IN THIS MONTH’S EDITION - Induslaw | Homeinduslaw.com/publications/Newsletter/Infolex_July_2012… · · 2009-08-31IN THIS MONTH’S EDITION: ... including a questionnaire sent

BANGALORE | NEW DELHI | HYDERABAD | MUMBAI

July 2012

IN THIS MONTH’S EDITION:

ARTICLES:

AN ANALYSIS OF THE ORDER OF Pgs 2-5

COMPETITION COMMISSION OF INDIA

ON CEMENT CARTELISATION

SERVICE TAX ON LEGAL SERVICES Pgs 6-8

REGULATORY UPDATES: Pgs. 9-14

MCA

RBI

SEBI

INDIRECT TAX

SERVICE TAX

TRAI

CASELAW UPDATES Pgs. 15-19

DECISION BY THE SUPREME COURT OF INDIA

DECISIONS BY THE HIGH COURT

DELHI HIGH COURT

MUMBAI HIGH COURT

Please write to [email protected] for any queries or comments on the contents of this newsletter.

Page 2

AN ANALYSIS OF THE ORDER OF COMPETITION

C O M M I S S I O N O F I N D I A O N C E M E N T

CARTELISATIONBy Aniket Gautam, Associate

The recent judgment of the Competition Commission of India (“CCI”) in Builders' Association of India vs. Cement

Manufacturers' Association & Ors aims to check cartelisation in the relevant industry and market in India. The CCI thvide its order dated 20 June 2012 upheld the complaint of Builders' Association of India (“BAI”) against the

Cement Manufacturers' Association (“CMA”) and eleven other cement manufacturing companies for violation of

Sections 3 and 4 of the Competition Act, 2002 (“Act”) which deals with anti-competitive agreements, including

cartelisation.

Background

In the present case, the BAI alleged that the cement manufacturing companies indulged into monopolistic and

restrictive trade practices to control the price of cement by restricting its production and supply and by collusive

price fixing of cement by forming a cartel. The CCI on the basis of various reports and investigation imposed a

penalty of 0.5 times the net profit of the said cement manufacturing companies for the period 2009-10 and 2010-

11. The CCI considered the parallel and coordinated behaviour of the cement manufacturing companies on price,

dispatch and supplies in the market and imposed penalty on the basis of the provision contained in Section 27 (b)

of the Act. The CCI found that the cement manufacturing companies had deliberately under-utilised the available

capacities with regard to the production and supply of cement in order to create an artificial scarcity in the relevant

market thereby causing an increase in price, especially during the peak demand period. The order passed by CCI

contains circumstantial and other material evidences, including a questionnaire sent to cement company officials

and their replies received during the investigation period, verification of company records etc. The leading eleven

cement manufacturing companies upon whom the penalty has been imposed are ACC, Ambuja Cements Limited,

Binani Cements, Century Cements, Grasim Cements (now merged with Ultratech Cements), India Cements, Jaypee

Cements, JK Cements, Lafarge India, Madras Cements and Ultratech Cements.

The present matter was investigated by the Director General of CCI (“Director General”), wherein the Director

General concluded in his report that the acts and conduct of the cement manufacturers were anti-competitive and

in contravention of the provisions of Sections 3(1), 3(3)(a), 3(3)(b) and 4 of the Act. After hearing the replies and

submission of the parties the substantive question before the CCI was whether the conduct of the cement

companies violated Sections 3 and 4 of the Act.

It was argued by the BAI that CMA served as a forum for communication for the cement manufacturers to enable

them to settle on the price of cement. Notwithstanding the fact that the CMA collected data pertaining to

indicative wholesale and retail prices of cement from across the country and provided the same to Department of

Industrial Policy and Promotion (“DIPP”), Ministry of Commerce and Industries, Government of India under its

instruction, the CCI held that the cement manufacturing companies interacted with each other to fix the prices.


DOS DONTS

Also the data of the cement manufacturers pertaining to the price, production and dispatch of cement is issued and

circulated by the CMA only amongst its members. The CMA held two High Power Committee Meetings during

January and February, 2011 which was attended by the cement manufacturers. The CCI observed that there was an

increase in the price of cement after the said meetings.

The following were the main issues examined by CCI:

1. Whether the acts and conduct of the parties i.e., with respect to the pricing ability, the production capacity

and supplies in the market was in violation of Sections 3 and 4 of the Act?

2. Whether there exists an agreement or arrangement among the parties in which they share details of cement

prices, production and capacity among each other using the platform of CMA?

3. Whether the parties have indulged in determining the prices of cement, in limiting and controlling the

production and supply of cement and dispatch parallelism?

4. Whether the acts and conduct of the parties caused increase in prices of cement?

Observations of the CCI

The CCI after going through the information, report of the Director General and averments of various parties in the

instant case observed the following facts:

1. Due to the existing oligopoly market structure, each company takes into account the likely reactions of other

companies while making decisions particularly as regards prices. In such a scenario circumstantial evidence

suffices for direct evidence and hence becomes the deciding factor to determine probable collusion between

companies and to prove cartelisation.

2. The CCI held that for an inquiry under Section 3 of the Act, there would be no requirement under the Act to

determine a 'relevant market'. It stated that there existed a distinction between 'market' as used in Section 3

and the 'relevant market' as defined in Section 4 of the Act.

3. The CCI held that CMA by virtue of its modus operandi was providing a platform to all the cement

manufacturers by sharing information related to the price, production and dispatch. This made co-

ordination easier amongst the cement companies. The CCI also stated that given the nature of data

exchanged between the parties, price parallelism could not be a reflection of non-collusive oligopolistic

market conditions.

4. The CCI further noted that the drop in production and dispatch was the deliberate act of shortage in

production and supplies by the cement companies and almost inelastic nature of demand of cement in the

market resulted into higher prices for cement. The CCI also noted that given the small number of major

cement manufacturers, the price leaders gave price signals through advanced media reporting which made it

easier for other manufacturers to co-ordinate their strategies.

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DOS DONTS

5. The CCI observed that the lower dispatches coupled with the lower utilisation established that the cement

companies indulged in controlling and limiting the supply of cement in the market.

In cartel cases, the CCI has the power to fine parties up to three times of its profit for each year of the continuance of

the cartel or 10% of its turnover for each year of the continuance of the cartel, whichever is higher. The turnover and

profit for the cement companies were examined and accordingly penalties were levied on these companies.

Directions of the CCI

The CCI directed the contravening cement manufacturers to deposit the penalty amount within ninety days of

receipt of the order. The Contravening cement manufacturing companies were also directed to 'cease and desist'

from indulging in any activity relating to agreement, understanding or arrangement on prices, production and

supply of cement in the market. Further, the CMA has been asked by the CCI to disengage and disassociate itself

from collecting wholesale and retail prices through the member cement companies and also from circulating the

details on production and dispatches of cement manufacturing companies to its members. Upon being argued by

the CMA and the eleven cement manufacturing companies that the collection of wholesale and retail prices of

cement was being done under the instruction of DIPP, the CCI held that the CMA or the cement manufacturing

companies cannot act in contravention of the Act. Further, the advice of DIPP with respect to the relevant provision

of the Act was obtained by CMA in June, 2008, when the enforcement provisions of Section 3 were not notified and thCMA did not seek such advice from DIPP after 20 May, 2009, when the provisions of Section 3 with regard to anti-

competitive agreement were notified.

Conclusion

The order has been passed by the CCI to curb the collusive manner of functioning of the cement manufacturing

companies, however, it is significant to note that the cement manufacturing companies can still determine the

price, production capacity and supply of cement in the relevant market in accordance with their valid business plan

as well as the study of prevailing state of affairs of relevant trade and industry.

The CCI has taken a position that in case of anti-competitive agreement direct evidence, i.e., a written agreement, is

not necessary to establish a common understanding or motive yet the same may be established from the activities

carried on by the parties. Thus, circumstantial evidence concerning the market and the conduct of market

participants may also establish an anti-competitive agreement. No cement manufacturing company is a dominant

player in India and the market is oligopolistic in nature comprising of a relatively small number of competing

companies. Despite the fact that in an oligopolistic market the firms observe price parallelism and are also aware of

the actions of the competitors and acquaint themselves with the strategic decisions of the competitors, such as

price, quantity or quality and influence each other's decision thereby creating interdependence, particularly with

respect to the prices, the CCI in the present case held that price parallelism was not as a result of non-collusive

oligopolistic market practice. Substantiating the same, the CCI held that there was synchronized behavior amongst

the CMA and the eleven cement manufacturing companies and there existed an anti-competitive agreement in

violation of Section 3 (3) (a) of the Act. The CCI further held that price parallelism occurred owing to the fact that

whenever the price of cement of one company went up, the same was followed by the other companies

simultaneously in different zones across the country. This occurred due to the reason that the cement

manufacturing companies met frequently at various meetings organized by CMA and collected the retail and

Page 4


DOS DONTS

wholesale prices disseminated by the CMA.

The present order has also outlined that determining relevant product market or geographical market is not

required in order to establish an anti-competitive agreement. It is contravention under Section 4 of the Act and not

Section 3 of the Act, that requires determination of relevant market in order to establish allegations concerning

abuse of dominant position pertaining to an area or a range of products within which a dominant player can exercise

its market power and profitability at the cost of the consumers or the market or the competitors.

The amount of penalty to be imposed under Section 27 (b) of the Act, i.e., ten per cent of the average of the turnover

for the last three preceding financial years should not be the only criteria with respect to determining and imposition

of such penalty and there should be certain additional guidelines formulated under the Act for the same so that the

observations of the CCI do not remain the sole decisive factor for imposition of such penalty.

In addition to the ambiguity surrounding the quality of circumstantial evidence that distinguishes price parallelism

from anti-competitive agreements, the CCI, while not bound to do so, has also not considered the aspect pertaining

to the actual loss caused to the end user or consumers. A building is constructed by any builder (i.e., a member of

BAI) for the sale of the same to the end user. In the construction of such structure the builder uses cement amongst

various other raw materials, however, the builder is not the end user of the final product, i.e., the building/structure.

It was also reported that a few cement manufacturing companies, which have been imposed with penalty in the

present case, intend to file an appeal against the present order passed by the CCI; however, till date there are no

confirmed reports of such appeal being filed.

***

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DOS DONTS

SERVICE TAX ON LEGAL SERVICESBy Eliane Muhury, Associate

stIn the erstwhile Service Tax regime, `Legal Consultancy Service' was made taxable with effect from 1 September

2009 under Section 65(105)(zzzzm) of the Finance Act,1994. The Service Tax exposure was limited only to service

provided by a business entity to any other business entity. Business entity included an association of persons, body

of individuals, company or firm, but did not include an individual. Further, the service rendered was restricted to

advise, consultancy or technical assistance in any branch of law, in any manner, but not appearance before any court,

tribunal or an authority. Service rendered by an individual advocate either to an individual or to a business entity was

outside the scope of the taxable service. Similarly, the service provided by a partnership firm of advocates to an

individual was also not liable to Service Tax.

stIndividual advocates were brought within the ambit of Service Tax vide Finance Act, 2011. With effect from 1 May

2011, the taxability under Section 65(105)(zzzzm) was extended to services provided by a business entity to an

individual and also services provided by an individual advocate to a business entity. Consequently, what came to be

taxed were services of advice, consultancy or assistance when provided by a firm of advocates to a business entity as

well as to an individual and representational service before any court, tribunal or authority when provided by an

individual advocate to a business entity. However, service provided by an individual advocate to an individual client

continued to be exempted from Service Tax.

With the introduction of the negative list regime of Service Tax with effect from 1-07-2012, the CBEC vide th thNotification No. 25/2012-S.T dated 20 June 2012 [superseding Notification No. 12/2012-S.T dated 17 March

2012] has specified 39 categories of services which are exempt from levy of Service Tax. Originally under Notification thNo. 12/2012-S.T dated 17 March 2012, “services provided to any person other than a business entity by an

individual as an advocate or a person represented on and as arbitral tribunals” was exempt. Vide Notification No. th25/2012-S.T dated 20 June 2012, legal services rendered by partnership firm of advocates have been exempted as

well from the levy of Service Tax. The relevant part of the Notification is reproduced below;

“6. Services provided by-

(a) an arbitral tribunal to -

(I) any person other than a business entity; or

(ii) a business entity with a turnover up to rupees ten lakh in the preceding financial year;

(b) an individual as an advocate or a partnership firm of advocates by way of legal services to,-

(i) an advocate or partnership firm of advocates providing legal services;

(ii) any person other than a business entity; or

(iii) a business entity with a turnover up to rupees ten lakh in the preceding financial year; or

(c) a person represented on an arbitral tribunal to an arbitral tribunal.”

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DOS DONTS

It may be noted that the exemption under the Notification would apply to individual advocates or a firm of

advocates for rendering legal services, only when it is provided to a person other than a business entity having a

turnover of at least Rs. 10 Lakhs in the preceding financial year. Under the Notification the term used is “services

provided by an individual as an advocate or a partnership firm of advocates by way of legal services”. Legal services

as defined in clause (w) of para 2 of the Notification includes advice, consultancy or assistance in any branch of law,

appearance or representational services before courts, tribunal and authorities.

Who is liable to pay?

For services provided to ' any person other than a business entity ', when an individual advocate or a firm of

advocates render any service to any person who receives such services in his capacity as an individual, then such

legal services would be exempt from payment of Service Tax. However, if service is provided relating to business

activity of an individual then the legal services would be charged to Service Tax. It is important to note that services

rendered to a business entity would be chargeable to Service Tax in the hands of the service receiver under the threverse charge method as per Notification No. 30/2012-ST dated 20 June 2012.

For example, if an individual advocate represents Mr. X in a civil court for some personal issue of Mr. X, then the

services rendered by the individual advocate would be exempt from payment of Service Tax. If the individual

advocate renders services to Mr. X, Director of M/s X & Co. Pvt. Ltd., relating to the business of X & Co. Pvt. Ltd., then

the legal services would be charged to Service Tax. However, under the reverse charge method, in terms of thNotification No. 30/2012-ST dated 20 June 2012, the liability to pay Service Tax would be shifted to X & Co. Pvt. Ltd.

which is a business entity.

Further, the Government has provided exemption from payment of Service Tax for those business entities whose

turnover in the previous financial year is less than Rs.10 Lakhs. To illustrate, an individual advocate renders legal

services to two business entities, namely M/s X & Co. Pvt. Ltd. and M/s Y & Co. Pvt. Ltd. in 2012. The turnover of X &

Co. Pvt. Ltd. for the year 2011-12 is Rs.20 Lakhs and the turnover of Y & Co. Pvt. Ltd. for the year 2011-12 is Rs.8 Lakhs.

In this case, the services rendered by the individual advocate to X & Co. Pvt. Ltd. would be taxable and the person

liable to pay Service Tax would be X & Co Pvt. Ltd., since it is a business entity whose turnover for the previous

financial year is more than Rs. 10 Lakhs. However, the services rendered to Y & Co. Pvt. Ltd. would be exempt from

Service Tax since the turnover Y & Co. Pvt. Ltd. for the previous financial year is below Rs.10 Lakhs.

Formalities of service receiver:

While an individual advocate or a firm of advocates rendering legal services would not be liable to pay Service Tax

under any circumstances, legal services rendered to any business entity whose turnover for the previous financial

year is above Rs.10 Lakhs would be taxable under reverse charge. Such business entity would be liable to deposit

Service Tax and also be eligible to take input credit of the tax paid. Therefore, the service recipient business entity

must register itself with the Service Tax Department and comply with all the Service Tax formalities. If such business

entity already has Service Tax registration then it must amend the registration certificate by adding this specific

category.

Formalities of service provider:

The individual advocate or a firm of advocates rendering such exempt legal services need not charge Service Tax

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DOS DONTS

in their invoices. In case of liability of payment of Service Tax under reverse charge, such service provider may not

charge Service Tax in the invoice but may mention a note at the bottom of the invoice that Service Tax shall be

payable by recipient under reverse charge at applicable rates and that fee does not include Service Tax.

A new Rule 5B has been added to the CENVAT Credit Rules, 2004 which provides for refund of CENVAT Credit to

service providers providing services taxed on reverse charge basis specified in Notification No. 30/2012-ST dated th20 June 2012. Accordingly, a service provider providing service on reverse charge basis and being unable to utilize

CENVAT Credit availed on inputs and input services for payment of Service Tax on such output services, shall be

allowed refund of such unutilized CENVAT Credit. The notification laying procedure, safeguards, conditions and

limitations is yet to be issued.

Hence, those individual advocates or firm of advocates who opt to claim CENVAT Credit on inputs and input services

used in providing the legal services ideally must continue with the Service Tax registration or obtain registration in

case they were earlier not registered. This aspect needs to be re-visited if and when the Government issues a

notification prescribing the procedure.

***

Page 8


Page 9

MINISTRY OF CORPORATE

AFFAIRS (“MCA”) UPDATES:

thThe MCA has issued two notifications dated 10 July

2012 bearing Notification No. S.O. 1538(E) (F NO.

1/1/2003-CL. V) (“Notification 1”); and Notification

No. S.O. 1539(E) (F NO. 1/1/2003-CL. V) (“Notification

2”). By virtue of the said Notifications, certain powers

and functions previously vested in the Central

Government under the Companies Act, 1956

(“Companies Act”) have been delegated to the

Registrar of Companies (“ROC”) and the Regional

Directors at specified States of India, respectively. Both thNotifications shall come into force with effect from 12

August 2012.

Under both the aforesaid Notifications, the delegation

has been made subject to the condition that the Central

Government may revoke such delegation of powers or

may by itself exercise the powers and functions so

delegated, if in its opinion such a course of action is

necessary in the public interest.

The key details of the aforesaid Notifications issued by

the MCA are as follows:

1. Notification 1:

The powers and functions vested in the Central

Government under the Companies Act in relation to the

following have been delegated to the ROC:

(i) Change of name by company;

(ii) Power to dispense with “Limited” in the name of

charitable or other company;

(iii) Approval of alteration of the articles of association

of a public company, the effect of which is to

convert such public company into a private

REGULATORY UPDATES:

company;

(iv) Granting extension of time in the event a duly

stamped and endorsed instrument of transfer of

shares relating to a company is not delivered within

the time period prescribed under the Companies

Act;

(v) Change of name of company for purposes of

registration under Part IX of the Companies Act.

2. Notification 2:

The powers and functions vested in the Central

Government under the Companies Act in relation to

inter alia the following been have delegated to

Regional Directors at Mumbai, Kolkata, Chennai,

Noida, Ahmedabad and Hyderabad:

(i) Alteration of the memorandum of association of a

company;

(ii) Rectification of name of company;

(iii) a) Appointment or reappointment an auditor of a

company in the event no auditors are appointed or

reappointed at an annual general meeting; b)

removal of the auditor so appointed by the Central

Government; and c) remuneration of such auditors

.

(iv) Rectification of Register of Charges of a company;

(v) Approval required to be obtained by a company

having a share capital of not less than

Rs.1,00,00,000/- (Rupees One Crore only) for

entering into certain contracts in which directors of

such company are interested.

***


Page 10

RESERVE BANK OF INDIA (“RBI”)

UPDATES:

1. Vide notification RBI/2011-12/617 A.P. (DIR Series) thCircular No. 134 dated 25 June 2012, it has been

decided to allow Indian companies to avail of external

commercial borrowings (”ECBs”) for repayment of

Rupee loan(s) availed from the domestic banking

system and / or for fresh Rupee capital expenditure,

under the approval route, subject to such companies a)

being in the manufacturing and infrastructure sector; b)

consistent foreign exchange earner during the past

three financial years; c) not being in the default

list/caution list of the RBI; and subject further to the

condition that such ECBs shall only be utilized for

repayment of the Rupee loan(s) availed of for 'capital

expenditure' incurred earlier which are still outstanding

in the books of the domestic banking system and / or

for fresh Rupee capital expenditure. The overall ceiling

for such ECBs shall be USD 10 (ten) billion. The

maximum permissible ECB that can be availed of by an

individual company will be limited to 50 per cent of the

average annual export earnings realized during the

past three financial years. The ECBs will be allowed to

companies based on the foreign exchange earnings

and its ability to service the ECB. The companies should

draw down the entire facility within a month after taking

the Loan Registration Number (”LRN”) from the RBI.

Companies desirous of availing such ECBs may submit

their applications in Form ECB through their designated

Authorised Dealer bank with certification from the

Statutory Auditor regarding the utilization of Rupee

loan(s) with respect to 'capital expenditure' incurred

earlier. Statutory Auditor shall also certify that the

Indian company is a consistent foreign exchange earner

during the past three financial years. The outstanding

Rupee loan(s) shall be duly certified by the domestic

lending bank(s) concerned and the designated

Authorised Dealer bank. Authorised Dealer should

ensure that the foreign exchange for repayment of ECB

is not accessed from Indian markets and the liability

arising out of ECB is extinguished only out of the

foreign exchange earnings of the borrowing company.

***

2. Vide notification RBI/2011-12/618 A.P. (DIR Series) thCircular No. 135 dated 25 June 2012, it has been

decided:

a) to enhance with immediate effect the existing limit

for investment by SEBI registered Foreign Institutional

Investors (”FIIs”) in Government securities by a further

amount of USD 5 billion taking the overall limit for FII

investment in Government securities from USD 15

billion to USD 20 billion. Accordingly, in partial

amendment to paragraph 1 of the SEBI circular thCIR/IMD/FII&C/18/2010 dated 26 November 2010,

the current limit of USD 5 billion for FII investment in G-

Secs with 5 year residual maturity shall be enhanced to

USD 10 billion. Further, the residual maturity for the

said USD 10 billion limit will stand reduced from

aforesaid 5 years to 3 years.

Further, in order to broad base the non-resident

investor base for Government Securities, it has also

been decided to allow long term investors like

Sovereign Wealth Funds (”SWFs”), multilateral

agencies, endowment funds, insurance funds, pension

funds and foreign central banks to be registered with

SEBI, to also invest in Government Securities for the

entire limit of USD 20 billion.

b) to change conditions for the limit of USD 22 billion

for FII investment in corporate debt long term infra

category, including the sub-limit of USD 5 billion with

one year lock-in/residual maturity requirement and

USD 10 billion for non-resident investment in

Infrastructure Debt Funds (”IDFs”) (which are all within

the overall limit of USD 25 billion for investment in

infrastructure corporate bonds) as under:

i). the lock-in period for investments under this limit

has been uniformly reduced to one year; and

ii). the residual maturity of the instrument at the time

of first purchase by an FII/ eligible IDF investor

would be at least fifteen months.


Page 11

c) Further, Qualified Foreign Investors (”QFIs”) can

now invest in that mutual fund (MF) schemes that hold

at least 25 per cent of their assets (either in debt or in

equity or both) in infrastructure sector under the

current USD 3 billion sub-limit for investment in mutual

funds related to infrastructure.

***

3. Vide the Non-Banking Financial Company –Factors

(Reserve Bank) Directions, 2012 issued by the RBI on rd23 July 2012, RBI has introduced a new category of

NBFCs viz; Non-Banking Financial Company–Factors.

The Central Government notified the Factoring ndRegulation Act, 2011 on 22 January 2012 which

regulates Factors and assignment of receivables in

favour of Factors, among others. Under the Act,

factoring companies other than banks, Government

companies etc. were to be registered with the RBI as

NBFCs. Hence RBI has decided to introduce a new

category of NBFCs viz; Non-Banking Financial

Company–Factors.

***

1. Reduction of Time-line for Transfer of Equity Shares

and Prescription of Time-line for Transfer of Debt

Securities:

thSEBI has, by way of circular CIR/MIRSD/8/2012 dated 5

July 2012, reduced the timeline for registering share

transfers to 15 days from the date of lodgment. Earlier

the timeline was 1 month. The same timeline shall also

be applicable for transfer of debt securities. SEBI has

directed all the stock exchanges to amend clauses in

their listing agreements to facilitate the new timeline.

SECURITIES AND EXCHANGE

BOARD OF INDIA (“SEBI” )

UPDATES:

stThis new timeline will come into force from 1 October

2012.

***

th2. SEBI has by way of informal guidance dated 10 July

2012 to M/s R. Systems International Limited clarified

that an acquirer holding less than 25% can make a

voluntary offer and then acquire shares in the market

during the course of the offer so as to cross that limit

under the SEBI (Substantial Acquisition of Shares and

Takeovers ) Regulat ions , 2011 (“Takeover

Regulations”). SEBI has stated that the restriction,

under Regulation 22(1) of the Takeover Regulations,

which prevents completion of acquisitions before

completion of the public offer applies only to

acquisitions under an “agreement” and not through

open-market purchases. SEBI has also clarified that the

size of a competing offer is not required to be a

minimum of 26% similar to an original offer. SEBI

confirmed that this was not necessary in view of the

specific provisions of Regulation 20(2) of the Takeover

Regulations.

***

INDIRECT TAX UPDATE:

Amendment to CENVAT Credit Rules, 2004

Vide Notification No.28/2012-Central Excise (N.T) thdated 20 June 2012, the Central Government has

amended the CENVAT Credit Rules, 2004. The amended

rules provide that the provider of service providing

services unable to utilise the CENVAT credit availed on

inputs and input services for payment of service tax on

such output services, shall be allowed refund of such

unutilised CENVAT credit subject to procedure,

safeguards, conditions and limitations, which have

been prescribed vide Notification No. 27 /2012-CE th(N.T.) dated 18 June 2012 which inter alia provides that

such refund cannot be availed more than once for each

quarter. The new rules further amend the definition of

“exempted services” to include any taxable service


Page 12

whose part of value is exempted on the condition that

no credit of inputs and input services, used for

providing such taxable service (except a service which is

exported). Further, the definition of “output services” is

amended to exclude services where the whole of

service tax is liable to be paid by the recipient of service.

***

1. The CBEC has issued Notification No. 25/2012-S.T thdated 20 June 2012 providing exemption to 39

services. Amongst the list of 39 exempted services, the

sale of businesses, services of construction of metro

and monorail, legal services provided by an advocates

or a partnership firm to a business entity with a turnover

of up to 10 lakh in the preceding financial year,

exemption to firm of advocates on the same lines as

individual advocates, certain support services in formal

education, transportation of passengers by ropeway,

cable car or air-tram, public libraries, public

conveniences, services by Employees State Insurance

Corporation (ESIC) to persons governed under

Employees Insurance Act and services provided in a

taxable territory where both service provider and

recipient are in a non-taxable territory, have been

added.

***

th2. As per Notification No. 30/2012-S.T. dated 20

June 2012 the extent of tax payable by provider and

receiver for certain services under reverse charge have

been notified. A dual system of part payment of Service

Tax by the provider and part payment by the receiver stw.e.f 1 July 2012 has been prescribed under which the

following has been notified:

I) Insurance Auxiliary service by an agent, services in

relation to general insurance business and services in

relation to distribution of mutual fund by a distributor

or agent of mutual fund are the services deleted from

reverse charge mechanism and the service tax for these

SERVICE TAX UPDATES:

services shall be collected from service provider instead

of service receiver.

ii) New services are brought under the ambit of

reverse charge mechanism:

(a) Services provided or agreed to be provided by an

arbitral tribunal to business entity and services

provided or agreed to be provided by individual

advocate or a firm of advocates by way of legal services

to business entity. These have 100% reverse charge.

(b) 100% reverse charge for services provided or

agreed to be provided by Government or local

authority by way of support services to business entity

excluding renting of immovable property, and services

specified in Section 66D(a)(i): service by department of

Posts to any person other than government, Section

66D(a)(ii): services in relation to an aircraft or a vessel,

inside or outside the precincts of a port or an airport

and Section 66D(a)(iii): transport of goods or

passengers.

(c) Service provided by any individual, partnership firm

or an HUF whether registered or not including

association of persons to a body corporate in relation

to supply of manpower for any purpose has 75%

reverse charge, service portion in execution of works

contract has 50% reverse charge, provision of service in

relation to Rent a cab service on abated value to any

person who is not engaged in the similar line of

business has 100% reverse charge and provision of

service in relation to Rent a cab service on non-abated

value to any person who is not engaged in the similar

line of business has 40% reverse charge.

***

th3. Notification No. 33/2012-S.T dated 20 June 2012

exempts small service providers whose value of taxable

service does not exceed Rs.10 lakhs.

***


Page 13

th4. Vide Notification No. 36/2012-S.T dated 20 June

2012, CBEC has inserted a new Rule 6A under the

Service Tax Rules, 1994 relating to export of service.

Prior to this, provisions related to export of services

were governed by “Export of Service Rules, 2005”. As

per the new notification a service shall be treated as

export when -

a) the provider of service is located in the taxable

territory ,

b) the recipient of service is located outside India,

c) the service is not a service specified in the section 66D

of the Act,

d) the place of provision of the service is outside India,

e) the payment for such service has been received by

the provider of service in convertible foreign exchange,

and

f) the provider of service and recipient of service are not

merely establishments of a distinct person in

accordance with item (b) of Explanation 2 of clause (44)

of section 65B of the Act.

Further, the Notification grants rebate of service tax or

duty paid on input services or inputs, as the case may

be, used in providing such service and the rebate shall

be allowed subject to such safeguards, conditions and

limitations, as may be specified, by the Central

Government, by notification.

***


provides conditions, limitations and procedures

specified for rebate of central excise duties paid on

inputs and service tax paid on the input services used

for services exported in terms of Rule 6A of Service Tax

Rules, 1994. Such rebate is being granted to the

exporters of services, except for exports to 'Nepal and stBhutan'. Prior to 1 July 2012 the rebate of service tax or

duty paid on input services or inputs which are used for

providing such taxable service was granted as per Rule

5 of the Export of Service Rules, 2005.

***

6. As per Notification No. 40/2012-S.T. dated 20th

June 2012, the services on which service tax is leviable

under section 66B of the said Act, received by a unit

located in a SEZ or Developer of SEZ and used for the

authorized operations are exempted from the whole of

the service tax, education cess and secondary and

higher education cess leviable thereon.

***

th7. Notification No. 41/2012-S.T dated 29 June 2012,

provides rebate of Service Tax paid on the taxable

services which are received by an exporter of goods and

used for export of goods, subject to the extent and

manner specified in the Notification.

i) The rebate shall be granted by way of refund of

service tax paid on the specified services.

ii) The rebate shall be claimed either on the basis of

rates specified in the Schedule of rates annexed to the

notification or on the basis of documents.

iii) No CENVAT credit of service tax paid on the

specified services used for export of goods should have

been taken under the CENVAT Credit Rules, 2004;

iv) The rebate shall not be claimed by a unit or

developer of a Special Economic Zone.

***


exempts the service provided by a commission agent

located outside India and engaged under a contract or

agreement or any other document by the exporter in

India, to act on behalf of the exporter, to cause sale of

goods exported by him. The exemption is as calculated

on a value up to ten per cent of the free on board value

of export goods for which the said specified service has


Page 14

been used, subject to the conditions specified.

***

th9. Notification No. 28/2012-C.E (N.T) dated 20 June

2012 has been issued amending the CENVAT Credit

Rules 2012. Apart from several change in definitions, a

new Rule 5B has been inserted in the CENVAT Credit

Rules, 2012. Rule 5B provides refund of CENVAT Credit

to service providers providing services taxed on reverse

charge basis. The refund of CENVAT Credit under Rule 5

of CENVAT Credit Rules, 2004 is subjected to specified

safeguards, conditions and limitations laid down under thNotification No. 27/2012-CE(N.T) dated 18 June 2012.

***

T E L E C O M R E G U L A T O R Y

AUTHORITY OF INDIA (“TRAI”)

UPDATE

TRAI has, in order to ensure more transparency in

delivery of broadband services and to protect interests thof consumers vide its notification dated 27 July 2012

issued certain directions to the broadband service

providers requiring them to provide on their website

and in all advertisements published through any media,

the information about (i) data usage limit with higher

speed; (ii) speed of connection upto data usage limit;

and (iii) speed of connection beyond data usage limit.

The aforesaid information must also be provided in

printed form to the new subscribers on their enrolment

and to existing subscribers through email and SMS.

Further, it has been directed that broadband

connection should not be below 256 kilobits per

second for all tariff plans and that the customers must

be provided an alert at the time of login to the network

of the service provider when their data usage reaches

eighty percent of data usage limit subscribed by them.

***


Page 15

CASELAW UPDATES

Decision by the Supreme Court of India

ACC Limited (formerly known as the Associated Cement Co. Ltd) v. Global Cements Ltd.,

th2012 STPL(Web) 327 SC, Date: 11 June 2012, Bench: K.S. Radhakrishnan & Jagdish Singh Khehar, JJ.

The Apex Court in ACC Limited versus Global Cements Limited (SLP (c) 17689 of 2012) has held that even in case of

the death of the named arbitrator the arbitration clause survives in the absence of any prohibition or debarment

dispute the parties by a substitute arbitrator. Objection can be raised only when such prohibition or debarment

exists.

In this case, the arbitration clause in the Agreement between the parties (clause 21) named two people who could be thappointed arbitrators in case of any dispute. Subsequently when disputes arose between the parties on 8 October

2011, the Respondent sent a letter to the Petitioner invoking clause 21 of the agreement and suggesting the name

of a sole arbitrator as the two nominated arbitrators had expired. The said notice was objected to by the Petitioner

on the ground that Clause 21 did not provide for appointment of any arbitrator other than those specifically named

in the said clause.

Thereafter, the Respondent filed an application under section 11 of the Arbitration and Conciliation Act 1996 (Act)

before the Bombay High Court. The Bombay High Court allowed the application and appointed a former judge as

the sole arbitrator, holding that in the absence of any prohibition or debarment in appointment of a substitute

arbitrator, the courts cannot presume that the parties intended that the vacancy that arises cannot be supplied by

the court under Section 11. It also noted that unless the parties have expressly precluded such a course being

followed, policy of the law must be given effect to which is to promote the efficacy of arbitration and the efficacy of

commercial arbitration - particularly when business dealings are based on an agreement which provides recourse to

arbitration.

The said order was challenged by the Petitioner before the Apex Court on the ground that parties never intended to

refer the dispute to any arbitrator except those named and that since the named arbitrators were no more, the

arbitration clause had no life.

The Apex Court while referring to other cases, upheld the Bombay High Court's decision, holding that clause 21 did

not prohibit or debar the parties in appointing a substitute arbitrator in place of the named arbitrators and so the

parties could approach the court for appointment of an arbitrator. The Apex Court also clarified that in case the

named arbitrator refuses to arbitrate the dispute, in such a situation also, it is possible for the parties to appoint a

substitute arbitrator unless the clause provides to the contrary.

***


Page 16

Decisions by the Delhi High Court:

M/s Indrama Investment Pvt. Ltd. and. M/s Select Holiday Resorts Ltd., CA No.331/2005 in Co. Pet. stNo.95/2004, Date: 1 June 2012

Sanction for a scheme of Amalgamation of Indrama Investment Private Limited (transferor company) with Select

Holiday Resorts Ltd. (transferee company) was sought by means of Company Petition No.95 of 2004 under Sections

391 and 394 of the Companies Act, 1956 (hereinafter referred to as the “Act”).

This was the second motion, previous to which, the transferor company had filed a Company Application under

Sections 391(1) and 394 of the Act praying for directions regarding dispensing with the requirement of convening of

the meetings of the equity shareholders and creditors of the transferor company and further directions regarding

convening and holding of meetings of the shareholders and unsecured and secured creditors of the transferee

company for the purpose of considering and approving the scheme of arrangement. This application was disposed

of by the Court dispensing with the meetings of the shareholders and creditors of the transferor company and

further directing convening of separate meetings of the equity shareholders, secured and unsecured creditors of

the transferee company.

After this, the Company petition for sanction of scheme of amalgamation was filed and duly advertised. The

Regional Director, Department of Company Affairs, Kanpur filed a report stating that he had no objections. Neither

were any other objections filed by anyone else for sanction of scheme and the court duly granted the scheme of

amalgamation.

Six months later, two applications were filed by two separate shareholders to set aside the order granting sanction

for the scheme since their shareholding was reduced and forfeited and as a result they were ousted from the

company. The applicants had two primary grievances namely that the valuation was improper and that this

amalgamation was a shrewd and fraudulent device to have 100% control over the company by the Sharma group

who prior to that held 99% of the company. The Applicants also argued that they should be treated as separate

classes of shareholders since 99% of the shares were held by the Sharma group and they could not be huddled along

with that. They hence argued that a separate meeting had to held for them under Section 391 of the Act.

The Court held that just because the applicants had small fractions of shares, that would not make them a separate

class. It held that they remained in the same category as other shareholders, i.e., equity shareholders and the

procedure as laid down in Section 391 of the Act was followed both at the stage of first motion and at the second

motion before approving the scheme and there was no need to revisit that.

The question to be determined here was whether the amalgamation was an unfair or inequitable arrangement. The

High Court confirmed the law as has been laid down earlier that merely because the arrangement results in

extinguishing some shares and resulting into 100% shareholdings in the hands of a particular group cannot be

treated improper per se. As regards the valuation, it upheld the settled position of law that a valuer's report is not to

be interfered with by a Court in the absence of any fraud or illegality which was not the allegation in the present case.

The court went on to note that valuation of shares is a technical matter and test of fairness of this valuation is not

whether the offer is fair to a particular shareholder but whether the overwhelming majority of the shareholders have

approved of the valuation.


Page 17

Hence, since the applicants were unable to show any ulterior motives behind the scheme, the applications were

dismissed.

***

Centre For Public Interest Litigation v Union of India and others, Delhi High Court

thDate of decision: 9 July 2012; Bench: A. K. Sikri J. Rajiv Sahai Endlaw J.

The Ministry of Civil Aviation (”MOCA”) was brought under the scanner in this PIL, for alleged deliberate and

misdirected decisions driving Air India (”AI”) and Indian Airlines (”IA”) into heavy losses to the tune of thousands of

crores. The Petitioner sought an investigation into this stating that MOCA's decisions had led to bail out plans by the

Government at the cost of the exchequer and benefited various other private Indian and foreign airlines. It was

contended that the lack of prudence on behalf of the executive and gross violations at various stages without even

proper study and lack of transparency proved that everything smacked of malafide, ulterior motives and ill

intentions to seek personal gains at the cost of national resources.

Several decisions of the government were under challenge, stating that all these decisions had been made without

proper study and at a huge cost leading to large debt and unproductivity:

(1) The decision, in 2006, to merge AI and IA. Though the merger was a good idea then given the market, it was only

on paper and never executed, though it was to be completed by 2009;

(2) AI's and IA's decision to go in for a huge acquisition plan to replace and enhance their fleet;

(3) The approach of leasing of aircrafts under leases that were expensive and had no exit clause;

(4) The decisions of the government granting major profit making routes and timings to one or two private airlines

causing loss to market share of the national carriers. Even foreign airlines were given unrestricted entry into India

and major routes were given to them without taking any reciprocal benefits for Air India;

5) Change of name from 'Indian Airlines' to Indian which was unnecessary and done at a huge cost.

These issues had been raised earlier by the two Parliamentary Committees namely Parliamentary Standing

Committee on Transport, Tourism and Culture and the Committee on Public Undertakings in their Reports.

The court looking into whether it could interfere with the executive's decision, noted that decision makers could also

commit errors and simply because the decision turns out to be erroneous or commercially unviable would not be a

reason enough to castigate the decision makers. However, this is subject to the caveat that the decisions taken

should be bonafide and not actuated with ulterior motives, malafide or arbitrariness. The reports of several

committees having indicated that “all is not well” with the government's decisions, the court was of the opinion that

some investigation was definitely required to see as to whether this was done by some particular persons for their

personal gains. The court noting that the matter is currently under examination of the Public Accounts Committee,


Page 18

felt that there was no need for the judiciary to intervene at this juncture but it advised the PAC to give the matter a

thorough examination.

***

Decision by the Bombay High Court:

The Commissioner of Income Tax Vs. M/s. Triumph International Finance (I) Limited, Income Tax Appeal No. th5746 of 2010, Date: 12 June 2012

Triumph International Finance (I) Limited (“Assessee”), a Public Limited Company, is a member of the National Stock

Exchange and is also a Category I Merchant Banker, registered with the Securities and Exchange Board of India

(SEBI). The Assessee is engaged in the business of shares, stock broking, investment and trading in shares and

securities.

For the assessment year 2003-2004, the Assessee had filed its return of income declaring loss of Rs. 17,27,21,815/-. stThe assessment was completed determining a loss of Rs. 9,84,92,500/-. Prior to 1 April 2002, the Assessee had

accepted a sum of Rs. 4,29,04,722/- as loan/inter-corporate deposit from the Investment Trust of India which was

repayable during the assessment year 2003-2004. On 3rd October 2002, the Assessee had transferred 1,99,300

shares of Rashal Agrotech Limited held by it to the Investment Trust of India for a total consideration of Rs.

4,28,99,325/-. Therefore, in the assessment year 2003-2004, the Assessee was liable to repay the loan/inter-

corporate deposit amounting to Rs. 4,29,04,722/- to Investment Trust of India and receive Rs. 4,28,99,325/- from

Investment Trust of India towards sale price of the shares of Rashal Agrotech Limited sold by the Assessee to the

Investment Trust of India. Instead of repaying the loan/inter-corporate deposit to the Investment Trust of India and

receiving the sale price of the shares from the Investment Trust of India, both the parties agreed that the amount

payable/receivable be set off in the respective books of account by making journal entries and pay the balance by

account payee cheque. Accordingly, after setting off of the mutual claim through journal entries, the balance

amount of Rs. 5,397/- due and payable by the Assessee to the Investment Trust of India was paid by a crossed

cheque dated 19th February 2003 drawn on the Citibank.

The assessing officer issued a show-cause notice calling upon the Assessee to show cause as to why action should

not be taken against the Assessee for violating the provisions of Section 269T of the Act, which provides that the

mode of repayment of loans above Rs 20,000/- should be only by account payee cheque or account payee bank

draft. The Assessee filed a detailed reply to the show-cause notice. Rejecting the contentions of the Assessee, the

assessing officer imposed penalty under Section 271E of the Act amounting to Rs. 4,28,99,325/- on the ground that

the Assessee is in contravention of the provisions of Section 269T of the Act. The Commissioner of Income Tax

(Appeals) confirmed the penalty levied upon the Assessee but the Tribunal reversed the CIT(A) order and held that

the payment through journal entries do not fall within the ambit of Section 269SS (which provides for the mode of

taking/accepting loans/deposits over Rs 20,000) or 269T of the Act and consequently no penalty can be levied either

under Section 271D or Section 271E of the Act. Challenging the aforesaid order, the Revenue filed an appeal before

the Bombay High Court.

The Assessee contended before the High Court that the bonafide transaction of repayment of loan/deposit by way

of adjustment through book entries carried out in the ordinary course of businesswould not come within the


Page 19

mischief of Section 269T of the Act and that Section 269T is applicable only if there is an actual outflow of funds and

not otherwise. It was further contended that if Section 269T is construed literally, it would lead to absurdity.

Rejecting the contentions of the Assessee, the Bombay High Court held that when there is a repayment of

loan/deposit through journal entries there is a violation of the provisions of Section 269T of the Act, even when there

is no actual outflow of funds.

On the question of imposition of penalty, the High Court observed that Section 273B interalia provides that

notwithstanding anything contained in Section 271E, no penalty shall be imposed on the person or the assessee, as

the case may be, for any failure referred to in Section 269T, if such person or assessee proves that there was

reasonable cause for such failure. The court held that, the expression 'reasonable cause' used in Section 273B would

have a wider connotation than the expression 'sufficient cause'. Therefore, the expression 'reasonable cause' in

Section 273B for non-imposition of penalty under Section 271E would have to be construed liberally depending

upon the facts of each case. In the instant case, the court observed that it is not in dispute that settling the claims by

making journal entries in the respective books is also one of the recognized modes of repaying loan/deposit.

Therefore, on the facts of the present case it was held that though the Assessee has violated the provisions of

Section 269T, the assessee has shown reasonable cause and therefore, no penalty can be imposed under Section

271E of the Act.

***


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