business advisor - volume i part 1 - october 25, 2012 - preview

Volume I Part 1 October 25, 2012 1 Business Advisor

Business

Advisor (Fortnightly inputs for professionals and executives)

Volume I Part 1 October 25, 2012

o Governance and Board Diversity

by Ramesh Venkataraman, CEO,

CurAlea

o Queries & Replies: Service tax and

Income tax

o The long wait for clarifications

from the Service Tax Department –

Joseph Prabakar, Advocate,

Chennai

o Circular on freebies, Service Tax

Order on due date

o Case law updates by V. K.

Subramani, Chartered Accountant,

Erode


Dear readers:

We are happy to announce the launch of ‘Business

Advisor’ as a fortnightly online magazine to update

finance, corporate governance, accounting, and

tax professionals and executives on the recent

developments in legislation and practice in these

domains.

Watch this space for the details about the experts

and senior professionals who will be associating

with ‘Business Advisor’ as editorial board

members.

For subscriptions, contact Shrinikethan, 34

Second Main Road, CIT Colony, Mylapore,

Chennai 600 004.

Feel free to send in your suggestions and feedback

to [email protected].

Wishing you a productive reading!

D. Murali, Editor

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".

mailto:[email protected]


Governance and Board Diversity

Ramesh Venkataraman

Inadequate gender diversity on Indian boards has

been a topic of heated discussion in recent times.

A recent news item said representation of women

in Indian Boards at 5% was amongst the lowest in

the world. Half of the companies that form the

Nifty Fifty have at least one woman director, so at

the macro level all looks well as far as diversity in

corporate India is concerned. However, a closer

look at gender diversity in Indian Boards reveals

an interesting picture.

Let us look at

presence of diversity

before assessing its representation. Three out of

four PSUs in the Nifty Fifty have women

directors, so the public sector is leading the

pack in bringing about greater gender diversity

at the top. This is not surprising given the focus

of the government on this aspect. New

generation industries i.e. IT, private banks and

pharma follow, where around half the

companies on the Nifty Fifty have women

directors on the Board. In the case of the

traditional private sector engineering-cum-

manufacturing companies and MNCs, only a third of the corporates on the

Nifty Fifty have gender diversity on their boards. Interestingly, male

domination of boards in traditional engineering companies is a global

phenomenon that is changing only in recent times.

In terms of representation, women directors constitute 6% of the total

director strength of the Nifty Fifty companies overall. Again the PSUs lead

the pack with a representation of 9%, followed by the new age businesses

with 7%. The private sector manufacturing and MNC companies have a

representation of 3%, not surprising given the fact that many of them do not

have women directors. Interestingly, only 6 of the 50 companies have more

than one woman representative on the board and Coal India with 4 women

directors tops the list.

In terms of

representation,

women directors

constitute 6% of

the total director

strength of the

Nifty Fifty

companies overall.


The Nifty Fifty covers India’s corporate giants, some of which are well known

for their good governance practices. This then begs the question if there are

deep rooted issues limiting their ability to have more gender diversity on

their boards? We look at some potential questions in the context of

corporate governance.

Is gender diversity essential for good governance?

At a conceptual level, good governance requires good directors, and the

objective of the corporate should be to have the best possible board

irrespective of gender. However, one cannot help thinking that corporate

governance would be poorer if board rooms were to remain a male preserve

for reasons other than genuine non-availability of suitable women

candidates for board positions.

In the last decade one has seen a

concerted effort on the part of many

corporates to ensure gender diversity

amongst the employees, for reasons of

good governance and business

sustainability. It would be reasonable to

assume that the factors influencing this

trend would apply to the board of a

company as well.

Is there a paucity of women with the

right qualifications?

A typical board member of a large

corporate is a 50 plus person who has

experience as a CEO or Director of

another large company. It is quite likely that not many women are available

who fit this requirement, given the fact that not many corporate CEOs in

India are women. However, a good number of board positions are also held

by professionals like Chartered Accountants, lawyers and management

consultants. These are domains where women have made a mark in the last

two decades.

A large number of women have graduated through our IIMs have in the last

20 years. Add to this the number of women who have held high positions in

our government and our central bank. Would this then mean that the

availability of women who can match wits with men on corporate boards

ought to be better today than say ten years back? This is a question that

needs some introspection.

In the last decade one

has seen a concerted

effort on the part of

many corporates to

ensure gender diversity

amongst employees, for

reasons of good

governance and

business sustainability.


Can women handle board responsibility?

The news item quoted at the start of this article had some interesting

observations. It said women shied away from taking more important

assignments and also find it difficult to balance roles such as that of a

board member with the demands of their homes. These seem to raise

questions about the ability of women to handle a board role effectively. We

are one of the few countries in the world to have had a woman Prime

Minister, and a bolder one has probably not led the country. Women

bureaucrats have distinguished themselves in challenging assignments. It is

quite hard to imagine that women would not have the mental toughness to

handle a director’s role. And the role as an independent member of a board

is not a full time job. A woman should not find it difficult to manage this

with other responsibilities she may have. On the contrary, she may probably

be able to devote more time to the board

role than a man with a full time job.

Is there a need for regulatory action?

Regulatory action for increasing diversity on

corporate boards can be a double-edged

sword. Appointing persons to the board

merely to fill a quota would be unfair to the

shareholders of the company. All the more,

it would be unfair to the person so

appointed.

Therefore regulatory action in the form of

quotas has been avoided by many countries

and rightfully so. However, what may be

desirable is affirmative action to institute

mechanisms that ensure a rigorous search is made for qualifying women

candidates whenever there is a vacancy on the board, and the shareholders

given a fair opportunity to promote diversity.

This could be a part of the charter of the Nominations Committee. Also, a

conglomerate with multiple listed companies has an opportunity to make a

start by appointing women directors initially in smaller group companies.

These steps could enable corporates to work towards a more sustainable

and organic solution than what one would achieve through a mandate.

(Ramesh Venkataraman is CEO, CurAlea Management Consultants,

Consultant in Risk Management and Corporate Governance)

Appointing persons

to the board merely

to fill a quota would

be unfair to the

shareholders of the

company. All the

more, it would be

unfair to the person

so appointed.


Queries & Replies

Service tax

Payment for technical services

Query: I am a paramedic attached to a hospital. I am eligible for 3% of the

fee collected from the patients for the radiation treatment given in the

hospital and supervised by me. I do not have any retirement benefits or

provident fund contribution by the hospital as employer. Previously, I paid

service tax since it was not an exempted service and I was registered in the

category of ‘Business Auxiliary Service”. I understand that the mega

exemption Notification No.25/2012 – ST, dated 20.06.2012 grants

exemption with effect from 01.07.2012.

Please clarify. Guide me on surrender of registration certificate with the

service tax authorities.

Reply: From the query its seems that the querist does not work under any

employment contract. Since the relationship of employer-employee does not

exist between the hospital and the querist, the payments have to be treated

as payment for technical services.

It is obvious that the employee is not eligible for superannuation benefits

and PF contribution of the employer and hence the receipts do not have the

character of salary. As there was no specific exemption previously, the

querist had registered under the service tax in the category of ‘business

auxiliary service’.

However, the mega exemption notification referred in the query in item (2)

covers ‘health care services by a clinical establishment, an authorized

medical practitioner or para-medics’. The word clinical establishment

defined in the ‘Clinical Establishments (Registration & Regulation) Act, 2010

defines clinical establishment means –

(i) “a hospital, maternity home, nursing home, dispensary, clinic,

sanatorium or an institution by whatever name called that offers services,

facilities requiring diagnosis, treatment or care of illness, injury, deformity,

abnormality or pregnancy in any recognized system of medicine established

and administered or maintained by any person or body of persons whether

incorporated or not; or

(ii) a place established by an independent entity or part of an

establishment referred to in sub-clause (i), in connection with the diagnosis


or treatment of diseases where pathological, bacteriological, genetic,

radiological, chemical, biological investigations or other diagnostic or

investigative services with the aid of laboratory or other medical equipment,

are usually carried on, established and administered or maintained by any

person or body of persons, whether incorporated or not, and shall include a

clinical establishment owned, controlled or managed by –

(a) the Government or a department of the Government;

(b) a trust, whether public or private;

(c) a corporation (including a society) registered under a Central,

Provincial or State Act, whether or not owned by the Government;

(d) a local authority; and

(e) a single doctor,

but does not include the clinical establishments owned, controlled or

managed by the Armed Forces constituted under Army Act, 1950, the Air

Force Act, 1950 and the Navy Act, 1957”.

In view of the above, radiological treatment includes radiology and nuclear

radiation. The amount received from the hospital by the querist for the

radiation treatment administered to the patients is exempt from service tax

w.e.f. 01.07.2012.

The querist is advised to intimate the fact of exemption given in the

notification to the Superintendent of Central Excise with whom he is

registered and after filing the return for the period upto 30th June, 2012 he

can surrender the registration by communicating appropriately.

Income-tax

Discontinued business

Query: A partnership firm having unabsorbed depreciation of Rs.30 lakhs

relating to the assessment year 2011-12 has discontinued the business

during the financial year 2012-13. The partners of the firm decided to

dispose off all the fixed assets (all depreciable) which would result in short-

term capital gain of Rs.35 lakhs. The partners propose to set off the brought

forward unabsorbed depreciation against the said short-term capital gain. Is

it possible? Is there any other tax efficient mode by which the disposal is

possible?

Reply: The partners have discontinued the business and they are eligible to

revive the business or any other business (if the deed of partnership permits


the same) at a later date. Regardless of such discontinuation or dissolution

of partnership or firm, the query is answered.

The unabsorbed depreciation of the firm would become the current year

depreciation by virtue of section 32(2) of the Act. To quote “where, in the

assessment of the assessee, full effect cannot be given to any allowance

under sub-section (1) in any previous year, owing to there being no profits

or gains chargeable for that previous year, or owing to the profits or gains

chargeable being less than the allowance, then subject to the provisions of

sub-section (2) of section 72 and sub-section (3) of section 73, the allowance

or the part of the allowance to which effect has not been given, as the case

may be, shall be added to the amount of the allowance for depreciation for the

following previous year and deemed to be part of that allowance, or if there is

no such allowance for that previous year, be deemed to be the allowance for

that previous year, and so on for the succeeding previous years”. (emphasis

supplied).

Therefore, the unabsorbed depreciation becoming current depreciation is

eligible for set off against any other head of income. The short-term capital

gain of Rs.35 lakhs would be scaled down by set off of brought forward

depreciation of the earlier year and only the resultant Rs.5 lakhs would be

chargeable to tax in the hands of the firm on the assumption that the firm

does not have any other income for the financial year 2012-13.

With regard to a superior tax efficient strategy, it is possible that the

partnership firm go in for slump sale envisaged in section 50B of the Act.

The condition is “transfer of one or more undertaking for a lump sum

consideration without values being assigned to the individual assets and

liabilities in such sales”.

If the depreciable assets sold could fit in to the term “undertaking” and has

been in operation for more than three years before the date of transfer, the

capital gain would obtain the character of ‘long-term capital gain’ which is

eligible for concessional rate of tax at 20% plus cess.

Charitable trust

Query: Sir, I want to start a charitable trust with the objects such as

advising the business entities on various strategies for sustaining growth.

The surplus of the activity however will be redeployed in the same activity

and no amount would be withdrawn for personal use by the trustees. Can

you please elucidate on the precautions to be taken and the conditions to be

satisfied for availing tax concessions?


Reply: A charitable trust can either be wholly religious or wholly charitable.

It cannot be partly religious and partly charitable. You have stated that the

object of the trust primarily is to advise the business entities for growth.

The term ‘charitable purpose’ defined in section 2(15) is worth a reference.

“Charitable purpose includes relief of the poor, education, medial relief,

preservation of environment (including watersheds, forests and wildlife) and

preservation of monuments or places or objects of artistic or historic interest

and the advancement of any other object of general public utility”. (Emphasis

supplied).

The proposed activity of the trust viz. helping business entities for

sustaining growth would fall in the category of ‘advancement of general

public utility’.

The proviso to section 2(15) says ‘the advancement of any other object of

general public utility shall not be a charitable purpose, if it involves the

carrying on of any activity in the nature of trade, commerce or business, or

any activity of rendering any service in relation to any trade, commerce or

business, for a cess or fee or any other consideration, irrespective of the

nature of use or application, or retention, of the income from such activity”.

The further proviso says that the first proviso (mentioned above) will not

apply if the aggregate value of receipts from the activities referred to therein

is Rs.25 lakhs or less in the previous year.

Therefore, in spite of your activity falling in the category of “any other object

of general public utility” you are eligible for availing the status of a

charitable trust so long as your aggregate receipt does not exceed Rs.25

lakhs.

With regard to availing tax concession in respect of the surplus generated

from the activity, you may note that you can form either a charitable trust

by a declaration in writing and register the same or you may prefer to

register as a society under the appropriate state Act dealing with

establishment and management of societies.

The following conditions may be kept in mind by the trust in order to be

eligible for registration under section 12A which is the gateway for availing

tax exemption at present:

1. The registration will be granted from the first day of financial year in

which the application is filed or the date of creation of the trust whichever is

later.


2. Certified true copy of the Trust Deed / Memorandum of Association /

Bye-laws / Accounts for the last three years are to be filed. In the case of

new trust, documents and accounts from the date of inception is to be filed

in duplicate.

3. There must be a clear provision as to investment of funds of Trust /

Society/ Institution to be in accordance with the provisions of Section

13(1)(d) read with section 11(5) of the Income-tax Act.

4. There must be a clause to the effect that the Trust/Society/Institution

formed shall be irrevocable.

5. The Trust Deed / Memorandum of Association / Bye-laws must state

that the accounts of the Trust / Society /Institution will be maintained

regularly and the accounts will be audited by a qualified Auditor every year.

6. There should be a specific clause in the Trust Deed / Bye-laws that

the income and funds of the Trust /society/Institution will be solely utilized

towards the objects and no portion of it will be utilized for payment to

Trustees/ Members by way of profit, interest, dividends etc,.

7. The Trust Deed / Memorandum of Association / Bye-laws must

specify the mode of disbursement of assets in the event of dissolution or

winding up of Trust/ Society/Institution. There should be a specific clause

that “in the event of dissolution of the Trust/Society, the assets of the

Society/Trust shall be transferred to another Charitable Trust /Society

having similar objects of this Trust /Society.

8. There should be a specific clause that any amendment to Trust

Deed/Memorandum of Association /Byelaws will be carried out only with

the approval of the Commissioner of Income-tax / DIT (Exemptions) in

whose jurisdiction the trust is located.

9. There should be a specific clause that the benefits of the

Trust/Society/Institution are open to all, irrespective of caste, religion sex,

etc.

10. There should be a specific clause that no activities of the Trust will be

carried out outside India.

11. There should be a specific clause that the Trust /Society /Institution

will not carry on any activity with the intention of earning profit.


The long wait

Joseph Prabakar

o Clarifications are not prompt from the Service Tax

Department.

o The officials do not commit themselves by issuing

clarifications since advocates tend to use the same

for arguing in favour of clients.

o We have, therefore, approached the High Court

under Article 226 of the Constitution, to direct the

Commissioner to issue clarification.

o Case of an assessee who had to wait for five years.

(Joseph Prabakar is Advocate, Chennai)

http://youtu.be/GkhbUqpM6wU


Inadmissibility of expenses incurred in providing

freebees to medical practitioner by pharmaceutical

and allied health sector industry

Circular No. 5/2012 [F. NO. 225/142/2012-ITA.II], dated 1-8-2012

It has been brought to the notice of the Board that some pharmaceutical

and allied health sector Industries are providing freebees (freebies) to

medical practitioners and their professional associations in violation of the

regulations issued by Medical Council of India (the 'Council') which is a

regulatory body constituted under the Medical Council Act, 1956.

2. The council in exercise of its statutory powers amended the Indian

Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,

2002 (the regulations) on 10-12-2009

imposing a prohibition on the medical

practitioner and their professional

associations from taking any Gift, Travel

facility, Hospitality, Cash or monetary

grant from the pharmaceutical and allied

health sector Industries.

3. Section 37(1) of Income Tax Act provides

for deduction of any revenue expenditure

(other than those failing under sections 30

to 36) from the business Income if such

expense is laid out/expended wholly or

exclusively for the purpose of business or

profession. However, the explanation appended to this sub-section denies

claim of any such expense, if the same has been incurred for a purpose

which is either an offence or prohibited by law.

Thus, the claim of any expense incurred in providing above mentioned or

similar freebees in violation of the provisions of Indian Medical Council

(Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be

inadmissible under section 37(1) of the Income Tax Act being an expense

prohibited by the law. This disallowance shall be made in the hands of such

pharmaceutical or allied health sector Industries or other assessee which

has provided aforesaid freebees and claimed it as a deductable expense in

its accounts against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by

the aforesaid medical practitioner or professional associations is also

Prohibition on the

medical practitioners

and their professional

associations from

taking any gift, travel

facility, hospitality,

cash or monetary

grant…


taxable as business income or income from other sources as the case may

be depending on the facts of each case. The Assessing Officers of such

medical practitioner or professional associations should examine the same

and take an appropriate action.

This may be brought to the notice of all the officers of the charge for

necessary action.

Service Tax Order on due date

Order No: 3/2012, dated 15-10-2012 F.No.137/99/2011-Service Tax

In exercise of the powers conferred by sub-rule(4) of rule 7 of the Service

Tax Rules, 1994, the Central Board of Excise & Customs hereby extends the

date of submission of the return for the period 1st April 2012 to 30th June

2012, from 25th October, 2012 to 25th

November,2012.

The circumstances of a special nature which

have given rise to this extension of time are

as follows:

a) ACES will start releasing the return in

Form ST3 in a quarterly format, shortly

before the due date of 25th October, 2012.

b) This will result in all the assesses

attempting to file their returns in a short

time period, which may result in problems in

the computer network and delay and

inconvenience to the assesses.

Watch these videos

T. N. Pandey, Chairman

(1989 - 1990), Central Board

of Direct Taxes (CBDT)

ACES will start

releasing the return

in Form ST3 in a

quarterly format,

shortly before the

due date of 25th

October, 2012.

http://www.youtube.com/playlist?list=PL8E9C606711F4D81F


Case law updates

V. K. Subramani

No TDS on reimbursement of expenses

The assessee made payment towards

reimbursement of relocation expenses paid by the

payee to its employees. The payment was made as

per the terms of the agreement between the payer

and payee. No profit or mark-up was made and

only the actual expenditure incurred by the payee

was reimbursed. It was held that the payment

though made to non-resident since there was no

income embedded in the said amount it is not

liable for deduction of tax at source. It was held

that the assessee (payer) cannot be treated as an

assessee in default under section 201(1). (Global

E-Business Operations (P) Ltd v. Dy.CIT (2012) 76 DTR (Bang)(Trib) 106)

Rejection of books not a pre-condition for reference u/s 142A

For the purpose of assessment or reassessment an estimate of value of

investment is required and the AO may require the Valuation Officer to

estimate the value and furnish a report under section 142A. There is no

condition that the books of account produced by the assessee have to be

rejected first before making such reference under section 142A. In the

valuation reference mention of section 50C instead of section 142A is not

fatal in view of section 292B. (Bharathi Cement Corpn. (P) Ltd v. CIT (2012)

76 DTR (AP) 155)

Repair and renovation of lease accommodation not perquisite

When the employer incurred expenses towards repairs or renovation of

leasehold residential accommodation provided to the employee no amount

could be added in respect of such expenditure as perquisite. The lease deed

did not provide any obligation on the employee to carry out repair and

renovation to the premises. Hence, there was no obligation on the employee

which was discharged by the employer as much as to attract section

17(2)(iv) of the Act. If at all the AO wanted to enhanced the perquisite value

he must go by rule 3(a)(iii) of the Income-tax Rules. (Scott R.Bayman v. CIT

(2012) 76 DTR (Del) 113)

Property inherited by partners as legal heirs not property of the firm

Where the legal heirs succeeding the estate of the diseased and constitute a

partnership with other family members (not being legal heirs), the assets of


the diseased related to the business will not become assets of the firm on

automatic basis. The legal heirs would inherit the assets in the status of co-

owners and the property in spite of being used by the firm cannot be treated

as property of the firm for charging capital gains upon its transfer. The legal

heirs whom so ever divested his share by way of transfer could be subjected

to tax consequence in personal capacity. (Dy.CIT v. South India Pulverising

Mills (2012) 76 DTR (Chennai) (TM) (Trib) 57)

Payment to trust by a company will not attract section 40A(2)

Payment of rent by a company in the capacity of a lessee to a trust (lessor)

will not attract section 40A(2)(b) since a trust is neither a company, nor

firm, nor HUF nor an AOP. Even though the directors of company were the

trustees of the trust, payment of such rent will not attract section 40A(2)

because in the trust the beneficiaries enjoy the benefit of the trust and the

function of the trustees is to merely administer the trust as per the recitals

of the trust deed. (Shanker Trading (P) Ltd v. CIT (2012) 76 DTR (Del) 40)

Non-compete fee capital expenditure eligible for depreciation

The assessee paid Rs.594 lakhs by way of non-compete fee on acquisition of

business on slump sale basis. The assessee claimed the payment as

business expenditure which the AO disallowed in toto as capital in nature.

The Commissioner (Appeals) allowed write off in five instalments. The

tribunal held that non-compete fee is a capital expenditure but eligible for

depreciation. It remanded the case to AO for allowing depreciation.

The court held that acquisition of business as a going concern and payment

of non-compete fee thereon is a capital expenditure, not deductible.

However, the assessee had disclosed the same in the balance sheet as

‘intangible asset’. It upheld the remand order of the tribunal for

reconsidering whether the same was eligible for depreciation at 25% under

section 32(1)(ii) of the Act. (Pitney Bowes India (P) Ltd v. CIT (2012) 76 DTR

(Del) 34)

Acquisition of asset jointly with spouse and benefit of exemption

When the assessee has long-term capital gain and redeployed the amounts

in investments eligible for exemption under sections 54 and 54EC it cannot

be denied merely for the reason that the name of the spouse of the assessee

was included as joint owner. When the money for such acquisition has not

flown from the spouse and was fully funded by the assessee the eligibility

for exemption could not be curtailed by attributing inclusion of spouse

name. (DIT (International Taxation) v. Mrs. Jennifer Bhide (2012) 75 DTR

(Kar) 402)

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


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

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

October 25, 2012

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