A weekly digest...

1

“Start by doing what’s necessary; then do what’s possible;

and suddenly you are doing the impossible .” - Francis of Assisi

Direct Tax Income- Tax department has started the process of online verification of Income Tax Returns (ITRs), thereby ending the practice of sending paper acknowledgement to its office in Bengaluru. A new "smart and intelligent database is being set up in the Income Tax department to help check tax evasion, a "menace" that is "spoiling" compliance culture, a top CBDT official said. The database will immensely improve "mining" of data as it will include all financial transactions of individuals and entities. More than 90 per cent of Indian businessmen are willing to pay more taxes only if the Income Tax department gives some clarity on taxation, said an international business report by Grant Thornton. Entrance fee paid to golf association in order to develop contacts with other corporate leaders is allowable business expenditure. President ITAT cannot constitute special bench without recommendation of regular bench. The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has approved the Signing and Ratification of agreement between India and Seychelles for the exchange of information with respect to taxes. The agreement will help curb tax evasion and tax avoidance. CBDT notifies 21 districts of the State of Bihar as backward areas u/s 32 and 32AD. Special IT Return Counters to be Organised for Salaried Tax Payers (Including Pensioners) to File Paper Returns Between 24th August and 31st August, 2015 at Pratyaksha Kar Bhawan in National Capital. Special Facilitation Counters for Senior Citizens and Differently Abled Persons. These counters to facilitate smaller tax payers having salary/pension income but their total income do not exceed Rs. 5 Lakhs or their returns do not contain any claim for refund. Circular No.14/2015 dated August 17th, 2015 throw clarification on certain issues under 10(23C)(vi) of Income Tax Act, 1961.

o While granting approval to entities covered under 10(23C)(vi), the prescribed authority has to ensure that the application institution must exist “Solely for educational purposes and not for purposes of profit”. o Existence of surplus from the activity will not mean absence of educational purpose. The test is the nature of activity. If the activity like running a printing press takes place, it is not educational.

o Provisions of Section 11 and 10(23C) are two parallel regimes and operate independently in their respective realms although some of the compliance criteria may be common to both. Therefore registration u/s 10(23C) does not require registering for 12AA. o Mere generation of surplus by educational institution from year to year cannot be a basis for rejection of application u/s 10(23C)(vi) if it is used for educational purposes unless the accumulation is contrary to the manner prescribed under law. o Charging of small amounts under different heads of fee, which are essentially in the nature of fee connected with imparting education, cannot be treated as profit making activity unless the amount is in the nature of ‘capitation fee’, whether charges directly or indirectly. o Exemption cannot be denied merely on account of appointment or removal of trustees.

Cost Inflation Index (CII) for the FY 2015-16 is ‘1081’.

High Court of Bombay at Goa has held in the case of Vassantram Mehta & Co. (P) Ltd. vs. JCIT that Interest not to be disallowed if interest free advance granted to sister concern due to commercial expediency and is for business purpose of assessee.

In the Case of ACIT v Akhil Jain, ITAT Delhi held that no interest will be levied u/s 234B during the Block Assessment by the virtue of Section 158BF.

In the case of V. M. Salgaocar & Brother Pvt. Ltd vs. The Asst. Commissioner of Income Tax, Goa High Court has held that deduction u/s 80HHC is to be allowed to the extent of gross total income and not to the extent of business profit only.

Indirect Tax

No Service tax on free Pick-up/Home delivery of food as the dominant intention of such transaction is that of ‘Sale’ as food is not served at Restaurant and no other element of service such as ambience, live entertainment (if any), air conditioning or personalised hospitality is offered.

The total indirect tax collections during the first four months of the fiscal rose by 37 percent. On the global front, Jaitley said developments like the possibility of US Federal Reserve cutting rates, crisis in Europe and devaluation of the Chinese currency will have implications on India. "Our fiscal deficit figures are under control. Inflation is very much under control. We stand by the growth projections which we made at the beginning of the year and indirect taxation data actually supplements the idea of those projections," Jaitley said.

The economy is in a revival phase and hinted that it will clock a growth rate in excess of 8 percent in 2015-16.

More than 150 trade leaders of 24 states at a trade conference held in Odisha had a

unanimous voice asking political parties not to play political innings on GST. The Confederation of All India Traders (CAIT) has called upon Prime Minister Shri Narendra Modi to convene a special session of parliament to pass the long-awaited GST bill.

In the case of CCE v M/s Gujarat Maritime Board (Civil Appeal No. 3347-3348 of 2014, Date of Decision: 22/07/2015) Hon’ble Supreme Court held that no service tax will be levied on the amount collected as wharfage charges, which is prescribed by the Statute.

Supreme Court bench comprising Chief Justice H.L. Dattu, Justice A.K. Mishra and Justice

Amitava Roy has stayed the Bombay High Court’s order, dated 15.12.2014 in the case of P.C. Joshi vs. Union of India, of dismissing the petition challenging levy of service tax on lawyers.

The Hon’ble Supreme Court in the case of Saral Wire Craft P. Ltd. held that where the

law provided a manner of doing certain thing then the same to be done in that manner only. The execution deviating the prescribed manner is of no cure. Thus, service of order by hand, where the prescribed manner is registered post under acknowledgment due, is no service at all on the assessee or its authorized agent.

The Revenue secretary, Mr Das has clarified that three draft GST legislations (Central

GST, State GST and Integrated GST) are being prepared by different committees comprising of senior officers of CBEC, department of revenue and finance and taxation department employees of state governments. Out of three committees, one has already finalised its draft while others will also submit the draft by 15th September 2015.

The Hon’ble CESTAT, New Delhi in the case of Suzuki Motorcycle (I) Pvt Ltd. vs

Commissioner of Central Excise held that CENVAT credit will be eligible even if expenditure is reimbursed by the parent company and the financial arrangement between the subsidiary company and the parent company has no connection or relevance for the purpose of availability of credit of Service Tax paid by the assessee.

The Reserve Bank of India released its quarterly statistics on credit and deposits of all scheduled commercial banks in India. The report shows that banks' credit growth has fallen to a 20-year low. According to the report, growth in aggregate deposits and gross bank credit decelerated to 10.6 percent and 8.6 percent, respectively, in June 2015 from 11.9 percent and 12.9 percent, respectively, a year ago.

The Modi government's Make in India policy will take manufacturing to new heights and there will be a huge requirement of energy, Pradhan said, adding that as per the estimates in the next 15 years there will be huge demand for petroleum products.

IDBI Bank on Friday said its Board has approved raising of foreign currency debt up to

USD 7.5 billion (about Rs. 49,000 crore).

Infra-sector lender IDFC Ltd on Friday said its board has approved raising of up to Rs. 80,000 crore by issuing non-convertible securities on private placement basis to expand business.

SENSEX26392.38Up 161.19

(0.61%)

NIFTY 8001.95Up 53.00(0.67%)

Gold 26625.0

Silver34380.00

Euro / Rupee74.01

Dollar / Rupee66.14

(Source: MoneyControl.com as on 26.08.2015)

Price-to-equity ratio: 9.8Debt-to-equity ratio: 1.15-year sales growth (absolute): 184 percent5-year profit growth: 347 percent

Price-to-equity ratio: 8.3Debt-to-equity ratio: 05-year sales growth: 82 percent5-year profit growth: 102 percent

Price-to-equity ratio: 10.2Debt-to-equity ratio: 1.835-year sales growth: 96 percent5-year profit growth: 194 percent

Price-to-equity ratio: 10.2Debt-to-equity ratio: 0.435-year sales growth: 135 percent5-year profit growth: 262 percent

Price-to-equity ratio: 14.46Debt-to-equity ratio: 05-year sales growth: 267 percent5-year profit growth: 268 percent

This is the biggest crash in about seven years and the fourth biggest ever for the BSE

benchmark index The BSE Sensex plunged 5.9% on Monday (1,625 points), making it the largest single-day decline since January 7, 2009. The Sensex had gone on to shed 64% in just nine months during that period, and many stocks lost over 90% of their value. Monday’s bloodbath left investors poorer by over 7 lakh crore. Finance Minister Arun Jaitley sought to allay fears, promising that the markets would settle down and that the government and the Reserve Bank were watching the situation closely. The Indian stock markets have been participating in the global rout that began last week. The global sell-off did not just include equities, but currencies and commodities as well. The only recent negative news for India was a lowering of its growth forecast for 2015 from 7.5% to 7% by the rating agency Moody’s. This was unlikely to have contributed significantly to this crash, as the market was unaffected when it was announced last week. This equilibrium was disrupted by China, whose stock market unexpectedly went into a bubble at the beginning of the year. The bubble eventually burst in June, setting off a chain of event that is the most likely cause of the global mayhem now. Yuan devaluation Initially, the Chinese government took surprisingly dramatic measures to curb the decline, and appeared to have succeeded at first. Then it unexpectedly devalued the Yuan. That decision was ostensibly to pave the path for its currency’s inclusion in IMF’s SDR basket – by making the Yuan eventually market-driven. The more likely reason was that its economy badly needed an export boost. Inevitably, other Emerging Markets – including India’s – brought their currencies down, too. The fall in currencies triggered off a decline in most EM stock markets, and the disequilibrium has led to the global rout. (Source: thewire.in)

Service Tax on Cost reimbursements – a paradoxical puzzle! In this world nothing can be said to be certain, except death and taxes - Benjamin Franklin. This quote holds good as far as payment of taxes is concerned, nonetheless amount of taxes to be deposited is anything but certain in India. A service provider ordinarily incurs certain expenses in the course of provision of service such as traveling expenses, boarding and lodging expense, mobile expenses which are recovered from the service recipient. Rationally, reimbursements for such expenses are not in the nature of remuneration for services rendered and hence should not constitute consideration in the hands of service provider. Yet in service tax arena, much of the controversy is centered around the taxability of such out-of-pocket expenses and reimbursements recovered by the service providers from the service recipients. There can be many such scenarios, where certain charges are recovered by way of reimbursements by service providers apart from the remuneration towards the services. A typical example of this is services rendered by a Chartered Accountant, who assists a client with statutory filings. Many a times while assisting the client, Chartered Accountants deposit statutory filing fee on behalf of clients or incur travel expenses rendering their professional services. While billing for his services the Chartered Accountant recovers these pay-outs / expenses as out-of-pocket expenses from the client. These charges are purely in the nature of reimbursements and have no ostensible connection with the services provided by the Chartered Accountant. Another avenue of ambiguity in this context is the arrangements where only reimbursements are charged. A classic example of this is when certain services such as brand promotion services are availed by one of the group entities on behalf of the entire group. The cost of these services are in-turn allocated across the beneficiary entities and proportionately recovered from such group entities by way of reimbursements.

Evidently, no services are provided and only reimbursements are claimed for expenses incurred. Previously, there was no specific provision to this effect and constant doubts remained as to the taxability of reimbursements for service tax purposes. But with the introduction of specific rules in this regard, the government made its intentions clear that service tax is indeed recoverable on out-of-pocket expenses and reimbursements. After the introduction of these Rules, entire industry started paying service tax on these reimbursements until when Delhi High Court in the case of Intercontinental Consultants held that no service tax

can be recovered on expenses as the Rules framed by the Government are beyond the powers imparted by statutory provisions. To overcome this decision of the Delhi High Court, the Government eventually through Union Budget 2015 amendment introduced enabling provision under the governing statute for levy of service tax on expense reimbursements. After this amendment, there is little scope of

any dispute and all reimbursements or costs incurred by the service provider in the course of providing taxable service are liable to service tax. It is also interesting to note that charging service tax on reimbursements many a time may lead to anomalies. For instance, if travel expenses of the service provider are paid by the client directly, the same are not taxable. On the contrary, while taking reimbursements it becomes a part of the value of taxable service and hence service tax becomes payable even on those charges. Importantly, under the income tax provisions, no withholding tax is to be deducted on mere cost reimbursements. Given this disconnect between the income tax and service tax treatment many business entities inadvertently end up missing payment of service tax on reimbursements and get into unwarranted-litigation. The impending introduction of Goods and Services Tax (‘GST’) regime presents itself as an opportunity for the government to address the ambiguity prevailing in the present regime. (Source: MoneyControl.com)

Let us explore this opportunity Dealing in money every day! Is it not something “Wow!!”? Who does not like it? Here we are talking about the business of Western Union Money Transfer. The Western Union Company is an American financial services and communications company. It has several divisions, with products such as person-to-person money transfer, money orders, business payments and commercial services. Western Union connects people and businesses around the globe by providing fast, reliable and convenient ways to move money. Their 160-year history and more than 500,000 Western Union Agent locations and lot many sub-agents in more than 200 countries and territories strengthen their commitment to offer services in every corner of the globe. Business Model It is a global money transfer service. In order to send funds, a sender goes to a Western Union office and presents funds that are to be transferred (plus fees) for "Next Day" or "Money in Minutes" service. The sender provides his or her name and address, the recipient's name, and a designated payment destination. Western Union then provides the sender a 10-digit Money Transfer Control Number (MTCN) that the sender must provide to the recipient. The recipient then proceeds to a Western Union agent office in the designated payment location, presents the 10-digit MTCN, and a photo ID. Money is then paid out to the recipient. Service Tax Ambit The Union Budget of 2015 has introduced a provision due to which commission received on Money Transfer Services (MTS) by Western Union agents and sub-agents has become chargeable to service tax. This levy is effective from May 14, 2015. However the rate of service tax to be applied on the commission received from May 14, 2015 to May 31, 2015 shall be 12.36%, whereas all commission received on or after June 1, 2015 will be charged to service tax @14%. The Commission payable by Western Union to agents and sub-agents for MTS is inclusive of all indirect taxes. In order to comply with the above change, the agents as well as sub-agents should get registered with Service Tax authorities in respect of MTS (Registration required since basic exemption is not available for branded services) and secure Service Tax Registration Certificate. The Central Board of Excise and Customs (CBEC) has clarified that the service tax will be only on the commission paid to Indian agents and not on the total amount remitted. Issues regarding Service Tax chargeability Vide circular No. 163/14/2012–ST, dated 10th July, 2012, on the issue of levy of service tax on the activities involved in the inward remittance it was clarified that there is no service tax per se on the foreign exchange remitted to India from outside for the reason that money does not constitute a service and that conversion charges or fee levied for sending such money would also not be liable to service tax as the person sending money and the company conducting the remittance are both

located outside India. It was also clarified that the Indian bank or financial institution who provides service to the foreign bank or any other entity is not liable to service tax as the place of provision of service shall be the location of the recipient of service. This clarification covers the scenario where the Indian bank or financial institution provides services on principal to principal basis to the foreign bank/entity, on its own account, and thus the service is covered by the general rule, i.e. rule 3 of the Place of Provision of Service Rules, 2012. However, subsequently, it had been brought to the notice of the Board that the foreign money transfer service operator (MTSO), conducting remittances to beneficiaries in India, have appointed Indian Banks/financial entities as their agents in India who provide agency /representation service to such MTSO for furtherance of their service to a beneficiary in India. The agents are paid a commission or fee by the MTSO for their services. The entire sequence of transactions in remittances of money from overseas through the MTSO route is as under: Step 1: Remitter located outside India (say ‘A’) approaches a Money Transfer Service Operator (MTSO)/bank (say B) located outside India for remitting the money to a beneficiary in India; ‘B’ charges a fee from ‘A’. Step 2: ‘B’ avails the services of an Indian entity (agent) (say ‘C’) for delivery of money to the ultimate recipient of money in India (say ‘E’); ‘C’ is paid a commission/fee by ‘B’. Step 3: ‘C’ may avail service of a sub-agent (D). ‘D’ charges fee/commission from ‘C’. Step 4: ‘C’ or ‘D’, as the case may be, delivers the money to ‘E’ and may charge a fee from ‘E’. Clarifications have been sought as to whether such agents (referred in Step 2 above) would fall in the category of intermediary, and if so, whether service tax would be leviable on the commission/fee amount charged by such agents. Clarifications have also been sought as to whether the services provided by sub agent (referred in step 3 & 4 above) are leviable to service tax and on certain other related issues. The issues discussed above have been examined and it is clarified as follows:

S.No. Issues Clarifications 1. Whether service tax is payable on

remittance received in India from abroad? No service tax is payable per se on the amount of foreign currency remitted to India from overseas. As the remittance comprises money, it does not in itself constitute any service in terms of the definition of ‘service’ as contained in clause (44) of section 65B of the Finance Act 1994.

2. Whether the service of an agent or the representation service provided by an Indian entity/ bank to a foreign money transfer service operator (MTSO) in relation to money transfer falls in the category of intermediary service?

Yes. The Indian bank or other entity acting as an agent to MTSO in relation to money transfer, facilitates in the delivery of the remittance to the beneficiary in India. In performing this service, the Indian Bank/entity facilitates the provision of Money transfer Service by the MTSO to a

beneficiary in India. For their service, agent receives commission or fee. Hence, the agent falls in the category of intermediary as defined in rule 2(f) of the Place of Provision of Service Rules, 2012

3. Whether service tax is leviable on the service provided, as mentioned in point 2 above, by an intermediary/agent located in India (in taxable territory) to MTSOs located outside India?

Service provided by an intermediary is covered by rule 9 (c) of the Place of Provision of Service Rules, 2012. As per this rule, the place of provision of service is the location of service provider. Hence, service provided by an agent, located in India (in taxable territory), to MTSO is liable to service tax. The value of intermediary service provided by the agent to MTSO is the commission or fee or any similar amount, by whatever name called, received by it from MTSO and service tax is payable on such commission or fee.

4. Whether service tax would apply on the amount charged separately, if any, by the Indian bank/entity/agent/sub-agent from the person who receives remittance in the taxable territory, for the service provided by such Indian bank/entity/agent/sub-agent

Yes. As the service is provided by Indian bank/entity/agent/sub-agent to a person located in taxable territory, the Place of Provision is in the taxable territory. Therefore, service tax is payable on amount charged separately, if any.

5. Whether service tax would apply on the services provided by way of currency conversion by a bank /entity located in India (in the taxable territory) to the recipient of remittance in India?

Any activity of money changing comprises an independent taxable activity. Therefore, service tax applies on currency conversion in such cases in terms of the Service Tax (Determination of Value) Rules. Service provider has an option to pay service tax at prescribed rates in terms of Rule 6(7B) of the Service Tax Rules 1994.

6. Whether services provided by sub-agents to such Indian Bank/entity located in the taxable territory in relation to money transfer is leviable to service tax?

Sub-agents also fall in the category of intermediary. Therefore, service tax is payable on commission received by sub-agents from Indian bank/entity.

Accordingly, Circular No. 163/14/2012-ST, dated 10.7.2012 stands superceded.

How is this an opportunity for us - the Professionals? There are large number of agents and sub-agents of Western Union located across India. You can find them almost on every street. Every agent or sub-agent require professional assistance in order to understand the applicability of Service tax and ensure compliance. Therefore, it is something like we are in demand, Bravo! We just need to present our self before an agent and the whole bunch of sub-agents are ours. Getting 50-60 customers at one go is practicable and very much possible. I have also been a western union sub-agent for almost 8 years before entering into our esteemed profession. This network of Service tax clients can surely help us grow better. Great opportunities come to all but many do not know they have met them. The sure way to miss success is to miss the opportunity. Therefore, act now or you will end being a mere viewer still waiting for your turn to come. _______________________________________________________________________________ About the author I am a budding Chartered Accountant enthusiastic to learn and share. You can reach me at:

1st Edition August 29, 2015 My sincere thanks to Ms. Akhila Simha, for her efforts in making this edition possible. _______________________________________________________________________________

MOHAMMED AIYAZ KHAN Hyderabad, India. Email: ca.aiyaz@gmail.com Ph: +91-8977288157