volume : 38 part : 07 october, 2014 c o n t e n t scaa-ahm.org/pdf/journal/journal-44.pdf ·...

Ahmedabad Chartered Accountants Journal October, 2014 389

Volume : 38 Part : 07 Oct ober, 2014E-mail : [email protected] Website : www.caa-ahm.org

Ahmedabad Chartered Accountants Journal

C O N T E N T S To Begin with

MananamHuman Values...................................................................................... CA. Pradip K. Modi.................. 391

Edi tor i alGoing out of the Way...........................................................................CA. Ashok Kataria .................... 392

From the President............................................................................ CA. Shailesh C. Shah.................393

Articles

Accounting & Tax Implication - Oil & Gas Industry........................... CA. Chintan Shah &CA. Sandip Gupta......................394

Forensic Audi t-Moving towards “True & Correct ” Scenario...............CA. Kush Paresh Desai...............399

Di rect Taxes

Glimpses of Supreme Court Ruli ngs................................................... Adv. Samir N. Divatia................406

From the Courts.................................................................................. CA. C.R. Sharedalal &CA. Jayesh Sharedalal............... 407

Tribunal News.....................................................................................CA. Yogesh G. Shah &CA. Aparna Parelkar.................. 410

Controversies......................................................................................CA. Kaushik D. Shah................. 415Judicial Analysis.................................................................................. Adv. Tushar P. Hemani................417

FEMA & International Taxation

FEMA Updates................................................................................... CA. Savan A. Godiawala............421

Indirect Taxes

Service Tax

Service Tax Decoded.......................................................................... CA. Punit R. Prajapati................423Recent Judgements............................................................................. CA. Ashwin H. Shah...................429

Value Added TaxManufacture under VAT Law............................................................... CA. Priyam R. Shah................... 431Recent Judgements and Updates........................................................ CA. Bihari B. Shah.....................435

Corporate Law & Others

Business Valuation.............................................................................. CA. Hozefa Natawala.................438Corporate Law Update....................................................................... CA. Naveen Mandovara.............441

From Published Accounts ................................................................ CA. Pamil H. Shah..................... 444

From the Government ......................................................................CA. Kunal A. Shah..................... 446

Associati on News.............................................................................. CA. Abhishek J. Jain &CA. Nirav R. Choksi...................447

ACAJ Crossword Contest....................................................................................................................448

Ahmedabad Chartered Accountants Journal October, 2014390

AttentionMember s / Subscri bers / Authors / Contr i butors1. Journals are carefully posted. If not received, you are requested to write to the Associati on's

Office within one month. A copy of the Journal would be sent, if extra copies are available.2. You are requested to i ntimate change of address to the Associati on's Offi ce.3. Subscription for the Financial Year 2014-15 is ` 400/-. Single Copy (if available) ` 40/-.4. Please mention your membership number/journal subscription number in all your correspondence.5. Whil e sending Articl es for this Journal, pl ease confirm that the same are not published / not

even meant for publ ishing elsewhere. No correspondence will be made in respect of Articlesnot accepted for publication, nor will they be sent back.

6. The opinions, views, statements, results published in this Journal are of the respective authors/ contributors and Chartered Accountants Association, Ahmedabad is neither responsible for thesame nor does it necessari ly concur with the authors / contributors.

7. Membership Fees (For ICAI Members)Li fe Membership ` 7500/-Entrance Fees ` 500/-Ordinary Membership Fees for the year 2014-15 ` 600/- / ` 750/-Financial Year : April to March

Published ByCA. Ashok Katar ia,on behalf of Chartered Accountants Association, Ahmedabad, 1st Floor, C. U. Shah Chambers, NearGujarat Vidhyapi th, Ashram Road, Ahmedabad - 380 014.Phone: 91 79 27544232Fax : 91 79 27545442No part of this Publi cation shall be reproduced or transmitted in any form or by any meanswithout the permission in writi ng from the Chartered Accountants Associati on, Ahmedabad.While every effort has been made to ensure accuracy of information contained in this Journal,the Publisher is not responsible for any error that may have ar isen.

Professional Awar ds

The best articles published in this Journal i n the categori es of 'Direct Taxes' , 'Company Law andAudi ting' and 'Alli ed Laws and Others' wi ll be awarded the Trophies/ Certif icates of Appreciationafter being vetted by experts in the profession.

Articles and reading literatures are invited from members as well as from other professional colleagues.

Pr inted : Pratiksha Pr interM-2 Hasubhai Chambers, Near Town Hall, Ellisbridge, Ahmedabad - 380 006.

Mobile : 98252 62512 E-mail : [email protected]

Journal CommitteeCA. Ashok Kataria CA. Pitamber Jagyasi

Chairman ConvenorMembers

CA. Gaurang Choksi CA. Jayesh Sharedalal CA. Mukesh KhandwalaCA. Naveen Mandovara CA. Rajni Shah CA. T. J. Advani

Ex-officioCA. Shailesh Shah CA. Abhishek Jain


We are just about to celebrate Diwali Festival. In recenttime celebration has become a phenomenon. We mayget joy out of celebration but not happiness. Today, onedoes not have time to look into his own self (Spiritually).The distance between two places i n the worl d isshortening but the distance between two human beingsis ever increasing. The obvious reason is, life has becometoo much materialistic. Life can be lived, driven bydesires or knowledge. If life is lived based on desires, itis easy and which provides instant grati f ication. Whenone tests the living life based on luxury and comforts,he does not dare to venture in to a living life based onknowledge (Gyana). A lifestyle based on desire givesquick and visible result but in the process human valuesare eroded whereas the life style based on Gyana mayappear to be diff icult however, at the end of the journeyit ensures abundant happiness which is a part of eternalsatisfaction as against more tangible joy derived withmaterialistic approach.

Life is a Festival bestowed by Almighty to Jiva. Oneshould live life with human values. Human values arethe vir tues t hat guide us to take int o account thehuman element when one interacts with other humanbeings. The legacy of how to inculcate human values isfound i n our Shastra. In today’s fast moving life, we asparents struggling hard to have time to interact even withour children on daily or weekly basis. We are overlookingour parents. We hardly interact with our neighbours.Mostly human touch is lost in all our day today humanactivities. We are so much concentrated on our goal ofbecoming financially wealthier by ignori ng the wealthof human relationship.

We are missing one point that we are human beings andwe need human beings to live on this earth. There ishardly anything that is not found out in our rich legacyof Shastra to discover new ways and means for humanvalue appreciation. The common ground of allReli gions is human value. The human values areembedded in customs , festivals or traditions. I t isimportant to follow such traditions and rituals andcelebrate the festivals with the spirit and intent for whichit has been introduced in our society. There is no

MananaM

Human Valuesadvocacy to follow Religion blindly but desirable to havea look at the customs and tradition with a scientif icapproach.

India has preserved human values by introducingfestivals, traditions and customs. As we know, Smriti(memory) has l imited life with reference to place andtime, while process of practicing values through othermodes known as Shruti, is timeless. India has rich legacyof Shruti . The Ramayana, Mahabharat , Gita and manymore other books are filled up with full of experienceand wisdom for human beings. All those are torch bearerfor the society.

Practicing Human Values are social, ethical and spiritualprocess in the mankind. The most of the parts of n worldneed to have more experience in practicing human values.They are appreciating human values based on theirsocial requirements. Unless the society respects eachhuman being, human value chain cannot be tied up. Forexample a marriage ceremony is an acceptance of naturalneed of human being, prevalent with utmost dignity, formany years in India. The relati onship between twofamilies is at paramount with dignified human values.Other examples of human value appreciati on arerespecting elders, teachers, parents and helping needyperson in society.

The reality is, Western world has been practicing Dharma(to act), Arth (Creation of money) and Kaam (desire).All activities are self-centered. They are far ahead infollowing this path with full of enthusiasm but they knowless about MOKSH (Spiritual eternity or happiness withinsoul ). We fol low them till they travel and stop there.We need to recall our rich legacy of practicing humanvalues. We need to see whose are we rather than who arewe. Money has limited purchasing power. Let us respectrelationship and follow the call of conscience. Someretrospection is suggested by posing question to ourselveswhether birth has taken as per our choice, whether deathis as per our expected time, whether the result of ourefforts is as per our expectation and … … .Have a Faithin Supreme Power .

Let us progress by respecting human values.

CA. Pradip K. [email protected]


After much hue and cry, the professionals acrossthe country took a sigh of relief when the CBDTextended the due date of filing of returns in case oftax audit assessees to 30-11-2014. The importantobservation that could be drawn is that the CBDTcontinuously ignored the representations made byvarious professional bodies seeking extension ofthe due date; despite the untimely change in thereporting requirement formats was a genuine causeof hardship for al l the practicing charteredaccountants. The CBDT did not seem to take apragmatic view of the situation but had to giveaway its adamant and rigid approach when variousHigh Courts of the country directed to extend thedate in line with the date of furnishing of tax auditreports.

The question arises, what has led all professionalto a situation where every one of us is complainingagainst the system and the changing time that iscasting more and more responsibility on a practicingchartered accountant. Be it the provisions of newCompanies Act, TDS compliances or fighting fora truly deserved extension of due date of filing ofreturns. The answer is simple. We appear togetherup to the point of raising a concern but then witheraway when the fight needs to be initiated againstthe system. We hardly show any valor to battle outthe problem on hand and try to adjust with asituation despite same being grossly unjust andunfair. Are we are not too reluctant to come out ofour comfort zone to protest and call spade, a spade?

The time when nobody is willing to come forwardto take any cause for the profession, may beincluding the Institute of Chartered Accountants ofIndia, the brave hearts who took up the issue ofextension of the due date and decided to challenge

EditorialGoing out of the Way

[email protected]

the order of CBDT in various High Courts deserveto be congratulated and complimented. As far asthe case in the Gujarat High Court is concerned, itis a matter of great pride that a member of theAssociation and more importantly a member of thisJournal Committee, CA . Rajni M. Shah firstdecided to take up the issue by going out of the allknown ways. Various petitions were filed on similarlines in various other High Courts of the countrywhere almost al l High Courts unanimouslyconcluded that the move of CBDT to extend dateof furnishing tax audit reports without extendingthe date of filing of return was not fair.

Again referring back the moot question, why arewe all just uniting to complain but not to take acause? Why are we afraid to come forward, tochallenge what is wrong. This piece of editorial andincluding all earlier have suggested that abrupt andrandom changes are coming as far as the legalcompliances are concerned and unfortunately thattoo from the regulatory authorities, ignoring theprovisions of law. We cannot and must not acceptthese procedural changes at the whims and wishesof handful of people, not backed by law.

The fight for extension of due date of filing of returnsis an example showing how to go about against thesystem that is non sympathetic to the people it issupposed to cater. We need to unite and fight againstall that is unjust and unfair. May more and morepeople join such movements! Kudos to CA. RajniM. Shah and all others brave hearts like him whowent out of the way and helped the profession bytaking a cause much beyond themselves.

Namaste,CA. Ashok Kataria


Dear Esteemed Readers

The last week of the month September was a weekof celebration and joy for professionals, tax payersand also a proud moment for all people of India.

Firstly on 24th September Indian Space ResearchOrganisation successfully launched an orbiter toMars. India’s space program demonstrated what’spossible when a determined group of people puttheir minds to solve a complex problem. There isalways a certain amount of nationalism attached tospace missions, and people of this country arejustifiably proud of the achievement. Speaking aftersuccessful launching of the orbiter our PrimeMinister Narendra Modi made an emotional appealto the youth of the nation, urging them to innovateand not be afraid of risks.

Secondly on 26th September Central Board of DirectTaxes has extended the due date of filing return ofincome to make it par with the date of filing theTax Audit Report. The extension of due date cameas a great rel ief to lakhs of taxpayer andprofessionals. There was no justification or reasonto extend the date of Tax Audit Report alone andnot to extend the date of filing income tax return.There was an easy solution to the uncomplicatedproblem. But CBDT made it more complicated andconfusing by not extending the date of filing return.The solution to the problem though looks easy butthat came only after intervention of the courts fromGujarat, Andhra Pradesh, Madras and Mumbai.High courts had to direct the lawmakers to extendthe due date of filing return of income. Extensionof due date of filing return of income and tax auditreport was the only possible solution of the problemwhich was created by the Central Board of Directtaxes by introducing the new forms of Tax auditreport in middle of the year.

The question that arose in everyone’s mind thatwhy CBDT has not taken into consideration the

From the PresidentCA. Shailesh C. Shah

[email protected]

representation made by the various Associationsfrom the whole country.

In today’s time CBDT needs to change its viewand approach to taxpayers and professionals.CBDT has to work on creating Friendly andPositive environment to achieve taxpayers voluntaryresponse to law / rules.

The journey of extension of due date for furnishingreturn of income has been a bumpy ride. Everysingle day of month of September, which isgenerally considered as the most hectic month forprofessionals, had been full of uncertainties andspeculation. The extension of due date by theCBDT has highly relieved everyone. The monthwhich otherwise is very hectic would have beenbit relaxed, this time around, apart from being amemorable one. The step of petitioners whochallenged it in the courts and role of judiciary inunderstanding gravity and urgency of the issue iscommendable.

Thirdly after extension of due date of filing returnof income all professionals and their familymembers could have enjoyed the Navratri withoutany tension. By the time this issue is in your handsthe festival of Navratri would be over. The festivalDusshera signifies victory of good over evil. I wishthat all the evils (ten evils viz. Lust, Anger,A ttachments, Greed, Over pride, Jealousy,Selfishness, Injustice, Cruelty and Ego) in andaround you vanish by the virtue of the goodness inand around you.

Wishing you a very happy Diwali and a Prosperousnew year.

With regardsCA. Shailesh C. ShahPresident


The Institute of Chartered Accountants of India –ICAI has issued the “Revised Guidance Note onOil and Gas Industry” (hereinafter referred to as“RGN”) which is effective from 1st April, 2013.We would like to state over here that GuidanceNotes are primarily designed to provide guidanceto members of ICAI on matters which may arise inthe course of their professional work and on whichthey may desire assistance in resolving issues whichmay pose dif f iculty. Guidance Notes arerecommendatory in nature. A member shouldordinarily follow recommendations provided in aguidance note relating to an auditing matter exceptwhere he is satisfied that in the circumstances ofthe case, it may not be necessary to do so. ICAI, inits above referred RGN, has explained variousissues which include accounting for Carried Interest,accounting for Side-Tracking Expenditure, etc.

This article has been prepared specifically to explainthe accounting as well as tax implications of“Carried Interest” as introduced in the abovereferred RGN. With this as a background, first ofall, let us have look at type of oil and gas operations.Traditionally, oil and gas operations have beenclassified as:

- Upstream: It includes Exploration & Productionof Crude Oil & Natural Gas. Thus, it generallyinclude all activities involved in finding andproducing oil and gas up to the initial point whenoil or gas is capable of being sold or used.

These are often referred to as exploration andproduction activities (E&P) which are normallycarried out along with joint venture partners.

- Downstream: It generally comprise Refining,Marketing & Distribution of Crude Oil &Natural Gas

Variations to these two conventional classificationscould be:

- Integrated Oil and Gas Company: One involvedin E&P activities and at least one downstreamactivity.

- Independent Oil and Gas Company: A companyinvolved primarily in only E&P activities.

Now, let us understand the meaning /concept ofthe “Carried Interest” which is as under:

“The concept of Carried Interest is seen in JointInterest Operations where one or more of theworking interest owners elect not to participate inthe drilling of a well. Such party electing not toparticipate is referred as Carried Party and the partywho agrees to pay the carried party’s share of costsis referred as Carrying Party. This carried interestis not permanently relinquished in the property butit is only temporarily transferred to the carryingparty and will revert back when the carrying partyreaches payout.”

This can also be explained with the help of followingexample:

A, B and C has signed a Production SharingContract on December 14, 2007 with theGovernment of India to form an UnincorporatedJoint Venture for conducting petroleum explorationoperations in the block named “XYZ” in the stateof Gujarat. The participation interest of the JVpartners is as under:

No. JV Partners Participating Interest

1 A (Operator) 80%

2 B 10%

3 C 10%

In August 2009, A entered into an Agreement withC, under which A granted 10% carried interest toC in the “XYZ” block.

The agreement provides that A is responsible forC’s share of costs incurred during the exploration

CA. Chintan [email protected]

Accounting &Tax Implication -Oil & Gas Industry CA. Sandip Gupta

[email protected]


Accounting & Tax Implication - Oil & Gas Industry

phase prior to the date of initial commercialproduction, and A shall recover such costs fromC’s share of profi t from oi l and gas upon thecommencement of production. A has shown Rs.200 crores as due from C under the head ‘Loansand Advances’ in its Annual Report for the year2011-12.

Now, it can be understood that the above referredagreement between A and C will be called “CarriedInterest Agreement” wherein A will be cal led“Carrying Party” and C will be called “CarriedParty”.

Having understood the meaning of carried interest,we will move to relevant extract of RGN in respectof Accounting of Carried Interest which has beenreproduced as under for ready reference:

“There are several types of “Carried Interest”arrangements that arise in practice. Eacharrangement may be unique and would requirecareful analysis in order to determine the substanceof arrangement. For example, a part of participatinginterest in an unproved property may be assignedto effect a “Carried Interest” arrangement wherebythe assignee (the carrying party) agrees to defrayall costs of drilling, developing and operating theproperty and is entitled to all of the revenue fromproduction from the property, excluding the thirdparty interest if any, until all of the assignee’s costshave been recovered, after which the assignee (thecarried party) wi l l share in both costs andproduction, based on the agreed arrangement. Insuch an arrangement the carried party shall make

no accounting for any costs and revenue untilpayout of the carried costs of carrying party.Subsequent to payout, the carried party shall accountfor its share of revenue, operating expenses andsubsequent development costs, if the arrangementprovides for subsequent sharing costs rather than acarried interest. During the payout period, carryingparty shall record all costs, including those carriedas per its normal accounting policy and shall recordal l revenue from the property including thatapplicable to the recovery of costs carried.”

The above accounting treatment will have to beanalyzed in respect of both carrying party andcarried party in the following three stages:� Before Commencement of Production� After Commencement of Production but till

payout period� After Commencement of Production and payout

period

Now, let us understand the accounting as well astax treatment in the above situations with the helpof example stated at page no. 1…

A, being operator, has incurred total expenditureon the block amounting to Rs. 600.00crores till 31-03-2013. The “XYZ” block gets success on 1stApril, 2013 and finds gross proved reserves of80,00,000 barrels. During each of the first 5 years,12,50,000 gross barrels of oil are produced andsolfnotd for $25 per barrel from the block and liftingcosts for the same is totaled at $5 per barrel.Exchange rate may be taken as 60 Rs./$.Computation of Payout will be as under:

Particulars 2013-14 2014-15 2015-16 2016-17 2017-18Sales Volume 1250000 1250000 1250000 1250000 1250000

Price / barrel 1500 1500 1500 1500 1500Gross Sales 1875000000 1875000000 1875000000 1875000000 1875000000

Less : Operating Expenses 375000000 375000000 375000000 375000000 375000000Net Profit 1500000000 1500000000 1500000000 1500000000 1500000000Payout 1500000000 3000000000 4500000000 6000000000 7500000000

From the above example, it is clear that carriedinterest of Rs. 60.00 crores (10% of Rs. 600.00crores) which will be recouped (i.e. payout) by theend of year 4. Hence as per the RGN, carried partyi.e. C will make no accounting till year 4.

From year 5 onwards, C will record for its share ofrevenue and operating expenses. Now, the questionunder consideration is about accounting by A. Ithas been mentioned that A should record all costs,including those carried as per its normal accounting


policy and shall record all revenue from the propertyincluding that applicable to the recovery of costscarried.

However, it has not been clarified that which normalaccounting policy will be applicable and hence thefollowing question arises:

� Whether A can continue with its existingaccounting policy i.e. disclosing cost of carriedinterest under the head “Loans and Advances”:

Under this situation, A is not considered as theowner of 10% carried interest and hence costincurred by A will be considered as cost incurredon behalf of C. The same will continue be disclosedas “Loans and A dvances” which wil l getproportionately reduced as and when the revenuewill be generated from the block. It may becontended that the above treatment may not be calledin line with the RGN as it is not affecting profit andloss account of A at any stage.

OR

� Whether A will be considered as the owner ofthe carried interest of 10% and A shouldcapitalize (or CWIP) all the cost incurred towardscarried interest of C?

Under this situation, A will capitalize all the costincurred (both, incurred of its own share andincurred on behalf of C) and then the same will getdepreciated year by year. On the other hand, allrevenue (both incurred of its own share and incurredon behalf of C) will be credited to profit and lossaccount.

It should be noted over here that A will recoup allthe cost incurred on behalf of C by the end of year4 but it will not be the same case with the cost. Thiscan be further explained with the help of followingexample:

Facts & Assumptions:

1) On 31-03-2013, CWIP in the books of A willbe Rs. 540.00 crores (90% of 600.00 crores).

2) On 1st April, 2013, A will capitalize Rs. 540.00crores.

3) Depreciation Rate has been assumed @ 15%

Profit and Loss Account Balance Sheet

Particulars Rs. In Particulars Rs. In Liabilit ies Rs. In Assets Rs. InCrores Crores Crores Crores

F.Y. 2014 - 15 F.Y. 2014 - 15

To Depreciati on 81.00 By Income 135.00 AssetCost 540.00(-) Depre : (81.00) 459.00

F.Y. 2015 - 16 F.Y. 2015 - 16

To Depreciati on 68.85 By Income 135.00 AssetWDV 459.00(-) Depre : (68.85) 390.15

F.Y. 2016 - 17 F.Y. 2016 - 17

To Depreciati on 58.52 By Income 135.00 Asset

WDV 390.15(-) Depre : (58.52) 331.63

F.Y. 2017 - 18 F.Y. 2017 - 18

To Depreciati on 49.74 By Income 135.00 AssetWDV 331.63(-) Depre : (49.74) 281.89



From the above, it is to be noted that total costof carried interest i.e. 60 crores has beenrecovered from the income of 4 years,however amount claimed as depreciation onthe carried interest comes to Rs. 28.68 croresonly during these 4 years. Hence it means thatdepreciation is recovered short to the extentof Rs. 31.32 crores by the end of year 4.

Now, the question arises, what should be donewith the unclaimed depreciation of Rs. 31.32crores (i.e. Rs. 60.00 crores Less 28.68 crores)in the books of A towards carried interest. Itis to be noted that A has credited all therevenue and hence remaining WDV of Rs31.32 crores may be reduced from the blockof asset and be charged to Statement of P&L.Al ternati vely, A should opt f or separatecapitalization and should depreciate the samein the proportion of income so that, afterpayout period, WDV itself will be Nil.

I ncome Tax Treatment

Now, so far as income tax treatment of carriedinterest i s concerned, f i rstly fol lowingquestions needs to be clarified:

(i) Whether expense incurred by A on behalfof C i.e. towards carri ed i nterest beconsidered as allowable for deduction u/s 42 of Income Tax Act, 1961 (herein afterreferred to as Act)?

Deduction u/s 42 is available only to the

extent of participating interest mentionedin PSC hence A is not eligible to claimdeduction u/s 42 for expenditure incurredon behalf of C.

(ii) Whether expense incurred by A on behalfof C i.e. towards carri ed i nterest beconsidered as allowable for deduction u/s 37 of the Act?

It is to be noted that all these expenditureare of capi tal in nature and capi talexpenditures are not al lowable u/s 37hence the above expenditure are notallowable u/s 37.

(ii i) Whether expense incurred by A onbehalf of C i.e. towards carried interest beconsidered as allowable for depreciationu/s 32 of the Act?

Even though the above expenditure areof capital in nature, the same cannot becapitalized as all these expenditures areto be recovered by A from the share of Cin total revenue. Hence, in fact, A has notincurred these expense for any asset to becapitalized but to recover from C.

In view of the above, it can be concluded thatexpenditure incurred by A on behalf of Ccannot be claimed as deduction in Act andhence the corresponding income i.e. share ofC in total revenue should also not be offeredfor income tax.



The above situation can be explained in tabular format as under for better understanding:

Name of Before commencement of After commencement of After Payout TaxCompany production production – ti l l Payout Books of Accounts Purpose

Books of Accounts Tax Purpose Books of Accounts Tax Purpose

A A's own share as No Tax A's own share as well Refer A wil l record only Refer(Carrying well as carried implication as carried interest wil l Note - 1 its share of revenue Note

Party) interest wil l be be accounted as per to 4 and cost. - 1accounted as normal accountingCWIP. policy. A should also

record all revenuethat is applicable tothe recovery of costscarried.

C No Accounting No Tax No Accounting No Tax Accounting treatment As per(Carried Treatment implication Treatment implicat should be given as per Note –Party) ion normal accounting 1 & 3

policy for i ts ownshare of revenue,operating expenses,and subsequentdevelopment costs, i fthe agreement providesfor subsequent sharingof costs rather than acarried i nterest.

Note Particulars Tax Implications No.

1 Expenditure incurred in respect of dri l l ing or exploration Deducti on u/s 42 of the Actactivities or services or in respect of physical assets used(To the extents of i ts own share i.e. 80%)

2 Expenditure incurred in respect of dri l l ing or exploration No deduction of expenditure under the income taxactivities or services or in respect of physical assets used act and i ncome should also not to be offered to that(To the extents of carried interest i .e. 10%) extent.

3 Other Expenditure (80% share) Deduction u/s 32 of the Act for capital expenditure.Remaining Expenditure as per normal provisions ofthe Act.

4 Other Expenditure (10% share) No deduction of expenditure under the Act and incomeshould also not to be offered to that extent.

Conclusion:

In today's era, oil and gas sector is very important sector and also backbone of economy of the countryhence considering the new developments in the sector, ICAI has come out with the Revised Guidance Noteon oil and gas sector. In view of the above analysis of Carried Interest, Carrying Party should properlyaccount the cost as well as revenue at each stage of business cycle. However looking to the complexities inaccounting as well as income tax on Carried Interest, ICAI should further come out with specific guidelinefor accounting in the case of carried interest.

❉ ❉ ❉



Introduction

“Thr ill seeking and auditing are not mutuallyexclusive.Forensic audit can be a high profile andfascinating blend of legal and numerical problemsolving where you are key to beating the bad guys.There’s nothing better than that thrill of getting thefinal bit ofevidence that pieces the jigsaw together”

- Mark Alden

Root cause of Forensic Auditing is fraud. Fraud isa widespread problem that affects practically everyorganization, regardless of size, location or industry.Fraud is an expensive drain on an enterprise’sfinancial resources which if not protectivelymanaged could put you out of business. Majoraccounting frauds such as Enron, Worldcom&Parmalat have deeply affected the economy of theworld. Some of the major fraudsters are

- Madoff - Jerone Kerviel - Charles Ponzi

- Kenneth Lay - Bernard Ebbers - Harshad Mehta

fraudulent act of them have led to loss of millionsof dollars.

As per one survey, less than 10% of the fraudsthat takes place are detected, out of this less than2% are detected by auditors and out of that 2%,98% are detected by accident rather than bydesign!!

The above line itself suggests how deep the scopeof the subject is.

The genesis of the Forensic Audit can be traced to1817 in court decision involving bankrupt case.First time, the phrase “Forensic Accounting” waspublished in an article in 1946 by Maurice EPeloubet. Sherlok Homes was the most famouspractitioner in the field of Forensic Audit.

According to one research, forensic accounting isone of the oldest professions and dates back to theEgyptians. The “eyes and ears” of the king was a

person who basical ly served as a forensicaccountant, watchful over inventories of grain, goldand other assets.

In India, Kautilya recognized the need of forensicaccountants and also mentioned 40 ways ofembezzlement centuries ago. Though not havingthe same name, the concept of forensic auditprevailed in several stories of Akbar & Birbal.

After the Enron debacle, auditing all over the worldhas come under the scanner. The age-old sayingthat ‘an auditor is a watchdog and not a bloodhound’ is being re-examined, if not questioned.Legislation which seeks to lay a greater emphasison detection and reporting of fraud by auditors hasbeen introduced all over the globe. In India also,legislation has shown serious doubts on functioningof audit function by imposing stringent provisionson persons associated with the accounts and auditunder the Companies Act, 2013. In this context,this article seeks to introduce concepts of ForensicAccounting and how our profession can contributefor the same.

Definition & Meaning

According to Webster’s Dictionary, the word“Forensic” means “Belonging to, used in or suitableto courts of judicature or to public discussion anddebate” & the word “Audit” means a “methodicalexamination & review”. Thus forensic Auditingaimed at in depth examination of records for findingconclusions which may be used judicially or forpublic discussion.

Forensic audit involves examination of legalities byblending techniques of propriety, regulari ty,investigative and financial audits. The objective isto find out whether or not true business value hasbeen reflected in the financial statements and in thecourse of examination to find whether any fraudhas taken place.Broad activities involved in ForensicAudit are summarized below.

Forensic Audit-Movingtowards “True &Correct ” Scenar io CA. Kush Paresh Desai

[email protected]


Forensic Audit-M oving towards “True & Correct ” Scenario

Before discussing about forensic audit in detail, it would be worthwhile to differentiate the StatutoryAudit & Forensic Audit:Sr.No Part iculars Statutor y Audit Forensic Audit

1. Objective Express opinion as to ‘true & Determine correctness of the accounts orfair’presentation. whether any fraud has actually taken place.

2. Techniques ‘Substantive’ and ‘compli ance’ Analysis of past trend and substanti veprocedures. or ‘i n depth’ checking of selected

transactions.

3. Peri od Normally all transactions for the No such limitations. Accounts may beparti cular accounting period. examined in detai l from the beginning.

4. Verif i cation of Relies on the management Independent ver if i cati on ofBalance Sheet certif i cate/ representation of suspected/ selected items carri edItems management. out.

5. Of f balance- Used to vouch the arithmetic Regular ity and propri ety of thesesheet items accuracy & compliance wi th transactions/contracts are

procedures. examined.

6. Adverse fi ndings Negative opinion or qualif i ed Legal determination of f raud andopinion expressed, wi th/wi thout naming persons behind such frauds.quanti f i cati on.

Activities involved in Forensic Audit

The expert Witness

L itigation Consultancy

Fraud Detection

Computer Forensics

Conceptual Base of Forensic Audit

In this ever growing world, needs are alwaysremained unsatisfied. People have never understoodthat simple formula of success is “There is noalternative to the hard work”. Greed and wish tobecome prosperous in short span of a time leads tofrauds.There are basically three elements whichperpetrate fraud which commonly builds a FraudTriangle mentioned as below:

Pressure

Opportunity

Rationalization(the fraud is acceptable)

Until recently, detecting a fraud or white collarcrime was thought to be part of the accounting andwas the responsibilities of the internal/externalauditors. However, we know that auditors can onlycheck compliance to the General ly AcceptedAccounting Principles. Thus a new category ofaccounting was needed to substantiate the suspectedfraudulent transactions. This area is known as“Forensic Accounting/Audit”.

Forensic Audit is the integration of accounting,auditing and investigation skills and involveslooking beyond the numbers to grasp the substanceof the situations. It is more than accounting and isdetective work. It is the application of a specializedknowledge to economic transaction analysis andreporting.

Three pillars of Forensic Auditing are:

Forensic Auditing

Acc

ount

ing

Inve

stig

atio

n Sk

ills

Aud

iting


Auditor’s Role in Fraud Detection

So far, our legislation has imposed the followingresponsibilities on the auditors in the event of fraudis observed by them.

1. Sect ion 142(12) of the Companies A ct,2013

Section 142(12) requires that if an auditorof a company, in the course of theperformance of his duties as auditor, has reasonto believe that an offence involving fraud isbeing or has been committed against thecompany by officers or employees of thecompany, he shall immediately report thematter to the Central Government.

2. SA-240 “The Auditor’s responsibilit iesrelating to Fraud in an Audit of FinancialStatements”

The above standard requires an auditor toconsider the following points.i. An attitude of Professional Skeptismii. Importance of teamworkiii. Perform additional/extended procedures

when fraud is suspectediv. Reporting obligationsv. Materiality is not an consideration when

fraud is observed

3. Clauses of CAR0-2003

Clause 4(iv) - The said clause requires theaudit to comment whether the company hasadequate Internal Control Systemcommensurate with the size of the companyand nature of its business.

Clause 4(xxi) - The said clause requires theauditor to report whether in his opinion anyfraud committed on or by the company.

4. Sales Tax Practitioners’ Association v/s TheState of Maharashtra

The above judgment specif ical ly hasspecifically provided the following:

“An auditor’s role includes fraud & errordetection and detection of fraud is of primaryimportance and that the auditor is exposed to

severe penal consequences for non-performance of his duty”.

5. Provisions of Reserve Bank of India

RBI requires Statutory Bank Branch Auditorsand Statutory Central A uditors to reportdirectly to it if they observe any fraudulentactivities.

Types of Frauds & Financial Cr imes

The following are some of the typical frauds whichwe need to understand:

Sr. Name of Br ief ExplanationNo the fraud

1. Trojan Horse This fraud is committed in twoFrauds parts:-

i) Resilience & strength of acontrol is tested by thepotential fraudster. If hisact is noticed orquestioned, he offers aplausible explanation offeigned ignorance orsimple lapse on his part &fraud doesn’t enter insecond phase.

ii) If his act is not noticed/questioned then fraudstermusters up the strength tocommit the fraud. Thesecond phase is thenactivated during which theactual act of damage isundertaken. The name isderived from the Greekmythology, where theycreated an innocentlooking wooden horse andlet them entered the city ofenemies. When enemydidn’t noticed such thing,one night soldiers hiddenin those horses attacked thecity and destroyed it.



2. Disaster There are frauds which thriveFrauds on situations of disaster, chaos,

anarchy and disorder. Thefraudster operates under theshield of the confusion createdin such situations. He commitsthe fraud in the situation whenit becomes impractical/impossible to comply with thesystem and procedures &information and evidence canbe easily suppressed.

3. Achilles The fraudster applies theHeel Frauds principle that no chain can

ever be stronger than i tsweakest link. These frauds areperpetrated by those with verysharp mind. The fraudstershave an eye for detail and theycan discern the smallestweakness in the system andexploit it. This is named afterthe legendary Achilles whowas invincible but for his heel.It was his heel which was theonly vulnerable part of hisbody which was attacked andwhich eventually brought hisdownfall.

4. Corporate Such fraud relates toEspionage unauthorized disclosure of the

company’s conf identialinformation to the competitorsby insiders. Today, theinformation carries the highestvalue and fraud relating tosel l ing the same to thecompeti tors is almostimpossible to prevent & deter.Since information is intangibleasset and hence it cannot be assecurely stored and monitoredlike tangible assets like cash,bullion, and other valuables. Inaddition, it can be easily theftvia e-mail or pen drive as it isdifficult to monitor the same.

5. Technical These are the frauds which canFrauds happen right in front of the

eyes of the management and itmay not even know that it hasbeen defrauded. This isbecause technical aspects arethe beyond the comprehensionand frauds using technologyare difficult to control. Suchfrauds can happen in any kindof organization wherecontrolling authorities havel i ttle or no technicalknowledge or where therearen’t sufficient tools to checksuch frauds. Here too suchfrauds are difficult for anyoneto detect.

Buddhism refers to three kinds of poisons ‘anger,greed & ignorance’. If not controlled, they alleventually lead to wrongdoing. A symptom or ‘RedFlag’ will surface in some form or other where anyof these three evils are present.Some of them are asfollows.

Steps involved in Fraud Detection

Following are the common steps, which the forensicauditor would normally follow in his investigation.

RED FLAGS IN DETECTION OF FRAUDS

A bsence of

Rotation of Duties

Close nexus with vendors,

clients or external parties Sudden Losses

Generation of Orphan Funds

Disaster S ituations

Missing Documentation

Chaotic Conditions

Irrational Behavior

Defining the Obje ctive

Crystall ization of

the terms of referen ce

Evidences col lected

directly: Documentar y tests and Inter views

Evidences col lected

indirectly: Field Au dit and Physical Che cks

Digital Analys is of

relationships and tren ds

Sti ng Operati ons or Decoy Traps or

Inves ti gators’

C onfrontation

In terviews

Evaluation o f evidences

Reporting



Types of Evidences

While one aspect of any fraud detection is acustomized programme, the real value lies in therelevance and reliabi lity of the evidences andinformation gathered. Data, information or evidenceof any kind by itself has no value but when logic,sense and reasoning are applied, it gains value.

As regards “Audit Evidences”, it is worthwhile todiscuss provisions of SAP 5 and theories of Vedicscripture cal led Nyaya Shastra which offerconsiderable insights to the Forensic Auditor.

i) Provisions of SAP 5 on “Audit Evidence”

SAP 5 prov ides some i nsights i nto theprocedure of weighing and judging evidence.The rel evant provisions are:- External evidence is more reliable than

internal evidence.- Internal evidence is more reliable when

internal controls are satisfactory.- Written or documented evidence is more

reliable than oral representations.- Evidence obtained by the auditor is more

reliable than that obtained through the auditee.- The documentary evidence originating from

third parties is the most reliable and evidenceoriginating from the auditee is the least reliable.

ii) Tenets of Nyaya Shastra

Nyaya Shastra, also part of the Vedic Scriptures,authored by Sage Gautama offer considerablehelp. The relevance of this in fraud detection isthat this teaches one as to possible means andaids for collection of information and evidence.Whi le Mimamsa doctr ine, which believes thatf or reaching conclusions, there should beunshakable and f irmly embedded truth, NyayaShastra facilitates application of methods or aidsto obtain information and evidence which willbe used i n reaching the eventual conclusion.According to it, there are several aids call edpramanas or types of proof s which facil itatesreaching the truth, which are as follows.

- Pratyaksha: Anything physically verifiable- Anumana: Inference of guess- Upamana: Description

- Shabda: Axioms or undisputed theories- Arthapat: Conclusion through the principle

of Reductio Ad Absurdum ( the method ofproving falsity by showing that its logicalconsequence is absurd or contradictory)

- Anupalabdhi: Conclusion through absenceof truth

Concepts applied in Fraud Detection

From the forgoing, it is evident that forensic auditingis a different field all together as compared to tax,normal audit, consultancy etc. In order to understandthe subject, a few theories have been explainedbelow so as to bring readers closer to the subject.These are various concepts and principles whichhave been successfully applied in fraud detectionand perhaps could be used effectively in similar orclose resembling situations.

i) Theory of Inverse Logic

Often it is not possible to ascertain whether theassertion is reliable for the want of information.In such situation, if you cannot find out whatthe truth of the matter is, find out what it cannotbe and eliminate all such possibilities. Thisprocess of elimination is application of inverselogic which sometimes is the only method leftto ascertain the truth. When the truth is bundledwith the all the other irrelevant information dueto which it is apparently not clearly visible, tryto eliminate all those irrelevant information, sothat you can reach at the truth.

ii) The concept of “Distrust the Obvious”

In fraud detection, it is prudent to distrust whatis obvious unless and unti l it is proved,preferably by hardcore evidence. All thesubmissions and facts of the case must beunderstood correctly so as to carry out a focusedinvestigation. Sometimes, an imperfectunderstanding of the question is so deeplyreached that consequently the simple answeris missed. Many times, the subconscious mindadds i ts own deep routed bel iefs andpresumptions to a message received by it andits intellect judges data or information in thelight of such presumptions.



iii) The Birbal Tips & Tricks in detecting guiltymindThe wisdom applied by the legendary Birbalcan be effective in fraud detection even today.We all know the anecdote where to find outthe real thief, Birbal provided servants with astraw stating that it was a “Magic Straw” andthe straw in the possession of the guilty servantwould grow an inch higher next day. The guiltin the servant who theft made him cut the strawby an inch to avoid getting caught. But thatwas precisely what gave him away, since hiswas the only strawwhich was an inch shorter.

iv) The Pr inciple of mir ror imagingThe law of physics tells us that every image ofan object in a mirror is identical to the object.This simple phenomenon can have an effectiveand meaningful application in fraud detection.This principle states that procedures andcontrols applied at one place should be possibleto apply at another if the set of circumstancesare the same. Results should be same or similarand deviation could mean that something isirregular. This theory is particularly helpful incontrol testing, where an examiner while testingthe control, perform similar procedure asmentioned in such control and try to analyzethe result obtained by him through theprocedure and results already exists.

v) The three dimensional visionScientifically, the two eyes of a human being seethe same object from slightly different angels.Therefore, although the object is the same, the brainreceives slightly different images, which are infusedand hence the viewer perceives solidity and depthof the object studied. In a similar manner, anexaminer may have access to a multitude of reports,information, documents and evidences. Differentkind of information from the different sourceswould look apparently irrelevant but when lookedfrom the different directionssimultaneously wouldprovide valuable information.

Case Studies based on above1. There was classic case of loss making hotel in

the remote area. The hotel was loss making forthe years, but suddenly, after joining new

manager, there was a sudden turnaround and thehotel stated making astronomical profits thoughbusiness conditions were gloomy. In addition,profits were realized in full cash receipts andhence there were no doubts for the management.However, what was really happening was themanager was selling of expensive assets of thehotel such as teak wood furniture, paintings, glassshow pieces etc. He pocketed the realization andpart of it was routed back as sales realization.When the hotel was fully stripped of all resources,the manager set the fire to escape from hisaccountability and to hide his fraud.Theories of “Distrust the obvious”, “DisasterFrauds” and “Theory of inverse logic” can beapplied here. In the above case, there wereenormous cash receipts on the days of strikeswhich is apparently impossible.

2. Fire occurred in the godown of electronic itemsand goods remained inside it were destroyed.After such incidence, the company put theclaim on insurance company. Insurancecompany appointed professional firm to verifythe validness of the claim. Professionalinvestigator noted that the stock shown in theclaim was incredibly higher than the normalstock, but there was no apparent evidence toprove such thing, as he got required purchaseand sales invoices as well as stock register.Based on that, he was going to certify the claimput by the company as correct, but before thathe planned to recheck the claim. First thing hedid was to visit the godown site again. At thattime, what he observed that apparently suchplace could not store the stock which wasclaimed by the company. Then he measuredthe area of godown viz-a-viz area of the boxesof stock which could occupy. And soon, theposition was pretty cleared that the claim wasinflated by 60%. Finally the company hadaccepted its mistake and put the revised claim.Here the theory of “Three Dimension Vision”would apply, where you see the situation fromall the possible angles, the picture would bepretty clear.



3. There was a charitable trust who has gainedconsiderable goodwill in doing activities ofwelfare towards society. It had put donationboxes in front of many public places. Themanaging trustee got disturbing news ofpilferage of such donation. Auditors had alsopointed out that the procedures of collectingsuch donation were weak. Hence, he hasappointed fraud detector who found thatsomeone from the trustee was pilfering thefunds. Hence, on one day he had called ameeting of trustees in which he has announcedthat he was going to put Rs.500 note with reddot on it in every donation box and on nextday if he didn’t find such note from any of thebox then collector of such box would declaredthief. And in amazingly, the real thief was caughtin this trap and he himself had put Rs.500 notewith red dot on it in the box collected it.

Theory of “Birbals’ tips and tricks”had appliedhere which is very effective in the currentscenario as well.

Conclusion

The field of forensic Auditing will continue todevelop and expand, with the number of corporatecollapses, there will be plenty of work for those inthe forensic industry in the future. The future offorensic Auditors is very bright. This specializedarea is the fastest growing area, interesting anddynamic which provide unlimited opportunities forthe next generation. A s a result of negativeconsequences, increasing emphasis is being placedtoday on protective prevention and early detection.There is a human tendency to get maximum in shortspan of time. It is not everyone on the earth, who isso fortunate enough to get maximum in a right way.In addition, in the developing country like Indianumber of large conglomerates got increased.Chances of fraud in large organizations are morethan as compared to smaller ones. In addition,advance technology has also made the businessesmore complex and uncontrollable by common man.Owners of the large business houses are unabletocontrol their vast spread businesses. With complexaccounting structure and gloomy picture presented

by the borrowers, the banks apparently are unableto check his financial viability. Due to complexaccounting structure and many transactions, taxationauthorities are unable to find detailed tax evasion.Due to control being occupied by majorityshareholders who is also the promoter group, it isdif f icult for the authori ty to protect smallshareholders interests. Due to all these factors, Indiawill soon need dedicated professionals in the lineof forensics who can prevent and detect financialfrauds. In the Government Department also, due tocomplex documentation and other processes, it isdifficult to assess whether any particular decisionmade or a particular tender awarded to any personis in the benefit of public as a whole or not.We being Chartered Accountants will be first expectedto fulfill such needs taking into account vast knowledgebase in the field of finance and accounts coupled withrich experience. With the expansion of industry in Indiaafter liberalization, incidents of frauds and moneylaundering are also proportionately increasing.Recognizing the need to have specialized course in thisfield, The Institute of Chartered Accountants of Indiahas already initiated the Certificate course in ForensicAccounting & Fraud Detection. The same impartsdetailed information in this field and would grant specialskills of its members in this direction. In future, theremay be the case that various legislative authorities maycome up with the panel empanelling professionalshaving prescribed qualification in the field of forensics.Based on our investigation, it will be smooth for themto put evidences in the Court of law.To conclude I would like to quote the famous quoteof Swami Vivekananda which says “Society doesnot go down because of the activities of criminals,but because of the inactivity of the good people”.Greed of mankind is never going to satisfy underany circumstances and hence crime would neverstop, and hence there would always be the need ofpersons who can think like the thieves but act likethe police.

Bibliography- ICAI’s material on “Certif icate Course on

Forensic Accounting & Fraud Detection”- Articles of CA. Chetan Dalal published in the

Bombay Chartered Accountant’s Journal❉ ❉ ❉



Glimpses of SupremeCourt Rulings

Advocate Samir N. [email protected].

Contempt of Cour t – Cr iminalContempt:

Being a member of the Bar, it was the appellant’sduty not to demean and disgrace the majesty ofjustice dispensed by a court of law. It is a case whereinsinuation of bias and predetermined mind hasbeen leveled by a practicing lawyer against threeJudges of High Court. Such casting of bald, oblique,unsubstantiated aspersions against the Judges of theHigh Court not only causes agony and anguish tothe judges concerned but also shakes the confidenceof the public in the judiciary in its function ofdispensation of justice. The judicial process is basedon probity, fairness and impartial ity which isunimpeachable. Such an act especial ly by themembers of the Bar who are another cog in thewheel of justice is highly reprehensible and deeplyregretted. Absence of motivation is no excuse.

The apology means a regretful acknowledgmentor an excuse for failure. An explanation offered toa person affected by one’s action that no offencewas intended, coupled with the expression of regretfor any that may have been given. Apology shouldbe unquestionable in sincerity. It should betempered with a sense of genuine remorse andrepentance, and not a calculated strategy to avoidpunishment.

Sub-section (1) of Section 12 of the Act and theExplanation attached thereto enables the court toremit the punishment awarded to committing thecontempt of court on an apology being made to thesatisfaction of the court. However, an apologyshould not be rejected merely on the ground that itis qualified or tendered at a belated stage if theaccused makes it bona fide. A conduct which abusesand makes a mockery of the judicial process of thecourt is to be dealt with iron hands and no personcan tinker with it to prevent, prejudice, obstruct orinterfere with the administration of justice. There

can be cases where the wisdom of rendering anapology dawns upon only at a later stage.Undoubtedly, an apology cannot be defence, ajustification, or an appropriate punishment for anact which tantamounts to contempt of court. Anapology can be accepted in case where the conductfor which the apology is given is such that it can be‘ignored without compromising the dignity of thecourt’, or it is intended to be the evidence of realcontrition. It should be sincere. Apology cannot beaccepted in case it is hollow; there is no remorse;no regret; no repentance, or if it is only a device toescape the rigour of the law. Such an apology canmerely be termed as ‘paper apology’.

[Bal Kishan Giri vs. State of Uttar Pradesh(2014) (7 SCC 280)]

Capital Gains – Transfer – Exemption:

In normal circumstances, the entire property cannotbe said to have been sold at the time when anagreement to sell is entered into. However, lookingat the provisions of Sec.2(47) of the Act, whichdefines the word ‘transfer’ in relation to a capitalasset, if a right in the property is extinguished byexecution of an agreement to sell, and that right istransferred to someone, it would amount to transferof a capital asset. An agreement to sell in respect ofa capital asset had been executed on December 27,2002, for transferring the residential house and asum of Rs.15 lakhs had been received by way ofearnest money. The sale deed could not be executedbecause of pendency of the litigation between thetestator’s son on the one hand and the appellantson the other as to the validity of the WILL underwhich the property devolved upon the appellants.By virtue of an order passed in the suit, theappellants were restrained from dealing with the

23

24

contd. on page no. 409


Tr ibunal : Power of rectification ofOrder - South India Corporation L td.v/s. ACIT (2014) 360 ITR 39 (Ker)

Issue :

What are the powers of I.T.A.T. in rectification oforder passed by it?

Held :

In appeal by the assessee, Tribunal held in favourof the assessee.

Subsequently a miscellaneous application was filedby the Revenue u/s 254(2) stating that a decisionof the jurisdictional High Court was not broughtto the notice of the Tribunal. The Tribunal allowedthe rectification application recalling the order anddismissed the appeal filed by the assessee.

High Court held that :-

Though the decision of the Division Bench of theCourt was very much in force as on the date of theappeal before the Tribunal, it was not brought tothe notice of the Tribunal but later on an applicationwas filed. Thus, this could be taken to be withinthe ambit of mistake apparent on the face of recordwhich required rectification.

Rule 8D : Recording of satisfaction :CIT v/s. Hero Management Services L td.(2014) 360 ITR 68 (Delhi)

Issue :

What is the pre requisition for invoking provisionsof Rule 8D?

Held :

In order to invoke Rule 8D of the Income Tax Rules,1962, the A.O. has to first record a finding that hewas not satisfied with the correctness of the claimof expenditure made by the assessee in relation toincome, which did not form part of the total incomeunder I.T. Act, 1961.

CA. C. R. [email protected]

High court dismissed the appeal by the revenue inlimine holding that no satisfaction as required byrule 8D had been recorded by the A .O. Nodisallowance could be made under section 14A.

Sec. 263 : Twin Condition : Erroneousand Prejudicial to the interests of theRevenue - CIT v/s. New Delhi TelevisionL td. (2014) 360 ITR 44 (Delhi)

Issue :

When the twin conditions, viz (1) Erroneous and(2) Prejudicial to the interest of the revenue can besaid to have been fulfilled to invoke provisions ofSec. 263?

Held :

Section 263 of the I.T. Act 1961, enables the CITto exercise the power of revision for correctingorders passed by the assessing officers when thetwo cumulative conditions are satisfied. Firstly, theOrder should be erroneous and secondly the ordershould also be prejudicial to the interests of theRevenue. An order is erroneous, when it isunsustainable, wrong or an incorrect decisiondeviating from law and the expression prejudicialto the interest of Revenue is of vide import and isnot confined to mear loss of tax. The power undersection 263 is vide but it can be exercised only whentwin conditions, mentioned in section 263 aresatisfied. There is difference between incompleteor inadequate verification and no verificationwhatsoever by the Assessing Officer. Where theassessing officer had adopted one of the two coursespermissible and available to him and this hasresulted in loss of revenue or two views werepossible and the assessing officer has taken one viewwith which the Commissioner may not agree, theorder cannot be treated as an erroneous order orprejudicial to the interests of revenue unless theview taken by the Assessing Officer is unsustainable

From the Cour ts

CA. Jayesh C. [email protected]

43

44

45


in law and therefore renders the order erroneous.The Commissioner must also show that prejudiceis caused to the interests of the revenue. The ordermust be clear and must set out logical ground andreason as to why the assessment is erroneous andprejudicial to the interests of the revenue.

Sec. 50C Applies to seller only : CIT v/s.Sar jan Realties L td. (2014) 220 Taxman112 (Guj) (Mag)

Issue :

Whether Provisions of Sec. 50C apply topurchaser?

Held :

A.O. made an addition on basis of difference invaluation of land by treating the same asunexplained investment in the case of the purchaser.Tribunal held that provisions of Sec. 50C wouldapply to a seller only and not to a purchaser anddeleted the addition. Deeming fiction created bySee. 50C which substitute’s consideration receivedon sale of a capital asset by stamp duty valuation isapplicable only in case of a seller and not buyer ofproperty. Hence Tribunal was justified in deletingimpugned addition in the case of purchaser.

Prior per iod expenses : Allowed in theyear of cr ystal l izat ion : SM CCConstruction India L td. v/s. Asstt. CIT(2014) 220 Taxman 354 (Delhi)

Issue :

Whether prior period expenses – crystallized duringthe current year is to be allowed ?

Held :

For the purpose of reopening assessment the A.O.recorded reason to believe that assessee had debiteda sum in profit and loss account on account of priorperiod expenses which had not been crystallizedduring relevant year, and hence, such prior periodexpenses should have been disallowed. A.O. placedreliance on notes to accounts filed along withReturn. However, said notes stated that prior periodexpenses crystallized /settled in relevant year. Nonew material came to knowledge A.O. Since, A.O.

had acted on mere surmise and without any rationalbasis, action of reopening of assessment wascontrary to law, and hence unsustainable.

Incorrect claim of Carr ied Forward lossis not concealment /inaccur ateparticulars - CIT v/s. Makino Asia (P)L td. (2014) 264 CTR 172 (Kar) : (2013)95 DTR (Kar) 9.

Issue :

Whether claim of C/F loss which is not allowableis concealment of income or furnishing ofinaccurate particulars ?

Held :

Merely because the assessee claimed set off of theloss carried forward would not mean that there wasconcealment of income as alleged or such claimwould amount to furnishing of inaccurateparticulars.

There cannot be any dispute that everything woulddepend upon the return filed by the assessee,because that is the only document where theassessee can furnish the particulars of his income.When such particulars furnished are found to beinaccurate the liability would arise. In the presentcase it cannot be said that the assessee furnishedany inaccurate particulars of his income in the returnand hence the liability would not arise.

Interpretation of Statutes : HarmoniousConstruction : Endemol India (P) L td.In RE. - Author ity of Advance Rulings(2014) 264 CTR (AAR) 135 : (2014) 361ITR 361 (ARR)

Issue :

What is the rule of interpretation of statutes wherethere are specific and general provisions?

Held :

High Court has stated as under :-

The essence of the Rule of harmonious constructionis inter alia as follows :

(i) It is the duty of the Courts to avoid a head onclash between two sections of a statute and

48

From the Courts

47

46

49


construe the provisions which appear to be inconflict with each other in such a manner as toharmonise them.

(ii) The provisions of one section of statute cannotbe used to defeat the other provisions unlessthe court in spite of its efforts, finds it impossibleto effect reconciliation between them.

(iii) All the provisions would be read togetherharmoniously so as to give effect to al lprovisions as a consistent whole, rendering nopart of the provision as surplusage.

From the Courts

When there is in the same statute a specific provisionand a general provision that in i ts mostcomprehensive sense, would include mattersembraced in the former, the particular provisionmust be taken to affect only such cases within itsgeneral language as are not within the provisionsof the particular provision. Where a generalprovision is expressed and the statute expresses alsoa particular expression incompatible with thegeneral intention, the particular intention is to beconsidered in the nature of an exception.

❉ ❉ ❉

contd. from page 406 Glimpses of Supreme Court Rulings

residential house. In the circumstances, for ajustifiable reason, which was not within the controlof the appellants, they could not execute the saledeed and the sale deed was registered only onSeptember 24,2004, after the suit challenging thevalidity of the WILL, had been dismissed. On thefacts and in view of the definition of the term‘transfer’, some right in respect of the capital assethad been transferred in favour of the vendee and,therefore, some right which the appellants had, inrespect of capital asset in question, had beenextinguished because after execution of theagreement to sell it was not open to the appellantsto sell the property to someone else in accordancewith law. A right in personam had been created in

favour of the vendee, in whose favour theagreement to sell had been executed and who hadalso paid Rs.15 lakhs by way earnest money. Theintension of the Legislature in enacting Section 54is to give the assessee relief in the matter of paymentof tax on long-term capital gains. The appellantswere entitled to relief u/s 54 of the Act in respect ofthe Long term capital gains which they had earnedin pursuance of transfer of their residential propertyand used for purchase of a new asset/residentialhouse.

[Sanjeev Lal vs. CIT (2014)( 365 ITR 389)]

❉ ❉ ❉

I hate cowardice; I wi ll have nothing to do with cowards or poli ticalnonsense. I do not believe in any politics. God and truth are theonly poli tics in the world, everything else is trash.

Swami Vivekananda


Hydr abad Pharma Infr astructure &Technologies L td. v. ADIT (Int Tax) 64SOT 179 (Hyd) - Assessment year: 2007-08 & 2008-09 Order Dated: 18thOctober,2013

Basic Facts

The assessee-company was a Special PurposeVehicle (SPV ) created for the purpose ofimplementing the projects funded under theIndustrial Infrastructure Up gradation Scheme(IIUS) by the Department of Industrial Policy andPromotion (DIPP), Ministry of Commerce,Government of India. During the year, it receivedgrant from the Central Government and kept theamount in short-term deposits in bank, as the samewas not immediately util ized. It earned interestincome on such deposits and treated the same asbusiness income. While completing the assessmentthe AO treated the interest income as income fromother sources. On appeal to CIT(A), the assesseecontended that the interest income had overridingcharge and referred to letter of the DIPP, dated 5-12-2011 wherein as per the instructions of theGovernment the interest income on deposits had tobe returned back to the Government or adjustedagainst future grant. Hence, it could not be treatedas its income. The CIT(A) did not accept thecontention of the assesse since according to himthe letter merely placed restriction on how theinterest income was to be utilized. According to himthe title of the original grant as well as the interestincome remained with the assessee and it was boundto use that amount for the purpose of achieving theobjects of the company. He, therefore, upheld theorder of the AO.

Issue

Whether interest earned from investment ofgrant is taxable if it is repaid to gr antor orreduces future grants?

Held

The Tribunal observed that the assessee itself wastreating such interest income as its business incomeand claimed deduction under section 80-IA on suchincome. A plain reading of the instructions issuedwould make it clear that the Government has givena clear instruction that interest on short-term depositseither has to be refunded back to the Governmentor to be adjusted against the future grants to bereleased for implementing the project. In otherwords, the amount to the extent of interest earnedon fixed deposits will be reduced from the grants.Therefore, in real sense, the interests on short-termdeposits arepartake thecharacter of grants, unless itis refunded back to the Government. In either case,interest earned on short-term deposits cannot be saidto have accrued as income to the assessee. Theinstruction issued by the Government also makes itmandatory that the SPV shall not utilize the interestearned on the grant for any purpose. Accordinglyit was held that interest earned on short-termdeposits cannot be treated as income of the assessee,when the assessee in strict sense of the term has nodominion over such income. But the matter wasset aside to the file of the AO to verify whetherinterest was refunded back to the Government orhas been adjusted against any future grant releasedto the assesse.

DDIT V. Reliance Infocom L td. 64 SOT137(Mum) (URO), 39 Taxmann.Com140 (Mum) Order dated: 6th September,2013

Basic Facts

The assessee Lucent Technologies, GRL LLC isan American company. Its Indian group companyLucent Technologies Hindustan Pvt. Ltd. (LTHPL)had entered into contract with Reliance InfocomLtd. for supply of hardware, software and also

CA. Yogesh G. [email protected]

Tr ibunal News

CA. Aparna [email protected]

37

38


installation. Thereafter, supply of software wasassigned to the assessee by way of triparti teagreement between Reliance, LTHPL and theassessee. The AO held that assessee had agencyPE in India as substantive functions of negotiations,entering into contracts, stocking of goods ormerchandising is being done by Indian EnterpriseLTHPL. Further according to him not only originalagreement has been entered into by the IndianCompany but services relating to making softwareoperation or warranties or maintenance were alsobeing done by LTHPL only. The AO also relied ondocuments found in the course of survey in thepremises of Alcatel Lucent International Ltd. (gotmerged entity of LTHPL) more particularly withrespect to letter of agreement dated 06.09.2008between group concerns with RelianceCommunications regarding restructure of paymentmile stone. He accordingly worked out businessprofi t at 32% of the total receipts. The DRPapproved the AO’s order hence the assessee was inappeal before Tribunal.

Issue

Whether, on facts, was there a PE of assessee-company in India and wil l the quest ion ofattr ibution of profits ar ise?

Held

The Tribunal held that LTHPL entered into anagreement for supply of hardware, software andalso installation and that company is an Indiancompany. After entering into an agreement supplyof software was assigned to the assessee Lucent byway of the tripartite agreement between Relianceand LTHPL and assessee Lucent. Eventhough,installation was on Indian company there is noevidence of either deputing personnel of assesseeLucent to India nor there is any evidence in therecord for invoking Service PE. Moreover forinvoking Agency PE , facts do not support AO’scontentions. The agreement entered is anindependent agreement, entered on principle toprinciple basis and nowhere the Indian companyhas authorized or has undertaken any responsibilityof the assessee Lucent. On the facts of the case thetribunal was of the opinion that there do not exist

any PE, more so of agency PE. It was also not thecase of the Revenue that the assessee deputed itspersonnel to India so as to invoke Service PE asper Indo-US DTAA. In view of the above, thetribunal held that there is no PE of the assesseecompany in India and as there is neither any officein India nor it has any business connection in Indianor carried out any business activities in India.A ssessee’s company is a standalone legalindependent entity. Therefore, as there is no PE inIndia, so the question of attribution of profits doesnot arise.

Sahara India Financial Corporat ionL td. vs. DCIT 163 T TJ 257 (Del) -Assessment Year: 2009-10Order Dated:10th January, 2014

Basic Facts

The assessee firm is a RBI registered ResiduaryNBFC engaged in the activity of collecting depositsmainly from rural parts of India from smalldepositors, which are collected through a batteryof agents spread over the rural areas. Deposits arecollected under various schemes like daily deposits,term deposits, recurring deposits, small deposits etc.The assessee had disallowance Rs. 26,646/- ofexpenses in terms of sec. 14A(2) r/w rule 8D. Butthe AO disallowed of Rs. 2,16,51,917/- which wasmore than the exempt income earned ofRs.68,37,583/-. On appeal CIT(A ) confirmedaddition and revised figure to Rs. 2,19,74,418/-

Issue

Whether disallowance under section 14A canexceed the income earned?

Held

It has not been disputed that the administration,expenses and books of account of investmentdivision are separately carried out and maintainedby the assessee. No infirmity has been found bythe department in this behalf. One of the main issueison whomlies onus to establish nexus of availablefunds with free and taxable income. Similarly courtshave held that a finding in objective terms about

Tribunal News

39


assessee’s working being unsatisfactory is to berecorded by AO in the order. If mechanical methodof r. 8D is applied, it leads to manifestly absurdresult in as much as for tax-free income ofRs.68,37,583 disal lowance ofRs.2,16,51,917(enhanced by CIT(A ) atRs.2,19,47,772) is made under s 14A which iswaytoo much than exempt income. The interpretationof provisions of s.14A r.w.r 8D is leading tounanticipated absurdities which cannot be theintention of legislature. Under these circumstanceshelp of external aids of construction forinterpretation of statue is called for. Looking atvarying interpretations offered by various courts andbenches of tribunal in relation to s.14A it is quitearduous to precisely decide the issue. In the givenfacts and circumstances without going into all theissues, it is appropriate to hold that the disallowanceof expenditure in any case cannot exceed theincome earned. In the interest of justice, it will bereasonable to estimate and disallow 50 per cent ofexempt income (Rs.68,37,583) as relatable toexempt income under section 14 r.w.r 8D

R. Kasi Vishwananthan & Bros. V.ACIT 64 SOT 154 - Assessment Year:2006-07 Order date: 11th October, 2013

Basic Facts

The assessee is engaged in the retail business intextiles. It filed its return of income for the yearunder consideration on 31-10-2006. TheDepartment carried out search and seizureoperations u/s. 133A of the Act in the businesspremises of the assessee on 24-12-2006.Consequent to the survey operations, the assesseefiled a revised return of income on 31-03-2007. Inthe revised return, the assessee disal lowedadvertisement charges of Rs.1,09,67,754/-u/s40(a)(ia) of the Act for non-deduction of tax atsource and also made a fresh claim for deductionof “loss on clearance sale” to the tune ofRs.1,04,98,946/-. The AO did not consider therevised return of income since according to him,the assessee came to know of his failure to deducttax at source on the advertisement charges

&resultant disallowance u/s 40(a)(ia) of the Act dueto survey operations carried by the department.Further according to the AO in order to reduce thetax liability arising out of the said disallowance, theassessee has claimed deduction of “loss onclearance sale”. Holding that the filing of revisedreturn itself is an afterthoughtthe AO did notconsider it but he disallowed the advertisementexpenses u/s 40(a)(ia) by treating the revised returnas explanation given by the assessee for thedisallowance. The CIT(A)also held that the assesseehas filed the revised return only to reduce the taxliability and hence it is clearly an afterthought.

Issue

Whether where assessee filed a revised returnin accordance with provisions of section 139(5),r evenue author i t ies wer e not justi f ied inr ej ect ing said r etur n without fol lowingprocedure prescr ibed under section 139(9) bymerely taking a view that revised return wasan after thought?

Held

The assessee has filed original return of income forAsst. Year 2006-07 on 31.10.2006, i.e. within thedue date prescribed u/s 139(1) of the Act for thatyear. Thereafter, the assessee has filed revised returnu/s 139(5) of the Act on 31.3.2007.The assessmentin the hands of the assessee is completed on29.12.2008 and one year period from the end ofthe assessment year under consideration expires on31.3.2008. Since the assessee has filed revisedreturn of income on 31.3.2007, it is well within thetime limit prescribed u/s 139(5) of the Act.It is seenthat the provisions of sec. 139(5) gives a right to anassessee to file a revised return of income if hediscovers any omission or any wrong statementtherein. In the instant case, the assessee has filedthe revised return on finding that the disallowancerequired to be made u/s 40(a)(ia) of the Act wasnot made in the original return of income and furtherthe claim of “loss on clearance sale” was not madetherein.I t is not the case of the AO that twoadjustments made by the assessee in the revisedreturn do not fall in the category of ‘omission orany wrong statement’ as stated in section 139(5).The

Tribunal News

40


power to treat a return of income as ‘invalid’ is givento the AO u/s 139(9). The AO has not followed theprocedures laid down in section 139(9) for thepurpose of rejecting the revised return ofincome.Thus, it is seen that the AO has not drawnsupport from any of the statutory provisions for thedecision taken by him to reject the revised return ofincome.The only reason given by the AO is that itis an afterthought on the part of the assessee.It isalso noticed that the AO had not fol lowedprocedures prescribed under section 139(9) fortreating a return as ‘invalid’, nor did he show thatadjustments made by assessee in return of incomedo not fal l in category of ‘omission or wrongstatement’.Hence, the AO and CIT(A) were notright in law in rejecting the revised return of incomefiled by the assessee.

Mando India Steer ing System (P.) L td.vs. ACIT 45 taxmann.com 160 (Che); 149ITD 284 - Assessment Year: 2008-09Order dated: 7thApr il, 2014

Basic Facts

The assessee is a wholly owned subsidiary ofMando Corporation, Korea and is engaged in theassembly of steering columns to Original EquipmentManufacturers (OEM) like Hyundai Motor IndiaLtd. The assessee in the course of its business hasinternational transactions on account of import ofmachinery, raw-materials, consumable componentsand finished goods besides payment of royalty,management fee, reimbursement of expenses etc.The assessee had adopted CUP method for thepurchase of machinery and reimbursement ofexpenses and TNM method for purchase of finishedgoods, raw-material components and consumables,payment of royalty, management fee developmentfee etc. The TPO after detailed analysis of theinternational transactions, made downwardadjustment of Rs.7,59,39,334/-.Aggrieved againstthe order of the TPO, the assessee filed objectionsbefore the Dispute Resolution Panel [DRP]. TheDRP rejected all the objections raised by theassessee and confirmed the findings of TPO. Onthe basis of the directions of the DRP, the AO

completed the assessment and made addition ofRs.7,59,39,334/- on account of difference in ALP.

Issue

Whether assessee being in the initial year of itsproduction, can under-utilization of productionbe ignored while determining ALP?

Held

The Revenue has not denied that the assessee is ininitial year of its production. It is also a well-knownfact that in the initial years of production, theoverhead f ixed costs are more due to under-utilization of resources. The TPO has brushed asidethe contention of the assessee with regard to theunder-utilization of capacity on the ground that theassessee had not claimed the idle capacityadjustment in initial TP analysis. The TPO had alsoraised objection that the installed capacity has beengiven in matric tones whereas the production isgiven in numbers. Due to difference in units ofexpression, it is difficult to analyze the percentageof capacity utilization. It is considered view thatunder-utilization of production capacity in the initialyears is a vital factor which has been ignored bythe authorities below while determining the ALPcost. The TPO should have made allowance forthe higher overhead expenditure during the initialperiod of production. In view of the above, Tribunaldeemed it appropriate to remit this issue back to theAssessing Officer with a direction to consider theclaim of the assessee with respect to idle capacityadjustment during the relevant period whiledetermining the ALP cost. The assessee was alsodirected to produce relevant documents incomparable units for the necessary analysis.

Meridian Impex vs. ACIT 164 TTJ 289(Rajkot)(TM) - Assessment Year: 2006-07 Order Date: 25th July, 2013

Basic Facts

The assessee-firm was engaged in the business ofmanufacturing and export of brass items. It was anhundred per cent export oriented unit and its incomewas exempt under section 10B. The assesseeclaimed deduction under section 80-IB for the first

Tribunal News

41

42


time in its return of income for assessment year inquestion. The assessee during the course ofassessment proceedings f iled a written letterwithdrawing its claim of deduction under section80-IB.The Assessing Officer, however, leviedpenalty under section 271(1)(c) on account ofmaking a wrong claim of deduction holding thesame as furnishing of inaccurate particulars ofincome within the meaning of section 271(1)(c).Inappellate proceedings, the Accountant Memberconfirmed the penalty order whereas JudicialMember deleted penalty holding that there was noconcealment of particulars of income on part ofassessee.In view of difference of opinion betweenthe members of the Tribunal, the matter was referredto the Third Member.

Issue

Whether since all mater ial and relevant facts tocomputat ion of total income wer e dulyfurnished by assessee and no deficiencies infurnishing of such facts were pointed out bydepartment, deeming fiction of Explanation 1to sect ion 271(1)(c) was not appl icable toassessee’s case?

Held

The assessee has disclosed all material facts relevantto its claim of deduction under section 80-IB in its‘statement of income’ filed along with its return ofincome.It is a clear case of honest difference ofopinion between the assessee and the revenueregarding the admissibility of a claim of deductionas per the provisions of the Act.There is no materialon record brought on behalf of the revenue tosuggest that the claim of the assessee in this regardwas not bona fide. In fact the disallowance ofdeduction under section 80-IB was made by theAO on the basis of the claim made in this regard bythe assessee in its statement of income filed alongwith the return of income.It is not the law thatwherever the assessee’s claim of deduction wasfound not acceptable by the department, the assessee

should be visited with penalty for furnishing ofinaccurate particulars of income under section271(1)(c).In this case, the assessee has during thecourse of assessment proceedings filed a writtenletter before the AO withdrawing claim of deductionunder section 80-IB. Even if the assessee has notwithdrawn its claim of deduction and had insistedfor allowance of deduction, even then in theabsence of any material brought on record toimplicate the assessee, by showing that his claimof deduction was not bona fide, it cannot be saidthat the assessee is gui lty of filing inaccurateparticulars of its income. Merely because the auditorof the assessee has not made the claim of thededuction, the assessee is not barred from makinga legal claim of deduction while filing its return ofincome. The requirement of filing of auditors’certificate along with claim of deduction made bythe assessee, is a procedural requirement and couldbe complied with during the course of assessmentproceedings.All the material and relevant facts tothe computation of total income were duly furnishedby the assessee, and no deficiencies in furnishingof such facts were pointed out by the department,the deeming fiction of the Explanation 1 to section271(1)(c) was not applicable to the facts andcircumstances of the case, as the explanation of theassessee is bona fide and the assessee has disclosedall material facts relevant to the computation ofincome before the AO.In view of the law laid downby the various Courts and the facts of the case ofthe assessee, it is held that the claim made by theassessee for deduction under section 80-IB was abona fide claim and does not amount to filing ofinaccurate particulars of income, and therefore theassessee is not liable to penalty under section271(1)(c).

❉ ❉ ❉

Tribunal News


Valuation of Closing Stock when MODVATadjustments are involved ?

Issue :

Whether the MODVAT credit on the raw materialsnot consumed shall form part of the cost of rawmaterial at the end of the accounting year ?

Proposition:

It is proposed that modvat credit for duty paid onraw material is available to manufacturer onpurchase but it would not amount to income for thepurpose of I.T. Act. It is further submitted that ifany adjustment is made to the valuation of theClosing Stock on account of utilized modvat credit.Then the AO has to revise both the opening andclosing stock and hence no addition can be madeto the total income.

View Against the Propostion:

It is submitted that under the Income Tax Act eachyear is self contained unit and the profits cannot bepostponed to the next year. It is the duty of the AOto correctly determine profit liable to tax every year.

The reference can be made to the decision of theSupreme Court in the case of CIT vs. British PaintsIndia Ltd. 188 ITR 44 which has laid down that ifthe system adopted by the assessee does not disclosethe true and proper income the AO is entitled toappropriate computation to determine the trueincome. Any system of accounting where profit ofone year is likely to be shifted to another year, suchmethod would be an incorrect method of computingprofit.

The Institute Chartered Accountants of India hasprescribed the net method of accounting for modvatbut the same should not be followed as it results inunderstatement of profit. The ICAI of India hasgiven alternatives in the Guidance note. The basicdifference between the net and the cross method is

that in the net method the rate per unit of rawmaterial does not include the element of modvatcredit whereas in the gross method the rate per unitincludes modvat credit. Under the abovecircumstances if assessee adopt net method then itresults into understatement of profits and therefore,the AO can apply the gross method of accountingand can make addition. If assessee adopts grossmethod of accounting then the closing stock of rawmaterial must include unutilized modvat credit.

When assessees follows net method of accountingi.e. the opening stock and closing stock of rawmaterial is shown net of modvat credit. Thepurchases are also shown net of modvat credit andthis net method of accounting results intounderstatement of prof its. Sec. 145A makes aspecial provision as to the requirement of valuationof stock to include any tax, duty, cess or fee to bringthe goods to the place of its location or conditionon the date of valuation.

Thus, after the amendment excise duty becomespayable on transfer of goods from the factory siteand would have to be included in the valuation ofclosing stock. As per sec. 43B also the deductionfor excise duty is available only when the actualpayment is made and hence, when unutilizedmodvat credit is included in the valuation of closingstock, the deduction is available only when the actualpayment is made. The reference can be made tothe decision in the case of Hindustan Unilever Ltd.v. Addl. CIT [2013] 22 ITR (Trib) 737 (Mum).

It is further submitted that when the assessee addedunutilized modvat credit to the closing stock whichwas merely carried forward by the assessee in hisbooks. It was contended by the assessee that theassessee’s treatment was justified in the light of theHigh Court decision in CIT v. Indo NipponChemical Co. Ltd.’s case (supra) subsequentlyaffirmed by the Supreme Court, which had pointed

CA. Kaushik D. [email protected].

Controversies


out that the assessment in this case related to a yearfor which the provisions of section 145A introducedwith effect from the assessment year 1999-2000 sothat i t was not applicable. I t was, therefore,concluded in Jindal Iron and Steel Co. Ltd, v.Deputy CIT [2013] 21 ITR (Trib) 414 (Mumbai)that the matter requires enquiry.

View in favour of the Propostion:

I would like to invite kind attention to the decisionof the Supreme Court in CIT vs. Indo NipponChemicals Co. L td. [2003] 261 ITR 275 (SC)wherein it is pointed out that the value of theunconsumed raw material and work-in-progress atthe end of the year at net method would beconsistent with the principles of accountancy.Adopting the gross method for purchases and netmethod for unsold stock at the end of the year isnot so consistent and is not permissible. Adoptionof a uniform net method cannot be faulted, whereit is consistently adopted. It is for this reason thatthe unavailed Modvat credit cannot be added backin the computation of the income on the groundthat Modvat credit available to manufacturers uponpurchase of duty-paid raw materials cannot betreated as income, as no income has been derivedbefore avail ing the same. In coming to theconclusion, the Supreme Court followed its owndecision in a central excise case in Collector ofCentral Excise v. Dai Ichi Karkaria Ltd., AIR 1999SC 3234, wherein it had found that the excise dutyunder section 4(1)(b) of the Act read with Rule 6of the Valuation Rules should be understood as bymen of commerce in understanding the concept ofcost. However, this decision, it may be pointed out,would have no application, where the purchasesthemselves are accounted on net method. It followsthat the treatment that is given by the assessee maybe capable of adjustment only if the same treatmentis not given for purchases and valuation of stock.

Summation :

The valuation of inventory is not affected byMODVAT credit. If the inventory is valued at grossrate then the purchases will also have to be recordedat the gross rate. For this proposition, reliance isplaced on the judgement of the Supreme Court in

the case of CIT vs. British Paints India Ltd. (1991)188 ITR 44 (SC). Whatever component forms partof purchase should also form part of the closingstock and if duty paid is excluded from purchase, itcannot be included in the closing stock.

Reliance is also placed on the judgement of theSupreme Court in the case of Collector of CentralExcise vs. Dai Ichi Karkaria Ltd. (1999) 156 CTR(SC) 172 in which, inter alia, it has been laid downthat excise duty paid on raw material, if modvated,shall not be included in the cost of production ofthe excisable product.

The Madras High Court, in CIT v. English ElectricCo. of India Ltd. [2000] 243 ITR 512 (Mad) heldthat, relief upon the nature of excise duty for adecision as to whether excise duty should be addedto the value of closing stock, the High Court pointedout that it does not become cost till excise duty isleviable on such production. Since it is leviable onlyon removal, the mere prospect of liability cannotbe converted into an asset in the manner expectedby the Assessing Officer. If such liability had beenincurred, it could have been added to the stock,while claiming the liability itself as a charge on theprofits. When there has been no such charge, theinference that the amount should be added to theclosing stock would not be correct. It is in thiscontext that in Jallo Subsidiary Industries Co.(India) Pvt. L td. v. CIT [2002] 256 ITR 452(Delhi), it was held in respect of excise liability,that it arises on the date of removal and not on thedate on which the excise demand is raised by theorder of the Collector of Central Excise. In comingto the decision, i t fol lowed the decision inKedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82ITR 363 (SC). The reasoning will possibly not beapplicable in cases of disputed duty, where it hasbeen adjudicated as payable in a later year. Thereasoning in unexceptionable. I t is themisunderstanding of this position of accounting andlaw, that has resulted in the enactment of section145A, requiring any tax actually paid or incurredby the assessee to bring goods to the place of itslocation as on the date of valuation to be added to

Cont r over si es

contd. on page no. 427


Holding period for Capital Asset to be countedfrom the date of allotmentof property, pendingPossession and Conveyance Deed.

CIT vs. AnilabenUpendra Shah 262 ITR 657(Guj)

xxx…

4. Mr.Kureshi has vehemently submitted that allthat the assessee acquired on 15-11-1979 wasthe shares in the Co-operative Housing Society,but she acquired possession of the flat only inOctober, 1981 presumably because theconstruction of the flat was not completed tillthen. It is, therefore, the contention ofMr.Kureshi that the assessee did not acquire,and could not have acquired, the flat which wasnot in existence on 15-11-1979. Since the flatwas constructed and acquired within three yearsprior to the date of transfer in December, 1982,the capital asset in question was a short-termcapital asset meaning thereby it was held forless than 36 months.

5. For the relevant assessment year 1983-84,clause (iii) of section 27 of the Act read asunder:—

“(iii)a member of a co-operative society towhom a building or part thereof is allotted orleased under a house building scheme of thesociety shall be deemed to be the owner of thatbuilding or part thereof;”

With effect from 1-4-1988, the following clause(iiia) was added :—

“(iiia)a person who is allowed to take or retainpossession of any building or part thereof inpart performance of a contract of the naturereferred to in section 53A of the Transfer ofProperty Act, 1882 (4of 1882), shall be deemedto be the owner of that building or part thereof;”

Advocate Tushar [email protected]

Judicial Analysis

6. A perusal of clause (iii) of section 27 makes itclear that the Legislature has not made anyreference to handing over possession becausethe possession is never considered to be a sinequa non of ownership which consists of abundle of rights. Moreover, the amendment bythe Legislature by insertion of clause (iiia) witheffect from 1-4-1988 also indicates that theLegislature was conscious of the fact that priorto 1-4-1988 taking or retaining possession ofany building in part performance of a contractof the nature referred to in section 53A of theTransfer of Property Act was not considered asownership for the purpose of the Income-taxAct. Hence, the assessee not getting possessionof the flat in question at the time of allotmenton 15-11-1979 did not detract f rom theassessee’s ownership of the property in questioneven if it was constructed after 15 11-1979.

xxx...

8. It is thus clear that the member of a co-operativehousing society only owns the shares in thatsociety. The right to enjoy, or derive from, anyland or building belonging to the co-operativehousing society is merely an incidental rightflowing from the ownership of the shares. Amember of a co-operative housing societycannot sel l all his shares in a co-operativehousing society and still retain any interest inany property, whether land or bui lding,belonging to a co-operative housing society andallotted/let out to the member. Similarly, amember of a co-operative housing society towhom a flat or land is allotted cannot transfersuch land or building without selling the sharesheld by him. Hence, when the question comesup for consideration as to which is the relevantdate, while computing the capital gain tax incase of transfer of his shares by a person who


is a member in a co-operative housing society,the relevant date would be the date on whichthe member acquires the shares in the co-operative housing society and the date on whichthe member had sold his shares in the said co-operative housing society.

In the facts of the instant case, it is clear thatthe assessee acquired shares in the co-operativehousing society and allotted the flat on 15-11-1979 and she transferred those shares on 4-12-1982. Thus, the assessee had held the sharesand allotment of the flat in the said co-operativehousing society for a period of more than 36months. Accordingly, the capital gain inquestion was rightly held by the Tribunal to bea long-term capital gain. Therefore, the assesseewas rightly entitled to the benefit of section 80Tof the Income-tax Act, 1961.

CIT vs. K. Ramakr ishnan 225 Taxman 123 (Del)

xxx…

2. In this case, the relevant facts relating to theacquisition of the capital asset, i.e., the HUDAplot and its ultimate disposal of the assesseewas considered by the Tribunal and discussedas follows :

“5. The learned counsel for the assessee, on theother hand, has placed strong reliance onthe impugned order. Besides addressing theoral arguments, he has also placed beforeus a brief wri tten synopsis. It has beencontended that the Assessing Officer hadwrongly treated the capital gain as short-term capital gain and while doing so, haderroneously taken the date of execution ofthe conveyance deed in favour of theassessee as the relevant date, rather than thedate of allotment of the plot to the assesseeby the HUDA ; that undisputedly, theassessee had booked the plot in question withthe HUDA on June 18, 1986, and haddeposited the earnest money ; that the plotwas allotted to the assessee on August 3,1999 ; that on receipt of the allotment letter,the assessee had deposited further amountson various dates, as given in the chart

contained in the written synopsis ; that bythe expiry of the period of sixty days fromthe date of allotment, i.e., by October 3,1999, the assessee had deposited 96 percent. of the tentative cost of the plot ; that asper the terms and conditions contained inthe allotment letter, since the assesseepaidthe instalment as demanded by the HUDA,the assessee was to become the beneficialowner of the residential plot in question ;that as per clause 5 of the allotment letter, aletter of acceptance was to be filed by theassessee along with an amount of Rs.10,155, within thirty days, thereby havingpaid 25 per cent. of the total cost of the plot; that this amount had to be deposited by theassessee in his capacity as the owner of theplot, on allotment, which was done, asevidenced by the receipt of payment ; thatas per clause 11 of the allotment letter, theright of the assessee in the allotted plot wasan absolute right as owner thereof ; that thisclause prohibited the assessee fromtransferring the plot except with thepermission of the HUDA ; that this clausestated that it was till the execution of theconveyance deed, that the assessee was notto be treated as owner of the plot ; that asper clause 12, execution of the conveyancedeed was not made subject to the handingover of the possession of the plot ; that thus,right from 1999, when the plot was allottedto the assessee, the assessee was havingabsolute rights thereon ; that in JitendraMohan v. ITO [2007] 11 SOT 594 (Delhi),it has been held that it is the date of allotmentwhich is relevant for the purpose ofcomputing a holding period and not the dateof registration of conveyance deed ; thatsection 47 of the Registration Act lays downthat registration of a document operatesretrospectively ; that in Gurbax Singh v.Kartar Singh [2002] 254 ITR 112 (SC), ithas been held that registration of a documentwould relate back to the date of its execution; that in HamdaAmmal v. AvadiappaPathar

Judicial Analysis


[1991] 1 SCC 715 and M. SyamalaRao v.CIT [1998] 234 ITR 140 (AP), it has beenheld likewise; that, therefore, the learnedCommissioner of Income-tax (Appeals) hascorrectly decided the issue in favour of theassessee ; and that as such, there being nomerit therein, the appeal of the Departmentbe ordered to be dismissed.”

3. In this case, the assessee acquired possessionof the plot on December 12, 2005, and soldthrough a registered sale deed dated January 9,2008. This court is of the opinion that havingregard to the findings recorded by the Tribunal,the assessee had acquired the beneficial interestto the property at least 96 per cent. of theamount was paid, i.e., by October 3, 1999. Thiscourt is supported in its findings by a DivisionBench ruling of the Punjab and Haryana HighCourt in Mrs.MadhuKaul v. CIT [2014] 363ITR 54/43 taxmann.com 417.

4. In view of the reasons the courts is satisfiedthat the Tribunal’s impugned order does notdisclose any error calling for interference. Theappeal is accordingly dismissed.

Ms. MadhuKaul vs. CIT 363 ITR (P& H)

xxx…

5. We have heard counsel for the parties andperused the impugned order.

6. The Income Tax Appellate Tribunal has heldthat as a specific flat was allotted to the assessee,on 30.11.1988, the allotment letter or paymentof first installment does not entitle the appellantto claim a long term capital gain. A similarcontroversy came up for adjudication in VinodKumar Jain (supra). The point for considerationin the aforesaid case was whether capital gainarising from allotment of flat on 27.02.1982,under a scheme framed by DDA, though, theactual flat was allotted and possession wasdelivered on 15.05.1986 was a long termcapital gain as the flat was sold on 06.01.1989.After considering Sections 2(29-A),(42A) readwith Section 54 of the Income Tax Act, 1961

Judicial Analysis

as well as Circular No.471, dated 15.10.1986,it was held as follows:—

’11. Section 2(14) defines capital asset. UnderSection 2(29A) long term capital asset isone which is not a short term capital asset.According to Section 2(42A) short termcapital asset at the relevant time meant, acapital asset held by an assessee for notmore than thirty-six months immediatelypreceding the date of i ts transfer. Aconjoint reading of aforesaid provisionsleads to one conclusion that a capital assetwhich is held by the assessee for 36months would be termed as a long termcapital asset and any gain arising onaccount of sale thereof would constitutelong term capital gain.

12. It would also be advantageous to refer toCircular No. 471, dated 15.10.1996 [162ITR (st.) 41] issued by CBDT on whichheavy reliance has been placed by theassessee whereby instructions have beenissued regarding treatment of capital gainstax in case of a flat purchased under Self-Financing Scheme. It reads thus:—

xxx…

13. On careful reading of the Circular issuedby the Board, para 2 thereof describes thenature of right that an allottee acquires onallotment of flat under Self-FinancingScheme. According to it, the allottee getstitle to the property on the issuance of anallotment letter and the payment ofinstalments is only a consequential actionupon which the delivery of possessionflows.’

7. We find no distinction between the opinionrecorded in the aforesaid judgment and thecontroversy in the present case. Admittedly, theflat was allotted to the appellant on 07.06.1986,vide letter conveyed to the assessee on30.06.1986. The assessee paid the f irstinstallment on 04.07.1986, thereby conferringa right upon the appellant to hold a flat, which


was later identified and possession deliveredon a later date. The mere fact that possessionwas delivered later, does not detract from thefact that the allottee was conferred a right tohold property on issuance of an allotment letter.The payment of balance instal lments,identification of a particular flat and deliveryof possession are consequential acts, that relateback to and arise from the rights conferred bythe allotment letter.

8. In view of what has been recordedhereinabove, we have no hesitation in holdingthat the Income Tax Appellate Tribunal haserred in holding that the transaction does notenvisage a long term capital gain. Consequently,we allow the appeal, set aside order dated15.02.1999 and answer the substantialquestions of law in favour of the assessee.

Circular No. 471, dated 15.10.1996 [162 ITR(st.) 41]

Capital gains tax- Whether investment in a flat underthe Self-Financing Scheme of the DelhiDevelopment Authority would be construction forthe purpose of ss.54 and 54F of the IT Act, 1961.

15/10/1986

CAPITAL GAINS SECTIONS 54, 54F.

Secs. 54 and 54F of the IT Act, 1961, provide thatcapital gains arising on transfer of a long-term capitalasset shal l not be charged to tax to the extentspecified therein, where the amount of capital gainis invested in a residential house. In the case ofpurchase of a house, the benefit is available if theinvestment is made within a period of one yearbefore or after the date on which the transfer tookplace and in case of construction of a house, thebenefit is available if the investment is made withinthree years from the date of transfer.

2. The Board had occasion to examine as towhether the acquisition of a flat by an allotteeunder the Self-Financing Scheme of the DelhiDevelopment Authority amounts to purchaseor its construction by the Delhi DevelopmentAuthority on behalf of the allottee. Under the

Self-Financing Scheme of the DelhiDevelopment Authority the allotment letter isissued on payment of the first instalment of thecost of construction. The allotment is finalunless it is cancelled or the allottee withdrawsfrom the Scheme. The allotment is cancelledonly under exceptional circumstances. Theallottee gets title to the property on the issuanceof the allotment letter and the payment ofinstalments is only a follow-up action andtaking the delivery of possession is only aformality. If there is a failure on the part of theDelhi Development Authority to deliver thepossession of the f lat after completing theconstruction, the remedy for the allottee is tofile a suit for recovery of possession.

3. The Board have been advised that under theabove circumstances, the inference that can bedrawn is that the Delhi Development Authoritytakes up the construction work on behalf of theallottee and that the transaction involved is nota sale. Under the Scheme, the tentative cost ofconstruction is already determined and theDelhi Development Authority facilitates thepayment of the cost of construction ininstalments subject to the conditions that theallottee has to bear the increase, if any, in thecost of the construction. Therefore, for thepurpose of capital gains tax, the cost of the newasset is tentative cost of construction and thefact that the amount was allowed to be paid ininstalments does not affect the legal positionstated above. In view of these facts, it has beendecided that cases of allotment of flats underthe Self-Financing Scheme of the DelhiDevelopment Authority shall be treated as casesof construction for the purpose of capital gains.

❉ ❉ ❉

Judicial Analysis


CA. Savan A. [email protected]

Refinancing of ECB at lower all-in-cost– Simplification of procedure

Refinancing of existing ECB by raising fresh ECBat lower all-in-cost is permitted subject to thecondition that the outstanding maturity of theoriginal loan is maintained. The cases, where theAverage Maturity Period (AMP) of the fresh ECBis more than the residual maturity of existing ECBwere examined by the Reserve Bank under theapproval route.

It has been decided to simplify the procedure bydelegating powers to the AD Category – I banks toapprove even those cases where the AMP of thefresh ECB is exceeding the residual maturity of theexisting ECB under the automatic route subject toconditions.

This facility will be available even in those caseswhere existing ECBs were raised under theapproval route subject to the amount of new ECBsbeing eligible to be raised under the automatic route.

For Full Text refer to A.P. (DIR Series) CircularNo. 21

h t t p : / / w w w . r b i . o r g . i n / S c r i p t s /NotificationUser.aspx?Id=9193&Mode=0

Purchase and sale of secur it ies otherthan shares or convertible debentures ofan Indian company by a person residentoutside India

In terms of Schedule 5 to the Foreign ExchangeManagement (Transfer or Issue of Security by aPerson Resident outside India) Regulations, 2000,eligible investors, viz., SEBI registered ForeignInstitutional Investors (FIIs), Qualified ForeignInvestors (QFIs), registered Foreign Portfol ioInvestors (RFPIs) and long term investors registeredwith SEBI, may purchase eligible governmentsecurities directly from the issuer of such securitiesor through registered stock broker on a recognised

Stock Exchange in India, subject to such terms andconditions as mentioned therein and limits asprescribed for the same by RBI and SEBI from timeto time.

In order to provide flexibility in regard to the mannerin which government securities can be acquired byeligible investors, any stipulation as to the mannerof acquisition from the said Regulations has beenremoved. Consequently, the eligible investors canacquire such securities in any manner as per theprevalent/approved market practice.

For full text refer to: A.P. (DIR Series) Circular No.22


Exter nal Commer cial Bor r owings(ECB) in Indian Rupees

In terms of AP (DIR Series) Circular No. 27 datedSeptember 23, 2011 read with Notification No.FEMA.3/2000-RB dated May 03, 2000, all eligibleborrowers are eligible to raise ECB in IndianRupees from foreign equity holders as per the extantECB guidelines.

With a view to providing greater flexibility forstructuring of ECB arrangements, recognised non-resident ECB lenders may extend loans in IndianRupees subject to the following conditions:

a) The lender should mobilise Indian Rupeesthrough swaps undertaken with an AuthorisedDealer Category-I bank in India.

b) The ECB contract should comply with all otherconditions applicable to the automatic andapproval routes as the case may be.

c) The all-in-cost of such ECBs should becommensurate with prevai l ing marketconditions.

FEMA Updates

34

35

36


For the purpose of executing swaps for ECBsdenominated in Indian Rupees, the recognised ECBlender, if it desires, may set up a representative officein India following the prescribed laid down process.

It may be noted that the hedging arrangement forECBs denominated in Indian Rupees extended bynon-resident equity-holders shall continue to begoverned by the provisions of AP (DIR Series)Circular No. 63 dated December 29, 2011.



Risk Management and I nter BankDealings: Hedging Facilities for ForeignPortfolio Investors (FPIs)

In order to enhance the hedging facilities for theFPIs holding securi ties under the PortfolioInvestment Scheme (PIS) in terms of schedules 2,2A, 5, and 8 of the Foreign Exchange Management(Transfer or issue of security by a person residentoutside India) Regulations, 2000 (Notification No.FEMA 20 /2000-RB dated 3rd May 2000) asamended from time to time, as announced in theMonetary Policy Statement of April 1, 2014, it hasbeen decided to permit FPIs to hedge the couponreceipts arising out of their investments in debtsecurities in India falling due during the followingtwelve months subject to the condition that the hedgecontracts shall not be eligible for rebooking oncancellation. The contracts can however be rolledover on maturi ty provided the relative couponamount is yet to be received.



Foreign Direct Investment (FDI) in India- Issue of equity shares under the FDIScheme against legitimate dues

An Indian company under the automatic route mayissue shares/convertible debentures to a personresident outside India against lump-sum technical

know-how fee, royalty External CommercialBorrowings (ECBs) (other than import duesdeemed as ECB or Trade Credit as per RBIguidelines) and import payables of capital goodsby units in Special Economic Zones subject tocertain conditions like entry route, sectoral cap,pricing guidel ines and compliance with theapplicable tax laws.

The extant guidelines for issue of shares/convertibledebentures under the automatic route have beenreviewed and, accordingly, it has been decided topermit issue of equity shares against any other fundspayable by the investee company, remittance ofwhich does not require prior permission of theGovernment of India or Reserve Bank of Indiaunder FEMA, 1999 or any rules/ regulations framedor directions issued thereunder, provided that:

(i) The equity shares shall be issued in accordancewith the extant FDI guidelines on sectoral caps,pricing guidelines etc. as amended by Reservebank of India, from time to time;

Explanation: Issue of shares/convertibledebentures that require Government approvalin terms of paragraph 3 of Schedule 1 of FEMA20 or import dues deemed as ECB or tradecredit or payable against import of second handmachinery shall continue to be dealt inaccordance with extant guidelines;

(ii) The issue of equity shares under this provisionshall be subject to tax laws as applicable to thefunds payable and the conversion to equityshould be net of applicable taxes.

For Full Text refer to A.P. (DIR Series) CircularNo. 31


❉ ❉ ❉

FEM A Updates

37

38


CA. Punit R. [email protected]

circulars having CE/CE(NT) series.Notifications for amendment and circulars forclari fication in the Service Tax are beingnotified or issued through the notifications andcirculars having ST series. Amendments andclarification in CENVAT are being issued ornotified through the CE series and hence if onewants to refer to such notification/circular, hehas to refer to Central Excise relatednotifications/circulars.

3. CENVAT Credit Rules, 2004 (Rules) definescertain terms. We need to refer to suchdefinitions. Many terms are given a meaningwhich is different than the meaning orunderstanding in general parlance. For example,for these Rules, services which are not subjectto service tax at all and services in the NegativeList are also to be considered as ExemptedServices as defined in the Rule 2(e) of the Rules.Similarly, what we understand as capital goodsin general meaning, may not be capital goodsas defined in the Rule 2(a) of the Rules forexample a Motor Car.

4. CENVAT Credit may be taken for Inputs (i.e.raw material etc.), Input Services and CapitalGoods. All three terms are defined in the Rulesand one need to classify its inputs in one of thethree stated above. In respect of Inputs, creditmay be taken immediately on receipt of Inputsin the factory of manufacturer or premise ofservice provider. In respect of Input Services,credit may be taken on receipt of Invoice orchallan. Thus, even if services are received andpayment is also made to service provider butinvoice is not raised or not reached to the servicerecipient, service recipient can’t take theCENVAT Credit.

5. W.e.f. 01-09-2014, it is provided that themanufacturer or provider of output service shall

Service Tax Decoded

CENVAT Cr edit – Basic Concepts andFundamentals

Service Tax being a Value Added Tax (VAT), aservice provider needs to discharge tax on the valueaddition made by the service provider. Althoughhe can collect the full service tax from the servicerecipient, he need to discharge service tax liabilitynet of the service tax he has already paid to personfrom whom he has received the services. In simplewords he can take credit of service tax he has paidto his suppl iers. Thus, through this simplemechanism, a service provider pays service tax onlyon the value addition made by him.

However, in India, tax provisions can’t be so simple.In India, it is not the pure VAT. Credit for inputservices, input materials and capital goods isrestricted in number of ways. Department treatscredit as a “facility” and not a “right” of the serviceprovider. Poor and ambiguous drafting of relatedprovisions and rules are also adding fuel to the fire.Al l such circumstances contribute to make aCENVAT credit one of the top subject of litigationin India. Some of the basic concepts andfundamentals are discussed in this article.

1. Manufacturing of goods attract Central ExciseDuty and provision of service attracts servicetax. Credit of Excise Duty can be taken andutilised for payment of service tax and creditfor service tax can be utilised for payment ofexcise duty. Thus cross tax credit for taxeslevied under two different statues is beingallowed and for that one common law, TheCENVAT Credit Rules, 2004 has been notifiedunder both tax statues i.e. The Central ExciseA ct, 1944 and The Finance A ct, 1994simultaneously.

2. Notifications for amendment and circulars forclarification in the Central Excise are beingnotified or issued through the notifications and


not take CENVAT credit after six months fromthe date of issue of invoice. This provision isapplicable only for Inputs and Input Serviceand not to the Capital Goods.

6. It is worth noting that the limitation is on thetaking the credit and not on utilising the credit.Once the credit is taken within the time limitprescribed, it can be uti l ised or carriedforwarded for utilisation without any time limit.

7. CENVAT credit for Capital Goods is to betaken at 50% in the first year and rest of thecredit may be availed in any subsequent year.Manufacturer el igible to avai l the SSIexemption can take 100% credit in the first yearitself. However, no such provision, for serviceprovider avail ing threshold exemption isavailable. Further, restriction of 50% is notapplicable in the case of credit of SAD. Further,credit in respect of capital goods shall not beallowed in respect of that part of the value onwhich depreciation is claimed under Section32 of the Income Tax Act, 1961.

8. Credit for various taxes paid may be taken. Forexamples, Excise Duty paid under the FirstSchedule and the Second Schedule of theCentral Excise Tariff Act, 1985, EducationCess and Secondary and Higher EducationCess on Excise Duty and Service Tax,Additional Duty leviable under Section 3 ofthe Customs Tariff Act, Special Additional Duty(SAD) leviable under 3(5) of the CustomsTariff Act (not available to Service Provider),Service Tax leviable under Section 66, 66A and66B of the Finance Act, 1994 etc. Detailed listis provided under Rule 3(1) of the Rules.

9. Credit so taken may be utilised for payment ofvarious taxes or amount due. For example, suchcredit may be utilised for payment of exciseduty on final products and service tax on outputservices. However, such utilisation is subjectto certain restrictions stated in provisos to Rule3(4) of the Rules. For example, credit of SADcan’t be utilised for payment of service tax.

10. Subject to the provisions of the Rules, once theCENVAT credit is availed for various taxes, itloses its individual identity. Once the CENVATcredit is properly taken, it becomes part andpartial of the common pool and such credit maybe utilised for payment of any tax liability asstated in Rule 3(4) of the Rules. Further, sucha pool of credit may be utilised for payment ofservice tax payable on any output service. Forexample, Input Service X is used for OutputService A and credit of service tax on InputService X is availed properly. Service tax ispayable on another Output Service B also forwhich Input Service X is not used. Still, creditfor Input Service X can be utilised to pay servicetax on Output Service B. Rule 3(4)(e) clearlystates that CENVAT Credit may be utilised forpayment of service tax on any output service.Thus, one to one correlation is not requiredbetween Input Service and Output Services.

11. When a service recipient is liable to pay servicetax, he is discharging service tax on behalf ofthe service provider. As he is not providing theOutput Service, he can’t have Input Service andthere is no question of payment of service taxby utilisation of CENVAT credit. Rules alsoclearly provides for that. However, if servicereceived by the service recipient, who has paidthe service tax as a recipient, qualifies as inputservice, service recipient can take CENVATcredit for the service tax he has paid as recipientof service. Thus, such a person has to first payservice tax out of his pocket, and then he maytake CENVAT credit for the same.

12. Many times service provider exports theservices and avail input services which are usedfor providing export services. As servicesexported are not subject to service tax, there isno question of payment of service tax on suchoutput service and in absence of output services,there can’t be input services. When services areexported, Indian economy gets benefit andGovernment also gets highly useful foreigncurrency. Further, taxes, even in input servicesshould not be exported along with services.Hence, Government, either repay the service

Servi ce Tax Decoded


tax on input service or pay other incentives.One option to give benefit is to allow theCENVAT credit of service tax paid on inputservices which are used for providing exportedservices. Rules allows such credit and suchcredit may be utilised for payment of servicetax on domestic output service on which servicetax is payable. If, for any reason, serviceprovider is not in position to utilise such credit,he is also given an option to get refund of suchCENVAT credit as provided in Rule 5.

13. Definition of Input Service as provided in theRule 2(l) is having three limbs. First l imbprovides that any service used by a provider ofoutput service for providing an output serviceis an Input Service. This part of the definitionis very wide. If any service has nexus withoutput service it is an Input Services. If serviceprovider is able to establish that he has usedthe service for providing output service, he cantake credit. Second limb is inclusive part. Itstarts with “and includes” which indicates thatit enhance the meaning of the term InputServices. It list out around twenty services likesecurity, financing, legal services, repair orrenovation of premise etc. Third part isrestrictive part and it strike out certain servicesfrom input services even if it can be inputservice as per first and second part of thedef initions. Examples of such services areconstruction and works contract services usedfor building or civil structure, renting of motorvehicle etc.

14. It is well settled principal that the classificationof the service can’t be changed or challengedat the recipients end. Department can’t changethe classification for Input Service and onlybased on revised classification challenge theeligibility of the credit.

15. Many times it happens that service providerprovides taxable (i.e which is subject to taxwithout any exemption) as well as exemptedservices. Further, it may happen that someservices are used exclusively for taxableservices, some are used exclusively for

exempted service and some are used for bothtaxable as well as exempted services. CENVATcredit for input services used exclusively forexempted services shall not be taken in anycase. Credit for input services used exclusivelyfor taxable services may be taken ful ly.However, complication starts when services areused for both taxable as well as exempt outputservices. For such common Input Services,three options are provided to the serviceprovider. First, he may to maintain separateaccounts for the receipt and use of input servicefor providing exempted service and taxableservices. Secondly, he can take common creditand pay amount equal to 6% of value ofexempted services. Third option is to determineand reverse/pay amount of credit inproportionate to value of taxable and exemptedoutput services. Detai led provisions areprovided in Rule 6 of the Rules.

16. Trading of Goods is also an exempt service forthe purpose of the Rule and hence if commonservices are used for providing taxable servicesas well as Trading of Goods, such commoninput services are subject to provision of Rule6 discussed above. For example, a car repairerprovides repairing services and also sales partsto his customers, he will be hit by the provisionsof Rule 6 of the Rules. For second and thirdoption discussed in the forgoing paragraph,value of the trading shall be the differencebetween the sale price and the cost of goodssold or 10% of the cost of goods sold whicheveris more.

17. In the case of Partial Reverse ChargeMechanism (PRCM) and sub-contracting, itmay happen that a main contractor can’t passon full credit to ultimate service recipient asservices between main contractor and ultimateservice recipient is subject to PRCM. In such asituation, credit may get accumulated at end ofthe main contractor and hence ultimately itbecomes cost to him and thus VAT passingchain gets affected. In such situation, a maincontractor is eligible to have refund of such



unutilised credit as provided in Rule 5B of theRules.

18. Many times organisation runs through branchesor units or similar arrangements. Head Officeor some branches or units don’t provide theoutput services but helps other branches inproviding output services. These branchesreceive Input Services and facilitate operationsof other branches. Documents eligible for takingCENVAT Credit are in the name and at addressof such branches. To avoid practical difficultiesand to distribute such credit to other branchesor units, provision for Input Service Distributor(ISD) has been incorporated in the Rules. Suchcredit distributing branches may be registeredas ISD and distribute credit of Input Servicesreceived by them to the branches providingoutput services.

19. CENVAT credit shall be taken only based onthe eligible documents. Invoice issued by amanufacturer or an importer or first/secondstage dealer or by a service provider isdocument based on which credit may beavailed. Besides that credit may be availedbased on Bill of Entry (for credit of AdditionalDuty or SAD), Challan (for payment of ServiceTax under RCM) or supplementary invoice (forservice tax recoverable for non/short payment/levy of service tax). CENVAT credit will notbe available unless the original documents areavailable with the service provider. Further allthe details as required to be there under theService Tax Rules, 1944 are contained in thesaid documents. In number of cases credit hasbeen denied due to the fact that the credit wastaken on the photocopies of the documents.

20. Once the credit is taken and utilised, net liabilityof the service tax payable gets reduced. Hence,if credit is taken wrongly, the same may berecovered from the service provider and section73 (Show Cause Notice etc.) and 75 (interest)of the Finance A ct, 1994 apply mutatismutandis. Even penalties can be levied forwrongly availed credit. W.e.f. 17-3-2012,interest is payable only if credit is utilised.However, for the period prior to 17-3-2012, as

held by the Supreme Court in the case of Ind-Swift Laboratories Ltd.[ 2012 (25) S.T.R. 184]interest is payable from the date of availingcredit even if the same is not utilised.

21. I t is well settled principle that once theCENVAT credit is reversed before utilisationof the same, the same is to be considered asnever taken. Hence, if service provider foundsthat he has taken the CENVAT credit wronglyand the same is left unutilised, the same maybe reversed and it should be treated as neverbeen taken. Certain exemptions are availableon the condition that CENVAT Credit is notavailable. However, if credit is reversed suomoto after substantial time limit (11 months to15 months), i t was held that benef i t ofexemption is not available. [Honb’ble SupremeCourt in Amrit Papers 2008 (12) STR 536].

22. It may happen that numbers of services are usedfor providing number of taxable output services.For example, telephone services, accountingservices, office cleaning services are used forproviding management consultancy services.Such Input Services may not directly used forproviding output services but are used foractivities which are finally used for providingoutput services. There may not be one to onecorrelation between input service and outputservices and Rules don’t require that thereshould be one to one correlation between InputServices and Output Services. There should benexus but not necessarily one to one.

23. W.e.f 01-04-2011 definition of Input Servicehas been amended and now services in relationto setting up of a factory or premise of theservice provider is not allowed. For example,Architect’s Services for setting up of new officeis not an Input Service. However, service usedin relation to modernisation, renovation orrepairs of a factory or premise of serviceprovider is still Input Service and credit maybe taken.

24. Many times some services are not having directrelationship with the output service ormanufacturing activities. However, it may be



statutory requirement to obtain such service forexample maintenance of garden in the factoryor paying insurance premium for employeesmay be statutory obligation of a manufactureror service provider under Environmental Lawsor Employment Laws. Without obtaining suchservices, a manufacturer can’t manufacture orprovider of service can’t provide the outputservices. In such a situation it is constantly heldby the various courts that such services areInput Services as the existence of OutputService is not possible without such services.

25. A job worker works on the material suppliedby the buyer/principle manufacturer. If processundertaken by him doesn’t amount to


contd. from page 416 Cont rover sies

the closing stock. But even this provision, ifproperly understood would refer to excise duty“actually paid or incurred”. It is the unjustifiedapprehension of the Revenue that such exciseamount, if unpaid, requiring to be disallowed undersection 43B of the Income Tax Act gets deducted,that has given rise to this provision. This provision,originally retrospective at the draft stage from thedate on which Modvat was introduced, was finallymade prospective, so that the Revenue stood to losebecause the opening Modvat credit had to be addedto the opening stock so as to neutralize the additionwith the Revenue losing such addition to openingstock not only for the year but in future years aswell. Adjustment for opening stock is inevitableeven as pointed out in the memorandum on theFinance (No.2) Bill, 1998, explaining section 145Aas requiring adjustment for both opening andclosing stock. Principle of inventory valuation speltout in the A ccounting Standard issued by theInstitute of Chartered Accountants of India wouldalso require such adjustment.

Finally let me refer to the decision in the case ofCIT vs. Indo Nippon Chemical Co. Ltd. (2000)245 ITR 384 (Bom.) their lordship of Bombay HighCourt held that :

“It is a well settled principle of law that valuationof closing stock has to be on the basis of purchase

manufacture such process is subject to servicetax but exemption is provided if principlemanufacturer is discharging excise duty on thef inal product. I f his process amounts tomanufacture, he is required to pay excise dutyon the goods produced by him and that too notonly on the value of job work charges but onvalue of goods also. In such situation, a jobworker can avail the CENVAT credit for Inputsused by him even if he is not the owner of thegoods, provided he is the consignee of thegoods. Thus, each job-worker need to ascertainthat whether his process amounts tomanufacture or not.

❉ ❉ ❉

cost. If the purchases include an element ofMODVAT benefit then the closing stock should alsocorrespondingly include the MODVAT benefit.”

The High Court also accepted that the calculationsmade by the AO were erroneous on the facts of thecase and that made by the assessee was correct.The AO’s calculations resulted in violation of thebalancing principle, whereas the same is followedcorrectly in the calculation of the assessee. Readingthe two methods given by the ICAI the court heldthat it is clear that in both cases the MODVAT creditis related only to the raw material consumed.Following the decision of the Supreme Court inthe case of Collector of Central Excise vs. Dai IchiKarkaria Ltd., the High Court held that whetherone applies the net method or the gross method ascalculated by the assessee the gross profit remainssame and hence there is no understatement of profitas envisaged by the assessing officer.

The decision of Bombay High Court has beenconfirmed by their lordships of Supreme Court inCIT Vs. Indo Nippon Chemical Co. Ltd. (2003)261 ITR 275 (SC).

❉ ❉ ❉


Add


CA. Ashwin H. [email protected]

[ 2014 ] 48 taxmann.com 164 (Madras)High Court of Madras GoodearthMar itime (P) L td v. Commissioner ofService Tax, Chennai

Payments made to agents located abroad for servicesrendered outside India cannot, prima facie, be taxedunder section 66A, as services are not ‘received’ inIndia.

Facts:-

Assessee, engaged in transport of cargo throughowned/chartered ships, made payments to theiragents located abroad. Department alleged thatpayments were made in respect of various servicesand were taxable in India. Assessee argued thatservices, if any, were rendered outside India andcould not, therefore, be regarded as ‘received’ inIndia for purposes of section 66A. Adjudicationrecorded fact that ‘services were rendered outsideIndia’ but upheld demand. Tribunal ordered pre-deposit of Rs. 130 lakh opining that assessee hadliquid assets of worth Rs. 39 crore. Assessee furtherclaimed that it was suffering from losses.

Held:-

In view of admitted fact that services were renderedoutside India, issue is purely legal and, therefore,prima facie, it will not fall within mischief of servicetax, as service tax is applicable only if service isreceived by a person in India. Prima facie findingof Tribunal, that there was a service received inIndia, does not appear to be supported by material.It may true be that there are some liquid assets incourse of business, but overall financial position ofcompany is reflected in profit and loss account,which shows a loss. Therefore, assessee hasestablished plea both on prima facie case and unduehardship. Pre-deposit was reduced to Rs. 50 lakhaccordingly.

Service Tax -Recent Judgements

[ 2014 ] 47 taxmann.com 198 (New Delhi- CESTAT) CESTAT, New Delhi BenchTaj View Hotel v. Commissioner ofCentral Excise, Kanpur

Renting of Banquet Hall for meetings/conferences/assembly to pharmaceutical companies, insurancecompanies, marketing companies etc. do notamount to ‘convention services’ where it is notshown that said renting was for holding formalmeetings or assembly which is not open to generalpublic

Facts:-

Assessee was registered under Mandap KeeperServices and was paying service tax thereunderclaiming abatement. Department alleged thatassessee had rented out a Banquet Hall for meetings/conferences/assembly to pharmaceutical companies,insurance companies, marketing companies etc. andsaid services were more appropriately classifiableunder Convention Services and raised demandaccordingly.

Held :-

There is a distinction between official, social orbusiness function which fall within scope of mandapkeeper and a formal meeting which falls withinscope of convention service. For classification asconvention service, service must be provided byone person to another in relation to holding of aconvention not open to general meeting/assemblypublic but there is no requirement that serviceshould be provided only in/upon immovableproperty including any furniture, fixtures, lightfittings and floor coverings therein. Since it wasnot alleged/concluded that renting of Banquet Hallto pharmaceutical, insurance and other companieswas for holding formal meetings or assembly whichis not open to general public, demand was invalid.

27 28


Further it was held that where a person (serviceprovider) is registered as a mandap keeper, demandof service tax under convention service, particularlyby invoking extended period of limitation is notjustified . Having regard to ambiguity between scopeof two taxable services, it would be illegitimate toallege suppression of facts or an intention to evadetaxes .

[ 2014 ] 47 taxmann.com 398 (New Delhi- CESTAT) CESTAT, New Delhi BenchShree Cement L td. v. Commissioner ofCentral Excise & Service Tax, Jaipur-I I

Event management services availed to facilitateorganisation of a dealer/retailer meet for promotion,marketing, advertisement and promotion of productsare eligible for credit, even though event is held intemple premises

Facts:-

Assessee, a cement manufacturer, took credit of‘event management’ services received for an eventorganised at temple located within factory premisesfor purpose of dealer’s meet on ground that samewas for advertisement/sales promotion. Departmentdenied credit on ground that since event wasorganized at ‘temple’, same could have been forreligious purposes only and even though dealersmight have attended same, credit could not beallowed.

Held :-

Event management services were availed tofacilitate organisation of a dealer/retailer meet forpromotion, marketing, advertisement and promotionof products, though in a temple premises - If thisfact is to be rebutted, Authorities below should havecogent and clear evidence to come to a contraryconclusion. Speculation and vacuous hypothesiscannot be a substitute for evidence, to support afinding. Department’s view that temple premises isused only for religious functions and for no othersocial activity is misconceived, as temple premisesare employed for a variety of social functionsincluding marriages. Hence, credit was allowed.

[ 2014 ] 48 taxmann.com 232 (Gujarat)High Court of Gujarat Cema Electr icL ighting Products India (P.) L td. v.Commissioner of Central Excise

Where it was found that assessee was recoveringamount from beneficiaries/its own employees whilerunning canteen, assessee was not entitled to CenvatCredit claimed by it in respect of catering services

Facts:-

Assessee took credit of payment made to canteencontractor even though they recovered same fromemployees/beneficiaries. Department denied saidcredit . The Commissioner (Appeals) and Tribunalconfirmed the demand. The assessee argued thatcredit was allowable on merits, even otherwise,extended period of limitation was not invocable andinterest/penalty were not leviable.

Held:-

It has been found that the assessee was recoveringthe amount from the benef iciaries/i ts ownemployees while running the canteen. Therefore,as such, the assessee was not entitled to CenvatCredit which was claimed by them. It was foundthat, in fact, amount was recovered by the contractorand the same was recovered by the assessee fromits employees/beneficiaries, therefore, the assesseewas not entitled to the Cenvat Credit of the sameand no error had been committed in confirming theshow-cause notice and making the demand. So faras interest and penalty are concerned, it is requiredto be noted that the aforesaid would be aconsequential under the relevant provisions of theAct and Cenvat Rules. There was no reason tointerfere with the impugned judgment and orderpassed by the learned Tribunal. The appeals weredismissed.

❉ ❉ ❉

Service Tax - Recent Judgements

29

30


CA. Pr iyam R. [email protected]

1. Introduction

From Excise perspective it is very important toknow whether any activity is treated asmanufacte or not as levy of excise depends onmanufacture, while from VAT perspective it isequaly important to understand whether anactivity is manufacture or not, as claim of Inputtax credit on r aw mater ial, processingmater ial, consumable as well as on capitalgoods depends on it.

2. Definition under GVAT

Sec 2(14) “manufacture” with its grammaticalvariations and cognate expressions meansproducing, making, extracting, collecting,altering, ornamenting, fishing, assembling orotherwise processing, treating or adapting anygoods; but does not include such manufacturesor manufactur ing processes as may beprescribed;

There are many criteria to determine, whetherany activity is manufacture or not like, comingin to existence of a new commercial commoditytest, common parlance test, commercialparlance test, marketability test etc. let usunderstand this aspect with judicialpronouncements.

3.1. Coming into existence of a new commercialcommodity not to be tr eated asmanufacture

3.1.1. For determining, whether any activityis manufacture or not there is nonecessity of coming into existence of anew commercial commodity to treat itas ‘manufactured goods’.

Under U.P Trade Tax Act, in the caseof Commissioner of Sales Tax v.Kaderul Sehat Dawakhana DivisionBench, Hon’ble Allahabad High Courthas held that, looking to the definitionof manufacture under the U .P. S.T .Act, it is not necessary that completelynew item should come into existence.Where a ‘goods’ known to the tradehas been prepared or produced, butthen certain changes are effected in itto adopt it for a particular purpose, itmay continue to have the samecommercial commodity, but when it isso adapted for a particular purpose. Ithas been subjected to a manufacturingprocess, and the goods so adaptedwould again be a ‘goods’ which, forthe purpose of the A ct, has beenmanufactured afresh.

3.1.2. To the same effect is the judgment of 3judges Bench of Hon’ble SupremeCourt in the case of B.P. Oil MillsLimited Vs. Sales Tax Tribunal andothers 1998 NTN (vol. 13) – 613:1998 U.P.T.C. 1020, decided on 03/09/1998, where in Hon’ble SupremeCourt has held that to be ‘manufacture’under the Uttar Pradesh Trade Tax Act,it is not necessary that completely newitem must come into existence. Afterprocessing crude oil into refined oil,the commodity may remain the same,but it amounts to ‘manufacture’ for thepurpose of section 2(e-1) of the UttarPradesh Trade Tax A ct, as per thedefinition of manufacture given under

Manufacture underVAT Law


the Uttar Pradesh Trade Tax Act,because its properties have changed.

3.2. Conversion of cotton into surgical cotton ismanufacturing

Under the Rajasthan Sales Tax Act, 1994,question before court was whether conversionof cotton in to surgical cotton can be treated asmanufacturing?

Rajasthan Sales Tax Act defines ‘manufacture’as follows –

Sec. 2(27) ‘manufacture includes everyprocessing of goods which brings into existencea commercial ly different and distinctcommodity but shall not include suchprocessing as may be notified by the StateGovernment”.

Held by the Rajasthan High Court – Surgicalcotton (also known as Absorption cotton orcotton wool) is dif ferent f rom cotton.Conversion of rawcotton into surgical cottoninvolves the process of manufacture.

It is an admitted fact that a definite chemicalprocess is involved in deriving out surgicalcotton. During this process when cotton istreated with acids and alkaloid, waste isconsumed. When cotton is cleaned some partof the cotton is further consumed. If total weightis calculated, as introduced in the process, theymay not be the same. With the production ofthe end product, a sizable amount of rawcotton is consumed weight – wise. That beingthe position, the end product is amenable tothat test where it is said that whether originalproductis consumed in the production of endproduct.

Surgical cotton in basically used for medicalpurposes. For medical purposes, use of ordinarycotton is not permissible in medical ethics.Allopathic method of medicines fixes standardsfor the qual ity of surgical cotton. Thesestandards are so definite and definable that none

of them would be available in ordinary cotton.If those parameters cannot be met in theordinary cotton and surgical cotton is only usedin allopathic form of medicine, then it cannotbe said that use of commodity isinterchangeable and in that view of the matter,surgicalcotton is a different commodity.

3.3 Conversion of Jumbo Rolls of PhotographicFilms into Small flats and rolls in the desiredsize is manufactur ing activity

The activity of Conversion of Jumbo rolls ofphotographic films and small flats and rolls inthe desired size amounts to manufacture.

(India Cine Agencies Vs. Commissioner ofIncome Tax, Madras, (2009) 53 S.T.A. 311,decided on 12/11/2008 by the supreme Court).

3.4 Grinding of Turmer ic Roots into Turmer icPowder is manufactur ing

In the case of Uma Murthy vs. Commissionerof Commercial Taxes, Banglore, (2010) 33VST 316, question before hon’ble court was,Whether the activity of the petitioner, namely,conversion of turmeric roots into turmericpowder is a manufacturing activity so as to beeligible for the benefit of sales taxexemption.

In view of the undisputed facts and thecertificate issued by the competent officer(General Manager of District Industries Centre,Mysore) certifying that the assessee has beenmanufacturing the goods of turmeric powderby following certain manufacturing processessuch as the roots of turmeric are boiled, dried,powdered and coloured. The abovemanufacturing processes involved inmanufacture of turmeric powder, which is oneof the spices different and distinct from theroots of turmeric. Therefore, Court hold thatthere is a manufacturing process involved inmaking of turmeric powder from roots ofturmeric.

Manufactur e under VAT Law


3.5 Pr eservation and t inning of fruits andvegetables is not Manufactur ing

Held by the Allahabad High Court – theprocess of preservation and tinning down doesnot amount to manufacture. If by the processfresh fruits and green vegetables are preservedas green vegetable and fresh fruits, they remainas fresh fruits and green vegetables. Thusmerely because they are tinned, they do notcease to be fresh fruits and green vegetables.(S.R. Cannery Vs. Commissioner of Trade Tax,(2006) 3 VLJ 8: 2006 NTN (vol. 29) 85: STI2006 Allahabad High Court 80: 2006 U.P.T.C.710 (2007) 10 VST 23 (All), decided on 16/12/2005).

Supreme Court in the case of DeputyCommissioner of Sales Tax Ernakulum v/s PioFood Packers 46 STC 63 has held that‘although a degree of processing is involved inpreparing pineapple slices from the originalfruits, the commodity continues to possess itsoriginal identity. It is further held that there isno essential difference between pineapple fruitand the canned pineapple slices. The dealer andconsumer regard both as pineapple and suchactivity is not treated as manufacturing activity.

3.6 Processing of Cashew nut into cashew nutKernel: is manufactur ing

Held by the Supreme Court in the case of VijayLaxmi Cashew Company and others V s.Deputy Commercial Tax Officer and Another– 1996 NTN (Supreme Court) – 1 : 1996U.P.T.C. 602 that:

Raw cashew nuts and cashew nut kernels aredifferent commodities. They are not supposedto be the same commodities in the common ofthe commercial parlance. Their uses are quitedifferent and the process of obtaining kernelfrom the raw cashes nuts is so elaborate thatcashew nut kernel cannot be held to be thesame as raw cashew nuts.

3.7 Mounting body on the chassis of vehicle ismanufacturing

In the case of Kumar Motors Vs. Commissionerof Sales Tax, U.P. Lucknow, 5 VST 646 (SC),it is held that the meaning of manufacture insection 2(e-1) of the U.P. Sales Tax Act, 1948,is of wide amplitude. It takes within its sweepnot only a new product but also alterationsmade in an existing product. In the case, theassessee purchased chassis of an auto rickshawand mounts the body on the chassis with thehelp of nuts and bolts and sells the autorickshaw.

It was held that he would be selling productwhich is different in condition from the chassisor the body, and such activity is treated asmanufacturing.

3.8 Conver sion of Coal dust in to CoalBr iquettes is manufactur ing

In the case of Sonebhadra Fuels V s.Commissioner, Trade Tax, U.P. 147 STC 594(SC), i t was held that the expression“manufacture” covers within its sweep not onlysuch activities which bring into existence a newcommercial commodity dif ferent f rom thearticle on which those activities were carriedon, but also such activities which do notnecessar ily result in br inging into existencean ar ticle different from the ar ticles onwhich such activities were carr ied on.

In this case, coal briquettes are not the samecommercial commodity as coal and coal is araw material for making coal briquettes. Theprocess of mixing crushed coal with bindersand pressing in the briquetting press to regularshape is processing, treating or adapting coalwithin the meaning of definition of manufacturein sec. 2(e-1) of the U.P. Trade Tax Act, 1948.By processing of coal to make coal briquettescoal dust loses its identity. Coal br iquettes andcoal-dust are two different commodities insubstance as well as character istics.



3.9 Whether loss of identity or character isnecessary to treat it as manufactur ing?

In the case of Deputy Commissioner of SalesTax (Law), Board of Revenue (Tax),Ernakulam Vs. Coco Fibres, 80 STC 249 (SC),it is held that it is not necessary that the stuff orthe material of the original article must lose itscharacter or identi ty or it should becometransformed in its basic and essential properties.In the case, the green husk is soaked into saltishsea water for days together and afterdecomposition, on being subjected to process,which is a distinct commodity known in thecommercial parlance. No one in the marketwould sell or supply husk when fiber is askedfor.

3.10 Purchase of bulk gas and repacking insmaller cylinders after giving d if f er en tgrades is manufactur ing activity.

In the case of M/s. AIR Liquide North IndiaPvt. Ltd. Vs. Commissioner, Central Excise,Jaipur, Civil Appeal No. 43 of 2005 Dt. 30/08/2011, the Hon’bleApex Court has held thatthe appellant had purchased Helium gas fromthe market in bulk and repacked the same intosmaller cylinders after giving different gradesto it and then sold the same in the open market.Various tests and some treatment given, the gaswas segregated into different grades havingdistinct properties and sold at different rates todifferent customers. In light of those facts, theHon’ble Apex Court held that Helium gas washaving different marketability, which it did notpossess earlier and hence the gas sold by theappellant was a distinct commercial commodityin the trade. If the product / commodity, aftersome process is undertaken or treatment isgiven, assumes a distinct marketability, differentthan its original marketability, then it can besaid that such process undertaken or treatmentgiven to confer such distinct marketabi litywould amount to “manufacture”. Thus thetreatment given by the appellant to the gas sold

by it would make different commercial productand therefore, it can surely be said that theappellant was engaged in a manufacturingactivity.

3.11 Dehusking paddy to produce r ice ismanufactur ing activity.

In the case of Ganesh Trading Co. Vs. State ofHaryana 32 STC 623 (SC), it is held thatalthough rice is produced out of paddy, it is nottrue to say that paddy continued to be paddyeven after dehusking. “Rice and paddy are twodifferent things in ordinary parlance. Therefore,when paddy is dehusked and riceproduced,there has been a change in the identity of thegoods.

3.12 Removing husk fr om natur al t i l l ismanufactur ing activity

Recently Hon’ble Gujarat VAT Tribunal in thecase of Keshav Till Factory v/s The State ofGujarat S.A. No: 65 of 2013 order dtd: 4-7-2014 it was held that doing business of buyingnatural till and after processing the same, theappellant is selling as mechanically hauled anddried till. The husk is removed from till by theprocess of washing with caustic soda. Then thesaid de-husked till is to be dried.

It was held that, activity undertaken by theappellant clearly amounts to manufacture andhence the appellants are held to be entitled toinput tax credit of raw materials, processingmaterials, fuel and capital goods used in theactivity of manufacturing.

4. Conclusion

As definition of manufacture is inclusivedef inition, i t covers many activi ties asmanufacture, but will depend on facts andcircumstances of each case.

❉ ❉ ❉



CA. Bihari B. [email protected].

Important Judgments:

[1] The Important Judgment delivered by theHon. GVAT Tribunal in case of SaurashtraChemicals L td. Vs. The State of Gujarat

Issue:

Appeal proceedings are a continuous part ofAsst. proceedings and therefore interest onrefund due to assessee as per the Appellate orderpassed by the Appellate Commissioner isallowable at applicable rate.

Facts:

In Saurashtra Chemicals Ltd. the Hon. GVATTribunal has delivered that the refund isal lowable to the assessee even in appealproceedings of appeal.

The appellant of Rajkot has filed an appealbefore the Ld. Joint Commissioner on the issuethat the appellant was entitled to a refund ofRs. 98,57,507/-, however, the Ld. JointCommissioner has held that the appellant wasnot entitled for interest on the refund.

Against the appellate order, the appellant hasgone before the Hon. Tribunal and the Hon.Tribunal has allowed the interest on refund atapplicable rate on the order passed by theAppellate Authority.

Readers are aware of the fact that till the dateof this judgment, the department not allowedthe refund arising on account of appellate orderand therefore so many dealers have lost theiropportunity to claim the interest on the refund.As this is an important judgment and thereforeimportant paragraphs of the decision arereproduced hereunder for the knowledge of thereaders.

The appellant had established its industrial unitpursuant to the Sales Tax incentive awarded

by the State Government and therefore theappellant was entitled to sales tax exemptionbenefit. The requisite certificates were issuedby the Competent Authorities enabl ing theappellant to claim such incentives. Theappellant had also undertaken modernizationof its then existing plant, for which it wasexpecting further additional sales tax incentives.

Though the requisite certificates for additionalincentives as a result of modernization of plantwere not received by the appel lant, inanticipation of such benefits, while filing returnsunder the Act and the Central Sales Tax Act,the appellant had claimed sales tax incentivesin respect of the total turnover of sales andpurchases effected by the appellant.

The Ld. Asst. Commissioner of Sales Taxinitiated assessment proceedings under section9(2) of the CST Act r.w.s. 41(3) of the GSTAct. However, since the requisite certificatesrelating to incentives for modernization of plantwere not received, the appellant requested todefer the assessment proceedings. However, theLd. Assessing Officer passed assessment order,wherein the incentives were partly given to theextents, they were admissible as per the originalinstallation of plant for which the incentivecertificates were issued, but did not grantincentives for remaining transactions. As a resultthereof, in assessment the Ld. Assessing Officerraise aggregate dues to the tune of Rs.12,67,98,729/- inclusive of tax, penalty andinterest against the appellant. Being aggrievedby the said assessment order, the appellantpreferred First Appeal before the Ld. DeputyCommissioner of Sales Tax, who was later ondesignated as the Learned Joint Commissionerof Sales Tax. For admission of the first appeal,the appel lant deposited an amount of Rs.99,98,464/-. Correspondingly, the appellant

VAT - Recent Judgementsand Updates


pursued before the competent authorities forgetting the certificates enabling the appellantto claim incentives as a result of modernizationof plant undertaken by the appellant. While thefirst appeals were pending, the appellant wasable to get the requisite certificates grantingsales tax incentives to the appellant. Thesecertificates were produced before the Ld. FirstA ppellate A uthori ty, who accepted thesubmissions of the appellant and ultimatelydecided to grant refund of Rs. 98,57,507/-

Arguments:

The Ld. Advocate of the appel lant furthersubmitted that the interpretation of the Ld. FirstAppellate Authority may lead to a situationwherein even if refund may be legally due to adealer in assessment, it may not be given inassessment but may be allowed in appeal so asto deny interest on refund to the dealer. Aninterpretation of the provision which leads tosuch a travesty of law is absolutely bad andillegal, He has further submitted that the strictinterpretation of the section as done by the Ld.First Appellate Authority leads to manifestunjust result which could never have beenintended by the legislature and therefore, it isnecessary to put a construction which modifiesthe meaning of the words used in section54(1)(aa) of the GST Act, so as to grant interesteven if refund becomes due to a dealer as resultof order passed in Appeal. In support of hissubmissions, the Ld. Advocate of the Appellanthas relied upon the following decisions of theHon’ble Apex Court.

[a] Tirath Sigh vs. Bachittar Singh AIR 1955SC 830

[b] Commissioner of Income Tax Bangalorevs. J.H.Gotla AIR 1985 SC 1968.

So far as the appellant’s main contention thatthe order passed in appeal is also an order ofassessment u/s. 41 of the Act is concerned.

Decision:

In view of what has been observed hereinabove and looking to the facts and

VAT - Recent Judgements and Updates

circumstances of the case and in light of thestatutory provisions and decided case law onthe subject, the Tribunal passes the followingorder.

This appeal is allowed. The appellant is entitledto interest on refund due to him as per firstappellate order passed by the Ld. JointCommissioner of Commercial Tax at theapplicable rate.

[2] The Important judgment delivered by theGuj ar at High Court in case of Shr iMohammed Abbas v. State of Gujarat –Registration Certificate cannot be cancelledwithout hear ing of a dealer.

Issue:

The registration certificate cannot be cancelledwithout hearing of the dealer, even though thedealer assessee is involved in criminal case.

Facts:

The Hon. Tribunal in case of MohammedAbbas vs. State of Gujaratg has decided thatprovisional registration certificate cannot becancelled without giving any opportunity to theassessee.

The department has cancelled the registrationof the dealer ab initio on the ground that theassessee was involved in criminal case. Beingaggrieved, the assessee has fi led the writpetition before the Gujarat High Court. The gistis as under.

Arguments by the assessee:

The learned counsel for the assessee submittedbefore the Gujarat High Court that theprovisional registration certificate issued to himhad become final under the provisions of rule5(16) of the Vat Rules.

Such registration can be cancelled only on thegrounds contained in section 27 of the Act. Sub-section 5(g) provides for cancellation of a dealerwho is convicted in any offence. However insuch case also, the Commissioner has to recordreasons and the assessee is to be heard beforepassing such order. It was submitted that since


the registering authority has not given anyopportunity of hearing to the assessee and notrecorded reasons, the order cancel ling theregistration certificate of the assessee must beset aside.

Arguments by the Revenue:

The Learned Counsel for the revenue submittedbefore the Gujarat High Court that in terms ofrule 5(15) the registering authority has powerto cancel the registration certificate where he isnot satisfied with the details of the assessee.

Decision:

The Hon’ble Gujarat High Court prima facieobserved that in the present case, the provisionalregistration certificate was converted into finalregistration certificate in terms of rule 5(15) ofthe Vat Rules. In such case, the registrationcertificate can only be cancelled on the groundmentioned in section 27 of the Act. Even insuch a case, the commissioner has to grant ahearing and pass an order recording his reasonsfor the same.

The Hon’ble High Court held that in thepresent case, the registering authority has notgiven hearing to the assessee. The grounds onwhich the registration was to be cancelled werenever brought to the notice of the assessee.Therefore the order of the registering authoritycannot be held.

[3] The Important judgment delivered by theGujarat Vat Tribunal in case of M/s. ModernTube I ndustr ies L td. – Registr at ionCertificates cancelled for not submittingreturns for three consecutive tax periods arerestored upon furnishing of cash secur ityof Rs. 5,00,000/- with a direction that theamount of secur ity after one year per iod canbe adjusted against the tax liability:

Issue:

The registration certificate cannot be cancelledwithout hearing of the dealer. The registrationcertificate was cancelled for not filing of threereturns consecutively, the appellant has

furnished the pending returns and made thepayment of tax.

The Appellate Authority has given the directionto the Commercial Tax Officer to restore theregistration by furnishing of Rs. 50.00 Lacs.The appel lant contended before the Hon.Tribunal and the Hon. Tribunal has given thedirection for the restoration of the registrationby furnishing a cash security of Rs. 5.00 Lacs.The gist is as under.

Facts:

The registration certificates were cancelled u/s. 27(5)(a) of the Vat A ct. Subsequent tocancellation of registration certif icates thepending returns were furnished by theappellant. However, because of irregularity ofthe appellant in filing of return and making thepayment of tax, the Ld. Appellate Authorityfor restoration of registration certificates directedthe appellant for furnishing of security of Rs.50.00 Lacs as provided in section 28 of the VatAct. As the appellant did not furnish thesecuri ty of Rs. 50.00 Lacs the order ofcancellation of registration certificates wasupheld by the Ld. Appellate Authority. Theappellant contended before the Hon. Tribunalthat he has submitted all pending returns. Asregard demanding of security of Rs. 50.00 Lacsby the Ld. A ppellate A uthori ty, i t wascontended that the Ld. Appellate Authority hasno jurisdiction to demand security. The Hon’bleTribunal held that the appeal proceeding is acontinuation of the original proceeding andhence it cannot be said that the first appellateauthority had no power to ask for security. TheHon’ble Tribunal restored registrationcertificates upon furnishing of cash security ofRs. 5.00 Lacs as against the amount of securityof Rs. 50.00 Lacs demanded by the Ld.Appellate Authority. The Hon’ble Tribunalfurther held that the amount of cash securitycan be adjusted after one year against anyliability raise against the appellant.

❉ ❉ ❉

VAT - Recent Judgements and Updates


CA. Hozefa [email protected]

value using an appropriate discount rate that reflectsthe required rate of return on the investment(compensating for risk). For the final year of theprojection period, the income stream that representsthe expected income stream in perpetuity iscapitalized to arrive at a terminal value, which isthen discounted back to a present value (at the samediscount rate) and added to the present value of theprior years’ income streams to arrive at theindication of fair intrinsic value.

This method is most commonly used when thecompany is expected to experience a period ofabnormal growth or when the growth rate for thenear term is anticipated to be significantly differentfrom the long-term rate of growth. This is predicatedupon the ability to create a reasonable forecast ofthe company’s income stream for the forecastperiod. If these conditions are satisfied, the multi-period discounted future income method may morereliably capture the value impacts of cyclicality orabnormal short-term factors impacting thecompany’s results than a capitalization method.

Single period capitalization method:

The basic of this approach is find the normalizedearning capacity of the business and to capitalize iton the basis of appropriate rate considering thebusiness fundamentals of safety, return and time.Alternately, an appropriate multiple can be usedwith the normalized earnings to arrive at fairestimation of business value.

This method of Valuation is relevant for valuingthe business enterprises as a going concern andwhere the business has a proven track record andthe business pertains to well established industrialsegments where information as to average price toearnings multiple (P/E Multiple) is readily available.

Business Valuation

The Income Approach

The concept is to value a business or asset basedon its earning capacity. Earnings is a final crux ofthe business activity. Earnings are linked with allother fundamentals of the business like growth,capital requirements, risk involvement oruncertainty, etc. and so, valuation of business basedon its earning capacity can be a better proxy.

The Income Approach derives an estimation ofvalue based on the sum of the present value ofexpected economic benefits associated with theasset or business (Economic benefits have twocomponents: cash flow (or dividends) and capitalappreciation). Under the Income Approach, theappraiser may select a single period capitalizationmethod or a multi-period discounted future incomemethod or a multi-period weighted income method.

The capitalization method estimates the fair marketvalue of a company by converting the income streaminto value by applying a capital ization rateincorporating a required rate of return for riskassumed by the user along with a factor for futuregrowth in the earnings stream being capitalized. Thisresults in a value based on the present value of thefuture economic benefits that the owner will receivethrough earnings, dividends, or cash flow. Thecapitalization method is based on the Gordonconstant growth model that uses a single periodproxy of future earnings to determine the presentvalue of the asset. This method is usually employedwhen a company is expected to experience steadyfinancial performance for the foreseeable future andwhen growth is expected to remain fairly constant.

Multi-period discounted future income methodsinvolve discounting a projected future incomestream on a year-by-year basis back to a present

Approaches to Valuation


Most businesses will have a lead-time of a fewyears before they start generating profits. Duringthis period this method of Valuation may not beapplicable and one would have to adopt a non–traditional method such as the Discounted CashFlow Method (Multiple period capitalizationmethod) which takes into account the futureprofitability of a business enterprise as also timevalue of money.

Methodology

The important task is to determine two factors (1)normalized earnings and (2) rate of capitalizationor multiple for capitalization (capitalization rate isthe inverse of multiple – 20% rate of returns equalsa multiple of 5).

Normalized earnings

Determination of normalized earnings or futuremaintainable profi ts is a complicated task as itinvolves not only objective consideration of theavailable f inancial information but, subjectiveevaluation of many other factors such as generaleconomic conditions, Government policies, forexample, the valuer may have to take a view onexchange rate, change in custom duty or incometax rates or changes expected in subsidy given bythe Government. The valuer has to give dueconsideration to these factors according to hisreading of the situation in each individual case. Ina business with a steady growth, past earnings willgive indication of the future profitabili ty and,therefore, average of the past three to five years’earnings is taken as a future maintainable profit.Before selecting the number of years for averaging,valuer has to look at the business cycle, changes inbusiness in those years or change in the scale ofbusiness. If the business is a cyclical business, careshould be taken to consider at least all the yearsrepresenting a single cycle. The importantconsiderations at this stage are how far the pastprofits are reflective of the future maintainableprofits. Past profits need to be adjusted for all non–recurring items and non–operating expenses/

incomes. The normalized earnings can be a Profitafter tax (PAT) OR a profit before Depreciation,Interest, and taxes (PBDIT) OR Net operation profitbefore amortization OR it may be simply a cashflow from the business operations. This earningsmay be considered from recent year earnings, ORsimple average of few years’ earnings, OR weightage average or geometric average of few years’earnings. Again it can be a forward looking ortrailing (based on past). For forward looking (alsoknown as leading) earnings the forecasted figuresmust be checked. CCI guidelines prescribe usageof simple average of last three financial years’ profitas future maintainable earnings of the company.

CCI guidelines, 1990 (para 7.3) state that “The cruxof estimating the Profit Earning Capacity Value liesin the assessment of the future maintainableearnings of the business. While the past trends inprofits and profitability would serve as a guide, itshould not be overlooked that valuation is for thefuture and that it is the future maintainable streamof earnings that is of great significance in theprocess of valuation. All relevant factors that havea bearing on the future maintainable earnings ofthe business must, therefore, be given dueconsideration”

Rate of capitalization or multiple for capitalization

The next important factor is the rate at whichadjusted maintainable profi t af ter tax is to becapitalised. The capital ization rate or the P/EMultiple shall be reflective of the value that thebusiness commands as on the date of valuation. Thedetermination of this rate is influenced by manyfactors, some are mentioned below:

· Prevailing rate of return on safe investment, sayGovernment Securities or RBI bonds

· Financial position of the company and PastTrack record

· Prevailing Price Earning ratio of comparablecompanies

Business Valuati on


· Risk factors associated with the company andthe industry

· Size of the business

· Stability of profits in the industry and of thecompany

· Industrial facts

As per the guidelines, “The Profit Earning CapacityValue” (PECV) will be calculated by capitalizingthe average of the after tax profits at the followingrates:

(i) 15% in the case of manufacturing companies,

(ii) 20% in the case of trading companies, and

(iii) 17.5% in the case of ‘intermediate’ companiesthat is to say, companies whose turnover fromtrading activities is more than 40%, but less than60% of their total turnover.” (para 7.1)

The CCI’s method of determining the capitalizationrate is peculiar. Finance theory suggests that thecapitalization rate is a function principally of thedegree of risk of the profit stream, i.e. the more riskybusiness should be capitalized at a higher rate. Onthe other hand, the factor to which the CCI attachesgreatest importance is whether the company is intrading or manufacturing. The implicit suggestionthat trading companies arc more risky thanmanufacturing companies is devoid of theoreticalor empirical support. Very often, an establishedtrading company carries far less risk than arelatively new manufacturing company. Again, theCCI’s demarcation of intermediate companies interms of percentage of sales from trading activity isalso unsound: percentage of profits is obviously themore relevant criterion. Finance theory asserts thatcompanies with substantial leverage (high debt/equity ratio) should be capitalized at higher ratesreflecting higher degree of risk. The CCI’s formuladocs not explicitly consider leverage at all indetermining the capitalization rate.

The formula

Gorden growth model estimates the value ofownership based on next year’s dividend paymentcapacity and capitalizing it considering the expectedrate of return (cost of capital) and estimated growthrate.

Following formula is used to estimate a value usingthis approach:

Value = Normalized earnings / (Ke – g)

Where,

Ke = required rate of return on investments

g = growth rate in earnings forever

Or

Value = Normalized earnings * Appropr iatemultiple

Appropriate multiple should be arrived at byconsidering the specific business risk, size risk,market risk, growth rate, expected return and suchother factors having impact on the businessoperations. This multiple should also co-relate withthe nature of earnings used. For example, if it isPBDIT then multiple should be based on capitalinvested and not only the owners’ fund. This willgive value of business. But if the earnings used isPAT then the multiple should reflect the factorsapplicable to ownership only. It will provide thevalue of owners’ fund in the business.

To conclude, we can say that it is on the bestjudgment of the appraiser to decide normalizedearnings and appropriate rate of capitalization.

❉ ❉ ❉

Business Valuati on


CA. Naveen [email protected]

(A) MCA Updates:

1. Clar ifications on Capitalization of Costs incases of Competitive Bid Power Projects(AS-10 and AS-16):

The Ministry has clarified that AccountingStandards AS-10 and AS-16 prescribe theprinciples of capitalization of various costsbased on the underlying concept that only suchexpenditure should be capitalized as form a partof the cost of fixed assets which increase theworth of the assets. Cost incurred during theextended delay in commencement ofcommercial production after the plant isotherwise ready does not increase the worth offixed assets. Such costs cannot, therefore, becapitalized.

It has further clarified that AS 10 and AS 16are applicable irrespective of whether the powerprojects are cost plus projects or competitivebid projects.

[General Circular dated 27th August, 2014]

2. A mendment in Schedule I I of theCompanies Act, 2013:

With effect from 29th August, 2014, Part Ain par agr aph 3 for sub-par agr aph ofSchedule I I relating to the useful life shallbe as under:

“The useful life of an asset shall not ordinarilybe different from the useful life specified in PartC and the residual value of an asset shall notbe more than five per cent of the original costof the asset:

Provided that where a company adopts a usefullife different from what is specified in Part C oruses a residual value different from the limitspecified above, the financial statements shalldisclose such difference and provide justification

Corporate Law Update

in this behalf duly supported by technicaladvice”

A fter Par t C par agr aph 4 shal l besubstituted as under:

“(a) Useful li fe specif ied in part c of theschedule is for whole of the asset andwhere cost of a part of the asset issignificant to total cost of the asset anduseful life of that part is different from theuseful life of the remaining asset, usefull ife of that signif icant part shal l bedetermined separately.

(b) The requirement under sub-paragraph (a)shal l be voluntary in respect of thefinancial year commencing on or after the1st April, 2014 and mandatory for financialstatements in respect of financial yearscommencing on or af ter the 1st April,2015.”

Paragraph 7 sub-paragraph (b) shall beread as under:

“After retaining the residual value, may berecognised in the opening balance of retainedearnings, where the remaining useful life of anasset is nil.”

[F. No. A-17/60/2012-CL -V dated 29t h

August, 2014]

3. Companies (Removal of Difficulties) 7t h

Order, 2014:

The MCA has substituted some portion of thesection 143(5) as mentioned hereunder, towiden the scope of the section so as to includeany company owned or controlled, directlyor indirectly, by the Central Government,or by any State Gover nment orGovernments, or par tly by the Central


Government and partly by one or moreState Governments:

In the case of a Government company or anyother company owned or controlled, directlyor indirectly, by the Central Government, orby any State Government or Governments, orpartly by the Central Government and partlyby one or more State Governments, theComptroller and Auditor-General of India shallappoint the auditor under sub-section (5) orsub-section (7) of Section 139 and direct suchauditor the manner in which the account s ofthe company are required to be audited and”.

[F. No. 1/33/2013-CL .-V dated 04t h

September, 2014]

4. Companies (Cor por ate SocialResponsibility Policy) Amendment Rules,2014:

Sub rule 6 in the Rule 4 has been amended soas to include the expenditure on administrativeoverheads within the 5% limit of total CSRexpenditure, which a company may spend forbuilding its own CSR capacity.

[F. No. 1/18/2013-CL .-Part dated 12t h

September, 2014]

5. Clar ification with regard to provisions ofCSR under section 135 of the CompaniesAct, 2013: (General Circular 36)

As the Rule 4(6) of the Companies (CorporateSocial Responsibility Policy) Rules, 2014, havebeen amended w. e. f. 12.09.2014, clarification(iv) in General Circular 21 dated 18.06.2014stands omitted.

[F. No. 05/01/2014-CSR dated 17t h

September, 2014]

6. Companies (Appointment and Qualificationof Directors) Amendment Rules, 2014:

In the Rule 9, following sub-rule 4 has beeninserted:

(4) In case the name of a person does not havea last name, then his or her father’s orgrandfather’s surname shall be mentioned

in the last name along with the declarationin Form No. DIR-3A .

After Rule 10, Rule 10A has beeninserted:

’10A.(1) Every director, functioning as adirector in one or more companies on orbefore the 30th June, 2007 and who hasnot yet intimated his DIN to such companyor companies shall, within one month ofthe receipt of Director Identi ficationNumber from the Central Government,intimate his Director Identi f icationNumber to the company or all companieswherein he is a director as per Form DIR-3B.

(2) The intimation by the company ofDirector Identification Number of i tsdirectors under section 157 of the Act shallbe furnished in Form DIR-3C withinfifteen days of receipt of intimation undersection 156.

· “Provisional DIN” has beensubstituted by “Application Number”and existing DIR-1 is omitted.

[F. No. 01/09/2013-Part-I I , CL -V dated 18th

September, 2014]

(B) SEBI UPDATES:

7. Amendments to SEBI (Issue of Capital andDisclosure Requirements) Regulat ions,2009 -Increasing the investment bucket foranchor investor and regulations concerningthe preferential issue norms.

SEBI has clarified that:

· The revised sub-regulation (3) of regulation43 on anchor investor allocation, shall beapplicable to issuers filing offer documentswith the Registrar of Companies on or afterthe date of notification of SEBI (Issue ofCapital and Disclosure Requirements)(Second Amendment) Regulations, 2014.

· The new and revised regulations underChapter VII viz. regulations 71A, 76, 76Aand 76B on preferential issue, shal l be

Corporat e Law Update


applicable for the preferential issuanceswhere notice for the general meeting forpassing of special resolution by theshareholders is issued on or after the dateof notification of SEBI (Issue of Capital andDisclosure Requirements) (SecondAmendment) Regulations, 2014.

[CI R/CFD/POL ICY CEL L /6/2014dated 11th September, 2014]

8. Corporate Governance in listed entities -Amendments to Clause 49 of the EquityL isting Agreement:

SEBI has amended the Clause 49 of the ListingA greement to address certain practicaldifficulties in ensuring compliance and mattersrequiring clarifications on interpretation ofcertain provisions, to ease the process ofimplementation of the same.

Major changes are as under:

· The provisions regarding appointment ofwoman director as provided in Clause 49(II)(A)(1) shall be applicable with effectfrom April 01, 2015.

· Amendment in Clause 49(I I)(B)(1)(c)relating to pecuniary relationship.

· Amendment in Clause 49(II)(B)(3)(a) w.r.t.the maximum tenure of IndependentDirectors.

· Amendment in Clause 49(II)(B)(4)(b) w.r.t.disclosure of terms and conditions ofappointment on the website of theCompany.

· Amendment in Clause 49(II)(B)(7) w.r.t.familiarisation programme for IndependentDirectors.

· Amendment in Clause 49(IV)(A) w.r.t. theconsti tution of nomination andremuneration committee.

· Amendment in Clause 49(V)(D) w.r.t.formulation of a policy for determining‘material’ subsidiaries.

· Amendment in Clause 49(V)(F) w.r.t.disposal of shares in material subsidiary ofthe Company to less than 50% or cease toexercise of control over it.

· Amendment in Clause 49(V)(G) w.r.t.Selling, disposing and leasing of assetsamounting to more than twenty percent ofthe assets of the material subsidiary.

· Amendment in clause 49(VI)(C) w.r.t.consti tution of Risk ManagementCommittee.

· Amendment in clause 49(VII)(A) w.r.t.transaction with a related party.

· Amendment in clause 49(VII)(B) w.r.t.conditions to consider the entity as therelated party.

· Amendment in clause 49(VII)(C) w.r.t.formulation of a policy on materiality of therelated party transactions.

· Amendment in clause 49(VII)(D) w.r.t. theprior approval of the Audit Committee forthe related party transactions.

· A mendment in clause 49(VII)(E) forproviding exceptions from the applicabilityof sub-clause 49(VII)(D) and (E) in caseof transactions between two Govt.Companies and holding & wholly ownedsubsidiary company.

· Clause 49 (VIII)(F), (G) and (H) standsdeleted.

· Clause 49(IX) for substitution of followingwords in place of the existing wordings:

“The CEO or the Managing Director ormanager or in their absence, a Whole TimeDirector appointed in terms of Companies Act,2013 and the CFO shall certify to the Boardthat”

[CIR/CFD/POLICY CELL /7/2014 dated15th September, 2014]

❉ ❉ ❉

Corporat e Law Update


AS – 9 Revenue RecognitionAnnual Report 2013-14

Lumax Auto Technologies Limited2.8 Revenue Recognition

Revenue is recognized to the extent that it isprobable that the economic benefits will be flowto the company and the revenue can be reliablymeasured.

Sale of goodsRevenue from operation is recognized when allthe significant risks and rewards of ownership ofthe goods have been passed to the buyer, usuallyon delivery of the goods. The company collectssales tax and value added taxes (VAT) on the behalfof the government and , therefore, these are noteconomic benefits following to the company.Hence, they are excluded from revenue. Exciseduty deducted from revenue (Gross) is the amountthat is included in the revenue (Gross) and not theentire amount of liability arising during the year.

InterestInterest income is recognized on a time proportionbasis taking into account the amount outstandingand the applicable interest rate. Interest income isincluded under the head “Other Income” in thestatement of profit and loss.DividendsDividend income is recognized when the company’sright to receive dividend established by the reportingdate.

Adani Power L imited

i. Revenue Recognitioni) Revenue from Power Supply is accounted

for on the basis of sales to State DistributionCompanies in terms of the Power PurchaseAgreements (PPA) or on the basis of salesunder merchant trading based on thecontracted rate, as the case may be.

ii) Interest income is accounted for on an accrualbasis. Dividend income is accounted forwhen the right to receive income established.

iii) Delayed payment charges and interest ondelayed payment for power supply arerecognized, on grounds of prudence, as andwhen recovered.

CMC L imitedg. Revenue Recognition

Sale of products

Revenue relating to equipment supplied isrecognised, net of returns and trade discounts,on transfer of significant risks and rewards ofownership to the buyer, which general lycoincides with the delivery of the goods tocustomers. Sales exclude sale tax and valueadded tax.Income from servicesRevenue from the contracts priced on a timeand material basis are recognised when servicesare rendered and related costs are incurred.Revenues from time bound fixed price contracts, are recognised over the life of the contractusing the proportionate of completion method,with contract costs determining the degree ofcompletion. Foreseeable losses on suchcontracts are recognised when probable.Revenues from maintenance contracts arerecognised pro-rata over of the contract.Revenue from “Education and Training” isrecognised on accrual basis over the course term.

Chemfab Alkalis Limitedj. Revenue Recognition

Domestic sale of product is recognised whenproduct are dispatched to the customer whishis when risks and rewards of ownership aretransferred as per the terms of sale/understanding with the customers. Sale are

CA. Pamil H. [email protected]

From Published Accounts


inclusive of excise duty but excluding otherstaxes and are net of rebates and discounts.

Export sale of products is recognised whengood are delivered to the carrier, which is whenrisks and rewards of ownership are transferredas per the terms of sale/understanding with thecustomers.

Revenues are recognised when collectabilityof resulting receivables is reasonably assured.

Income from service activities is accounted foron rendering the service in accordance with thecontractual terms and when there is nouncertainty in receiving the same.Insurance claims are accounted for on the basisof claims admitted /expected to be admitted andto the extent that there is no uncertainty inreceiving the claims.

Interest income is recognized using timeproportion method.

Dividend Income is accounted when the rightto receive is established.

Cords Cable Industr ies L imitedIV) Revenue Recognition

Revenue is recognised to the extent that isprobable that the economic benefits will flowto the company and the revenue can be reliablymeasured. The following specific recognitioncriteria must also be met before revenue isrecognised.

a) Revenue from sale of goods is recognizedwhen all the significant risks and rewardsof ownership of the goods have beenpassed to the buyer, usually on delivery ofgoods. The company collects all relevantapplicable taxes like sale taxes, value addedtaxes(VAT) etc. on behalf of the governmentand, therefore these are not economicbenefits following to the company. Hence,they are excluded from the revenue. Grossturnover is net of sales tax and inclusive ofexcise duty & cess.

b) All other income are accounted for onaccrual basis.

c) Profit on sale of investments is recognizedon the date of the transaction of sale and is

From Published Accounts

computed as excess of sale proceeds overits carrying amount as at the date of sale.

Suryachakra Power Corporation L imited3. Revenue Recognition

a) The company’s revenue from sale ofelectricity is based on the Power PurchaseA greement (PPA) entered in to withA ndaman and Nicobar (A & N)administration. The PPA is for period of 15years initially and shall have an extensionof the terms and the effective term for 3further periods of 5 years and contains aset of pre-defined formulae for calculationof revenue to be billed on a monthly basis.Such billings as per the terms of the PPAinclude a fixed charge payment, a variablecharge payment, incentive payment, foreignexchange adjustment and charge in lawadjustment. The revenue from sale of poweris recognized on the basis of billing to A&Nadministration as per the terms andcondition contained in the PPA.

b) Revenue from trading of goods, where thecompany acts as an agent are recognisedwhen the related services are performed.

c) Income from interest on deposits isrecognised on the time proportionatemethod using the underlying interest rates.

Ravi Kumar Distiller ies Limited2.8. Revenue Recognition

The company is in the business of manufacturingand sale of IMFL products. Sale of goods arerecognised when the goods are dispatched /onpassing title of the goods to the customers. Thesales are accounted by including the scheme/discounted /Excise Duty and Sales Tax. Thescheme discounts /Sales Tax are charged offseparately to the Profits and loss Account. Profiton sale of investments is recoded on transfer oftitle from the company and is determined as thedifference between the sale price and thecarrying value of the investment. Interest isrecognised based on time-proportion methodbased on rate implicit in the transaction.

❉ ❉ ❉


CA. Kunal A. [email protected]

From the Government

the JV and vice versa; and (ii) inter se betweenthe members of the JV. In addition, doubts havealso been raised regarding taxation of cash callsor capital contribution made by the membersto the JV and also administrative servicesprovided by a member to the JV.

The issue has been examined and w.e.f. 1st July,2012, under the negative list approach, allservices are taxable subject to the definition ofthe service [available in section 65B (44) ofthe Finance Act, 1994], other than the servicesspecified in the negative list [section 66D] andexemption notification [Notification No. 25/2012-ST]. According to Explanation 3(a) ofthe definition of service, “an unincorporatedassociation or a body of persons, as the casemay be, and a member thereof shall be treatedas distinct persons”. In accordance with theabove explanation, JV and the members of theJV are treated as distinct persons and therefore,taxable services provided for consideration, bythe JV to its members or vice versa and betweenthe members of the JV are taxable.

(For full text refer Circular no. 179, dated24th September,2014)

❉ ❉ ❉

Income Tax

1) CBDT hereby extends the last date of depositof TDS/TCS during the month ofSeptember,2014 from 7th October,2014 to 10th

October,2014 without entai l ing anyconsequential interest.

(Press Release , dated 1st October,2014)

2) Order regarding extension of due date forfurnishing of return of income for AY 14-15

CBDT hereby extends the due date forfurnishing of return of income for AY 14-15from 30th September, 2014 to 30t h

November,2014 , case of an assessee who isrequired to file his return of income by 30th

September,2014 as per clause (a) ofExplanation 2 to sec 139(1) of the IT Act andis also required to get his accounts auditedunder sec 44AB of the Act or is a workingpartner of a firm whose accounts are requiredto be audited under section 44AB of the Act.

(For full text r efer Order dated 26t h

September,2014)

Service Tax

1) Circular regarding levy on service tax ontaxable ser vices pr ovided By JV (JointVenture) and vice versa

Certain doubts have been raised regarding thelevy of service tax on taxable services provided(i) by the members of the Joint Venture (JV) to


Association News

CA. Abhishek J. JainHon. Secretary

CA. Nirav R. ChoksiHon. Secretary

Glimpses of events gone by:

1. On 8th September 2014, 4th Study Circle Meeting was held on the topic of “ Tax Audit – ReportingRequirement Compliance” at H.K. College of Commerce Conference Hall, Ashram Road, Ahmedabad.

❉ ❉ ❉

Forthcoming Programmes

Date/Day Time Programmes Venue02.11.2014 7.30 p.m. Diwali Get - Together Angan Party Plot, Opp. Nandavan IV,Sunday to 9.30. p.m. B/h. Jodhpur Gam, Satelite, Ahmedabad

20.12.2014 8.00 a.m. Cricket Match - Sardar Patel Stadium, AhmedabadSaturday to 1.00 p.m. President XI Vs. Secretary XI

(L to R CA. Mehul Shah, Speaker CA.Chirag M. Shah, CA. Shailesh C. Shah,

CA. Naishal Shah)

Participants at Study Circle Meeting

President of the Association CA. Shailesh C. Shah offering a Memento to Shri Y.K. Batra,Commissioner of Income Tax (TDS).

2. On 12th September 2014, a workshop was organized with Income Tax Department on “TDS Provisions”jointly with Gujarat Chamber of Commerce & Industries, Ahmedabad Branch of WIRC of ICAI, AllGujarat Federation of Tax Consultant, Income Tax Bar Association and Tax Advocate Association atGCCI Premises, Ashram Road, Ahmedabad.


Across

1. ________________ is the attribute of Strong.

2. The end product of education should be a free_________ man.

3. __________ will not be allowed in computingthe income of the Trust in respect of an assetwhere cost of acquisition has already beenallowed as application.

Down

4. As per Article 366(12), goods includes allmaterial, commodities and _______ .

5. ________ Capital is the primary source ofcompetitive intangibles for organization today.

6. _______ and ______ of the signatory is nowmandatorily required in the revised tax auditreport.

ACAJ Crossword Contest # 6

Notes:

1. The Crossword puzzle is based on previousissue of ACA Journal.

2. Three lucky winners on the basis of a drawwill be awarded prizes.

3. The contest is open only for the members ofChartered Accountants Association and nomember is allowed to submit more than oneentry.

ACAJ Crossword Contest # 5 - SolutionAcross1. Missionaries 2. Expense3. Charity

Down4. Investor 5. Senior6. TDS

❉ ❉ ❉

Winners of ACAJ Crossword Contest # 5

1. CA. Ajit C. Shah

2. CA. Niraj Agarwal

3. CA. Mohan Akalkotkar

4. Members may submit their reply eitherphysically at the office of the Association orby email at [email protected] on orbefore 31/10/2014.

5. The decision of Journal Committee shall be finaland binding.