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CNK & Associates, Mumbai
Contractor Nayak & Kishnadwala, Vadodara CNK Kaid Auditing, Dubai
January 2014
CNK Knowledge Tracker ……Be a Step Ahead
January 2014 For Private Circulation only
CNK & Associates 2
Contents Corporate Law Updates
Companies Act, 2013 3
Circulars from Ministry of Corporate Affairs 3
Circulars from SEBI 5
Circulars from IRDA 9
Accounting and Auditing
ICAI Announcements 10
RBI circular 10
Expert Advisory Committee Opinions 11
Reserve Bank of India/ FEMA
Notification 14 Domestic Tax
Notification / Circulars 16
Recent judicial decisions 17 International Taxation/Transfer Pricing
Notification / Circulars 22
Recent judicial decisions 23
Service Tax
Latest Notifications/Orders & Circulars/ Trade Notices
29
Recent judicial decisions 31
Maharashtra Value Added Tax/ Central Sales Tax
Latest Notifications/Orders & Circulars 35
Recent judicial decisions 36
Disclaimer and Statutory Notice 39
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Corporate Law Updates
Companies Act, 2013
The Companies Act, 2013
The Companies Bill received the assent from President of India on 29th August 2013.
The Bill has now become Companies Act, 2013.
The Companies Act, 2013 contains 470 Sections wherein the operative part of the Section is
governed by the rules issued there under. For the same, the Ministry of Companies Affairs
(MCA) had released the following draft rules:-
1st / 2nd Phase in September 2013.
3rd Phase in October 2013.
4th Phase -Investor Education and Protection Fund Authority Rules, 2013 in Nov 2013.
5th Phase- Companies (Winding up) Rules, 2013 in November 2013.
6th Phase- Companies (Cost Records and Cost Audit) Rules, 2013 in November 2013.
MCA has also notified that National Company Law Appellate Tribunal (Salary,
Allowances and other Terms and Conditions of Service of Chairperson and other
Members) Rules, 2014 and National Company Law Tribunal (Salary, Allowances and
other Terms and Conditions of Service of President and other Members) Rules, 2013
will come into force on the date of publication in the official gazette.
Circulars from Ministry of Corporate Affairs(MCA)
Relaxation of last date and additional fee in filing of e-Form 23C for
appointment of Cost Auditor
The MCA has decided to extend the last date of filing and to relax the additional fee
applicable on e-form 23C to 30 November, 2013 or within 30 days of the commencement of
the company’s financial year to which the appointment relates, whichever is later
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Clarification with regard to applicability of the provision of Section 372A
of the Companies Act, 1956.
Section 185 of the Companies Act, 2013 which deals with Loans to Directors
(corresponding to Section 295 of the Companies Act, 1956) was notified with effect from
12th September 2013 while Section 186 of such Act relating to limits for giving Loan and
Investment by Companies was not notified.
Section 185 has removed the exemptions available under the earlier section 295 to private
companies and to transactions between a company and its subsidiary. Also, the requirement
for approval of Central Government to be sought for director related transactions is also not
incorporated. This has posed several practical difficulties to companies.
MCA has vide circular 18/2013 dated 19th November, 2013 clarified that Section 372A of
the Companies Act, 1956 dealing with Inter-corporate Loans shall continue to remain in
force till Section 186 of the Companies Act, 2013 is notified.
The above clarification however, does not seem to remove the difficulties faced on
implementation of section 185.
Clarification with regard to applicability of Section 182(3) of the
Companies Act, 2013.
As per Section 182(3) of the Companies Act, 2013, every company shall disclose in its profit
and loss account any amount or amounts contributed by it to any political party during the
financial year to which that account relates, giving particulars of the total amount
contributed and the name of the party to which such amount has been contributed.
With the coming into force of the scheme relating to ‘Electoral Trust Companies’ (ETC) in
terms of Section (24AA) of the Income Tax Act, 1961 read with Ministry of Finance
notification dated 31st January 2013, MCA, in relation to disclosures to be made under
section 182 (3) of the Companies Act, 2013 has issued a clarification vide circular 19/2013
dated 10th December, 2013 that –
Companies contributing any amount or amounts to an ETC for contributing to a
political party or parties are not required to make disclosures required under section
182(3) of Companies Act 2013. It will suffice if the Accounts of the company disclose
the amount released to an ETC.
Companies contributing any amount or amounts directly to a political party or parties
will be required to make the disclosures laid down in section 192(3) of the Companies
Act, 2013.
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ETC will be required to disclose all amounts received by them m other companies/
sources in their Books of Accounts and also disclose the amount or amounts contributed
by them to a political party or parties as required by section 182(3) of Companies Act,
2013.
.Clarification with regard to holding of shares or exercising power in a
fiduciary capacity- Holding and Subsidiary relationship under Section
2(87) of the Companies Act, 2013.
After notification of Section 2(87) of the Companies Act, 2013 which defines ‘subsidiary
company’ or ‘subsidiary’, a number of representations were received by the MCA.
Clarification was sought on whether shares held or power exercisable by a company in a
'fiduciary capacity' will be excluded while determining if a particular company is a subsidiary
of another company. The stakeholders further pointed out that in terms of section 4(3) of
the Companies Act, 1956, such shares or powers were excluded from the purview of
holding-subsidiary relationship.
MCA, has vide circular 20/2013 dated 27th December, 2013 clarified that the shares held
by a company or power exercisable by it in another company in a 'fiduciary capacity' shall
not be counted for the purpose of determining the holding-subsidiary relationship in terms
of the provision of section 2(87) of the Companies Act, 2013.
Circulars from Securities and Exchange Board of
India (SEBI) Discussion Paper (DP) on “Review of guidelines governing stock related
employee benefit schemes’
SEBI has issued the above DP paper for public comment to replace SEBI (Employee Stock
Option Scheme (ESOP) & Employee Stock Purchase Scheme (ESPS)) Guidelines, 1999.
The proposed guidelines are issued to provide for a regulatory framework for all kinds of
employee benefit schemes, address the concerns regarding composition of employee welfare
trusts, disclosures etc. and to enable secondary market transactions with adequate safeguards.
This DP includes matters and proposed changes such as :
What types of ESOP schemes should be covered under proposed new regulations.
How would the welfare schemes like general employee benefit scheme, retirement
benefit scheme and any other such employee benefit scheme be covered?
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Mode of setting up schemes viz. should they be directly granted and administered by
the company or a flexibility in the regulations to grant, manage and administer through
a trust.
What are the key provisions, power, duties which need to be captured in the relevant
agreement including trust deed meant for administering the scheme through agencies/
trust, etc.
Whether Secondary Market (SM) acquisitions should be permitted in Company’s own
or related entity’s shares for ESOP/ESPS/Stock Appreciation Right Scheme, General
Employee Benefit Scheme and Retirement Benefit Scheme.
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1384944786125.pdf
Extension of timeline for alignment of employee benefit schemes with
the SEBI (ESOP and ESPS) Guidelines, 1999.
SEBI, vide circular (CIR/CFD/POLICYCELL/14/2013) dated January 17, 2013 inter alia,
made certain amendments to ELA and SEBI (ESOP and ESPS) Guidelines, 1999 in order to
address the concerns over acquisition of shares by employee welfare trusts from the SM.
Further vide circular dated May 13, 2013, SEBI extended the time line for aligning the
existing employee benefit schemes involving securities of the company with the SEBI
(ESOS and ESPS) Guidelines, 1999 to December 31, 2013002E
In light of the ongoing review, SEBI has further extended the time line for alignment of
existing employee benefit schemes with SEBI (ESOP and ESPS) Guidelines, 1999 to June
30, 2014. Accordingly, in Clause 35C (ii) of the ELA, the words “December 31, 2013” shall
be replaced with “June 30, 2014”.
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1385722463027.pdf
Proposals for allowing certain class of companies to file shelf prospectus
for public issuance of non-convertible debt securities- Paper seeking
public comments
As per the notified Section 31 of the Companies Act, 2013, any class or classes of
companies, as SEBI may provide by regulations in this behalf, may file a shelf prospectus
with the Registrar of Companies. Therefore SEBI has proposed to allow following
companies/ entities to file Shelf Prospectus for public issuance of nonconvertible debt
securities-
Public financial institutions and Scheduled Banks (which were allowed under Section
60A of the Companies Act, 1956);
Issuers authorized by the notification of CBDT to make public issue tax free secured
bonds, with respect to such tax free bond issuances;
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Infrastructure Debt Funds – Non-Banking Financial Companies regulated by RBI;
Other NBFCs, registered with RBI, complying with the prescribed criteria
Listed Issuers complying with prescribed criteria.
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1385462454074.pdf
Compliance with the provisions for Equity Listing Agreement (ELA) by
listed Companies – Monitoring by Stock Exchanges
The ELA mandates listed companies to make periodic and even based disclosures which are
price sensitive in nature and which will have bearing on the performance of the Company.
Concerns have been raised that even though listed Companies make disclosures to Stock
Exchanges within the timeframe stipulated under the ELA, the contents of the disclosures
made by such Companies are not adequate and accurate.
Thus, it was felt that current monitoring mechanism of Stock Exchanges to ascertain the
adequacy and accuracy of disclosures made in compliance with the ELA needs to be more
effective. Accordingly, the Stock Exchanges are advised vide circular
CIR/CFD/POLICYCELL/13/2013 to:
Put in place appropriate framework to effectively monitor the adequacy and accuracy of
the disclosures made by listed Companies;
Devise framework in such a way that it detects any non-compliance/ violation of
Securities Contracts (Regulations) Act, 1956, SEBI Act, 1992, the Rules and Regulations
made thereunder, ELA, and any other applicable laws.
Put in place an appropriate mechanism for handling complaints related to such
inadequate and inaccurate disclosures and non –compliances mentioned above and
treat such cases as per Standard Operating Procedure laid down by SEBI vide Circular
No. CIR/MRD/DSA/31/2013 dated September 30, 2013;
Submit to SEBI an “Exception Report” in addition to the existing reporting
requirements , with the details of Companies which do not respond to clarifications
sought by them and/or where the response submitted by the Company is not
satisfactory in the opinion of the Stock Exchange and;
Obtain details of the promoters/directors and /or Key Managerial Personnel of the
listed Companies who shall be responsible for ensuring compliance with the provisions
of the ELA and in case of defaults, disclose such details on its website.
In order to enable the Recognised Stock Exchanges and the listed Companies to put in place
adequate infrastructure to ensure compliance with the requirements of this Circular,
Recognised Stock Exchanges shall begin with monitoring the adequacy and accuracy of
disclosures made by top 500 listed Companies (by market capitalization as on March 31,
2013) in compliance with Clauses 35, 36, 41 and 49 of the ELA for the quarter ending
December 31, 2013.
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1384773842436.pdf
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Illustrative format of Statements of Assets & Liabilities in SEBI (ICDR)
Regulations, 2009.
Schedule VIII of SEBI (ICDR) Regulations, 2009 provides for the illustrative format of
Statement of Assets and Liabilities in offer document which is in accordance with the
erstwhile format of Schedule VI of the Companies Act, 1956.
After the notification and implementation of the revised Schedule VI of Companies Act,
1956, the aforesaid format has been updated and brought in line with the requirements of
the Companies Act, 1956. The revised format is also in line with the requirements of
Companies Act, 2013 as Schedule III of Companies Act, 2013 has adopted the same format
as notified under revised Schedule VI of Companies Act, 1956.
This Circular is applicable for all draft/final offer documents filed with the Board on or after
the date of this circular i.e. 3rd December 2013.
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386071665107.pdf
Justice Sodhi Committee on Insider Trading Regulations report to SEBI.
The high level committee to review the SEBI (Prohibition of Insider Trading) Regulations,
1992 has submitted its report to SEBI.
The committee has made a range of recommendations to the legal framework for
prohibition of insider trading in India and has focused on making this area of regulation
more predictable, precise and clear by suggesting a combination of principles-based
regulations and rules that are backed by principles.
Some of the salient features of the proposed regulations are set out below:
While enlarging the definition of “insider”, the term “connected person” has been
defined more clearly and immediate relatives are presumed to be connected persons.
Insiders would be prohibited from communicating, providing or allowing access to
“unpublished price sensitive information” (UPSI) unless required for discharge of duties
or for compliance with law.
Trading in listed securities when in possession of UPSI would be prohibited except in
certain situations provided in the regulations.
Trades by promoters, employees, directors and their immediate relatives would need to
be disclosed internally to the company. Trades within a calendar quarter of a value
beyond Rs. 10 lakhs or such other amount as SEBI may specify, would be required to be
disclosed to the stock exchanges.
For details refer: http://www.sebi.gov.in/cms/sebi_data/pdffiles/26940_t.pdf
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Annual System Audit of Stock Brokers/ Trading Members
This circular has been issued to protect the interest of investors in securities and to promote
the development of, and to regulate the securities market.
The stock exchanges should ensure that system audit of stock brokers / trading members are
conducted in accordance with the prescribed guidelines enclosed in this circular.
Exchanges are advised to keep track of findings of system audits of all brokers on quarterly
basis and ensure that all major audit findings, specifically in critical areas, are rectified /
complied in a time bound manner failing which follow up inspection of such brokers may be
taken up for necessary corrective steps / actions thereafter, if any
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1383740120626.pdf
Master Circular for Mutual Funds
Master Circular is a compilation of all the existing/applicable circulars issued by Investment
Management Department of SEBI issued to Mutual Funds. This Master Circular includes
circulars issued up to March 31, 2013.
Some of the chapters covered are :
Offer document for schemes
Conversion and consolidation of schemes and launch of additional plan
Risk Management System
Secondary Market Issues. etc.
For details refer: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1378979660117.pdf
Circulars from Insurance Regulatory and
Development Authority (IRDA)
Master Circular on preparation of Financial Statements and filing of
returns of Life Insurance Business
In order to enable the insurers to have a one stop document with all such directions issued
in connection with preparation and presentation of financial statements, and the filing of
financial returns, a master circular has been prepared. This Master Circular consolidates all
the Circulars issued by the Authority as appended to this circular and will have the effect of
superseding all the earlier circulars/ guidelines issued earlier in this regard. The Master
Circular covers all performance ratios mandated through the “Public Disclosures” and shall
be effective from 01 April 2014.
For details refer:
http://www.irda.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo2138&flag=1
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Accounting and Auditing
• ICAI Announcements
Exposure Draft (ED) on Investment Entities (Amendments to Indian
Accounting Standard ( Ind AS) 110, Ind AS 112 and Ind AS 27)
The ICAI has issued this ED on Investment Entities which includes amendments to :
Ind AS 110- Consolidated Financial Statements
Ind AS 112 – Disclosure of Interests in Other Entities
Ind AS 27- Separate Financial Statements
ED of Revised Standard on Auditing (SA) 610 (Revised) Using the Work
of Internal Auditors
The ICAI has issued this ED which deals with the external auditor’s responsibilities if using
the work of internal auditors. This includes:
Using the work of the internal audit function in obtaining audit evidence; and
Using internal auditors to provide direct assistance under the direction, supervision and
review of the external auditor.
• RBI Circular Deferred Tax Liability (as per Accounting Standard (AS) 22) on Special
Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961.
The RBI has observed that some banks are not creating deferred tax liability (DTL) on
Special Reserve as per AS 22 Accounting for taxes on Income on the grounds that they do not
intend to withdraw from such reserve in the future. The matter has been examined by RBI
and banks are advised that, as a matter of prudence, DTL should be created on Special
Reserve.
For this purpose , banks may take the following course of action- If the expenditure due to the creation of DTL on Special Reserve as at 31 March 2013
has not been fully charged to the P&L account, banks may adjust the same directly
from Reserves. The amount so adjusted may be appropriately disclosed in the notes to
accounts of the financial statements for the financial year 2013-14.
DTL for amounts DTL for amounts transferred to Special Reserve from the year
ending 31 March 2014 onwards should be charged to the P&L account of that year.
In view of the requirement to create DTL on Special Reserve, banks may reckon the entire
Special Reserve for the purpose of computing Tier-I Capital.
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Expert Advisory Committee Opinions (As reported in the Chartered Accountant Journal, ICAI)
Treatment of Disputed Elements of Cost in Valuation of Inventory of
Raw Material.
FACTS
A Company (A Ltd.), is engaged in refining of crude oil. It is engaged in production of
petroleum products, i.e. high speed diesel, motor spirit, aviation turbine fuel, raw petroleum
coke etc. A Ltd. has stated that it shares transportation cost on crude oil with X Refinery and
Petrochemicals Limited and certain elements of this transportation cost are disputed. The
company has accounted for these disputed elements as a part of its raw material cost and
considers the same also for closing inventory valuation.
QUERY
Expert Advisory Committee (EAC) opinion is sought on whether the procedure followed
by A Ltd for valuation of inventory with inclusion of disputed items of additional
transportation cost for which no agreement has yet been reached between two parties as
part of cost of crude oil is correct or not.
OPINION
EAC notes that the basic issue raised in the query relates to the inclusion of additional
transportation cost which is under dispute in the aggregate inventory cost. It has not
examined any other issue that may arise from the facts of the case like appropriateness of
inclusion of various components of the additional transportation costs in the inventory
cost, creation of liability/provision in respect of disputed transportation cost etc.
EAC notes from the facts of the case that A Ltd. has recognised transportation cost which
is under dispute in the inventory cost and therefore, has presumed from the facts of the
case that these are the costs necessary for bringing the inventories to their present location
and condition. Accordingly, the issue that arises is that only because these are ‘disputed’,
whether these should be considered as ‘abnormal’ and excluded from inventory cost.
The EAC is of the view that just because a cost is under dispute does not make it wasted
materials, labour, or other production cost and, therefore, it cannot be considered as an
abnormal cost and opined that the procedure followed by the Company for valuation of
inventory with inclusion of additional transportation cost which is under dispute as a
part of cost of crude oil is correct.
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Accounting treatment of share application money pending for allotment
invested by holding company in subsidiaries.
FACTS
The Company is a Government Company and is holding 100% shares in its subsidiaries,
which are also Government Companies. The holding company receives funds from the
State Government which are invested in the subsidiaries as ‘Share Application Money’. The
subsidiaries have negative net worth and have not allotted shares till the date of approval of
accounts. Their auditors advised them to make suitable provision for diminution in the
value of investments. The Company made a provision upto the level of equity shares
actually allotted by the subsidiaries subsequent to the close of the financial year till the date
of approval of accounts of the holding Company.
QUERY
EAC opinion is sought on the following issues:
i. Whether share application money is to be considered for making provision for diminution
in the value of investments even though the shares for the same are yet to be allotted.
ii. Whether share application money, for which shares are allotted subsequent to the end of
financial year but before adoption of accounts, should be considered as share capital for the
purpose of making the provision.
iii. For making provision, whether to consider that revaluation of assets is under progress and
that the fair market value of assets would be higher than the historical value/cost of assets.
OPINION
The EAC opined that:
i. Since the money is not refundable, share application money pending allotment should be
considered as long-term investment while making provision for diminution. Even if it is
refundable and shown as ‘advances’, an appropriate provision should be made based on
recoverability.
ii. There is no need for disclosing the share application money as ‘shares’ till the date of
allotment, as it is taking place in the subsequent year. However, irrespective of the fact
that share application money is refundable or not, provision needs to be created based on
recoverability.
iii. In determining the value of investment, fair value of the underlying assets of the subsidiaries
may also be considered which will help in concluding whether the decline in the value of
investments is other than temporary.
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Recognition of free of Cost Equipment Provided by a Contractee to the
Contractor
FACTS
The Company is a defence public sector undertaking under the Ministry of Defence and is
engaged in the construction of Warships and Submarines. The Company entered into an
agreement with the buyer for the construction and delivery of 3 ships. The Company has
agreed for construction of 3 ships on ‘Fixed Price’ basis with variable component in respect
to certain items. The buyer intimated to the querist that certain equipments out of variable
cost items will be supplied by him at ‘free of cost’ for installation on board of ship.
Therefore, the variable cost item cost consists of 2 parts: - (a) Purchase orders of some
equipments are placed by the Company and also paid for. The equipment cost, installation
cost and profit and loss thereon is claimed and reimbursed by the buyer to the Company. (b)
Certain equipments are ordered and paid for by the buyer. These equipments are known as
‘Buyer Furnished Equipments’ and are delivered to the Company ‘free of cost’ for installing
in the ship.
QUERY
EAC opinion is sought on the on the following issues:
i. Whether the Buyer Furnished Equipment’s (BFE’s) cost can be considered as inventory
(simultaneously creating liability to the buyer) and then on issue to ship can be taken in WIP,
so that accretion to WIP will be recognised as revenue.
ii. Whether BFE’s value can be considered as a part of a sale value in the year of delivery.
OPINION
EAC opined that:
i. The BFEs cannot be considered as inventories/WIP. This is because, orders for BFEs
are directly placed by the buyer and payment is also made by the buyer. These are supplied
to the Company for installing in the ship and the buyer pays installation charges which are
included in the contract price. Thus, the Company has neither incurred any cost on BFEs
nor any amount is recoverable on account of such equipments except installation charges.
Therefore, such equipments are not ‘assets’ that may be considered as a part of WIP.
ii. The BFEs cost cannot be considered as part of sale value /contract revenue. After
installation in the ship, BFE’s are returned to the buyer after completion of the ship. These
are only held by the Company in the capacity of a bailee. Since, these cannot be
considered as ‘asset’, therefore cannot be considered as ‘inventory’ nor as WIP. Accordingly,
these cannot also be considered as a part of sale value or revenue of the Company as no
consideration would be receivable in respect of the cost of such equipments.
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Reserve Bank of India (RBI)/Foreign
Exchange Management Act, 1999
(FEMA)
RBI Notifications/ Orders & Circulars
Bank Rates
The movement in bank Rates over the period 2003 to date is as under:
This rate is relevant for inter-corporate loans & investments as per Sec 372A. As per Sub
Section (3) of Sec 372A “No loan to any body-corporate shall be made at a rate of interest lower than the
prevailing bank rate, being the standard rate made public under section 49 of the Reserve Bank of India
Act”. These provisions however do not apply to certain companies as specified in the said
section.
Section 372A will be replaced by section 186 of the Companies Act, 2013 as and when
notified.
Definition of Group Company – FDI and Transfer of Issue of Security by
a Person resident outside India
The RBI vide circular number 68 dated November 1, 2013 has incorporated the definition of
group company as under:
“Group company means two or more enterprises which, directly or indirectly, are in position to:
1. Exercise 26 percent, or more of voting rights in other enterprise; or
2. Appoint more than 50 percent, of members of board of directors in the other enterprise”.
Date
Bank Rate (%)
Before April 2003 6.00
14th February, 2012 9.50
16th April, 2012 9.00
28th January, 2013 8.75
18th March 2013 8.50
2nd May 2013 8.25
14th July 2013 10.25
20th September 2013 9.50
7th October 2013 9.00
29th October 2013 8.75
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Foreign Director Investment in Financial Sector – Transfer of shares
Pursuant to FEMA Notification 20/2000 dated 3rd May 2000 read with circular No. 43 dated
4th Nov 2011, transfer of shares from Residents to Non-residents where the investee
company was in the financial services sector, No objection Certificate (NOC) was required
to be obtained from the respective financial sector regulator/regulators of the investee
company as well as transferor and transferee entities and such NOCs were to be filed with
Form FC-TRS to the AD bank. The RBI vide circular number 72 dated November 11, 2013
has decided that the requirement of NOCs will be waived and no such NOCs shall need to
be filed along with form FC-TRS where the investee company is in the financial sector.
However, it is clarified that, any ‘fit and proper due diligence ’requirement as regards the Non-
resident investor shall have to be complied with.
External Commercial Borrowings (ECB) by Holding Companies / Core
Investment Companies (CIC) for use in Special Purpose Vehicles (SPV)
The Reserve Bank of India (‘RBI’) vide circular number 78 dated December 3, 2013, in order
to strengthen the flow of resources to Infrastructure sector has permitted Holding
Companies / CICs registered with the RBI to raise ECBs under both the automatic as well
as the approval route for project use in SPV subject to the following terms and conditions:
The SPV business activity should be engaged in the infrastructure sector (as defined)
The infrastructure project must be implemented by the SPV established exclusively for
implementing the project.
The ECB proceeds must be used for fresh capital expenditure or for refinancing of existing
rupee loans (under approval route) availed from domestic banks.
The ECB for SPV can be raised up to 3 years after the commercial operations date.
The SPV should furnish an undertaking that no other method of funding will be utilised for
that portion of fresh capital expenditure.
The ECB funds should be deposited into a separate escrow account conforming with the
existing guidelines on usage of ECB funds pending utilization and use of such proceeds
should be monitored by Ads for the permissible end uses.
For CICs there are two additional conditions applicable for raising finance via ECBs:
The ECB loan acquired is within the leverage limit stipulated for CICs; and
The ECB availed should be on a fully hedged basis for CICs with asset size below Rs. 100
crore.
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CNK & Associates 16
Domestic Tax
Notifications/Circulars Reverse Mortgage (Amendment) Scheme, 2013 - (Notification No.
79/2013 dated 7th October, 2013)
The Central Board of Direct Taxes (CBDT) has amended the Reverse Mortgage Scheme,
2008 by:
Authorizing the approved lending institutions to disburse the loan to annuity sourcing
institution i.e. LIC of India or any other insurer registered with IRDA for the purpose of
periodic payments by way of annuity to the Reverse Mortgager. The Mortgager can
therefore receive annuity till his lifetime which was not possible under the earlier scheme.
Such annuity received will not be considered as income in the hands of the recipient since it
is received under the Scheme.
Extending the period of reverse mortgage loan (either lump sum or periodic payments) to
20 years from existing 15 years.
Notification of various Commodity Exchanges as recognised
associations – (Notification Nos. 90/2013, 91/2-13 and 92/2013 dated 27th
November, 2013).
The CBDT has notified National Commodity and Derivative Exchange Ltd. (NCDEX),
Universal Commodity Exchange Ltd. (Mumbai ) (UCE) and Multi Commodity Exchange of
India Ltd. (MCX) as recognized associations under clause (iii) of explanation 2 of section
43(5)(e) for considering transactions of trading in commodity derivatives carried out on the
said exchanges as eligible transactions. The transactions carried out on these exchanges will
therefore not be considered as speculative in nature.
Changes in Rules for application of PAN in Form 49A and 49AA –
(Notification No. 96/2013 dated 23rd December, 2013).
The CBDT has revised Form 49A and 49AA and requirements of supporting documents for
PAN application across various categories of applicants by amending Rule 114(4) of the
Income Tax Rules, 1962.
PAN applications by Individuals being Indian citizens and Hindu Undivided Families (HUF)
have to be accompanied by proof of date of birth, which was not required earlier. For proof
of date of birth, the supporting documents include birth certificate, pension payment order,
marriage certificate, matriculation certificate, passport, driving licence, domicile certificate
January 2014 For Private Circulation only
CNK & Associates 17
issued by the Government, or affidavit stating the date of birth. In case of PAN for HUF,
proof of date of birth of Karta has to be attached.
For proof of identity certain new documents have been included like Aadhar card, ration
card with photograph of the applicant and bank certificate in original on letter head from the
bank branch. Certificates from educational institutes which were earlier accepted as proof of
identity have been withdrawn and will no longer be valid.
For proof of address, the documents required such as utilities bills, credit card statements,
Depository account statements etc. must be recent and not more than three months old.
For application of PAN for HUF, an affidavit by the Karta stating the name, father's name
and address of all the coparceners on the date of application must be attached.
Recent Judicial Decisions
Income from Business and Profession and allowability of expenditure
Depreciation allowable on revaluation of agency rights including goodwill – CIT and
Another v. Manipal Universal Learning Pvt. Ltd. [2013] 359 ITR 369 (Karnataka High
Court).
The Karnataka High Court held that in case of sale of agency rights and revaluation of such
rights, the excess consideration paid over the value of the net assets was in the nature of
goodwill paid for the future profits of the business, and depreciation on the same was
allowable.
Any right which enables an assessee to carry on business effectively and profitably is
an intangible asset and is eligible for depreciation – Tirumala Music Centre (P) Ltd.
v. ACIT [2013] 39 taxmann.com 196 (Hyderabad Trib.)
The Hyderabad Tribunal held that the term ‘commerce’ in the expression ‘business or
commercial rights’ encompasses business in its fold and therefore, any right which is
obtained carrying on a business effectively and profitably is an intangible asset and is eligible
for depreciation.
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Disallowance under section 14A read with Rule 8D would be added back in
computation of Book Profit for the purpose of Minimum Alternate Tax – ITO, Ward
– 4(2)(4), Mumbai v. RBK Share Broking (P.) Ltd. [2013] 37 taxmann.com 128
(Mumbai Trib.)
The Mumbai Tribunal held that under Rule 8D, even though no specific amount debited to
the Profit and Loss Account is disallowed, it is presumed that such amount of disallowance
is always out of the expenses specifically debited to the Profit and Loss Account. Hence,
such disallowance, being expenditure incurred to earn exempt income is to be added to the
Book Profits in the case of computation of the Minimum Alternate Tax.
Disallowance of Capital expenditure on account of non-deduction of tax at source –
CIT v. Mark Auto Industries Ltd [2013] 358 ITR 43 (Punjab & Haryana High Court)
The Punjab & Haryana High Court held that in the absence of any requirement of law of
deducting tax out of expenditure on technical know-how which was capitalized and which
was not claimed as revenue expenditure, the deduction could not be disallowed under
section 40(a)(i) of the Act.
Whether provisions of section 40(a)(ia) apply to sums “payable” at the year-end or
also to the sums paid during the year - Income Tax Officer v. M/s Theekathir Press
[2013] ITA No. 2076/Mds/2012 (Chennai Tribunal).
Following the rulings of Special Bench in Merilyn Shipping and Transports 16 ITR 1 and the
Allahabad High Court in Vector Shipping Services, the Chennai Tribunal held that disallowance
provisions under section 40(a)(ia) apply only to sums payable at the year end and not to the
sums paid during the year.
However, post this ruling, CBDT has issued Circular no. 10/DV/2013 dated 15th December
2013 wherein it is stated that “the Board is of the view that the provisions of section
40(a)(ia) of the Act would cover not only the amounts which are payable as on 31st March of
a previous year but also which are payable at any time during the year. The statutory
provisions are amply clear and in the context of section 40(a)(ia) of the Act, the term
“payable” would include ‘amounts which are paid during the previous year’. ”
Premium paid to LIC for payment of leave encashment to employees not covered
under section 43B –Hero MotoCorp Ltd. v. ACIT, Range -12, New Delhi [2013] 60
SOT 25 (Delhi Trib.)
The Delhi Tribunal held that section 43B applies only in case of actual payment of leave
encashment by the employer to its employee and not in a case, wherein the employers has
paid premium to LIC towards master policy to cover leave encashment to its employees. In
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view of the same, the Tribunal held that such payments would not be disallowed under
section 43B.
Loss on premature cancellation of foreign exchange forward contracts in case of
export business is not a speculation loss – London Star Diamond Company (I) Pvt.
Ltd v. DCIT [2013] 38 taxmann.com 338 (Mumbai Trib.)
The Mumbai Tribunal held that loss arising on premature cancellation of a forward contract
entered into with banks for hedging foreign exchange losses in relation to exports is integral
to or incidental to the export activity and therefore, cannot be considered as a separate
activity being a speculative activity. Therefore, the Tribunal held that such loss was a
business loss and not a speculation loss.
Inter-corporate deposits are not chargeable to tax as deemed dividend – IFB Agro
Industries Ltd. v. JCIT [2013] itatonline.org (Kolkata Trib.)
The Kolkata Tribunal has held that the term “deposits” does not constitute loans and
advances and therefore, inter-corporate deposits are not chargeable to tax as deemed
dividend.
Capital Gains
Amount received by a partner on retirement from partnership firm not chargeable to
tax - CIT and Another v. Dynamic Enterprises [2013] 359 ITR 83 (Karnataka High
Court- Full Bench); CIT v. Mr. Riyaz A. Sheikh [2013] itatonline.org (Mumbai High
Court)
The Karnataka and Mumbai High Courts held that when a retiring partner takes only money
towards value of his share and when there is no distribution of capital assets among the
partners, there is no transfer of a capital asset and consequently no tax on profits and gains is
payable under section 45(4) of the Act.
Taxability of transfer of right over property - SSPDL Ltd. v. DCIT, Circle – 3(2)
[2013] 59 SOT 68 (Hyderabad Tribunal)
The assessee carrying in business of property development entered into a MOU with owner
of property for its purchase. Later, the assessee entered into an agreement of sale, wherein it
agreed to relinquish its rights over the property and received a sum. The Hyderabad Tribunal
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held that a right over a property which is part and parcel of business undertaking constitutes
capital asset under section 2(47) of the Act and any transfer or relinquishment of any such
right is chargeable under the head ‘capital gains’.
Date of transfer in case of Development Rights Agreement – Bhatia Nagar Premises,
Co-operative Society Ltd. v. Income Tax Officer [2013] 59 SOT 134 (Mumbai
Tribunal)
The Mumbai Tribunal held that transfer of property under the Development Rights
Agreement could be said to have taken place when the possession is handed over to the
developer and not on the date of agreement when only a small portion of the consideration
had been received as earnest money deposit.
Conversion of leasehold property into a freehold property does not change the period
of holding – CIT v. Smt. Rama Rani Kalia [2013] 38 taxmann.com 176 (Allahabad
High Court).
The Allahabad High Court held that conversion a property from a leasehold property into a
freehold property only improves the title of the property and the period of holding of the
said property would be computed from the date on which such property was held and not
the date of conversion.
Section 54EC exemption is available despite sale of depreciable assets being deemed
to be treated as short term capital assets–CIT v. Aditya Medisales Ltd [2013] 38
taxmann.com (Gujarat High Court) .
The Gujarat High Court held that section 50 which deems depreciable assets to be short
term capital assets is only for the limited purpose of computation of capital gains whereby
the benefit of indexation is not allowed. The High Court further held that nothing in the law
prevented the assessee from claiming exemption under section 54EC against capital gains
arising on sale of depreciable assets held for a period exceeding 3 years.
TDS Credit and Assessment Procedures
TDS credit to be given even in absence of TDS certificate or entry in form 26AS –
Citicorp Finance (India) Ltd. v. ACIT [2013] itatonline.org (Mumbai Trib.)
Following the Delhi High Court decision in the case of Court on Its Own Motion v. CIT, the
Mumbai Tribunal held that credit for TDS would have to be given even if the TDS is not
reflected in the computer generated form 26AS. The Department should grant credit for
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TDS once valid TDS certificates are produced or where the TDS certificate has not been
issued by the deductor, on the basis of evidence produced regarding tax deducted at source
and on furnishing an indemnity bond.
Voluntary disclosure does not absolve assessee of penalty unless explanation offered
is bonafide and satisfactory – MAK Data Pvt Ltd v. CIT [2013] 38 taxmann.com 448
(Supreme Court)
The Supreme Court has held that an assessee cannot be absolved of penalty under section
271(1)(c) on mere voluntary disclosure for income concealed. The assessee must provide a
bonafide explanation for concealment of income or furnishing inaccurate particulars of
income. It is only on satisfaction of the Assessing Officer (AO) that bonafide and sufficient
explanation is provided, can the assessee be absolved of the penalty.
The AO has the power to launch fishing and roving enquiries with a view to detect
tax evasion under section 133(6) – Kathiroor Service Cooperative Bank v. CIT [2013]
39 taxmann.com 49 (Supreme Court)
The Supreme Court held that the legislative intent behind section 133(6) was to give the AO
wide powers to gather general particulars in the nature of survey in order to tackle tax
evasion effectively and therefore, the AO is empowered to launch fishing and roving
enquiries with a view to detect tax evasion under this section.
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International Taxation / Transfer
Pricing
Notifications/Circulars
International Tax
Cyprus notified as a ‘notified jurisdictional area under section 94A of the
Act - Notification Number 86 / 2013 dated November 1, 2013
The Ministry of Finance has issued a Notification dated 1.11.2013 notifying Cyprus as a
“notified jurisdictional area” under section 94A of the Act. The consequences of the
Notification are draconian and are broadly as follows:
All transaction with a person in Cyprus will have to meet the rigors of transfer pricing ;
A deduction in respect of any payment made to any financial institution in Cyrus and
deduction in respect of any other expenditure or allowance arising from the transaction with
a person located in Cyprus is subject to specific conditions;
Sum received from a person located in Cyprus is deemed to be the income of the assessee
unless the assessee satisfactorily explains the source of such money in the hands of the payer;
Payments to persons located in Cyprus is liable for TDS at the highest of the following rates: At the rate or rates in force;
At the rate specified in the relevant provision of the Act; or
At the rate of thirty percent.
Transfer Pricing Clarification in respect of applicability of section 144C (1) - Circular
Number 9 / 2013 dated November 19, 2013. The Central Board of Direct Taxes (‘CBDT’) vide para 45.5 of circular No. 5 of 2010 dated
03.06.2010 had explained the provisions of section 144C(1) of the Income-tax Act, 1961
(‘the Act’) wherein inadvertently it was stated that the provisions of the said section will
apply in relation to the assessment year 2010-11 and subsequent years.
The CBDT has now clarified that section 144C of the Act is applicable to any order which
proposes to make variation in income or loss returned by an eligible assessee, on or after 1st
October, 2009 irrespective of the assessment year to which it pertains.
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Directives on Safe Harbour Rules - CBDT letter dated December 20,
2013
Pursuant to the final Safe Harbour Rules notified w.e.f.18th September 2013 the CBDT has
issued a letter dated December 20, 2013 in which it has laid down important directives and
clarifications on the manner in which the Safe Harbour Rules are to be implemented. The
directives and clarifications are as follows:
AOs should carefully verify and provide to the CBDT in writing the details of all Form
3CEFA received by them relating to Safe Harbour Options;
The AO has to examine the form and decide within 2 months of the end of the month in
which the option is filed as to whether to accept the Safe Harbour option or to make a
reference to the TPO. If no action is taken, the Safe Harbour option will be considered as
having been accepted and it will remain valid for 5 years;
If there are minor defects in Form 3CEFA, the AO has to provide an opportunity to the
taxpayer to rectify the same. However, the statutory time limit of 2 months provided in Rule
10TE (14)(i) cannot be exceeded;
The AO has to verify the eligibility of the assessee and the international transactions. Under
Rule 10TF, the Safe Harbour Rules will not apply to a country notified under section 94A
(e.g. Cyprus);
If the taxpayer has opted for Safe Harbour but has reported rates or margins less than the
Safe Harbour rates or margins, the income has to be computed on the basis of the Safe
Harbour rates or margins;
The Safe Harbour rates or margins are not a benchmark for cases not covered by the Safe
Harbour Rules. In such cases, a regular transfer pricing audit should be carried out without
regard to the Safe Harbour rates or margins
Recent Judicial Decisions
International Tax
Distinction between copyrighted article and copyright right still relevant
under Double Taxation Avoidance Agreement (DTAA) despite
retrospective amendment under the Act - DIT v Nokia Networks OY
(358 ITR 259) - Delhi High Court.
The Delhi High Court held that payment for a copyrighted article does not fall within the
purview of ‘royalty’ under the India-Finland Double Taxation Avoidance Agreement
(‘DTAA’). The provisions of the Act which were amended, with retrospective effect by the
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Finance Act, 2012; to clarify that payment for computer software would qualify as ‘royalty,
the Delhi High Court observed that such amendments cannot be read into a DTAA.
With respect to taxation of turnkey contracts for supply of equipment and installation, the
Delhi High Court held that the determinative factor is where the property in goods passes.
The place of negotiation, the place of signing of agreement or formal acceptance thereof or
the overall responsibility of the taxpayer is irrelevant circumstances. The Court also held that
the assessee’s liaison office merely carried on advertising activities and did not constitute a
business connection or permanent establishment as it did not carry out any business activity
for the assessee in India and that its role was only to assist the assessee in preliminary and
preparatory work.
Fees paid to a foreign company for operating India specific website
which provides online auction is not fees for technical services. Indian
group entities rendering marketing support services are ‘dependent
agents’ however they do not constitute Dependent Agent Permanent
Establishments in India - eBay International AG v DDIT – ITA No 8907
/ Mum / 2010 - Mumbai ITAT
The assessee is a company incorporated in Switzerland and operates in India providing
online platforms for purchasing and selling of goods and services to users in India. The
assessee had entered into market support agreements with eBay India and eBay Motors for
support services in connection with its websites. The assessee earned revenues from the
sellers of goods who were required to pay a user fee on every successful sale of their
products on the website. The issues before the Tribunal were whether: (i) The user fee from
the sellers in India would be in the nature of fees for technical services under the Act (ii)
EBay India and eBay Motors constitute a permanent establishment (‘PE’) for the assessee
under the India – Switzerland DTAA. The Tribunal ruled that apart from making the
assessee’s websites available in India on which various products of third-party sellers are
displayed, the assessee had no role in affecting the sales. Accordingly, the fees received from
the sellers on the successful sales cannot be designated as consideration for rendering
managerial, technical or consultancy service under the fees for technical services definition
under the Act. The Tribunal, therefore, upheld the classification of the income as ‘business
profits’. On the PE aspect under the DTAA, the Tribunal held that though EBay India and
eBay Motors are ‘dependent agents’ of the assessee, as they are legally and economically
dependent on the assessee, they do not constitute a PE for the assessee as they do not have
an authority to conclude contracts on behalf of the assessee..
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Expatriation of employees under seconded agreement without transfer of
technology would not fall under term make available as per article
13(4)(c) of Indo-UK DTAA, and therefore, payment made by assessee
towards salary expenditure of employees deputed to assessee under
seconded agreement could not be considered as fees for technical
services - Additional DIT v Mark & Spencer Reliance India P Ltd – 38
taxmann.com 190 – Mumbai ITAT
The assessee made a payment of Rs. 4.83 crores to Mark & Spencer UK for the purpose of
salary of employees deputed to the assessee under a seconded agreement. The Mumbai
Tribunal held that merely providing the employees or assisting in the business would not
constitute make available of the services of any technical or consultancy in nature. It held
that expatriation of employee under seconded agreement without transfer of technology
would not fall under the term make available as per the article 13(4)(c) of Indo-UK DTAA.
As per the definition of fees for technical services the same means payment of any kind to
any person in consideration for service or services of technical nature if such services make
available technical knowledge, experience, skill know how or process which enables the
person acquiring the services to apply technology contained therein.
Royalty and fees for technical services cannot be taxed under residual
Article 22 of India- Thailand treaty, unless item of income does not fall
under any other express provisions of DTAA - Bangkok Glass Industry
Co. Ltd. v. Assistant Commissioner of Income-tax [2013] 34
taxmann.com 77 (Madras)
The Madras High Court held that India-Thailand DTAA does not contain a specific article
dealing with Fees for Technical Services. Accordingly, since the entire payment could not be
regarded as Royalty and the same was in the nature of Fees for Technical services, it was
held that the same has to be taxed under Article 7 on business profits. The taxability under
Article 22 on other income would come into play only when an item of income did not fall
for consideration under any of the express provisions of the DTAA.
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Section 195(1) of the Act applies to issue of shares to non-resident. AO
has no power to issue NIL Tax Deduction at Source certificate –
BIOCON Biopharmaceuticals Pvt. Ltd. v. Income Tax Officer (ITA
Nos. 507 to 510/Bang/2009)
The Bangalore Tribunal held that issue of shares i.e. payment of consideration in kind for
availing technology from the non-resident was also contemplated under the provisions of
section 195(1) of the Act. The use of the expression ‘or by any other mode’ in section 195(1)
made the intention of the legislature clear that those provisions are to be attracted even to
cases where payment was made otherwise than by money.
Further, the Tribunal also held that section 195(2) of the Act presupposes that the person
responsible for making the payment to a non-resident was in no doubt that tax was payable
in respect of some part of the amount to be remitted to a non-resident, but was not sure as
to what should be portion, so taxable or was not sure as to the amount of tax to be
deducted. It therefore concluded that the order passed by the AO holding that no tax was
deductible at source would be non est. in law.
Transfer Pricing
Arm’s length price of royalty for trademark usage and technical know-
how fee can be determined as per Transactional Net Margin Method
(‘TNMM’). Approval of Reserve Bank of India & Government means
payment is as at arm’s length - Cadbury India Ltd v ACIT – (ITA No
7408 / Mum / 2010 & ITA No 7641 / Mum / 2010– Mumbai ITAT)
The Mumbai Tribunal held that the assessee has been paying royalty on technical know-how
to its parent AE since 1993. Other group companies across the Globe are also paying the
same royalty. Also, the payment is as per the approval given by the RBI and the SIA. Hence
there cannot be any scope of doubt that the royalty payment on technical know-how is at
arm’s length. As regards the royalty on trademark usage, the assessee is in fact paying a lesser
amount if the payment is compared with the payment towards trademark usage by other
group companies using the brand “Cadbury” in other parts of the world. Accordingly, the
royalty payment on trademark usage is also within the arms’ length and does not call for any
adjustment.
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TNMM under Rule 10B(1)(e) contemplates ALP determination with
reference to the relevant factors (cost, assets, sales etc.) of the assessee
and not those of the AE or third party. Assessee’s study report cannot be
discarded without showing how it is wrong. Finding that assessee is a
risk bearing entity should be based on tangible material - Li & Fung
India Pvt Ltd v Commissioner of Income-tax - (ITA 306 / 2012) – Delhi
High Court
The assessee rendered sourcing support services to its Hong-Kong based Associated
Enterprise for which it received a 5 percent markup on its cost and used the Transactional
Net Margin Method to determine the arm’s length price. The TPO held that cost to be
considered for the purpose of determining the 5 percent markup should be the FOB value.
On appeal the Delhi Tribunal held that the assessee was performing all the critical functions
with the help of tangible and unique intangibles as well as supply chain developed, which
helped the AE to enhance its business and resulted in location saving to the customer.
Accordingly the Tribunal held that the compensation for the services rendered by assessee to
the AE, equivalent to the cost plus 5% markup was not at arm’s length. The Tribunal
therefore accepted the TPO’s reasoning for applying the 5% of the FOB value of exports.
On appeal, the High Court held that using the FOB value as the basis of computing the 5
percent markup is not in line with the provisions of the Act and Rules as the compensation
model of the assessee is based on the functions performed and the operating costs incurred
and not the cost of good sourced by third party customers from Indian vendors / exporters.
To apply the TNMM, the assessee’s net profit margin realized from international
transactions had to be calculated only with reference to cost incurred by it, and not by any
other entity, either third part vendors or the AE. The High Court further held that Rule
10(B)(1)(e) of the Rules does not use the cost incurred by third parties to compute the net
profit margin of the assessee for the purpose of TNMM. The assessee had made no
investment in plant, inventory, working capital etc nor did it bear the enterprise risk for
manufacture and export. It merely rendered support services in relation to the exports which
were manufactured independently. Thus, attributing the cost of such third party
manufactures when the assessee did not engage in such activity and when those costs were
clearly not the assessee’s cost, but those of third parties is clearly impermissible.
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Discounted Cash Flow method most appropriate for determining arm’s
length value of shares - VIHI LLC v. Assistant Director of Income Tax
(ITA No. 17/(Mds.)/2012)
The Chennai Bench held that Discounted Cash Flow method is most preferable over the
Yield method or Net asset value method prescribed in guidelines of the Comptroller of
Capital Issues for determining the arm’s length price for sale of shares.
Less complex party to controlled transactions should be tested party for
analyzing international transactions – General Motors India Pvt. Ltd. v.
DCIT [2013] 37 taxmann.com 403 (Ahmedabad Tribunal)
The Ahmedabad Tribunal rejected the revenue’s argument that foreign AE should not be
selected as a ‘tested party’ as the companies selected by the taxpayer did not fall within the
ambit of TPO’s jurisdiction and, thus, he could neither have called for any additional
information nor scrutinized their books of account. It further observed that the Revenue
could get all the relevant particulars around the globe by using the latest technology under its
thumb or could direct the taxpayer to furnish the same. Thus, taking into consideration the
various decisions on the subject and in particular United Nation’s Practical Manual on
Transfer Pricing, it allowed the Foreign AE to be selected as the tested party since it was the
least complex party to the controlled transaction.
Applicability of transfer pricing in respect of receivables - ACIT v M/s
Sanghavi Exports - (ITA No 24/Mum/2012) – Mumbai ITAT
The assessee was engaged in the business of cutting and polishing of rough diamonds and
manufacturing of studded jewellery and exporting them. The Transfer Pricing Officer
(‘TPO’) observed that the tax payer had amount receivables from its related parties and that
the average period of receivable was 210 days as compared to 180 days in case of third
parties. Resultantly an adjustment of 8 percent on the average receivables was made to the
assessee’s income. The CIT (A) held that debit balance was not an individual international
transaction by itself and was a result of an international transaction. The department
contended that the CIT (A)’s order should be in accordance with the retrospective
amendment to section 92B of the Act and therefore be overruled. The ITAT set aside the
order of the CIT(A) and remanded the matter back to the TPO as the explanation to section
92B of the Act was to be considered..
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Service Tax
Latest Notifications/Orders & Circulars/Trade
Notices
Service Tax exemption granted to canteen in a factory
Notification No. 14 / 2013-Service Tax dated. 22.10.2013:
The Central Government has extended the scope of Exemption to Services provided in
relation to serving of food or beverages by a canteen maintained in a factory covered under
the Factories Act, 1948 (63 of 1948), having the facility of air-conditioning or central air-
heating at any time during the year.
Time Period specified for submitting the Quarterly statement by
Developers and SEZ units.
Notification No. 15/2013-Service Tax dated 21.11.2013
Amended the Notification No. 12/2013-Service Tax dated 01st July, 2013 whereby the
quarterly statement, in Form A-3 by the developer and units of SEZ claiming ab - initio
exemption under the said notification is to be furnished by 30th of the month following the
particular quarter to the jurisdictional Superintendent of Central Excise.
Lowering of the threshold limit for e-payment
Notification No. 16/2013 - Service Tax dated 22.11.2013
Instruction No. F.No: 137/116/2012- Service Tax
Amended the proviso to rule6(2) of the Service Tax Rules, 1994, whereby provisions of
mandatory electronic payment of Service tax has been extended to tax payers whose liability
is Rs. 1 Lac or more instead of the existing Rs. 10 Lacs. This Notification shall come in to
force with effect from 01st January, 2014
Clarification regarding Restaurant Service
Circular No.173/8/2013 –ST dated 07.10.2013.
In a complex, if there is more than one restaurant, which are clearly demarcated and
separately named but food is sourced from a common kitchen, only the service provided in
the air-conditioned restaurant is liable to service tax and service provided in a non-air-
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conditioned or non-centrally air- heated restaurant will not be liable to service tax. In such
cases, service provided in the non-air-conditioned / non-centrally air-heated restaurant will
be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.
Services are provided by air-conditioned restaurant in other areas e.g. swimming pool or an
open area attached to the restaurant, are liable service tax.
If goods are sold across the counter on MRP basis they have to be excluded from total
amount for the determination of value of service portion
Clarification in respect of Service Tax Voluntary Compliance
Encouragement Scheme (VCES)
Circular No.174/9/2013 –ST dated 25.11.2013.
Central Board of Excise and Customs (CBEC) has issued the following clarifications:
The designated authority shall ensure that no declaration is returned citing the reasons that
the same is incomplete. In all cases, declaration should be promptly received and duly
acknowledged. Request for clarification should be dealt with promptly. Defects in the
application, if any, should be explained to the declarant and possible assistance be provided
in rectifying these defects. The effort must be to accept a declaration, as far as possible, and
recover the arrears of tax.
The conditions prescribed under section 106(2) for rejection of declaration may be
construed strictly and narrowly. The concerned Commissioner may ensure that no
declaration is rejected on frivolous grounds or by taking a wider interpretation of the
conditions enumerated in section 106(2). If the issue or the period of inquiry, investigation
or audit is identifiable from summons or any other document, the declaration in respect of
such period or issue alone will be liable for rejection under the said provision. Examples-
If an inquiry, investigation or audit, pending as on 1.3.2013 was being carried out for
the period from 2008-2011, benefit of VCES would be eligible in respect of ‘tax dues’
for the year 2012, i.e., period not covered by the inquiry, investigation or audit.
If an inquiry or investigation, pending as on 1.3.2013 was in respect of a specific issue,
say renting of immovable property, benefit of VCES would be eligible in respect of ‘tax
dues’ concerning any other issue in respect of which no inquiry or investigation was
pending as on 1.3.2013.
It is also reiterated that the designated authority, if he has reasons to believe that the
declaration is covered by section 106(2), shall give a notice of intention to reject the
declaration within 30 days of the date of filing of the declaration stating such reasons to
reject the declaration. Commissioners should ensure that this time line is followed
scrupulously
In cases where documents like balance sheet, profit and loss account etc. are called for by
department in the inquiries of roving nature, while quoting authority of section 14 of the
Central Excise Act in a routine manner, the designated authority/ Commissioner concerned
may take a view on merit, taking into account the facts and circumstances of each case as to
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CNK & Associates 31
whether the inquiry is of roving nature or whether the provisions of section 106 (2) are
attracted in such cases.
The benefit of the Scheme would be available even if payment or part payment of tax dues
made after 10th May, 2013 but before filing the declaration if such amount is declared under
the scheme subsequently along with the remaining tax dues, if any, provided that Cenvat
credit has not been utilized for payment of such amount.
No declaration can be made in such case where service tax pertaining to the period covered
by the Scheme along with interest has already been paid by the parties, before the Scheme
came into effect, so as to get waiver from penalty and other proceedings as no “tax dues” is
pending in such case. However, in such cases, there may be a case for taking a lenient view
on the issue of penalties under the provision of the Finance Act, 1994. In this regard
attention is invited to section 73 (3) and section 80 of the Finance Act, 1994.
Recent Judicial Decisions
Larsen & Toubro Ltd. vs. CCE, Vadodara-II 2013 (32) STR 113 (Tribunal-Ahmadabad) The Assessee has units of located in SEZ as well as DTA. Separate Registrations have been
taken. Services are provided by SEZ unit to DTA unit. Separately invoices have been raised
by SEZ unit on DTA unit. The department sought to demand service tax on SEZ units on
the ground that units located in SEZ and DTA units of the appellant are separate legal
entities and services provided by SEZ units are taxable service.
The Tribunal held that, SEZ units do not have separate balance-sheet and audited accounts
and they are considered as division of L&T for all statutory and SEZ purposes. Merely
because invoices have been issued and agreement has been entered into, SEZ unit do not
become separate legal entities. In terms of definition of person, it cannot be said that the
units in SEZ and DTA units can be considered as separate person.
Decided in favour of the Assessee
Sports Club of Gujarat Ltd v Union of India [2013 (31) STR 645 (Guj)] Sections 65(25a), Section 65 (105) (zzze) and Section 66 of the Finance Act, 1994 held to be
ultra vires as amended by the Finance Act,2005 to the extent of services being provided by a
club to its members
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Three different clubs of Ahmadabad filed a writ seeking that Sections 65(25a), Section
65(105) (zzze) and Section 66 of the Finance Act, 1994 be held ultra-virus to the extent of
services being provided by a club to its members.
Relying upon a long line of cases, the latest among them being the Jharkhand HC decision in
the case of Ranchi Club Limited [2012 (26) STR 401 (Jhar)], the Gujarat HC took note of
the principle of mutuality and held that since service requires existence of two parties, no
service transaction can exist between club and its member. In this regard, income tax
jurisprudence was also considered.
The HC also held that there was no loss of mutuality even if the club in question was
incorporated under the Companies Act, 1956.
Vodafone Essar Cellular Ltd. vs. CCE, Pune-III 2013 (31) STR 738 (Tri-Mumbai) The appellant in this case, claimed export of telecom services provided in India to
International in bound roamers registered with foreign telecom network operators, for
which consideration was received in convertible foreign exchange. The Tribunal held that,
there is no contract/agreement between assessee and subscriber of foreign telecom operator
and therefore foreign telecom service provider is paying for services as recipient of service.
Telecom service falls under category III of ESR, 2005 and CBEC in circular No.
111/5/2009-ST dated 24/02/2009 clarified that benefit accruing to foreign service provider
as subscriber billed for services rendered. The ratio of Tribunal’s decision in Paul Merchants
2013 (29) STR 257 (Tribunal) is squarely applicable to the present case and therefore service
is qualified as export of service
Bhagwati Security Services (Regd.) vs. UOI 2013 (31) STR 537 (All.) Service tax liable to reimbursed from the service receiver
The assessee has provided security services to BSNL under an agreement. The petitioner
deposited service tax on reimbursement of expenses and applied for reimbursement of
service tax from BSNL, which was denied on the ground that, the same was not
contemplated in the agreement.
The High Court held that, Service tax is statutory liability and Statute is imposing the tax
upon the person to whom the service is being provided and the service provider is merely a
collecting agency, therefore the respondent is liable to make reimbursement of service tax to
petitioner.
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CNK & Associates 33
[Kerala Classified Hotels and Resorts Association vs. UOI (2013) 31 STR 257 (Ker.)] Services provided by restaurants/ hotels- is unconstitutional
The Kerala High Court held the levy of service tax on services provided by restaurants
[clause (zzzzv)] and accommodation services provided by hotels, inns, guest house, club or
campsite [sub clause (zzzzw)] as unconstitutional on the following grounds:
As regards services provided by restaurants, the Court held that supply of food or beverages
“by way of or as part of any service”, is deemed to be a ‘sale’ under article 366(29-A)(f) and
hence the State Government alone has the legislative competence to enact the law for
imposing a tax on the service element forming a part of sale of such goods under entry 52 of
the state list (i.e. tax on sale or purchase of goods) and the Central Government in exercise
of the residuary power under entry 97 of List I of the Constitution cannot impose service
tax.
As regards services provide by hotels or guest house, the Court held it to be within the
exclusive legislative function of the State under entry 62 of List II (i.e. tax on luxuries)
The High Court also allowed the petitioners to seek refund of the tax (if any) paid by them
on the said services
CCE v. Cadila Healthcare Ltd. (2013) 30 STR 3 (Guj.)
The following credits on input services were held by the High Court to be admissible /
inadmissible to a company engaged in manufacture of drugs:
Credit on clinical testing services availed prior to commencement of commercial production
was allowed in view of the fact that the final product could be manufactured only after
obtaining regulatory approval of the clinically tested samples and therefore such services
were directly related to the manufacture of the final product. The department plea that
unless goods reach commercial production stage Cenvat Credit was not admissible was
rejected.
Service tax paid (as a recipient of service) on commission paid to foreign agents for ‘sale of
final products’ was held inadmissible since-
They are not services directly or indirectly in relation to manufacture of final products
or clearance of final product from the place of removal;
The services are not in relation to ‘sales promotion’ but are for actual sales of goods on
behalf of the principal;
They are not ‘activities related to business "such as" (meaning of the same nature)
accounting, auditing, financing share registry, etc. since it is not of the same nature.
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CNK & Associates 34
Cenvat Credit on courier services used for transportation of goods outside factory would be
admissible for the period prior to 1-4-2008, being service used in relation to clearance of
final products from the place of removal.
Cenvat Credit in respect of clearing and forwarding agent’s service would be admissible for
the period prior to 1-4-2008 as being services used in relation to clearance of final products
from the place of removal.
Cenvat Credit on repair and maintenance of copier machine, air-conditioner and water
cooler are admissible being services necessary for the factory building as well as for activities
relating to business and therefore, integrally connected with the business of the
manufacturer.
The services of interior decorator and commercial or industrial construction being services
used in relation to repair / renovation of factory would fall under the inclusive part of the
definition of ‘input services’ and Cenvat Credit on the same would be admissible.
Notwithstanding the above, Cenvat Credit on the above services and services of a
management consultant would be admissible since the said services are specifically
mentioned as input services u/r. 6(5) of the Cenvat Credit Rules, 2004 and all services
mentioned in rule 6(5) are essentially ‘input services’ as defined in Rule 2(l).
Credit on technical inspection and certification services availed for calibration and checking
of measurement instrument used for manufacture of products is admissible as being a
service in relation to manufacture of final products.
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CNK & Associates 35
Maharashtra Value Added Tax
(MVAT) Act, 2002, MVAT Rules, 2005
and Central Sales Tax Act (CST), 1956.
Latest Notifications/ Orders & Circulars
Circulars
Physical submission of Audit Report in form 704 for the F.Y. 2012-13.
Trade Circular No. 10T of 2013 dated 16.12.2013
The dealers who are required to file Audit report under the MVAT Act, 2002 for the F.Y
2012-13 shall also make physical submission of the following documents with the authorities
prescribed-
A statement of submission of audit report in the prescribed format, duly
signed/stamped by the dealer ;
Signed copy of the acknowledgement generated on filing the report; and
Copy of Part I of the Report, signed by the auditor.
Further, if the dealer accepts the recommendations made by the auditor then the following
documents shall also be submitted along with the above mentioned ones in order to avoid
further enquires for the same which is a newly introduced provision-
Copies of tax paid challan
Copies of revised returns.
Grant of refund of ITC denied due to purchase from non-filer suppliers.
Trade Circular No. 9T of 2013 dated 11.12.2013
The dealers who have become eligible for refund due to filing of returns and payment of tax
by their suppliers (who were non-filers earlier) shall be granted the refunds of such ITC in
accordance with the procedures set up by the department without the claimant dealers
having to file a refund application.
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CNK & Associates 36
Correction of mistakes made by the dealers of miscellaneous refunds of
excess payments of taxes.
Trade Circular No. 7T of 2013 dated 16.12.2013
On a representation being made by various dealers and banks about the errors committed
while making e-payments of taxes under the MVAT and CST Acts, the Sales tax department
has laid down the revised procedures for correcting various such errors.
Uploading of information of PAN/TAN and other contact details for
Maharashtra State Tax on Professions trades Calling and Employment
Rules, 1975.
Trade Circular No. 6T of 2013 dated 16/12/13
The Profession tax department has issued a list of details to be submitted while uploading
the PT Info Form by all existing and new profession tax payers in order to update the same
in the database of the department.
Recent Judicial Decisions Whether production of Form F is permissible at any stage by the
appellant?
Agrimas Chemicals Ltd v/s State of Haryana and Others (2013) 64 VST 134 (P&H)
In the above case interstate Branch Transfers were treated as interstate sales without C form
and thus charged to tax @ 12.5% by the original Assessing Authority and the same was
affirmed by the Joint Excise and Taxation Commissioner (Appeals) and by the Tribunal.
However the Punjab & Haryana High Court permitted the dealer to produce the F Forms
for the first time and on those premise, considered the transaction as interstate branch
transfer and not as interstate sales.
Whether disallowance of Input credit was justified merely on ground that
selling dealer did not serially number Tax Invoices under provisions of
West Bengal VAT Act?
Rohini Ferrous Pvt Ltd. v/s Sales Tax Officer Beadon Street Charge and Others
(2013) 64 VST 203 (WBTT)
Input credit on purchases made was disallowed on the ground that tax invoices were not
serially numbered by the seller which was in violation of provisions of West Bengal VAT
Act.
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CNK & Associates 37
The Taxation Tribunal on an application made by the dealer challenging the disallowance of
input tax held that, mere non-maintenance of serially numbered invoices by seller could not
make the tax invoice invalid
Whether cranes given on hire with operator and helper is liable to tax
being transfer of right to use goods under West Bengal VAT Act?
W. B Crane & Equipment Owners’ Welfare Association and Others v/s Asst Sales
Tax officer, Central Section, Investigation Wing, Kolkata Others (2013) 64 VST 435
(WBTT)
Members of the W. B Crane & Equipment Owners’ Welfare Association gave the cranes on
hire to the Contractors. However the overall control remained with the members of the
Association. Contractors using cranes for works contract were not entitled to make free use
of the same.
Tribunal observed that the various provisions of the agreement showed that effective
control of the crane was with the owner only. All facts lead to the assumption that no
absolute right to use was created by execution of the agreements.
The tribunal further held that there was no transfer of right to use the cranes from the
members to the contractors and as such the same didn’t amount to sale under the Act. Thus,
the transaction would not be subject to sales tax.
Whether transaction is held as interstate sales or local sales since the
contract provided for movement of goods from Tamil Nadu to work site
of the buyer at Warora?
Aspick Engineering (P.)Ltd v/s State of Tamil Nadu (2013) 62 VST (Mad)
The assessee in Tamil Nadu sold goods to a dealer in Warora in Maharashtra. This being in
the nature of inter-state sale was treated as local sale by the assessing officer on the ground
that the delivery of goods had been taken inside the state itself.
The tribunal also rejected the dealer’s case, on the ground that the price was ex-godown and
the purchaser took delivery of goods at his own cost along with insurance.
However the Madras High court held that which party bore the insurance cost does not
determine the nature of sale and it was clear that sale and movement of goods were
intimately connected and that the movement of goods was a consequence of sale. Thus the
sale was an Inter- State sale.
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CNK & Associates 38
Whether it is justified to disallow credit on Purchases made by the dealer
prior to Publication of particulars of the selling dealer whose certificate
of registration cancelled under the provisions of Gujarat VAT Act?
Meet Traders v/s State of Gujarat and Another (2013) 63 VST 246 (Guj)
Purchases were made by the dealer both before and after the date on which the registration
of the selling dealer was cancelled, therefore input tax credit was denied by the department
and as a further action, delivery of the goods purchased after cancellation of registration
number of the selling dealer, was stopped by issuing an order.
The purchasing dealer appealed to the High Court which held that the Input tax credit on
the purchases made by the dealer up to the date of cancellation cannot be denied to the
dealer under the Gujarat VAT laws and also that the commissioner was not entitled to detain
the delivery of the goods
Whether opportunity can be granted to the assessee to produce
declaration form C before the Revisional authority in a case where
certain C forms are found to be defective?
AAR Kay Agro Spring Industries v/s State of Madhya Pradesh and Others (2013) 62
VST 197 (MP)
The assessee had produced C forms before the assessing authority seeking concessional rate
of tax on such transactions. However the same was denied on the grounds that a few of the
C form declarations were defective.
It was observed that under CST Rules applicable to Madhya Pradesh, C form declaration
could be filed subsequently and not necessarily with the returns i.e. provision requiring filing
declaration forms along with the return was directory and not mandatory. Object of the rule
was to ensure that the assessee was not denied the benefit which was available to it under the
law on a technical plea.
Hence assessee was given permission to file fresh correct C forms duly issued by the
competent authority before the revisional authority within a period of 30 days.
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CNK & Associates 39
DISCLAIMER AND STATUTORY
NOTICE
This e-publication is published by CNK & Associates, India, solely for the
purposes of providing necessary information to employees, clients and other
business associates. This publication summarizes the important statutory and
regulatory developments. Whilst every care has been taken in the preparation of
this publication, it may contain inadvertent errors for which we shall not be held
responsible. The information given in this publication provides a bird’s eye view
on the recent important select developments and should not be relied solely for
the purpose of economic or financial decision. Each such decision would call
for specific reference of the relevant statutes and consultation of an expert.
This document is a proprietary material created and compiled by CNK &
Associates. All rights reserved. This newsletter or any portion thereof may not
be reproduced or sold in any manner whatsoever without the consent of the
publisher.
This publication is not intended for advertisement and/or for solicitation of
work.
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