Volume I Part 5 December 25, 2012 1 Business Advisor

Business

Advisor (Fortnightly inputs for professionals and executives)

Volume I Part 5 December 25, 2012

Volume I Part 5 December 25, 2012 2 Business Advisor

Contents

Residence Certificate Rules - T. N. Pandey

Secretarial Standards - Dr S. Chandrasekaran

Vegetables on EMI - Bimbadhar Mishra

Service tax on reimbursements ultra vires - Dr Sanjiv Agarwal

Cooperative governance - Dr B. Yerram Raju

Corporate Social Responsibility (CSR)

Rahul Pillai, Country Manager India, Interem

Year-end observations

Manish Garg, President, Everest Industries Ltd

Ankur Bhatia, Executive Director, Bird Group

Abhijita Kulshrestha, Gemstone Universe

Sudarshan Boosupalli, GM-India, Ruckus Wireless Inc.

Bijay Agarwal, Managing Director, Salarpuria Sattva

Preenand Premachandran, CEO, Hebron Properties

Suraj H. Asrani, COO, Cornerstone Properties

Asif Upadhye, CFO, Never Grow Up

Information - Section 80CCG

Case laws update - V. K. Subramani

(Cover image: Toshiba Satellite laptop keyboard)

Disclaimer: "Management and editors do not necessarily agree with the

views of the authors in their articles and of the readers in their letters,

and of the query editors in their replies. The editors, authors and / or

publishers shall not be responsible for any kind of result generated out

of any action taken on the basis of suggestions, etc., made in any of the

write ups, interviews contained in any part of the magazine or for any

error, omission, commission to any person, whether subscriber or

otherwise. The copyright of all the materials printed herein including

articles, queries and replies etc., rests with the publishers".

Volume I Part 5 December 25, 2012 3 Business Advisor

Tax Residence Certificate Rules are half-

baked response to treaty-shopping

T. N. Pandey

The object of Double Taxation Avoidance Agreements

(‘Treaties’ for short) is to eliminate the double taxation of

certain incomes where residents of one country derive income

from a source in another country and also aim to ensure

facilitating international trade and commerce, flow of

investments as also equitable collection of revenue. Obviously,

benefits of such treaties can legitimately be availed of by the

residents of the contracting States. However, the residents of other (third)

States misuse the bilateral tax treaties through treaty-shopping which is

done through the establishment of base

companies solely for enjoying the benefits of tax

treaty rules without being a party to these.

Indo-Mauritius tax treaty

Indo-Mauritius tax treaty is a classical example

to illustrate how treaties are abused. Treaty-

shoppers have made Mauritius a preferred

destination for investments in India. Because of

loopholes in the treaty, 40% of FDI comes to India

through Mauritius! One major abuse of this

treaty is that a mere certificate of residence from

Mauritius, which cannot be questioned by the AO, confers tax exemption in

respect of capital gains! Umpteen instances from the decisions of Courts

and Rulings from Authority for Advance Rulings (AAR) have demonstrated

misuse of the treaty. One instance of abuse can be seen from the recent

ruling of AAR in SmithKline Beecham Port Louis Ltd., in re (2012) 209

Taxman 596. The company before the AAR claimed to be a tax resident of

Mauritius. It is a part of ‘G’ group of companies. Its shares are held by a

Company ‘S’ of United Kingdom. The applicant holds 99.9 per cent shares of

an Indian company ‘GS’ which is also a part of ‘G;’ group. The applicant

proposed to transfer its shares in ‘GS’ to ‘K’ a Singapore based company. It

is also a part of ‘G’ group of company. The claim before the AAR was that

the income derived by the proposed sale would be capital gains and though

it is taxable in India under the Income-tax Act, it is not taxable in India in

view of Article 13 of Double Taxation Avoidance Convention between India

and Mauritius. On these facts and issues raised, the AAR held in favour of

Treaty-shoppers

have made

Mauritius a

preferred

destination for

investments in

India.

Volume I Part 5 December 25, 2012 4 Business Advisor

applicant deciding that since there is no material to rebut the presumption

of tax residency of the applicant it is eligible for claiming the benefit of the

India-Mauritius DTAC by invoking section 90(2). If so, it has to be ruled that

article 13 is attracted and going by paragraph 4 thereof, the capital gains is

not chargeable to tax in India.

CBDT’s blessings to misuse of Mauritius treaty

The CBDT issued Circular No. 789 dated 13.4.2000 to the effect that

wherever a certificate of residence is issued by the Mauritius authorities,

such certificate is to constitute sufficient evidence for accepting the status of

residence as well as beneficial ownership for applying the Convention

(Treaty). This test of residence is also to be applied in respect of income from

capital gains on sale of shares. Accordingly, FIIs, etc., which are resident in

Mauritius will not be taxable in India on income from capital gains arising

in India on sale of shares as per paragraph 4

of article 13 of the Convention of tax treaty

between India and Mauritius on production of

residence certificate.

Delhi HC’s decision

The Delhi High Court in the case of Shiva Kant

Jha (2002) 256 ITR 563(Del) did not consider

CBDT’s circular valid. It observed that the

function of an ITO is quasi-judicial in nature.

It is for the purpose of finding out as to

whether an assessee can take shelter under

double taxation avoidance treaty or not; he is

entitled to make such enquiries, which are

permissible in law. For that purpose, it not only is entitled to lift the

corporate veil but also is entitled to find that not only as to whether a

company is actually a resident of Mauritius or not, and or whether it is

paying income-tax in Mauritius or not, or in fact the company is not a

resident of Mauritius at all. Conclusiveness of a certificate of residence

granted by the Mauritius tax authorities is not contemplated under the

treaty or under the Act. Taking undue advantage of a scheme only for the

purpose of avoidance of tax cannot but be deprecated and this treaty-

shopping, which amounts to abuse of Indo-Mauritius bilateral treaty, may

amount to fraudulent practice and cannot be encouraged. Unfortunately,

this decision of the HC was contested by Government of India and the

Circular was considered valid by the apex court not on merits but on

technical ground that the CBDT is competent to issue such circular.

Conclusiveness of a

certificate of

residence granted

by the Mauritius

tax authorities is

not contemplated

under the treaty or

under the Act.

Volume I Part 5 December 25, 2012 5 Business Advisor

Nonetheless, the Delhi HC’s decision indicates that the CBDT’s circular is

not well-conceived.

Such abuses have been continuing for years with the Government’s

connivance. However, the FM took note of (or was forced to do so by adverse

criticism) such practices only in the Finance Act, 2012 when sub-sections

(4) [identically worded] were introduced in sections 90 and 90A of the

Income-tax Act, 1961, barring availing of tax benefits under tax treaties

without Tax Residence Certificate.

The objective behind such provisions has been explained in the Explanatory

Memorandum to Finance Bill, 2012 thus:

“….It is noticed that in many instances the taxpayers who are not tax resident

of a contracting country do claim benefit under the DTAA entered into by the

Government with that country. Thereby, even third-party residents claim

unintended treaty benefits… Therefore, it is proposed to amend Section 90

and Section 90A of the Act to make submission of

Tax Residency Certificate containing prescribed

particulars, as a necessary but not sufficient

condition for availing benefits of the agreements

referred to in these Sections.”

These tax provisions have been supplemented by

Rules and forms by promulgation of Income Tax

(12th Amendment) Rules, 2012. These changes

prescribe the furnishing of information for

getting TRCs by non-resident and resident

taxpayers and are intended to prevent third-party residents from taking

unintended tax benefits. These, however, leave much to be desired.

Certain issues concerning issue of TRCs need deliberation

(A) In case of non-residents

Such assessees need to give information regarding their activities.

Without such information, the system can be misused by fly-by-night

operators as is happening in the context of Mauritius treaty.

The format in which certificate is to be given (in cases of non-

residents) to ensure uniformity and completeness, should be a part of

tax treaties (DTAAs).

It should be clarified that the AO getting the TRC can question the

information given in it and its genuineness unlike as in the case of

Mauritius where the CBDT has specifically barred any enquiry by its

The Delhi HC’s

decision indicates

that the CBDT’s

circular is not

well-conceived.

Volume I Part 5 December 25, 2012 6 Business Advisor

circular no. 789. The observation concerning TRC that “it is a

necessary but not sufficient condition for availing benefits of the

agreements” shows that the AO is not barred from making scrutiny.

Clarity needs to be brought in this regard.

Whether new TRCs would differ from those that are being issued by

Mauritius? There is no case for making any discrimination in this

regard?

In view of new TRCs CBDT’s circular No. 789 loses its relevance and

needs to be withdrawn.

With the scheme of new TRCs coming into operation, the Shome

Committee’s recommendation that (a) GAAR provisions should not

apply where circular No. 789 is applicable; and (b) that circular no.

789 should continue to apply in cases of Mauritius taxpayers, become

redundant. It may be so stated.

(B) TRC in the case of residents

The format for application for TRC and certificate should be necessary

only in cases of new taxpayers, as in the case of existing taxpayers,

whether a person is resident or not is already available with the AO in

the return filed. The existing taxpayers should not be burdened for

applying for TRCs in an elaborate way. A simple application should

do.

A time limit should be

fixed within which TRC would

be issued after receipt of

application in cases of

resident taxpayers.

Application fee needs to

be charged for issuing TRCs to

avoid infructuous work.

The Government seems to

have moved halfway

reluctantly. To make the

scheme to succeed, it needs to

be fine-tuned on the lines

indicated.

(T. N. Pandey is former

Chairman, Central Board of

Direct Taxes)

Volume I Part 5 December 25, 2012 7 Business Advisor

Secretarial Standards strengthen

corporate governance

Dr S. Chandrasekaran

The clearance of the Companies Bill by Parliament on the

night of 18th December, 2012, is a welcome move. The

objectives of the Bill, inter alia, are enhanced disclosure and

transparency, protection of interest of all stakeholders for

good corporate governance, and at the same time omitting

unwanted and obsolete compliance requirements. On its

enactment, it would be corporate-friendly for proper

compliance and at the same time have

better regulation of corporate India.

It is also interesting that the Government

has felt the importance of introducing non-

financial standards besides financial

standards and has given due statutory

recognition to Secretarial Standards. The

Act provides broad parameters for proper

compliance, but companies in the absence

of clear-cut information follow divergent

secretarial practices and compel the

Government to issue circulars and

clarifications from time to time.

Secretarial Standards issued by ICSI

In the changing economic and commercial climate, nationally as well as

internationally, modern methods of convening meetings including audio and

video visuals safeguard the interest of investors’ fraternity and all

stakeholders, but divergent methods and practices are being followed by

corporate professionals. In recognition of the practical difficulties being

faced by professional members, the Institute of Company Secretaries of

India (ICSI) constituted Secretarial Standards Board with the aim of

preparing secretarial standards. The basic aim is to integrate, harmonise

and standardise all diverse secretarial practices for better corporate

governance and it was left to the corporate sector to adopt such secretarial

standards voluntarily. Many of the listed companies follow the secretarial

standards in letter and spirit for better corporate governance. The

Standards are common for both listed and unlisted companies.

The basic aim of

Secretarial Standards

is to integrate,

harmonise and

standardise all diverse

secretarial practices

for better corporate

governance.

Volume I Part 5 December 25, 2012 8 Business Advisor

Acceptance of suggested standards by Government

Some of the recommendations made in the Standards has been given due

importance by the Government and find place in the Companies Bill.

Gap between two board meetings: The Act requires to have a proper board

meeting once in a quarter thereby leaving a change to corporate to have a

gap between two board meetings to the extent of just a few days short of six

months. However, listed companies have to ensure that the gap between two

board meetings does not go beyond 120 days. Secretarial Standards suggest

that there should not be a gap of more than 120 days and in the Bill the

same has been introduced.

Length of Notice of Board Meeting: There being no mention about the length

of notice for convening a board meeting, companies follow diverse practices

and small companies tend to misuse such freedom. The suggestion of 15

days notice for convening a board meeting in the Standard has been

considered and now it is kept that a minimum of seven days notice is to be

given for convening a board meetings.

Gifts at AGM: The recommendation made in the Standard for General

Meeting that no gifts shall be given at the annual general meeting has

already been considered by the Government and it has issued a draft

circular in this regard.

Recording of general meeting proceedings: Elaborate information on

preparation and maintenance of general meeting’s proceedings has been

provided in the Standard. The Government has now given a thought and

introduced that a Report of all Annual General Meetings has to be filed with

the Registrar of Companies. This would further strengthen the investors’

confidence and at the same time available in a public portal for their

information.

A place in the Companies Bill

The ICSI has so far come out with following ten Secretarial Standards which

are recommendatory in nature:

SS-1 in relation to meetings of Board of Directors;

SS-2 in relation to general meetings;

SS-3 in relation to dividend;

SS-4 in relation to registers and records;

Volume I Part 5 December 25, 2012 9 Business Advisor

SS-5 in relation to minutes;

SS-6 in relation to transmission of shares and debentures;

SS-7 in relation to passing of resolutions by circulation;

SS-8 in relation to affixing common seal;

SS-9 in relation to forfeiture of shares;

SS-10 in relation to Board’s report.

The Secretarial Standards Board (SSB) was constituted with the objective of

formulating Secretarial Standards with eminent and senior members of the

profession as its members. Besides, SSB is represented by the Ministry of

Corporate Affairs, the Securities and Exchange Board of India, Chambers of

Commerce and by both professional bodies viz. the Institute of Chartered

Accountants of India and the Institute of Cost Accountants of India.

The Government, having considered the merits of Secretarial Standards,

which would further strengthen the corporate governance, has now made it

mandatory for the first two standards on Meetings of Board of Directors and

General Meetings for compliance by the corporate India. No doubt, such an

initiative would play a positive role and sooner or later all Secretarial

Standards would be made mandatory as in the case of financial standards.

(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates,

Company Secretaries, Delhi www.cacsindia.com)

Volume I Part 5 December 25, 2012 10 Business Advisor

Service tax on reimbursements is now

ultra vires

Dr Sanjiv Agarwal

Prologue

Service providers and professionals are aware that Service

Tax is payable @ 12.36 per cent on the value to taxable

services which implies gross amount charged by the service

provider for such service provided or agreed to be provided.

The valuation of services is further governed by valuation

rules wherein it has been provided that if some expenses or costs are

incurred by the service provider in the course of provision of service, all

such costs shall be treated as a part of the consideration and be included in

the value for the purpose of Service Tax. However, if such expenses are

incurred as a pure agent of the service receiver, they

are excluded from the value, subject to seven

stringent conditions so much so that even where it is

a case of reimbursement, in most of the cases, it may

not get excluded.

Recent court verdict

As a major relief to all the service providers, the

Delhi High Court in Intercontinental Consultants and Technocrats Pvt Ltd v.

Union of India (2012) 12 TMI 150(Delhi); TIOL – 966- HC-DEL-ST has

overruled this provision stating that imposing Service Tax on

reimbursements is not in the scheme of law and such a provision is ultra

vires (illegal) the Finance Act, 1994 itself.

In this judgment, the court has held that what is to be taxed is the gross

amount charged by the service provider ‘for such service’. The words ‘such

service’ are important for taxation. It is only the value of ‘such service’ which

can be taxed and nothing else. The value of service, to be taxed, can,

therefore, never exceed the gross amount charged by the service provider for

such service provided. Thus, there can be no Service Tax on

reimbursements as such reimbursements (say, travelling, accommodation

etc.) as it would amount to double taxation.

The court has upheld that Service Tax cannot be levied on reimbursement of

expenses, that too a case of consulting engineer’s services. It would also

The words

‘such service’

are important

for taxation.

Volume I Part 5 December 25, 2012 11 Business Advisor

imply that such reimbursements cannot be taxed in case of other service

providers also which may include architects, management consultants,

chartered accountants, company secretaries, cost accountants, advocates,

scientists or even a beautician.

The issue of imposing Service Tax on reimbursement of expenses has always

been a issue of debate and dispute both in pre- and post-2006 era when

Service Tax (Determination of Value) Rules, 2006, were notified, and concept

of ‘pure agent’ was brought in. ‘Pure agent’ in the rules has been so defined

that service provider can never be called a pure agent so long as he utilises

or consumes the services, for which reimbursement is sought in rendering

of output taxable service. Such a rule defeats the very purpose of

reimbursement and such amounts are subjected to double taxation: one,

when original service provider provides such service; and, two, when

reimbursement is sought, even on actuals without any mark-up or profit

element.

Other relevant pronouncements

Earlier in CCE & C, Rajkot v. Reliance

Industries Ltd (2012) 37 STT 359 (Supreme

Court), where Department was in appeal,

the apex court held that expenses incurred

on account of reimbursable expenses do not

form part of value of taxable services. Hence

reimbursable charges incurred by assessee

for travelling allowances to consulting

engineers are not required to be included in

the fees for services so paid by them for the

purpose of Service Tax. But the Supreme Court did not hold that Rule 5(1)

is ultra vires the provisions of section 67 of the Finance Act, 1994 which

provides for provisions on valuation of taxable services.

However, contrary to a clear stand taken by Delhi High Court and Supreme

Court, a Larger Bench of CESTAT in Shri Bhagavathy Traders v. CCE (2011)

33 STT 1 (Cestat, Bangalore), earlier held that the cost of inputs or input

services which go into the manufacture or output services cannot be

considered as reimbursements for service provider. The reimbursement will

arise only when the person actually paying was under no obligation to pay

the amount and he pays the amount on behalf of the buyer of the goods and

recovers the said amount from the buyer of the goods. Only when the

service recipient has an obligation legal or contractual to pay certain

amount to any third party and the said amount is paid by the service

The apex court held

that expenses

incurred on account

of reimbursable

expenses do not form

part of value of

taxable services.

Volume I Part 5 December 25, 2012 12 Business Advisor

provider on behalf of the service recipient, the question of reimbursing the

expenses incurred on behalf of the recipient shall arise. The claim for

reimbursement towards rent for premises, telephone charges, stationery

charges, etc., amounts to a claim by the service providers that they can

render such services in vacuum. What are cost for inputs services and

inputs used in rendering services cannot be treated as reimbursable costs.

There is no justification or legal authority to artificially split the cost

towards providing services partly as cost of services and the rest as

reimbursable expenses.

In such cases, effectively, double taxation takes place as in the first place,

the original service provider charges tax and then when reimbursement is

claimed, even without any margin or profit on actuals only, then also

Service Tax is leviable. This interpretation is a major relief to the service

providers but it may be short-lived as the Government is most likely to

challenge the same.

Epilogue

Now that the Delhi High Court has announced its judgment, the ball lies in

the court of the Government of India. Since this judgment is likely to have a

major impact on Revenue and will also unsettle the settled position on

interpretation of law on reimbursement of expenses, it will create a lot of

confusion in the minds of assessees as well as service providers. The

judgment is most likely to be appealed against and may also get stayed. If

not or if it takes time, the Government has one more weapon in its armoury;

i.e., to amend the law in the ensuing Budget and it may be pleased to do so

retrospectively for which it is known for.

(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Chartered

Accountants, Jaipur www.ascoca.org)

Volume I Part 5 December 25, 2012 13 Business Advisor

Cooperative governance

Dr B. Yerram Raju

The Constitution 97th Amendment Act 2012, one of the

very progressive legislations of the UPA Government,

aims to correct mis-governance of cooperative societies

in the country, among other important provisions, at a

time when speaking of good governance is akin to

smelling jasmine in fish and fowl market. The Act itself

specified that the States shall amend their respective

cooperative Acts before February 14, 2013, one year from the date of

notification of the Act in line with the provisions of this Act. If the States do

not amend their Acts as above, the 97th Amendment Act shall govern the

State Cooperatives.

Article 19(4) defined Cooperative Society as one that is promoted, managed

and controlled by members. This would mean that the control of the

Cooperative Societies to whatever extent it rested with the Registrar of the

Cooperative Societies shall be unconstitutional. All such provisions in the

existing Acts shall be removed from the modified Acts.

It also specified in section 243ZO that such member to participate in

elections should be actively availing the services of the Society and should

be attending its meetings with certain regularity. This called for defining the

Active Member in the new Act of the States.

This Act under article 243ZK also specified that the States shall also set up

a State Election Authority to conduct elections to the Cooperative Societies

in the State and these should be conducted once every five years. If the

State Government so chooses, it can entrust the responsibility to the State

Election Commission, but with specific mention in the newly amended

Cooperative Act. It has also mentioned that such elections should be

conducted in a manner that the new Board should assume charge

immediately after the first Board concludes its term. There are around six

lakh cooperatives in the country with estimated 23 million members. It has

become a habit with the States conducting such elections irrespective of the

party in power to go in for enrolment of members just before elections as

anybody paying a small share capital of ten rupees can become a member.

To prevent such malpractice the Act, in section 243ZO, specifies the

eligibility of members who can participate in voting.

Volume I Part 5 December 25, 2012 14 Business Advisor

The Act clearly defines Board as the ‘Board of Directors or the Governing

Body of the Society, or whatever name called, to which the direction and

control of the management of the affairs of a society is entrusted.’ There is

brazen violation of the Constitution by even the UPA-ruled State like Andhra

Pradesh. The 97th Constitution Amendment Act 2012 dealing with

Cooperative legal reforms and governance statutorily seeks a State Election

Authority to conduct elections to cooperatives and the States are to carry

out all the amendments required before February 14, 2013. The State that

has been postponing elections to cooperatives for the last two years

announced them hurriedly to have the last laugh on their subversive

methods of winning the elections. The new Act would not allow non-active

members to cast their vote. The ruling party is afraid of losing hold on the

cooperative societies that hitherto formed the bedrock of State politics.

States like Tamil Nadu and Karnataka issued ordinances repeating the

Central Act that were returned promptly.

The Board shall have maximum 21 members and

provided for reservation of SC/ST and women not

exceeding three provided the Society base itself

does not have such constituency. General Body has

been given supreme authority thus conferring

autonomy in the Society. The rights of members

have also been defined along with the information

the society should provide to the members and the

regulator. The Board shall have three independent

professional directors but would not have voting

rights. These directors should submit to the

General Body their statement of assets and liabilities and shall not be

defaulters to the society in terms of their obligations.

No Board can be superseded by the Government for more than six months

with the exception of cooperative banks where the supersession can be for

one year under the direction of the RBI.

Governance of cooperatives through this Act provides for better participation

in its management and control and has prospect of superior governance

over the existing Companies, where the shareholders of the Company have

to understand the company only from their half-yearly and annual reports.

Cooperatives as body corporate managed and controlled by members could

compete on their own terms effectively with other forms of business

organisations.

(Dr B. Yerram Raju is Regional Director, PRMIA-Hyderabad www.prmia.org)

The new Act

would not allow

non-active

members to

cast their vote.

Volume I Part 5 December 25, 2012 15 Business Advisor

Corporate Social Responsibility (CSR):

Business leader’s views

Interem

Rahul Pillai, Country Manager India

Save the Children India (STCI), located in Sarai Kale

Khan, New Delhi, was established eight years ago. It

has grown from a handful of children to 525 children

and women who benefit from STCI. This NGO provides

preschool, computer literacy, academic assistance,

vocational training, health/ nutritional education,

anti-trafficking and community awareness. The

American Women Association (AWA) has been

sponsoring the Christmas party in total or in

partnership with other organisations for the past six

years. The party has grown to be the highlight of the

year for the children and women of STCI. Over the years, gifts have been

household goods, toys, sweaters, jackets, school-bags and ladies handbags.

There have been many wonderful volunteers, assisting with gift-giving and

playing Santa (even an Ambassador’s son). The Christmas party is held in a

Hindu Temple for the benefit of a predominantly Muslim community,

sharing a Christian Holiday. It is a unique and wonderful gathering that

celebrates the true essence of the season, peace and goodwill to all.

Transporting 525 gifts usually entailed a well-coordinated caravan of cars.

This year, the NGO was blessed with a helping hand from Interem. The

Interem team helped to load, transport and unload 36 boxes filled with gifts

absolutely free of cost.

(Interem is a part of the Freight Systems Group, a Dubai-based MNC with

business interests in shipping, freight forwarding, supply chain,

warehousing, BPO and relocation services, with presence in 18 countries

and a turnover exceeding $350 million.)

Volume I Part 5 December 25, 2012 16 Business Advisor

Year-end observations

Building solutions

Manish Garg, President, Everest Industries Ltd

How has been 2012 for the industry/ sector/ domain

– what has changed during the year and also what

has not, both in tune and contrary to expectations?

The year 2012 was a mixed lot for the Indian

building solution; domestic business did well, and

private sector demand remained robust. However,

slowdown in infrastructure projects affected the

market a little bit. We at Everest Industries Ltd are a

building solutions company. Our order bookings

went up by 25% as compared to previous year, and sales went up by about

10%, the progress has been heartening on account of repeat business from

our major customers. We have done various projects during last one year,

such as a 5-storey building for IIT in Mumbai, 60,000 sq ft.; a

manufacturing facility for Parle Agro, in Banaras, 1,20,000 sq ft.; a factory

for a German multinational in filter business Mann and Hummel Filters at

Bawal, Haryana, 95,000 sq ft.; buildings for Ranbaxy, Wockhardt, Godrej,

Cadbury, Jeumont, Kalpana Industries; actually we completed over 200

projects last year. Acute shortage of trained manpower for design and

execution is a big challenge, everyone wants readymade engineers, no one is

interested in creating them. Everest is doing a lot in this field by training

raw talent under its unique GET/ DET programme wherein fresh engineers

go through a rigorous classroom and practical training in the concerned

domain, before being absorbed as engineers.

Outlook for 2013 in the specific industry/ sector/ domain, with reasoning.

Our target is to double our business in next one year, and we plan to

achieve this through organic growth, better utilisation of our capacities, and

increase in productivity. We also are working upon to increase our

penetration in the market place to be deepest penetrated. We are starting a

roofing factory in Orissa which will be the biggest in the Eastern zone.

Volume I Part 5 December 25, 2012 17 Business Advisor

Aviation

Ankur Bhatia, Executive Director, Bird Group – and Chairman of CII’s

Core Committee on growth potential of civil aviation and airports

The year 2012 saw Indian aviation industry going

through some prominent challenges, which hindered its

projected growth. The downfall of Kingfisher Airlines has

left a negative impact on the Indian aviation industry.

Additionally, the increasing oil prices, decline in

passenger traffic, and liquidity constraints, have

completely jeopardised the economics of some airlines

and continued to strain and drain the limited financial

resources of the airlines.

To address the concerns surrounding the operating viability of Indian

carriers, the Government has initiated a series of measures including FDI in

aviation, direct import of ATF, lifting the freeze on international expansions

of private airlines and financial assistance to the national carrier. Looking at

these changes, 2013 looks bright, as growth is projected with the increase

expected in the passenger demand and traffic. Further with the FDI coming,

the Indian aviation sector is capable of growing 120-130 per cent as more

international carriers will look to invest in domestic airlines. Therefore,

there is an urgent need to have a strong regional infrastructure, as foreign

airlines will look at a strong infrastructure base first, before investing.

Volume I Part 5 December 25, 2012 18 Business Advisor

Gems and jewellery

Abhijita Kulshrestha, Senior Gemmologist and Consultant, Gemstone

Universe

The gems and jewellery industry has definitely been

affected by the economic downturn and the emergence

of better business environment elsewhere (read

China), where there is a decline of 13.19 per cent in

exports as revealed by GJEPC. However, the industry

is hopeful about the coming year.

While the ‘plain vanilla’ yellow gold and diamonds

continue their scintillating hypnotic grip on the Indian

consumer psyche, the Indian markets are fast growing

adventurous about experimenting with coloured gemstones. Precious gems

are fast emerging as the new fashion statement as well as an attractive

avenue of investment.

When the stocks, bullion, dollar, commodities…all continue to remain

uninspiring, precious gemstones are fast emerging as the sound and solid

investment option. The industry is now looking at greater interest from

investors rather than just retail sales.

Volume I Part 5 December 25, 2012 19 Business Advisor

Enterprise IT

Sudarshan Boosupalli, GM-India & SAARC Operations, Ruckus Wireless

How has been 2012 for the enterprise IT space – what has changed during

the year, and also what has not, both in tune and contrary to expectations?

In 2012, the adoption of tablets and smartphones

continued to grow at a fast pace making way for the

players of those segments, but IT managers are no longer

able to stop the mobile devices being used in their

corporate wireless networks. The demand for BYOD (bring-

your-own-device) intensified across all enterprises; it

became a top priority for enterprise to embrace both staff

and visitors.

For successful implementation of BYOD, the wireless

infrastructure must be ready to handle the unique challenges of a mobile

environment – secure, easy on-boarding, and offering IT managers the

visibilities of these devices. Most important of all, their wireless networks

must be able to handle 2x - 3x the device density.

Outlook for 2013, in the enterprise IT space, with reasoning.

As a part of the technologically-

progressive users are constantly on the

go, there is a strong need to manage

the multiple mobile devices. In 2013,

the focus would be on management

solutions for mobile device.

What remains unchanged is the need

to have pervasive performance – a

combination of intelligence features

that help IT managers to automatically

optimise their wireless networks to

offer super reliable, consistent

performance all the time. Ruckus’

BeamFlex has been the proven choice

in many of today’s largest and most

complicated wireless networks in many

major universities, hotels, hospitals

and retail outlets across India.

Volume I Part 5 December 25, 2012 20 Business Advisor

Real estate

Bijay Agarwal, Managing Director, Salarpuria Sattva Group

How was the year 2012 for the real estate industry?

The growth of the real estate sector in Bangalore has

been good this year. There was an overall

appreciation of 10-12% in the real estate market

which was very realistic. Bangalore has today evolved

into a mature real estate market. Residential property

sales in Bangalore, compared to other cities in the

South have been stable and consistent this year. It

was genuine demand from owner occupiers which

made the market very healthy.

What are your expectations from the year 2013?

The real estate market will continue to grow in 2013. We expect a rise in

prices of up to 15%; however, it is in 2014 that we expect the market to be

bullish.

Salarpuria Sattva has up to 30 million sq ft space in different stages of

development in Bangalore, Hyderabad, Vizag, Pune, Kolkata, Jaipur, Goa

and Chennai.

In Bangalore we have three new residential projects that will be launched in

2013. We are also focused on Hyderabad where we have just launched a 1.6

million sq ft mixed-use development with the work, live and play concept.

Preenand Premachandran, CEO, Hebron Properties

How was the year 2012 for the real estate industry?

The year 2012 was a good year for North and East Bangalore with the

growth being largely driven by the Bangalore International Airport and the

IT sector respectively. These areas are also seeing a

good growth in terms of commercial, retail, and

social infrastructure.

There was a good growth in real estate resulting

from the investments in IT projects and the

Aerospace SEZ, which the government plans to set

up in the next few years. North and East

Bangalore have been witnessing increased real

estate activity over the past few years and with

Volume I Part 5 December 25, 2012 21 Business Advisor

residential projects booming in these areas, retail interests will also perk up

here.

What are your expectations from the year 2013?

Bangalore will continue to retain its sheen in the year 2012 in the real

estate domain, thanks to the good potential that it offers for investors in

terms of appreciation. Hebbal would see at least 20-30 per cent appreciation

in property values. Another area to watch out for is Old Madras Road, where

a lot of projects are now coming up. In 2013, we could see property prices

appreciating by 20 per cent in this location. Similarly, Sarjapur Road and

Whitefield too would see good appreciation and growth thanks to their

proximity to the IT hub. Over the next three years, we can expect a 100 per

cent growth in capital appreciation. The mid-scale apartment projects will

continue to be the driver in 2013 too.

Suraj H. Asrani, COO, Cornerstone Properties

How was the year 2012 for the real estate

industry?

The passing year (2012) has seen Bangalore

emerge as the most stable destination for realty

across the country. Bangalore saw healthy

absorption levels across commercial and

residential markets with a healthy increase in

capital values.

In terms of geographical spread, the North, East and South East regions

remained the most preferred destinations for IT, commercial and residential

in Bangalore. Increased infrastructure, better connectivity and good office

space absorption have seen values considerably appreciating. The city

continued to be the preferred destination for IT/ITES companies, with a

total absorption of around 9-9.5 million sq ft in 2012.

Whitefield and the ORR have seen the maximum absorption of office space;

residential demand in these areas along with Varthur and Sarjapur Road

are robust and have seen successful launches and increased demand.

What are your expectations from the year 2013?

We expect Bangalore to retain its “preferred choice” title. This would be due

to a host of positive factors like reduced interest rates, policy changes and

improved infrastructure. The Cabinet approval of the PRR would be a game

Volume I Part 5 December 25, 2012 22 Business Advisor

changer as access and connectivity to outlying/fringe areas would be rapid

and easier.

In terms of infrastructure development the projects slated to progress

include the PRR, Elevated Expressway to BIAL, the High Speed Rail Link to

BIAL and the Signal Free ORR Corridor.

2013 will be an exciting year for retail development. The announcement of

FDI in this space would result in MNC retailers evincing closer interest in

India. Bangalore has remained a preferred destination for retailers and with

more brands entering the fray, we expect developers to launch larger malls

with more interesting tenant mixes and as the infrastructure (Metro and

PRR) expands footprints, concepts like strip malls and large format malls

would find favour.

The commercial real estate outlook for 2013 is optimistic, with Whitefield,

Varthur, Sarjapur Road and the ORR being the preferred options for

occupiers. The long-awaited go ahead to the PRR would be a defining factor

in further accelerating

growth in commercial

realty.

In terms of residential an

interesting array of projects

ranging from integrated

townships, condominiums,

villas/ villaments,

affordable housing etc.,

have been announced with

higher anticipated demand

across geographies.

Prices are on an upswing

and the customer has

access to a wider array of

offerings. Another

encouraging trend is the

vibrant end user market.

This trend would continue

in 2013, and with RBI

easing liquidity, we expect

an exciting year ahead.

Volume I Part 5 December 25, 2012 23 Business Advisor

Employee engagement and people management

Asif Upadhye, CFO, Never Grow Up

While the job market is blooming for the ‘right

candidate,’ one of the key challenges that human

resource managers have faced across industries is

‘engaging talent’ once on board. Another challenge

that remains is ‘building effective and transparent’

dialogue between the core management team and

everyone else. While there is no dearth of talent

with the sheer number of employable ‘Gen Y’

candidates coming from colleges and B-Schools

across the country, recruiting people who ‘fit the

company culture’ needs to take precedence before their pedigree. Only then

can we have the right task force.

With a fresh batch of employees joining each year, a clear cut strategy on

their career progression during their stint needs to be in place and this

needs to be communicated regularly and effectively.

Especially since this new and diverse breed of employees also comes with a

different set of expectations as compared to the predecessors. Managing

these expectations in an attempt to curb attrition seems to be one of the

biggest challenges HR professionals face today. Attrition numbers in the

first year or 1.5 years across companies or industries are an indicator of the

amount of work that is needed in the space of active employee engagement.

While companies remain open to caring for their employees and paying

‘attention’ to engagement scores, organisations need to truly start looking at

employees as their greatest asset (not necessarily just a cost centre) and

undertake initiatives and prove this belief on a consistent basis. This can be

either by rewarding emotional

intelligence or taking steps to

build the right ‘top down’ culture

across the company by

ingraining company values while

remembering that this is not a

one-time task. Also see a lot of

focus on the ‘softer’ aspects of

building and managing teams

gaining prominence in the next

two years.

Volume I Part 5 December 25, 2012 24 Business Advisor

Information

Section 80CCG

Section 80CCG was inserted by the Finance Act, 2012 to be effective from

the assessment year 2013-14 onwards. The key points of the legal provision

are given below:

In the case of resident individuals investment in listed equity shares notified

by the Central Government is eligible for deduction from gross total income.

The quantum of deduction is 50% of the amount invested in such equity

shares and the amount of deduction shall not exceed Rs 25,000.

It is a one-time deduction for the investment made and where an assessee

has claimed deduction for any assessment year, the assessee shall not be

eligible for deduction under this section for any subsequent assessment

year.

The following conditions are to be satisfied:

The gross total income of the assessee should not exceed Rs 10 lakh

for the relevant assessment year.

The assessee must be a new retail investor specified under the

scheme notified by the Central Government.

The investment must be in listed equity shares as specified under the

scheme.

The lock-in period is three years

from the date of acquisition; and

Such other condition as may be

prescribed in the scheme notified by the

Central Government.

Where the assessee fails to comply with

any condition specified above, the

deduction originally allowed shall be

deemed to the income of the assessee of

the previous year and liable to tax for the

assessment year relevant to the previous

year in which the violation of condition or

conditions takes place.

Rajiv Gandhi Equity Savings Scheme,

2012 notified on 23.11.2012

Volume I Part 5 December 25, 2012 25 Business Advisor

Case laws update: Capital gains

V. K. Subramani

Agricultural land beyond municipal limit

In CIT v. Madhukumar .N (HUF) 78 DTR 391 (Karn) it was held

that an agricultural land is not a capital asset unless it falls

within the exception given in section 2(14)(iii) which covers

two categories. An agricultural land within the jurisdiction of

a municipality is a capital asset regardless of whether it is a

notified municipality. However, where the agricultural land is

situated beyond the municipal limits then, only when it is

notified it is chargeable to capital gains upon transfer of the same. Where

the agricultural land is situated beyond the municipal limit and such

distance is not covered by the notification issued by the Central Government

the transfer of agricultural land is not liable to tax.

Capital gain for charitable trusts

A wholly charitable entity eligible for the benefits of section 11 always faces

the dilemma of deciding whether the capital gain is chargeable to tax or not.

Where the capital asset say, cost Rs 2 lakh is sold for Rs 5 lakh there will be

a resultant capital gain of Rs 3 lakh. This capital gain would be eligible for

tax relief to the extent the sale consideration is deployed towards acquisition

of yet another capital asset by the institution. For example, if the trust given

above deploys Rs 4 lakh in acquiring a capital asset, the excess of the

amount utilised over the cost of the transferred asset is eligible for tax relief.

Thus the excess of Rs 2 lakh more than the cost of the originally transferred

capital asset deployed in new asset acquisition is exempt from tax and the

balance of Rs 1 lakh is only chargeable to tax. A charitable organisation

even if keeps the sale consideration in the form of fixed deposit in a bank it

is eligible for tax relief since the fixed deposit is to be treated as capital asset

as per Circular No.883 dated 24.09.1995.

A further liberal interpretation could be found in Asst. DIT v. Murugappa

Chettiar Trust (303 ITR 360 (Mad)) where it was held that amount lying in

current account satisfies the requirement of section 11(5)(iii) and hence the

capital gain parked in current account is also eligible for tax relief.

Splitting of consideration on sale of building

A building when transferred is chargeable to tax as capital gain. When such

building was owned for more than 36 months before the date of transfer it is

Volume I Part 5 December 25, 2012 26 Business Advisor

taxable as long-term capital gain. A building could be a depreciable asset

(example factory building) or a capital asset simpliciter say a residential

building. However, the land beneath the building is not a depreciable asset

as held by the apex court in CIT v. Alps Theatre 65 ITR 377 and hence when

transferred it is either short-term or long-term capital asset. Section 50

meant for depreciable assets will not apply to capital gain arising from

transfer of land. Reference could be made to CIT v. I. K. International (P) Ltd

72 DTR 70 (Del.). While transferring a building it is possible to split the

consideration attributable to land and a portion attributable to a building to

optimise the capital gains tax. Such splitting of consideration could be

found in CIT v. Dr D. L. Ramachandra Rao 236 ITR 51.

Section 50C for stock in trade

When a capital asset being a land or building or both is transferred the sale

consideration would be compared with the value adopted by stamp

valuation authority for the purpose of computing capital gains. If the stamp

valuation authority fixes the value which is higher than the value disclosed

in the conveyance deed, the taxpayer can contest the valuation and a

reference could be made to other authorities of the State government for

fixing the value. Where such value is not contested before the valuation

authority the taxpayer can contest the value for income-tax assessment

before the Assessing Officer. On such occasion, the Assessing Officer will

make a reference to the departmental Valuation Officer who may fix the

value more than or less than the value fixed by the stamp valuation

authority. If the value fixed by the Valuation Officer is more than the value

fixed by the stamp valuation authority then the value fixed by the stamp

valuation authority will be adopted. If the value fixed by the valuation officer

is less than the value fixed by the stamp valuation authority, then such

reduced value will be adopted for capital gain computation.

Since the section uses the word ‘capital asset’ an immovable property being

land or building or both, if does not fall within the expression “capital asset”

then it is not governed by section 50C. Thus the value adopted by valuation

authority will not have any binding value for the purpose of determining the

income from the transaction which is prima facie income from business.

Reference could be made to CIT v. Kan Constructions & Colonizers (P) Ltd 70

DTR 169 (All).

Indexation for inherited assets

Where a capital asset is inherited by the taxpayer the period of holding of

the previous owner is also to be included for determining the character of

capital asset, viz. long-term or short-term. However, the controversy with

Volume I Part 5 December 25, 2012 27 Business Advisor

regard to indexation is because of clause (iii) of the Explanation to section

48 which uses the expression ‘for the first year in which the asset was held

by the assessee or for the year beginning on the first day of April, 1981,

whichever is later’. The Bombay High Court in CIT v. Manjula J. Shah 68

DTR 269 has held that the indexation benefit must be given from the date in

which the previous owner obtained ownership of the asset.

A further liberal interpretation could be found in CIT v. Ms Janhavi S. Desai

75 DTR 1 (Bom) where the assessee inherited the property from her mother

who had inherited the property from her late husband (father of the

assessee). The court held though a fraction of ownership was inherited from

her mother the date of indexation must relate to the date on which the

original owner acquired the property and from whom the property had

travelled by means of a transaction or transactions not being regarded as

transfer.

Residential house outside India and section 54F

When a long-term capital asset is transferred and the assessee opts to

invest in a residential house to avail the benefit of exemption under section

54F, the issue arises as to whether the residential house must be in India or

whether could be located outside India. In Vinay Mishra v. Asst. CIT 20 ITR

(Trib) 129 (Bang) the assessee sold shares and had chargeable long-term

capital gains. He acquired a residential house outside India and claimed the

benefit of exemption under section 54F. The tribunal held that on prima

facie drafting of the section there is no requirement that the residential

house must be located within India. Following the precedent in Prema P.

Shah & Sanjiv P. Shah v. ITO 282 ITR (Trib) 211 (Mum) the claim of the

assessee was upheld.

Shifting of industrial undertaking

An industrial undertaking could be shifted from an urban area to any area

and in the process when the capital assets are transferred, the capital gain

arising therefrom is eligible for exemption if it is utilised in acquisition of

plant and machinery for re-establishing the undertaking or acquisition or

construction of building for the purposes of his business. In Dy. CIT v.

Enpro Finance 77 DTR 297 (Mum)(Trib) the assessee while shifting the

industrial undertaking acquired a building for a business and not for re-

establishing the undertaking. The claim of the assessee was that acquisition

or construction of building can be for any business purpose and not

necessarily for re-establishing the industrial undertaking shifted from the

urban area.

Volume I Part 5 December 25, 2012 28 Business Advisor

A comparative study with section 54D dealing with capital gain arising from

compulsory acquisition of land and building forming part of an industrial

undertaking would show that the section mandates construction or

acquisition of building for the purpose of re-establishing the said

undertaking or setting up of another industrial undertaking. This kind of

condition is not found in section 54G(1), hence acquisition of building for

any other business of the assessee on shifting of industrial undertaking is

also advantageous.

Excess amount received by retiring partner

When a partner retires from the partnership firm and receives a sum more

than the amount standing to his credit in the books of account of the firm,

it is always fraught with controversy. There is a very old court decision in

the case of CIT v. Raghukumar .L 141 ITR 674 (AP) which was contested with

regard to its validity consequent to omission of section 47(ii).

The Andhra Pradesh High Court in Chalasani Venkateswara Rao v. ITO 349

ITR 423 (AP) has held that section 45(4) meant to tax only the partnership

firms and could not be applied for taxing a retiring partner even if he

receives a sum more than what was standing to his credit at the time of

retirement. This decision taking into account the present position of law

might prove to be a shot in the arm for the taxpayers.

Depreciation whether rate specific or unit specific

Section 50 dealing with capital gain in respect of depreciable asset comes in

the chapter ‘capital gains’ but it is chargeable to tax only in respect of

taxpayers having income from business/ profession or income under the

head ‘other sources’.

Where a taxpayer has multiple businesses and closes down one such

business, the tax implication of the transfer of depreciable assets of the

closed down business unit/ division was discussed in CIT v. Ansal

Properties & Infrastructure Ltd 73 DTR 131 (Del). The court held the concept

of block of asset is rate specific and not unit or division specific. Even if a

division is closed down but before the end of the year the assets of the block

or class are acquired, any surplus in the interregnum is not to be

considered. The court was categorical to hold that the opening block value

and all additions during the year have to be added and transfers/ sale have

to be reduced therefrom to decide the short-term capital gain or loss.

Cessation of block during the year at any point of time during the year

cannot be considered for the purpose of applying section 50.

(V. K. Subramani is a Chartered Accountant, Erode)

Volume I Part 5 December 25, 2012 29 Business Advisor

List of contributors to this issue

T. N. Pandey, Former Chairman, Central Board of Direct

Taxes, Noida

Dr S. Chandrasekaran, Chandrasekaran Associates,

Delhi

V. K. Subramani, Chartered Accountant, Erode

Bimbadhar Mishra, Andhra Bank, Hyderabad

Dr Sanjiv Agarwal, Agarwal Sanjiv & Company, Jaipur

Dr B. Yerram Raju, Regional Director, PRMIA, Hyderabad

Rahul Pillai, Country Manager India, Interem

Manish Garg, President, Everest Industries Ltd

Bijay Agarwal, Managing Director, Salarpuria Sattva

Ankur Bhatia, Executive Director, Bird Group

Abhijita Kulshrestha, Gemstone Universe

Sudarshan Boosupalli, GM-India, Ruckus Wireless Inc.

Preenand Premachandran, CEO, Hebron Properties

Suraj H. Asrani, COO, Cornerstone Properties

Asif Upadhye, CFO, Never Grow Up

Volume I Part 5 December 25, 2012 30 Business Advisor

Published by: Shrinikethan, Chennai http://bit.ly/ShriMap

Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk

December 25, 2012

Business Advisor

On finance,

accounting, controls,

risk management,

taxation, and more…