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3CASC BULLETIN, JANUARY 2016

EDITORIAL

December Becomes Dreadful forChennai?

This December was no different than whatwe saw last year, except for the nature ofcalamity which Chennai has witnessed.First Tamilnadu including Chennai lost oneof the charismatic and immensely powerfulleader in Ms. Jayalalithaa. After beinghospitalised for over 75 days, she breathedher last on 5 th December, 2016. The CentralGovernment as well as the StateGovernment were worried about whatwould happen on her death and hadprepared contingency plans to overcomeriots, if any. To everyone’s surprise therewas at most calm and peace from everyquarter whether it was the ruling partycadre or the opposition. It was extraordinary show of sympathy and respectfrom all quarters.

Chennai was getting back to normalcy andwe had the “VARDAH” which means RedRose and as name contributed by Pakistan.Whether it was a storm or cyclone, it hasleft a devastating impact on Chennai bytaking with it lakhs of Trees, uprootingelectrical polls, building, etc. In tarot,“Rose” is considered as a symbol ofbalance. But for us it had imbalanced theentire natural ambiance by carrying the

winds with speed of over 120 Km per hoursalong with the most required rain for therain deficient Chennai. It took lot of timeand energy in just clearing the trees fromvarious places. It will take years togetherto bring back even some of the greeneries.It should be the endeavour of everyChennaite for that every human being totry to restore back the environment byplanting trees. The impact was so high thatin the era of shortage of currency, there wasliterally no digital connectivity to carry onthe basic activity. The bankers as well astraders were just turning away thecustomers for want of connectivity, themajor reasons therefor was the serviceproviders had not laid underground cablesbut were using the trees and poles on theroad to provide the facility. Again thepublic of Chennai are to be appreciated forshowing utmost constraint andunderstanding the situation by beingunited and calm.

Amendment to Payment of Wages Act

With the push for digital payment, everynews or notification / clarification by theGovernment is taking new information bythe Media. The Cabinet decided to bringin the ordinance to amend the Payment ofWages Act, 1936, to allow business and


Finance Act, 2016, one for IncomeDisclosure and another for DisputeResolution. Sensing the chance of failureof the scheme for Income Disclosure, theGovernment has pressed into promotionmode. In this process the departmentalpeople were asked to conductpromotional meetings and all of asudden the Assessing Officer were madeto do certain activities which they havenever done. The CBDT came out withFAQs in 4 sets to clarify and convincethe stakeholders to opt for the scheme.All kinds of methods like threatening aswell as convincing, are used to makethe scheme successful. The AssessingOfficer are now made to behave like asalesman who has to achieve the targetof making the scheme successful andalso document the same by updatingthe higher authorities with pictures andvisuals. The Assessing Officer have beenprovided with all materials likestandees, banners, pamphlets, etc. Themajor controversy was created witheffective rate of tax and secondcontroversy related to reopening of theassessment. The effective rate of tax hasbeen put to rest after requirement ofclarification was forced upon CBDT byrepresentation from professionalassociations and others. However, the

other controversy continues with thestatement from CBDT confirming thatSection 197(C) of Income Disclosure Act,2016, will prevail over the reopeningscheme under Income Tax Act. TheCBDT seems to ignore the fact that theSection 197 starts with the words “Forthe removal of doubts ….” and thus arenot able to explain how these words canbe ignored. However, the CBDT istrying its level best to make the schemesuccessful and let’s hope it succeeds.

Appeal

Members are requested to attend theprograms conducted by CASC and arealso requested to send their suggestionsand / or value additions to the servicesprovided by CASC including thisBulletin. The same can be sent by hardcopy to the office of the CASC oremailed to [email protected] or anyof the Members on the ManagementCommittee.

For and on behalf of Editorial Board

Editor

industrial undertaking to pay salariesthrough Cheques or electronically, whichis yet to be declared so by the Government.However, the Government had placedbefore the Lok Sabha, the Payment ofWages (Amendment) Bill, 2016, on 8th

December, 2016. The Bill could not movefurther due to reasons well known, as theLok Sabha had not functioned effectively.It is worthwhile to note the “Statement ofObjects and Reasons” as stated in the saidBill which is

“The Payment of Wages Act, 1936 (the Act)regulates the payment of wages of certainclasses of employed persons. The Act wasamended several times and last amendedin the year 2005. Section 6 of the Actprovides that all wages shall be paid incurrent coin or currency notes or in both.However, proviso to said section enablesthe employer to pay the wages to anemployee either by cheque or by creditingthe wages in his bank account afterobtaining his written authorisation.

According to section 6 of the Payment ofWages Act, 1936, the wages are to be paidin current coin or currency notes or in both.However, in 1975, a proviso was added“[Provided that the employer may, afterobtaining the written authorisation of theemployed person, pay him the wageseither by cheque or by crediting the wages

in his bank account.]”. According to saidproviso the wages can be paid throughbanking channel only if the employee givesa written consent. Without our knowledgewe have been violating a law andGovernment also requesting the employersto make the wages payment through digitalmode.

Greetings

CASC Management Committee, on its ownbehalf and on behalf of the each and everymember, wishes everyone a happy andprosperous new year, a happy Pongal anda happy Republic Day.

Appeal

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

For and on behalf of Editorial Board

Editor


DISCLAIMER :

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

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RECENT DECISIONS - SERVICE TAX

CA. VIJAY ANAND

1. Franchise agreement effectivelynothing more than a mere permissiveuse cannot be made liable to VAT:

In Mahyco Monsanto Biotech (India)Pvt Ltd. V UOI, 2016(44) STR 161(Bom.) two petitions were filed beforethe high court, whose facts, challenges& observations could be summarizedas under:-

Monsonto Petition

Monsanto India, is a joint venture companyof Monsanto Investment India PrivateLimited (“MIIPL”) and the MaharashtraHybrid Seeds Co. Monsanto Indiadevelops and commercializes insect-resistant hybrid cottonseeds using aproprietary “Bollgard technology”, onethat is licensed to Monsanto India byMonsanto USA through its wholly ownedsubsidiary, Monsanto Holdings PrivateLimited (“MHPL”). This technology isfurther sublicensed by Monsanto India tovarious seed companies on a non-exclusiveand non-transferable basis to use, test,produce and sell genetically modifiedhybrid cotton planting seeds. In return forthis technology, Monsanto India receivestrait fees based on the number of packetsof seeds sold by the sub-licensees. Thesesublicensing agreements, with almost 40seed companies, are the transactions inquestion.

Petitioner challenges Entry 39 of ScheduleC to the Maharashtra Value Added TaxAct, 2002 (“the MVAT Act”) wherein therespondents are (1) the Union of India, (2)the State of Maharashtra and (3) thePrincipal Commissioner of Service Tax and(4) the Commissioner of Sales Tax and thatthe exercise of power of the RespondentNo.1 under Entry 54 in List II of theConstitution is ultra vires as it encroacheson the power vested exclusively in theUnion under Entry 97 in List I. The HighCourt observed as under:-

1. The principal question of this disputeis whether these agreements wherebythe ‘Monsanto technology’ is grantedby the Petitioner to the seed companiesamounts to mere permissive use and,therefore, a service under Section65(B)(44) of the Finance Act, 1994 (“Finance Act”) read with Entry 97 ListI of the Constitution, or whether it is a“deemed sale” in the nature of“transfer of right to use goods” underclause (b)(iv) of the Explanation to


Section 2(24) of the MVAT Act readwith Article 366(29A)(d) and Entry 54List II of the Constitution.

2. The first issue is whether there is a‘transfer’ within the meaning of Article366(29A)(d). The essence of a ‘transfer’is the divesting of a right or goods fromtransferor and the investing of the samein the transferee as the seeds embeddedwith the technology are transferred.Monsanto India is divested of thatportion of the technology embedded inthese seeds which are fully vested inthe sub-licensee. The effective controlover the seeds, and, therefore thatportion of the technology that isembedded in the seeds, is entirely withthe sub-licensee as the sub-licensee isnot bound to use the seeds inaccordance with Monsanto India’swishes. Monsanto India cannot furtherdictate to the sub-licensee what he or itmay do with these technology infusedseeds. The sub-licensee can do as itwishes with them. It may not use themat all. It may even destroy the seeds.Upon the completion of the delivery ofthose seeds, the petitioner has nothingat all to do with the technologyembedded in those seeds given to thesub-licensee. In other words, thetransfer is to the exclusion of MonsantoIndia.

3. A fabric or textile retailer, for instance,or one dealing in electronics, may havemultiple brands on sale. This is not acase of a transfer, the right to the retailer

is a mere right to display, and there isno transfer of the right to use thosemarks. There is a mere permission todisplay goods bearing the mark. Anagreement that allows for a mere rightto display would be purely a service,and never a sale. At the end of theagreement, the retailer would have tocease all display of the mark; anycontinued use would be aninfringement. The fact that the retailervends goods bearing those marks doesnot in any sense confer on himownership of those marks, nor does itdivest the proprietor of those marks ofany of the incidents of proprietorship.

4. As per Monsanto India’s sublicenseagreement, the term of the agreement,is for an initial period of ten years andis further renewable in increments offive years by mutual consent of bothparties, unless it is otherwiseterminated earlier and that after theexpiry or termination of the agreement,the sub-licensee is not bound to returnto Monsanto India any portion of theinitial seeds given under theagreement. The control (andownership) of the technologycontained in those donor seedsproduced by the sub-licensee is withthe sub-licensee. Monsanto India hasnothing whatsoever to do with thisportion of the technology. The sub-licensee is given a two year window tosell or otherwise dispose of anyremaining GMO planting seeds.


After this period, Monsanto India hasthe option of requiring the sub-licenseeto sell these planting seeds to MonsantoIndia itself or to dispose them for non-planting purposes. The ownership ofeven the planting seeds is with the sub-licensee and Monsanto India canfurther sublicense the BollgardTechnology to a maximum of threeother companies in the same territoryas that the of the original sub-licensee.For additional transfers, MonsantoIndia would have to first consult thesub-licensee. This suggests that atransfer of the right has, in fact, takenplace. The degree of territorialexclusion is irrelevant. The question iswhether or not there is any exclusivity.If it were mere permissive use, therewould be no question of the MonsantoIndia having to first consult the sub-licensee before effecting furthertransfers.

5. Further, the sub-licensee can assign theagreement and its rights andobligations under it to its wholly-owned subsidiaries without MonsantoIndia’s permission which can neverhappen in a case of a permissive use.In law, a wholly-owned subsidiary is adistinct legal entity. In a case of serviceor permissive use, a person can neverassign the goods or rights to a thirdperson.

6. When one buys a book from Amazonfor their Kindle device, Amazon can

transfer the intellectual property of thebook to multiple other userssimultaneously, but each singletransaction would still be a sale. Thiswould also be true of the example of amusic CD. The CD is the ‘medium’ bywhich the intellectual property, viz. thesongs, passes to the buyer. Themanufacturer can sell it to an end-useror to an intermediate retailer. The samesong can be put on countless CDs. Thistoo is a sale. When one buys a car, onebuys the technology that is containedin the body of the car, the body is justthe medium. Similarly, on iTunes,when one buys a song, the song istransferred into a format which isaccessible to the buyer, a proprietaryformat that needs a special device orsoftware. Yet it is a sale. LimitlessiTunes users can buy the songsimultaneously. This is a sale to eachof them. In the case of CD containingsoftware, say for example MicrosoftWord, the medium would again be theCD holding the intellectual property,which would be the softwaretechnology. This would also be a sale,despite the fact that this same softwaretechnology could be put on unlimitednumber of CDs and sold to multipleusers simultaneously. Effective controlof that particular software on that oneCD is passed to the buyer. The buyercould use it, alienate it, destroy it, anddo anything at all that he likes with it.If he made illicit copies of it, this would


constitute infringement and that initself would not make the transfer ofthe software on a CD a service. Even ifthe buyer transferred this nontransferable software, it would amountto a breach of contract provided in theCD package, just as it would underMonsanto India’s sublicensingagreement. However, this does not doanything to disqualify the transactionitself from being a sale. These are allsales.

7. The most fundamental aspect ofpermissive use of goods is that at theend of the period for which the use isgranted, the goods must be returned tothe transferor. When a car is taken onhire, a fee is paid and the car can beused for a certain period of time.During this time, the person renting thecar can only use it. He cannot part withit and certainly cannot destroy it. Oncethe period of hire comes to an end, thecar must be returned to the transferor.Therefore, the effective control over thecar remains with the transferor.Similarly, in the case of a book library,the books must be returned to thelibrary. With the Kindle Unlimited, onemust pay a subscription fee to gainaccess to an unlimited number of booksin the proprietary AZW format. Whenthe subscription expires, all the booksare repossessed. iTunes Radio too is asimilar concept. A subscription fee ispaid, which allows access to music.Once this expires, access to the music

is denied. These are cases of permissiveuse. The Monsanto India sub licensingtransaction could only be a service in acase where the seed companies gaveMonsanto India a bag of seeds tomutate and improve with the BollgardTechnology which would, thereafter,be returned to the seed companies.

8. One may ‘purchase’ a license toMicrosoft Office or Adobe Photoshop.This may be a one-off, standaloneproduct, delivered either by downloador on physical media. That is for theuser to keep and do with it what hewishes (except, of course, attemptingto decompile it). He does not have touse it all; he can destroy the media andall personal copies of it. The samesoftware is also available for asubscription for an annual or monthlyfee, the software can be downloadedand used. If the subscription ends, atthe very least updates end and verypossibly the software will not functionoptimally. The latter may be a service,very like car rental or book borrowingfrom a library. The former is clearly asale. The subject of the levy is not thetechnology nor the medium but thelicense and the terms of that license aredeterminative.

9. Where a license is purchased, it is stilla sale, although what the user has‘purchased’ is the right to use thesoftware. Every license has a uniquekey and every sale is therefore uniquely


identified. The purchase is therefore atransfer of the right to use thatparticular, identified software. Theproprietary rights to the software donot have to be ‘sold’ or ‘transferred’.Microsoft and Adobe retain all thoserights, and all intellectual propertycontinues to vest in them. This is, atransfer of the right to use thatsoftware, and to that extent, theintangible (the software) is sold but theterms of that license allow the softwarevendor to retain complete seizing anddominion over all intellectual propertyrights.

10. Monsanto India’s case is no different.Its sub-licensee do not acquire anyproprietary intellectual property rightsover the Bollard Technology; MonsantoIndia’s and its parents’ patents,copyright, marks and other intellectualproperty rights are preserved intact,unaffected by the sublicensing. Thisdoes not warrant the applicability ofMVAT.

Subway Petition:-

Subway is a private limited company andwas granted a sub-license by SubwayInternational B.V. (“SIBV”), a Dutchlimited liability corporation to establish,operate and franchise others to operateSubway- branded restaurants in India.This non-exclusive license was granted toSIBV itself by Subway SystemsInternational Ansalt, which in turn was

granted such a license by Doctor’sAssociates Inc., an entity that owns theproprietary system for setting up andoperating these restaurants. Theserestaurants serve sandwiches and saladsunder the service mark 'Subway'. Theagreement includes not only the trademark Subway, but also associatedconfidential information and goodwill,such as policies, forms, recipes, tradesecrets and the like. Subway enters intofranchise agreements with third parties,under which it provides specified servicesto the franchisee. In return, the franchiseeundertakes to carry on the business ofoperating sandwich shops in Subway’sname. The agreement only provides for avery limited representational or displayright, and the franchisee cannot transfer orassign these exclusive rights to any thirdperson.

Subway also reserves the right to competewith these franchisees in the agreement.Under this agreement, Subway receivestwo kinds of consideration, one being aonetime franchisee fee which is paid whenthe agreement is signed; and the second isa royalty fee paid weekly by the franchiseeon the basis of its weekly turnover. Underthese agreements, the franchisees have nomore than a right to display Subway’sintellectual property in the form of marksand logos, and a mere right to use suchconfidential information as Subwaydiscloses and as prescribed by the franchiseagreement.


Subway filed a writ petition challengingItem (12) under the Notification No. VAT-1505/CR-114/ Taxation-1, dated 1st June2005 as being ultra vires Section 6 of theMVAT Act and Article 246 of theConstitution. The High Court observed asunder:-

1. Under the franchise agreements, thefranchisees have no more than a rightto display Subway’s intellectualproperty in the form of marks andlogos, and a mere right to use suchconfidential information as Subwaydiscloses and as prescribed by thefranchise agreement. Subway has beenpaying service tax to the Union of Indiaon the consideration received by it fromthe franchisees. During November2014, the fourth respondent soughtinformation from Subway under theMVAT Act, whereinafter, a view wastaken that that consideration should besubject to VAT, which was followed bythe issuance of various notices askingto show cause as to why suchconsideration should not be assessed tosales tax, and why no penalty shouldbe imposed on the whole time directorand the executive of the agency thatmaintained Subway’s books ofaccounts.

2. Subway wrote to the fourth respondentrequesting it not to assess tax till adecision was arrived at in the presentwrit proceedings, which it had by thenalready filed which was not accepted

and an ex parte assessment order,including interest and penalties waspassed and a Notice of Demand in thisamount was issued.

3. The argument of the State that theeligibility of VAT is to be determinedby the State, and therefore it could levya sales tax on a transaction whichalready attracts service tax cannot beaccepted, relying on the decisions in (a)Bharat Sanchar Nigam Ltd. V. UOI2006 (2) STR 161 (S.C.) (b) ImagicCreative Pvt. Ltd. V. CTO 2008 (9) STR337 (S.C.) and (c) Association ofLeasing and Finance Companies v.UOI 2010 (20) STR 417 (S.C.), whichemphasize that service and sales tax aremutually exclusive of each other.

4. The petitioner’s transaction cannot besplit into two distinct or severablecomponents is correct and that the Statecannot tax the entire transaction as asale either. If a State was to bepermitted to tax the whole transaction,it would amount to entrenching uponthe powers exclusively available to theCentre under the Union List, which justcannot be done.

5. The agreement between subway and itsfranchisees is not a sale, but is in fact abare permission to use, which is subjectonly to service tax. The fact that theagreement between Subway and itsfranchisee is limited to the preciseperiod of time stipulated in the


agreement is vital to the case and thatat the end of the period of theagreement, or before in case there wasany breach of its terms, the right of thefranchisee to display the mark‘Subway’ and its trade dress, and allother permissions would also end. Thisis what sets this agreement apart fromthe case of Monsanto and itssublicensee.

6. In Monsanto’s case, the seed companiescould do as they pleased with the seedsand could alienate or even destroythem whereas in Subway’s case, thereare set terms provided by theagreement which have to be followed.A breach of these would result intermination of the agreement. There isno passage of any kind of control orexclusivity to the franchisees which isan example of permissive use. Whenthe sublicensing of technology inMonsanto is held to be a transfer ofright to use, this franchising agreementmust be held to be permissive use.

7. There is no exclusivity for Subwayfranchise and the agreement itself saysthat Subway may itself open andoperate its own outlets in directcompetition with the franchisee and thefranchisee cannot unilaterally sub-franchise. The right of transferability isextremely restricted and is impossiblewithout Subway control throughout.Similarly, if there is no requirement ofhaving to cease display and use, or

return the intangible property at theend of the franchise agreement’s term,then the transaction might arguably bea sale.

8. Exercises in co-branding or sub-branding, where one party franchisesits mark on a territorially restrictedbasis and allows the franchisee tocombine it with its own or other marksmay also well have an element of sale.Subway is having a deep and pervasivecontrol and dominion over thefranchisee’s daily operations, withoutceding to the franchisee the slightesthint or latitude in what it may do withthe permitted marks and technology.This is diametrically opposed to theMonsanto model for Monsanto Indiahas no control whatever in what itslicensee does with the BT-infuseddonor seeds that licensee may choosenot to use them at all. There is also noquestion of any ‘return’ or ‘cessation’to Monsanto India. Hence, Subwayfranchise agreement do have any of thenecessary elements of a sale or adeemed sale, consequent to which, itwill not be within the purview of theMVAT Act.

9. Furthermore, nothing which is a servicecan be artificially converted into ortreated as a sale merely by the insertionof an omnibus clause in a state-leveltaxing statute. The introduction of theword ‘franchise’ in the amendedMVAT by notification will have to be


read to mean those franchises that canreasonably and plausibly be construedto have the effect of a sale and cannotbe widened to include agreementsstyled as ‘franchise’ agreements simplybecause of the nomenclature.

10. Mere inclusion of ‘franchises’ under theMVAT Act would not automaticallymake all franchise agreements liable tosales tax. What must be looked at is thereal nature of the transaction and theactual intention of the parties. Theagreement must be consideredholistically, and effect must be given tothe contracting parties’ intentions. Thelabel or description of the document isirrelevant. An agreement styled as afranchise might, on a properexamination, turn out to be nothingmore than a mere license (as inSubway’s case). On the other hand, anagreement that calls itself a licensemight actually be a franchise.

11. If, in a given case, a franchiseagreement is effectively nothing morethan a mere permissive use, it cannotbe made liable to VAT. It would beservice, and hence liable to service tax.When interpreting a taxing statute, orfor that matter any statute, full effectmust be given to the words used by theLegislature. This, however, does notmean that this principle must bestretched to a point which leads to anabsurd result, or one that was not

contemplated by the Legislature. TheLegislature is presumed to know thelaw and to have acted in accordancewith it.

12. What the Legislature intended was toincluded only those franchiseagreements that involved a transfer ofthe right to use or some other aspect ofa deemed sale as defined under Article366(29A) of the Constitution.

13. Once the above conclusion is arrivedthen the argument on situs is irrelevantin as much as if a franchise agreementis not liable to sales tax, then it is notliable to sales tax by any state agencyanywhere, irrespective of location,which would be Delhi.

Hence, the petitions were disposed of inaccordance with the aforesaid manner.

2. Job work/contract manufacturing ofalcholoic liquors fit for humanconsumption – leviable under servicetax – no constitutional invalidity

In Carlsberg India Private Limiter v.UOI 2016 (44) STR 349 (Del.), thepetitioners were engaged in themanufacturing, brewing and bottling ofalcoholic liquor for humanconsumption i.e. beer of their ownbrands as well as brands owned byothers for which they held the requisitelicenses from the Haryana StateGovernment and has been paying State


Excise Duty on the beer manufacturedby them, both under their own & otherbrand names. The petitioners have filedwrit petitions in the High Courtchallenging the constitutional validityof:- (a) section 66D of the Finance Act,1994 r.w. section 65B(40) as amendedby the Finance Act, 2015 andNotification No. 14/2015 –ST dated19.05.2015 and (b) section 65(19) of theFinance Act, 1994 insofar as it pertainsto the taxability of the manufacture ofalcoholic beverages and (c) Show causenotices that have been issued. The highcourt observed as under:-

1. The case of the petitioners is that byamending Section 65(19) of the FA 1994,the Parliament was seeking to usurpthe exclusive jurisdiction of the StateLegislature to levy excise duty on themanufacture of alcoholic liquor forhuman consumption which appears tobe a colourable exercise of legislativepower impinging on the exclusivelegislative domain of the StateLegislature as service tax is not leviableon the activity of manufacture of goods.

2. The two competing entries in thepresent case are Entry 51 of List IIwhich according to the Petitionerscovers the entire field as far asmanufacture of alcoholic liquor forhuman consumption is concerned,whether it is manufactured by oneselfor through another by way of job work.The competing entry, relied upon by

the Respondents to sustain thelegislation, is Entry 97 of List I which isthe residual entry. The question thatthen arises is whether ‘in pith andsubstance’ the provisions underchallenge seek to levy service tax onmanufacture per se of alcoholic liquorfor human consumption, or on theservice aspect of the manufacturewhich is undertaken by one entity foranother on job work basis.

3. In M/s. Hoechst PharmaceuticalsLimited v. State of Bihar (1983) 4 SCC45, the pith and substance doctrine wasdiscussed. The petitioner in that casewas engaged in the manufacture andsale of various drugs throughout Indiaincluding the State of Bihar. Thequestion that arose was whetherSection 5 of the Bihar Finance Act, 1981(‘BF Act’) which provided for the levyof a surcharge on every dealer whosegross turnover during a year exceedsRs. 5 lakhs was constitutionally valid.The High Court had upheld theconstitutional validity of the Section.

4. If the ‘pith and substance’ doctrine isapplied in the instant case, it is evidentthat while Entry 51 of List II envisagesmanufacture of alcoholic liquor forconsumption it does not contemplate asituation of manufacture of alcoholicliquor by one person or entity foranother. Importantly, the taxable eventis the manufacture and it is amenableto state excise duty. However, when it


comes to manufacture for another, inpith and substance it is a serviceperformed by one for another andcannot therefore fall within the ambitof Entry 51 of List II.

5. The matter could be approached byemploying the ‘aspect doctrine’ as well.In the present case, service tax oncontract manufacturing of alcoholicbeverage for human consumption canbe legislated validly by the Parliamentwith respect to Entry 97 in List I. Thecase of the petitioner on the other handis that Parliament lacks the legislativecompetence to do so since the activityis essentially one of manufacture ofalcoholic liquor for humanconsumption which is squarely andentirely covered by Entry 51 of the StateList.

6. The aspect of performing a serviceemerges when the activity ofmanufacture is undertaken by one foranother. As explained in Associationof Leasing and Finance Companies v.UOI 2010 (20) STR 417 (S.C.), servicetax is “a tax on an activity” and a valueadded tax. The value addition is onaccount of the activity that providesvalue addition.

7. Therefore while facially it might seemthat one and the same activity is madethe subject of two imposts, in pith andsubstance what is made amenable toone of the imposts, in this case service

tax, and is the ‘service’ aspect of jobwork and not the activity ofmanufacture by an entity for and byitself per se.

8. Consequently, even applying theaspect doctrine it is possible torecognise the legislative competence ofParliament in seeing to bring within theservice tax net the activity of job workinvolved in the manufacture ofalcoholic liquor for humanconsumption. However, if the brandowner itself is also manufacturing theproduct, the question of collection ofservice tax cannot arise. The questionof rendering service for another personas defined u/s 65B (44) of the FA 1994would arise only where themanufacturing is undertaken, not bythe brand owner, but its outsourcedlicense holder.

9. The essential feature as far as Section65B (44) of the FA 1994 is concerned isthe rendering of a service i.e. anyactivity carried out by a person foranother person for consideration.Therefore, a manufacturing activityundertaken by an entity for itselfcannot be said to be a service providedto anyone and definitely not to itself.Therefore, that activity of manufactureby the brand owner who is also alicence holder could not be said to beamenable to service tax. However,where manufacturing of alcoholicliquor for human consumption is not


manufactured by the entity holdinglicence/brand owner, but by anotherentity holding such licence and the costof manufacture is to be reimbursed bythe principal manufacturer/brandowner and that activity by one personfor another would therefore be ‘service’within the meaning of Section 65B (44)of the FA 1994.

10. Therefore, the challenge to the validityof section 65(19)of the FA 1994 asamended in 2009 and whereby theexpression ‘business auxiliary service’did not exclude the activity ofmanufacture of alcoholic liquor forhuman consumption, whenundertaken by one entity for another,is negatived.

11. W.e.f. 01.06.2015, services by way ofcarrying out any process amounting tomanufacture or production of goodsexcluding alcoholic liquor for humanconsumption was removed from thenegative list and is effectively subjectto service tax from that date. It istraceable to Entry 97 of List I as it doesnot fall within the ambit of any of thetaxing entries in List II.

12. The challenges to the constitutionalvalidity of service tax levy in differentcontexts have by and large failed. InGujarat Ambuja Cements Limited v.UOI 2006 (3) STR 608 (S.C.) thelegislative competence of Parliament toimpose service tax on transport ofgoods was challenged wherein it was

contended that under Entry 56 of ListII which pertained to “tax on goods andpassengers carried by roads or inlandwaterways” was fully covered andtherefore, the Parliament has nolegislative power to levy tax on thetransport of those goods. The Courtexplained there is a distinction betweenthe object of tax, the incidence of taxand the machinery of the collection ofthe tax. The legislative competence isto be determined with reference to theobject of the levy and not with referenceto its incidence or machinery. The levydistinct from the levy envisaged underEntry 56. Mere fact that two levies areto be measured on the same basis, butthat does not make the levy the same.

13. The decision in Association of Leasingand Finance Companies v. UOI 2010(20) STR 417 (S.C.) dealt with financingand leasing services undertaken bybanks and financial institutions. Thechallenge was to the validity of Section65(12) and Section 65 (105) (zm) insofaras they seek to levy service tax onleasing and hire purchase. It wascontended that insofar it also related tofinance and leasing services includingequipment leasing and hire purchase,it was beyond the legislativecompetence of Parliament by virtue ofArticle 366(29A) of the Constitution. Adistinction was drawn between the twokinds of services. It was pointed outthat the funding activity undertaken bythe financing party could be in the form


of loan or equipment leasing or hirepurchase financing. In that process twodistinct and different transactions takeplace, namely the financing transactionand the equipment leasing/hirepurchase transaction. The former waseligible to service tax whereas the latterwould be eligible to local sales tax/VAT. It was pointed out that financingas an activity was different and distinctfrom lease/hire purchase in theessence.

14. The act of manufacturing for anotherby way of job work answers falls underthe plain definition of service underSection 66B (44) of the FA and, hence,it is a fallacy to equate the two activitiesviz., manufacture of such alcoholicliquor by and for oneself andundertaking manufacture for another.The changes brought about in 2015 wasintended to capture the latter aspectwhich is unique to job work for thepurposes of levy of service tax. In hisbudget speech on 28th February 2015,the Finance Minister explained, interalia, that service tax was “to be leviedon service by way of carrying out anyprocesses as job work for productionor manufacture of alcoholic liquor forhuman consumption.

Hence the conclusion were as under:-

a. What is sought to be made amenableto service tax is the activity of contractmanufacturing of alcoholic liquors fitfor human consumption by one entity

for another. Such provision of servicewhich is in pith and substance notcovered under Entry 51 of List II of theSeventh Schedule to the Constitutionof India is certainly amenable to levyof service tax by Parliament which iscompetent to legislate on that aspectwith reference to Entry 97 of List I.

b. The challenge to the validity of Section113(A) (1) of the FA, 2009 by whichSection 65(19) of the FA 1994 stoodamended and Section 66B of the FA1994 read with 65B(40) and Section 66Dof the FA 1994 as amended by Clause(f) of Section 107 and Clause (2) ofSection 109 of FA 2015 are negatived.

c. The validity of the notificationappointing the commencement date ofthe above amendment as 1st June 2015as the date on which the aboveprovision would come into force areupheld.

d. There is no reason therefore to interferewith the SCN issued could be validlytermed as a business auxiliary serviceand amenable to service tax. Therespective contentions of the parties onthese aspects is left open to be urged inthe adjudication proceedings Thechallenge to the Notification No.14/2015/ST dated 19th May 2015 and theSCN is, therefore, negatived leaving itopen to the petitioner to urge allcontentions available to it on meritsbefore the adjudicating authority.


Accordingly the petitions were disposed.

3. Levy of service tax & VAT aremutually exclusive - mere display ofadvertisement of the advertisers onsite not to lead to conclusion that theyhave acquired right to use the sites

In Tim Delhi Airport AdvertisingPrivate Limited v. SpecialCommissioner-II, Department ofTrade & Taxes 2016 (44) STR 349(Del.), Delhi International Airport Ltd.(‘DIAL’) had entered into Operations,Management and DevelopmentAgreement dated 4th April, 2006(‘OMDA’) with the Airport Authorityof India (‘AAI’) whereby AAI hasgranted DIAL, the exclusive right andauthority to operate, maintain,develop, design, construct, upgrade,modernize, finance and manage theIndira Gandhi International Airport.The Petitioner successfully participatedin the bidding process and was grantedthe licence for designing, setting up,developing, operating and maintainingthe Sites for display of advertisementsin terms of a licence agreement dated17th August, 2010 (hereafter ‘theLicence Agreement’).

The sites are located within or in thevicinity of the Indira GandhiInternational Airport, which is asecured area, and as such, access to the

Sites is highly restricted. The Petitionerentered into agreements with variouspersons including advertisementagencies in terms of which theadvertisement content and/oradvertisement material is provided bythe advertiser. The Petitioner prints andmounts the advertisement at the sitesand is remunerated for the same. DIALhas also entered into a SponsorshipAgreement dated 17th August, 2010and a supplementary agreement dated18th August, 2011 with the Petitionerwhereby, the Petitioner was granted anonexclusive licence for procuring,acquiring, installing, managing,maintaining and upgrading 318 nos.Master Antenna Television Screens(MATVs) at designated locations atIndira Gandhi International Airport,New Delhi. The petitioner was licensedto display brand logos on the saidscreens and had entered into anagreement with M/s LG ElectronicsIndia Pvt. Ltd. (‘LG’) for installation of318 MATVs at various display sites atTerminal 3 of the Indira GandhiInternational Airport at New Delhi.Petitioner was also duly registered withthe Service Tax Department andregularly filed its returns of service taxin respect of the aforesaid services forthe period August, 2010 to June, 2012under the category “sale of space ortime for advertisement”. The petitionerfiled a writ petition with the High Courtimpugning that the Commissioner


(Trade and Taxes) Delhi, VAT holdingthat VAT is payable on revenuereceived on account of deemed salepertaining to right to use the hoardings,panels, display boards, kiosks etc.which observed as under:-

1. The legislative competence of theParliament to tax Services is traced toEntry 97 of list I of the Seventh Scheduleto the Constitution of India while thepower of a State to levy Sales Tax orVAT is traced to Entry 54 of List II ofthe Seventh Schedule to theConstitution of India. Undisputedly,States have the power to levy sales tax/VAT but the same is subject to thetransaction falling within theparameters of a ‘sale’. Taxing atransaction of rendering service wouldfall outside the legislative competenceof a State legislature and thus, even bya device of legal fiction, suchtransactions cannot be subjected to levyof Sales Tax or VAT.

2. In Gujarat Ambuja Cements Ltd. v.UOI (2006) 3 STR ITR 608 (SC), theSupreme Court had held that themutual exclusivity which has beenreflected in Article 246(1) means thattaxing entries must be construed so asto maintain exclusivity and that,although generally speaking a liberalinterpretation must be given to taxingentries, this would not bring within itspurview a tax on subject matter whicha fair reading of the entry does not

cover. If in substance, the statute is notreferable to a field given to the State,the court will not by any principle ofinterpretation allow a statute notcovered by it to intrude upon this field.

3. Insofar as the legislative competence ofParliament or State to make a particularlegislation is concerned, the same hasto be considered in the context of thesubject of the legislation. In Union ofIndia v. Shri Harbhajan SinghDhillon: (1971) 2 SCC 779, aConstitution Bench of the SupremeCourt applied the doctrine of pith andsubstance in order to examine whetherimposition of wealth tax on agriculturallands, by virtue of an amendment tothe definition of ‘net wealth’ under theWealth Tax Act brought about by theFinance Act, 1969 fell within thelegislative competence of theParliament or the States. The SupremeCourt has also in several casesexplained the difference between theincidence of tax and the measure of tax.

4. In (a) Bharat Sanchar Nigam Ltd. V.UOI 2006 (2) STR 161 (S.C.) and(b) Imagic Creative Pvt. Ltd. V. CTO2008 (9) STR 337 (S.C.), the SupremeCourt unequivocally held that the levyof service tax and VAT were mutuallyexclusive and even in cases ofcomposite contracts, sales tax wouldnot be payable on the value of the entirecontract irrespective of the element ofservice provided.


5. In cases where the contracts areindivisible, other than those contractswhich are by legal fiction deemed tobe divisible under article 366 (29A)ofthe Constitution of India, the intentionof the parties to the transaction wouldbe material. While, considering theissue whether providingSIM(Subscribers’ IdentificationModule) Cards would be chargeable tosales tax, the Supreme Court, in BharatSanchar Nigam Limited held that if theSIM card is not sold by the assessee tothe subscribers but is merely part of theservices rendered by the serviceproviders, then a SIM card cannot becharged separately to sales tax and thatit would depend ultimately upon theintention of the parties. If the partiesintended that the SIM card would be aseparate object of sale, it would be opento the Sales Tax Authorities to levy salestax thereon.

6. The question whether a transactionwould fall within the parameters of adeemed sale or a service is essentiallya question of fact and would have tobe determined in appropriateproceedings. The fact that the Assesseehas filed its returns for service tax andalso paid service tax may not bedeterminative of the true nature of thetransaction and certainly, theauthorities under the DVAT cannot beprecluded from independentlyexamining the transactions in question.

7. In Bharat Sanchar Nigam Ltd. theSupreme Court had explained that toconstitute a transaction of transfer of aright to use goods, the transaction musthave the following attributes:-

(a) There must be goods available fordelivery;

(b) There must be a consensus ad idem asto the identity of the goods;

(c) The transferee should have a legal rightto use the goods consequently all legalconsequences of such use including anypermissions or licenses requiredthereof should be available to thetransferee;

(d) For the period during which thetransferee has such legal right, it has tobe the exclusion to the transferor thisis the necessary concomitant of theplain language of the statute ;

(e) Having transferred the right to use thegoods during the period for which it isto be transferred, the owner cannotagain transfer the same rights to others.

8. Section 2(1)(zc)(vi) of the DVAT Act isidentically worded as sub-clause (d) ofArticle 366(29A)of the Constitution ofIndia. It is important to note that underthe expanded scope of tax on the saleor purchase of goods, tax on transferof the right to use goods has beenincluded. This is not the same as a taxon the use of goods and the two


expressions cannot be readsynonymously. Therefore, for atransaction to fall within the meaningof Section 2(1)(zc)(vi) of the DVAT Act,it is necessary that there should be atransfer of the right to use.

9. On a plain reading of theaforementioned definition, it isdoubtful whether the petitioner wouldhave any right to transfer any right touse the Sites in question. It is alsoimportant to examine the petitioner’scontention that the sites were beingused by the petitioner for renderingservices and no right to use the siteshad in fact been transferred by thepetitioner. Merely, because theadvertisements of the advertisers weredisplayed on the Sites would notnecessarily lead to the conclusion thatthey had acquired the right to use theSites.

10. A transfer of the right to use goods alsoentails delivery of the goods inquestion. In Bharat Sanchar Nigam Ltd.In the present case, it is not disputedthat the sites in question are located ina restricted area and none of theadvertisers have an unmitigated accessto those sites and sites are retained byDIAL. In the circumstances, it wouldbe difficult to accept the view that thetransactions entered into by thePetitioner with the advertisersconstituted transfer of the right to usethe sites in question.

11. Insofar as the challenge to the orderpassed by the Commissioner u/s 85 ofthe DVAT Act is concerned, the saidorder cannot be read to mean that inevery case where advertisements aredisplayed on hoardings, panels,display boards, kiosks, etc., theadvertisers would be liable to pay VATon the amount received for display ofsuch advertisements. VAT would beapplicable only in cases where it isfound as a matter of fact that there hasbeen a transfer of right to usehoardings, panels, display boards, etc.which constitute goods and cannot beapplied where the necessaryconcomitants of sale u/s 2(1)(zc)(vi) areabsent. Consequently, the order wasmodified and the SpecialCommissioner was directed to considerthe objections filed by the petitioner inlight of the above observations withoutinsisting on pre-deposit of any amount.

12. Insofar as the impugned noticesrequiring the petitioner to producedocuments, such assessments weredirected to be completed keeping inview the observations made above.

Hence, the petition was disposed of inabove said terms.

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


CASC CHENNAI, MEMBERSHIP FEE

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

Individual MembershipAnnual Membership 750.00Life Membership 7,500.00

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

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

CASC BULLETIN - ADVERTISEMENT TARIFF - PER MONTH

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

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

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

Kindly contact [email protected] for the updates.

Rs.


RECENT DECISIONS IN VAT / CST

Condonation delay: Merely because theapplicant is the State, delay cannot becondoned without a proper explanation assection 5 of the Limitation Act, 1963 isequally applicable to the State as well. TheGovernment is a litigant before the courtlike any other litigant. Hence, even toinvoke these aspects of peculiarfunctioning of Government, a specific caseis required to be made out as to which arethose aspects which in a particular casecaused delay in preferring the appeal.“Sufficient Cause” was the essentialcondition for allowing applications forcondonation of delay. The appellant hadfailed to make out such sufficient cause inall the three applications. A general andvague averment was made in the first twonotices of motion as to the cause for delayin preferring the appeals except forattributing it to the various factors relatingto procedural mandates in Governmentfunctioning. This was not sufficient, therewas absolutely no averment in the noticesof motion or even in the submissions as towhich were those peculiar or distinctiveaspects of the Government functioning,which resulted in causing delay of abouttwo years in preferring these appeals. Evenas regards the third notice of motion,though the details of the various internalcorrespondence were given and the causewas attributed to the fact that the specialleave petition was preferred in theSupreme Court of India against the order

CA. V.V. SAMPATHKUMAR

of the Tribunal, the decision of the Tribunalwas dated June 19, 2009 and the specialleave petition was disposed of on February7, 2011 itself. Even if the period consumedin prosecuting the special leave petitionfiled in the Supreme Court of India wasexcluded from consideration, there was adelay of about five years. Such a delaycould not be attributed merely to thefunctioning of the Government andinternal correspondence. The Governmenthad given the sanction to file the writpetition on December 13, 2011 itself. Thedraft appeal received approval thereafterfrom the Department on December 16,2015. No explanation at all is offered forthis delay of four years and the subsequentdelay of again about two months inpreferring this appeal with notice ofmotion. Therefore, the Court held that thedelay could not be condoned. [2016] 93VST 387 (Bom) ADDITIONALCOMMISSIONER OF SALES TAX,VAT-DI, M. S., MUMBAI V. KAYANIBAKERY


Arrears of tax: It is clear from theprovisions of the Partnership Act, that aminor can only be admitted to the benefitsof the partnership and cannot becomeliable to the debts or the loss of thepartnership. Section 30 also clearlyindicates that the minor is not a partner ofthe firm. Therefore, there cannot be anyrecovery action of arrears of tax from aminor who is admitted to the benefits of afirm. [2016] 93 VST 397 (Ker) J.RAJMOHAN PILLAI V.DISTRICTCOLLECTOR, KOLLAM AND OTHERS

Alternative Remedy: Petitioner filed a writpetition alleging that the assessment orderhad been passed in gross violation ofprinciples of natural justice. Perusal of therecord showed that necessary opportunityhad already been granted to the petitionerto defend the proceedings. The question tobe considered was whether on account ofnot giving an opportunity as claimed bythe petitioner, she had suffered anyprejudice or not. Court held that suchissues could not be considered by the courtin a writ petition filed under article 226 ofthe Constitution of India. [2016] 93 VST 403(Ker) N.JAYA V. CTO, ATTINGAL,THIRUVANANTHAPURAM DISTRICTAND ANOTHER

Natural Justice: Notice for assessment wasissued to the appellant, a dealer of LPG gas,alleging that during the relevantassessment year, the appellant hadsuppressed huge turnover based on detailswhich were obtained from the Kerala

Value Added Tax information System uploaded by the appellant herself. On receiptof the notice the appellant submitted herreply requesting the respondent to provideher with the details based on which noticewas issued. She also sought extension oftime for submitting the reply. However anorder was passed demanding tax andinterest. A writ petition filed before thesingle judge was dismissed. In a writappeal filed in this regard the Court heldthat the details that were relied on againstthe appellant were those obtained from theKerala Value Added Tax InformationSystem, which were not uploaded by theappellant, but by the Indian OilCorporation Ltd. When the appellant hadsought those details from the respondentthat those details were not furnished inresponse to the appellant’s request. Evenif the refusal was justified on the groundthat those details should be obtained fromthe Indian Oil Corporation Ltd. and notfrom the respondent such informationshould have been given to the appellant,so that the appellant could haveapproached the Indian Oil CorporationLtd. and obtained the details. This was notdone but order of assessment was passedfastening huge liability on the appellanttowards tax and interest. Thus the orderwas passed in violation of the principlesof natural justice. Therefore, the assessmentorder as well as the order by the singlejudge was set aside. [2016] 93 VST 405(Ker) N.JAYA V. CTO, ATTINGAL,THIRUVANANTHAPURAM DISTRICTAND ANOTHER


Opportunity: The petitioner-dealer wasissued a show-cause notice pursuant to aninspection of its place of business by theEnforcement Officials proposing a revisionof the assessment stating that the dealerhad purchased assets and liabilities andthereby goodwill and intellectual propertyand brand name were purchased and thatthe goodwill and intellectual propertywere intangible goods liable to tax at fourper cent under section 12 of the TNVATAct, 2006. The dealer in its reply stated thatit entered into a business transferagreement for transfer of the business as awhole and for sale of any asset or goodsand that merely because the schedule tothe agreement set out a value for thepurpose of valuation, it did not mean thatthe sale was in respect of that asset, thateven otherwise, goodwill or brand couldnot be stated to be consumed or used inmanufacture and were not inputs formanufacturing activity, that the dealer hadrequested the authority to grant 15 days’time to produce the records relating toinput-tax credit. On a writ petition againstthe order of revision of assessment theCourt held that the assessing authority wasrequired to examine whether it was a caseof transfer of business as a whole, perusethe business transfer agreement and ifnecessary call for other records. This hadnot been done. Therefore, the findingrecorded by the assessing authority was tobe set aside and remanded for freshconsideration and that there was no

sufficient opportunity granted to thedealer, since after the receipt of the noticethe dealer sought for time at least of 15 daysand this had not been either accepted orrejected. [2016] 93 VST 408 (Mad)PREETHI KITCHEN APPLIANCES (P)LTD.V.ASSISTANT COMMISSIONER(CT), SHOLINGANALLURASSESSMENT· CIRCLE, PERUNGVDI,CHENNAI

Settlement: During the pendency ofappeals by the dealer and by theDepartment to the Tribunal arising out ofa common order of the Appellate AssistantCommissioner, the dealer challenging theorder of remand and the Departmentchallenging the cancellation of penalty, thedealer filed an application for settlementunder the Tamil Nadu Sales Tax(Settlement of Arrears) Act, 2010. Theapplication was accepted and the dealerpaid the entire arrears of tax together with25 per cent of the interest computed on theentire arrears at six per cent per annum.The application for settlement was allowedand a certificate in terms of section 8 wasissued. As a consequence, the Tribunaldismissed the dealer’s main appeal, butallowed the appeal of the Departmentarising out of penalty. On a revisionpetition, the Court held that once acertificate is issued in terms of section 8 ofthe Act, the dealer stands discharged of anyfurther obligations by virtue of sub-section(1) of section 8. The application forsettlement was not only in respect of the


arrears of tax and but also in respect ofpenalty. The order of the Tribunal wasliable to be set aside. [2016] 93 VST 430(Mad) XEROX MODI CORPORATIONLTD. Vs STATE OF TAMIL NADU

Revision: The assessing authority hadexpressed the opinion with regard to therate of tax on the de-oiled cake whilescrutinising C forms which is an expressionof opinion on the available materialsbrought on record and, therefore, the firstappellate authority and the Tribunal werejustified in concurring with that order. TheRevenue had not challenged the orderpassed by the Joint Commissioner. TheHigh Court had not expressed any opinionon this score. Considering the cumulativeeffect of the facts and law, it must be heldthat there should not have been reopeningof assessment on a change of opinion laterto the decision of the Supreme Court inAgricultural Produce Market Committeev. Biotor Industries Ltd. [2014] 73 VST 1(SC) whereby the Apex court concludedthat there was a distinction between oilcake and de-oiled cake and they were twodifferent commercial products. [2016] 93VST 441 (SC) RAVI PRAKASHREFINERIES (P.) LTD. V.STATE OFKARNATAKA

Input Tax Credit: An assessment orderwas passed by the authority imposing tax,interest and penalty since the registrationcertificate of the seller from whom theassessee had purchased goods was

cancelled ab-initio. An appeal filed beforethe Deputy Commissioner was partlyallowed by way of reducing the quantumof penalty. The Tribunal on an appealpartly allowed it by holding that input-taxcredit which was excess amount lying withCommercial Tax Department should havebeen carried further for the next year andthe authority ought not to have imposedinterest or penalty. The Department filedan appeal and the assessee also challengedthe judgment claiming that he would beentitled for input-tax credit since the samehad not been granted only on the groundthat the registration of the seller had beencancelled with retrospective effect anddismissing the appeal filed by theDepartment, the court held that theTribunal had not committed any error indeleting the interest as well as penaltyimposed upon the assesse as it was anundisputed fact that when the assessee hadpurchased the goods from the dealer/seller, the seller/dealer was registeredunder the provisions of the Value AddedTax Act and that his registration had beencancelled subsequently. Therefore, theassessee could not be deprived of his rightof getting credit of input tax availableunder the provisions of the Value AddedTax Act. [2016] 93 VST 511 (Guj) STATEOF GUJARAT V. DELTA RUBBER ANDPLASTICS PRODUCTS

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


LEGAL UPDATE ON DIRECT TAXES

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

I. Whether assessment made in respectof undeclared income, surrenderedvoluntarily, for the business carriedon outside the books of account in thestatements recorded (u/s 132(4) by wayof oath) by assesse and his relativesafter the search as well as materialscollected in course of search is valid?

The issue came up for consideration inthe case of Smt. DAYAWANTI v. CIT[2016] 75 taxmann.com 308 (Delhi HC)October 27, 2016

FACTS:

1. The assessee, being a proprietor, hasbeen carrying on the business ofmanufacturing ‘gutka’. Her sons alsohave constituted partnership andcarried on the same business. Searchand seizure operation was carried outon 22nd March, 2006 in the premisesof assessee’s group entities and seizedmaterials in the form of documentskuchaparcha, sale deeds etc. Statementsu/s 132(4), by administering oath, werenot recorded during the course ofsearch but recorded at later dates on18-4-2006 and 3-5-2006 from theassessee and her family memberswhereby it was admitted that theassessee was proprietor only by record

and the entire business was carried outby her sons and further surrendered anadditional income to the tune of Rs.3.50crores for the business carried outoutside the books of account.

2. In response to the notice issued u/s153A on 21-8-2006, the assesseefurnished copies of returns that havefiled already u/s 139(1); wherein saleswas declared at Rs. Rs. 69,28,582/-,Gross Profit at Rs. 7,30,961/- and rateof gross profit @ 10.55%. Whilecompleting assessment u/s153A, AOrejected the books of accounts for non-production of vouchers andconfirmation of balances and estimatedthe sales at Rs. 1.00 crore by adoptingthe rate of GP @ 20%, besides otheradditions.

3. Aggrieved the assessee filed an appealwith a contention that the estimation ofturnover and rate of G.P. are arbitrary


and not based on any materials. CIT(A) directed the AO to adopt the bookturnover of as Rs. 69,28,582/- as thereis no evidence for its suppressionhowever with a rate of GP @ 12% forincome estimation, which was, furtherappealed by both the parties. ITATconfirmed the turnover of Rs.1 crorebased on admission made by theassessee that there were sales outsidethe books of account with a rate of G.P@ 15%, which has been adopted in theassessment of subsequent years.

4. For the contention of assessee thatproceedings initiated u/s 153A of ITAare invalid since no search warrant hasbeen issued in the name of assessee,the ITAT held that since the address ofthe premises has been mentioned in thesearch warrant, which was also theresidence and place of business of theassessee and further having carried outa search the proceedings cannot beturned invalid at a later date.

5. On appeal to HC, the assesseecontended that the estimation madewas not based on the materials seizedand not restricted for the period forwhich it relates; but relied on theincome surrendered in the statementsrecorded which do not have valuesince these were not recorded duringthe search but at later dates.

HC DECISION:

6. Relying on the decision ofBHAGIRATH AGGARWAL v. CIT[2013] 351 ITR 143/215 Taxman 229/31taxmann.com 274 (Delhi) it is held thatAO is empowered to compute the totalincome for six assessment years priorto the year of search u/s 153A and thereis no limitation under the statue tocurtail the jurisdiction of AO.Affirming the decision of ITAT foradditions and rate of G.P. it is held thatthe same are not arbitrary in the presentcase where concealment is habitual andthe possibility of periodical destructionof records.

BUTTRESSES/GROUNDS for theDECISION:

Onus lies on the assessee to prove thestatements as incorrect:

7. Additions made relying on statementsrecorded during search operationscannot be deleted in the absence ofproving the statements as incorrect -BHAGIRATH AGGARWAL v. CIT[2013] 351 ITR 143/215 Taxman 229/31taxmann.com 274 (Delhi).

Inference and estimation on the basisof seized material of similartransactions for the remaining periodof 6 years u/s 153A:


8. Where a bill book disclosing a sale fora period of 19 days, which was notpreviously shown in the account booksmaintained, inference and estimationfor the whole year for the purpose ofassessment under M.P. Sales tax Actand Central Sales tax Act held validand the estimation is not arbitrary- CITv. H.M. ESUFALI H.M. ABDULALI[1973] 90 ITR 271 [SC]

Voluntary admissions u/s 132(4) haveevidentiary value:

9. An admission in statements recordedu/s 132(4) is an extremely importantpiece of evidence but it cannot be saidthat it is conclusive; however the onuslies on the part of the assessee to provethat it is incorrect in order to struckdown its probative value. Admissionmade voluntarily becomes evidencewhereas by force not so -PULLANGODE RUBBERPRODUCTS CO. LTD. v. STATE OFKERALA (1973) 91 ITR 18 SC.

Statements u/s 132(4) [search] vs133A(3)(ii) [survey]; the former hasevidentiary value and the latter not so:

10. Section 133A(3)(iii) enable theauthority to record statement of anyperson which may be useful for orrelevant to any proceeding under ITA,

whereas u/s 134(2) the authority haspower to examine any person on oathand can record sworn statement in thecourse of any search and seizure.Consequently statement u/s 132(4) hasevidentiary value whereas statementrecorded u/s 133A(3)(iii) has not so. -CIT v. DHINGRA METAL WORKS[2010] 328 ITR 384/[2011] 196 Taxman488/9 taxmann.com 83 (Delhi); PAULMATHEWS v. CIT [2003] 263 ITR 101/129 Taxman 416 (Ker HC)

Scheme of search assessment u/s 153A:

11. Finance Act 2003 introduced section153 for search assessment w.e.f.01.06.2003 which does not provide thatit shall be made strictly in accordancewith evidence/materials/informationfound as a result of search, which is anessential requirement in the erstwhilesection 158BB prior to 51.05.2003. Thesummary and legal position of searchassessment u/s 153A discussed in thedecision CIT v. KABUL CHAWLA[2016] 380 ITR 573/[2015] 234 Taxman300/61 taxmann.com 412 [Del HC] isbriefly as under:

a. Notice u/s 153A(1) is mandatoryrequiring to file returns for sixassessment years immediately prior tothe year of search conducted u/s 132.


b. Assessments and reassessmentspending on the date of the search shallabate and fresh assessment ought to becarried out u/s 153A.

c. There will be only one assessment orderfor the assessment of six years six AYsin which both the disclosed and theundisclosed income would be broughtto tax.

d. Though section 153A is silent that theadditions should be strictly on the basisof evidence found in the course ofsearch, the estimation or inferencemade by AO cannot said to be arbitraryif the evidence obtained during thecourse of search has relationship withpost search material and otherinformation available.

e. The word ‘assess’ in Section 153A isrelatable to abated proceedings and theword ‘reassess’ to completedassessment proceedings; in the absenceof discriminating material, thecompleted assessment/s can bereiterated and the abated assessment/s can be made.

f. In case of pending assessments only oneassessment ought to be made u/s 153Aon the basis of findings of the search.

AUTHORS’ NOTE:

Search warrant:

12. The issue of a search warrant by theCommissioner under section 132 is nota judicial or quasi-judicial act - ITO v.SETH BROS. [1969] 74 ITR 836 (SC);Validity of a search cannot bequestioned where the places relating topartners of firm and directors ofcompanies in the same group had alsobeen correctly described in the searchwarrant. There is nothing wrong inauthorizing search of a group ofconcerns by a single warrant issuedunder section 132 - JOSE CYRIAC v.CIT [2011] 336 ITR 241 (Ker.). Non-issuance of warrant of authorization toassessee and absence of its service uponhim does not vitiate search - RAGHURAJ PRATAP SINGH v. ACIT [2009]179 Taxman 73 (All.); Where theCommissioner signed blank warrantsin which the IAC filled the particulars,the search would be illegal and thearticles seized were liable to bereturned - JAGMOHAN MAHAJAN v.CIT [1976] 103 ITR 579 (Punj. & Har.);MANMOHAN KRISHAN MAHAJANv. CIT [1977] 107 ITR 420 (Punj. &Har.).

13. Illegality of the search does not vitiatethe evidence collected during such


illegal search - Dr. PARTAP SINGH v.DIRECTOR OF ENFORCEMENT[1985] 155 ITR 166 (SC).

Statements on oath u/s 132(4):

14. Where no incriminating materials werefound during course of search,statement of assessee recorded undersection 132(4) have no evidentiaryvalue - CIT v. NARESH KUMARAGARWAL [2015] 53 taxmann.com306 (AP); Statements recorded one andhalf months after search could not bebrought under purview of section132(4) and, hence, could not be basis ofassessment - CIT v. BALAJI STEELPROFILES [2015] 59 taxmann.com 375/232 Taxman 806 (AP & Telangana).The burden is on the AO also to provethat the admitted income is really theincome of the assessee where suchstatement is retracted.

‘Person’ in section 153A includesservants also:

15. The expression in section 153A, ‘in thecase of a person where a search isinitiated under section 132’ cannot begiven a restricted interpretation so asto exclude the servants and agents ofthat ‘person’ - TAPASYA PROJECTSLTD. v. Asstt. CIT 2009 Tax LR 30(All.). Further, Rule 112A(3) empowers

the AO to examine on oath any otherperson; however a reasonableopportunity shall be provided to theperson to show cause why suchstatement/material should not be usedagainst him.

Evidence for additions in blockassessment u/s 153A for a period ofsix years:

16. Additions made u/s 153A need not berestricted or limited to incriminatingmaterial found during course of search- FILATEX INDIA LTD. v. CIT [2014]49 taxmann.com 465 (Delhi). It is notrequired/mandatory to collectinformation and evidence for each andevery year for six previous years inorder to initiate proceedings undersection 153A - SUNNY JACOBJEWELLERS & WEDDING CENTREv. Dy. CIT [2014] 48 taxmann.com 347(Ker.).

II. Whether the AO can invokeExplanation 3 to section 43(1) anddisallow the claim of depreciation on‘distribution network’, beingintangible assets, on the premise thatthe assets were revalued with anintention to claim higher depreciationin a situation where the assets weretransferred between the relatedparties?


The issue came up for consideration inthe case of SANYO BPL (P.) Ltd. v.DCIT, Circle -12(3), BENGALURU[2016] 75 taxmann.com 253 (Bangalore- Trib.) NOVEMBER 4, 2016

FACTS:

1. The assesse-company acquiredmanufacturing of colour televisionfrom BPL LTD on a slump sale basis,in which M/s. BPL Ltd is holdingsubstantial share to the extent of 50%.Though there is no dispute in thefixation of sale consideration but issuearose on the apportionment of valuebetween depreciable assets and non-depreciable assets. Of the sale valuedetermined Rs.81.19 crores, value forland fixed at Rs.6.22 crores and valuefor depreciable assets at Rs.73.83 crores;however the value of WDV in the booksof BPL Ltd before transfer was only atRs.15.75 crores and increase in valuedepreciable assets comes at Rs. 58.80 asper the report of the independentvaluer, which in fact claimed by theassessee as value of intangible assetsbeing distribution network. During thecourse of assessment, the AO acceptedthe increase in value of depreciableassets only 25% and by invokingExplanation 3 to Sec. 43(1) disallowedthe balance increase in the cost of

depreciable assets and consequently itsdepreciation.

2. CIT (A) confirmed the disallowanceand on further appeal;

ITAT DECISION:

3. Right to use distribution network doesnot create any intangible assets andholding a substantial share of 50% bythe seller company would lead to inferthat fictitious price has been put on theasset in order to avail higherdepreciation under the ITA andtherefore, the disallowance by AO isjustified. The principles enunciated inthe case of MCDOWELL& CO. LTDv. CTO [1984] 154 ITR 148 are squarelyapplicable as it is nothing but acolourful device adopted with anintention to avoid tax.

BUTTRESSES/GROUNDS for theDECISION:

4. Goodwill so ascertained is a depreciableasset in the light of Explanation 3(b) tosection 32(1) of the Act as a right as “anyother business or commercial rights ofsimilar nature” and the law is fairlysettled to the extent that excess ofconsideration paid over assets takenover assets constitutes goodwill and thesame is eligible for depreciation - CITv. SMIFS SECURITIES LTD. [2012]


348 ITR 302 (SC). However, what isdescribed as “goodwill” in the balance-sheet of business need not always bean intangible asset entitled todepreciation and in order to claimdepreciation, it should lose its value byuse.

5. Section 43(1) the words ‘cost’ hasprefixed the word ‘actual’. The originalcost of a particular asset is a questionof fact which has to be determined onthe evidence of material; however, ifcircumstances exist showing that afictitious price has been put on the assetor there is fraud or collusion betweenthe vendor and the vendee for inflationor deflation of value for ulteriorpurpose, then it is open for the Income-tax authorities to ascertain the actualcost - GUZDAR KAJORA COALMINES LTD. v. CIT [1972] 85 ITR 599[SC]; JOGTA COAL CO. LTD. v. CIT[1965] 55 ITR 89 [Cal.]

III. Whether condonation of delay can berejected by CBDT when assessee hadencountered certain hardship ordifficulty in uploading his return, dueto a technical snags in the website ofthe IT Department consequent to thelast hour rush in filing returns?

The issue came up for consideration inthe case of CBDT v. REGENINFRASTRUCTURE & SERVICES

(P.) LTD. [2016] 75 taxmann.com 135(Madras) NOVEMBER 1, 2016

1. For the Assessment Year 2010-11, thedue date for filing return has beenextended from 30.09.2010 to 15.10.2010,as general life has been disturbed dueto floods; due to slow down in thewebsite of income tax department theassesse could upload its return sometime past 00.00 hours on 15.10.2010.For an application moved u/s 119 (2)(b) of ITA to condone the delay of onein filing income tax return beforeCBDT, the application was rejected onthe only ground that since there wasno floods in the State of Tamil Naduthe return could have easily filed in thenormal period (i.e. on or before30.09.2010) or at least any time up tothe extended period of 15.10.2010.

2. In response to a writ, the Honble HighCourt has condoned the delay byholding that Board has not exercisedits discretion properly in keeping withthe legal principles relevant for suchconsideration.

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


GAIN ARISING ON TRANSFER OF DEPRECIABLE ASSET[SS. 41 (2), 48, 49 &112 V. SS. 50, 50A & 50C]

Limitation of Definitions:

S. 2 of the Income tax Act, 1961, definesvarious expressions which occur in the Actto avoid ambiguities. Definitions are oftenused to encapsulate a concept so as to save,having to repeat it every time it is used andthus, help to shorten the legislation. Alldefinitions given in an interpretationclause are normally enacted subject to theusual qualification - “unless the contextotherwise requires”. The meaning of aword or expression defined may have tobe departed from on account of the subjector context in which the word had beenused and that will be giving effect to theopening sentence in definition sectionnamely “unless the context otherwiserequires”.

Long/short term capital asset/gain:

Capital asset means property of any kindheld by an assessee, whether or notconnected with his business or profession[S. 2 (14)]. Long term capital gain meanscapital gain arising from the transfer of along term capital asset [S.2 (29B]. Short-term capital asset means a capital asset heldby an assessee for not more than thirty sixmonths immediately preceding the date of

transfer [2(42A]. Thus, in order toconstitute a long term capital asset, it mustbe a capital asset and it must have beenheld for more than thirty six months. Aconjoint reading makes it appear thatdepreciable business asset is a capital assetand if held for more than thirty six months,it is long term capital asset and the gain ontransfer is long term capital gain.Nevertheless, it is subject to the context,the collocation and the object of S. 45 to S.55A in Chapter IV E of the Act

Non-obstante clause and legal fiction inS.50:

S. 50 starts ‘notwithstanding anythingcontained in clause (42A) of section 2’ andends ‘such excess shall be deemed to bethe capital gain arising from the transferof short term capital asset’. This sectiongave rise to a doubt whether gain on saleof a depreciable asset held for more thanthirty six months would be a short termcapital gain? As a consequence:

(i) Whether such gain arising on transferof depreciable asset would be eligiblefor deduction under sections 54E, 54ECand 54F of the Act?


(ii) Whether the non-obstante clause andthe legal fiction would have the effectof denying concessional rate of taxprovided U/s 112 to the capital gainarising on transfer of depreciable asset?

The non-obstante clause and the legalfiction created U/s 50 override theprovisions of sections 48 and 49, whichdeal with the manner and method ofcomputation of capital gain arising ontransfer of depreciable asset. Theprescription U/s 50 stops withcomputation of capital gain on depreciableasset and the legal fiction should not bestretched beyond the purpose for which itwas created, the purpose being to adoptcost of acquisition at WDV and not toextend indexation benefit to a long termdepreciable asset. The legal fiction vanishesonce its purpose is served. Therefore, it isincorrect to assume that the said fictionhold good for entire Chapter IV E of theAct.

For the above reason Courts whileinterpreting S. 50 r/w 54E [CIT v. ACEBuilders (p) Ltd (2006) 281 ITR 210], S. 50r/w 54F [CIT v. Rajiv Shukla [(2011) 334ITR 138] and S. 50A r/w 54 EC [CIT vUnited Paper Industries (2014) 42Taxmann.com 79], have held that evendepreciable assets held for more than threeyears are capital assets for the purposes of

the Act. The Supreme Court upheld theview of the High Courts in CIT v DempoCo. Ltd [(2016) 387 ITR 354 (SC)]. The firstissue that specified investments U/s 54E,54EC and 54F, made out of capital gainarising on transfer of depreciable asset, areentitled to deduction has been finallysettled in favour of the tax payer.

Concessional rate of tax (S. 112):

The second question whether capital gainarising on sale of a depreciable asset isentitled to be taxed at the concessional rateprescribed U/s 112 of the Act is yet to befinally resolved. Nevertheless, the deemingfiction of S. 50 has a limited application inas much as the fiction created there underhas the effect of qualifying the applicationof only sections 48 and 49 and does notcontrol any other provisions of the Act. Inother words, it provides for the manner ofcomputation of the capital gains; but notthe rate of tax on capital gains U/s 112 ofthe Act. It is settled law that “a legal fictionis a conscious error, a deliberate falsehood.It can therefore, never attain apotheosis norcan it be used to work injustice. We haveto interpret legal fiction in such a manneras would not work injustice to a party foreven when the court steps into the worldof legal fantasy the principle of equity andjustice cannot be lost sight of.” There is noreason why a different lens is required todecide this issue as well.


Omission and reintroduction of S. 41 (2)– impact:

A. S. 41 (2) was omitted w.e.f AY 1988-89and was reintroduced from AY 1998-99.The legal position, till omission viz. AY1987-88 was that profit on transfer of adepreciable asset, restricted to cost ofacquisition or sale price whichever was lesswas assessed as balancing charge U/s 41(2) and any amount received in excess ofthe original cost was considered undercapital gain as in the case of any othercapital asset. This was the accepted practicetill 31.03.1987.

B. The Taxation Laws (Amendment andMiscellaneous Provisions) Act, 1986reintroduced the concept of ‘Block ofAssets’ by substituting S. 2 (11) to includeintangible assets also to match with themarch of times, which created assets likeknow-how, patents, copy rights, trademark, licences, franchises etc in bigbusiness houses. Consequently, with effectfrom 01.04.1988, S.43 (6) (c) was introducedto provide for computation of WDV ofblock of assets and S.50 was introduced toprovide a method of taxing the excess ofsale price over WDV of ‘Block of Assets’as arrived at u/s 43 (6) (c). Consequently,S. 41 (2) was omitted w.e.f 01.04.1988. TheExplanatory Memorandum to TaxationLaws (amendment and miscellaneousprovisions) Act, 1986 explained the newscheme of taxation as under:

“It is proposed that the assets which are eligiblefor 100 per cent depreciation in the initial yearitself will continue to get this benefit. Inaddition, there will be only two rates ofdepreciation presently proposed at 33 1/3 percent and 50 per cent in respect of plant andmachinery. Because of the introduction of thesystem of allowing depreciation on blocks ofassets at enhanced rates, both these provisions[sections 32(1) (iii) and 41 (2)] have lost theirrelevance and hence they have been omitted bythe Amending Act.

The term ‘group of assets within a class ofassets’ for the purpose of S.50 wasexplained in CIT v Ansal Properties &Infrastructure Ltd [2012] 207 Taxman 61(Delhi) thus “Block of assets for purposeof S.50 would mean assets of all units ofassessee having same rate of depreciationand not assets of only one unit”.

C. However, the system of allowingdepreciation on blocks of assets at enhancedrates was never put on the statute book. Bythe Finance (No: 2) Act, 1998, S. 32 (1) (iii)and S. 41 (2) were restored back on thestatute with retrospective effect, thusrestoring back the scheme of levy ofbalancing charge and S.50A wasintroduced to provide for method ofcomputing capital gain on transfer ofdepreciable asset other than ‘Block ofAsset’. Clause 18 to Notes on clauses to thesaid Finance Act read:


“It is proposed to insert sub-section (2) in s.41 so as to provide for manner of calculation ofthe amount which shall be chargeable toincome-tax as income of the business of theprevious year in which money is payable forbuilding, machinery, plant, or furniturereferred to in the proposed sub-section of S. 41is sold, discarded, demolished or destroyed”.

Clause 26 proposing to insert S. 50A read:“The proposed section seeks to providethat the provisions of sections 48 and 49shall apply subject to the modification thatthe written down value as defined in clause(6) of section 43, of the asset, as adjusted,shall be taken as cost of acquisition of theasset in respect of which depreciation hasbeen obtained by the assessee in anyprevious year”.

Can S.41 (2) and Ss.50/50A coexist?

It may be noticed that the intent and objectof both sections 50 and 50A is not to allowindexation benefit on the original cost ofacquisition of depreciable asset byremoving the operation of sections 48 and49 and take WDV as the cost of acquisition.Thus, S. 50 and S.50A are in pari materianotwithstanding the language employedand their intent and purpose is to tax theexcess on sale of depreciable asset as shortterm capital gain overriding the provisionsof S.48 and S.49. The Hon’ble SupremeCourt in the case of CIT v Urmila Ramesh

[230 ITR 422 (1998)] observed: “Section 41(2) is a special provision whereby theamount received in excess of written downvalue becomes chargeable to income tax asincome of business or profession of theprevious year in which money payable forthe building, machinery, plant or furniturebecome due. But for this specific provision,this amount would not have been taxed asincome from business. Building,machinery etc on which depreciation hasbeen allowed would be the capital asset ofthe assessee. Any sum received in respectthereof would ordinarily represent acapital receipt. But, S. 41(2) regard thisamount (balancing charge) as income frombusiness.” It was contended in the abovecase that by virtue of section 50, the writtendown value of the asset became the actualcost of acquisition and the amount realizedin excess thereof was short-term capitalgain. The Supreme Court repelled thecontention by giving an ‘obiter dicta’ that‘in any event as this amount has alreadybeen assessed U/s 41 (2) in the hands ofthe assessee, the same amount cannot beregarded as capital gains’. In other words,both section 41 (2) and section 50 of the Actcannot apply to the same amount as itwould result in taxing twice the sameincome.

Secondly, where the provisions of s. 41 (2)is applied, the deeming provisions of S. 50C


would not apply because the word ‘money’used in section 41 (2) has to be interpretedonly the actual money or cash, and not asany other thing or benefit which could beevaluated in terms of money [CIT vKasthuri & sons Ltd (1999) 103 Taxman342 SC]. Therefore, sale value ofdepreciable asset for the purpose ofcomputation of profit under section 41 (2)can only be the money actually receivedand S. 50C has no application.

Business asset and S. 50C:

S. 50C applies to capital assets being land,building or both. Since the provisions of S.50C are deeming provisions, the settledlaw and well accepted rule ofinterpretation is that deeming provisionsare to be construed strictly. Whileinterpreting deeming provisions neitherany word can be added nor deleted fromthe language used expressly [2016]Taxmann.com 99. Therefore, S.50C cannotbe extended to a composite commercialasset sold as a going concern. Hon’bleJurisdictional High Court in the case of CITv. Thiruvengadam Investments P Ltd(2010) 320 ITR 345 held: “Provisions of S.50C can be applied only to find out the truevalue of capital asset. Where however, theproperty in the hands of the assessee wastreated as business asset in his books ofaccount and not as capital asset, there wasno question of invoking the provisions ofsection 50C.”

Conclusion:

In practice, problems arise when acommercial asset is sold lock, stock, andbarrel. Such commercial asset comprises ofland, building, machineries, furniture andfixtures and other infrastructures andexcept land, all other assets are depreciableassets. Though lump sum price agreed isfor all the assets collectively, theRegistration Department trifurcates thevalue for land, building and other assetsfixed to the land and adopt a higher valuefor the purpose of registration. S. 50Ccovers only land, building or both. As theprice mentioned in the document istrifurcated and values enhanced arbitrarilyfor the purpose of Registration, withoutmaking empirical study on the value ofbusiness assets, the computation of capitalgain becomes difficult and gives rise tolitigation. Much worse, registration valueis enhanced even for other depreciablebusiness assets like machinery etc. In suchsituations S. 41 (2) appears to be the remedyto come over the provisions of S. 50/50A/50C by computing profit U/s 41 (2) andalso computing capital gain taking cost ofacquisition with indexation benefit in viewof the decisions of the Hon’ble SupremeCourt, cited supra.

Compiled by CA. Louis Dominic


FOREX LOSSES ON INDIGENOUS ASSETS ALLOWABLE AS DEDUCTION

A recent direct decision on the issue ofallowability of foreign exchange lossesincurred on restatement of foreigncurrency loans taken for acquisition ofindigenous fixed assets came up forconsideration before the Pune Bench of theTribunal in Cooper Corporation (P) Ltd vs.DCIT [2016] 69 taxmann.com 244 (Pune -Trib.).

Facts of the case

The assessee had originally taken rupeeterm loans for acquisition of indigenousassets, expansion of project etc.Subsequently these loans were convertedto foreign currency loans to avail the lowerrate of interest on such loans. Howeverwhile interest costs were saved, theassessee suffered losses due to strongerforeign currency and claimed it as businessloss. The AO disallowed the loss on twogrounds namely that such restatement losswas notional and that the loss was capitalin nature since the loan was utilized foracquisition of capital assets.

On appeal, the Commissioner (Appeals)granted partial relief to assessee on accountof foreign exchange loss arising on loansfound to be connected to revenue itemssuch as bill discounting, debtors, etc.However, in respect of other loans, the CIT(A) observed that such loans were taken

for capital purposes and, therefore, theassessee was not entitled to deduction ofsuch losses.

Department’s arguments before Tribunal

The gist of the Department’s argumentbefore the Tribunal was as under:

• The loss on year- end restatement of theloan was merely notional

• Further, the loss was capital in naturesince the loan was utilized foracquisition of fixed assets. The Dept.relied upon the decision of the SC inSutlej Cotton Mills Ltd. v. CIT [1979]116 ITR 1 for the proposition that theloss is capital in nature.

Contentions of the assessee

• The tax treatment of foreign exchangelosses was dealt with by Sec43A whichspecify that realized foreign exchange

CA. S. MURALIDHAR & CA. R. V. KRISHNAN


gains and losses were required to beadjusted against the cost of fixed assetsonly when the assets were importedfrom a country outside India. In

• the instant case, Sec 43A had noapplication as the loans were utilizedfor acquisition of indigenous assets andnot imported assets.

• The treatment of exchange losses wasconsistent with the provisions of AS11,which is mandatory for companies.

• The assessee had converted the rupeeloans to foreign currency loans in orderto save interest cost and thus the losswas in revenue field.

• The treatment was in line with theIncome Computation and DisclosureStandards (ICDS) issued by the CBDT.

Decision of the Tribunal

The Tribunal observed as under:

• The main purpose of converting therupee loans into Foreign CurrencyLoan (FCL) was to save on the interestcost and this had been demonstratedby the assessee.

• Acquisition of capital assets wasalready complete when the rupee loanswere converted to FCL.

• On the issue whether exchange lossarising on the restatement of FCL wasmerely notional, the Tribunal observedthat Sec145 of the IT Act mandates anassessee to follow either the mercantileor cash system of accounting forcomputation of Business Income. Sec209 of the CA 1956 compels companiesto follow the mercantile system ofaccounting, while Sec 211 mandatescompliance with AccountingStandards. Thus, in view of the variousprovisions of the Companies Act andIncome Tax Act, it was mandatory todraw accounts as per AS 11. In termsof AS 11, the loss arising on restatementof FCL was a real and accrued loss andnot merely notional. “Actual payment…..is an irrelevant consideration toascertain the point of accrual ofliability.” For these reasons the loss washeld to be real and accrued and notmerely notional.

• On the issue whether the loss is capitalin nature as contended by theDepartment, the Tribunal negativedthis contention and held such loss asallowable on revenue account underSec 37(1) on the following grounds.

§ Sec 43A is confined to cases whereFC Loans have been utilized foracquisition of assets from abroad. It hasno application to the assessee’s case as


the FCL was used to acquire onlyindigenous assets by the assessee.

§ In the absence of specific provisions inthe Income Tax Act, the allowability ofthe loss is based on the generallyaccepted accounting principles(GAAP)and the mandatory provisions of AS 11which require exchange losses onmonetary items( which includes loans)to be treated as revenue expense.

§ The claim of exchange fluctuation lossas a revenue item is also founded onthe argument that the converting rupeeloans to FCL was taken to save interestcosts and consequently to augment theprofitability or reduce revenue lossesof the assessee. The loss therefore has adirect nexus to the saving in interestcosts.(Incidentally this is in line with AS16-Borrowing Costs- which treatsexchange losses on foreign currencyborrowings, to the extent of differencebetween interest on local currencyborrowings and foreign currencyborrowings, as part of borrowing costs)

§ The Supreme Court in IT v. Tata Ironand Steel Co. Ltd. [1998] 231 ITR 285held that cost of an asset and cost ofraising money for purchase of asset aretwo different and independenttransactions. Thus, events subsequentto acquisition of assets cannot changethe price paid for it. Therefore,fluctuations in foreign exchange rate

while repaying instalments of foreignloan raised to acquire asset cannot alteractual cost of assets.

§ The Tribunal distinguished the SCdecision in Sutlej Cotton Mills since inthe instant case the loss has a directnexus to savings in interest cost ratherthan to the acquisition of capital asset.

§ The Tribunal also referred to the newIncome Computation and DisclosureStandards (ICDS) and noted that interms of these Standards also, allexchange gains and losses in respect ofmonetary items are required to treatedas income or expense, subject to theprovisions of Sec 43A/Rule 115.

Conclusion

This is a far reaching judgement andperhaps the first direct decision on thepoint of allowability of exchange lossesincurred on restatement of loans takenfor acquisition of indigenous assets. Ifan assessee is able to prove that thepurpose of taking the FCL was to saveinterest cost, the exchange fluctuationloss on restatement or settlement of theFCL would be allowable as it is meantto effect savings in revenue field.

(The authors are Chennai based CharteredAccountants. They can be reachedat [email protected] [email protected])


Using the Excel Built-In Data Entry Form

When entering data into an Excel list, some people preferto use Excel's data entry form - a dialog box that adjuststo your data. Before you can use this form, you have toset up the column headers in your worksheet.

Alternatively, you can designate the data range as a table,by choosing Insert Tables Table.

EXCEL TIPS

CA. DUNGAR CHAND U. JAIN

The Data Form command doesn't appear on the Ribbon, so here's how to add thecommand to the Quick Access toolbar:

1. Right-click the Quick Access toolbar and choose Customize Quick Access Toolbar fromthe shortcut menu. Excel displays the Quick Access Toolbar tab of the Excel Optionsdialog box.

2. In the drop-down list on the left, choose Commands Not in the Ribbon.

3. In the list box on the left, choose Form and then click the Add button.


Say, we need to fill these information i.e. Clients Bill Summary First Select C3 to H7.

After you select the data, Click "Form" icon in the Quick Access toolbar. Once clicked,the data entry form is displayed like this.

4. Click OK to close the Excel Options dialog box. A new icon appear in the Quick Accesstoolbar.


However, if the number of columns in your list exceeds the limit of your display, thedialog box contains two columns of field names. Also, if your list consists of more than32 columns, the Form command doesn't work and the information may have to be directlyentered into the cells.

When the Data Form dialog box appears, the first record (if any) in the list is displayed.Notice the indicator in the upper right corner of the dialog box; this indicator tells youwhich record is selected and the total number of records in the list.

To enter a new record, click the New button to clear the fields. Then you can enter thenew information into the appropriate fields. Press Tab or Shift+Tab to move among thefields. When you click the New (or Close) button, the data that you entered is appendedto the bottom of the list.

You also can press Enter, which is equivalent to clicking the New button. If your listcontains any formulas, they're also entered automatically into the new record in the listfor you.

Once the data is typed, the same appears as follows:


You can use the Data Form dialog box for more than just data entry. You can edit existingdata in the list, view data one record at a time, delete records, and display records thatmeet certain criteria.

The dialog box contains a number of additional buttons:

• Delete : Deletes the displayed record.

• Restore : Restores any information that you edited. You must click this buttonbefore you click the New button.

• Find Prev : Displays the previous record in the list. If you entered a criterion, thisbutton displays the previous record that matches the criterion.

• Find Next : Displays the next record in the list. If you entered a criterion, this buttondisplays the next record that matches the criterion.

• Criteria : Clears the fields and lets you enter a criterion on which to search forrecords. For example, to locate records that have Amount more thanRs.50,000 enter >50000 into the "Amount (Rs.)" field. Then you can usethe Find Next and Find Prev buttons to display the qualifying records.

• Close : Closes the dialog box (and enters any data that you were entering).

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

CBDT Constitutes High-Level Committee to Advise on Re-Engineering ofAssessment Proceedings

The CBDT has issued an Office Memorandum dated 19th December 2016 statingthat it has set up a committee of high-ranking officials to provide advise on re-engineering the assessment procedure and to arrive at a definite standardassessment procedure through an e-system which should incorporate within itselfthe principles of certainty, transparency, accountability and natural justice on theone hand and rules for addressing the revenue risks involved on the other. TheCommittee will also advice of the necessary changes in the Income Tax Laws andRules necessary for implementing such an assessment procedure.

Source - www.itatonline.org


EXTERNAL COMMERCIAL BORROWINGS

CS GAURAV KUMAR

PART-I

The lending and borrowing in foreign currency is governed by ForeignExchange Management Regulations, 2000 and the regulations issuedby the Reserve Bank of India (RBI) from time to time. RBI had on 1stJanuary 2016 issued the Master Directions on External CommercialBorrowings, Trade Credit, Borrowing and Lending in Foreign Currency byAuthorised Dealers and Persons other than Authorised Dealers, which shallsupersede all previous circulars and notifications issued by RBI w.r.t.to ECBs. Funds raised by resident entities from foreign investorsthrough borrowings are called External Commercial Borrowings or ECB. This frameworkfor ECB, aims to attract flow of funds from abroad which will continue to be a major toolto calibrate our policy towards capital account management in response to evolvingmacroeconomic situation and also:

i. a more liberal approach, with fewer restrictions on end uses, higher all-in-cost ceiling,etc. for long term foreign currency borrowings as the extended term makes repaymentsmore sustainable and also minimizes roll-over risks for the borrower;

ii. A more liberal regime for INR denominated ECBs where the currency risk is borne bythe lender;

iii. Expansion of the list of overseas lenders to include long-term lenders, such as, InsuranceCompanies, Pension Funds, Sovereign Wealth Funds;

iv. Only a small negative list of end-use restrictions applicable in case of long-term ECBand INR denominated ECB;

v. Alignment of the list of infrastructure entities eligible for ECB with the HarmonisedList of the Government of India.

What is an ECB?


FIG : 1

• ECBs are commercial loans raised by eligible resident entities from recognisednon-resident entities and should conform to parameters such as minimum maturity,permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

• The parameters apply in totality and not on a standalone basis.

• The framework for raising loans through ECB are:

Track I Track II Track III

Medium term foreign currency denominated ECB with minimum average maturity of3/5 years

Long term foreign currency denominated ECB with minimum average maturity of10 years

Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years

FORMS OF ECB

• ECBs are commercial loans raised by eligible resident entities from recognisednon-resident entities and should conform to parameters such as minimum maturity,permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

• The parameters apply in totality and not on a standalone basis.

• The framework for raising loans through ECB are:


FIG : 2

Indian entities may borrow from recognised non-resident entities through:

• Loans including bank loans;

• Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible,optionally convertible or partially convertible preference shares /debentures);

• Buyers' credit;

• Suppliers' credit;

• Foreign Currency Convertible Bonds (FCCBs);

• Financial Lease; and

• Foreign Currency Exchangeable Bonds (FCEBs)

Investment in Non-convertible Debentures (NCDs) in India made by Registered ForeignPortfolio Investors (RFPIs) is not covered under the ECB framework.

PARAMETERS FOR RAISING FUNDS THROUGH ECBS

FIG : 3

For borrowing under the ECB framework certain parameters have to be complied by theresident entities. These parameters shall apply in totality for the eligible borrower.


2. Eligible Borrowers:

1. Minimum Average Maturity (MAM) Period:

Track I Track II Track III Foreign currency denominated ECB o MAM of 3 years for ECB

upto USD 50 million or its equivalent

o MAM of 5 years for ECB beyond USD 50 million or its equivalent.

Long term foreign currency denominated ECB MAM of 10 years irrespective of the amount.

Indian Rupee (INR) denominated ECB Same as Track I

Track I Track II Track III Foreign currency denominated ECB o Companies engaged in

manufacturing and development of software,

o Shipping and airlines companies.

o SIDBI. o Units in SEZs. o Export Import Bank of

India (only under the approval route).

o Companies in infrastructure sector, NBFCs-Infrastructure Finance Companies, NBFCs-Assets Finance Companies, Holding Companies and Core Investment Companies.

Long term foreign currency denominated ECB o All entities listed under

Track I. o Companies in

infrastructure sector. o Holding companies. o Core Investment

Companies (CICs). o Real Estate Investment

Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI).

Indian Rupee (INR) denominated ECB o All entities listed

under Track II. o All NBFCs. o NBFCs-Micro Finance

Institutions, Not for Profit companies, Societies, trusts and cooperatives, NGOs which are engaged in micro finance activities.

o Companies engaged in miscellaneous services like R&D, training (other than educational institutes), supporting infrastructure, providing logistics services.

o Developers of SEZs/ National Manufacturing and Investment Zones.


3. Recognised Lenders/Investors:


Foreign currency denominated ECB

o International banks

o International capital markets

o Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions

o Export credit agencies

o Suppliers of equipment

o Foreign equity holders

o Overseas long term investors

o Pension funds

o Insurance companies

o Sovereign Wealth Funds

o Financial institutions located in International Financial Services Centres in India

o Overseas branches / subsidiaries of Indian banks

Long term foreign currency denominated ECB

o All entities listed under Track I but for overseas branches / subsidiaries of Indian banks

Indian Rupee (INR) denominated ECB

o All entities listed under Track I but for overseas branches / subsidiaries of Indian banks. In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organisations and individuals


4. All-in-cost:


Foreign currency denominated ECB

o The all-in-cost ceiling is prescribed through a spread over the benchmark as under

i. For ECB with MAM of 3 to 5 years - 300 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.

ii. For ECB with average maturity period of more than 5 years – 450 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.

o Penal interest, if any, for default or breach of covenants should not be more than 2 per cent over and above the contracted rate of interest.

Long term foreign currency denominated ECB

o The maximum spread over the benchmark will be 500 basis points per annum.

o Remaining conditions will be as given under Track I.

Indian Rupee (INR) denominated ECB

o The all-in-cost should be in line with the market conditions.


5. End-use prescription



6. Individual Limits

Individual limits refer to the amount of ECB that can be raised in a financial year underthe automatic route. Any borrowings above the prescribed limits will come under theapproval route. For computation of individual limits under Track III, exchange rateprevailing on the date of agreement should be taken into account.

7. Currency of Borrowing

ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees.Change of currency of ECB from one convertible foreign currency to any other convertibleforeign currency as well as to INR is freely permitted. Change of currency from INR toany foreign currency is, however, not permitted.

Raising of funds through ECB will be continued in Part-II of the Article...

(The author can be reached at the email ids - [email protected] &[email protected])

Sector Maximum amount under automatic route

§ Infrastructure and manufacturing,

§ Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs),

§ NBFCs-Asset Finance Companies (NBFC-AFCs),

§ Holding Companies and Core Investment

Companies

USD 750 million

Software development

USD 200 million

Micro finance activities

USD 100 million

For remaining entities

USD 500 million


A QUICK ROUND UP on

INSOLVENCY AND BANKRUPTCY CODE 2016

Introduction :








RECENT DECISIONS - EXCISE AND CUSTOM LAWS

CA. B.DEBASIS NAYAK & CA. SRIHARI V.K.

Central Excise

Penalty not imposed as the delay inpayment of tax was unintentional andthere were lot of disputes on the taxabilityduring the period of non-payment

In the case of CCE vs Ponds Exports Ltd(2016-TIOL-2221-CESTAT-MAD) thetaxpayers are manufacturers of Footwearand were paying Sales Commission tovarious commercial concerns situatedoutside India for rendering the services.Show Cause Notice (“SCN”) was issueddemanding payment of service tax alongwith interest and penalty on said salecommission under reverse charge. Thecurrent appeal is only on the levy ofpenalty.

The Tribunal observed that the taxpayerduly discharged their tax liability relatingto the period April 18, 2006 to on (February05, 2009) much before receipt of SCN.Penalty in the instant case is unsustainableas the delay in payment of tax wasunintentional and there were a lot ofdisputes as to whether tax was payableunder reverse charge. Although Section66A of the Finance Act, 1994, came intoeffect from April 18, 2006, there weredoubts till decision of Supreme Court in thecase of Indian National Ship-ownersAssociation Vs UOI was rendered. It cannotbe said that the issue was clear and thedispute was free from doubts. The Tribunalfurther observed that it cannot also bestated that there was a malafide intentionon the taxpayer’s part.

The Tribunal also noted that the issue wasrevenue neutral and thus held the aspectof malafide fails.

The Tribunal upheld the decision of theCommissioner setting aside the penaltiesby invoking section 80 of the Finance Act,1994

Definition of “inputs” does not includeevery product related to the premises ofmanufacturer

In the case of Subramaniya Siva Co-operative Sugar Mills Ltd (“Taxpayer”)(2016-TIOL-2781-CESTAT-MAD) Vs CEC,the taxpayer is engaged in the manufactureof Sugar and Molasses. The issues involvedin this case was with respect to availmentof Cenvat Credit on Iron and Steelstructures and Asbestos sheet productsused for installation of capital goods in thefactory.

Revenue sought to recover the Cenvatcredit availed on iron and steel structuresand asbestos sheets along with interest andpenalty. The adjudication authoritiesconfirmed the demand with respect toasbestos sheet because asbestos sheets arenot capital goods.


The taxpayer contended that asbestossheets were used for replacing thedamaged roofing of the sugar mill andgodown where sugar bags were to bestored.

The Tribunal observed that asbestos sheetused as civil construction item is excludedfrom the ambit of capital goods. Thetaxpayer contended that the goods shouldbe classified as ‘input’ if not capital goods.The Tribunal observed that if the inputswere to include every product which issomehow related to the premises where themanufacturing process goes on, then theremay not be a need to provide a definitionof the term ‘capital goods’. This wouldrender the definition of the term “capitalgoods” to be redundant as well as theprovisions relating to extending the benefitof Cenvat credit to the capital goods.

Mumbai Cestat holds that the right toavail credit in respect of capital goodsaccrues the minute they are received in thepremises of the provider of output service.

In the case of Reliance Gas TransportationInfrastructure Ltd (“Taxpayer”) (2016-TIOL-1593-CESTAT-MUM) the taxpayeris engaged in the business of transportationof gas through pipeline. Taxpayer laid crosscountry pipelines from Kakinada inAndhra Pradesh to Bharuch in Gujarat,spanning around 1285 Kilometers. Thedispute relates to the Cenvat Credit availedon input services and capital goodsbetween March 2008 and March 2009.

The Revenue denied credit in respect ofinput service provided by pipeline laying

contractors on the premise that the saidservices had been availed of for creation ofimmoveable property. Revenue furtherdenied credit in respect of the other serviceprovider and capital goods because thesame were not used by the taxpayer forrendering its output service but wereinstead used by the pipe line layingcontractors.

The Tribunal held the following:

With respect to services provided bypipeline laying contractor, it was observedthat the definition of input services (duringrelevant period) covered services used forsetting up a factory / premises of an outputservice provider. Tribunal held that Cenvatcredit of pipeline laying contractor cannotbe denied.

With respect to other service providers theTribunal observed that these serviceproviders were engaged/contracted andpaid for by the taxpayer. Hence, from therecord the privity of contract is between thetaxpayer and the service provider. Giventhis, the finding by the revenue that theservices availed from other serviceproviders were used by the pipeline layingcontractors is clearly untenable.

As regards Capital goods, the Tribunal heldthat in the instant case, the pipes,compressor, valves, etc. on which credit hasbeen availed as capital goods areundisputedly specified capital goods (asper definition of capital goods underCenvat Credit Rules 2004). The right toavail credit in respect of such capital goodsaccrues the minute they are received in the


premises of the provider of output service.Tribunal held that the right to avail creditin respect of the same is clearlyindefeasible.

In absence of any provision requiring oneto one co-relation, even though service isnot used in appellants’ factory butreceived and used in different factory ofsame company, credit cannot be denied:

In the case of Nestle India Limited VsCommissioner of Customs& CentralExcise, Goa, 2016-TIOL-3263-CESTAT-Mum, the taxpayer was engaged in themanufacture of sugar confectionery andchocolates. Taxpayer availed Cenvat creditdistributed by their Head Office. However,such credit was attributable to the productmanufactured at different factory. Revenuedenied the said credit because it is notrelated to the product manufactured bytaxpayer.

The Tribunal observed that as per provisionfor distribution of the credit, there is nocondition of one to one correlation betweenthe credit distributed and the quantum ofservices received by a factory. The Tribunalrelied on the decision in the case of ECOFIndustries Pvt. Ltd -2011-TIOL-770-HC-KAR-ST and held that even though theservice is not used in the taxpayers’ factorybut received and used in different factoryof the same company, credit cannot bedenied.

No reversal of cenvat credit on wastegenerated out of inputs sent to job workerwhen such goods are put into furtherprocess at the job worker’s end andsuffers excise duty

In the case of Bharat Heavy Electricals Ltdvs CCE&ST 2016-TIOL-3215-CESTAT-DEL, BHEL procured raw materials viz.copper rods and bare wires and availedcredit of excise duty on such raw materials.These were supplied to various job workersunder the cover of central excise challan forconversion into intermediate products suchas bare copper conductors, Mica tapedconductors in terms of Rule 3 (1) of CCRread with Notification No.214/86-CE dated25.3.1986.

Revenue authorities raised a demand ofcenvat credit on BHEL because certainquantity of inputs on which cenvat credithas been availed and sent to job worker hasnot been fully accounted for and receivedback. The copper rods seized in thepremises of the job worker was alsoordered to be confiscated with option toredeem the same on payment of fine.

The Tribunal observed that there willcertainly be a process loss and emergenceof scrap in the form of off-cuts and otherpieces. Off-cuts and the copper scrap,which is not useable are retained by the jobworkers and have been put to profitableuse in further manufacture of various otheritems. These manufactured items havebeen cleared on payment of proper centralexcise duty at the job worker’s end. Thishas also not been disputed. Given this thetribunal held that there is no justificationfor reversal of any credit availed on inputsby BHEL. The Tribunal further observedthat there is no allegation of diversion ofinputs or unaccounted clearance of thesame either at the BHEL side or at the end


of the job work- manufacturer. Finding nomerit in the impugned order, the Tribunalset aside the same and the appeals wereallowed

Customs

Depreciation cannot be denied to goodsimported under Customs Notification No153/93

In the case of L and T Info City Ltd, theissue involved in this appeal was regardingdenial of depreciation on the equipmentsused in the export of software after de-bonding of warehouse and recovery ofduty on full value of the equipment.

The taxpayer was permitted to set up aninfrastructure facility for STP units underthe STPI Scheme. The Taxpayer hadimported duty free infrastructural facilityequipment’s worth Rs.19.90 Crores, forexport of software from STPI units. On de-bonding, the Revenue insisted for paymentof duty on the original value of theequipment, without allowing depreciationbecause said Notification No. 153/93-Cusdoes not have any specific provision forallowing “Depreciation”.

The taxpayer contended that when allconditions of Notification 153/1993-Cushad been fulfilled, denial of depreciationon the sole ground that the benefit wasavailable only to STPI units as the appellanthad only provided infrastructure, iserroneous. Even in cases where the STPIunit has kept the goods in store which arenot in working condition, Tribunal hasextended the depreciation by relying on

CBEC circular No.29/2003 dated 03-04-2003 in the case of Iflex Solutions Ltd.Considering that the CBEC Circular hasbeen consistently allowed depreciationthrough Circulars The appellant would beeligible for the depreciation as prescribedby the CBEC Circular applicable at the timeof debonding.

Whatever may be circumstances underwhich goods could not be cleared frombonded warehouse, duty liability would beat rate prevalent at time of filing ex-bondBoE and not when they were bonded-Customs

In the case of Amuja Cement Eastern LtdVs Commissioner of Customs (I), Mumbai,2 0 1 6 - T I O L - 3 1 7 7 - C E S T A T - M u m ,M/s Modi Cement Ltd imported aconsignment of ‘roller pair assembly’ andfiled an in-bond bill of entry datedDecember 2, 1998 and the same wasassessed and the goods were permitted tobe deposited in warehouse for a period ofone year. Subsequently, due to financialproblems, Modi Cement Ltd. did not clearthe consignment and was taken over by thetaxpayer with all assets and liabilities.Taxpayer filed ex-bond bill of entry onMarch 19, 2001 and sought clearance of theconsignment which was allowed butsubject to discharge of duty liability at therate prevalent on March 19, 2001. Taxpayercontested the said findings because thegoods should have been assessed at the ratewhich was prevalent when they were bonded.The lower authorities did not agree withthis contention and hence the taxpayer isbefore Tribunal.


The Tribunal observed that the goods werewarehoused on December 26,1988 and theywere to be cleared on December 25, 1989as per the order passed on the in-bond billof entry. Tribunal relied on the case ofKesoram Rayon vs. CC, Calcutta, 2002-TIOL-818-SC-CUS wherein the Apex courthad held that once the goods which arewarehoused are not cleared within theperiod granted or the extension thereof, thegoods are to be considered as improperlyremoved from the warehouse. Based on theabove, Tribunal upheld the demand ofduty.

Imported is second hand tunnelingequipment in semi knocked down conditiondoes not require import licence

In the case of CC vs International MetroCivil Contractors 2016-TIOL-3306-CESTAT-MUM the taxpayer had importedtwo tunnel boring machines; since theywere of huge dimensions, the same weredismantled in convenient assemblies to suitthe manner of packing of handling andpacking for transporting to India, hencethey were imported in knocked downcondition in two consignments and the billsof entry were provisionally assessed. Theadjudicating authority accepted thecontention of the respondent and finalizedthe assessment.

Revenue preferred an appeal against theadjudication order which was rejected bythe Commissioner. Revenue is beforetribunal on following grounds.

• The respondent had imported parts andcomponents of second hand machineryby filing six different bills of entry on twodifferent ports and hence they must beseized separately as presented, withoutclubbing the entire goods covered underthe six bills of entry, as one completemachinery;

• The goods were not imported under theProject Import Regulations, 1986 to clubpart shipments of the Plant andMachinery to classify;

• The goods which were imported undersix shipments were used second handequipments and are not capital goods interms of Foreign Trade Policy, henceimport and requires specific importlicence which is not obtained by thetaxpayer

The Tribunal referred to the decision of thefirst appellate authority where in it wasobserved that goods were dismantled forconvenient assemblies to suit the mannerof packing/handling them for purpose ofsubsequent transporting to India. It is notthe case of the tribunal that Tunneling &boring machines are not capital goods,hence licence might not be required.Tribunal after noting that the Revenue hasnot produced any additional evidence totake a different view than that of firstappellate authority, the Revenue appealwas dismissed.

(The authors are a Chennai based CharteredAccountants. They can be reacheda t c a d e b a s i s @ g m a i l . c o m a n [email protected])

THE CHARTERED ACCOUNTANTS STUDY CIRCLE CELEBRATES

37th Anniversary

Date : 5th January 2017

Venue : Hotel Palmgrove

Time : 6.00 p.m. to 9.00 p.m.

Speaker : CA P.Rajendrakumar on Indirect Taxes - Recent Development

Hon’ble Justice Anita Sumanth Participates

(confirmation awaited)

Dinner : 8.30 p.m.

CASC Announces

Joint Public Meeting on Union Budget

Date : 2nd February 2017

Venue : TAG P.S.Dakshinamurthy Auditorium

P.S.Senior Secondary School, R.K.Mutt Road

Mylapore, Chennai - 600 004

Time : 5.45 p.m.

High Tea : 5.30 p.m.

Eminent speakers are being arranged

❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁❁

Documents

G:CASC BULLETIN BOOK JOBCASC BULLETIN BOOK …casconline.org/images/CASC BULLETIN january 2017.pdf · All information and material printed in this Bulletin (including but not flowcharts