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3CASC BULLETIN, DECEMBER 2015

EDITORIALWill it Work?

The Honourable Prime Minister promisesthat Assessing Officers will be heldaccountable and responsible for the orderspassed by them. The Honourable PrimeMinister seems to have understood thepains of the assessees and in turn of theprofessionals when it stated the undermentioned words in his inaugurals addressat the Delhi Economics Conclave, 2015,

“We are also taking several steps to serve thehonest taxpayer better. Electronic filing ofreturns now covers 85% of all tax returns.Earlier, electronic returns had to be followedby a paper verification which used to take weeksto be processed. This year, we have introducede-verification using Aadhaar and over fourmillion taxpayers made use of this facility. Forthem, the entire process was simple, electronicand completed instantly with no paper at all.This year, 91% of electronic returns wereprocessed within ninety days as compared to46% last year. Nearly 90% of refunds wereissued within 90 days. I have asked the IncomeTax Department to move to a system where notonly returns but also scrutiny is done withouthaving to go to the office. Queries could beraised and answered online or by Email. Thereshould be a visible electronic trail of what ispending with whom, where, and for how long.This is being piloted in five big cities. I havealso instructed that the performance appraisalsystem, for Income Tax Officers be changed.The appraisal should reflect, whether or not theofficer’s orders and assessments have been

upheld on appeal. This will deter corruptionand also motivate officers to pass correct orders.When fully implemented, these changes,namely online scrutiny, and changes inperformance appraisal have transformativepotential.”

Will it be delivered is a million dollarquestion which only time can deliver?There seems to be few steps for easing ofcompliance like

a) Notification F. NO. DGIT(S)/DIT(S)-V/ASK/2015-16/11972,Dated: 20/10/2015, issued byDirector of Income Tax (Systems),for redressal of grievances receivedfrom taxpayers by email atAyakarSampark Kendra

b) Instruction No. 17/2015 (F. No.225/290/2015-ITA-II dated 9th

November, 2015) issued by CBDT,stating that Local Committees to beconstituted to deal with grievancesfrom High Pitched scrutinyassessments.

c) Procedure For Filing Appeals,Curing Defective AppealsAndEffective Representation In TheDelhi High Court, dated 12 th

November, 2015

Will this work, in particular the secondinstruction namely the grievances fromHigh Pitched scrutiny assessments.Thiswill work only if the assessee takes on the

4CASC BULLETIN, DECEMBER 2015

Assessing Officer and files the grievancepetition. How many assessees wouldprefer this or how many professionals willadvise this? Seems to be step taken for thepurpose of taking. For inadvertentmistakes the assessees are taken to task.For example one assessee has remitted thetax by quoting a wrong TAN and uploadedthe TDS return. The return has beenprocessed and demand has been raised asthe TAN was wrongly quoted. This hasalso triggered a report to the CBDT andCBDT directs down the line to see is this acase of attempt to defraud the departmentand accordingly issues instructions to thefield officer to take appropriate action. Theimmediate reaction even after verifyingonline the genuineness of the claim, theAssessing Officer threatens based on thelast line in the instructions notice “file FIR,if deemed fit”. The Assessing Officer goesto the extent of using all the powers underthe Income Tax Act, without even knowingthe purpose of the section. This is the levelof appreciation of the instructions receivedfrom the higher-ups.

ICAI

The Institute has vide its announcementdated 20th November, 2015, has requestedthe members to provide self-attested copyof PAN cards and that to has to besubmitted to the concerned regional office.The announcement also talks about socalled advice from the Income TaxDepartment, though the copy of the saidadvice is attached with the announcement.

Hope the advice is received in writing. Wellthe members may not be averse toproviding such information but themembers would be aware of the securityof the data or information of the membersat ICAI level, particularly during theelection period. A member would haveforgotten where he had undergone article-ship training but he reminded of the sameduring the election period. Under thesecircumstances how the ICAI is going tosafeguard this information that to dulyattested. What happens in case it ismisused? Well like there were somemessages going around in the social mediaabout safeguards whenever the selfattested PAN data is submitted likementioning the date of signing, thepurpose for which it was issued, notleaving much of space between the PANcard Xerox and signature, etc.

Hope this doesn’t end up like phishingscam which has not spared even the HighCourt Judge, Police Chief – DG & IG, etc.These cases have happened within a spanof 6 months, in spite of repeated messagesand knowledge dissemination by thevarious authorities through variousmodes.

ICAI should come out with clarity and ifpossible also to undertake that theseinformation and / or records will be heldconfidential and will not be shared unlessand until reuired by any authority underany law in force.

5CASC BULLETIN, DECEMBER 2015

20 Ways to make your firm better

According to Mr. Daniel Hood, aspublished over a period of time in thewebsite of accountingtoday.com, the 20ways to a better firm is by adopting thefollowing 20 ideas

IDEA 1 : Find out what other firms aredoing well, and copy them.

IDEA 2 : Ask your staff what they think.

IDEA 3 : Keep your staff informed andengaged.

IDEA 4 : Build a better on-boardingprogram.

IDEA 5 : Put more rigor into your hiringprocess.

IDEA 6 : Pick up best practices fromleading firms.

IDEA 7 : Let employees know what youwant from them, and what they can expectin return.

IDEA 8 : Offer employees resources forcareer development.

IDEA 9 : Pay special attention to your nextgeneration of leaders.

IDEA 10 : Management behavior can havean unsuspected impact on staff behavior— for good or ill.

IDEA 11 : Help employees see the biggerpicture – and feel like a part of it.

IDEA 12 : Treat employees’ time likemoney.

IDEA 13 : Close your office more often.

IDEA 14 : Give feedback wheneverpossible.

IDEA 15 : Expose them to every area ofyour practice.

IDEA 16 : Not every position at your firmneeds to be filled by a CPA.

IDEA 17 : Money is always nice.

IDEA 18 : Give employees access to firmleadership.

IDEA 19 : Rewards don’t have to befattening.

IDEA 20 : The best workplaces know whento stop working.

The author has given elaborate material ineach of the above ideas and in case any ofthe members want to have the abovecontent in detail, kindly drop a mail withthe said request at [email protected]

Appeal

Members are requested to attend theprograms conducted by CASC and are alsorequested to send their suggestions and /or value additions to the services providedby CASC including this Bulletin. The samecan be sent by hard copy to the office ofthe CASC or emailed [email protected] or any of theMembers on the Management Committee.

For and on behalf of Editorial Board

Editor

6CASC BULLETIN, DECEMBER 2015

DISCLAIMER :

The contents of this Monthly Bulletin are solely for informational purpose. Itneither constitutes professional advice nor a formal recommendation. Whiledue care has been taken in assimilating the write-ups of all the authors. Neitherthe respective authors nor the Chartered Accountants Study Circle acceptsany liabilities for any loss or damage of any kind. No part of this MonthlyBulletin should be distributed or copied (except for personal, non-commercialuse) without express written permission of Chartered Accountants Study Circle.

COPYRIGHT NOTICE :

All information and material printed in this Bulletin (including but notflowcharts or graphs), are subject to copyrights of Chartered Accountants StudyCircle and its contributors. Any reproduction, retransmission, republication,or other use of all or part of this document is expressly prohibited, unlessprior permission has been granted by Chartered Accountants Study Circle.All other rights reserved.

ANNOUNCEMENTS :

1. The copies of the material used by the speakers for the regular meetings heldtwice in a month is available on the website and is freely downloadable.

2. Earlier issues of the bulletin is also available on the website in the “News” column.

The soft copy of this bulletin will be hosted on the website shortly.

READER’S ATTENTION

You may please send your Feedback Contributions / Queries on Direct Taxes, IndirectTaxes, Company Law, FEMA, Accounting and Auditing Standards, Allied Laws orany other subject of professional interest at [email protected]

For Further Details contact :“The Chartered Accountants Study Circle”

“Prince Arcade”, 2-L, Rear Block, 2nd Floor, 22-A, Cathedral Road,Chennai - 600 086. Phone 91-44-28114283

Log on to our Website :www.casconline.org

for updates on monthly meetings and professional news.Please email your suggestions / feedback to [email protected]

7CASC BULLETIN, DECEMBER 2015

RECENT DECISIONS - SERVICE TAX

1. Pre deposit of 7.5% of the tax amountconfirmed – right of appeal accruedon the date of initiation of assessmentproceedings and governed by lawprevailing at that date and not withinthe date of filing an appeal –amendment provisions mandatorypre-deposit of 7.5% of the tax amountconfirmed not applicable:

In Fifth Avenue Sourcing (P) Ltd. V.CST, Chennai – [2015] 40 STR 71(Mad.), the petitioner was engaged inthe business of sourcing for ForeignBuyers to procure Indian Garmentswherein after receiving orders from thebuyers from abroad, they placed orderson different vendors/manufacturers inIndia and raised proforma invoice onthe overseas buyer for the total orderand again open Letter of Credit (LC) intheir name. Similarly, on receipt ofproforma invoice from the Indianvendors/manufacturers, the Letter ofCredit would be transferred to therespective vendors/manufacturers,after retaining the margin of thepetitioner. Once the shipment of thegoods was effected, the documentsfrom the vendors would reach thepetitioner bank through the vendor’sbank and only thereafter, the petitionerwould substitute their invoice and billsof exchange permissible as per UCPand then the documents were sent tothe buyers situated abroad. Upon

receipt of the payment, the petitioner’sbankers would credit the petitionerwith the margin in convertible foreigncurrency and the rest of the amountwould be sent to the vendors inconvertible foreign currency. Theadjudicating authority confirmed thedemand under ‘’Business AuxiliaryServices’’, against which they filed awrit petition to file an appeal before theCESTAT without making the paymentof 7.5%. The high court observed asunder:-

a. In M/s. Muthoot Finance Limited vs.Union of India and another 2015 (38)STR 1133 (Kar.), the high court allowedthe petition to file an appeal along withan application filed by the petitioner forwaiver of pre-deposit and stay ofrecovery of the amounts confirmed.

b. This view was followed in a subsequentcase reported in Secretary toGovernment, Department ofAgriculture, Government of Kerala and

CA. VIJAY ANAND

8CASC BULLETIN, DECEMBER 2015

another v. UOI, and another 2015-TIOL-895-HC-Kerala-ST.

c. In M/s.K.Rama Mohana Rao & Co. vUnion of India, Ministry of Finance,New Delhi and 4 others 2015-TIOL-511-HC-AP-CX, the high court heldthat on the date of initiation ofproceedings, the aforesaid amendmentmandating pre-deposit was not in forcewhich was made during the pendencyof the matter. Hence, on the date ofinitiation of proceedings, the right toappeal also accrues on that date, inview thereof, as the appeal is incontinuation of the originalproceedings. The aforesaidamendment may not be applicable forthe simple reason that the proceedingswere initiated with the issuance ofshow cause notice prior to theamendment.

d. In Deputy Commercial Tax Officer,Tirupur Central I Assessment Circle,Tirupur and others v. Cameo Exportsand others 2006 (147) STC 218 (Mad)),the High Court held that the assessee'sright to file an appeal and a furtherappeal under the earlier Act accrues themoment he filed his return whichcommenced the assessmentproceedings.

Hence, it was held that the amendedprovisions mandating pre-deposit ofthe Act are not given retrospectiveeffect as of from an anterior date, it has

been construed that the amendedprovisions are prospective.

2. Adjustment of excess payment ofservice tax in subsequent monthswithout intimation to superintendent– reflected in ST-3 returns – restrictingthe adjustment to Rs. 1 lakh on theground that case is covered under rule6(4a) and not under rule 6(1a) ofservice tax rules, 1994 – notsustainable:

In Garima Associates v. CC&CE,Chandrapur- [2015] 40 STR 247 (Tri. -Mumbai), an excess tax payment wasmade and this was adjusted in thesubsequent months and also reflectedin the ST-3 return. The adjudicatingauthority restricted the adjustment toRs. 1 lakh on the ground that the casewas covered under rule 6(4A) of theService Tax Rules, 1994 which requiredmaximum adjustment upto Rs. 1 lakhand this was also sustained by theCommissioner (Appeals) as it requiresintimation to the Superintendentwithin 15 days of such adjustment andthis was not done in the instant case.On appeal, the Tribunal observed asunder:-

a) As per Rule 6(1A), the assessee ispermitted to pay Service Tax inadvance and such advance can beadjusted for subsequent periodprovided intimation is given toJurisdictional Superintendent withinfifteen days of such advance payment.

9CASC BULLETIN, DECEMBER 2015

b) In the instant case no intimation wasgiven to Superintendent regarding theexcess payment and this proceduralnon compliance cannot be a ground forthe denial of substantive benefit.

c) The excess payment and its subsequentutilization have been reflected in theST-3 Returns.

d) The intention of the Rule is that anyexcess amount should be adjustedagainst the forthcoming liability and ifthat is not allowed Government willunjustify enrich itself which is not theintention.

Hence, the appeal was allowed.

3. Manpower supply servicestransmission and distribution ofelectricity – denial of exemptionunder notification No.45/2010-st dated20.07.2010 on the ground that suchsupply was permitted of transmissionand distribution of electricity was nottenable :

In MD Aub Khan v. CC, CE & ST,Guntur- [2015] 40 STR 267 (Tri. –Bang.), the appellant was providingmanpower supply services in relationto transmission and distribution ofelectricity and was claiming exemptionunder Notification No.45/2010-STdated 20.07.2010 and subsequentlyunder Notification No.11/2010-STdated 27.02.2010, which were denied bythe Adjudicating Authority andsustained by Commissioner (Appeals)

holding that such services wereprovided prior to distribution andtransmission of electricity and, hence,ineligible.

On appeal, the Tribunal observed thatNotification No.45/2010-ST exemptsall the services rendered in relation totransmission and distribution ofelectricity and there was no distinctionmade as to whether the services shouldbe provided prior to commencement oftransmission or distribution orsubsequently.

Hence, the Tribunal held that theappellant was entitled of suchexemption and allowed the appeal withconsequential relief.

4. Provision of operation synergybetween Indian subsidiary andassociates and call centres on behalfof overseas associate company –billings are received in convertibleforeign currency – export of services– entitled to refund under rule 5 ofCENVAT credit rules, 2004:

In Centric India Offshore Pvt. Ltd. v.CST, Delhi- [2015] 40 STR 326 (Tri. –Del.), the appellant entered into serviceagreements with the overseas associateenterprise M/s. Centrica PLC to assistin managing partnership withsuppliers in India and for facilitatingefficient interface to ensure thatsuppliers follow best practices and

10CASC BULLETIN, DECEMBER 2015

share such best practices and processesutilized in India and to advise onwidening the scope of potential servicesdelivered in India through a directworkforce in greater control and otherassociated services. The assessee’soverseas associate had subsidiaries andaffiliates such as British Gas TradingLtd. and Direct Energy Marketing Ltd.which were served by Indian callcentres namely EXL and WNS. The roleof the assessee under its arrangementwith its overseas associate enterprisewas to provide the interface andoperation synergy between BGTL andDEML and Indian call centres – EXLand WNS.

The remuneration for services renderedby the assessee to overseas entities wasreceived in convertible foreignexchange and the recipient of theservice is located outside India. Theappellant claimed refund of cenvatcredit on various input services forproviding services to an overseas entityfor the quarter Jan. 2010 to March 2010under rule 5 of the Cenvat Credit Rules,2004 read with Notification Nos. 4/2006-CE (NT) and 5/2006-CE (NT)dated 14.03.2006.

The refund claim was rejected by theadjudicating authority holding thatthere was not export of service as theservice was not used outside India,relying on Board Circular dated13.05.2011. On appeal, the Tribunalobserved as under:-

a) The facts and circumstances in thisappeal are identical to the facts that fellfor consideration by the larger Benchin Paul Merchants v. CCE, Chandigarh– 2013 (29) STR 257 (Tri. – Del.), theratio whereof was reiterated inMicrosoft Corpn. (INDIA) Pvt. Ltd. v.CST, New Delhi – 2014 (36) STR 766which have clearly ruled that since thebenefit of services provided to theforeign recipient accrue economicbenefit to the overseas entity, thetransactions fall within the ambit ofexport of services, used outside India.

b) Applying the above ratio to the presentcase, the interface provided by theassessee to synergize activities of theoverseas entities and Indian call centreswould be export of services since thisservice accrues to the benefit of theoverseas entity and is therefore to beconsidered as having been used outsideIndia and for the benefit of the overseasentity.

Hence, the Tribunal allowed the appealheld that the appellant is eligible forrefund of unutilized credit underRule 5 of the Cenvat Credit Rules, 2014.

5. Intellectual property services –demand raised on profit earned bybrand owner of the job worker ofmanufacture of IMFL underintellectual property servies – notsustainble:

11CASC BULLETIN, DECEMBER 2015

In BDA Pvt. Ltd. v. CCE, Meerut -[2015] 40 STR 352 (Tri. – Del.), the brieffacts of the case are that the appellantis owner of brand name “OfficersChoice”. They are engaged inmanufacture and sale of Indian MadeForeign Liquor (IMFL). As theappellant was not havingmanufacturing facility to produceIMFL in the State of Uttar Pradesh, theyentred into agreement dated 19.08.2000with M/s. Pilkhani Distillary andChemical Works (M/s. Pilkhani). Theadjudicating authority confirmed thedemand under ‘intellectual propertyservice’ holding that that M/s. Pilkhaniis using the brand name and technicalknowhow of the appellant and payingconsideration in terms of royalty for useof brand name and technical knowhowof the brand owner. On appeal, theTribunal observed as under:-

a) On perusal of the agreement (a) formanufacture and sale; and (b) for usership, the following facts emerged:

• The appellant is a brand owner of theIMFL.

• The appellant is having an arrangementwith M/s. Pilkhani for manufacture ofIMFL at their distillery.

• The appellant allowed M/s. Pilkhani(for manufacture) as a licence ownerand sell the same as per their directionand their price and the price fixed bythe appellant.

• Out of the sale proceeds, M/s. Pilkhanishall retain cost of manufacture ofproducts and statutory demands andremit the balance to the appellant.

b) The arrangement between theappellant and M/s. Pilkhani would becovered by the exclusionary clausepertaining to manufacture in thedefinition of taxable service, based onCBEC Circular dated 23.10.2008.Furthermore, as per CBEC Circulardated 30.10.2009, the surplus and profitearned by the brand owner is notlegible to Service Tax.

c) In view of the above, service tax is notrequired to be paid under IntellectualProperty Services.

Furthermore, extended period cannotbe invoked as there were clarificationsby CBEC on 27.10.2008 and 30.10.2009.Hence, the appeal was allowed on theimpugned order set aside.

6. Cenvat credit of service tax bycontractors and other providers forlaying gas transmittion pipeline –leviable – advance ruling:

In RE: GSPL India Transco Ltd. [2015]40 STR 393 (AAR), the applicants aresubsidiaries of Gujarat State PetronetLimited (GSPL), which is aGovernment Company under theCompanies Act, 1956 who propose tobe involve in laying of pipeline and to

12CASC BULLETIN, DECEMBER 2015

avail the benefit of Cenvat credit inrespect of Service Tax that would becharged by its contractors forinstallation and commissioning relatedservices on the input side for bringinginto existence a pipeline and utilizingthe same for discharging its outputservice tax liability. As the facts andquestion, on which Advance Rulingsought, is same in respect of abovereferred applicants, which wererejected vide order dated 30.03.2012 asnot maintainable, which was restoredpursuant to the order of the GujaratHigh court.

Thereafter, fresh applications werefiled consequent to the introduction ofthe negative taxes regime with effectfrom 01.07.2012 for which the authorityobserved as under:-

a) The activity of laying of pipeline beginswith identification of route of thepipeline from the source to destinationwhich involves a feasibility analysis toensure that an acceptable route for thepipeline exists that provides the leastimpact to the environment and publicinfrastructure already in place. Oncethe route for the pipeline is identified,the next step is to acquire Right of Useand Right of Way on the said route. Inthis regard the applicant would obtainthe Right of Use (ROU) in respect ofthe land along the identified routeeither under the Gujarat Water & Gas

Pipelines (Acquisition of Right of Userin Land) Act, 2000 or the Petroleum andMinerals Pipeline (Acquisition of Rightof User Inland) Act, 1962.The first oneis Gujarat State legislation and thesecond one is a Central legislation andboth are exactly pari materia. Therequisite rights of way are obtainedthrough privately negotiated contracts.

b) For the purpose of laying pipeline, theapplicant would be required to procuresteel pipes and valves and furtherwould have to get the pipes and valvesinstalled and commissioned along theidentified routes so as to connect thesource to the destination. In this regard,the applicant would either grantvarious turnkey contracts (EPCContracts) involving supply of pipes aswell as installation and commissioningof the said pipes to bring into existencea pipeline connecting the source to thedestination or would procure the pipesthemselves and separately obtain theservices of construction contractors forinstallation and commissioning of thesaid pipes to bring into existence apipeline. EPC Contractors, under nocircumstances, have the completeresponsibility of bringing into existencethe pipeline. Inter-State pipelines likethe one envisaged under the proposedbusiness are massive projects for whichthe applicant would need to appointmyriad contractors for various scopesof work.

13CASC BULLETIN, DECEMBER 2015

c) Further, apart from the constructionrelated services from the EPCContractors/other constructioncontractors, the applicant would alsoobtain other services like third partyinspection and testing, consultingengineering etc which would berequired to bring into existence apipeline. The scope of work of the EPCContractors would relate toconstruction of the complete pipelinesby carrying out inter alia the followingspecific work scopes:

• Supply of Plant and Equipment(including pipes and valves)

• installation and construction services,and other services

• Supply of mandatory spares within andoutside India

• Civil works package for constructingthe stations along the pipeline route

d) Service by the EPC Contractors/construction service providers wouldessentially consist of putting togetherthe individual pipes issued free of costby the applicant by welding / usingnuts and bolts / other means andbringing into existence a pipeline alongthe identified route. Such pipes, onceconnected to each other, are referred toas ‘pipelines’ in trade parlance, as wellas in dictionaries. Such pipelines arethen placed under the surface of the

earth in trenches which are dug forsuch purpose. EPC Contractors wouldqualify their services as “workscontract services” as defined underSection 65B (54) of the Finance Act, postJuly 1, 2012 and discharge Service Taxaccordingly.

e) Other construction contractors andother service providers who would beproviding pure services would raiseservice invoices and pay service taxthereon at the applicable rates that willbe utilized by the applicant forproviding services of gas transportthrough pipelines on the output side.In this context, the applicant has soughtfollowing ruling from the Authority:

Whether the Applicant is eligible to availCENVAT Credit of the service tax thatwould be paid by the EPC Contractor/otherconstruction contractors and other serviceproviders (except for service tax paid vis avis construction services for the civil workspackage for building the pipelinesubstations) against the Applicant’s outputservice tax liability under the taxableoutput service in the nature of transport ofgas through pipelines.

f) Rule 3 (1) of Cenvat Credit Rules, 2004enables a provider of output service totake credit of Service Tax leviable underSection 66 B of the Finance Act, 1994,paid on any input service by theprovider of output services. There is nodoubt that the applicant is provider of

14CASC BULLETIN, DECEMBER 2015

output service i.e. transport of gasthrough pipeline and therefore, eligibleto take credit of Service Tax paid oninput service i.e. construction/erection, installation andcommissioning by EPC contractors/third party.

g) As per Rule 2 (l), “input service” meansany service used by a provider ofoutput service for providing an outputservice. However, it excludes serviceportion in the execution of workscontract and construction services.Service of laying of pipeline is differentfrom construction of building or a civilstructure, as under erstwhile Section65(25b) of the Finance Act, 1944,‘commercial and industrial service”meant (a) construction of a newbuilding or a civil structure or a partthereof, or industrial constructionservice meant construction of a newbuilding or civil structure or a portthereof or (b) construction of pipelineor conduit. Hence, construction of abuilding or a civil structure is differentthan construction of laying of pipelineand would not come under theexclusion clause (a) above i.e.construction or execution of workscontract of a building or civil structure.

h) The other exclusion clause 2 sub-parts,namely; (a) Service portion used for

laying of foundation for support ofcapital goods and (b) service portionused for making of structure forsupport of capital goods. Both theexcluded services are to be used forsupport of capital goods and there isno doubt that the subject goods i.e.pipes and valves, are capital goods butthe input service to be rendered by theapplicant is not for support of pipesand valves i.e. “capital goods” but forlaying of pipeline for transport of gas.Here input service received by theapplicant from EPC contractors andothers is not for laying of foundationnor for making of structure for supportof capital goods and, hence, it does notfall under the exclusion clause.

Hence, the Authority held that theappellant is eligible to avail cenvatcredit on service tax paid by EPCContractors/other ConstructionContractors and other serviceproviders (except for Service Tax paidvis-à-vis construction services for thecivil works package for building thepipeline sub-stations.

(The author is a Chennai based CharteredAccountant. He can be reached [email protected])

15CASC BULLETIN, DECEMBER 2015

CASC CHENNAI, MEMBERSHIP FEE

Corporate MembershipCorporate Annual Membership 3,000.00Corporate Life Membership (20 Years) 20,000.00

Individual MembershipAnnual Membership 750.00Life Membership 7,500.00

CASC - HALL RENTHALL RENT FOR 2 HOURS 1,000.00HALL RENT FOR 2-4 HOURS 1,500.00HALL RENT FOR FULL DAY 2,500.00LCD RENT FOR 2 HOURS 600.00LCD RENT FOR 2-4 HOURS 800.00LCD RENT FOR FULL DAY 1,200.00

The above amounts are EXCLUSIVE of Service Tax. Applicable Taxes will beadded.

CASC BULLETIN - ADVERTISEMENT TARIFF - PER MONTH

Full Page Back Cover 2,500.00Full Page Inside Cover 2,000.00Half Page Back Cover 1,500.00Half Page Inside Cover 1,250.00Full Page Inside 1,200.00Half Page Inside 750.00Strip Advertisement Inside 500.00

Minimum 6 months advertisement is required.If advertisement is 12 months or above, special discount of 15% is available

Your demand draft / cheque at par should be drawn in the name of“The Chartered Accountants Study Circle” payable at Chennai.

Kindly contact [email protected] for the updates.

Rs.

16CASC BULLETIN, DECEMBER 2015

RECENT DECISIONS IN SALES TAX / VAT

Transfer of property: The petitionerentered into a contract with J whereby itagreed to provide 2D seismic dataacquisition and basic processing servicesto J which was engaged in oil explorationin the State. The State took the stand thatONGC had exclusive use and right to usethe goods involved in the contracts andtherefore there was transfer of the right touse goods and tax was leviable undersection 4(3) of the Tripura VAT Act, 2004read with rule 7(2) of the Tripura VATRules, 2005 and that in terms of section 4(3)of the Act the person making payment onthis account was bound to deduct tax asleviable under law. The questions thatarose for consideration were whether theservices being rendered by the petitioner-company were in the nature of workscontract or were pure and simple servicesand whether the equipment which hadbeen brought in by the petitioner for itsown use to carry out the surveys had beentransferred to J and there was any “sale”The Court held that from the terms of thecontract it was clear that there was notransfer of any property. In fact none ofthe machinery of the petitioner was toremain with J. There was no stipulation inthe contract which would indicate thatthere was any transfer of right to useproperty. This was not a works contractbecause no work was to be done exceptcarrying out a survey. The contract did notfall within the ambit of a works contract.

Right from the very beginning thepetitioner had asked the Superintendent ofTaxes to clarify whether or not the work ofgeophysical survey fell within the ambitof works contract. The petitioner’s claimregarding amendment of registrationcertificate by way of changing economiccode from works contract to servicecontract was wrongly rejected on theground that the petitioner was engaged indrilling. The petitioner was not engagedin drilling work but in carrying out seismicsurvey work. Therefore, there was notransfer of right to use goods and thepetitioner was only rendering serviceswhich were only amenable to tax by theUnion of India and not by the State. [2015]81 VST 536 (Tripura) Asian OilfieldServices v. State of Tripura and others

Recovery of Tax: Under section 17(1) of theAPGST Act notice can be issued by theassessing authority only if any amount wasdue from the dealer towards arrears of tax,interest, penalty or fee. The premise,

CA. V.V. SAMPATHKUMAR

17CASC BULLETIN, DECEMBER 2015

underlying a notice issued under section17(1), was that the dealer was in arrears ofsales tax, interest or penalty. The dealer, inthis case, was the Forest Department of theGovernment of Andhra Pradesh whichsupplied bamboo to the petitioner. Thenotice, dated September 14, 2007, issuedto the petitioner, for the recovery of arrears,did not refer to any assessment ordershaving been passed against the ForestDepartment of the Government of AndhraPradesh. A notice issued by theCommercial Taxes Department related toarrears of tax, allegedly due from the ForestDepartment, under the Act for the years1991-92 to 2004-05. Supply of bamboo bythe Forest Department of the Governmentof A. P. to the petitioner, for a part of thisperiod (the five year period from 1994- 95to 1998-99), was the subject-matter ofconsideration in a batch of revisionpetitions, which had been allowed by thecourt. Stating so, the notice datedSeptember 14, 2007 was set aside. [2015]81 VST 564 (T and AP) ITC Limited VsCommissioner of Commercial Taxes, A.P., Hyderabad and others

Works contract in SEZ: Circular No. 9 of2013, dated July 24, 2013 issued by theCommissioner of Commercial Taxesstating that works contracts executed forspecial economic zone units would nothave the benefit of zero rating, since goodstransferred by a contractor were neitherexported as such, or used in themanufacture of other goods which were

exported as required under section 18(2)of the Tamil Nadu Value Added Tax Act,2006, was held to be valid. [2015] 82 VST63 (Mad) Tulsyan NEC Limted v.Assistant Commissioner (CT) Harbour-(III), Assessment Circle, Chennai

Tribunal: The order of the Tribunaldirecting the First Appellate authority todecide the matter pending before it withina period of three months and that toofollowing the decision of the Tribunal inthe case of ONGC Limited deserved to bequashed and set aside since the case ofONGC is pending before the High Court.[2015] 82 VST 107 (Guj) State of Gujaratv. Essar Oil Ltd.

Refund: For the delay in processing therefund claim of the Dealer, the Court heldthat the dealer must be compensated bythe Department by an order ofcompensatory costs to be recovered by theDepartment from the officer who was atfault. [2015] 82 VST 122 (BOM) BhatiaIndustries and Infrastructure Ltd. V.Stateof Maharashtra and others

Penalty: Normally the transporter is notliable for undervaluation of goods ormisdescription of goods. The transporteris only expected to transport the goods andhe has no reason to disbelieve the bill oflading; bill of sale or any other documentsproduced by the consignor or showing thedescription and value of goods. However,where the description on the face of it does

18CASC BULLETIN, DECEMBER 2015

not match the packing the transporter mustexplain why there is a discrepancy.Obviously the transporter cannot knowwhat is inside the box but when the goodsare in an open condition and are clearlyvisible then it is the duty of the transporterto ensure that the goods which hetransports match the description given inform XVI and are duly entered in formXXV. If the Revenue Department on thebasis of cogent materials and evidencebefore it can establish that the transporteris hand in glove with the dealer or that thetransporter and the dealer are one and thesame person though under different tradenames a presumption can be drawn againstthe transporter also and in such case thetransporter may face penal proceedings.The show cause notices issued were vagueand did not clearly depict the violationsmade by the transporter but in the finalorder reference had been made to thevarious violations committed by thetransporter and compounded by them... Inview of the fact that the law in this regardwas not very clear and also in view of thefact that in most cases the show-causenotices were vague, the orders passedagainst the transporters were to be set asideand the petitions allowed subject to theconditions that the transporters, with effectfrom July 1, 2015 strictly comply with theprovisions of the Act and the Rules asinterpreted by the court in Ruchi SoyaIndustries Ltd.. v. State of Tripura [2015]78 VST 273 (Tripura), and in this judgment,that the transporters comply with their

duties as set out in the judgment. Statingso, the Levy of penalty was set-aside andthe transporters were to be given one moreopportunity. [2015] 82 VST 255 (Tripura)Sherowali Trade & Transport and 5Others vs .State of Tripura and others

Freight Charges : If according to the termsof a contract, the cost of freight and otherexpenses in respect of transportation ofgoods, are incurred by the dealer for or onbehalf of the buyer, such cost of freight andother expenses shall not be included in thesale price but the burden of such proof shalllie on the dealer which in effect means thatif the terms of a contract provide that thesaid amount is reimbursable, the burdenis shifted to the dealer to prove that thesaid amount was separately reimbursable.On a conjoint reading of the clauses enteredinto by and between the parties, underterms and conditions in the contract, theseller was required to deliver the goods atthe destination after taking intoconsideration the transit risk and all otherliability, namely, delivery charges plussales tax plus octroi duty plus local taxesand levies, in transit and at destination onthe corporation selling price to the generaltrade on the date of delivery for eachsupply. Hence, the sale price of thepetroleum products included the actualdelivery charges, freight and the transit riskof the goods was upon the dealer and theamount received by the dealer from thepurchasers towards delivery charges andfreight and therefore, the freight was

19CASC BULLETIN, DECEMBER 2015

includable in the sale price. [2015] 82 VST264 (Raj)Indian Oil Corporation Umitedv. Assistant Commissioner, CommercialTaxes, Special Circle, Rajasthan, Jaipur

Manufacture: The process of manufacturewould mean that the process of change inthe product and bringing out a newproduct or combination of products in theprocess to bring out a new product wouldamount to manufacture. The process ofmaking coal from coke will bring a newproduct from the coal; therefore, itamounts to manufacture. [2015J 82 VST313 (Gauhati) Ganesh Metcoke Industriesv. State of Assam and others

Input Tax Credit: while disallowing theinput-tax credit to the dealer on thepurchases from L, the DC had observedthat the certificate of registration in the caseof L had been cancelled ab initio holdingthat all the transactions by L were bogusand not genuine and that L indulged inbilling activities only and therefore, eventhe transactions between the dealer and Lwere also bogus and non-genuine. To someextent, he was justified in drawing such aninference. However, the dealer wasrequired to be served with the order in thecase of L cancelling its certificate ofregistration ab initio and the findingsrecorded by the appropriate authority inthe case of L holding the transactions by Lincluding the transaction with the dealeras bogus and non-genuine and the finding

that L had indulged in billing activitiesonly. After giving an opportunity to thedealer and confronting it with the findingsrecorded by the appropriate authoritycancelling the certificate of registration abinitio in case of the seller L, the claim ofthe purchaser such as the dealer of theinput-tax credit on the purchases madefrom such seller, was required to beconsidered. An opportunity is required tobe given to such purchasing dealer to provethe genuineness of the transaction or tojustify its claim to input-tax remanded tothe adjudicating authority to consider theclaim of the dealer for input-tax credit onthe alleged purchases made by the dealerfrom L after giving an Opportunity to thedealer with respect to the observationsmade in the case of L insofar as the allegedtransactions between the dealer and L andafter giving an opportunity to the dealerto prove the genuineness of the transactionbetween it and L. [2015] 82 VST 324 (Guj)Shree Bhaira V Metal Corporation v.Stateof Gujarat

Rectification: The Tax Board was notjustified in holding that a mistake apparenton the-face of record was committed by theTax Board in its earlier order. The TaxBoard had reviewed its own order whichwas impermissible in law. New facts hadbeen considered by the Tax Board whilecoming to the conclusion that the turnovertax and surcharge was not leviable. Thescope of rectification as per the Act is

20CASC BULLETIN, DECEMBER 2015

limited and an order can be rectified on amistake apparent, obvious and glaring andevery mistake cannot be rectified by theTax Board. Even re-appreciation of thesame material is not permissible.Rectification implies the correction of anerror or removal of defects or imperfectionsand could not be used to appreciate theevidence on new facts which were notplaced earlier. Rectification implies anerror, mistake or defect which afterrectification is made right. [2015] 82 VST335 (Raj) Assistant Commissioner, WorksContract & Leasing Tax, Alwar v.P.N.C.Construction

Recovery: The petitioner-companypurchased an item of property owned bya company in liquidation, in accordancewith the provisions contained in theCompanies Act, 1956 pursuant to a tendernotice issued by the official liquidator andthe sale was confirmed by the court whichdirected the official liquidator to executethe sale deed in respect of the property infavour of the petitioner and the sale deedwas accordingly executed in its favour bythe official liquidator. The petitionerproposed to establish an industrial unit inthe property, for which clearances wererequired to be obtained from variousauthorities. The third respondent refusedto issue the certificates and instead, issueda communication, stating that revenue

recovery proceedings were pendingagainst the company in liquidation forrecovery of its sales tax dues when theproperty was purchased by the petitionerand therefore, the validity of thetransaction in favour of the petitioner needto be examined before the certificatessought for by the petitioner were issued.On a writ petition the Court held that thecommunication of the third respondentwas liable to be quashed and theauthorities in question were to issue thecertificates sought for by the petitioner.[2015] 82 VST 341 (Ker] BRD FinanceUmited v. District Collector, Thrissur’andothers

Interest: Where the case is remanded backby the appellate authority to the assessingofficer after setting aside the assessmentorder without any specific directionto refund the amount, it is not obligatoryon the part of the assessing officer torefund the amount and to pay the interestin case if the amount is not refundedwithin the specific period. [2015] 82 VST371 (All) [FB] Lucent Technologies (P)Ltd. v. Commissioner, Trade Tax, U. P.,Lucknow

(The author is a Chennai based CharteredAccountant. He can be reached [email protected])

21CASC BULLETIN, DECEMBER 2015

LEGAL UPDATE ON DIRECT TAXES

I. Whether lease of plant and machineryalong with land and building, for aperiod of ten years, was a capital assetwithin the meaning of section 2(14) ofIT Act? Whether lease of facilities i.e.plant and machinery along with andbuilding amount to transfer (orconstituting sale of leasehold rights)within the meaning of Section 2(47)of IT Act?

The issue came up for considerationin the case of TELETUBEELECTRONICS LTD. v. CIT Delhi-VI, [ 2015 ] 61 taxmann.com 350 (Delhi-HC), SEPTEMBER 24, 2015

Facts of the case:

1. The assessee, Teletube Electronics Ltd(TEL) has leased out all its threeproduction lines of glass bulb divisionat Bhivadi, Rajasthan to Samcor GlassLimited, Kota (‘SGL’). In the leaseagreement entered, it has beenmentioned that ‘facilities’ defined as the“plant and machinery and land andbuildings” of the glass bulb divisionwas leased to SGL for a period of 10years with effect from that date saidlease. Subsequently the lessee shiftedthe lease lines from the place of Bhivadito Kota.

2. The consideration for lease has beenarrived at Rs. 20.72 crores on the basisof valuation of the business of glass

CA. G. PARI & CA. P. PRADEEP KUMAR

bulb division of TEL, which is payableby way of advance Rs.3.64 crores andthe balance in 16 half-yearlyinstallments, along with interest @ 14%,after allowing a moratorium period oftwo years.

3. A survey was conducted in thepremises of TEL, which observed thatTEL has retained the possession of landand building for conducting its trainingprogrammes.

4. The AO, while making assessment,concluded that the lease transactionsare coming within the purview oftransfer U/s.2(47) of IT Actcontemplating the lease period, whichcovers the entire life of the asset anddue to shifting of production lines toanother place. Also observed that theland and building is still in thepossession of TEL.

5. The CIT (A) uphold the assessment ofAO by observing the lease deed as asham transaction to postpone the taxliability.

22CASC BULLETIN, DECEMBER 2015

6. The ITAT has vacated the order of CIT(A), and by referring the decision of theSupreme Court in A.R. Krishnamurthyv. CIT [1989] 176 ITR 417 (SC) as wellas in Palshikhar HUF v. CIT 172 ITR311(SC) and held that the transactionof lease would fall within the generalmeaning of transfer of a capital asset,consequently Section 269UA was notapplicable. The meaning of transfer inSection 269UA(f) has to be restricted forthe purposes of Chapter XXC.Explanation to Section 2(47) could beinvoked only where the transaction didnot fall either in the general meaningof the word ‘transfer’ or within any ofthe sub-clauses in Section 2 (47) of theAct. As per lease deed, the leaseholdrights in the business assets were sold.Consequently, Section 45 wasapplicable. However, Section 50 is notapplicable since the asset itself was nottransferred.

HC Decision:

Leasehold rights of present case – nota capital asset U/s.2 (14):

7. As per the terms of lease, the lessee hasa limited right to hold and possess thefacilities for a limited period of 10 yearswith further restriction on sub-lettingit or transferring any right or interesttherein to anyone without thepermission of the lessor. Further, it isexplicit that at the end of the leaseperiod, the lessee would revert thefacilities leased to the lessor. Therefore,

it is held that it is difficult to hold thatthe leasehold rights given under thelease agreement is a ‘capital asset’.

No transfer of capital assets due tovarious restrictive clauses in leaseagreement:

8. It is ruled that the ITAT has erred inconveniently choosing to not apply theExplanation 1 to Section 2 (47) in orderto arrive at the conclusion there wasindeed a ‘transfer’ of a capital asset. Asthe lease agreement contains variousrestriction clauses including that thelessee would not claim any right, titleor interest over the facilities other thanthe rights granted by the lessor, thiswould not amount to transfer of leasehold rights U/s.2 (47) of IT Act.

Buttresses/Grounds for the decision:

Mining lease endorses a transfer ofinterest and creates a rights in rem infavour of lessee:

9. Section 2 (14) (a) of the Act, whiledefining the ‘capital asset’ employedthe words ‘property of any kind’, whichreflects the legislative intent to bringwithin its fold even a lease ofimmovable property. The Patna HighCourt in Traders and Miners Ltd. v.CIT [1955] 27 ITR 341 held that leaseof land for a period of 99 years was atransfer of interest in the land andcreates a right in rem. It was held thatthere is a transfer of interest in favourof the lessee notwithstanding that the

23CASC BULLETIN, DECEMBER 2015

property leased reverts to the lessor.This decision was approved by theSupreme Court in A.R. Krishnamurthyv. CIT [1989] 176 ITR 417 (SC).However, this is a case whereby, thelessee not only has the right to possessand enjoy the property but also exploitit for the minerals.

No transfer of capital asset in case oflease having tenure of less than twelveyears:

10. Section 2 (47) (vi) read withExplanation 1 thereto of the Act whichdefines ‘transfer’ and read it along withthe definition of ‘immovable property’under 269 UA (d) (i) and (ii) of the Actand the word ‘transfer’ in section 269UA (f) (i). As per section 269 UA (f) (i)there was no ‘transfer’ of a capital assetas defined under Section 2 (14) of theAct if the lease was for a period of lessthan twelve years.

Views of ITAT are not acceptable onthe interpretation of ‘transfer’ in Sec.2(47):

11. The HC has not accepted the mannerof interpretation of the term ‘transfer’by the ITAT. When the word ‘transfer’itself has been defined under Section2(47) (vi) and by virtue of Explanation1 “shall” have the same meaning asSection 269UA(d) then it is not possibleto ‘restrict’ Explanation 1 to only thosetransactions described in Chapter XXC.Explanation 1 is a deeming fiction and

incorporates by way of reference theprovisions of Section 269 UA (d) inorder to understand the meaning of theword ‘transfer’ for the purposes ofSection 2 (47) (vi). Therefore, it isasserted, that entire scheme has to begiven effect to.

Real intention has to be gathered fromthe terms of lease in a tangible andobjective manner:

12. For the conclusion by CIT (A) and ITATthat the lease is a sham transaction topostpone the tax liability, the courtobserved that, It is the settled legalposition that the court would have tofind out as to what was the realintention of the parties in entering intothe agreement and that “such intentionhas to be gathered from the words inthe said agreement in a tangible and inan objective manner and not upon ahypothetical assessment of thesupposed motive of the assessee toavoid tax.” – CIT V. Cosmo Films Ltd.[2011] 12 taxmann.com 217 (Del)

13. “It is open for Assessees to arrange theiraffairs in such a manner that it wouldnot attract the tax liabilities, so far as itcan be managed within the permissiblelimit of the law. Tax management ispermissible, if the law authorises so.”– CIT v. George Willamson (Assam)Limited [2004] 136 Taxmann 52 (Gau.)citing the decision of the SC in Unionof India v. Azadi Bachao Andolan[2003] 132 Taxman 373 (SC).

24CASC BULLETIN, DECEMBER 2015

II. Whether disallowance U/s.14A wouldbe applicable when the assessee-bankheld the investments as stock-in-tradeand further projects availability ofadequate interest free funds (currenta/c balances) and own capital for theinterest free investments?

The issue came up for consideration inthe case of HDFC Bank Ltd. v. DCIT2(3), Mumbai, [ 2015 ] 61 taxmann.com361 (Mumbai - Trib.), SEPTEMBER 23,2015.

Contention of the Assessee-Bank:

1. The assesse-bank contended that it hadsufficient balance in the current depositaccounts, on which no interest issuffered, and this can or must thereforebe considered as applied toward tax-free investments for the purpose ofsection 14A of IT Act.

2. Further, the said investments includesecurities which are eligible for beingconsidered as stock-in-trade of theassessee’s business, acquired in theregular course of its business, so that itwould not attract disallowanceU/s.14A – relied on CIT v. IndiaAdvantage Securities Ltd. (in ITAppeal No. 1131 of 2013 dated13.04.2015); CCI Ltd. v. Jt. CIT [2012]71 DTR 141(Kar) [206 Taxmann 563],which decision is in fact in line with thatby the Apex Court in CIT v. IndianBank Ltd. [1965] 56 ITR 77 (SC)

Contention of the Revenue:

3. The capital raised by the assesse-bankwas specifically meant to meet thecapital adequacy norms and, thereforethis can neither be presumed norinferred as having been invested inshares, including preference shares andPSU bonds, so as to be excluded whilereckoning the disallowance under rule8D.

HC Decision:

4. Following the jurisdictional court’sdecision in Godrej & Boyce Mfg. Co.Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom)and distinguishing the facts in the caseof CIT v. Reliance Utilities and PowerLtd [2009] 313 ITR 340 (Bom), it is heldthat in the absence of proof for nexusbetween the source and investment fortax free investments, section 14A r.w.r.8D would be applicable for the tax-freeinvestments, even this has been held asstock-in-trade,

Buttresses/Grounds for the decision:

Availability of funds vis-à-vis nexusfor investment:

5. The assessee-bank has not establishedthe nexus of source and investmentbased on facts, i.e., of the funds beingsourced/contracted for a particularpurpose, to which purpose they aresubsequently applied. The courtobserved that the contention raised bythe assesse-bank with respect to

25CASC BULLETIN, DECEMBER 2015

availability of current accounts andown capital for tax free investments,appears, is guided solely by the motiveto avoid the incidence of section 14A.

6. Section 14A of the IT Act read with rule8D being mandatory, does not envisageavailability of funds per se, butpresumes the nexus whether only thesefunds that had gone to fund therelevant investments - Godrej & BoyceMfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR81 (Bom). The principles enunciatedin Godrej & Boyce’s case is, Sec. 14Ais attempted to ensure that the taxincentive to certain incomes is not usedto reduce the tax payable on the taxableincome, i.e., by debiting theexpenditure incurred to earn the non-taxable income against taxable income.In other words, the object of Sec. 14Ais to widen the theory of apportionmentof expenditure and allow only that partof expenditure which relates to incomeforming part of total income.

Dividends does not form part of totalincome by virtue of sec 10(33) in thehands of recipient though tax has beenpaid U/s.115-O by the disbursingcompany:

7. “The payment by a domestic companyunder section 115-O(1) of additionalIncome-tax on profits declared, distributedor paid is a charge on a component of theprofits of the company. The company ischargeable to tax on its profits as a distincttaxable entity and it pays tax in discharge

of its own liability and not on behalf of oras an agent for its shareholders. In thehands of the shareholder as the recipient ofdividend, income by way of dividend doesnot form part of the total income by virtueof the provisions of section 10(33). Incomefrom mutual funds stands on the samebasis.” - Godrej & Boyce Mfg. Co. Ltd.v. Dy. CIT [2010] 328 ITR 81 (Bom)followed by CIT v. Damani Estates &Finance (P.) Ltd. [2013] 25 ITR 683(Mum) (Trib) & D. H. Securities (P)Ltd. v. DCIT [2014] 146 ITD 1 (Mum)(TM);

Whether the word ‘investment’appearing in rule 8D extends to stock-in-trade also?

8. It is immaterial whether the shares areheld as investment or stock-in-trade,both being assets of a compositebusiness giving rise to two sets ofincome viz., taxable and tax-exempt.This view has been endorsed by largerbench of the tribunal in ITO v. DagaCapital Management Pvt. Ltd. [2009]312 ITR (AT) 1 (Mum)(SB), which hasbeen approved by the Hon’ble Courtin Godrej & Boyce (supra).

9. The apex court’s decision in the case ofCIT v. Indian Bank Ltd. [1965] 56 ITR77 (SC), referred by the applicantmay not be applicable as it has beenrendered prior to co-option of section14A on the statute. Prior tointroduction of section 14Aapportionment did not apply to

26CASC BULLETIN, DECEMBER 2015

composite and individual businesseswhich earned both taxable and non-taxable income. Section 14A wasenacted, to overcome theseimpermissibility, and to apportionexpenditure between the taxable andnon-taxable incomes, for the purposeof disallowing direct and indirectexpenditure incurred in relation toincome, which did not form part of totalincome. - CIT v. Walfort Share andStock Brokers P. Ltd. [2010] 326 ITR 1(SC).

III. Whether proviso to section 2(15)substituted by the Finance Act 2015 isapplicable with prospective effect?Whether the activity of ‘towndevelopment’ carried out by a trustconstituted by State Governmentunder State law is ‘advancement ofany other object of general publicutility’ constituting ‘charitablepurposes’ U/s.2(15) of IT Actcontemplating the recentamendments?

The issue came up for consideration inthe case of Hoshiarpur ImprovementTrust v.ITO - Ward 1, Hoshiarpur, [2015 ] 61 taxmann.com 162 (Amritsar -Trib.), SEPTEMBER 10, 2015.

Facts of the case:

1. The assesse-trust is set up, under thePunjab Towns Improvement Act 1922,(PTIA, in short) by the Government ofPunjab and has principal objects for

development of the town as per theregulations of PTIA under theguidance, instructions and strictsupervision of the State Government.

2. The AO observed that the activity ofthe trust being acquisition of land, todevelop it and sell it in the shape ofplots, flats and commercial booths atmarket rates cannot be construed asadvancement of any other object of“general public utility” and theseactivities are carried out only to earnprofits. Therefore, he denied exemptionU/s.11 of IT Act on the ground that thetrust cannot be regarded as ‘charitable’within the meanings of Section 2(15) ofthe Act though the trust is being “runas per the rules and regulations of theState Government”. The AO, thus,equated the activity of the trust with anormal builder except the fact that ithas been controlled by the StateGovernment.

3. The AO referred to the proviso toSection 2(15) of the Act which providesthat “the advancement of any otherobject of general utility shall not be acharitable purposes if it involves thecarrying on of any activity in the natureof trade, commerce or business or anyactivity of rendering any service inrelation to any trade, commerce orbusiness, for a cess or fee or any otherconsideration, irrespective of the natureof use or application or retention of theincome from such activity” and the

27CASC BULLETIN, DECEMBER 2015

decisions of Lok Shikshan Trust v.CIT[(1975) 101 ITR 234 (SC)]; IndianChamber of Commerce & Ors v. CIT[(1975) 101 ITR 797 (SC)] and CBDTinstruction No.1024 dated 7thNovember 1976,for denying theexemption.

4. The CIT(A) upheld the order of AO byfurther referring the decision ofHon’ble Kerala High Court in the caseof Info Parks Vs DCIT [(2010) 329 ITR404 (Ker)], which has been renderedwith respect to the impact of insertionof proviso to Section 2(15).

Decision of Tribunal:

Proviso to Sec. 2(15) substituted by theFA 2015 to be effective prospectively:

5. The proviso inserted by the Finance Act2015, since seeks to restrict the scopeof Section 2(15) is only prospective ineffect i.e. effective from the assessmentyear 2016-17 – relied on the decision offive members bench of the apex courtin the case of CIT v. Vatika TownshipsPvt Ltd [(2014) 367 ITR 466 (SC), whichruled on the basis of principle of lawknown as ‘lex prospicit non respicit’ i.e.‘law looks forward not backward’, that, ‘ acurrent law should govern currentactivities. Law passed today cannot applyto the events of the past’.

From the facts, Profit making is notthe dominant object and trust is notthe mask or device to hide the truepurpose of doing business:

6. The registration has been granted onthe premise that objects of the trustwere advancement of objects of generalpublic utility, and there is no paradigmshift from this fundamental position.It further cannot hold that theGovernment formed these trusts bylegislating the Punjab TownsImprovement Act 1922 with an intentto carry on the business as colonizer ordeveloper and formation of this trustas a mask or device to hide the truepurpose of the doing business. Theallegation of the profit making does notobliterate the overall objects of generalpublic utility. The trust is pursuing theState Government policies for planneddevelopment of city, which is nothingbut advancement of an object of generalpublic utility.

Buttresses/Grounds for the Decision:

Scope of proviso to Sec. 2(15) asexplained in Himachal PradeshEnvironment Protection and PollutionControl Board v. CIT [(2010) 9 ITR Trib204 (Chandigarh)]:

7. The insertion of proviso to s. 2(15) doesnot mean that the receipt of anypayment for anything done for trade,commerce or business, the assessee willbe hit by the said proviso.

8. The CBDT, vide Circular No. 11, dt.19th Dec., 2008 [(2009) 221 CTR (St) 1],has observed the scope of proviso toSec. 2 (15) as,

28CASC BULLETIN, DECEMBER 2015

“The newly amended s. 2(15) will applyonly to the entities whose purpose is‘advancement of any other object of generalpublic utility’ i.e., the fourth limb ofdefinition of ‘charitable purpose’ containedin s. 2(15).”

“Whether such an entity is carrying on anactivity in the nature of trade, commerceor business is a question of fact which willbe decided based on the nature, scope,extent and frequency of activity”

“Under the principle of mutuality, iftrading takes place between the personswho are associated together and contributeto a common fund for the financing of someventure or object, and in this respect haveno dealings or relations with any outsidebody, then the surplus returned to suchpersons is not chargeable to tax.”

“…. If such assessee is engaged in anyactivity in the nature of trade, commerceor business or renders any service inconnection to trade, commerce or business,it would not be entitled to claim that itsobject is for charitable purposes. In such acase, the object of ‘general publicutility’ will only be a mask or a deviceto hide the true purpose which is trade,commerce, or business or rendering of anyservice in relation to trade, commerce orbusiness.”

9. The significance of the expression, “notinvolving the carrying on of anyactivity for profit” in the definition of“charitable purpose” has been

examined by the Supreme Court in thegreat detail in the cases of LokShikshana Trust v. CIT [1975] 101 ITR234 (SC) and Indian Chamber ofCommerce v. CIT [1975] 101 ITR 796(SC). However, this expression hasbeen deleted by the Finance Act 1983and therefore these cases are notapplicable for the definition of`charitable purpose’ in the present case.

10. To constitute ‘charitable purposes’U/s.2(15) of IT Act, the factor to beexamined is, Whether the dominantobject of the activity is profit makingor carrying out a charitable purpose?.If it is the former, the purpose wouldnot be a charitable purpose, but, if it isthe latter, the charitable character of thepurpose would not be lost - CIT v.Surat Art Silk Clothes ManufacturersAssociation [(1980) 121 ITR 1 (SC).

11. ‘Profit on sale’ does not essentially andnecessarily imply profit motive inactivities of the trust. No activity shallbe construed as charitable in naturewhen it is dominated and triggered byeconomic greed - Devki DeviFoundation v. DIT [(2015) 56taxmann.com 56 (Delhi)]

IV. Whether the expression, ‘any salarydue from an employer’ U/s.15 of ITAct represents gross salary earnedduring the year or net salary afteradjustment of excess salary paid inearlier years consequent to error?

29CASC BULLETIN, DECEMBER 2015

The issue came up for consideration inthe case of Vrajeshwari B Parikh v.ITO, Ward -6(2), Baroda, [ 2015 ] 61taxmann.com 235 (Ahmedabad - Trib.)SEPTEMBER 15, 2015.

Facts of the case:

1. The assessee has received actual salaryof Rs.4,56,821/- for the financial year2007-08. However, it has beenobserved that the assessee has drawnexcess salary to the tune of Rs.213,132/- for the period 1998-99 to 2007-08 dueto some error in fixing the pay on itsrevision. During the financial year2007-08, when it was deducted theassessee refunded the excess salary ofRs.2,13,132/- and offered the netreceipts of Rs.243,689/- (Rs.456,821/-less Rs.213,132/-) as salary due, beingtaxable for the financial year 2007-08.

2. The AO added the excess salaryrefunded Rs.213,132/- to the returnedincome and held that salary due, astaxable, U/s .15 of IT Act is gross salaryearned during the year, beingRs.456,821/- and not net salaryreturned.

3. The CIT (A) confirmed the order of AO.

Decision of Tribunal:

4. Following the decision of SC inthe case of Chandi Prasad Uniyal& ORS. v. State of Uttarakhand[(2012) 8 SC 417], reproduced atwww.indiankanoon.org/doc/8446951,

the Tribunal held that, ‘The amountwhich constituted “salary due from anemployer” was only the amount net ofrecovery, which the employer waslegally empowered to make, in respectof excess payments made on accountof wrong pay fixation’.

Buttresses/Grounds for the Decision:

5. “accrual” of an income or of an income“arising”, refer to occurrence of anincome and to income shaping into ameasurable format. However, anincome becoming “due from” someonerefers to an ̀ unqualified right to receivethat income from that person’.

6. The expression used in section 15(1) ofITA is “due” which represents amountpayable, rather than amount “earned”or “accrued”.

7. ‘Any amount paid/received withoutauthority of law can always berecovered barring few exceptions ofextreme hardships but not as a matterof right, in such situations law impliesan obligation on the payee to repay themoney, otherwise it would amount tounjust enrichment’ - Chandi PrasadUniyal & ORS. v. State ofUttarakhand [(2012) 8 SC 417],reproduced at www. indian kanoon. org/doc/8446951.

(The authors are Chennai based Chartered Accountantsand they can be reached at [email protected]& [email protected] respectively)

30CASC BULLETIN, DECEMBER 2015

RECENT DECISIONS - EXCISE AND CUSTOMS LAW

Tankers cannot be termed as bulk packsand the activity of transferring the goodsfrom tankers into smaller drums cannotbe said to be manufacture

In the case of V V F Ltd vs CCE 2015-TIOL-2415-CESTAT-MUM, taxpayers weremanufacturers of fatty acids, Oleic 26, Oleic20 and LOFA. These goods are classifiableunder Chapter 38. The manufacturedgoods were cleared from themanufacturing units located in Gujaratafter payment of duty to Mumbai in lorrytankers. The duty-paid goods wereunloaded in Mumbai into carboys ofdifferent capacity. On these carboys nameof the manufacturer, quantity, batchnumber, etc. were labelled and thereafterkept in warehouse and sold to thecustomers. Revenue demanded exciseduty on the grounds that labelling andpacking from bulk container to carboysamounts to manufacture as per Note 5 toChapter Note 38 of Central Excise TariffAct, 1985 (“Tariff Act”) and, therefore, thetaxpayers are required to pay duty inMumbai on the repacked goods.

The Tribunal observed that the Board videCircular dated 16/12/2009 (“Circular”)has examined this issue. After consideringthe Circular, the Tribunal observed that thefirst issue which needs to be decided iswhether the “container/ lorry tanker” canbe considered as bulk pack. The Tribunalrelied on the case of Ammonia Supply Cowherein the Delhi Tribunal had held thatAmmonia gas brought in tankers can never

be termed as brought in bulk packs andtherefore the activity of transferring thegoods from tankers into smaller drumscannot be said to be covered under Note10 to Chapter 28 (similar to Note 5 toChapter Note 38 of Tariff Act). In view ofthe Circular and various decision taken bythe Tribunal the appeals was allowed infavour of the taxpayer.

Cenvat Credit on inputs used in exportedgoods, premises from where the goodshave been exported is not much ofrelevance

In the case of Jayaswals Neco Ltd vs CCE2015-TIOL-2388-CESTAT-MUM, thetaxpayer has imported fitment and availedCenvat credit in respect of CVD paidthereon. The said fitment was sentto a job worker under the cover of challanissued under Rule 4(5)(a) of Cenvat CreditRules, 2004 (Cenvat Rules). The job workerfitted the fittings into cylinder heads andcleared the cylinders from the premises ofjob worker for export on behalf of thetaxpayer. The Revenue Authorities deniedthe Cenvat Credit taken on the fitments on

CA. SUKHPAL SINGH & CA. SRIHARI V.K.

31CASC BULLETIN, DECEMBER 2015

the ground that taxpayer is not themanufacturer therefore they are notentitled for the credit of fitment.

The Tribunal observed that fitting offitments supplied by the taxpayer wascarried out by the job worker and exportedon behalf of the taxpayer hence taxpayeris legally entitled for Cenvat Credit inrespect of fitment. Further, supply offitment by the taxpayer under Rule 4(5)(a)of Cenvat Rules, use of said fitment forexport goods and the export of the finalproduct from the premises of the jobworker is not under dispute. The Tribunalalso viewed that premises from where thegoods have been exported is not much ofrelevance, it is export irrespective oflocations, either from the taxpayerspremises or from the job workers premises,the Cenvat Credit should be allowed oninput used in the export goods. Based onthe above discussion, the Tribunal held thatthe taxpayer is entitled for the CenvatCredit in respect of fitment used in the finalproduct by the job worker and cleared finalproduct from the premises of job workerfor export on behalf of the taxpayer.

Installation, erection and commissioningcharges for equipment installed atcustomer’s premises and values thereofneed not be added/included fordetermining the assessable value

In the case of CCE vs Official Liquidatorfor M/s.Brimco Plastic Machinery Pvt Ltd2015-TIOL-273-SC-CX, the taxpayer wasmanufacturer of excisable goods, namelyplastic machinery, and also undertakeinstalling and commissioning the goods atthe factory sites of their customers. Most

of the components of such machineries aremanufactured by the taxpayer at theirfactory while some components are boughtfrom market and brought to their factory.All such components are taken inunassembled form for the purpose ofconvenient transportation to the site oftheir customers, where such machinery isassembled and installed. The RevenueAuthorities sought to add certain costincurred towards installation, erection, etc.,for arriving at the transaction value forpurpose of calculation of Excise Duty.

The issue before the Apex Court waswhether the installation, erection andcommissioning charges for equipmentinstalled at customer’s premises and valuesthereof can be added/included fordetermining the assessable value. TheSupreme Court observed that as perSection 4 of the Central Excise Act, 1944the transaction value is to be arrived at thetime of clearance of the goods at the factorygate. All the expenses which are incurredpost clearance (that too, after the supplyof equipment) in respect of installation, etc.,could not have been taken intoconsideration in the facts of the presentcase as noted by the CESTAT. The RevenueAppeal was dismissed.

Delay for filing appeal condoned as thetaxpayer filed the appeal before wrongauthority based on preamble attached tothe impugned order

In the case of Cadbury (I) Ltd vs CCE 2015-TIOL-2325-CESTAT-MUM, taxpayer filedan application for condonation of delay of373 days in filing the appeal before theTribunal. The appellant submitted that the

32CASC BULLETIN, DECEMBER 2015

delay occurred because they filed anappeal before the wrong forum and thiswas due to the reason that the preambleattached to the impugned order-in-appeal(“OIO”) indicated that the appeal shouldbe filed to the Joint Secretary, Ministry ofFinance, Department of Revenue, NewDelhi.

The Tribunal observed that the contentionof the taxpayer is correct as the preambleattached to the OIO indicates that theappeal against OIO be filed before the JointSecretary. The preamble does not indicatethat an appeal should be filed before theTribunal. The taxpayer filed the appealbefore the Joint Secretary only due to thesaid instruction. The Tribunal Condonedthe delay.

Every amount collected by themanufacturer from the buyer is notincludible in the assessable value for thepurpose of collection of calculation ofDuty

In the case of CCE vs DiffusionEngineering Ltd 2015-TIOL-2183-CESTAT-MUM, taxpayers weremanufacturers of steel products and sellingthe same through various dealers. Thetaxpayers were also getting diaries andcalendars printed for the purpose ofAdvertisement. The dealers werepurchasing these diaries and calendarsfrom the appellant and some amounts werebeing collected by the taxpayers from thedealers who purchased the goods. TheRevenue Authorities demand duty on theamounts collected by the taxpayers fromthe dealers on the grounds that the cost of

advertising was includable in assessablevalue.

Relying on the decision of the Tribunal incase of AMCO Batteries (2007(207) ELT612), the Tribunal observed that unlesspurchase and distribution of such materialby dealers is mandatory, the value of thesame cannot be added. The transactionvalue will only contain the amountscollected in connection with sale ofexcisable goods. Every amount collected bythe manufacturer from the buyer is notincludible. Revenue has not been able toestablish from fact that the amountscollected were in connection with sale ofexcisable goods. The taxpayer has clearlystated that the diaries and calendars aremade and supplied at the request of dealersand it is not mandatory. In view of abovethe Tribunal dismissed the Revenueappeal.

Debiting Cenvat account cannot beconsidered as compliance of requirementof pre-deposit under Section 35F of ExciseAct if the dispute relates to incorrectutilisation of amount from Cenvataccount

In the case of Supermax Personal Care PvtLtd vs CCE&ST 2015-TIOL-2177-CESTAT-MUM, the taxpayer was a largetaxpayer unit (‘LTU’) engaged in themanufacture of shaving systems and safetyrazor blades. They have six factories,located at different places including Thaneand Hyderabad. The factory at Thanefailed to pay a part of the duty in the monthof January 2013. Thereafter, they paidCentral Excise duty in cash on eachclearance after 7th of March 2013. In March

33CASC BULLETIN, DECEMBER 2015

2013, the Taxpayers’ request to get all thefactories centrally registered as LTU wasapproved. As a result, Cenvat creditavailable in various factories wascombined into one account and depositedthe short payment of duty of Thane unitby way of reversal of credit. Interest onsuch short payment was paid in cash. Therevenue raised a demand on the groundthat such reversal of the credit was not aproper payment of duty and hence thedefault which started in January,continued. Commissioner confirmed thedemand. The taxpayer filed an appealbefore the Tribunal. However, requiredmandatory pre-deposit under Section 35Fof the Central Excise Act, 1944 (“ExciseAct”) was not made. Hence, a notice formaintainability of appeal was issued by theRegistry.

The Tribunal distinguished the caseswherein it was held that debit in Cenvataccount is sufficient compliance for thepurpose of section 35F of Excise Act on theground that credit itself was not contestedby the revenue hence cannot be consideredas precedents. Tribunal further observedthat the CESTAT Circular issued onAugust 28, 2014, which equates the cashpayment of duty with the debits made inthe Cenvat Registers, will apply to normalsituations where the debit through Cenvatitself is not under a challenge, as it is inimpugned case. The Tribunal furtherobserved that the crux of the issue is thevalidity of debits made in the Cenvataccount as against demand of payment incash. The whole purpose of Section 35F ofExcise Act is to ensure that the order issuedby various authorities are complied with,

at least in part, before the appeal. TheTribunal dismissed the appeal as non-maintainable for lack of compliance ofrequirement of Section 35F of Excise Act.

Imported goods subjected to process ofcoating at Customs Warehouse andthereafter cleared to ONGC Projectclaiming exemption under Notification21/2002 Cus, surplus material cannot betreated as unauthorized diversion

In the case of Swiber Construction Pvt Ltdvs CC 2015-TIOL-2421-CESTAT-AHM,the taxpayer was awarded a contract foroffshore exploration/exploitation activityof ONGC operation as a sub-contractor.The taxpayer entered into a sub-contractfor installation, inspection and testing etc.and fabrication of bends of the said Projectwith another Sub contractor. Subcontractorimported C.S. Seamless Line Pipes andfiled Warehouse Bills of Entry.Subcontractor carried out certain processessuch as Coating etc. on the imported pipesin the warehouse and thereafter filed ex-bond Bills of Entry and Coastal shippingbills. The goods were removed fromwarehouse to project site claimingexemption from payment of Customs dutyunder Sl No 215 of Notification No.21/2002-Cus, dated March 1, 2002 (“CustomsNotification”) for use at ExplorationProject. After completion of the use of thesaid pipes at Project site, the surplus 410Coated Pipes were received back by theTaxpayer. The Revenue Authoritiesdenied the exemption under CustomsNotification alleging that the importedpipes had not been used at the project andthe taxpayer had attempted to divert the

34CASC BULLETIN, DECEMBER 2015

said imported goods for homeconsumption without payment ofappropriate Customs duty.

The Tribunal observed that the taxpayerfulfilled the conditions mentioned inCustoms Notification. The coated pipeswere removed from the bonded warehousefor use in the offshore project under theBills of Coastal goods. The imported goodswere issued for laying the project and thesaid pipes had lost its identity afterprocessing at warehouse. So, it may beconstrued that the imported goods wereused for the purpose of project.

As regards the allegation of unauthorizedremoval, the Tribunal observed that thereis no material availability of unauthorizeddiversion of the goods from the warehouse.The goods were cleared for use at ONGCProject and the surplus material cannot betreated as unauthorized diversion. TheTribunal held that the demand of duty andconfiscation of the goods cannot besustained.

Conversion of free shipping intodrawback shipping bill permissible onlywhen claim for duty drawback wasbeyond control of exporter. Drawback onAll Industry Rate can be consideredwithout converting Shipping Bill

In the case of Cargill India Pvt Ltd vsCC&CE 2015-TIOL-263-SC-CUS, thetaxpayer was an exporter of a variety offood and agriculture related products. Thetaxpayer filed free shipping bills for exportand did not claim any duty drawback.

The question before the Supreme Court isas follows:

1) Whether the taxpayer is entitled toclaim conversion of free shipping billsinto drawback shipping bills on thebasis of Rule 12(1)(a) of the Customs,Central Excise Duties and Service TaxDrawback Rules, 1995 (“the DrawbackRules”)?

2) If the answer to the aforesaid questionis in the negative, whether the taxpayeris entitled to the benefit of dutydrawback on the strength of CircularNo. 04/2004 dated January 16, 2004(“Circular”) even without seekingconversion?

The Supreme Court after considering theprovision of Rule 12(1)(a) of DrawbackRules, observed that conversion ofshipping billing is permissible only whenthe exporter is able to satisfy theCommissioner that “for reasons beyond hiscontrol” drawback was not claimed. TheApex Court observed that no case wasmade out by the taxpayer to suggest thatclaim for drawback was beyond the controlof the appellant.

As regard the second question, afterperusing the Circular, the Supreme Courtheld that the Commissioner may examineand consider the individual request onmerits and facts in terms of the Circular.The case was remanded to theCommissioner to examine and consider therequest of the taxpayer on merits.

(The authors are Chennai based CharteredAccountants and they can be reachedat [email protected] &[email protected] respectively)

35CASC BULLETIN, DECEMBER 2015

RECENT JUDICIAL PRECEDENTS ON DIRECT TAXES

Case law 1:

Whether omission to file certified copyof the instrument of change in thepartnership deed along with returnwould attract consequences laid down inU/s.185? S.R.Batliboi & Associates –Calcutta High Court - TS-645-HC-2015(CAL)

Facts

Assessee S.R. Batliboi & Associates (apartnership firm) changed its partnershipdeed in August 2004 and thus was requiredto file a certified copy of deed alongwithits tax return as per Sec 184(4). Assesseefiled its return without changedpartnership deed, but the same was filedduring the course of assessmentproceedings. During assessment, AOdisallowed amount of over Rs 4.49 lakhson account of remuneration to partnersU/s.185 on the ground that the instrumentof change in partnership was not filedalongwith the return. On appeal, CIT(A)and ITAT ruled in assessee’s favour andheld that non – filing of instrument ofchange in partnership deed along withreturn (same being filed duringassessment), was only an omission andthus would not make the return invalid todis-entitle assessee’s claim of remunerationpaid to partners which was otherwise paid

in accordance with the deed and provisionsof Act.

Held

HC dismisses Revenue’s appeal, deletesdisallowance of remuneration to partnersU/s.185 on omission to file reconstitutedpartnership deed alongwith the return asrequired U/s.184(4) [assessee filed thesame during the course of assessmentproceedings]; Sec. 185 provides fordisallowance of interest, commission,remuneration, etc. paid to partner(s) in caseof non-compliance with Sec 184 (whichrequires a firm to furnish reconstitutedpartnership deed along with its return);Rejects Revenue’s contention that Sec. 185been emphatic in nature, omission tocomply with Sec 184(4) precludes assesseefrom claiming the said deduction; HCholds that although Sec 185 r.w.s. 184, isworded in emphatic terms, is not intendedto be a mandatory provisions; Relies on SCruling in Kulu Valley Transport Co.Pvt.Ltd

CA. K. SUDARSHAN

36CASC BULLETIN, DECEMBER 2015

Case Law 2:

2. CIT vs. M/s.PVS Memorial HospitalLtd. ITA No. 16 of 2014 (Kerala)(HC) AY2005-06, 2006-07

Facts

a. The assessee, a hospital, entered intoan agreement with M/s.LakeshoreHospital and Research Centre Limited(‘other party’) by which the latter hadundertaken to perform variousprofessional services in the assessee’shospital.

b. Assessee deducted tax at the rate of 2%U/s.194C before making payment.

c. However, assessment was completedon the basis that tax deductible was at5% as prescribed U/s.194J and theentire tax in this regard was disallowedU/s. 40(a)(ia)of Act.

d. The CIT(A) confirmed the assessmentorder for both the years. The ITAT alsoconfirmed the disallowance for the AY2005-06. However, in so far as the AY2006-07 was concerned, the ITATallowed the assessee’s appealby following the Hon’ble CalcuttaHigh Court judgment in case ofCIT vs. S.K.Tekriwal (361 ITR 432) andheld that when tax was deducted undera wrong provision of law, thendisallowance cannot be madeU/s. 40(a)(ia).

e. Aggrieved, the assessee filed an appealbefore the Hon’ble Kerala High Courtfor the AY 2005-06 and the Departmentwent into an appeal for the AY 2006-07.

Held

i. Firstly, the HC, after considering theagreement entered into between theassessee and the other party, concludedthat the latter had undertaken to renderprofessional services to the assesseeand this was not a case where they wereundertaking a contract work.Consequently, it held that tax wasdeductible U/s.194J and not U/s.194C.

ii. On the question whether disallowancecould be made U/s.40(a)(ia), the HC,held that the said section was amachinery provision and not acharging section and thus, should beunderstood in such a manner so as tomake the provision workable. For this,it relied upon the Apex Court judgmentin case of Gurusahai Saigal v. CIT [ITR(XLVIII - 1963)].

iii. It further held that, once it was held thatthe section under consideration was amachinery provision, the expression“tax deductible at source underChapter XVII-B” occurring in theSection has to be understood astax deductible at source underthe appropriate provision of Chapter

37CASC BULLETIN, DECEMBER 2015

XVII-B. Therefore, it held that, if taxwas deductible under Section 194J butwas deducted under Section 194C, sucha deduction would not satisfy therequirements of Section 40(a)(ia).

iv. It also discussed that the latter part ofthe section i.e. ‘such tax has not beendeducted’, again referred to the taxdeducted under the appropriateprovision of Chapter XVII-B.

v. Ultimately, it concluded that acumulative reading of the provisionshowed that deduction under a wrongprovision of law will not save anassessee from section 40(a)(ia)

vi. In so far as judgment of the Hon’bleCalcutta High Court was concerned, itstated that they were unable to agreewith that view.

Case Law 3:

Section 32: The assessee has the right todisclaim depreciation in its entirety.However, it cannot claim depreciation forthe current year and disclaim unabsorbeddepreciation M/s. Seshasayee Paper &Boards Limited vs. DCIT – [Civil AppealNos. 1812-1813 of 2005, dated 15th March,2015]

The assessee claimed the depreciationallowance insofar as it pertained to thecurrent year. At the same time, it did not

want to claim the set off of the unabsorbeddepreciation allowance of the previousyears.

The Supreme Court was called upon toconsider: whether it is open to the assesseeto invoke the provisions of section 32 ofthe Act by claiming depreciation of thecurrent year, but at the same time choosenot to make a claim of set off of unabsorbeddepreciation allowance of the previousyears?

• The Supreme Court rejecting the pleaheld that once the unabsorbed carriedforward depreciation has become apart of the depreciation of the currentyear, it is not open to the assessee tobifurcate the two again and exercisingits choice to claim the depreciation ofthe current year under Section 32(1) ofthe Act and take a position that sinceunabsorbed depreciation of theprevious years is not claimed, it cannotbe thrusted upon the assessee.

• The position would have been differentif the assessee had not claimed anydepreciation at all. However, once thedepreciation is claimed and whilegiving deductions the depreciation isto be set off against the profits of thecurrent year prior to the unabsorbedcarried forward investment allowance,it is the entire depreciation, namely, thedepreciation of the current year as well

38CASC BULLETIN, DECEMBER 2015

as the unabsorbed carried forwarddepreciation, which is to be taken intoaccount as by virtue of the fictioncreated under section 32(2) of the Act,carried forward depreciation alsopartakes the character of depreciationof the current year.

• This scrambled egg cannot beunscrambled now. Otherwise, it wouldamount to negating the legal fiction thatis created by the said provision, evento the limited extent. In fact, the casefalls within the ambit of the said limitedextent of legal fiction and gets coveredby it Commissioner of Income-Tax,Kanpur v. Mother India RefrigerationIndustries P. Ltd. (1985) 155 ITR 711referred)

Case Law 4:

S. 43B: “Vend fee” paid by the assesseeto the Government, even if of the natureof “privilege fee” falls within theexpression “fee by whatever name called”Commissioner of Income Tax, Kerala vs.M/s. Travancore Sugars & Chemicals Ltd.– [Civil Appeal No. 2558 of 2005, dated,7th May, 2015]

A reading of section 43B after it wassubstituted by the Finance Act, 1988 witheffect from 01.04.1989 shows that subclause (a) in section 43B has beenconsiderably widened by the amendment

by the addition of the words “by whatevername called”. It is clear, therefore, that toattract this section any sum that is payablewhether it is called tax, duty, cess or fee orcalled by some other name, becomes adeduction allowable under the said Sectionprovided that in the previous year, relevantto the assessment year, such sum shouldbe actually paid by the assessee. (ii) Evenif the vend fee that is paid by therespondent to the State does not directlyfall within the expression ‘fee’ containedin section 43B(a), it would be a ‘fee’ by‘whatever name called’, that is even if thevend fee is called a ‘privilege’ as has beenheld by the High Court in the judgmentunder appeal

Case Law 5:

S. 40(a)(ia): (a) The second provisoinserted by FA 2012 cannot be treated asretrospective in operation (b) The fact thatthe payees have already paid tax on theamounts paid does not mean that adisallowance for failure to deduct TDScannot be made, (c) S. 40(a)(ia) cannot beinterpreted to mean that it applies onlyto amounts “paid” and not to those“payable” –Thomas Muthoot Kerala HighCourt

The fact the second proviso was introducedwith effect from 01.04.2013 is expresslymade clear by the provisions of the FinanceAct 2012 itself. A statutory provision,

39CASC BULLETIN, DECEMBER 2015

unless otherwise expressly stated to beretrospective or by intendment shown tobe retrospective, is always prospective inoperation. Finance Act 2012 shows that thesecond proviso to Section 40 (a)(IA) hasbeen introduced with effect from01.04.2013. Reading of the second provisodoes not show that it was meant orintended to be curative or remedial innature, and even the appellants did nothave such a case. Instead, by this proviso,an additional benefit was conferred on theassessee. Such a provision can only beprospective.

Case Law 6:

ITO vs. Legal Heir of Shri DurgaprasadAgnihotri (ITAT Mumbai)

Correctness of law laid down by BombayHigh Court in Ace Builder 281 ITR 210that deduction U/s.54EC is available toshort-term capital gains computed U/s.50doubted by Tribunal

Facts

The assessee sold a shop and earned long-term capital gains. The assessee investedRs.25,50,000 in capital gain bonds ofNational Highway Authority of India andclaimed exemption under section 54EC ofthe Act against the aforesaid capital gainearned. The Assessing Officer denied thebenefit of exemption under section 54EC

on the ground that the shop was adepreciable asset and the resultant gainwas a short term capital gain whereas theexemption under section 54EC wasavailable only on long term capital gain(LTCG). The CIT(A) allowed the appeal byrelying on CIT v/s Ace Builder Pvt. Ltd.,281 ITR 210 where it was held that s. 54ECdeduction is allowable for short termcapital gain U/s.50 of the Act ondepreciable assets.

By virtue of the deeming provision ofsection 50, cost of a long-term capital asset(LTCA), i.e., as per section 2(29A), wheredepreciable, forming part of a block assetson which depreciation stands claimed, thecapital gain on its transfer would have tobe computed in terms thereof, i.e. bytreating the WDV of the relevant block ofassets (or, as the case may be, the relevantasset) as its cost of acquisition. The seconddeeming per the provision of section 50 isqua the nature of such capital gains, i.e., ascapital gains arising from the transfer of aSTCA. Section 54EC is available on capitalgain arising on the transfer of a LTCA, i.e.,which is not a STCA by definition. Thesame shall, therefore, not apply to capitalgains computed U/s.50

(The author is Chennai based CharteredAccountant. He can be reached [email protected])

40CASC BULLETIN, DECEMBER 2015

REGISTERED VALUERS UNDER COMPANIES ACT, 2013(Provisions of Section 247 is yet to be notified)

CS S. DHANPAL

Registered Valuer is one among the manynew concepts introduced by theCompanies Act, 2013 to provide for aproper mechanism for valuation of thevarious assets and liabilities related to acompany and to standardize the procedurethereof. This will not only help ineliminating doubts relating to arbitraryvaluation and window dressing but willalso act as an assurance to the concernedstake holders and regulators regarding theauthenticity of the valuation of the assetor liability under consideration. It alsothrows open a new area of professionalopportunity.

Section 247 of the Companies Act, 2013contains provisions exclusively regardingregistered valuers.

Definition (Rule 17.1):

‘Registered Valuer’ means a personregistered as a Valuer under Chapter XVIIof the Act.

Who can act as a registered valuer?

A person who is registered as a RegisteredValuer in pursuance of Section 247 of theAct with the Central Government andwhose name appears in the register ofRegistered Valuers maintained by theCentral Government or any authority,institution or agency, as may be notifiedby the Central Government only can act asa registered valuer. An application for

registration as valuer shall be made inForm No. 17.1 by individuals and firmsand Form No. 17.2 by others, along withthe fee as provided.

The following persons shall be eligibleto apply for being registered as a valuer:

• A chartered accountant, companysecretary or cost accountant who is inwhole-time practice, or retired memberof Indian Corporate Law Service or anyIndian Citizen holding equivalentIndian or foreign qualification as theMinistry of Corporate Affairs may byan order recognize.

• A Merchant Banker registered withSEBI and having in his employmentpersons having qualifications asmentioned above to carry out valuationservices by such qualified persons

• A member of the Institute of Engineersand who is in whole-time practice

• A member of the Institute of Architectsand who is in whole-time practice

41CASC BULLETIN, DECEMBER 2015

5 years of continuous post membershipexperience is mandatory in all theabove cases.

In the case of merchant banker thevaluation report shall be signed by thequalified person.

For the purposes of this rule, a personshall be deemed “to be in whole-timepractice”, when individually or inpartnership or in limited liabilitypartnership or in merchant banker withother persons in practice who aremembers of other professional bodies,he, in consideration of remunerationreceived or to be received:

(i) engages himself in the practice ofvaluation; or

(ii) offers to perform or performs servicesinvolving valuation of any assets withthe object of arriving at financial valueof the asset being valued; or

(iii) renders professional services orassistance in or about matters ofprinciple or detail relating to valuation.

• A person or entity possessing necessarycompetence and qualification as maybe notified by the Central Governmentfrom time to time.

EXCEPTION:

Pending notification of Section 247 of theCompanies Act 2013, for the purpose ofIssue of shares on preferential basis underSection 62(1)(c) of the Companies Act 2013,the required valuation report can be

obtained from an independent merchantbanker who is registered with the Securitiesand Exchange Board of India or anindependent Chartered Accountant inpractice having a minimum experience often years till a registered valuer isappointed in accordance with theprovisions of the Act as the relevantprovision got inserted vide Companies(Share Capital and Debentures)Amendment Rules, 2014.

What requires valuation by a registeredvaluer under the Act?

Any property, stocks, shares, debentures,securities or goodwill or any other assetsor net worth of a company or its liabilitieswhich requires valuation under theprovision of the Companies Act, 2013 shallbe valued by a registered valuer.

In the Act, specific mention about valuationby registered valuer has been made in thefollowing Sections:

Section 62(1)(c) – Further issue of sharecapital, other than Rights Issue and Issueunder a Scheme of Employee Stock Option.

Section 192(2) – Non cash transactioninvolving directors

Section 230(2) – Valuation report in case ofa scheme of compromise or arrangementwith creditors or members

Section 236(2) – Purchase of minorityshareholding

Section 281(1)(a) proviso – Submission ofreport by company liquidator

42CASC BULLETIN, DECEMBER 2015

Section 305(2)(d) – Declaration of solvencyin case of proposal to wind up voluntarily

Section 319(3)(b) - Power of CompanyLiquidator to accept shares, etc., asconsideration for sale of property ofcompany.

Methods of valuation

ã Before adoption of the methods ofvaluation, the registered valuer shalldecide the approach to valuationbased upon the purpose of valuation:

(a) Asset approach;

(b) Income approach;

(c) Market approach

ã The valuer shall consider thefollowing points while undertakingvaluation

(a) Nature of the business and the Historyof the Enterprise from its inception;

(b) Economic outlook in general andoutlook of the specific industry inparticular;

(c) Book value of the stock and thefinancial condition of the business;

(d) Earning capacity of the company;

(e) Dividend –paying capacity of thecompany;

(f) Goodwill or other intangible value;

(g) Sales of the stock and the size of theblock of stock to be valued

(h) Market prices of stock of corporationsengaged in the same or a similar line ofbusiness;

(i) Contingent liabilities or substantiallegal issues, within India or abroad,impacting the business;

(j) Nature of instrument proposed to beissued, and nature of transactioncontemplated by the parties.

ã A registered valuer shall make avaluation of any asset as on valuationdate, in accordance with any one ormore of the following methods:

(a) Net asset value method - represents thevalue of an entity’s assets less the valueof its liabilities

(b) Market Price method: Under thismethod the current price at which thesubject of valuation is bought or soldin the market between unrelated thirdparties is taken into account;

(c) Yield method / Profit Earning CapacityValue (PECV): Under this method thevalue is calculated by capitalizing theaverage of the after tax profits for thepreceding three years (or such otherperiod. Provided adequate justificationis available for choosing anotherperiod) at capitalisation rates specifiedin the report

(d) Discounted Cash Flow Method (DCF):This method expresses the presentvalue of the business as a function ofits future cash earnings capacity.

43CASC BULLETIN, DECEMBER 2015

(e) Comparable Companies MultiplesMethodology (CCM): This Methoduses the valuation ratios of a publiclytraded company and applies that ratioto the company being valued (afterapplying appropriate discount orpremium, as the context may require).

(f) Comparable Transaction MultiplesMethod (CTM) - entails valuation onthe basis of similar transactions amongunrelated parties in the peer groupcompanies.

(g) Price of Recent Investment method(PORI) - entails valuation on the basisof recent investment received in thecompany from an independentinvestor.

(h) Sum of the parts valuation (SOTP) –where each part of the business isvalued according to method(s)appropriate to that business, and theresults are summed up to obtain totalvalue of the business

(i) Liquidation value - if the value is beingcalculated in a liquidation scenario

(j) Weighted Average Method – Underthis method the weights are assignedto the values calculated under differentvaluation approaches.

(k) Any other method accepted or notifiedby the Reserve Bank of India, Securitiesand Exchange Board or Income TaxAuthorities.

(l) Any other method(s) that the valuermay deem fit to adopt in the givencircumstances of the case, providedthat adequate justification for use ofsuch method(s) (and not any of themethods above) must be included inthe report.

ã A registered valuer shall make avaluation of any asset as on valuationdate, in accordance with theapplicable standards, if any, as maybe stipulated for this purpose.

For the purposes of this rule, ‘valuationdate’ means the date on which theestimate of value is applicable. It maybe different from the date of thevaluation report or the date on whichthe investigations were undertaken orcompleted.

Appointment of registered valuer[Section 247(1)]:

The registered valuer needs to beappointed by the audit committee or in itsabsence, by the Board of Directors.

Duties of Registered Valuer [Section247(2)]:

(a) make an impartial, true and fairvaluation of any assets which may berequired to be valued;

(b) exercise due diligence whileperforming the functions as valuer;

(c) make the valuation in accordance withsuch rules as may be prescribed; and

44CASC BULLETIN, DECEMBER 2015

(d) not undertake valuation of any assetsin which he has a direct or indirectinterest or becomes so interested at anytime during or after the valuation ofassets.

Contents of Valuation Report

The report of valuation by a registeredvaluer shall be as near to and shall containsuch information as set out in Form No.17.3.

Furnishing of Particulars in certain casesby registered valuers

Where any person who is registered as avaluer under section 247 or who has madean application for registration as a valuerunder that section is, at any timethereafter,—

(a) sentenced to a term of imprisonmentfor any offence; or

(b) found guilty of misconduct in hisprofessional capacity by anyassociation or institute or other bodyof which he is a member or with whichhe is registered; he shall immediatelyafter such conviction or finding,intimate the particulars thereof to theCentral Government, institution oragency with which he is registered as avaluer and cease to act as valuer unless

ã permitted by the Central Government,institute or agency with which he isregistered as a valuer, or

ã the order imposing penalty/sentencehas been stayed by competentauthority.

In case valuer is found guilty ofprofessional misconduct or otherwise bythe Institute of which he is a member or byNFRA or where the SEBI removed theregistration of the merchant banker, suchvaluer shall cease to be the valuerautomatically and their name shall beremoved from the register of valuer unlesssuch order has been stayed by theCompetent Authority.

Any ongoing assignment of suchvaluer, who has ceased to be a valuer, shallbe assigned to other valuer from the panelmaintained by Central Government or anyauthority or institution to complete theassignment, if no stay is granted on suchappeal, if any.

Removal and restoration of names ofvaluers from register

Removal:

The name of a registered valuer canbe removed from the register by theCentral Government if the government issatisfied –

ã that his name has been entered in theregister by error or on account ofmisrepresentation or suppression of amaterial fact

ã that he has been convicted of anyoffence and sentenced to a term of

45CASC BULLETIN, DECEMBER 2015

imprisonment or has been guilty ofmisconduct in his professional capacitywhich, in the opinion of the CentralGovernment or any authority,institution or agency, renders his nameunfit to be kept in the register.

ã that his performance is such that hisname should not remain on the registerof valuers, satisfied, after giving thatperson a reasonable opportunity ofbeing heard and after such furtherinquiry, if any, as it thinks fit to make.

The Central Government or any authority,institution or agency may appoint one ormore competent persons as enquiryofficer(s) for conducting an enquiry asreferred above. The officer(s) conductingan enquiry shall have the same powers asare vested in a Civil Court under the Codeof Civil Procedure, 1908 while make anenquiry and he may also call upon suchexperts from the field of law, economics,business, finance, accountancy,international trade, management,technology or such other discipline as hedeems necessary to assist him inconducting the enquiry.

Appeal:

A registered valuer aggrieved by an orderpassed for removal of name may prefer anappeal in accordance with the procedurelaid down in the respective Acts,regulations or bye-laws governing therespective professional. An appeal against

the order of the Central Government shallbe preferred to the Tribunal.

Restoration:

The name can be restored on sufficientcause being shown to the satisfaction of theCentral Government.

Penal Provisions [Section 247(3) & (4)]:

• If a valuer contravenes the provisionsof this section or the rules madethereunder, the valuer shall bepunishable with fine which shall not beless than Rs. 25,000/- but which mayextend to Rs. 1,00,000/-.

• If the valuer has contravened suchprovisions with the intention todefraud the company or its members,he shall be punishable withimprisonment for a term which mayextend to 1 year and with fine whichshall not be less than Rs. 1,00,000/- butwhich may extend to Rs. 5,00,000/-.

• Where a valuer has been convicted asabove, he shall be liable to—

(i) refund the remuneration receivedby him to the company; and

(ii) pay for damages to the company orto any other person for loss arisingout of incorrect or misleadingstatements of particulars made inhis report.

(The author is a Chennai based Company Secretary.He can be reached at [email protected])

46CASC BULLETIN, DECEMBER 2015

FOREIGN REMITTANCES BY RESIDENT BUSINESSMENIMPORT OF GOODS, MACHINERY ETC.

Impact of the amendment to Section 195(6) with effect from 01.06.2015

CA. PRASANTH SRINIVAS

1. Whether certificate / declaration U/s.195(6) (i.e. Rule 37BBand Forms 15CA/15CB) are required in case of import ofgoods, machinery etc.?

a. Position till 31.05.2015Section 195 (6), as of now, requires reporting only of thosepayments which comprise of income chargeable to taxunder the Income Tax Act 1961. Whether payments againstimport of goods, machinery etc. comprise of any incomechargeable to tax or not is illustrated later. At Present, thepayers are commonly following the view that import ofgoods, machinery etc. are not chargeable to tax in Indiaand therefore Forms 15CA/15CB are not required. Rule 37BB, as of now, also says thatcertificates and declarations are required only when the payment comprises of incomechargeable to tax.

b. Position from 01.06.2015From 01.06.2015 The person responsible for paying to a non resident / foreign company,any sum (whether or not chargeable under the provisions of the Act in the hands ofrecipient) shall furnish the information relating to payment of such sum, in such formand manner, as may be prescribed.

That means Forms 15CA/15CB become mandatory irrespective of the chargeability ofthe amount concerned. Even in respect of payments hitherto considered as non-taxable(E.g. import of goods), Forms 15CA/CB will be warranted.

But Rule 37BB is not amended and it continues to say that 15CA and 15CB are requiredonly when the payment comprises of income chargeable to tax. However, when thereis a clash between Act and Rules, the Act shall prevail. Amendment in Rule 37BB isexpected soon.

2. Whether payments against import of goods and machinery are chargeable to tax?As per Section 90 of the Income Tax Act, 1961, chargeability can be viewed from theprespective of the Income Tax Act 1961 or from the perspective of Double Tax AvoidanceAgreement between India and the payee’s country, whichever is beneficial to the taxpayer.

However, if benefit of treaty is to be taken, then the payee shall furnish a Tax ResidencyCertificate (TRC) (i.e. a certificate from the tax authorities of the other country that thepayee is a tax resident of that country)

47CASC BULLETIN, DECEMBER 2015

* Though circular 23 dated 23.07.1969 is withdrawn, the facts analysed therein still holdvalid Prasad Productions Ltd., Chennai vs Department of Income Tax (I.T.A. No. 663/Mds/2003)

Documentation1 Evidence that the payee is a non-resident2 Evidence to prove that income is not chargeable to tax3 Copy of PAN card of the payee4 Other import papers relevant for issuing the certificate - i.e. copy of agreement, purchase

order, invoice, terms of payment, bank’s contracted rate / RBI reference rate, etc

3. Whether PAN of the payee is compulsory?PAN is not required if income of the payee is not chargeable to tax. A Kowsalya Bai vs.UOI (2012) 22 taxmann.com 157(KAR)

If income becomes taxable under the provisions of the Act, payee’s PAN is required. IfPAN is absent, Section 206AA will be attracted and Tax must be deducted at a higherrate . If income becomes taxable under DTAA rate, PAN is not compulsory and TDShas to be made at the DTAA rate as held by the Pune ITAT in DDIT vs. Serum InstituteIndia Ltd. reported in [2015] 56 taxmann.com 1 (Pune - Trib.). A contrary view isexpressed by the Bangalore ITAT in Bosch Ltd. Vs. ITO reported in [2012] 28taxmann.com 228 (Bangalore - Trib.) All said, for all practical purposes, it is advisableto have the PAN of the payee.

4. Chargeability under the provisions of the Act illustrated?

48CASC BULLETIN, DECEMBER 2015

Documentation

1 Evidence that the payee is a non-resident2 Copy of TRC3 Evidence to prove that the payee does not have a PE in India or income is not attributable

to such PE (at least a declaration from the payee)4 Copy of PAN card of the payee5 Other import papers relevant for issuing the certificate - i.e. copy of agreement, purchase

order, invoice, terms of payment, bank’s contracted rate / RBI reference rate, etc

5. Other matters1 Assessees to refer to latest DTAA as there are constant updates vide notifications2 Assessees to file TDS return for the respective quarter vide Form 27 Q

(The author is a Chennai based Chartered Accountant. He can be reached at [email protected])

4. Chargeability under the provisions of DTAA illustrated? (may vary from country tocountry)

49CASC BULLETIN, DECEMBER 2015

EXCEL TIPSISNA Function

Features of the function :This function tests a cell to determine whether it contains the Not Available error #N/A.The #N/A is generated when a function cannot work properly because of missing data.The #N/A can also be typed in to a cell by the user to indicate the cell is currently empty,but will be used for data entry in the future.ISERR FunctionUSAGEISERR function can be used to check for error valuesSYNTAXThe syntax for the ISERR function in Microsoft Excel is:ISERR (Value)

Where value is The value that is to be tested. If value is an error value(except #N/A), this function will return TRUE. Otherwise, it will return FALSE.

50CASC BULLETIN, DECEMBER 2015

Very often, spreadsheet contains a large amount of formulas which will not properlycalculate when an error is encountered. The ISERR function, in combination with the Iffunction, can be used to default a cell's value when an error is occurred. This allows yourformulas to evaluate properly without your intervention.

ISERR FUNCTION & IF FUNCTION

Example:

The following tables were used to calculate the cost of a single bottle of Soft drinks, bydividing the cost of the crate by the quantity of bottles in the crate.

Table 1 shows what happens when the value zero 0 is entered as the number of bottles.The #DIV/0 indicates that an attempt was made to divide by zero 0, which Excel doesnot do.

Table 2 shows how this error can be ignored by using the =ISERR() function

51CASC BULLETIN, DECEMBER 2015

REPORTING AND IDENTIFICATION OF PHISHING, FRAUDULENTREFUND E-MAIL SCAMS AND FAKE INCOME TAX WEB SITES

Disclaimer

• The Income Tax Department does notrequest detailed personal informationthrough e-mail.

• The Income Tax Department does notsend e-mail requesting your PINnumbers, passwords or similar accessinformation for credit cards, banks orother financial accounts.

Identification of phishing / fraudulentrefund e-mails:

• What is ‘phishing’?

• Samples of phishing e-mails PDF

Advisory

If you receive an e-mail from someoneclaiming to be the authorized by IncomeTax Department or directing you to anIncome Tax website:

• Do not reply.

• Do not open any attachments.Attachments may contain maliciouscode that will infect your computer.

• Do not click on any links. If you clickedon links in a suspicious e-mail orphishing website then do not enterconfidential information like bankaccount, credit card details.

• Do not cut and paste the link from themessage into your browsers, phishers

can make link look like real, but itactually send you to different websites.

• Use anti-virus software, anti spyware,and a firewall and keep them updated.Some phishing e-mails containsoftware that can harm your computeror track your activities on the internetwithout your knowledge. Anti-virus &Anti-spyware software and firewall canprotect you from inadvertentlyaccepting such unwanted files.

Reporting:

• If you receive an e-mail or find awebsite you think is pretending to beof Income Tax Department, forward thee-mail or website URL [email protected]. A copymay also be forwarded [email protected]

• You may forward the message asreceived or provide the Internet headerof the e-mail. The Internet header hasadditional information to help us locatethe sender.

• After you forward the e-mail or headerinformation to us, delete the message.

• If you receive a phishing mail notpertaining to the Income TaxDepartment, forward the same [email protected]

Source: http://www.incometaxindia.gov.in/Pages/report-phishing.aspx

52CASC BULLETIN, DECEMBER 2015

Among others Special InvestigationTeam (SIT) calls for greater vigilance bylaw enforcement and intelligenceagencies while examining the cases ofpersons holding Directorship in morethan 20 Companies and where more than20 companies are operating from thesame address

The Special Investigation Team (SIT) in itsThird Report had observed the followingwith respect to Shell Companies andBeneficial Ownership:

"Shell Companies and beneficialownership (Reference p. 73-76 of theThird SIT Report)

The Report of the Committee headed byChairman, CBDT on "Measures to tackleBlack Money in India and Abroad"submitted in 2012 observed as follows:

3.4 The primary method of generation ofblack money remains suppression ofreceipts and inflation of expenditure.The suppression could be over a rangeof businesses and industrial activitieswhich are covered by what may becalled 'primary' enactments toregulate sale receipts, actualproduction, charging amount inexcess of statutory amounts, etc. …..

3.6 However, as manipulation of incomeis not always possible by suppressionof receipts, tax-payers may try toinflate expenses by obtaining bogus orinflated invoices from 'bill masters',who make bogus vouchers and chargenominal commission. As thesepersons are of very modest means,upon investigation, they tend to leavethe business and migrate from the citywhere they operate. This is one of thereasons for a proportion of income taxarrears attributed to 'assessee nottraceable'.

3.7 Similarly, there are other categories ofsmall 'entry operators', who provideaccommodation entries by acceptingcash in lieu of cheque/ demand draftgiven as loans/advances/sharecapital, etc and thereby launder largesums of money at minisculecommissions. Due to frequentmigration, such entry operatorsescape prosecution under the IncomeTax Act. The appellate tax bodies alsotend to tax their income at nominalrates. There is no effective deterrence,except for taxing commission on suchbogus receipts and tax in the hands ofbeneficiaries. Providing fake bills andentries need to be dealt with stronglyand as criminal offence under the taxlaws."

PRESS RELEASE SIT 3rd REPORT

53CASC BULLETIN, DECEMBER 2015

Use of shell companies to provideaccommodation entries to launder blackmoney has been observed in a number ofhigh profile cases investigated or underinvestigation in the recent past.

The strategy to curb this menace has to betwofold:

(i) Proactive detection of creation of shellcompanies: This would involveintelligence gathering through regulardata mining and dissemination ofinformation gathered to various lawenforcement agencies for activesurveillance.

(ii) Deterrent penal action against personsinvolved in creation of shellcompanies and providingaccommodation entries.

The following recommendations are madein this regard:

(i) Proactive detection of creation of shellcompanies: Serious Fraudsinvestigation office (SFIO) underMinistry of Company needs toactively and regularly mine the MCA21 database for certain red flagindicators. These red flag indicatorscould be based on common DINnumbers in multiple companies,

companies with same address, samecontact numbers, use of only mobilenumbers, sudden and unexpectedchange in turnover declared in returnsetc. These indicators are illustrative innature and the SFIO office can preparea set of indicators based on its ownexperience and consultation withother law enforcement agencies likeCBDT, ED and FIU.

(ii) Sharing of information on such highrisk companies with law enforcementagencies: Once certain companies areidentified through data mining above,the list of such high risk companiesshould be shared with CBDT and FIUfor closer surveillance.

(iii) In case after investigation/assessmentby CBDT, a case of creatingaccommodation entries is clearlyestablished, the matter should bereferred to SFIO to proceed underrelevant sections of IPC for fraud.SFIO should also refer the matter toEnforcement Directorate for takingaction under PMLA for all such casesof money laundering.

(iv) It has also been observed that in manycases of creation of shell companies,the shareholders or directors of suchCompanies are persons of limited

54CASC BULLETIN, DECEMBER 2015

financial means like drivers, cooks orother employees of main persons whointend to launder black money.Section 89(1) and 89(2) of theCompanies Act, 2013 provides forpersons to declare if they have"beneficial interest" in the shares of theCompany or not. Section 89(4) enjoinsthe Central Government to make rulesto provide for the manner of holdingand disclosing beneficial interest andbeneficial ownership under thissection. The Ministry of CompanyAffairs may frame such rules at theearliest."

The SIT had requested Ministry ofCorporate Affairs to provide the followingdata:

i) Persons who held Directorship inmore than one Company

ii) Companies who have the same officeaddress

The data was subsequently provided bythe Ministry of Corporate Affairs. From aperusal of data given by the Ministry ofCorporate, the following points stand out:

i) There are 2627 persons holdingDirectorship in more than 20

Companies in violation of Section 165of the Companies Act, 2013. It maybe mentioned this is also in violationof s. 275 of the erstwhile CompaniesAct, 1956. The total number ofCompanies involved is 77696.

ii) A total of 345 addresses have at least20 Companies operating from thesame address. The total number ofCompanies sharing their address withat least 19 more Companies are 13581in number. While there is no specificAct/Rule which debars Companiesfrom having the same address, SIT hasdesired greater vigilance is accordedby law enforcement and intelligenceagencies like CBDT, CBEC, ED andFIU while examining the operationsof such Companies.

The SIT has requested Ministry ofCompany affairs to take necessary actionwith respect to violation of the CompaniesAct noted above. The SIT has furtherrequested CBDT, CBEC and EnforcementDirectorate to undertake due diligence onthe Companies data referred to above.

DSM/MAM/KA(Release ID :130163)