. It is like a negotiation.Government provide opportunity to avoid litigation,grants relaxation from keeping records and providessimplici ty and offers a reduced rate based onassumption and presumption. On the other hand itasks for the addition of value of goods in total valueand asks for the service tax at reduced rate thereon.Thus, i t is more l ike a convenient method forvaluation for commerce and industries and in factsfavours commerce and industries and it is not againstthe basic charging Section 66B of the Finance Act,1994 or valuation adopted under Section 67 of theFinance Act, 1994 or even against the Constitutionof India.

Law relating to addition of value of the GoodsSuppl ied by the Service Recipient to ServiceProvider will be discussed in the next issue of thejournal.

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Service Tax Decoded


CA. Ashwin H. [email protected]

Commi ssioner s of Cent r al Exci se,Customs and Service Tax Surat I vs. M/s. Ketan Engineer ing Services (2015) 22CCHST 0605 (Tr i – Ahd)

Facts:-

Assessee was engaged in providing service ofmaintenance and repairs of plant and equipmentsof industrial clients, which was chargeable to servicetax u/s 65(64) of the Finance Act 1994. Show causenotice was issued proposing demand of Service Taxalong with interest and to impose penalty undercategory of Repair and Maintenance Service.Commissioner dropped proceedings initiated byshow cause notice.

Held:-

Assessee was admi t tedl y manufacturer oftransformers and also undertook to providerepairing service to several firms and had receivedpayments f or repai ri ng servi ces provided.Maintenance or repai r carried out undermaintenance contract or agreement was coveredunder service tax. Def ini tion of Repai r andMaintenance Service fal lings u/s 65(64) of theFinance Act 1994 provides for any person who wasunder maintenance contract or agreement whichwould include rate contract or value contract as heldby Tribunal in the case Anand Transformers PvtLtd. Hence, assessee clearly fell within second limbof expression maintenance or repairs defined in s65(64) and must be deemed to have rendered taxableservice u/s 65(105)(zzg).Revenue’s Appealallowed.

Gujarat State Fer tilizers & Chem. Ltdvs. CCEC& ST(A) Vadodara-I 2015 38STR 1165 ( Tr i-Ahd)

Facts:-

The appellant in this case received incinerationcharges for usage of storage tank to store chemicals

Service Tax -Recent Judgements

received from other factories and contended thatthey have received amount for sharing commonexpenses and therefore not liable to service tax.

Held:-

It was held that the same is liable to service taxunder the category of Storage & WarehousingServices.

Commissioner of Central Excise, Goa v.New Er a Handl ing Agency (2015) 59taxmann.com 438 (SC)

Facts:-

Assessee was engaged in packaging of fertilisermanufactured by Z. Department demanded servicetax thereon. Tribunal held that : (a) packaging offertiliser is a statutory requirement as per EssentialCommodity Act, 1955 and Fertili ser (Control)Order, 1985~ (b) fertil izer cannot be marketedwithout same~ hence, manufacture is complete onlywhen packaging is done and therefore, packagingwould form an integral part of manufacture andexcluded from scope of packaging services.

Held:-

Since ferti l i ser cannot be marketed wi thoutpackaging, packaging of fertiliser is an integral partof manufacture and not taxable under PackagingServices. There is no good ground to interfere withjudgment of Tribunal . Hence, Appeal wasdismissed.

Coal Handler (P) L td v. Commissionerof Cent r al Exci se (2015) 57taxmann.com 402 (SC)

Facts:-

Assessee was appointed as agent by cementcompanies in respect of raw material ‘coal’, for :(a) following up allotment of coal rakes by Railways

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CA. Pr iyam R. [email protected]

When Goods purchased by branch officein auction and send it to head off iceoutside state, is i t inter state sale orBr anch Tr ansfer ? Commissioner ofCommercial Taxes, Hyderabadv/s DesaiBeedi Company (2015) 82 VST 242 (SC)

Background of the case:

The dealer, registered under the Andhra PradeshGeneral Sales Tax Act, 1957 and the Central SalesTax Act, 1956 was engaged in the manufacture of“beedi” and had its factory and head office outsidethe State. The registered branch office in the Stateafter purchasing “beedi” leaves by participating inthe auction conducted by the Forest Department,Government of Andhra Pradesh, dispatched themto its head office outside the State and Claimedexemption on that transaction on the ground thatthe transaction was in the nature of inter-State saleand therefore not exigible to tax under the 1957Act. The Commercial Taxes Officer rejected theclaim to exemption holding that the sale was a singlepoint sale where the dealer was the final purchaserwithin the State and thus, the taxable event tookplace in the State. The first appellate authority, inappeal filed by the dealer, set aside the assessmentorder and remanded the matter for reassessmentholding that the transactions were inter-State andnot liable to be taxed under the 1957 Act. The HighCourt held that the sale was an inter-state sale. Onappeal by the Department :

Held, allowing the appeal, that the events of saleof goods by the seller and the movement of goodsfrom the State to another State were not inextricablyconnected and were independent of each other.There was no incident of direct sale between theseller and the dealer’s head office outside the State.It was the branch office that purchased the goodsand received them subsequent to payment made byit to the seller and thereafter, transferred them to

head office outside State. The incidence of sale wascomplete once the purchaser, i.e., the branch office,rendered the payment for the goods. Once the saletransaction concluded in the State, the mere transportof goods from the branch office in the state to thehead office outside State would not result in an inter-state sale. Therefore, the sale or purchase of the“beedi” leaves did not occasion the movement ofthe goods outside the State in order to qualify as aninter-State sale u/s. 3(a) of the 1956 Act andtherefore, was exigible to tax under the 1957 Act.

Interest is ar ising pursuant to order inappeal , i nt er est is payable f r omassessment order or from appeal order.?State of Gujarat v/s Doshi Pr inting Press(2015) 82 VST 384 (Guj )


Assessee has succeeded in the proceeding of thefirst appeal before the appellate authority and theappellate authority has ordered for refund of thetax amount. However, as the interest was notawarded on such refund of the tax amount, theassesses preferred second appeal before theTribunal.

Once an order is passed by the competent authorityfor assessment and an appeal is preferred beforethe appel late authority against such order ofassessment, and the appellate authority modifies theorder of assessment, the principles, of doctrine ofmerge would squarely apply. Once the order ofassessment merges with the order of the appellateauthority in appeal, one may say that the assessmentis finalised by the appellate authority in appeal, onemay say that the assessment is finalised by theappellate authority in the appeal. The same wouldbe the situation if such circumstances arise in thesecond appeal or in any further appeal, expresslyprovided by the statute and the order of assessmentof assessing authority or the first appellate authority

VAT - From the Cour ts

11

12


is modified. Under these circumstances, it cannotbe said that while giving effect to sec. 54(1) (aa) ofthe Act, the effect would be available to theassessment made by the assessing authority onlyand not the further modification made by the firstappellate or therefore, the second appellate authorityonly and not the further modification made by thefirst appellate authority or thereafter, the secondappellate authority or even third appellate authorityas the case may be. To say that unless there is aspecif ic provision providing for enti tlement ofinterest on refund on account of the appellate order,no interest would be available would run counterto the basic principles of doctrine of merger whichis well accepted doctrine incorporated in the systemof administration of justice.

It may also result in discriminatory treatment to theextent that a dealer who succeeds in the assessmentand is entitled to the refund would get interest onrefund but a dealer who has carried the matter inappeal and becomes entitled to refund on accountof the order of the appellate authority, would notget interest.

Although in taxing statutes, the principles of equitymay have little role to play at the same time, anystatute in a taxation matter should also meet the testof constitutional provisions. In addition, theprinciples of compensatory measure may apply ifthe taxing statute is si lent on this aspect. TheLegislature may control quantification of interestor the entitlement of interest on refund subject tomeeting with the test of constitutional provision.But, when the Legislature is silent about entitlementof interest on refund of the tax amount already paidby the citizen, interest can be considered by way ofa compensatory measure.

Appeals filed by the dealer were allowed and theappellate authority ordered refund of tax. The dealerpreferred an appeal to the Tribunal seeking intereston the refund. The Tribunal found that interest onthe refund of tax should be made available on therefund of the tax accrued on account of the orderpassed in appeal against the assessment orders. Onappeal by the Department :

Held, accordingly, dismissing the appeal, that theorder of the Tribunal did not call for interference.

Input Tax Credit- In case of purchasefrom cancelled dealer, purchasing dealerto be served with copies of order passedin r espect of sel l ing dealer - Shr eeBhairav Metal Corporation v/s State ofGujarat (2015) 82 VST 324 (Guj )


The petitioner – dealer carried on business in ferrous– non – ferrous metal and in its computation ofinput-tax-credit for the year 2006-07 showedpurchases of Rs. 48,12,825/ alleged to have beenpurchased from one L. The dealer produced thebills with respect to purchase of goods alleged tohave been purchased from L. The assessing officerallowing the input-Tax credit as claimed by thedealer including the purchase made by the dealeralleged to have been purchased from L. Thecertificate of registration of L was cancelled ab-initio from February 22, 2006 on the ground that Lwas not a genuine dealer and had indulged in billingactivities only and all the transactions made by Lwere bogus and non-genuine. The order passed bythe assessing officer allowing the input –tax creditclaimed by the dealer of Rs. 6,49,561/- was revisedby the DC raising a demand for tax, interest andpenalty u/s. 34(7) and 34(12) of the Gujarat ValueAdded Tax Act, 2003 and disallowing the inputtax credit of Rs. 6,49,561/- claimed by the dealeron the purchases made by the dealer from Lobserving that all the transaction by L includingthe transactions between L and the dealer werebogus and non-genuine. The dealer preferred arevision application before the Tribunal whichdismissed the revision appl ication. ON a writpetition :

Held, that while disallowing the input tax credit tothe dealer on the purchase from L, the DC hadobserved that the certificate of registration in the caseof L had been cancelled ab initio from February 22,2006 holding that all the transactions by L were bogusand not genuine and that L indulged in bil lingactivities only and therefore, even the transactionsbetween the dealer and L were also bogus and non-


13


genuine. To some extent, he was justified in drawingsuch an inference. However, the dealer was requiredto be served with the order in the case of L cancellingits certificate of registration ab initio and the findingsrecorded by the appropriate authority in the case ofL holding the transactions by L including thetransaction with the dealer bogus and non-genuineand the finding that L had indulged in billing activitiesonly. After giving an opportunity to the dealer andnon-fronting it with the findings recorded by theappropriate authority cancelling the certificate ofregistration ab-initio in case of the seller L, the claimof the purchaser such as the dealer of the input-tax-credit on the purchases made from such seller, wasrequired to be considered. An opportunity is requiredto be given to such purchasing dealer to prove thegenuineness of the transaction or to justify its claim

to input – tax – credit. The dealer was not servedwith a copy of the order in the case of L cancellingits certificate of registration ab-initio from February22, 2006. However, while claiming input-tax-crediton purchases the dealer was also required to proveand establish the actual movement of goods and thegenuineness of the transaction. Mere production ofthe bills, vouchers, etc. was not sufficient to claimthe input tax credit. Therefore, the matter was to beremanded to the adjudicating authority to considerthe claim of the dealer from L after giving anopportunity to the dealer wi th respect to theobservations made in the case of L insofar as thealleged transactions between the dealer and L andafter giving an opportunity to the dealer to prove thegenuineness of the transactions between it and L.

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contd. from page 315 Ser vice Tax - Recent Judgements

27(b) supervising loading and labelling of rail wagons(c) drawing samples of coal loaded on wagons (d)paying freight to Railways and (e) dispatching railreceipts to cement companies. Department arguedthat i t amounted to Clearing and ForwardingAgent’s services.

Held:-

It was held that in this case, (a) there is no role ofassessee in getting coal cleared from collieries/supplier of coal~ (b) movement of coal is undercontract of sale between coal company and cementcompanies~ (c) even coal is loaded on to railwaywagons by coal company~ (d) goods are not underany legal detention from which they need to be freedby assessee~ (e) destination of goods is known tocoal company and railway rakes are placed by coalcompany for said destinations~ (f) there is nooccasion for cement companies to instruct assesseeto dispatch/forward goods~ (g) assessee does noteven undertake any loading operation. Primary jobof assessee, as per contract between assessee andcement companies, is of supervising and liaisoningwith coal company as well as Railways to see thatmaterial required by cement companies is loadedas per schedule.› Hence, services rendered byassessee would not qualify as C&F Agent.

Commissioner of Service Tax, Mumbai-I v. M aer sk India (P) L td. (2015 57taxmann.com 168 (SC)

Facts:- Assessee was providing Steamer Agentservices to foreign clients against consideration inconvertible foreign exchange. Services renderedagainst convertible foreign exchange enjoyedexemption upto 28›2›2003 said exemption waswi thdrawn from 1›3›2003 and restored from20›11›2003. Department demanded service tax, asservices were provided in non›exempt period.Assessee argued that in view of CBEC Circular dated25›4›2003, it amounted to export and not liable toservice tax. Tribunal held that Circular dated25›4›2003 was retrospective and export of servicecould not be taxed . Department argued that onlythose services would be export, which are performedoutside India~ in this case, services have beenrendered on Indian shores albeit clients are residentsabroad, hence, it would not amount to export.Held:- It was held that in this case, recipient ofservice is resident abroad and consideration forservice is being paid in convertible foreign exchangefrom abroad as such services amounted to ‘exportservices’ in view of judgment in CST v. SGS India(P.) Ltd. [2014] 45 taxmann.com 188/45 GST 365(Bom.) › Hence, no service tax could be demanded.

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CA. Bihar i B. [email protected].

Statute UpdatesValue Added Tax (VAT)

[I] Impor tant Notifications/Circulars:

The Finance Department, Gandhinagar, hasissued a Notif ication dated 19.6.2015 forRemission of the amount of tax payable by thespecified dealer on the sale of E-bid Re-gasifiedLiquid Natural Gas (RLNG) to the specifiedPower Plant under the GOI-MOP-Schemeannounced vide Office Memorandum No. 4/2/2015-TH-1 dated 27.3.2015 wi th certainterms and conditions and the specified dealershall have to apply to the Commissioner ofCommercial Taxes in various forms specifiedunder the GVAT Rules. The remission shall begranted for the period from 1.6.2015 to31.3.2016 and the specified dealer shall notissue tax invoice and shall not charge the taxfrom the purchaser for the sale of RLNG.

Moreover, the specified dealer shall have tofurnish the certificate issued by the Energy andPetrochemical Department, Govt. of Gujaratwi thi n the peri od of 3 months to theCommissioner. This remission shall not beallowed on the sale of RLNG which is used inthe generat ion of electri ci ty whi ch i ssubsequently sold outside the State of Gujarat.In the Noti f ication, the def ini tion of thespecified dealer, specified power plant, formof application & form of certificate etc. areenclosed.

[II] Impor tant Judgment:

[A] M/s. Siemens Ltd. in the matter of recovery oftax dues – GVAT Tribunal dated 17-6-2015.

Issue:

If a dealer has made stay application before theHon. Tribunal and the hearing of the saidapplication is pending till date, the department

cannot take any action or activity for therecovery of dues.

Held:

The entire demand of the appellant was raisedon the ground of non-submission of Form C,Form E-1 & E-II.

The appellant has collected the Form – C andsubmitted during the course of proceedings ofthe first appeal and the demand of tax after thef irst appeal ef fect was Rs. 2,30,00,000/-.Against the demand, the appellant has paid anamount of Rs. 91,00,000/- at first appellatestage. However the department has taken therecovery action and through bank attachmentrecovered Rs. 3,26,99,064/-.

The important paragraphs of the decision arereproduced hereunder:

The Ld. Commercial Tax Practi tioner hasfurther submitted that order passed by the Ld.Joint Commissioner was received by theappellant on 27.04.2015 and second appealwas filed before the Tribunal on 11.06.2015.The second appeal was filed within the statutoryperiod of two months from the date of receiptof the said order. He has further submitted thatsince the department has initiated coerciverecovery measures, the appellant has filed anapplication for early hearing on the same day,i.e. 11.06.2015. However, before this Tribunalcould take any decision on the said applicationof the appellant, the department has recoveredRs. 3,26,99,064/- on 12.06.2015 from the bankaccount of the appel lant attached by thedepartment. He has further submitted that theCommercial Tax Officer, under the pressurefrom the higher authorities, has collected thedemand draft from the bank amounting to Rs.3,26,99,064/- and issued the challan of the likeamount by way of recovery against the

VAT - Updates andTribunal Judgements


outstanding demand. He has further submittedthat the Commercial Tax Officer has taken thecoercive recovery measures despite the fact thatthe appellant has informed the Commercial TaxOff icer in wri ting on 11.06.2015 that thesecond appeal was filed before this Tribunalwherein stay appl ication as wel l as theapplication for early hearing were separatelyfiled. He has also informed that the appellanthas al ready paid pre-deposit amount of Rs.91,87,250/- at the first Appellate stage and reliefof Rs. 40,49,770/- was granted in the firstappeal. He has also submitted that normally insuch matters, when second appeal is filed beforethis Tribunal, a direction to deposit 20% of thetax demand by way of pre-deposit is orderedby this Tribunal and on payment of suchamount, normally, the matter is sent back tothe concerned authority to verify the formsalready submitted and which may be submittedwithin the period of 3 to 6 months from thedate of the receipt of the said order. In this viewof the matter, the coercive action of thedepartment in taking recovery of Rs.3,26,99,064/- is absolutely unjustif ied andcontrary to the settled legal position and inviolation of the principles of natural justice. Insupport of these submi ssions, the Ld.Commercial Tax Practitioner has relied uponthe order passed by the Hon. Gujarat HighCourt in the case of Novartis India Limited vs.Commercial Tax Off icer in Special Civi lApplication No.1326 of 2009 dated 27.3.2009wherein the demand raised was recovered.The amount of Rs. 80.00 Lacs was recoveredfrom the bank account of the said appellant andwhen the said coercive action was challengedbefore the Hon. Gujarat High Court, the learnedAsst. Government Pl eader stated underinstructions, that the respondent authority shallrefund a sum of Rs. 65.00 Lacs to the Petitionerout of the total sum recovered from the attachedBank Account and will retain the balance sumof Rs. 15.00 Lacs as pre-deposi t for thepurpose of hearing appeal pending before FirstAppellate Authority. On this assurance, the saidpetitioner has withdrawn the petition.

VAT - Updates and Tr ibunal Judgements

The Ld. Government Representative appearingfor the respondent on the other hand has stronglydefended the action of the department and hassubmitted that once the appeal is decided onmerits by the Appellate Authority, the departmenthas every right to recover the outstanding amountin accordance with law. He has further submittedthat after considering the payment already madeas well as the relief granted by the Ld. JointCommissioner, the department has recoveredonly the balance outstanding demand and hencethere is no justification in challenging the saidaction of the department on the ground that thepowers were exercised in a high handed manner.He has further submitted that the decisions reliedupon by the appellant are not applicable to thefacts of the present case. The decision taken inthe case of Novartis India Limited is based onconsensus arrived at between the parties andhence no reliance can be placed on the saiddecision.

Once the Tribunal has come to the conclusionthat action of the department is not bonafideexercise of the powers and only because ofachieving the alleged target of recovery, if suchaction was taken, the same could not besustained. Even otherwise, the appellant is amul ti -national company and the recoverywould not be affected in case the appellant failsin this appeal. On the contrary, if the appellantsucceeds in this appeal, in that case, it is verydifficult for the appellant to get the refund. TheTribunal has come across several cases of thisnature, where for years together refunds werenot given and it is only when the directions areissued to the learned Commissioner to remainpersonally present, such refunds were given.The Tribunal, therefore, direct the respondentto retain the amount of Rs. 1,60,00,000/- whichis more or less equivalent to the amount ofoutstanding tax demand, exclusive of interestand penalty, by way of pre-deposit and grantstay against the recovery of the outstandingdemand and return the balance amount to theappellant within 15 days from the date of receiptof this order. Whi le issuing this mandatory


direction, the Tribunal derives support from thedecision of Hon. Gujarat High Court in the caseof Novartis India L imited. The Tribunal isaware about the fact that the said decision isbased on the consensus arrived at between theparties.

However, the fact still remains that the StateGovernment being a party in that case as wellas in the present case, cannot adopt twodifferent standards in two different cases. Thedealers are expecting the same treatment fromthe state and hence the learned GovernmentRepresentative, instead of justi fying thedepartment’s action before this Tribunal shouldhave come forward wi th the suggestion toretain part of the amount by way of pre-depositand return the balance amount so recoveredfrom the attached bank account to the appellant,as it was done before the Hon. Gujarat HighCourt in the case of Novartis India Limited.

In the above view of the matter, the Tribunaladmi ts this appeal and grant stay againstrecovery of the outstanding demand with thedirection to the department to retain the amountof Rs. 1,60,00,000/- by way of pre-deposit andreturn the balance amount so attached from thebank account of the appellant to the appellantwithin 15 days from the date of receipt of thisorder.

[B] Bansal Brothers, GVAT Tribunal decided on27.09.2012 that Ship Breaking activity is amanufacturing activi ty and tax credi t isadmissible in respect of purchase of Oxygenand LPG.

Held:

The appellant was engaged in the business ofship breaking and was using Oxygen and LPGfor breaking ship of steel and iron plate. Anapplication u/s. 80 was made raising questionthat whether tax credit of the amount of taxpaid in purchases of oxygen gas and LPG isadmissible or not? It was held by the Ld. JointCommissioner that the activity of ship breakingis not amount to manufacture as held by theHon. Tribunal in the case of M/s. Mahavir

Inducto Melt Pvt. Ltd. Appeal No. 13 of 2000decided on 27.01.2006 and hence the tax creditwas not admissible to the applicant in respectto purchase of oxygen and LPG.

The appellant challenged determination orderpassed u/s. 80 before Hon. Tribunal andcontended that the judgment in the case of M/s. Mahavir Inducto Melt Pvt. Ltd. (supra) isnot applicable to the facts of the case of theappellant because in the said judgment theappel lant was purchasing scrap ship andthereafter was selling parts of the dismantledship, where as the appellant is purchasing shipplying on the sea water and selling parts of theship after dismantling it. The appellant reliedon the terms of the agreement entered with theship owner and section 2(14) of manufactureprovided in the Vat Act.

The appel lant rel ied on the judgment ofBombay High Court in case of M/s. IndianMetal Traders 41 STC 169 and in the case ofM/s. Shi p Scrap Traders 251 ITR 806.Appellant also rel ied on the judgment ofSupreme Court in case of M/s. Vi jay ShipBreaking Corporation, 314 ITR 309. The Ld.G. A. relied on the judgment in case of M/s.Delhi Iron and Steel Co. 38 STC 202, M/s.Raman & Co. 33 STC 1 (Madras) and 93 STC185 (S.C), M/s. Krishena Kumar (1990) 4 SCC207, M/.s. Aruit Das (2000) 5 SCC 488, IPCL(2001) 101 STC 786, M. R. Apparao 4 STYC638, Manoharlal (2002) 7 SCC 222 andMahadeva Shetty (2003) 7 SCC 197.

Hon. Tribunal interpreted the definition of termmanufacture provided in section 2(14) in viewof certain judgments and further relying on thejudgments held that the activity of the appellantis manufacturing activity as covered by section2(14) of the Vat Act and the tax credit of theamount of tax paid on purchase of oxygen andLPG is admissible to the appellant as they areraw material used in the manufacturing activityof ship breaking.

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VAT - Updates and Tr ibunal Judgements


CA. Hozefa [email protected]

the conclusive value. These approaches are havingnumerous sub-approaches or techniques withineach. Based on the requirement of specific purpose,the val ue analyst i s requi red to appl y hi sprofessional wisdom and experience to finalize thetechnique/s to consider. He should also bear in mindthat the value arrived on applying each theseselected techniques is very likely to differ and therange between the least value and highest value maybe signi f icant. I f the fundamentals are wel lconsidered and assumptions are well decided thenthis difference may not be so. Here again, afterderiving values using different applied techniques,the Analyst is on the subjective mode and he canchoose one or more techniques wi th dif ferentweightage to arrive at the conclusive value ofbusiness. Base on his best of professional judgment,he may also end up with range of value based onrequirement and circumstances.While concluding a value for specific interest, a valueanalyst should also consider the premiums anddiscounts necessary to incorporate in businessestimation. Examples of these premiums anddiscounts are control premium (an investor may bewilling to pay something extra for getting controlover business or management or specific area/s),synergy premium (the likely benefit directly orindirectly effecting the existing profile of proposedinvestor) , portfolio discount (the business enterprisemay include more than one business streams andthere may not be perfect co relation within thosestreams or it owns dissimilar operations or assets thatdo not fit well together) , blockage discount (theownership may be embedded with some restrictionson departing), lack of control discount (theownership may come but not with reasonable orexclusive control), Ill iquidity discount (in case ofclosely held business entities, normally, the ownerof business or equity holder are not in a position tochange their holdings as easily and frequently tomanage their risk perceptions, as they can for publiclytraded companies), key person discount (the businessmay be dependable on working style, experience andskills of one or few specific person/s) etc.

❉ ❉ ❉

Business Valuation

Valuation Process

After going through the prof ile of cl ient andunderstanding the purpose of engagement, as wellas intended use of valuation, the valuation processbegins with deciding the standard of value basedon the accepted premise. The standard of value maybe loosely said as a definition of value. It will mainlybe based on the intended use of value. If the owner(as investor) wants to launch a new project then hemay like to know “the fair value” of existingbusiness and the “investment value” of businesscombined with proposed projects. Just on the otherside, a financer while financing the same project,may like to know the “fair value” as well as the“liquidation value” of the business. If the valuationreport could not be used for the purpose i t isintended to be used then where is the NEED ofvaluation? The purpose, not always demands thefair value but a value which can help the best toarrive at a better decision.In my view, in order to achieve the intended benefitsfrom valuation, analyst should consider the purposeforcing towards the need of valuation. Based onrelevant standards, business appraise can derive aspecific value or may come out with different valuedepending upon the techniques applied. Theassumptions should be explicit to make the valuebetter useful.The basics of standards are reproduced as follow:Fair value : that may be intrinsic value (adjusted assetbased value or earning capacity based value) or theextrinsic value (market based value- relative value)Investment value : based on the individualperceptions of the investor. It includes the value ofsynergy with investors’ existing status. (it could bea liquidation value of concerned asset plus marginalbenefits derived from the transaction)Liquidation value : Realizable value of assetsSelection of Valuation TechniquesOnce the standard of value if decided, the valuationanalyst needs to finalize the appropriate techniquesto consider while moving towards deriving thevalue of business. As we know, there are threeapproaches to valuation used widely to arrive at

Academic Refresher


CA. Naveen [email protected]

Corporate Law Update

MCA Updates:

1. Pr ior / advance adjour nment motion bylearned counsel in the matters listed beforethe Company Law Board:

Company Law Board has issued a circular thatal l the l earned Counsels shal l ci rcul ateadjournment motion a week before the date ofhearing for seeking adjournment and file thesame with the concerned Bench. The Counselshall also appear on the date of hearing forplacing the request before the Bench.

[Circular No. 9/4/2015/PB-CLB dated 07th

July, 2015]

2. Relaxation of additional fees and extensionof last date of f i l i ng of for ms M GT-7(Annual Retur n) and AOC-4 (FinancialStatement).

Looking to the delay in notif ication of theelectronic versions of forms AOC-4, AOC-4(XBRL), MGT-7 and AOC-4 CFS, the MCAhas decided to relax the additional fees payableon forms AOC-4, AOC-4 XBRL and MGT-7up to 31/10/2015. Further, a Company whichis not required to file its financial statement inXBRL format and required to file its CFS(Consolidated Financial Statements) would beable to do so in the separate form for CFSwithout any additional fees up to 30/11/2015.

[F. No. 1/34/2013-CL-V dated 13th July,2015]

3. Clar ification with regard to cir culation andfiling of financial statement under relevantprovisions of the Companies Act, 20l3.

· The MCA has clarified that a company holdinga general meeting after giving a shorter noticeas provided under section 101 of the Act, mayalso circulate financial statements (to be laid/considered in the same general meeting) at suchshorter notice.

· The MCA has also clarified that in case of aforeign subsidiary, which is not required to getits accounts audited as per legal requirementsprevalent in the country of its incorporation andwhich does not get such accounts audited, theholding/parent Indian may place/f ile suchunaudi ted accounts to comply wi threquirements of Section 136(1) and 137(1), asapplicable. These, however, would need to betranslated in English, if the original accountsare not in English. Further, the format ofaccounts of foreign subsidiaries should be, asfar as possible, in accordance with requirementsunder Companies Act, 2013. In case, this isnot possible, a statement indicating the reasonsfor deviation may be placed / held along withsuch accounts.

[F. No. No. 1/19/2013-CL-V dated 21st July,2015]

4. M odi f icat ion in var ious e-for ms by theM CA:

The MCA has modified the version of e-formsDPT-3, Form-4 (LLP), CRA-2, MSC-3 andFC-1, w. e. f. 07th July, 2015.

SEBI Updates:

1. Review of minimum contract size in equityder ivatives segment:

The framework for determination of lot sizefor derivatives contracts specified vide SEBIcircular dated January 08, 2010 is modified asunder:

a. The lot size for derivatives contracts inequity derivatives segment shall be fixedin such a manner that the contract value ofthe derivative on the day of review is withinRs. 5 lakhs and Rs. 10 lakhs.

b. For stock derivatives, the lot size (in unitsof underlying) shall be fixed as a multiple


Corpor ate L aw Update

of 25, provided the lot size is not less than50. However, if the contract value of thestock derivatives at the minimum lot sizeof 50 is greater than Rs. 10 lakhs, then lotsize shal l be fixed as a mul tiple of 5,provided the lot size is not less than 10.

c. For index derivatives, the lot size (in unitsof underlying) shall be fixed as a multipleof 5, provided the lot size is not less than10.

The aforesaid provisions shall be made effectivefrom the next trading day after expi ry ofOctober, 2015 contracts.

[CIR/MRD/DP/14/2015, July 13, 2015]

2. Secur i t ies and Exchange Boar d ofIndia (Issue and L isting of Debt Secur itiesby Municipalities) Regulations, 2015:

These regulations shall apply to:

a. Public issue of debt securities; and

b. Listing of debt securities issued throughpublic issue or on private placement basison a recognised stock exchange.

· “corporate municipal entity” means a companyas defined under Companies Act, 2013, whichis a subsidiary of a municipality and which isset up for the purpose of raising funds for aspecific municipality or group of municipalities;

· “debt securities” means a non-convertible debtsecuri ties which create or acknowl edgeindebtedness, and include debenture, bondsand such other securities of a municipality, or acorporate municipal entity, whether constitutinga charge on the assets of such body or not;

· “municipality” means an institution of self-government constituted under Article 243Q ofthe Constitution of India;

· “national municipal accounts manual” meansthe municipal accounting manual formulatedby the Ministry of Urban Development;

For details please refer the following link:

http: / /www.sebi .gov.i n/cms/sebi _data/attachdocs/1436964571729.pdf.

[Notification dated 15th July, 2015]

3. Policy for annulment of trades under takenon stock exchanges:

· Examination of trade(s) for annulment may betaken up either suomoto by stock exchange orupon receipt of request from a stock broker.

· Stock brokers shall submit the request to thestock exchange wi thin 30 minutes fromexecution of trade(s) which is sought to beannul led. However, stock exchange mayconsider requests received after 30 minutes, butno longer than 60 minutes, only in exceptionalcases and after examining and recordingreasons for such consideration.

· Stock exchanges shall charge an applicationfee equal to 5% of the value of trade(s) foraccepting annulment request f rom a stockbroker, subject to minimum fee of Rs. 1 lakhand maximum fee of Rs. 10 lakhs. Stockexchanges may suitably increase the upper limitof the application fee as deemed necessary todiscourage frequent or frivolous requests forannulment. The amount realised as applicationfee shall be credited to the “Investor ProtectionFund” of the concerned stock exchange.

For details please refer the following link:

http: / /www.sebi .gov.i n/cms/sebi _data/attachdocs/1437033678905.pdf.

[CIR/MRD/DP/15/2015, July 16, 2015]

4. SEBI (Pr ohibi t ion on Raising Fur therCapi tal fr om Publ ic and Transfer ofSecur ities of Suspended Companies) Order,2015.

· In order to ensure effective enforcement oflisting conditions and improve complianceenvironment among the listed companies andtaking into account the interests of investors insecurities and the securities market, the SEBIhas ordered that-

a) A suspended company, its holding and/orsubsidiary, its promoters and directors shallnot, issue prospectus, any offer document,or advertisement soliciting money from thepublic for the issue of securities, directly


Corpor ate L aw Update

or indirectly; till the suspension is revokedby the concerned recogni zed stockexchange or securities of such companyare del isted i n accordance wi th theappl i cabl e del i st ing requi rements,whichever is earlier:

Provided that SEBI may, in the interest oftrade and securities market, relax the strictenforcement of this restricti on onrecommendation of the concerned stockexchange in case of companies, other thanaforementioned, wherein such promotersare also promoters/directors;

b) The suspended company and thedepositories shall not effect transfer, byway of sale, pledge, etc., of shares of asuspended company held by promoters /promoter group and directors til l threemonths after the date of revocation ofsuspension by the concerned recognizedstock exchange or til l securities of suchcompany are delisted in accordance withthe appl icable delisting requi rements,whichever is earl ier. The concernedrecognized stock exchange anddepositories shall co-ordinate with eachother for ensuring compl iance of thisrequirement. Such promoter/director mayfile objection, if any, before the concernedrecognized stock exchange who may, onsati sfactory reasons shown by suchpromoter/director, remove this restrictionin accordance wi th i ts applicable rule,regulations and bye-laws.

· For the aforesaid purposes, “suspendedcompany” means a listed company in whoseshares trading is suspended from trading by therecognized stock exchange on account of noncompliance with listing requirements.

[General Order No. 1 of 2015, dated 20t h

July, 2015]

Case Laws:

1. Ar abi Syed M ohammed Mohiuddin andothers vs. SEBI: (Appeal No. 193, 195 to

198, 307 to 309 of 2014 decided by the SATon July 10, 2015):

Facts of the case:

Appel lants (Executives of Mahindra andMahindra L imi ted) are aggrieved by therespective adjudication orders passed by theAdj udicat ing Off i cer (“AO”) of SEBI ,whereby penalty of Rs. 2 lac is imposed oneach of the appellant under Section 15A(b) ofSEBI Act, for violating regulation 13(4) readwith regulation 13(5) of the SEBI (Prohibitionof Insider Trading) Regulations, 1992.

Observation:

Counsel for the appel lants stated that theappellants in all these appeals are not pressingthe respective appeals on merits but requestedthat the quantum of penalty imposed on eachappellant be reduced in view the fact that theviolation relates to the failure to disclose tradingin shares which is comparatively small.

It was brought to the notice that since the AOhas imposed penalty of Rs. 2 lac on Shri SudhirPrabhakar Pathak under Section 15A (b) forfailing to disclose sale of 12000 shares of thecompany during the same period, imposingpenalty of Rs. 2 lac on the appellants hereinunder Section 15A (b) for failing to disclosesale of 1000 or less than 1000 shares of thecompany during the same period would not beappropriate. Therefore, in our opinion, it wouldbe just and proper to reduce the penal tyimposed on each appellant under Section 15A(b) of SEBI Act from Rs. 2 lac to Rs. 1 lac.

Conclusion:

Accordingly, orders impugned in each appeal aremodified by reducing the penalty imposed underSection 15A (b) of SEBI Act from Rs. 2 lac to Rs.1 lac and the additional penalty of Rs. 2 lac imposedunder Section 15 HB of SEBI Act on appellant inAppeal No. 307 of 2014 is sustained and All theappeals are disposed of accordingly.

❉ ❉ ❉


Adv. Ankit [email protected]

Allied Laws Corner

money’. Money Laundering is the processof conversion of such proceeds of crime, the‘di rty money’, to make i t appear as‘legi timate’ money.In the PMLA, 2002,money laundering has been defined as “anyprocess or activity connected with proceedsof cri me i ncludi ng i ts conceal ment,possession, acquisition or use and projectingor claiming it as untainted property”.

Q.4 How does Money Launder ing actual lytake place?

A.4. The process of Money Laundering generallyinvolves the following three steps :(a)Placement:- The Money Launderer, who isholding the money generated from criminalactivities, introduces the illegal funds into thefinancial systems. This might be done bybreaking up large amount of cash into lessconspi cuous smal ler sums whi ch aredeposited directly into a Bank Account orby purchasing a series of instruments suchas Cheques, Bank Drafts etc., which are thencollected and deposited into one or moreaccounts at another location.(b)Layer ing:-The second stage of Money Laundering islayering. In this stage, the Money Launderertypically engages in a series of continuousconversions or movements of funds, withinthe financial or banking system by way ofnumerous accounts, so as to hide their trueorigin and to distance them from thei rcriminal source. The Money Launderer mayuse various channels for movement of funds,like a series of Bank Accounts, sometimesspread across the globe, especially in thosejurisdictions which do not co– operate in antiMoney Laundering investigations.(c)Integration:- Having successfully processedhis criminal profits through the first twostages of Money Laundering, the Launderer

Fr equent l y Asked Quest i ons on “ThePrevention of Money Launder ing Act”

Q.1 What is the object of Prevention of MoneyLaunder ing Act, 2002?

A.1 It is an Act to prevent money-laundering andto provide for confiscation of propertyderived f rom, or involved i n, money-laundering and to punish those who committhe offence of money laundering.

Q.2. Which agency administers the Preventionof Money Launder ing Act, 2002?

A.2. The Directorate of Enforcement in theDepartment of Revenue, Ministry of Financeis responsible for investigating the cases ofof fence of money l aundering underPrevention of Money Laundering Act,2002.Financial Intell igence Uni t - India(FIU-IND) under the Department ofRevenue, Ministry of Finance is the centralnational agency responsible for receiving,processing, analyzing and disseminatinginformation relating to suspect financialtransactions to enforcement agencies andforeign FIUs.

Q.3. What is Money Launder ing?

A.3. The goal of a large number of criminalactivities is to generate profit for an individualor a group. Money laundering is theprocessing of these criminal proceeds todisguise their illegal origin.Illegal arms sales,smuggling, and other organized crime,including drug trafficking and prostitutionrings, can generate huge amounts of money.Embezzlement, insider trading, bribery andcomputer fraud schemes can also producelarge prof its and create the incentive to“legitimize” the ill-gotten gains throughmoney laundering. The money so generatedis tainted and is in the nature of ‘di rty


then moves to this third stage in which thefunds reach the legitimate economy, aftergetting inseparably mixed with the legitimatemoney earned through legal sources ofincome. The Money Launderer might thenchoose to invest the funds into real estate,business ventures & luxury assets, etc. so thathe can enjoy the laundered money, withoutany fear of law enforcement agencies.

The above three steps may not always followeach other. At times, illegal money may bemixed with legitimate money, even prior toplacement in the financial system. In certaincash ri ch businesses, l ike Casi nos(Gambling) and Real Estate, the proceeds ofcrime may be invested without entering themainstream financial system at all.

Q.5. What is the offence of Money Laundering?

A.5. Whosoever directly or indirectly attempts toindulge or knowingly assists or knowingly isa party or is actually involved in any processor activity connected with the proceeds ofcrime including its concealment, possession,acquisition or use and projecting or claimingit as untainted property shall be guilty ofoffence of money laundering (Section 3).

Q.6. What are proceeds of cr ime?

A.6. “Proceeds of crime” means any propertyderived or obtained, directly or indirectly, byany person as a result of criminal activityrelating to a scheduledoffence or the valueof any such property.

Q.7. What is a ‘scheduled offence’?

A.7. The offences listed in the Schedule to thePrevention of Money Laundering Act, 2002are scheduled offences in terms of Section2(1)(y) of the Act. The scheduled offencesare divided into two parts - Part A & PartC.In part A, offences to the Schedule havebeen listed in 28 paragraphs and it comprisesof of fences under Indi an Penal Code,of fences under Narcoti c Drugs andPsychotropic Substances, offences underExplosive Substances Act, offences underUnl awful Activi ties (Preventi on) Act,

offences under Arms Act, offences underWild Life (Protection) Act, offences underthe Immoral Traff ic (Prevent ion) Act,offences under the Prevention of CorruptionAct, offences under the Explosives Act,offences under Antiquities & Arts TreasuresAct etc.Part ‘C’ deals wi th trans-bordercrimes, and is a vital step in tackling MoneyLaundering across International Boundaries.Prior to 15th February, 2013, i.e., the date ofnotification of the amendments carried outin PMLA, the Schedule also had Part B forscheduled offences where the monetarythreshold of rupees thirty lakhs was relevantfor initiating investigations for the offence ofmoney laundering. However, al l thesescheduled offences, hitherto in Part B of theSchedule, have now been included in PartA of Schedul e w.e.f 15.02.2013.Consequently, there is no monetary thresholdto initiate investigations under PMLA.

Q.8. What are the possible actions which canbe taken against persons / proper t iesinvolved in Money Launder ing?

A.8. Following actions can be taken against thepersons involved in Money Laundering:-(a)Attachment of property under Section5,seizure/ freezing of property and recordsunder Section 17 or Section 18. Property alsoincludes property of any kind used in thecommission of an offence under PMLA,2002 or any of thescheduled offences.(b)Persons found guilty of an offence of MoneyL aundering are puni shable wi thimprisonment for a term which shall not beless than three years but may extend up toseven years and shall also be liable to fine[Section 4].(c) When the scheduled offencecommitted is under the Narcotics andPsychotropic substances Act, 1985 thepunishment shall be imprisonment fora termwhich shall not be less than three years butwhich may extend up to ten years and shallalso be liable to fine.(d) The prosecution orconviction of any legal juridical person is notcontingent on the prosecution or convictionof any individual.

All ied Laws Cor ner


Q.9. Whether the statement recorded beforethe Investigating Officer under PMLA isadmissible evidence under the Law?

A.9. Yes, the statement recorded before theInvestigat ing Off icer under PMLA isadmissible evidence in the Court as such aproceeding under Section 50(2) and 50(3)of the Act is a judicial proceeding within themeaning of Section 193 and 228 of IPC.

Q.10. W hat is bur den of pr oof i n anyproceedings relating to proceeds of cr imeunder PMLA, 2002?

A.10. (a) In the case of a person charged with theoffence of money-laundering under section3, the Authority or Court shall, unless thecontrary is proved, presume that suchproceeds of crime are involved in money-laundering; and(b) In the case of any otherperson the Authority or Court, may presumethat such proceeds of crime are involved inmoney-laundering [Section 24].

Q.11. What is meant by the term “Proper ty” inthe Prevention of Money Launder ing Act,2002?

A.11. “Property” means any property or assets ofevery description, whether corporeal orincorporeal, movable or immovable, tangibleor intangible and includes deeds andinstruments evidencing title to, or interest in,such property or assets, wherever located.Further, property includes, property of anykind used in the commission of an offenceunder this Act or any of the scheduledoffences [Section 2(1)(v)].

Q.12. What is “attachment”?

A.12. “Attachment” means prohibition of transfer,conversion, disposition or movement ofproperty by an order issued under ChapterIII of the Act [Section2(1)(d)].

Q.13. What are the cir cumstances under whichproper ties can be provisionally attachedunder PMLA?

A.13. (i) Where the Director, or any other officernot below the rank of Deputy Di rectorauthorised by the Director has reasons to

bel ieve (the reason for such belief to berecorded in writing), on the basis of materialin his possession, that— (a) any person is inpossession of any proceeds of crime and(b)such proceeds of crime or l ikely to beconcealed, transferred or dealt with in anymanner which may result in frustrating anyproceedings relating to confiscation of suchproceeds of crime he may, by an order inwriting, provisionally attach such propertyfor a period not exceeding 180 days fromthe date of the order, in such manner as maybe prescri bed.(i i ) No such order ofattachment shall be made unless, in relationto the scheduled offence, a report has beenforwarded to a Magistrate under section 173of the Code of Criminal Procedure, 1973, ora complaint has been f i ledby a personauthori zed to investi gate the offencementioned i n the Schedul e, before aMagistrate or court for taking cognizance ofthe scheduled offence, as the case may be ora similar report or complaint has been madeor filed under the corresponding law of anyother country.(iii) Further any property of anyperson may be attached, if the Director orany other of ficer not below the rank ofDeputy Di rector authorized by him hasreason to believe (reasons for such belief tobe recorded in writing), on the basis ofmaterial in his possession, that if suchproperty involved in money laundering is notattached immediately the non-attachment ofthe property is l ikely to frustrate anyproceedings under this Act [Section 5].

Q.14. How long this or der of pr ovi si onalattachment of proper ty will remain inforce?

A.14. Every order of provisional attachment shallcease to have effect after 180 days from thedate of the order, if no order is passed by theAdjudicating Authorityunder PMLA thatthe said property is involved in moneylaundering.However, within said 180 days,if the Adjudicating Authority, by an order,records a f inding that properties are not



involved in money laundering, the order ofprovisional attachment shall cease to haveeffect from the date of such order of theAdjudicating Authority [Section 5(3)].

Q.15. What i s the r emedy avai l able t o aaggr ieved person, where the proper ty isprovisionally attached?

A.15. It has been provided in the Act that beforerecording the finding that all or any of theproperties are involved in money laundering,the Adjudicating Authority has to issue a showcause notice of not less than thirty days to theaggrieved person. The aggrieved person at thisstage can submit his reply and attend thehearing before the Adjudicating Authority topresent his defence [Section 8(1)].

Q.16. What wi ll happen i f the Adj udicat ingAuthor ity records the finding that the allor any of the proper ties are involved inmoney launder ing?

A.16. Where the Adjudicating Authority decidesthat any property is involved in money-laundering, he shall, by an order in writing,confirm the attachment of the property. Suchattachment shall— (a) continue during thependency of the proceedings relating to anyoffences under this Act before a court orunder the corresponding law of any othercountry, before the competent court ofcriminal jurisdiction outside India, as the casemay be; and(b) becomes final after an orderof confiscation is passed [Section 8(3)].

Q.17. What wil l happen to the seized/frozenrecords after conf iscation of pr oper tyinvolved in money launder ing or used forthe commission of the offence of themoneylaunder ing under Section 8 of PMLA?

A.17. After an order of confiscation of propertiesunder Section 8 has been passed, theAdjudicating Authori ty shall direct therelease of the records to the personfromwhom such records were seized.However,the Director or any other officer authorizedby him in this behalf , may wi thhold therelease of any such record for a period ofninety days if he (Director of Enforcement)

is of the opinion that such property isrelevant for the appeal proceedings under thisAct [Section 21(5 & 6)].

Q.18. Which is the Appellate Author ity againstt he or der passed by Adj udicat ingAuthor ity and what is the time limit to fileappeal?

A.18. The Director or any person aggrieved by anorder made by the Adjudicating Authorityunder this Act, may prefer an appeal to theAppellate Tribunal. Appeal has to be filedwithin a period of forty-five days from thedate of receipt of a copy of the order madeby the Adjudicating Authority. AppellateTribunal mayentertain an appeal after theexpiry of the period of forty-five days if it issatisfied that there was sufficient cause fornot fil ing it within that period [Section 26].

Q.19. Which is the Appellate Author ity againstthe order passed by Appellate Tr ibunaland what is the time limit to file appeal?

A.19. Any person aggrieved by any decision ororder of the Appellate Tribunal may file anappeal to the High Court within sixty daysfrom the date of communication of thedecision or order of the Appellate Tribunalto him on any question of law or fact arisingout of such order. Thus appeal can be filedbefore High Court on any question of lawor fact.High Court may, if it is satisfied thatthe appellant was prevented by sufficientcause from filing the appeal within the saidperiod, allow it to be filed within a furtherperiod not exceeding sixty days [Section 42].

Q.20. Whether t he pr oper t ies involved inmoney launder ing located in India can beconfiscated, where the offence of moneylaunder ing has been committed outsideIndia?

A.20. The properties involved in money launderinglocated in India, where the offence of moneylaundering has been committed outside India,can be ordered to be conf iscated by theSpecial Court/Adjudicating Authority on anapplication moved to the Special Court/Adjudicating Authority [Section 58B & 62A].



Q.21. What is the punishment if a person beinglegally bound to state the truth of anymatter refuses to answer any question putto him, refuses to sign any statement madeby him, or omits to attend or producebooks of account or documents at theplace or time in compliance of summonissued under section 50?

A.21. Penalty – A sum which shall not be less thanfive hundred rupees but which may extendto ten thousand rupees for each such defaultor failure, can be imposed. Further, a personwho intentionally disobeys any directionissued under Section 50 shall also be liableto be proceeded against under Section 174of the Indian Penal Code, 1860 [(Section 63(3 & 4)].

Q.22. Whether a suit can be brought in civilcour t t o set aside or modi f y anypr oceedi ngs taken or made underPMLA, 2002?

A.22. No suit can be brought in any civil court toset aside or modify any proceeding taken ororder made under PMLA, 2002 and noprosecution, suit or other proceeding shalllie against the Government or any officer ofthe Government for anything done orintended to be done in good faith under thePMLA, 2002 [Section 67].

Q.23. What is the mechanism to recover the fineor penalty imposed on any person underSection 13 or Section 63?

A.23. Where any fine imposed on any personunder section 13 or section 63 is not paidwithin six months from the day of impositionof fine or penalty, the Director, FIU-Ind orDirector of Enforcement or any other officerauthorised by them in this behalf may proceedto recover the amount from the said personin the same manner as prescribed in ScheduleII of the Income tax Act, 1961 (43 of 1961)for the recovery of arrears and he or anyofficer authorised by him in this behalf shallhave al l the powers of the Tax RecoveryOfficer mentioned in the said Schedule forthe said purpose [Section 69].

Q.24. What are provisions when the offence ofmoney l aunder ing is commi tt ed bycompanies?

A.24. (1) Where a person committ ing acontravention of any of the provisions of thisAct or of any rule, direction or order madethere under is a company, every person who,at the time the contravention was committed,was in charge of, and was responsible to thecompany, for the conduct of the business ofthe company as well as the company, shall bedeemed to be guilty of the contravention andshall be liable to be proceeded against andpunished accordingly :Provided that nothingcontained in this subsection shall render anysuch person liable to punishment if he provesthat the contravention took place without hisknowledge or that he exercised al l duediligence to prevent such contravention.(2)Notwi thstanding anything contained insubsection (1), where a contravention of anyof the provisions of this Act or of any rule,direction or order made there under has beencommitted by a company and it is proved thatthe contravention has taken place with theconsent or connivance of, or is attributable toany neglect on the part of any director,manager, secretary or other officer of anycompany, such director, manager, secretary orother officer shall also be deemed to be guiltyof the contravention and shall be liable to beproceeded against and punished accordingly.(3) Further, a company may be prosecutednotwithstanding whether the prosecution orconviction of any legal juridical person shallbe contingent on the prosecution or convictionof any individual [Section 70].

Q.25. What wil l happen i f ther e is conf lictbetween the provisions of PMLA, 2002and other Acts / laws?

A.25. The provisions of PMLA, 2002 have over-riding effect, notwi thstanding anythinginconsistent therewith contained in any otherlaw for the time being in force [Section 71].

❉ ❉ ❉



CA. Pamil H. [email protected]

From Published Accounts

Particular description

Technical know how Over the useful l i fe ofunderlying assets

Computer software Over the period of 5 year

Development right Depleted in proportion ofoi l and gas producti onachieved vi s-a-vi s theproved reserves (net ofreserves to be retain tocover abandonment cost asper the production sharingcontract and thegovernment of indi a’sShare i n reserves.where appl i cabl eConsidering the estimatedfuture expenditure on thedeveloping the reserves asper technical evaluation

Other Over the peri od ofagreement of right to use,provided in the case of jetty,aggregate amountamortized to date is not lessthan the aggregate rebateavailed by the company.

Chowgule Steamship L imited

Fixed assets (other than building ) are stated atpurchase price and exchange difference arising onthe conversion of foreign currency borrowing forthe acquisition of the ship from outside India at theyearend date and the exchange difference on thepayment of those borrowing during the year debited/ credited to the profit & loss statement .

Building has been revalued on 31st march 2002.

The company depreciates its fleet of ship on thestraight line basis as per the useful life as prescribed

AS- 6 Depreciation –Significant Accounting Policy

Reliance Industr ies L imited

Tangible assets

Depreciation on the fixed assets is provided to theextent of depreciable amount on the written downvalue (WDV) method except in case of assetspertaining to ref ining segment and SEZ uni tdeveloper where depreciation is provided on straightline method (SLM). Depreciation is provided basedon the useful life of the assets as prescribed inschedule 2 of the companies act, 2013 except inrespect of following assets, where useful life isdifferent then those prescribed in schedule 2 areused ;

Particular description

Fixed bed catalyst over its useful life as(useful life 2 year technical assessedor more)

Fixed bed catalyst 100% depreciation in the(useful life 2 year or year of additionmore)

assets acquired from over the period of lease1STapril, 2001 under termfinance lease

Premium on over the period of leaseleasehold land term

In respect of additions or extensions forming an partof existing assets asset and insurance spares,including incremental cost arising on the accountingof translation of foreign currency liabilities for theacquisition of fixed assets, depreciation is providedas aforesaid over the residual life of the respectiveassets.

Intangible assets

These are amortized as under


in the schedule 2 of the company act 2013 the costof second hand ship and other capital assets additionthere to are depreciated as reference to their residuallive. Other assets are depreciated on written downvalue basis as per the useful life as prescribed inthe schedule 2 to the company act 2013

Hove Services L imited

(1) Parent and Indian subsidiar ies

(a) Tangible assets – deprecation on the fixedassets is provided based on useful life ofthe land in the manner prescribed in thepart C of the schedule 2 of the companyact 2013 or on the management estimatedof use full life the assets .

Investment in the propriety is amortizedover the period of lease

(b) Intangible Assets – software product(meant for the sale) are amortized over itsestimated useful l ife of 8 year. othersoftware product are depreciated over itsperiod of license

(2) Foreign subsidiar ies

Depreciation is provided on the straight linemethod at the following rates determine basedon management estimate of the useful life ofthe assets.

Fixed assets useful life in the year

Computer 2-5

plant &machinery 8-10

furniture and fixture 12-16

software product 3-8

goodwill 8

2210. present to the companies act 2013 (“theact”) coming in to effect from 1st April 2014,the group has realigned the remaining usefullife of its fixed assets in accordance with theprovision of prescribed under schedule 2 of theact. Consequently in case of assets which havecompleted theory use full life , carrying value(net of the residual value ) as at 1st April 2014


amounting to Rs. 863920/- has been adjustedto reserves. Also carrying value of other assets(net of residual value) is being depreciated overthe remaining useful life. Consequently, thedepreciation and amortization expenses for theyear ending 31/03/2015 is higher by theRs.749880/- (net of deferred tax Rs.311274/-).

FIB Industr ies L imited

Depreciation on tangible fixed assets has beenprovided on the straight line method as per usefullife prescribed in schedule 2 of the company act,2013 except in respect of tools and moulds in whosecase the life of the assets is assessed as 5 year basedon technical advice, taking into accounts the natureof the assets, the estimated usage of the asset, theopening condition of the assets, past history of thereplacement , anticipated technological changemanufacture warranties and maintenance supportsetc.

The cost of lease hold land is amortized over theperiod of lease.

Intangible assets are amortized over the bestestimated of its useful life on a straight line basis.The Estimated useful life currently ranges from 3to 5 year.

Chemfab Alkalis L imited

Fixed assets are recorded at cost less accumulateddepreciation. The company capi talizes all costrelating to acquisition and installation of fixed assets.cost of spare relating to specific item of fixed assetsid capitalized. Cost of modification that enhancethe operating performance or extend the useful lifeof fixed assets are also capitalized where there iscertainty of deriving future economic benefit fromthe use of the such assets.

Eligible borrowing cost is capitalized as part ofqualifying fixed assets. Other borrowing cost areexpensed.

Advance paid toward the acquisition of fixed assetsoutstanding at each balance sheet date are disclosedas” capital advance “ under the long term loan andadvance and cost of fixed assets not ready to use


before such date are disclosed under “capi talworking in progress “.

Fixed assets are depreciated pro- rata to the periodof use, based on straight line method at the rateprescribed under schedule 14 of the companies act,1956 or based on the depreciation rates as per theestimated useful life of assets whichever is higher.

As the certified by the management and relied uponby the auditor, based on the technical assessmentof the management

Assets costing less than Rs. 5000/- are ful lydepreciated in the year of addition, as and whencapitalized.

Depreciation is accelerated on fixed assets, basedon their condition, usability etc. as per the technicalestimated of the management, where necessary.

VA Tech Webag L imited

Tangible assets

Tangible assets are stated at acquisition cost lessaccumulated depreciation and impairment losses,if any, cost of acquisition comprises of purchaseprice and directly attributable cost of bringing theassets to its working condition for the intended useand is net of refundable duties and as applicableCost of intangible assets are not ready for theintended use before such date is disclosed as capitalwork in progress.

Subsequent expenditure incurred on an item oftangible assets is added to the book value of thatasset only if this increases the future benefit fromthe existing assets beyond its previously assessedstandard of performance.

Gain or losses that arises on disposal or retirementof an assets are measured as the difference betweennet disposal proceeds and the carrying value of anassets and are recognized in the statement of profitand loss when the assets is derecognized.

Depreciation on assets is provided on straight linemethod at the rates and in the manner prescribed inschedule 2 of the companies, act, 2013 except forvehicle where the management believes that theuseful life of 5 year would best represent the period

over which the management except to use theseassets. Hence the useful li fe of these assets isdi fferent from that prescribed under part C ofschedule 2 of the companies act, 2013 during theyear the companies has change the pol icy ofdepreciation from written down value method tostraight line method

Tangible assets held for sale or retired from activeuse are stated at the lower of their net book valueand net realizable value and shown separately inthe stand alone in financial statement. In additionany expected loss is recognized immediately in thestatement of profit and loss.

Intangible assets and amor tization

Intangible assets acquired separately are measuredon ini tial recognized at cost. Following initialreorganization the intangible assets are carried outat cost less accumulated amortization and areaccumulated impairment if any.

Software i s states at cost l ess accumulatedamortization and is being amortized on a straightline basis over the estimated useful life of 5 year

Gain or losses that arise on disposal or retirementof an intangible assets are measured as the differencebetween net disposal proceeds and the carryingvalue of an intangible assets and are recognized inthe statement of profit and loss when the intangibleassets is derecognized .

The amortization period and the method arereviewed at each balance sheet date. If the excepteduseful life of the assets is significantly different fromthe previous estimates, The amortization period ischanged accordingly. If there has been a significantchange in the excepted pattern of economic benefitf rom the assets, the method the method ofamortization is change to reflect the change patternsuch change are accounted in accordance withaccounting standard( AS ) 5, net profit or loss forthe period , prior period item and change inaccounting policies.

❉ ❉ ❉



CA. Kunal A. [email protected]

From the Government

Income Tax

1) CBDT notified cost inflation index for thef i nancial year 2015-16 as 1081, videnotification no. 60 , dated 24/07/2015.

2) CBDT notifies new ITR forms 3,4,5,6 and 7vide notification no. 61, dated 29/07/2015.

3) The Central Government wi th respect toregistration of persons, due di ligence andmaintenance of information, and the Board for

matters relating to statement of reportableaccounts, hereby make the rules 114F, 114Gand 114H after the rule 114E further to amendthe Income-tax Rules, 1962. They shall comeinto force on the date of their publication in theOfficial Gazette.

(For full text refer notification no. 62, dated 07/08/2015)

❉ ❉ ❉

RepresentationDate: 27.08.2015

To,Pr. Chief Commissioner of I . Tax, Gujarat (CCA)Aayakar Bhavan,Ashram Road, Ahmedabad.Respected Sir,Sub: Request for non-init iation of penalty u/s. 272A(1)(c) & other applicable provisions of I . T.

Act, 1961 due to Rally & Curfew in Gujarat1. A massive kranti rally was organized at GMDC ground in Ahmedabad in the morning of 25th August,

2015 by Patidar Anamat Andolan Samiti (PAAS) and lakhs of supporters across the Gujarat trooped intothe city for participation in rally. Most of the roads in city were blocked and l ife was brought to astandstill on 25th August, 2015. At the end of the rally there was a police lathicharge to disperse thesupporters, which resulted in violence all over Ahmedabad. Violence was also spread across the north aswell as the south Gujarat towns and indefinite curfew was clamped f rom the evening of 25th August,2015, by Police.

2. This was followed by Gujarat Bandh on 26th August, 2015 & clamping of curfew in various parts ofAhmedabad as well as the Gujarat State. Schools & colleges remained closed as also a large businessestablishments. The many cities in Gujarat have not returned to normalcy till date.

3. As a result of above, several assessees/professionals have not been able to attend various I.T. proceedingsscheduled since 25th August, 2015.

4. We hereby earnestly request your good self to pass on necessary instructions to the cadres for non-initiation of penalty proceedings u/s. 272A(1)(c) & other applicable provisions, for non attendance ofhearings since 25th August , 2015 & oblige.

Thanks & Regards,Yours Truly,For, Chartered Accountants Association, Ahmedabad. Sd/- Sd/- CA. S. K . Sadhwani CA. Aj it C. Shah Chairman, L & R Committee Convener, L & R Committee Mob. No.: + 91-94270 27284 Mob. No.: +91-98240 50526


RepresentationDate: 28th August, 2015

To,Hon. Finance M inister,Government of IndiaMinistry of FinanceRoom No. 46, North BlockNew Delhi - 110 001.

Respected Sir,Sub: Request for extension of due date for fil ing of return of income and tax audit repor t, due to

violence, imposition of cur few & disruption of communication lines in var ious par ts of Gujarat– AY 2015-16

1. Sir, as you are aware, Ahmedabad & various parts of Gujarat witnessed sudden eruptions & violencesince 25th August, 2015. At least 9 people are killed in various parts of Gujarat, 9 police stations ofAhmedabad and 8 other cities of the state were under curfew and the situation in not yet normal. Thenews hit the headlines in print & electronic media.

2. The Authorities have discontinued the internet services since the midnight of 25th August, 2015 for fewdays. The other communication lines are disrupted all over the state.

3. Under these circumstances, assessees find it almost impossible to file their returns by 31st August, 2015i.e. the extended due date. CAs/Professionals/ Accountants have also not been able to function, resultinginto the delay of tax audits.

4. In view of above, on behalf of assessees of Gujarat, we earnestly request you to instruct CBDT toextend the due date for fil ing of return of income by assessees in the state of Gujarat as under:i. The due date for fil ing the return of income from 31st August, 2015 to 30th September, 2015.ii. For the assessees, where the due date for fil ing the return of income is 30th September, 2015,

the due date for fil ing return of income shall be extended to 31st December, 2015, alsoconsider ing the fact that the last schema for fil ing the return of income has been releasedonly in fir st week of August, 2015.

5. Sir, kindly consider above request favorably & oblige.Thanks & Regards,Yours Truly,For, Char tered Accountants Association, Ahmedabad.

Sd/- Sd/-

CA. S. K . Sadhwani CA. Aj it C. ShahChairman, L & R Committee Convener, L & R CommitteeMob. No.: 94270 27284 Mob. No.: 98240 50526

Copy To: Hon. Chairman Central Board of Direct Taxes, North Block, Secretariat, New Delhi – 110 001.

(With a request to do the needful in this matter)


Acr oss1. Provisions of Sec. 179 can be invoked when

any tax due from ______________ cannot berecovered.

2. ________ has power to allow a claim which isnot made in the return.

3. ____________ is not expenditure and hencenot to be considered for calculation under rule8D.

Down4. _________ is the biggest hurdle in sel f

realization.5. All assessees who file return through ______

mode are not required to send copy of ITR-Vto CPC, Bangalore.

6. RRC of the Association was held at ________,Udaipur

ACAJ Crossword Contest # 16

Notes:

1. The Crossword puzzle is based on previousissue of ACA Journal.

2. Two lucky winners on the basis of a draw willbe awarded prizes.

3. The contest is open only for the members ofChartered Accountants Association and nomember is allowed to submit more than oneentry.

ACAJ Crossword Contest # 15 - SolutionAcross1. Compensatory 2. Fourteen3. Deserve

Down4. Advance 5. Business6. Five

❉ ❉ ❉

Winners of ACAJ Crossword Contest # 15

1. CA. Surya Chhabria

2. CA. Rakesh Gupta

4. Members may submi t thei r reply ei therphysically at the office of the Association orby email at [email protected] on orbefore 15/09/2015.

5. The decision of Journal Committee shall be finaland binding.

C O N T E N T S this country the birth in a community is making a person lucky instead of his hard...

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