cnk knowledge tracker · 2018. 6. 15. · international taxation/transfer pricing notification /...

CNK & Associates, Mumbai

Contractor Nayak & Kishnadwala, Vadodara CNK Kaid Auditing, Dubai

January 2014

CNK Knowledge Tracker ……Be a Step Ahead

January 2014 For Private Circulation only

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Contents Corporate Law Updates

Companies Act, 2013 3

Circulars from Ministry of Corporate Affairs 3

Circulars from SEBI 5

Circulars from IRDA 9

Accounting and Auditing

ICAI Announcements 10

RBI circular 10

Expert Advisory Committee Opinions 11

Reserve Bank of India/ FEMA

Notification 14 Domestic Tax

Notification / Circulars 16

Recent judicial decisions 17 International Taxation/Transfer Pricing

Notification / Circulars 22

Recent judicial decisions 23

Service Tax

Latest Notifications/Orders & Circulars/ Trade Notices

29


Maharashtra Value Added Tax/ Central Sales Tax

Latest Notifications/Orders & Circulars 35


Disclaimer and Statutory Notice 39


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Corporate Law Updates

Companies Act, 2013

The Companies Act, 2013

The Companies Bill received the assent from President of India on 29th August 2013.

The Bill has now become Companies Act, 2013.

The Companies Act, 2013 contains 470 Sections wherein the operative part of the Section is

governed by the rules issued there under. For the same, the Ministry of Companies Affairs

(MCA) had released the following draft rules:-

1st / 2nd Phase in September 2013.

3rd Phase in October 2013.

4th Phase -Investor Education and Protection Fund Authority Rules, 2013 in Nov 2013.

5th Phase- Companies (Winding up) Rules, 2013 in November 2013.

6th Phase- Companies (Cost Records and Cost Audit) Rules, 2013 in November 2013.

MCA has also notified that National Company Law Appellate Tribunal (Salary,

Allowances and other Terms and Conditions of Service of Chairperson and other

Members) Rules, 2014 and National Company Law Tribunal (Salary, Allowances and

other Terms and Conditions of Service of President and other Members) Rules, 2013

will come into force on the date of publication in the official gazette.

Circulars from Ministry of Corporate Affairs(MCA)

Relaxation of last date and additional fee in filing of e-Form 23C for

appointment of Cost Auditor

The MCA has decided to extend the last date of filing and to relax the additional fee

applicable on e-form 23C to 30 November, 2013 or within 30 days of the commencement of

the company’s financial year to which the appointment relates, whichever is later


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Clarification with regard to applicability of the provision of Section 372A

of the Companies Act, 1956.

Section 185 of the Companies Act, 2013 which deals with Loans to Directors

(corresponding to Section 295 of the Companies Act, 1956) was notified with effect from

12th September 2013 while Section 186 of such Act relating to limits for giving Loan and

Investment by Companies was not notified.

Section 185 has removed the exemptions available under the earlier section 295 to private

companies and to transactions between a company and its subsidiary. Also, the requirement

for approval of Central Government to be sought for director related transactions is also not

incorporated. This has posed several practical difficulties to companies.

MCA has vide circular 18/2013 dated 19th November, 2013 clarified that Section 372A of

the Companies Act, 1956 dealing with Inter-corporate Loans shall continue to remain in

force till Section 186 of the Companies Act, 2013 is notified.

The above clarification however, does not seem to remove the difficulties faced on

implementation of section 185.

Clarification with regard to applicability of Section 182(3) of the

Companies Act, 2013.

As per Section 182(3) of the Companies Act, 2013, every company shall disclose in its profit

and loss account any amount or amounts contributed by it to any political party during the

financial year to which that account relates, giving particulars of the total amount

contributed and the name of the party to which such amount has been contributed.

With the coming into force of the scheme relating to ‘Electoral Trust Companies’ (ETC) in

terms of Section (24AA) of the Income Tax Act, 1961 read with Ministry of Finance

notification dated 31st January 2013, MCA, in relation to disclosures to be made under

section 182 (3) of the Companies Act, 2013 has issued a clarification vide circular 19/2013

dated 10th December, 2013 that –

Companies contributing any amount or amounts to an ETC for contributing to a

political party or parties are not required to make disclosures required under section

182(3) of Companies Act 2013. It will suffice if the Accounts of the company disclose

the amount released to an ETC.

Companies contributing any amount or amounts directly to a political party or parties

will be required to make the disclosures laid down in section 192(3) of the Companies

Act, 2013.


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ETC will be required to disclose all amounts received by them m other companies/

sources in their Books of Accounts and also disclose the amount or amounts contributed

by them to a political party or parties as required by section 182(3) of Companies Act,

2013.

.Clarification with regard to holding of shares or exercising power in a

fiduciary capacity- Holding and Subsidiary relationship under Section

2(87) of the Companies Act, 2013.

After notification of Section 2(87) of the Companies Act, 2013 which defines ‘subsidiary

company’ or ‘subsidiary’, a number of representations were received by the MCA.

Clarification was sought on whether shares held or power exercisable by a company in a

'fiduciary capacity' will be excluded while determining if a particular company is a subsidiary

of another company. The stakeholders further pointed out that in terms of section 4(3) of

the Companies Act, 1956, such shares or powers were excluded from the purview of

holding-subsidiary relationship.

MCA, has vide circular 20/2013 dated 27th December, 2013 clarified that the shares held

by a company or power exercisable by it in another company in a 'fiduciary capacity' shall

not be counted for the purpose of determining the holding-subsidiary relationship in terms

of the provision of section 2(87) of the Companies Act, 2013.

Circulars from Securities and Exchange Board of

India (SEBI) Discussion Paper (DP) on “Review of guidelines governing stock related

employee benefit schemes’

SEBI has issued the above DP paper for public comment to replace SEBI (Employee Stock

Option Scheme (ESOP) & Employee Stock Purchase Scheme (ESPS)) Guidelines, 1999.

The proposed guidelines are issued to provide for a regulatory framework for all kinds of

employee benefit schemes, address the concerns regarding composition of employee welfare

trusts, disclosures etc. and to enable secondary market transactions with adequate safeguards.

This DP includes matters and proposed changes such as :

What types of ESOP schemes should be covered under proposed new regulations.

How would the welfare schemes like general employee benefit scheme, retirement

benefit scheme and any other such employee benefit scheme be covered?


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Mode of setting up schemes viz. should they be directly granted and administered by

the company or a flexibility in the regulations to grant, manage and administer through

a trust.

What are the key provisions, power, duties which need to be captured in the relevant

agreement including trust deed meant for administering the scheme through agencies/

trust, etc.

Whether Secondary Market (SM) acquisitions should be permitted in Company’s own

or related entity’s shares for ESOP/ESPS/Stock Appreciation Right Scheme, General

Employee Benefit Scheme and Retirement Benefit Scheme.

For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1384944786125.pdf

Extension of timeline for alignment of employee benefit schemes with

the SEBI (ESOP and ESPS) Guidelines, 1999.

SEBI, vide circular (CIR/CFD/POLICYCELL/14/2013) dated January 17, 2013 inter alia,

made certain amendments to ELA and SEBI (ESOP and ESPS) Guidelines, 1999 in order to

address the concerns over acquisition of shares by employee welfare trusts from the SM.

Further vide circular dated May 13, 2013, SEBI extended the time line for aligning the

existing employee benefit schemes involving securities of the company with the SEBI

(ESOS and ESPS) Guidelines, 1999 to December 31, 2013002E

In light of the ongoing review, SEBI has further extended the time line for alignment of

existing employee benefit schemes with SEBI (ESOP and ESPS) Guidelines, 1999 to June

30, 2014. Accordingly, in Clause 35C (ii) of the ELA, the words “December 31, 2013” shall

be replaced with “June 30, 2014”.


Proposals for allowing certain class of companies to file shelf prospectus

for public issuance of non-convertible debt securities- Paper seeking

public comments

As per the notified Section 31 of the Companies Act, 2013, any class or classes of

companies, as SEBI may provide by regulations in this behalf, may file a shelf prospectus

with the Registrar of Companies. Therefore SEBI has proposed to allow following

companies/ entities to file Shelf Prospectus for public issuance of nonconvertible debt

securities-

Public financial institutions and Scheduled Banks (which were allowed under Section

60A of the Companies Act, 1956);

Issuers authorized by the notification of CBDT to make public issue tax free secured

bonds, with respect to such tax free bond issuances;

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1384944786125.pdf



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Infrastructure Debt Funds – Non-Banking Financial Companies regulated by RBI;

Other NBFCs, registered with RBI, complying with the prescribed criteria

Listed Issuers complying with prescribed criteria.


Compliance with the provisions for Equity Listing Agreement (ELA) by

listed Companies – Monitoring by Stock Exchanges

The ELA mandates listed companies to make periodic and even based disclosures which are

price sensitive in nature and which will have bearing on the performance of the Company.

Concerns have been raised that even though listed Companies make disclosures to Stock

Exchanges within the timeframe stipulated under the ELA, the contents of the disclosures

made by such Companies are not adequate and accurate.

Thus, it was felt that current monitoring mechanism of Stock Exchanges to ascertain the

adequacy and accuracy of disclosures made in compliance with the ELA needs to be more

effective. Accordingly, the Stock Exchanges are advised vide circular

CIR/CFD/POLICYCELL/13/2013 to:

Put in place appropriate framework to effectively monitor the adequacy and accuracy of

the disclosures made by listed Companies;

Devise framework in such a way that it detects any non-compliance/ violation of

Securities Contracts (Regulations) Act, 1956, SEBI Act, 1992, the Rules and Regulations

made thereunder, ELA, and any other applicable laws.

Put in place an appropriate mechanism for handling complaints related to such

inadequate and inaccurate disclosures and non –compliances mentioned above and

treat such cases as per Standard Operating Procedure laid down by SEBI vide Circular

No. CIR/MRD/DSA/31/2013 dated September 30, 2013;

Submit to SEBI an “Exception Report” in addition to the existing reporting

requirements , with the details of Companies which do not respond to clarifications

sought by them and/or where the response submitted by the Company is not

satisfactory in the opinion of the Stock Exchange and;

Obtain details of the promoters/directors and /or Key Managerial Personnel of the

listed Companies who shall be responsible for ensuring compliance with the provisions

of the ELA and in case of defaults, disclose such details on its website.

In order to enable the Recognised Stock Exchanges and the listed Companies to put in place

adequate infrastructure to ensure compliance with the requirements of this Circular,

Recognised Stock Exchanges shall begin with monitoring the adequacy and accuracy of

disclosures made by top 500 listed Companies (by market capitalization as on March 31,

2013) in compliance with Clauses 35, 36, 41 and 49 of the ELA for the quarter ending

December 31, 2013.





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Illustrative format of Statements of Assets & Liabilities in SEBI (ICDR)

Regulations, 2009.

Schedule VIII of SEBI (ICDR) Regulations, 2009 provides for the illustrative format of

Statement of Assets and Liabilities in offer document which is in accordance with the

erstwhile format of Schedule VI of the Companies Act, 1956.

After the notification and implementation of the revised Schedule VI of Companies Act,

1956, the aforesaid format has been updated and brought in line with the requirements of

the Companies Act, 1956. The revised format is also in line with the requirements of

Companies Act, 2013 as Schedule III of Companies Act, 2013 has adopted the same format

as notified under revised Schedule VI of Companies Act, 1956.

This Circular is applicable for all draft/final offer documents filed with the Board on or after

the date of this circular i.e. 3rd December 2013.


Justice Sodhi Committee on Insider Trading Regulations report to SEBI.

The high level committee to review the SEBI (Prohibition of Insider Trading) Regulations,

1992 has submitted its report to SEBI.

The committee has made a range of recommendations to the legal framework for

prohibition of insider trading in India and has focused on making this area of regulation

more predictable, precise and clear by suggesting a combination of principles-based

regulations and rules that are backed by principles.

Some of the salient features of the proposed regulations are set out below:

While enlarging the definition of “insider”, the term “connected person” has been

defined more clearly and immediate relatives are presumed to be connected persons.

Insiders would be prohibited from communicating, providing or allowing access to

“unpublished price sensitive information” (UPSI) unless required for discharge of duties

or for compliance with law.

Trading in listed securities when in possession of UPSI would be prohibited except in

certain situations provided in the regulations.

Trades by promoters, employees, directors and their immediate relatives would need to

be disclosed internally to the company. Trades within a calendar quarter of a value

beyond Rs. 10 lakhs or such other amount as SEBI may specify, would be required to be

disclosed to the stock exchanges.

For details refer: http://www.sebi.gov.in/cms/sebi_data/pdffiles/26940_t.pdf


http://www.sebi.gov.in/cms/sebi_data/pdffiles/26940_t.pdf


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Annual System Audit of Stock Brokers/ Trading Members

This circular has been issued to protect the interest of investors in securities and to promote

the development of, and to regulate the securities market.

The stock exchanges should ensure that system audit of stock brokers / trading members are

conducted in accordance with the prescribed guidelines enclosed in this circular.

Exchanges are advised to keep track of findings of system audits of all brokers on quarterly

basis and ensure that all major audit findings, specifically in critical areas, are rectified /

complied in a time bound manner failing which follow up inspection of such brokers may be

taken up for necessary corrective steps / actions thereafter, if any


Master Circular for Mutual Funds

Master Circular is a compilation of all the existing/applicable circulars issued by Investment

Management Department of SEBI issued to Mutual Funds. This Master Circular includes

circulars issued up to March 31, 2013.

Some of the chapters covered are :

Offer document for schemes

Conversion and consolidation of schemes and launch of additional plan

Risk Management System

Secondary Market Issues. etc.


Circulars from Insurance Regulatory and

Development Authority (IRDA)

Master Circular on preparation of Financial Statements and filing of

returns of Life Insurance Business

In order to enable the insurers to have a one stop document with all such directions issued

in connection with preparation and presentation of financial statements, and the filing of

financial returns, a master circular has been prepared. This Master Circular consolidates all

the Circulars issued by the Authority as appended to this circular and will have the effect of

superseding all the earlier circulars/ guidelines issued earlier in this regard. The Master

Circular covers all performance ratios mandated through the “Public Disclosures” and shall

be effective from 01 April 2014.

For details refer:

http://www.irda.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo2138&flag=1



http://www.irda.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo2138&flag=1


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Accounting and Auditing

• ICAI Announcements

Exposure Draft (ED) on Investment Entities (Amendments to Indian

Accounting Standard ( Ind AS) 110, Ind AS 112 and Ind AS 27)

The ICAI has issued this ED on Investment Entities which includes amendments to :

Ind AS 110- Consolidated Financial Statements

Ind AS 112 – Disclosure of Interests in Other Entities

Ind AS 27- Separate Financial Statements

ED of Revised Standard on Auditing (SA) 610 (Revised) Using the Work

of Internal Auditors

The ICAI has issued this ED which deals with the external auditor’s responsibilities if using

the work of internal auditors. This includes:

Using the work of the internal audit function in obtaining audit evidence; and

Using internal auditors to provide direct assistance under the direction, supervision and

review of the external auditor.

• RBI Circular Deferred Tax Liability (as per Accounting Standard (AS) 22) on Special

Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961.

The RBI has observed that some banks are not creating deferred tax liability (DTL) on

Special Reserve as per AS 22 Accounting for taxes on Income on the grounds that they do not

intend to withdraw from such reserve in the future. The matter has been examined by RBI

and banks are advised that, as a matter of prudence, DTL should be created on Special

Reserve.

For this purpose , banks may take the following course of action- If the expenditure due to the creation of DTL on Special Reserve as at 31 March 2013

has not been fully charged to the P&L account, banks may adjust the same directly

from Reserves. The amount so adjusted may be appropriately disclosed in the notes to

accounts of the financial statements for the financial year 2013-14.

DTL for amounts DTL for amounts transferred to Special Reserve from the year

ending 31 March 2014 onwards should be charged to the P&L account of that year.

In view of the requirement to create DTL on Special Reserve, banks may reckon the entire

Special Reserve for the purpose of computing Tier-I Capital.


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Expert Advisory Committee Opinions (As reported in the Chartered Accountant Journal, ICAI)

Treatment of Disputed Elements of Cost in Valuation of Inventory of

Raw Material.

FACTS

A Company (A Ltd.), is engaged in refining of crude oil. It is engaged in production of

petroleum products, i.e. high speed diesel, motor spirit, aviation turbine fuel, raw petroleum

coke etc. A Ltd. has stated that it shares transportation cost on crude oil with X Refinery and

Petrochemicals Limited and certain elements of this transportation cost are disputed. The

company has accounted for these disputed elements as a part of its raw material cost and

considers the same also for closing inventory valuation.

QUERY

Expert Advisory Committee (EAC) opinion is sought on whether the procedure followed

by A Ltd for valuation of inventory with inclusion of disputed items of additional

transportation cost for which no agreement has yet been reached between two parties as

part of cost of crude oil is correct or not.

OPINION

EAC notes that the basic issue raised in the query relates to the inclusion of additional

transportation cost which is under dispute in the aggregate inventory cost. It has not

examined any other issue that may arise from the facts of the case like appropriateness of

inclusion of various components of the additional transportation costs in the inventory

cost, creation of liability/provision in respect of disputed transportation cost etc.

EAC notes from the facts of the case that A Ltd. has recognised transportation cost which

is under dispute in the inventory cost and therefore, has presumed from the facts of the

case that these are the costs necessary for bringing the inventories to their present location

and condition. Accordingly, the issue that arises is that only because these are ‘disputed’,

whether these should be considered as ‘abnormal’ and excluded from inventory cost.

The EAC is of the view that just because a cost is under dispute does not make it wasted

materials, labour, or other production cost and, therefore, it cannot be considered as an

abnormal cost and opined that the procedure followed by the Company for valuation of

inventory with inclusion of additional transportation cost which is under dispute as a

part of cost of crude oil is correct.


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Accounting treatment of share application money pending for allotment

invested by holding company in subsidiaries.

FACTS

The Company is a Government Company and is holding 100% shares in its subsidiaries,

which are also Government Companies. The holding company receives funds from the

State Government which are invested in the subsidiaries as ‘Share Application Money’. The

subsidiaries have negative net worth and have not allotted shares till the date of approval of

accounts. Their auditors advised them to make suitable provision for diminution in the

value of investments. The Company made a provision upto the level of equity shares

actually allotted by the subsidiaries subsequent to the close of the financial year till the date

of approval of accounts of the holding Company.

QUERY

EAC opinion is sought on the following issues:

i. Whether share application money is to be considered for making provision for diminution

in the value of investments even though the shares for the same are yet to be allotted.

ii. Whether share application money, for which shares are allotted subsequent to the end of

financial year but before adoption of accounts, should be considered as share capital for the

purpose of making the provision.

iii. For making provision, whether to consider that revaluation of assets is under progress and

that the fair market value of assets would be higher than the historical value/cost of assets.

OPINION

The EAC opined that:

i. Since the money is not refundable, share application money pending allotment should be

considered as long-term investment while making provision for diminution. Even if it is

refundable and shown as ‘advances’, an appropriate provision should be made based on

recoverability.

ii. There is no need for disclosing the share application money as ‘shares’ till the date of

allotment, as it is taking place in the subsequent year. However, irrespective of the fact

that share application money is refundable or not, provision needs to be created based on

recoverability.

iii. In determining the value of investment, fair value of the underlying assets of the subsidiaries

may also be considered which will help in concluding whether the decline in the value of

investments is other than temporary.


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Recognition of free of Cost Equipment Provided by a Contractee to the

Contractor

FACTS

The Company is a defence public sector undertaking under the Ministry of Defence and is

engaged in the construction of Warships and Submarines. The Company entered into an

agreement with the buyer for the construction and delivery of 3 ships. The Company has

agreed for construction of 3 ships on ‘Fixed Price’ basis with variable component in respect

to certain items. The buyer intimated to the querist that certain equipments out of variable

cost items will be supplied by him at ‘free of cost’ for installation on board of ship.

Therefore, the variable cost item cost consists of 2 parts: - (a) Purchase orders of some

equipments are placed by the Company and also paid for. The equipment cost, installation

cost and profit and loss thereon is claimed and reimbursed by the buyer to the Company. (b)

Certain equipments are ordered and paid for by the buyer. These equipments are known as

‘Buyer Furnished Equipments’ and are delivered to the Company ‘free of cost’ for installing

in the ship.

QUERY

EAC opinion is sought on the on the following issues:

i. Whether the Buyer Furnished Equipment’s (BFE’s) cost can be considered as inventory

(simultaneously creating liability to the buyer) and then on issue to ship can be taken in WIP,

so that accretion to WIP will be recognised as revenue.

ii. Whether BFE’s value can be considered as a part of a sale value in the year of delivery.

OPINION

EAC opined that:

i. The BFEs cannot be considered as inventories/WIP. This is because, orders for BFEs

are directly placed by the buyer and payment is also made by the buyer. These are supplied

to the Company for installing in the ship and the buyer pays installation charges which are

included in the contract price. Thus, the Company has neither incurred any cost on BFEs

nor any amount is recoverable on account of such equipments except installation charges.

Therefore, such equipments are not ‘assets’ that may be considered as a part of WIP.

ii. The BFEs cost cannot be considered as part of sale value /contract revenue. After

installation in the ship, BFE’s are returned to the buyer after completion of the ship. These

are only held by the Company in the capacity of a bailee. Since, these cannot be

considered as ‘asset’, therefore cannot be considered as ‘inventory’ nor as WIP. Accordingly,

these cannot also be considered as a part of sale value or revenue of the Company as no

consideration would be receivable in respect of the cost of such equipments.


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Reserve Bank of India (RBI)/Foreign

Exchange Management Act, 1999

(FEMA)

RBI Notifications/ Orders & Circulars

Bank Rates

The movement in bank Rates over the period 2003 to date is as under:

This rate is relevant for inter-corporate loans & investments as per Sec 372A. As per Sub

Section (3) of Sec 372A “No loan to any body-corporate shall be made at a rate of interest lower than the

prevailing bank rate, being the standard rate made public under section 49 of the Reserve Bank of India

Act”. These provisions however do not apply to certain companies as specified in the said

section.

Section 372A will be replaced by section 186 of the Companies Act, 2013 as and when

notified.

Definition of Group Company – FDI and Transfer of Issue of Security by

a Person resident outside India

The RBI vide circular number 68 dated November 1, 2013 has incorporated the definition of

group company as under:

“Group company means two or more enterprises which, directly or indirectly, are in position to:

1. Exercise 26 percent, or more of voting rights in other enterprise; or

2. Appoint more than 50 percent, of members of board of directors in the other enterprise”.

Date

Bank Rate (%)

Before April 2003 6.00

14th February, 2012 9.50

16th April, 2012 9.00

28th January, 2013 8.75

18th March 2013 8.50

2nd May 2013 8.25

14th July 2013 10.25

20th September 2013 9.50

7th October 2013 9.00

29th October 2013 8.75


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Foreign Director Investment in Financial Sector – Transfer of shares

Pursuant to FEMA Notification 20/2000 dated 3rd May 2000 read with circular No. 43 dated

4th Nov 2011, transfer of shares from Residents to Non-residents where the investee

company was in the financial services sector, No objection Certificate (NOC) was required

to be obtained from the respective financial sector regulator/regulators of the investee

company as well as transferor and transferee entities and such NOCs were to be filed with

Form FC-TRS to the AD bank. The RBI vide circular number 72 dated November 11, 2013

has decided that the requirement of NOCs will be waived and no such NOCs shall need to

be filed along with form FC-TRS where the investee company is in the financial sector.

However, it is clarified that, any ‘fit and proper due diligence ’requirement as regards the Non-

resident investor shall have to be complied with.

External Commercial Borrowings (ECB) by Holding Companies / Core

Investment Companies (CIC) for use in Special Purpose Vehicles (SPV)

The Reserve Bank of India (‘RBI’) vide circular number 78 dated December 3, 2013, in order

to strengthen the flow of resources to Infrastructure sector has permitted Holding

Companies / CICs registered with the RBI to raise ECBs under both the automatic as well

as the approval route for project use in SPV subject to the following terms and conditions:

The SPV business activity should be engaged in the infrastructure sector (as defined)

The infrastructure project must be implemented by the SPV established exclusively for

implementing the project.

The ECB proceeds must be used for fresh capital expenditure or for refinancing of existing

rupee loans (under approval route) availed from domestic banks.

The ECB for SPV can be raised up to 3 years after the commercial operations date.

The SPV should furnish an undertaking that no other method of funding will be utilised for

that portion of fresh capital expenditure.

The ECB funds should be deposited into a separate escrow account conforming with the

existing guidelines on usage of ECB funds pending utilization and use of such proceeds

should be monitored by Ads for the permissible end uses.

For CICs there are two additional conditions applicable for raising finance via ECBs:

The ECB loan acquired is within the leverage limit stipulated for CICs; and

The ECB availed should be on a fully hedged basis for CICs with asset size below Rs. 100

crore.


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Domestic Tax

Notifications/Circulars Reverse Mortgage (Amendment) Scheme, 2013 - (Notification No.

79/2013 dated 7th October, 2013)

The Central Board of Direct Taxes (CBDT) has amended the Reverse Mortgage Scheme,

2008 by:

Authorizing the approved lending institutions to disburse the loan to annuity sourcing

institution i.e. LIC of India or any other insurer registered with IRDA for the purpose of

periodic payments by way of annuity to the Reverse Mortgager. The Mortgager can

therefore receive annuity till his lifetime which was not possible under the earlier scheme.

Such annuity received will not be considered as income in the hands of the recipient since it

is received under the Scheme.

Extending the period of reverse mortgage loan (either lump sum or periodic payments) to

20 years from existing 15 years.

Notification of various Commodity Exchanges as recognised

associations – (Notification Nos. 90/2013, 91/2-13 and 92/2013 dated 27th

November, 2013).

The CBDT has notified National Commodity and Derivative Exchange Ltd. (NCDEX),

Universal Commodity Exchange Ltd. (Mumbai ) (UCE) and Multi Commodity Exchange of

India Ltd. (MCX) as recognized associations under clause (iii) of explanation 2 of section

43(5)(e) for considering transactions of trading in commodity derivatives carried out on the

said exchanges as eligible transactions. The transactions carried out on these exchanges will

therefore not be considered as speculative in nature.

Changes in Rules for application of PAN in Form 49A and 49AA –

(Notification No. 96/2013 dated 23rd December, 2013).

The CBDT has revised Form 49A and 49AA and requirements of supporting documents for

PAN application across various categories of applicants by amending Rule 114(4) of the

Income Tax Rules, 1962.

PAN applications by Individuals being Indian citizens and Hindu Undivided Families (HUF)

have to be accompanied by proof of date of birth, which was not required earlier. For proof

of date of birth, the supporting documents include birth certificate, pension payment order,

marriage certificate, matriculation certificate, passport, driving licence, domicile certificate


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issued by the Government, or affidavit stating the date of birth. In case of PAN for HUF,

proof of date of birth of Karta has to be attached.

For proof of identity certain new documents have been included like Aadhar card, ration

card with photograph of the applicant and bank certificate in original on letter head from the

bank branch. Certificates from educational institutes which were earlier accepted as proof of

identity have been withdrawn and will no longer be valid.

For proof of address, the documents required such as utilities bills, credit card statements,

Depository account statements etc. must be recent and not more than three months old.

For application of PAN for HUF, an affidavit by the Karta stating the name, father's name

and address of all the coparceners on the date of application must be attached.

Recent Judicial Decisions

Income from Business and Profession and allowability of expenditure

Depreciation allowable on revaluation of agency rights including goodwill – CIT and

Another v. Manipal Universal Learning Pvt. Ltd. [2013] 359 ITR 369 (Karnataka High

Court).

The Karnataka High Court held that in case of sale of agency rights and revaluation of such

rights, the excess consideration paid over the value of the net assets was in the nature of

goodwill paid for the future profits of the business, and depreciation on the same was

allowable.

Any right which enables an assessee to carry on business effectively and profitably is

an intangible asset and is eligible for depreciation – Tirumala Music Centre (P) Ltd.

v. ACIT [2013] 39 taxmann.com 196 (Hyderabad Trib.)

The Hyderabad Tribunal held that the term ‘commerce’ in the expression ‘business or

commercial rights’ encompasses business in its fold and therefore, any right which is

obtained carrying on a business effectively and profitably is an intangible asset and is eligible

for depreciation.


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Disallowance under section 14A read with Rule 8D would be added back in

computation of Book Profit for the purpose of Minimum Alternate Tax – ITO, Ward

– 4(2)(4), Mumbai v. RBK Share Broking (P.) Ltd. [2013] 37 taxmann.com 128

(Mumbai Trib.)

The Mumbai Tribunal held that under Rule 8D, even though no specific amount debited to

the Profit and Loss Account is disallowed, it is presumed that such amount of disallowance

is always out of the expenses specifically debited to the Profit and Loss Account. Hence,

such disallowance, being expenditure incurred to earn exempt income is to be added to the

Book Profits in the case of computation of the Minimum Alternate Tax.

Disallowance of Capital expenditure on account of non-deduction of tax at source –

CIT v. Mark Auto Industries Ltd [2013] 358 ITR 43 (Punjab & Haryana High Court)

The Punjab & Haryana High Court held that in the absence of any requirement of law of

deducting tax out of expenditure on technical know-how which was capitalized and which

was not claimed as revenue expenditure, the deduction could not be disallowed under

section 40(a)(i) of the Act.

Whether provisions of section 40(a)(ia) apply to sums “payable” at the year-end or

also to the sums paid during the year - Income Tax Officer v. M/s Theekathir Press

[2013] ITA No. 2076/Mds/2012 (Chennai Tribunal).

Following the rulings of Special Bench in Merilyn Shipping and Transports 16 ITR 1 and the

Allahabad High Court in Vector Shipping Services, the Chennai Tribunal held that disallowance

provisions under section 40(a)(ia) apply only to sums payable at the year end and not to the

sums paid during the year.

However, post this ruling, CBDT has issued Circular no. 10/DV/2013 dated 15th December

2013 wherein it is stated that “the Board is of the view that the provisions of section

40(a)(ia) of the Act would cover not only the amounts which are payable as on 31st March of

a previous year but also which are payable at any time during the year. The statutory

provisions are amply clear and in the context of section 40(a)(ia) of the Act, the term

“payable” would include ‘amounts which are paid during the previous year’. ”

Premium paid to LIC for payment of leave encashment to employees not covered

under section 43B –Hero MotoCorp Ltd. v. ACIT, Range -12, New Delhi [2013] 60

SOT 25 (Delhi Trib.)

The Delhi Tribunal held that section 43B applies only in case of actual payment of leave

encashment by the employer to its employee and not in a case, wherein the employers has

paid premium to LIC towards master policy to cover leave encashment to its employees. In


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view of the same, the Tribunal held that such payments would not be disallowed under

section 43B.

Loss on premature cancellation of foreign exchange forward contracts in case of

export business is not a speculation loss – London Star Diamond Company (I) Pvt.

Ltd v. DCIT [2013] 38 taxmann.com 338 (Mumbai Trib.)

The Mumbai Tribunal held that loss arising on premature cancellation of a forward contract

entered into with banks for hedging foreign exchange losses in relation to exports is integral

to or incidental to the export activity and therefore, cannot be considered as a separate

activity being a speculative activity. Therefore, the Tribunal held that such loss was a

business loss and not a speculation loss.

Inter-corporate deposits are not chargeable to tax as deemed dividend – IFB Agro

Industries Ltd. v. JCIT [2013] itatonline.org (Kolkata Trib.)

The Kolkata Tribunal has held that the term “deposits” does not constitute loans and

advances and therefore, inter-corporate deposits are not chargeable to tax as deemed

dividend.

Capital Gains

Amount received by a partner on retirement from partnership firm not chargeable to

tax - CIT and Another v. Dynamic Enterprises [2013] 359 ITR 83 (Karnataka High

Court- Full Bench); CIT v. Mr. Riyaz A. Sheikh [2013] itatonline.org (Mumbai High

Court)

The Karnataka and Mumbai High Courts held that when a retiring partner takes only money

towards value of his share and when there is no distribution of capital assets among the

partners, there is no transfer of a capital asset and consequently no tax on profits and gains is

payable under section 45(4) of the Act.

Taxability of transfer of right over property - SSPDL Ltd. v. DCIT, Circle – 3(2)

[2013] 59 SOT 68 (Hyderabad Tribunal)

The assessee carrying in business of property development entered into a MOU with owner

of property for its purchase. Later, the assessee entered into an agreement of sale, wherein it

agreed to relinquish its rights over the property and received a sum. The Hyderabad Tribunal


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held that a right over a property which is part and parcel of business undertaking constitutes

capital asset under section 2(47) of the Act and any transfer or relinquishment of any such

right is chargeable under the head ‘capital gains’.

Date of transfer in case of Development Rights Agreement – Bhatia Nagar Premises,

Co-operative Society Ltd. v. Income Tax Officer [2013] 59 SOT 134 (Mumbai

Tribunal)

The Mumbai Tribunal held that transfer of property under the Development Rights

Agreement could be said to have taken place when the possession is handed over to the

developer and not on the date of agreement when only a small portion of the consideration

had been received as earnest money deposit.

Conversion of leasehold property into a freehold property does not change the period

of holding – CIT v. Smt. Rama Rani Kalia [2013] 38 taxmann.com 176 (Allahabad

High Court).

The Allahabad High Court held that conversion a property from a leasehold property into a

freehold property only improves the title of the property and the period of holding of the

said property would be computed from the date on which such property was held and not

the date of conversion.

Section 54EC exemption is available despite sale of depreciable assets being deemed

to be treated as short term capital assets–CIT v. Aditya Medisales Ltd [2013] 38

taxmann.com (Gujarat High Court) .

The Gujarat High Court held that section 50 which deems depreciable assets to be short

term capital assets is only for the limited purpose of computation of capital gains whereby

the benefit of indexation is not allowed. The High Court further held that nothing in the law

prevented the assessee from claiming exemption under section 54EC against capital gains

arising on sale of depreciable assets held for a period exceeding 3 years.

TDS Credit and Assessment Procedures

TDS credit to be given even in absence of TDS certificate or entry in form 26AS –

Citicorp Finance (India) Ltd. v. ACIT [2013] itatonline.org (Mumbai Trib.)

Following the Delhi High Court decision in the case of Court on Its Own Motion v. CIT, the

Mumbai Tribunal held that credit for TDS would have to be given even if the TDS is not

reflected in the computer generated form 26AS. The Department should grant credit for


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TDS once valid TDS certificates are produced or where the TDS certificate has not been

issued by the deductor, on the basis of evidence produced regarding tax deducted at source

and on furnishing an indemnity bond.

Voluntary disclosure does not absolve assessee of penalty unless explanation offered

is bonafide and satisfactory – MAK Data Pvt Ltd v. CIT [2013] 38 taxmann.com 448

(Supreme Court)

The Supreme Court has held that an assessee cannot be absolved of penalty under section

271(1)(c) on mere voluntary disclosure for income concealed. The assessee must provide a

bonafide explanation for concealment of income or furnishing inaccurate particulars of

income. It is only on satisfaction of the Assessing Officer (AO) that bonafide and sufficient

explanation is provided, can the assessee be absolved of the penalty.

The AO has the power to launch fishing and roving enquiries with a view to detect

tax evasion under section 133(6) – Kathiroor Service Cooperative Bank v. CIT [2013]

39 taxmann.com 49 (Supreme Court)

The Supreme Court held that the legislative intent behind section 133(6) was to give the AO

wide powers to gather general particulars in the nature of survey in order to tackle tax

evasion effectively and therefore, the AO is empowered to launch fishing and roving

enquiries with a view to detect tax evasion under this section.


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International Taxation / Transfer

Pricing

Notifications/Circulars

International Tax

Cyprus notified as a ‘notified jurisdictional area under section 94A of the

Act - Notification Number 86 / 2013 dated November 1, 2013

The Ministry of Finance has issued a Notification dated 1.11.2013 notifying Cyprus as a

“notified jurisdictional area” under section 94A of the Act. The consequences of the

Notification are draconian and are broadly as follows:

All transaction with a person in Cyprus will have to meet the rigors of transfer pricing ;

A deduction in respect of any payment made to any financial institution in Cyrus and

deduction in respect of any other expenditure or allowance arising from the transaction with

a person located in Cyprus is subject to specific conditions;

Sum received from a person located in Cyprus is deemed to be the income of the assessee

unless the assessee satisfactorily explains the source of such money in the hands of the payer;

Payments to persons located in Cyprus is liable for TDS at the highest of the following rates: At the rate or rates in force;

At the rate specified in the relevant provision of the Act; or

At the rate of thirty percent.

Transfer Pricing Clarification in respect of applicability of section 144C (1) - Circular

Number 9 / 2013 dated November 19, 2013. The Central Board of Direct Taxes (‘CBDT’) vide para 45.5 of circular No. 5 of 2010 dated

03.06.2010 had explained the provisions of section 144C(1) of the Income-tax Act, 1961

(‘the Act’) wherein inadvertently it was stated that the provisions of the said section will

apply in relation to the assessment year 2010-11 and subsequent years.

The CBDT has now clarified that section 144C of the Act is applicable to any order which

proposes to make variation in income or loss returned by an eligible assessee, on or after 1st

October, 2009 irrespective of the assessment year to which it pertains.


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Directives on Safe Harbour Rules - CBDT letter dated December 20,

2013

Pursuant to the final Safe Harbour Rules notified w.e.f.18th September 2013 the CBDT has

issued a letter dated December 20, 2013 in which it has laid down important directives and

clarifications on the manner in which the Safe Harbour Rules are to be implemented. The

directives and clarifications are as follows:

AOs should carefully verify and provide to the CBDT in writing the details of all Form

3CEFA received by them relating to Safe Harbour Options;

The AO has to examine the form and decide within 2 months of the end of the month in

which the option is filed as to whether to accept the Safe Harbour option or to make a

reference to the TPO. If no action is taken, the Safe Harbour option will be considered as

having been accepted and it will remain valid for 5 years;

If there are minor defects in Form 3CEFA, the AO has to provide an opportunity to the

taxpayer to rectify the same. However, the statutory time limit of 2 months provided in Rule

10TE (14)(i) cannot be exceeded;

The AO has to verify the eligibility of the assessee and the international transactions. Under

Rule 10TF, the Safe Harbour Rules will not apply to a country notified under section 94A

(e.g. Cyprus);

If the taxpayer has opted for Safe Harbour but has reported rates or margins less than the

Safe Harbour rates or margins, the income has to be computed on the basis of the Safe

Harbour rates or margins;

The Safe Harbour rates or margins are not a benchmark for cases not covered by the Safe

Harbour Rules. In such cases, a regular transfer pricing audit should be carried out without

regard to the Safe Harbour rates or margins


International Tax

Distinction between copyrighted article and copyright right still relevant

under Double Taxation Avoidance Agreement (DTAA) despite

retrospective amendment under the Act - DIT v Nokia Networks OY

(358 ITR 259) - Delhi High Court.

The Delhi High Court held that payment for a copyrighted article does not fall within the

purview of ‘royalty’ under the India-Finland Double Taxation Avoidance Agreement

(‘DTAA’). The provisions of the Act which were amended, with retrospective effect by the

http://www.itatonline.org/info/index.php/finance-ministry-notifies-cyprus-for-fraud-tax-evasion-non-compliance/


CNK & Associates 24

Finance Act, 2012; to clarify that payment for computer software would qualify as ‘royalty,

the Delhi High Court observed that such amendments cannot be read into a DTAA.

With respect to taxation of turnkey contracts for supply of equipment and installation, the

Delhi High Court held that the determinative factor is where the property in goods passes.

The place of negotiation, the place of signing of agreement or formal acceptance thereof or

the overall responsibility of the taxpayer is irrelevant circumstances. The Court also held that

the assessee’s liaison office merely carried on advertising activities and did not constitute a

business connection or permanent establishment as it did not carry out any business activity

for the assessee in India and that its role was only to assist the assessee in preliminary and

preparatory work.

Fees paid to a foreign company for operating India specific website

which provides online auction is not fees for technical services. Indian

group entities rendering marketing support services are ‘dependent

agents’ however they do not constitute Dependent Agent Permanent

Establishments in India - eBay International AG v DDIT – ITA No 8907

/ Mum / 2010 - Mumbai ITAT

The assessee is a company incorporated in Switzerland and operates in India providing

online platforms for purchasing and selling of goods and services to users in India. The

assessee had entered into market support agreements with eBay India and eBay Motors for

support services in connection with its websites. The assessee earned revenues from the

sellers of goods who were required to pay a user fee on every successful sale of their

products on the website. The issues before the Tribunal were whether: (i) The user fee from

the sellers in India would be in the nature of fees for technical services under the Act (ii)

EBay India and eBay Motors constitute a permanent establishment (‘PE’) for the assessee

under the India – Switzerland DTAA. The Tribunal ruled that apart from making the

assessee’s websites available in India on which various products of third-party sellers are

displayed, the assessee had no role in affecting the sales. Accordingly, the fees received from

the sellers on the successful sales cannot be designated as consideration for rendering

managerial, technical or consultancy service under the fees for technical services definition

under the Act. The Tribunal, therefore, upheld the classification of the income as ‘business

profits’. On the PE aspect under the DTAA, the Tribunal held that though EBay India and

eBay Motors are ‘dependent agents’ of the assessee, as they are legally and economically

dependent on the assessee, they do not constitute a PE for the assessee as they do not have

an authority to conclude contracts on behalf of the assessee..


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Expatriation of employees under seconded agreement without transfer of

technology would not fall under term make available as per article

13(4)(c) of Indo-UK DTAA, and therefore, payment made by assessee

towards salary expenditure of employees deputed to assessee under

seconded agreement could not be considered as fees for technical

services - Additional DIT v Mark & Spencer Reliance India P Ltd – 38

taxmann.com 190 – Mumbai ITAT

The assessee made a payment of Rs. 4.83 crores to Mark & Spencer UK for the purpose of

salary of employees deputed to the assessee under a seconded agreement. The Mumbai

Tribunal held that merely providing the employees or assisting in the business would not

constitute make available of the services of any technical or consultancy in nature. It held

that expatriation of employee under seconded agreement without transfer of technology

would not fall under the term make available as per the article 13(4)(c) of Indo-UK DTAA.

As per the definition of fees for technical services the same means payment of any kind to

any person in consideration for service or services of technical nature if such services make

available technical knowledge, experience, skill know how or process which enables the

person acquiring the services to apply technology contained therein.

Royalty and fees for technical services cannot be taxed under residual

Article 22 of India- Thailand treaty, unless item of income does not fall

under any other express provisions of DTAA - Bangkok Glass Industry

Co. Ltd. v. Assistant Commissioner of Income-tax [2013] 34

taxmann.com 77 (Madras)

The Madras High Court held that India-Thailand DTAA does not contain a specific article

dealing with Fees for Technical Services. Accordingly, since the entire payment could not be

regarded as Royalty and the same was in the nature of Fees for Technical services, it was

held that the same has to be taxed under Article 7 on business profits. The taxability under

Article 22 on other income would come into play only when an item of income did not fall

for consideration under any of the express provisions of the DTAA.


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Section 195(1) of the Act applies to issue of shares to non-resident. AO

has no power to issue NIL Tax Deduction at Source certificate –

BIOCON Biopharmaceuticals Pvt. Ltd. v. Income Tax Officer (ITA

Nos. 507 to 510/Bang/2009)

The Bangalore Tribunal held that issue of shares i.e. payment of consideration in kind for

availing technology from the non-resident was also contemplated under the provisions of

section 195(1) of the Act. The use of the expression ‘or by any other mode’ in section 195(1)

made the intention of the legislature clear that those provisions are to be attracted even to

cases where payment was made otherwise than by money.

Further, the Tribunal also held that section 195(2) of the Act presupposes that the person

responsible for making the payment to a non-resident was in no doubt that tax was payable

in respect of some part of the amount to be remitted to a non-resident, but was not sure as

to what should be portion, so taxable or was not sure as to the amount of tax to be

deducted. It therefore concluded that the order passed by the AO holding that no tax was

deductible at source would be non est. in law.

Transfer Pricing

Arm’s length price of royalty for trademark usage and technical know-

how fee can be determined as per Transactional Net Margin Method

(‘TNMM’). Approval of Reserve Bank of India & Government means

payment is as at arm’s length - Cadbury India Ltd v ACIT – (ITA No

7408 / Mum / 2010 & ITA No 7641 / Mum / 2010– Mumbai ITAT)

The Mumbai Tribunal held that the assessee has been paying royalty on technical know-how

to its parent AE since 1993. Other group companies across the Globe are also paying the

same royalty. Also, the payment is as per the approval given by the RBI and the SIA. Hence

there cannot be any scope of doubt that the royalty payment on technical know-how is at

arm’s length. As regards the royalty on trademark usage, the assessee is in fact paying a lesser

amount if the payment is compared with the payment towards trademark usage by other

group companies using the brand “Cadbury” in other parts of the world. Accordingly, the

royalty payment on trademark usage is also within the arms’ length and does not call for any

adjustment.


CNK & Associates 27

TNMM under Rule 10B(1)(e) contemplates ALP determination with

reference to the relevant factors (cost, assets, sales etc.) of the assessee

and not those of the AE or third party. Assessee’s study report cannot be

discarded without showing how it is wrong. Finding that assessee is a

risk bearing entity should be based on tangible material - Li & Fung

India Pvt Ltd v Commissioner of Income-tax - (ITA 306 / 2012) – Delhi

High Court

The assessee rendered sourcing support services to its Hong-Kong based Associated

Enterprise for which it received a 5 percent markup on its cost and used the Transactional

Net Margin Method to determine the arm’s length price. The TPO held that cost to be

considered for the purpose of determining the 5 percent markup should be the FOB value.

On appeal the Delhi Tribunal held that the assessee was performing all the critical functions

with the help of tangible and unique intangibles as well as supply chain developed, which

helped the AE to enhance its business and resulted in location saving to the customer.

Accordingly the Tribunal held that the compensation for the services rendered by assessee to

the AE, equivalent to the cost plus 5% markup was not at arm’s length. The Tribunal

therefore accepted the TPO’s reasoning for applying the 5% of the FOB value of exports.

On appeal, the High Court held that using the FOB value as the basis of computing the 5

percent markup is not in line with the provisions of the Act and Rules as the compensation

model of the assessee is based on the functions performed and the operating costs incurred

and not the cost of good sourced by third party customers from Indian vendors / exporters.

To apply the TNMM, the assessee’s net profit margin realized from international

transactions had to be calculated only with reference to cost incurred by it, and not by any

other entity, either third part vendors or the AE. The High Court further held that Rule

10(B)(1)(e) of the Rules does not use the cost incurred by third parties to compute the net

profit margin of the assessee for the purpose of TNMM. The assessee had made no

investment in plant, inventory, working capital etc nor did it bear the enterprise risk for

manufacture and export. It merely rendered support services in relation to the exports which

were manufactured independently. Thus, attributing the cost of such third party

manufactures when the assessee did not engage in such activity and when those costs were

clearly not the assessee’s cost, but those of third parties is clearly impermissible.


CNK & Associates 28

Discounted Cash Flow method most appropriate for determining arm’s

length value of shares - VIHI LLC v. Assistant Director of Income Tax

(ITA No. 17/(Mds.)/2012)

The Chennai Bench held that Discounted Cash Flow method is most preferable over the

Yield method or Net asset value method prescribed in guidelines of the Comptroller of

Capital Issues for determining the arm’s length price for sale of shares.

Less complex party to controlled transactions should be tested party for

analyzing international transactions – General Motors India Pvt. Ltd. v.

DCIT [2013] 37 taxmann.com 403 (Ahmedabad Tribunal)

The Ahmedabad Tribunal rejected the revenue’s argument that foreign AE should not be

selected as a ‘tested party’ as the companies selected by the taxpayer did not fall within the

ambit of TPO’s jurisdiction and, thus, he could neither have called for any additional

information nor scrutinized their books of account. It further observed that the Revenue

could get all the relevant particulars around the globe by using the latest technology under its

thumb or could direct the taxpayer to furnish the same. Thus, taking into consideration the

various decisions on the subject and in particular United Nation’s Practical Manual on

Transfer Pricing, it allowed the Foreign AE to be selected as the tested party since it was the

least complex party to the controlled transaction.

Applicability of transfer pricing in respect of receivables - ACIT v M/s

Sanghavi Exports - (ITA No 24/Mum/2012) – Mumbai ITAT

The assessee was engaged in the business of cutting and polishing of rough diamonds and

manufacturing of studded jewellery and exporting them. The Transfer Pricing Officer

(‘TPO’) observed that the tax payer had amount receivables from its related parties and that

the average period of receivable was 210 days as compared to 180 days in case of third

parties. Resultantly an adjustment of 8 percent on the average receivables was made to the

assessee’s income. The CIT (A) held that debit balance was not an individual international

transaction by itself and was a result of an international transaction. The department

contended that the CIT (A)’s order should be in accordance with the retrospective

amendment to section 92B of the Act and therefore be overruled. The ITAT set aside the

order of the CIT(A) and remanded the matter back to the TPO as the explanation to section

92B of the Act was to be considered..


CNK & Associates 29

Service Tax

Latest Notifications/Orders & Circulars/Trade

Notices

Service Tax exemption granted to canteen in a factory

Notification No. 14 / 2013-Service Tax dated. 22.10.2013:

The Central Government has extended the scope of Exemption to Services provided in

relation to serving of food or beverages by a canteen maintained in a factory covered under

the Factories Act, 1948 (63 of 1948), having the facility of air-conditioning or central air-

heating at any time during the year.

Time Period specified for submitting the Quarterly statement by

Developers and SEZ units.

Notification No. 15/2013-Service Tax dated 21.11.2013

Amended the Notification No. 12/2013-Service Tax dated 01st July, 2013 whereby the

quarterly statement, in Form A-3 by the developer and units of SEZ claiming ab - initio

exemption under the said notification is to be furnished by 30th of the month following the

particular quarter to the jurisdictional Superintendent of Central Excise.

Lowering of the threshold limit for e-payment

Notification No. 16/2013 - Service Tax dated 22.11.2013

Instruction No. F.No: 137/116/2012- Service Tax

Amended the proviso to rule6(2) of the Service Tax Rules, 1994, whereby provisions of

mandatory electronic payment of Service tax has been extended to tax payers whose liability

is Rs. 1 Lac or more instead of the existing Rs. 10 Lacs. This Notification shall come in to

force with effect from 01st January, 2014

Clarification regarding Restaurant Service

Circular No.173/8/2013 –ST dated 07.10.2013.

In a complex, if there is more than one restaurant, which are clearly demarcated and

separately named but food is sourced from a common kitchen, only the service provided in

the air-conditioned restaurant is liable to service tax and service provided in a non-air-


CNK & Associates 30

conditioned or non-centrally air- heated restaurant will not be liable to service tax. In such

cases, service provided in the non-air-conditioned / non-centrally air-heated restaurant will

be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.

Services are provided by air-conditioned restaurant in other areas e.g. swimming pool or an

open area attached to the restaurant, are liable service tax.

If goods are sold across the counter on MRP basis they have to be excluded from total

amount for the determination of value of service portion

Clarification in respect of Service Tax Voluntary Compliance

Encouragement Scheme (VCES)

Circular No.174/9/2013 –ST dated 25.11.2013.

Central Board of Excise and Customs (CBEC) has issued the following clarifications:

The designated authority shall ensure that no declaration is returned citing the reasons that

the same is incomplete. In all cases, declaration should be promptly received and duly

acknowledged. Request for clarification should be dealt with promptly. Defects in the

application, if any, should be explained to the declarant and possible assistance be provided

in rectifying these defects. The effort must be to accept a declaration, as far as possible, and

recover the arrears of tax.

The conditions prescribed under section 106(2) for rejection of declaration may be

construed strictly and narrowly. The concerned Commissioner may ensure that no

declaration is rejected on frivolous grounds or by taking a wider interpretation of the

conditions enumerated in section 106(2). If the issue or the period of inquiry, investigation

or audit is identifiable from summons or any other document, the declaration in respect of

such period or issue alone will be liable for rejection under the said provision. Examples-

If an inquiry, investigation or audit, pending as on 1.3.2013 was being carried out for

the period from 2008-2011, benefit of VCES would be eligible in respect of ‘tax dues’

for the year 2012, i.e., period not covered by the inquiry, investigation or audit.

If an inquiry or investigation, pending as on 1.3.2013 was in respect of a specific issue,

say renting of immovable property, benefit of VCES would be eligible in respect of ‘tax

dues’ concerning any other issue in respect of which no inquiry or investigation was

pending as on 1.3.2013.

It is also reiterated that the designated authority, if he has reasons to believe that the

declaration is covered by section 106(2), shall give a notice of intention to reject the

declaration within 30 days of the date of filing of the declaration stating such reasons to

reject the declaration. Commissioners should ensure that this time line is followed

scrupulously

In cases where documents like balance sheet, profit and loss account etc. are called for by

department in the inquiries of roving nature, while quoting authority of section 14 of the

Central Excise Act in a routine manner, the designated authority/ Commissioner concerned

may take a view on merit, taking into account the facts and circumstances of each case as to


CNK & Associates 31

whether the inquiry is of roving nature or whether the provisions of section 106 (2) are

attracted in such cases.

The benefit of the Scheme would be available even if payment or part payment of tax dues

made after 10th May, 2013 but before filing the declaration if such amount is declared under

the scheme subsequently along with the remaining tax dues, if any, provided that Cenvat

credit has not been utilized for payment of such amount.

No declaration can be made in such case where service tax pertaining to the period covered

by the Scheme along with interest has already been paid by the parties, before the Scheme

came into effect, so as to get waiver from penalty and other proceedings as no “tax dues” is

pending in such case. However, in such cases, there may be a case for taking a lenient view

on the issue of penalties under the provision of the Finance Act, 1994. In this regard

attention is invited to section 73 (3) and section 80 of the Finance Act, 1994.


Larsen & Toubro Ltd. vs. CCE, Vadodara-II 2013 (32) STR 113 (Tribunal-Ahmadabad) The Assessee has units of located in SEZ as well as DTA. Separate Registrations have been

taken. Services are provided by SEZ unit to DTA unit. Separately invoices have been raised

by SEZ unit on DTA unit. The department sought to demand service tax on SEZ units on

the ground that units located in SEZ and DTA units of the appellant are separate legal

entities and services provided by SEZ units are taxable service.

The Tribunal held that, SEZ units do not have separate balance-sheet and audited accounts

and they are considered as division of L&T for all statutory and SEZ purposes. Merely

because invoices have been issued and agreement has been entered into, SEZ unit do not

become separate legal entities. In terms of definition of person, it cannot be said that the

units in SEZ and DTA units can be considered as separate person.

Decided in favour of the Assessee

Sports Club of Gujarat Ltd v Union of India [2013 (31) STR 645 (Guj)] Sections 65(25a), Section 65 (105) (zzze) and Section 66 of the Finance Act, 1994 held to be

ultra vires as amended by the Finance Act,2005 to the extent of services being provided by a

club to its members


CNK & Associates 32

Three different clubs of Ahmadabad filed a writ seeking that Sections 65(25a), Section

65(105) (zzze) and Section 66 of the Finance Act, 1994 be held ultra-virus to the extent of

services being provided by a club to its members.

Relying upon a long line of cases, the latest among them being the Jharkhand HC decision in

the case of Ranchi Club Limited [2012 (26) STR 401 (Jhar)], the Gujarat HC took note of

the principle of mutuality and held that since service requires existence of two parties, no

service transaction can exist between club and its member. In this regard, income tax

jurisprudence was also considered.

The HC also held that there was no loss of mutuality even if the club in question was

incorporated under the Companies Act, 1956.

Vodafone Essar Cellular Ltd. vs. CCE, Pune-III 2013 (31) STR 738 (Tri-Mumbai) The appellant in this case, claimed export of telecom services provided in India to

International in bound roamers registered with foreign telecom network operators, for

which consideration was received in convertible foreign exchange. The Tribunal held that,

there is no contract/agreement between assessee and subscriber of foreign telecom operator

and therefore foreign telecom service provider is paying for services as recipient of service.

Telecom service falls under category III of ESR, 2005 and CBEC in circular No.

111/5/2009-ST dated 24/02/2009 clarified that benefit accruing to foreign service provider

as subscriber billed for services rendered. The ratio of Tribunal’s decision in Paul Merchants

2013 (29) STR 257 (Tribunal) is squarely applicable to the present case and therefore service

is qualified as export of service

Bhagwati Security Services (Regd.) vs. UOI 2013 (31) STR 537 (All.) Service tax liable to reimbursed from the service receiver

The assessee has provided security services to BSNL under an agreement. The petitioner

deposited service tax on reimbursement of expenses and applied for reimbursement of

service tax from BSNL, which was denied on the ground that, the same was not

contemplated in the agreement.

The High Court held that, Service tax is statutory liability and Statute is imposing the tax

upon the person to whom the service is being provided and the service provider is merely a

collecting agency, therefore the respondent is liable to make reimbursement of service tax to

petitioner.


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[Kerala Classified Hotels and Resorts Association vs. UOI (2013) 31 STR 257 (Ker.)] Services provided by restaurants/ hotels- is unconstitutional

The Kerala High Court held the levy of service tax on services provided by restaurants

[clause (zzzzv)] and accommodation services provided by hotels, inns, guest house, club or

campsite [sub clause (zzzzw)] as unconstitutional on the following grounds:

As regards services provided by restaurants, the Court held that supply of food or beverages

“by way of or as part of any service”, is deemed to be a ‘sale’ under article 366(29-A)(f) and

hence the State Government alone has the legislative competence to enact the law for

imposing a tax on the service element forming a part of sale of such goods under entry 52 of

the state list (i.e. tax on sale or purchase of goods) and the Central Government in exercise

of the residuary power under entry 97 of List I of the Constitution cannot impose service

tax.

As regards services provide by hotels or guest house, the Court held it to be within the

exclusive legislative function of the State under entry 62 of List II (i.e. tax on luxuries)

The High Court also allowed the petitioners to seek refund of the tax (if any) paid by them

on the said services

CCE v. Cadila Healthcare Ltd. (2013) 30 STR 3 (Guj.)

The following credits on input services were held by the High Court to be admissible /

inadmissible to a company engaged in manufacture of drugs:

Credit on clinical testing services availed prior to commencement of commercial production

was allowed in view of the fact that the final product could be manufactured only after

obtaining regulatory approval of the clinically tested samples and therefore such services

were directly related to the manufacture of the final product. The department plea that

unless goods reach commercial production stage Cenvat Credit was not admissible was

rejected.

Service tax paid (as a recipient of service) on commission paid to foreign agents for ‘sale of

final products’ was held inadmissible since-

They are not services directly or indirectly in relation to manufacture of final products

or clearance of final product from the place of removal;

The services are not in relation to ‘sales promotion’ but are for actual sales of goods on

behalf of the principal;

They are not ‘activities related to business "such as" (meaning of the same nature)

accounting, auditing, financing share registry, etc. since it is not of the same nature.


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Cenvat Credit on courier services used for transportation of goods outside factory would be

admissible for the period prior to 1-4-2008, being service used in relation to clearance of

final products from the place of removal.

Cenvat Credit in respect of clearing and forwarding agent’s service would be admissible for

the period prior to 1-4-2008 as being services used in relation to clearance of final products

from the place of removal.

Cenvat Credit on repair and maintenance of copier machine, air-conditioner and water

cooler are admissible being services necessary for the factory building as well as for activities

relating to business and therefore, integrally connected with the business of the

manufacturer.

The services of interior decorator and commercial or industrial construction being services

used in relation to repair / renovation of factory would fall under the inclusive part of the

definition of ‘input services’ and Cenvat Credit on the same would be admissible.

Notwithstanding the above, Cenvat Credit on the above services and services of a

management consultant would be admissible since the said services are specifically

mentioned as input services u/r. 6(5) of the Cenvat Credit Rules, 2004 and all services

mentioned in rule 6(5) are essentially ‘input services’ as defined in Rule 2(l).

Credit on technical inspection and certification services availed for calibration and checking

of measurement instrument used for manufacture of products is admissible as being a

service in relation to manufacture of final products.


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Maharashtra Value Added Tax

(MVAT) Act, 2002, MVAT Rules, 2005

and Central Sales Tax Act (CST), 1956.

Latest Notifications/ Orders & Circulars

Circulars

Physical submission of Audit Report in form 704 for the F.Y. 2012-13.

Trade Circular No. 10T of 2013 dated 16.12.2013

The dealers who are required to file Audit report under the MVAT Act, 2002 for the F.Y

2012-13 shall also make physical submission of the following documents with the authorities

prescribed-

A statement of submission of audit report in the prescribed format, duly

signed/stamped by the dealer ;

Signed copy of the acknowledgement generated on filing the report; and

Copy of Part I of the Report, signed by the auditor.

Further, if the dealer accepts the recommendations made by the auditor then the following

documents shall also be submitted along with the above mentioned ones in order to avoid

further enquires for the same which is a newly introduced provision-

Copies of tax paid challan

Copies of revised returns.

Grant of refund of ITC denied due to purchase from non-filer suppliers.


The dealers who have become eligible for refund due to filing of returns and payment of tax

by their suppliers (who were non-filers earlier) shall be granted the refunds of such ITC in

accordance with the procedures set up by the department without the claimant dealers

having to file a refund application.


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Correction of mistakes made by the dealers of miscellaneous refunds of

excess payments of taxes.


On a representation being made by various dealers and banks about the errors committed

while making e-payments of taxes under the MVAT and CST Acts, the Sales tax department

has laid down the revised procedures for correcting various such errors.

Uploading of information of PAN/TAN and other contact details for

Maharashtra State Tax on Professions trades Calling and Employment

Rules, 1975.

Trade Circular No. 6T of 2013 dated 16/12/13

The Profession tax department has issued a list of details to be submitted while uploading

the PT Info Form by all existing and new profession tax payers in order to update the same

in the database of the department.

Recent Judicial Decisions Whether production of Form F is permissible at any stage by the

appellant?

Agrimas Chemicals Ltd v/s State of Haryana and Others (2013) 64 VST 134 (P&H)

In the above case interstate Branch Transfers were treated as interstate sales without C form

and thus charged to tax @ 12.5% by the original Assessing Authority and the same was

affirmed by the Joint Excise and Taxation Commissioner (Appeals) and by the Tribunal.

However the Punjab & Haryana High Court permitted the dealer to produce the F Forms

for the first time and on those premise, considered the transaction as interstate branch

transfer and not as interstate sales.

Whether disallowance of Input credit was justified merely on ground that

selling dealer did not serially number Tax Invoices under provisions of

West Bengal VAT Act?

Rohini Ferrous Pvt Ltd. v/s Sales Tax Officer Beadon Street Charge and Others

(2013) 64 VST 203 (WBTT)

Input credit on purchases made was disallowed on the ground that tax invoices were not

serially numbered by the seller which was in violation of provisions of West Bengal VAT

Act.


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The Taxation Tribunal on an application made by the dealer challenging the disallowance of

input tax held that, mere non-maintenance of serially numbered invoices by seller could not

make the tax invoice invalid

Whether cranes given on hire with operator and helper is liable to tax

being transfer of right to use goods under West Bengal VAT Act?

W. B Crane & Equipment Owners’ Welfare Association and Others v/s Asst Sales

Tax officer, Central Section, Investigation Wing, Kolkata Others (2013) 64 VST 435

(WBTT)

Members of the W. B Crane & Equipment Owners’ Welfare Association gave the cranes on

hire to the Contractors. However the overall control remained with the members of the

Association. Contractors using cranes for works contract were not entitled to make free use

of the same.

Tribunal observed that the various provisions of the agreement showed that effective

control of the crane was with the owner only. All facts lead to the assumption that no

absolute right to use was created by execution of the agreements.

The tribunal further held that there was no transfer of right to use the cranes from the

members to the contractors and as such the same didn’t amount to sale under the Act. Thus,

the transaction would not be subject to sales tax.

Whether transaction is held as interstate sales or local sales since the

contract provided for movement of goods from Tamil Nadu to work site

of the buyer at Warora?

Aspick Engineering (P.)Ltd v/s State of Tamil Nadu (2013) 62 VST (Mad)

The assessee in Tamil Nadu sold goods to a dealer in Warora in Maharashtra. This being in

the nature of inter-state sale was treated as local sale by the assessing officer on the ground

that the delivery of goods had been taken inside the state itself.

The tribunal also rejected the dealer’s case, on the ground that the price was ex-godown and

the purchaser took delivery of goods at his own cost along with insurance.

However the Madras High court held that which party bore the insurance cost does not

determine the nature of sale and it was clear that sale and movement of goods were

intimately connected and that the movement of goods was a consequence of sale. Thus the

sale was an Inter- State sale.


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Whether it is justified to disallow credit on Purchases made by the dealer

prior to Publication of particulars of the selling dealer whose certificate

of registration cancelled under the provisions of Gujarat VAT Act?

Meet Traders v/s State of Gujarat and Another (2013) 63 VST 246 (Guj)

Purchases were made by the dealer both before and after the date on which the registration

of the selling dealer was cancelled, therefore input tax credit was denied by the department

and as a further action, delivery of the goods purchased after cancellation of registration

number of the selling dealer, was stopped by issuing an order.

The purchasing dealer appealed to the High Court which held that the Input tax credit on

the purchases made by the dealer up to the date of cancellation cannot be denied to the

dealer under the Gujarat VAT laws and also that the commissioner was not entitled to detain

the delivery of the goods

Whether opportunity can be granted to the assessee to produce

declaration form C before the Revisional authority in a case where

certain C forms are found to be defective?

AAR Kay Agro Spring Industries v/s State of Madhya Pradesh and Others (2013) 62

VST 197 (MP)

The assessee had produced C forms before the assessing authority seeking concessional rate

of tax on such transactions. However the same was denied on the grounds that a few of the

C form declarations were defective.

It was observed that under CST Rules applicable to Madhya Pradesh, C form declaration

could be filed subsequently and not necessarily with the returns i.e. provision requiring filing

declaration forms along with the return was directory and not mandatory. Object of the rule

was to ensure that the assessee was not denied the benefit which was available to it under the

law on a technical plea.

Hence assessee was given permission to file fresh correct C forms duly issued by the

competent authority before the revisional authority within a period of 30 days.


CNK & Associates 39

DISCLAIMER AND STATUTORY

NOTICE

This e-publication is published by CNK & Associates, India, solely for the

purposes of providing necessary information to employees, clients and other

business associates. This publication summarizes the important statutory and

regulatory developments. Whilst every care has been taken in the preparation of

this publication, it may contain inadvertent errors for which we shall not be held

responsible. The information given in this publication provides a bird’s eye view

on the recent important select developments and should not be relied solely for

the purpose of economic or financial decision. Each such decision would call

for specific reference of the relevant statutes and consultation of an expert.

This document is a proprietary material created and compiled by CNK &

Associates. All rights reserved. This newsletter or any portion thereof may not

be reproduced or sold in any manner whatsoever without the consent of the

publisher.

This publication is not intended for advertisement and/or for solicitation of

work.

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