Whereas the annexed Convention between the Government of Republic of India and the Council of Ministers of Serbia and Montenegro for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital was signed at New Delhi on the 8th day of February, 2006;
And whereas the State Union of Serbia and Montenegro was disintegrated into two independent States after Montenegro’s formal declaration of independence on 3rd June, 2006 and Serbia’s formal declaration of independence on 5th June, 2006;
And whereas the National Assembly of the Republic of Serbia has ratified the said Convention as published in the Official Gazette of the Republic of Serbia-Internationa l Treaties No.102/07 dated 7th November, 2007 and accordingly reference in the said Convention to ‘Serbia and Montenegro’ shall be read as reference to Serbia; And whereas the date of entry into force of the said Convention is the 23rd day of September, 2008, being the date of later of the notifications of completion of the procedures as required by the respective laws for entry into force of this Convention, in accordance with paragraph 2 of Article 30 of the said Convention;And whereas sub-paragraph (2) of paragraph 2 of Article 30 of the said Convention provides that the provisions of the Convention shall have effect in India in respect of the taxes on income derived and taxes on capital owned in each fiscal year beginning on or after the first day of April in the calendar year next following the year in which the Convention enters into force;
Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961) and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.
Friday, January 23, 2009
Govt on overdrive to grant service tax refunds to exporters
Govt on overdrive to grant service tax refunds to exporters
In a recently issued SERVICE TAX CIRCULAR NO. 106/09/2008 DT. 11.12.2008 , Central Board of Excise and Customs (CBEC) has relaxed the procedures for refund of tax paid on specified services used for export of goods with a direction to its formation to pay refund claims in 30 days.
Earlier a Circular No. 101/4/2008-ST, dated 12.5.2008 was issued whereby the procedural difficulties that were being faced by the merchant exporters and the exporters having multi location offices were resolved. Subsequently, notification No. 32/2008-ST, dated 18.11.2008 has also been issued to extend the period of filing of refund claim by the exporter from 60 days to six month and from the end of the quarter to which such refund claim pertains and also to allow refund on testing service, without any copy of agreement with the buyer of goods, if such testing and analysis is statutorily stipulated by domestic rules and regulations.
In signification move Board has taken up the issue of the exporters that are not registered with the central excise. Now the unregistered exporters will have to file a refund claim. Board circular mentions it that " (i) He shall file the claim with the central excise authority having jurisdiction the over factory of manufacture [para 2 (b)(i) of the notification];
(ii) He shall file a declaration in the format given in the annexure to the notification. The CX authority would issue a STC No. (Service Tax Code) to him [para 2 (c) and 2(d) of the notification].
The Board has further decided that simplified procedure for refund, as prescribed by the Board vide circular No. 828/5/2006-CX dated 20.4.2006 for sanction of refund/rebate of unutilized CENVAT credit under rule 5 of the CENVAT Credit Rules, 2004/rebate would apply to refund claims under notification No. 41/2007-ST. Under this simplified procedure, 80% of the due refund amount is sanctioned as adhoc interim refund to specified category of exporters having good track record, within 15 days of filing of a refund claim, subject to the condition that refund claim is complete and contains the requisite documents.
This simplified procedure for sanction of refund/rebate is applicable only to the following categories of exporters having good track record i.e. exporters against whom no offence case has been booked by the Department during the preceeding three years or/and where no recovery of short levy is pending on date.
(a) All exporters who have an export turnover of Rs. 5 crores in the current year or the preceding financial year.
(b) Public Sector Undertakings including PSUs of the State Government.
(c) Star Export Houses as specified under Chapter 3.5 of the Foreign Trade Policy, 2004-2009.
(d) Manufacturer-exporters registered with Central Excise who have been exporting during the previous two financial years and have minimum export of Rs. 1 crore or more during the preceding financial year.
(e) Manufacturer-exporters registered with Central Excise who has paid duty of Rs. 1 crore or more during the preceding financial year.
(f) All Export Oriented Units.
In a recently issued SERVICE TAX CIRCULAR NO. 106/09/2008 DT. 11.12.2008 , Central Board of Excise and Customs (CBEC) has relaxed the procedures for refund of tax paid on specified services used for export of goods with a direction to its formation to pay refund claims in 30 days.
Earlier a Circular No. 101/4/2008-ST, dated 12.5.2008 was issued whereby the procedural difficulties that were being faced by the merchant exporters and the exporters having multi location offices were resolved. Subsequently, notification No. 32/2008-ST, dated 18.11.2008 has also been issued to extend the period of filing of refund claim by the exporter from 60 days to six month and from the end of the quarter to which such refund claim pertains and also to allow refund on testing service, without any copy of agreement with the buyer of goods, if such testing and analysis is statutorily stipulated by domestic rules and regulations.
In signification move Board has taken up the issue of the exporters that are not registered with the central excise. Now the unregistered exporters will have to file a refund claim. Board circular mentions it that " (i) He shall file the claim with the central excise authority having jurisdiction the over factory of manufacture [para 2 (b)(i) of the notification];
(ii) He shall file a declaration in the format given in the annexure to the notification. The CX authority would issue a STC No. (Service Tax Code) to him [para 2 (c) and 2(d) of the notification].
The Board has further decided that simplified procedure for refund, as prescribed by the Board vide circular No. 828/5/2006-CX dated 20.4.2006 for sanction of refund/rebate of unutilized CENVAT credit under rule 5 of the CENVAT Credit Rules, 2004/rebate would apply to refund claims under notification No. 41/2007-ST. Under this simplified procedure, 80% of the due refund amount is sanctioned as adhoc interim refund to specified category of exporters having good track record, within 15 days of filing of a refund claim, subject to the condition that refund claim is complete and contains the requisite documents.
This simplified procedure for sanction of refund/rebate is applicable only to the following categories of exporters having good track record i.e. exporters against whom no offence case has been booked by the Department during the preceeding three years or/and where no recovery of short levy is pending on date.
(a) All exporters who have an export turnover of Rs. 5 crores in the current year or the preceding financial year.
(b) Public Sector Undertakings including PSUs of the State Government.
(c) Star Export Houses as specified under Chapter 3.5 of the Foreign Trade Policy, 2004-2009.
(d) Manufacturer-exporters registered with Central Excise who have been exporting during the previous two financial years and have minimum export of Rs. 1 crore or more during the preceding financial year.
(e) Manufacturer-exporters registered with Central Excise who has paid duty of Rs. 1 crore or more during the preceding financial year.
(f) All Export Oriented Units.
If only Raju had read Jack Welch
A few days after the icon-turnedconman Ramal inga Raju dropped the Satyam bombshell, a friend of mine who happens to be a financial consultant, recommended that I read Jack Welch’s Winning.
Welch, during his 40-year career at General Electric, led the company to success around the globe in multiple markets and against brutal competition, before retiring in 2001 as chairman and CEO. If the legendary Bill Gates described the book as “a candid and comprehensive look at how to succeed in business — for everyone from college graduates to CEOs’’, another legend, Warren Buffet, said “no other management book will ever be needed.’’ As I finished reading it in a week, writing reports on the Satyam scandal in between, there was no doubt that both Gates and Buffet were right, and I was left wondering how much of what was said in the 360-page book was true in the case of the Hyderabad-based IT major.
Many experts have speculated — in speech and print — as to how this fraud, said to be one of the biggest in corporate India, could have occurred. At the risk of being called cynical, I doubt whether it would be fully unravelled given the politico-corporate nexus (with due apologies to Hon’ble MP Jayanthi Natarajan who appears to be upset over politicians being blamed for the scandal).
Many also likened it to what happened to Enron or Arthur Andersen, but the question that remains is what is the common “wrecking point’’, so to speak, between the three. For this, we need to go back to Jack Welch to grasp the disconnect between mission and values, the most abstract, overused and misunderstood words in business but all the same critical for success.
Founded almost a century ago, Arthur Andersen’s mission was to be the most respected and trusted auditing firm in the world. It was a company that prided itself on the courage to say no, even if that meant losing a client. Not surprisingly, it earned respect around the globe. As the boom period arrived in the ’80s, Arthur Andersen decided to enter the consulting business, where there was excitement and big money.
The conscientiousness that guided the accounting firm gave way to aggressive sales behaviour by marketing men and soon the consulting business had eclipsed the auditing side. Quite naturally, disputes arose over which was the better business and soon the partners ended up in courts, leading to the collapse of the company in 2002.
The case of Enron, as Jack Welch tells us, was no different. It was a simple pipeline and energy company, engaged in supplying gas from one point to another, cheaply and quickly. Then, the company changed missions and made Enron a predominantly trading firm. Again, the goal was faster growth. The trading desk was where everyone wanted to be, and the pipeline and energy business was relegated to the background.
Ultimately, Enron collapsed.
Now, the Ramalinga Raju story. Having failed in quite a few businesses in the early stages of his entrepreneurship, Ramalinga Raju, like many others, ventured into software in the late ’80s. Raju’s mission was to be among the top IT companies but when the company grew significantly, then began the disconnect between the mission and values. The initial group of people who shaped and gave a direction to the company found themselves expendable. Hiring was done left, right and centre — often reportedly for pecuniary considerations by those vested with that authority — as businesses are also appraised in terms of employee strength. Then, there was lack of candour, the biggest dirty little secret in business, as Welch calls it. It blocks smart ideas, quick action and valuable ideas from the staff.
A very senior staffer at Satyam narrated how the only dictum for employees was to do what Ramalinga Raju wanted them to. No one really exercised their brains and even if they did, they were unwilling to tell the boss that what he wanted to be done may not be the best course of action. Just one example.
A year ago, Raju desired that an internal survey be done on client satisfaction, obviously because he smelt that all was not well.
Quite a few wanted to tell the truth but the response they got from the group heads was to soften the bad news. Ultimately, the CEO was given survey forms in which client satisfaction was rated at 8 or 9 out of 10, far from reality. Not being candid is self-interest — making one’s own life easier — and that is what Satyam heads were advised to do.
In one of those innumerable meetings Jack Welch addressed since his retirement, he was once asked by a young woman how any businessperson could practise candour when “only the voice of the boss is allowed.’’ His counter-query was: “Why aren’t you asking those questions to your own bosses?’’ Pat came her answer: “I can’t bring that up.
I’d get killed.’’ It was no different at Satyam where if you wanted to keep the job you had to shut your mouth, just as its former chief finance officer Vadlamani Srinivas did. All he did was to sign wherever he was asked to. Like many others, he wanted to keep the job and was paid handsomely too for remaining silent. If only Ramalinga Raju had chosen a core team of professionals and not mere yes-men, the current crisis in Satyam may perhaps have been averted.
Over a period, corporate values in Satyam were given the go-by. Like Andersen and Enron, Raju also embarked on a short-cut method to make big money. The path chosen was real estate and infrastructure. Over the past two years, Satyam staffers often gossiped in canteens over lunch that their boss was no longer interested in the software business and would soon plunge into infrastructure projects. For Raju, the focus moved away from managing creative brains in the best possible manner to engaging powerbrokers (liaison officers as they are euphemistically called) to deal with the political system for bagging contracts. The inevitable collapse happened and the rest is history.
Having said this, the fact remains that for millions of young minds in the state of Andhra Pradesh, if not in the country, Ramalinga Raju was an icon. Getting a job in Satyam was their guiding star while pursuing their software education. Thus, more than the magnitude of the fraud, the bigger damage is the hurt that someone whom they had eulogised and looked up to for inspiration is now charged with a host of offences.
Not just the young. Raju was a role model even for businessmen who kept dreaming of making it big like him. “Are you from Ramalinga Raju’s State?” was a frequent question whenever they went out of the State or country. Now, the same query which once elicited pride smacks of ridicule.
The money involved in the fraud may be recovered, Satyam may be back on track but the beating the image has taken will take a lot of time to repair.
Welch, during his 40-year career at General Electric, led the company to success around the globe in multiple markets and against brutal competition, before retiring in 2001 as chairman and CEO. If the legendary Bill Gates described the book as “a candid and comprehensive look at how to succeed in business — for everyone from college graduates to CEOs’’, another legend, Warren Buffet, said “no other management book will ever be needed.’’ As I finished reading it in a week, writing reports on the Satyam scandal in between, there was no doubt that both Gates and Buffet were right, and I was left wondering how much of what was said in the 360-page book was true in the case of the Hyderabad-based IT major.
Many experts have speculated — in speech and print — as to how this fraud, said to be one of the biggest in corporate India, could have occurred. At the risk of being called cynical, I doubt whether it would be fully unravelled given the politico-corporate nexus (with due apologies to Hon’ble MP Jayanthi Natarajan who appears to be upset over politicians being blamed for the scandal).
Many also likened it to what happened to Enron or Arthur Andersen, but the question that remains is what is the common “wrecking point’’, so to speak, between the three. For this, we need to go back to Jack Welch to grasp the disconnect between mission and values, the most abstract, overused and misunderstood words in business but all the same critical for success.
Founded almost a century ago, Arthur Andersen’s mission was to be the most respected and trusted auditing firm in the world. It was a company that prided itself on the courage to say no, even if that meant losing a client. Not surprisingly, it earned respect around the globe. As the boom period arrived in the ’80s, Arthur Andersen decided to enter the consulting business, where there was excitement and big money.
The conscientiousness that guided the accounting firm gave way to aggressive sales behaviour by marketing men and soon the consulting business had eclipsed the auditing side. Quite naturally, disputes arose over which was the better business and soon the partners ended up in courts, leading to the collapse of the company in 2002.
The case of Enron, as Jack Welch tells us, was no different. It was a simple pipeline and energy company, engaged in supplying gas from one point to another, cheaply and quickly. Then, the company changed missions and made Enron a predominantly trading firm. Again, the goal was faster growth. The trading desk was where everyone wanted to be, and the pipeline and energy business was relegated to the background.
Ultimately, Enron collapsed.
Now, the Ramalinga Raju story. Having failed in quite a few businesses in the early stages of his entrepreneurship, Ramalinga Raju, like many others, ventured into software in the late ’80s. Raju’s mission was to be among the top IT companies but when the company grew significantly, then began the disconnect between the mission and values. The initial group of people who shaped and gave a direction to the company found themselves expendable. Hiring was done left, right and centre — often reportedly for pecuniary considerations by those vested with that authority — as businesses are also appraised in terms of employee strength. Then, there was lack of candour, the biggest dirty little secret in business, as Welch calls it. It blocks smart ideas, quick action and valuable ideas from the staff.
A very senior staffer at Satyam narrated how the only dictum for employees was to do what Ramalinga Raju wanted them to. No one really exercised their brains and even if they did, they were unwilling to tell the boss that what he wanted to be done may not be the best course of action. Just one example.
A year ago, Raju desired that an internal survey be done on client satisfaction, obviously because he smelt that all was not well.
Quite a few wanted to tell the truth but the response they got from the group heads was to soften the bad news. Ultimately, the CEO was given survey forms in which client satisfaction was rated at 8 or 9 out of 10, far from reality. Not being candid is self-interest — making one’s own life easier — and that is what Satyam heads were advised to do.
In one of those innumerable meetings Jack Welch addressed since his retirement, he was once asked by a young woman how any businessperson could practise candour when “only the voice of the boss is allowed.’’ His counter-query was: “Why aren’t you asking those questions to your own bosses?’’ Pat came her answer: “I can’t bring that up.
I’d get killed.’’ It was no different at Satyam where if you wanted to keep the job you had to shut your mouth, just as its former chief finance officer Vadlamani Srinivas did. All he did was to sign wherever he was asked to. Like many others, he wanted to keep the job and was paid handsomely too for remaining silent. If only Ramalinga Raju had chosen a core team of professionals and not mere yes-men, the current crisis in Satyam may perhaps have been averted.
Over a period, corporate values in Satyam were given the go-by. Like Andersen and Enron, Raju also embarked on a short-cut method to make big money. The path chosen was real estate and infrastructure. Over the past two years, Satyam staffers often gossiped in canteens over lunch that their boss was no longer interested in the software business and would soon plunge into infrastructure projects. For Raju, the focus moved away from managing creative brains in the best possible manner to engaging powerbrokers (liaison officers as they are euphemistically called) to deal with the political system for bagging contracts. The inevitable collapse happened and the rest is history.
Having said this, the fact remains that for millions of young minds in the state of Andhra Pradesh, if not in the country, Ramalinga Raju was an icon. Getting a job in Satyam was their guiding star while pursuing their software education. Thus, more than the magnitude of the fraud, the bigger damage is the hurt that someone whom they had eulogised and looked up to for inspiration is now charged with a host of offences.
Not just the young. Raju was a role model even for businessmen who kept dreaming of making it big like him. “Are you from Ramalinga Raju’s State?” was a frequent question whenever they went out of the State or country. Now, the same query which once elicited pride smacks of ridicule.
The money involved in the fraud may be recovered, Satyam may be back on track but the beating the image has taken will take a lot of time to repair.
NOTIFICATION NO. 11/2009
Income-tax (Fourth Amendment) Rules, 2009 - Amendment in rule 37A - TDS/Time limit under rule 37A revised
In exercise of the powers conferred by section 295 read with sub-section (3) of section 200 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2009
(2) They shall come into force with effect from the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in rule 37A, —
(a) for the words “shall send within fourteen days from the end of the quarter”, the words “shall send on or before the 15th July, the 15th October, the 15th January in respect of the first three quarters of the financial year and on or before the 15th June following the last quarter of the financial year” shall be substituted.
(b) the proviso shall omitted
In exercise of the powers conferred by section 295 read with sub-section (3) of section 200 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2009
(2) They shall come into force with effect from the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in rule 37A, —
(a) for the words “shall send within fourteen days from the end of the quarter”, the words “shall send on or before the 15th July, the 15th October, the 15th January in respect of the first three quarters of the financial year and on or before the 15th June following the last quarter of the financial year” shall be substituted.
(b) the proviso shall omitted
NOTIFICATION NO. 11/2009
Income-tax (Fourth Amendment) Rules, 2009 - Amendment in rule 37A - TDS/Time limit under rule 37A revised
In exercise of the powers conferred by section 295 read with sub-section (3) of section 200 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2009
(2) They shall come into force with effect from the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in rule 37A, —
(a) for the words “shall send within fourteen days from the end of the quarter”, the words “shall send on or before the 15th July, the 15th October, the 15th January in respect of the first three quarters of the financial year and on or before the 15th June following the last quarter of the financial year” shall be substituted.
(b) the proviso shall omitted
In exercise of the powers conferred by section 295 read with sub-section (3) of section 200 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2009
(2) They shall come into force with effect from the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in rule 37A, —
(a) for the words “shall send within fourteen days from the end of the quarter”, the words “shall send on or before the 15th July, the 15th October, the 15th January in respect of the first three quarters of the financial year and on or before the 15th June following the last quarter of the financial year” shall be substituted.
(b) the proviso shall omitted
eTDS Statement without sufficient valid PANs...
Procedure for filing TDS returns with insufficient deductee PAN
As per instructions issued by the Central Board of Direct Taxes (CBDT), it is
mandatory for deductors to file TDS/TCS statements with a threshold limit of
Permanent Account Number (PAN) of deductees. To facilitate deductors who face
problem in filing TDS returns because of insufficiency of PAN of the deductees and
also to accommodate the deductees who have intimated their PAN, the Income Tax
Department (ITD) has specified the following procedure for filing TDS/TCS returns:
Deductors can file a return containing deductee records which meets the
specified threshold limit of PAN quoting, i.e., a deductor can file a return
containing deductee details who have provided valid PAN. It can
subsequently file a correction return with details of remaining deductees.
E.g. as below:
Suppose a challan payment of Rs.1,00,000/- has been made for nonsalary
TDS against 100 deductees each with TDS of Rs.1,000/-. Under
the existing procedure the deductor will have to quote at least 85 PAN
failing which his return will be rejected.
there are only 50 deductees whose PAN is available and the
deductor attempts to file a return with details of 100 deductees with
PAN of only 50 deductees, the return will automatically be rejected at
present.
However, if he files a return with challan amount of Rs. 1,00,000/- and
with details of 50 deductees with PAN, with deductee total of
Rs.50,000/-, the return will be accepted. It means the deductor can
furnish the details relating to such deductees whose PANs are
available.
The deductor can later file correction returns with other details of
remaining deductees with the same challan details, i.e., the challan
amount should be the amount deposited (in this case Rs. 1,00,000/-).
The return will be accepted so long as the TDS total of incremental
deductees is less than or equal to the balance of Rs.50,000/-.
As per instructions issued by the Central Board of Direct Taxes (CBDT), it is
mandatory for deductors to file TDS/TCS statements with a threshold limit of
Permanent Account Number (PAN) of deductees. To facilitate deductors who face
problem in filing TDS returns because of insufficiency of PAN of the deductees and
also to accommodate the deductees who have intimated their PAN, the Income Tax
Department (ITD) has specified the following procedure for filing TDS/TCS returns:
Deductors can file a return containing deductee records which meets the
specified threshold limit of PAN quoting, i.e., a deductor can file a return
containing deductee details who have provided valid PAN. It can
subsequently file a correction return with details of remaining deductees.
E.g. as below:
Suppose a challan payment of Rs.1,00,000/- has been made for nonsalary
TDS against 100 deductees each with TDS of Rs.1,000/-. Under
the existing procedure the deductor will have to quote at least 85 PAN
failing which his return will be rejected.
there are only 50 deductees whose PAN is available and the
deductor attempts to file a return with details of 100 deductees with
PAN of only 50 deductees, the return will automatically be rejected at
present.
However, if he files a return with challan amount of Rs. 1,00,000/- and
with details of 50 deductees with PAN, with deductee total of
Rs.50,000/-, the return will be accepted. It means the deductor can
furnish the details relating to such deductees whose PANs are
available.
The deductor can later file correction returns with other details of
remaining deductees with the same challan details, i.e., the challan
amount should be the amount deposited (in this case Rs. 1,00,000/-).
The return will be accepted so long as the TDS total of incremental
deductees is less than or equal to the balance of Rs.50,000/-.
Wednesday, January 21, 2009
NOTIFICATION NO. 10/2009
Income-tax (Third Amendment) Rules, 2009
- Amendment in New Appendix 1
In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income-tax (Third Amendment) Rules, 2009
(2) They shall come into force on the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in the Table to New Appendix 1, in Part-A relating to TANGIBLE ASSETS, under the heading III. MACHINERY AND PLANT, in item (3), after sub-item (vi) and entries relating thereto, the following shall be inserted, namely:—
“(via) New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of April, 2009 and is put to use before the 1st day of April, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table] 50”.
[F. No. 142/01/09-TPL]
- Amendment in New Appendix 1
In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules may be called the Income-tax (Third Amendment) Rules, 2009
(2) They shall come into force on the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in the Table to New Appendix 1, in Part-A relating to TANGIBLE ASSETS, under the heading III. MACHINERY AND PLANT, in item (3), after sub-item (vi) and entries relating thereto, the following shall be inserted, namely:—
“(via) New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of April, 2009 and is put to use before the 1st day of April, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table] 50”.
[F. No. 142/01/09-TPL]
NOTIFICATION NO: 5/2009, Dated : January 7, 2009
Whereas the annexed Convention between the Government of Republic of India and the Council of Ministers of Serbia and Montenegro for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital was signed at New Delhi on the 8th day of February, 2006;
And whereas the State Union of Serbia and Montenegro was disintegrated into two independent States after Montenegro’s formal declaration of independence on 3rd June, 2006 and Serbia’s formal declaration of independence on 5th June, 2006;
And whereas the National Assembly of the Republic of Serbia has ratified the said Convention as published in the Official Gazette of the Republic of Serbia-Internationa l Treaties No.102/07 dated 7th November, 2007 and accordingly reference in the said Convention to ‘Serbia and Montenegro’ shall be read as reference to Serbia; And whereas the date of entry into force of the said Convention is the 23rd day of September, 2008, being the date of later of the notifications of completion of the procedures as required by the respective laws for entry into force of this Convention, in accordance with paragraph 2 of Article 30 of the said Convention;And whereas sub-paragraph (2) of paragraph 2 of Article 30 of the said Convention provides that the provisions of the Convention shall have effect in India in respect of the taxes on income derived and taxes on capital owned in each fiscal year beginning on or after the first day of April in the calendar year next following the year in which the Convention enters into force;
Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961) and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.
And whereas the State Union of Serbia and Montenegro was disintegrated into two independent States after Montenegro’s formal declaration of independence on 3rd June, 2006 and Serbia’s formal declaration of independence on 5th June, 2006;
And whereas the National Assembly of the Republic of Serbia has ratified the said Convention as published in the Official Gazette of the Republic of Serbia-Internationa l Treaties No.102/07 dated 7th November, 2007 and accordingly reference in the said Convention to ‘Serbia and Montenegro’ shall be read as reference to Serbia; And whereas the date of entry into force of the said Convention is the 23rd day of September, 2008, being the date of later of the notifications of completion of the procedures as required by the respective laws for entry into force of this Convention, in accordance with paragraph 2 of Article 30 of the said Convention;And whereas sub-paragraph (2) of paragraph 2 of Article 30 of the said Convention provides that the provisions of the Convention shall have effect in India in respect of the taxes on income derived and taxes on capital owned in each fiscal year beginning on or after the first day of April in the calendar year next following the year in which the Convention enters into force;
Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961) and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.
Frauds can not be stopped by a defined audit process
The Big Four accounting firms are reputed to have strong process controls. How then could one such firm have failed to detect such a multi-year scam as is getting unravelled in Satyam? “There is a co-relation between the size of audit firms and the size of companies, and hence all large corporate frauds involve big audit firms,” answers Mr Shankar Jaganathan, author of ‘Corporate Disclosures 1553-2007: The Origin of Financial and Business Reporting’ (Routledge).
A defined audit process can never be a defence against frauds, he cautions, during the course of a recent email interaction with Business Line. “By definition a successful fraud must overcome the defined audit process.”
Just as a low tide reveals the rubbish accumulated in a beach, a falling market will throw up frauds, analogises Mr Jaganathan. “The longer the bull-run, the higher the duration of the frauds.”
Excerpts from the interview.
Based on your study of the corporate history over the last five hundred years, can you put the Satyam scam in perspective?
Corporate world is an integral part of the free market economy. As Adam Smith said in the 18th century, we get our daily bread not due to the benevolence of the baker, but his self- interest. Greed is but only the extreme form of self-interest. Corporates fuelled by self-interest, have periodically exploded, ignited by greed, as witnessed by corporate scandals and bankruptcies.
Globally in the 20th century, except during the two World Wars, every decade saw significant cases of corporate scam. While corporate scams are deplorable, a positive outcome is in the progress of corporate disclosures, auditing standards and corporate governance practices. In fact it was a multi-year scam involving City of Glasgow Bank in 1878 which had inflated its assets by about £5 million that led to audit for companies being made compulsory.
Seen in the Indian context, Satyam scam is by far the biggest. Even globally it finds its place in the top league. In 2003, the SEC of the US had awarded the title the largest financial fraud in history to the €13.3 billion scam involving the Italian diary foods company Parmalat. Given this, Satyam may still rank as the largest self-confessed scam, globally.
Putting it in perspective, Satyam case should be seen as an aberration of the free market economy and not as being representative of the Indian corporate governance standards.
Independent directors are seen as a safeguard against such scandals? Have the independent directors in Satyam failed or does the concept of independent directors need a re-look?
The concept of independent directors is relatively new in the corporate history. It was only in 1940 that independent directors were recommended to the boards of mutual funds to protect mutual fund investors in the US.
But it was the spate of corporate scandals in the 1970s in the UK that prompted the Bullock Committee on Industrial Democracy to suggest a ‘2x+y’ formula for the corporate boards, where ‘x’ stood for equal number of directors representing shareholders and employees and ‘y’ for a smaller number of independent directors to resolve any deadlock. In a move to pre-empt legislation for employee representation in the Board, the corporate world in England hastily embraced the concept of independent directors.
The Cadbury Committee in 1992, which itself was set up following the corporate scandals involving BCCI, PolyPeck and Maxwell, provided respectability to the concept of independent directors, by focusing on independent directors as a part of the new practices for better governance.
Corporate history of the past decade has more than clearly shown that independent directors have not served their purpose. The Satyam case is not an isolated example of the failure of independent directors but only a reinforcement of that failed concept.
Maybe it is time to revisit the system of stakeholder representation - employees, customers, suppliers and the local community; all of whom will have a stake in the company and cannot resign when the going gets tough.
Would you categorise the failure of auditors to detect this scam as a failure of an individual or a failure of the auditing standards? Do auditors take into account lower PE ratios paid by the investors and widening bond spreads to tighten the audit scrutiny?
With the benefit of hindsight, a lot of issues appear with greater clarity. But the primary job is to decide if the failure to detect the fraud was a result of collusion, sub-standard performance or inadequate auditing standards, after the frauds have surfaced.
As of now, adequate information is not available in this case to make a clear judgment. But with the available information, it is apparent that the quantum of benefits an audit firm or an audit partner receives from the audit compared with the potential penalties is inadequate to suggest collusion, though this may appear contrary to the popular opinion.
Narrowing the choice between sub-standard performance and inadequate standards, the needle tilts more towards a procedural lapse in obtaining bank confirmation rather than inadequate standards.
There is a famous 19th century English case which defines the approach of auditors. An auditor is seen as a watchdog and not a bloodhound. In that the case the judge held, ‘He is justified in believing the tried servants of the company in whom confidence is placed by the company.’ This approach holds true even today.
The market reputation of the company is considered by the auditor before deciding to accept an assignment. However, after accepting the assignment, based on what I have seen, few auditors change their auditing techniques based on financial market reactions, unless it is of a very serious nature. Definitely lower PE ratios and widening bond spreads are not triggers.
There is a strong suspicion that other companies may be in a situation similar to Satyam’s? What should be done to flush them out? Can some kind of amnesty scheme be used for this purpose?
Traditional wisdom says frauds are like cockroaches. When you see one, there are surely more, whether you see them or not. On the other hand, an event like Satyam is more like a Black Swan event: a high-impact event that before the event is seen is a low-probability event but after the event is seen is highly predictable. While simultaneous occurrence of two Black Swan events is unlikely, it is better to be careful rather than regret later.
I see companies with large liquid assets make extra effort to address the concern of investors about fictitious assets during the results announcement this month. In addition, companies will also focus on the alignment of profits and cash flows. We have not seen amnesty schemes work even with regard to black money. Hence, there is less chance for success to flush out corporate frauds with amnesty schemes.
Should India also look to have a system of corporate restatements as in the US to force the Indian companies to correct their mistakes rather than carry them forward?
The basis for treatment of errors in financial statements under the US GAAP and the Indian GAAP is different. Under the US GAAP, errors are rectified by restatement, i.e. correcting the statements of the concerned year and republishing them. Under the Indian GAAP, if errors are noticed in subsequent accounting period, they will be accounted in the period in which they are noticed and classified as ‘prior period items’ in the financial statements. The system under the Indian GAAP highlights the errors adequately and in my view does not need any change. .
Finally, what should Indian regulators do to ensure that such events are not repeated?
The regulators can take two distinct approaches - a preventive one or a palliative approach. Palliative approach would involve measures to detect similar cases by introducing new processes and additional verification methods. These measures are seen as proactive measures to build investor confidence.
However, in my view, preventive measures would be more effective. This would involve a simple and a short Act that makes accounting misstatements a crime and impose stringent penalty both financial and imprisonment. The financial penalty would be related to the size of the fraud.
To enforce the law, special courts could be formed to expedite justice. This in my view is a more effective step in building a better business environment as India moves towards eradicating poverty and generating all-round prosperity.
A defined audit process can never be a defence against frauds, he cautions, during the course of a recent email interaction with Business Line. “By definition a successful fraud must overcome the defined audit process.”
Just as a low tide reveals the rubbish accumulated in a beach, a falling market will throw up frauds, analogises Mr Jaganathan. “The longer the bull-run, the higher the duration of the frauds.”
Excerpts from the interview.
Based on your study of the corporate history over the last five hundred years, can you put the Satyam scam in perspective?
Corporate world is an integral part of the free market economy. As Adam Smith said in the 18th century, we get our daily bread not due to the benevolence of the baker, but his self- interest. Greed is but only the extreme form of self-interest. Corporates fuelled by self-interest, have periodically exploded, ignited by greed, as witnessed by corporate scandals and bankruptcies.
Globally in the 20th century, except during the two World Wars, every decade saw significant cases of corporate scam. While corporate scams are deplorable, a positive outcome is in the progress of corporate disclosures, auditing standards and corporate governance practices. In fact it was a multi-year scam involving City of Glasgow Bank in 1878 which had inflated its assets by about £5 million that led to audit for companies being made compulsory.
Seen in the Indian context, Satyam scam is by far the biggest. Even globally it finds its place in the top league. In 2003, the SEC of the US had awarded the title the largest financial fraud in history to the €13.3 billion scam involving the Italian diary foods company Parmalat. Given this, Satyam may still rank as the largest self-confessed scam, globally.
Putting it in perspective, Satyam case should be seen as an aberration of the free market economy and not as being representative of the Indian corporate governance standards.
Independent directors are seen as a safeguard against such scandals? Have the independent directors in Satyam failed or does the concept of independent directors need a re-look?
The concept of independent directors is relatively new in the corporate history. It was only in 1940 that independent directors were recommended to the boards of mutual funds to protect mutual fund investors in the US.
But it was the spate of corporate scandals in the 1970s in the UK that prompted the Bullock Committee on Industrial Democracy to suggest a ‘2x+y’ formula for the corporate boards, where ‘x’ stood for equal number of directors representing shareholders and employees and ‘y’ for a smaller number of independent directors to resolve any deadlock. In a move to pre-empt legislation for employee representation in the Board, the corporate world in England hastily embraced the concept of independent directors.
The Cadbury Committee in 1992, which itself was set up following the corporate scandals involving BCCI, PolyPeck and Maxwell, provided respectability to the concept of independent directors, by focusing on independent directors as a part of the new practices for better governance.
Corporate history of the past decade has more than clearly shown that independent directors have not served their purpose. The Satyam case is not an isolated example of the failure of independent directors but only a reinforcement of that failed concept.
Maybe it is time to revisit the system of stakeholder representation - employees, customers, suppliers and the local community; all of whom will have a stake in the company and cannot resign when the going gets tough.
Would you categorise the failure of auditors to detect this scam as a failure of an individual or a failure of the auditing standards? Do auditors take into account lower PE ratios paid by the investors and widening bond spreads to tighten the audit scrutiny?
With the benefit of hindsight, a lot of issues appear with greater clarity. But the primary job is to decide if the failure to detect the fraud was a result of collusion, sub-standard performance or inadequate auditing standards, after the frauds have surfaced.
As of now, adequate information is not available in this case to make a clear judgment. But with the available information, it is apparent that the quantum of benefits an audit firm or an audit partner receives from the audit compared with the potential penalties is inadequate to suggest collusion, though this may appear contrary to the popular opinion.
Narrowing the choice between sub-standard performance and inadequate standards, the needle tilts more towards a procedural lapse in obtaining bank confirmation rather than inadequate standards.
There is a famous 19th century English case which defines the approach of auditors. An auditor is seen as a watchdog and not a bloodhound. In that the case the judge held, ‘He is justified in believing the tried servants of the company in whom confidence is placed by the company.’ This approach holds true even today.
The market reputation of the company is considered by the auditor before deciding to accept an assignment. However, after accepting the assignment, based on what I have seen, few auditors change their auditing techniques based on financial market reactions, unless it is of a very serious nature. Definitely lower PE ratios and widening bond spreads are not triggers.
There is a strong suspicion that other companies may be in a situation similar to Satyam’s? What should be done to flush them out? Can some kind of amnesty scheme be used for this purpose?
Traditional wisdom says frauds are like cockroaches. When you see one, there are surely more, whether you see them or not. On the other hand, an event like Satyam is more like a Black Swan event: a high-impact event that before the event is seen is a low-probability event but after the event is seen is highly predictable. While simultaneous occurrence of two Black Swan events is unlikely, it is better to be careful rather than regret later.
I see companies with large liquid assets make extra effort to address the concern of investors about fictitious assets during the results announcement this month. In addition, companies will also focus on the alignment of profits and cash flows. We have not seen amnesty schemes work even with regard to black money. Hence, there is less chance for success to flush out corporate frauds with amnesty schemes.
Should India also look to have a system of corporate restatements as in the US to force the Indian companies to correct their mistakes rather than carry them forward?
The basis for treatment of errors in financial statements under the US GAAP and the Indian GAAP is different. Under the US GAAP, errors are rectified by restatement, i.e. correcting the statements of the concerned year and republishing them. Under the Indian GAAP, if errors are noticed in subsequent accounting period, they will be accounted in the period in which they are noticed and classified as ‘prior period items’ in the financial statements. The system under the Indian GAAP highlights the errors adequately and in my view does not need any change. .
Finally, what should Indian regulators do to ensure that such events are not repeated?
The regulators can take two distinct approaches - a preventive one or a palliative approach. Palliative approach would involve measures to detect similar cases by introducing new processes and additional verification methods. These measures are seen as proactive measures to build investor confidence.
However, in my view, preventive measures would be more effective. This would involve a simple and a short Act that makes accounting misstatements a crime and impose stringent penalty both financial and imprisonment. The financial penalty would be related to the size of the fraud.
To enforce the law, special courts could be formed to expedite justice. This in my view is a more effective step in building a better business environment as India moves towards eradicating poverty and generating all-round prosperity.
Monday, January 19, 2009
Software Licensing Not "Royalty"
Income tax - India-UK DTAA - software licensing - income arising from allowing ‘right to use’ to Indian software buyers is actually sale of copyrighted article which does not involve transfer of copyright and such receipt is not royalty either under Sec 9(1)(vi) or under DTAA: ITAT
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘F’ : NEW DELHI
ITA No. 847/Del/2008
Assessment Year : 2003-04
M/s INFRASOFT LIMITED
INDIA BRANCH OFFICE,
C/o BENTLEY SYSTEMS INDIA PVT LTD
203, OKHLA INDUSTRIAL ESTATE, PHASE-III,
NEW DELHI - 110020
PAN NO : AAACI5073L
Vs
ASSISTANT DIRECTOR OF INCOME-TAX
CIRCLE-2(2), INTERNATIONAL TAXATION, NEW DELHI
THE use and spread of software application has been phenomenal in India. So is the case with the tax treatment of receipts resulting from either sale of software or licensing of software programmes. What is treated as royalty by the Revenue is actually reckoned as a plain sale of copyrighted article by the assessee. Thus there is nothing new about this dispute as decided by the Special Bench of the Tribunal in the Motorola case. However, there is an element of novelity in the approach of the CIT(A) but the same has been rejected by the Tribunal, relying on the decision of the Special Bench which is binding on it.
And its decision is - the amount received by the assessee under the license agreement for allowing use of the software is not ‘royalty’ either under Sec 9(1)(vi) of the Income-tax Act or under India-UK DTAA. It has also held that the other receipts on account of maintenance charges and training fees being incidental to the software receipts assume the same character as that of software receipts and the same are liable to be taxed accordingly.
The Tribunal ordered remand of the case to the file of the AO with a direction to reframe the assessment in view of the decision that the payment received by the assessee company against software licensed is not in the nature of royalty but was in the nature of business profits chargeable to tax in its hands under Article 7 of the DTAA.
Facts of the case
The assessee is a marketing and development company of an international group owned by a holding company viz. Infrasoft Corporation, USA. The said group is leader in civil engineering software and has developed a software called Mx which is used for civil engineering work in various countries throughout the world. The said software is used for the design of highways, railways, airports, ports, mines etc. Based on the market position and business potential for the said software and related products in India, a branch office of the group was established in India after obtaining necessary approval mainly for import and supply of software. Branch office also provides support services including system related services such as installation of software, interface to peripherals, uninstallation, imparting of training on the application of software etc. A return of income for the year under consideration was filed by the assessee company on 28.11.2003 declaring a loss of Rs.21,75,246/ -.
In the said return, receipts were shown by the assessee company from sale/licensing of the software. According to the AO, the said receipts having regard to the nature of services rendered by the assessee company were in the nature of royalty. He, therefore, required the assessee to show cause as to why the said receipts should not be taxed as royalty as per Article 13 of DTAA and Section 44D read with Section 115A of the Income-tax Act, 1961. In reply, it was submitted on behalf of the assessee company before the AO that the moment copies of software program are made and marketed, the same become goods which are chargeable to sales tax. In support of this submission, reliance was placed on behalf of the assessee company on the decision of Supreme Court in the case of Tata Consultancy Services Vs. State of Andhra Pradesh wherein it was held that software, both canned and uncanned, is intellectual property put on a media and answers the definition of “goods”. It was contended that when the software is goods as held by Supreme Court, the assessee company is entitled to deduction of purchase cost of software as well as other expenses incurred and the net profit alone can be taxed and that too, as business profits as per Article 7 of the DTAA between UK and India. It was also contended that even if the receipts of the assessee are to be treated as royalties or fees for technical services, the same having been arisen through a permanent establishment in India, it was chargeable to tax as business profit as per the said Article 7. As regards the applicability of Section 44D, it was submitted on behalf of the assessee company that Section 44D has been inserted by the Finance Act, 2003 making all the expenditure incurred for earning royalty or fees for technical services allowable and although the same has been made effective from 1.4.2004, it can still be applied in the case of the assessee involving AY 2003-04 going by the legislative intention behind inserting the provisions of Section 44D.
AO did not accept the submissions. As regards the decision of Supreme Court in the case of Tata Consultancy Services cited by the assessee company, he held that the same was rendered in the context of Sales Tax Act and the definition of “goods” as given in the relevant Sales Tax Act was interpreted by the SC in order to decide as to whether the software recorded on computer disk was covered within the said definition or not. He held that the said decision rendered in an altogether different context thus was not applicable and the reliance of the assessee on the said decision was clearly misplaced. As regards the provisions of Section 44D relied upon by the assessee, he held that the said provisions inserted in the statute specifically w.e.f. 1.4.2004 are applicable prospectively and the same, therefore, were not applicable in the case of the assessee involving AY 2003-04.
The Assessing Officer then considered the definition of ‘royalty’ given in Section 9(1)(vi) of the Income tax Act as well as in Article 13 of the DTAA and came to the conclusion that the amount received by the assessee company from licensing of software was qualified to be royalty as per the said definitions.
The issue went to the CIT(A) who gave a detailed findings which are,
++ As per provisions of section 9(1)(vi) the royalty income should satisfy twin conditions that there has to be consideration, and this consideration should be for transfer of all or any right (including the granting of the licence) in respect of the copyright, patent, invention, design, secret formula or process, scientific work. In this case the payment under software license agreement has fulfilled both the conditions and the income from software license was taxable in India as royalty.
++ As per provision of section 9 the payment made for import of software are royalty payment and the only exception provided is in the form of second proviso to section 9(1)(vi) of the Act which excludes such royalty income from purview of section 9(1)(vi) only when the computer software is supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under the policy of computer software export, software development and training 1986 of the Government of India. However, this exception is not applicable to the facts of this case where appellant had granted software licence to various Indian customers.
++ The characterization taxability of income from import of software has been made amply clear in the Income-tax Act through section 115A of the Act which specifically refers to cases where royalties are paid to non-resident for the transfer of all or any right (including the granting of the license) in respect of any computer software to a person resident in India.
++ A copy of software supplied by the appellant did not amount to a sale but it is a licence to use the software. This is because software is an intellectual property right (IPR) which can be licensed to one user and can be given further to any number of user. In other words the IPR in software still remain intact with the supplier. Thus effectively the consideration paid is only for license use. It is pertinent to mention here that the Finance Act, 2004 has inserted Category No.55B to include “intellectual property services” to mean
“(a) transferring whether permanent or otherwise or
(b) permitting use or enjoyment of any intellectual property right” for levy of service tax. This amendment has been noticed by the CESTAT in Araco Corporation v. CCE
++ By the expedient of “deeming fiction” or “inclusive definition” Parliament and State Legislatures are competent to give a specific definition to a particular transaction. Such definition is confined to the specific statute only. Such definition cannot be imported into a different statute which defines the same transaction differently. The necessary corollary is that “sales treatment” of computer software under sales tax law, does not, per se, influence income-tax treatment of software transactions, as income-tax law defines this transaction differently.
++ OECD recommendations remain mere recommendations unless they are incorporated into domestic law and/or DTAAs. The distinction between “copyright right” and “program copy” recommended by the OECD has been dissented from even by several member States (discussed supra) not to speak of India which is no Tribunal even a member of the OECD. Indian laws and India’s DTAA recognize only two types of transactions in respect of computer software: sale and licence (letting). No further dissection of licensing (on the lines of the OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian DTAAs. Therefore, notwithstanding attractive phraseology and nomenclature, any computer software licence fees, where the vendor retains ownership and grants user rights only to the licensee are, without an iota of doubt, taxable as royalties having an Indian source.”
Having heard the parties the Tribunal observed that,
++ the material facts involved in the present case relevant to the issue under consideration are similar to the facts involved in the case of Motorola Inc. inasmuch as the relevant clauses of the concerned agreements as referred to by the Special Bench and analyzed to come to the conclusion in the case of Motorola Inc. are almost identical. For example, the license granted to the licensee by the assessee company to use the software was a non-exclusive and non-transferable license as stipulated in clause 2(a) of the license agreement. The licensee was also allowed to make only one copy of the software and associated support information for back up purposes with a condition that such copy shall include Infrasoft copyright and all copies of the software shall be the exclusive property of Infrasoft as per clause 2(d) of the license agreement.
++ As per clause 2(f) of the license agreement, the licensee was allowed to use the software only for his own business as specifically identified and was not allowed to loan, rent, sale, sub-licenses or transfer the copy of software to any third party without the consent of Infrasoft. The licensee was also prohibited from copying, de-compiling, de-assembling or reverse engineering the software without the written consent of Infrasoft as per clause 2(h) of the license agreement.
++ It was also stipulated in clause 5(a) of the license agreement that all copyrights and intellectual property rights in and to the software and copies made by the licensee are owned by Infrasoft and only Infrasoft has the power to grant the license rights for the use of the software. Clause 7(b) of the license agreement also provided that upon termination of the said agreement for any reason, licensee shall return the software including supporting information and license authorization devices to Infrasoft.
++ The sum and substance of the relevant clauses material in this context of the agreement entered into by the assessee with the licensee in the present case thus were similar to that of the agreement analyzed and relied upon by the Special Bench in the case of Motorola Inc. (supra) to come to the conclusion that the payment made for transfer of right to use the software was not for any copyright in the software but only for the software as such as a copyrighted article and the same, therefore, could not be considered as royalty within the meaning of explanation (2) below Section 9(1) of the Income-tax Act or Article 13.3 of the relevant DTAA.
++ A perusal of the impugned order of the learned CIT(A), however, shows that the decision of Special Bench of ITAT in the case of Motorola Inc. (supra) cited on behalf of the assessee was distinguished by him on the basis that the assessee in that case had purchased an integrated electronic switching system consisting of both hardware as well as software whereas the assessee in the present case has licensed only the software to Indian customers without there being any sale of integrated hardware. The decision of the Special Bench in the case of Motorola Inc. on this issue as discussed by us in the foregoing portion of this order, however, shows that this aspect of the matter was not at all taken as basis by the Tribunal to come to the conclusion as it ultimately did. There is nothing whatsoever in the order of the Special Bench to indicate or even suggest that this was in any way the material aspect on the basis of which the Tribunal had proceeded or had rendered its decision.
++ We also fail to understand how this aspect of the matter is so material to distinguish the well-considered and well-discussed decision of the Special Bench rendered after taking into consideration all the relevant aspects. Even the impugned order of the learned CIT(A) does not throw any light on the issue as to how this difference in factual position was so material to justify his action in not following the decision of the Special Bench of the Tribunal which was binding on him. In our opinion, the material facts of the present case relevant to the issue on the other hand were exactly similar to that of the case of Motorola Lac. (supra) as already pointed out by us and the ratio decidendi of the decision of the Tribunal thus was directly applicable in the present case. The difference in facts sought to be pointed out by the learned CIT(A) was actually immaterial or insignificant in this context and the learned CIT(A), in our opinion, ought to have followed and applied the decision of the Special Bench of ITAT in the present case being a binding precedent.
++ heavy reliance has been placed by the CIT(A) in support of his conclusion on the report of the high powered committee stated to be set up by Ministry of Finance, Government of India in the year 1999. This report has been relied upon by the learned CIT(A) for categorization of the software payment as royalty which is different from the revised OECD Commentary. As submitted by the learned counsel for the assessee in this regard, there is, however, nothing either in the order of the learned CIT(A) or even brought on record by the learned DR during the course of appellate proceedings before the Tribunal that the said report of the high powered committee has been accepted by the Government. In any case, the said report or more particularly the recommendation or suggestion of the high powered committee as contained in the said report have not been incorporated anywhere in the relevant provisions of the Income-tax Act. We also see no basis on which the said report can justifiably be preferred to the decision of Special Bench of the Tribunal in the case of Motorola Inc. (supra) which is directly on the point in issue and which is binding on us.
++ The CIT(A) has also relied on the decisions rendered by the courts of other countries wherein software payments have been characterized as royalty in contradistinction to the revised OECD Commentary. He, however, has overlooked the fact that in the decisions rendered by the Courts as well as by the Tribunal in India including especially the Special Bench and Division Bench of the ITAT, the similar payments have been held to be not in the nature of royalty and the same being binding on him, there was no justification to prefer the decisions of the Courts from other countries in preference to the said binding precedent.
++ Even the decision of Supreme Court in the case of Tata Consultancy Services (supra) cited on behalf of the assessee before him was distinguished by him on the ground that the same was rendered in the context of Sales-tax Act and the software was held to be goods liable to sales tax relying on the extended definition of “goods” as given in the Sales Tax Act. According to the learned CIT(A), when different statutes by different phraseology treat the same transaction differently, the attempt at importing the meaning assigned in one statute into a different statute is prohibited.
++ He, however, overlooked that in the case of Tata Consultancy Services (supra), Supreme Court had not only considered the issue from the angle of whether the software was goods for the purpose of Andhra Pradesh Sales Tax Act but the computer software was held to be goods by the Apex Court even under Article 366(12) of the Constitution of India. As held by the Supreme Court in this context, the term “goods” as used in Article 366(12) of the Constitution of India is very wide and includes all types of movable properties, whether those properties be tangible or intangible.
++ It was also held by the Supreme Court that a software program may consist of various commands which enable the computer to perform the designated task and the copyright in that program may retain with the originator of the program. However, the moment copies are made and marketed, they become goods which are susceptible to sales tax. It was further held that even intellectual property once it is put on the media whether it is in the form of books or canvas or computer discs or cassette and marketed would become goods. It was held that in all such cases the intellectual property is incorporated on a media for purposes of transfer and when the sale is made it is not just that of media which by itself has very little value. What the buyer purchases and pays for is not the disc or CD. A perusal of the other case laws relied upon by the CIT(A) in his impugned order as well as those cited by the DR at the time of hearing before us also shows that the decisions rendered therein are not directly applicable to the point in issue.
Thus the Tribunal finally held that the amount received by the assessee under the license agreement for allowing use of the software was not ‘royalty’ either under the Income-tax Act or under DTAA. It also held that the other receipts on account of maintenance charges and training fees being incidental to the software receipts assume the same character as that of software receipts and the same are liable to be taxed accordingly.
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘F’ : NEW DELHI
ITA No. 847/Del/2008
Assessment Year : 2003-04
M/s INFRASOFT LIMITED
INDIA BRANCH OFFICE,
C/o BENTLEY SYSTEMS INDIA PVT LTD
203, OKHLA INDUSTRIAL ESTATE, PHASE-III,
NEW DELHI - 110020
PAN NO : AAACI5073L
Vs
ASSISTANT DIRECTOR OF INCOME-TAX
CIRCLE-2(2), INTERNATIONAL TAXATION, NEW DELHI
THE use and spread of software application has been phenomenal in India. So is the case with the tax treatment of receipts resulting from either sale of software or licensing of software programmes. What is treated as royalty by the Revenue is actually reckoned as a plain sale of copyrighted article by the assessee. Thus there is nothing new about this dispute as decided by the Special Bench of the Tribunal in the Motorola case. However, there is an element of novelity in the approach of the CIT(A) but the same has been rejected by the Tribunal, relying on the decision of the Special Bench which is binding on it.
And its decision is - the amount received by the assessee under the license agreement for allowing use of the software is not ‘royalty’ either under Sec 9(1)(vi) of the Income-tax Act or under India-UK DTAA. It has also held that the other receipts on account of maintenance charges and training fees being incidental to the software receipts assume the same character as that of software receipts and the same are liable to be taxed accordingly.
The Tribunal ordered remand of the case to the file of the AO with a direction to reframe the assessment in view of the decision that the payment received by the assessee company against software licensed is not in the nature of royalty but was in the nature of business profits chargeable to tax in its hands under Article 7 of the DTAA.
Facts of the case
The assessee is a marketing and development company of an international group owned by a holding company viz. Infrasoft Corporation, USA. The said group is leader in civil engineering software and has developed a software called Mx which is used for civil engineering work in various countries throughout the world. The said software is used for the design of highways, railways, airports, ports, mines etc. Based on the market position and business potential for the said software and related products in India, a branch office of the group was established in India after obtaining necessary approval mainly for import and supply of software. Branch office also provides support services including system related services such as installation of software, interface to peripherals, uninstallation, imparting of training on the application of software etc. A return of income for the year under consideration was filed by the assessee company on 28.11.2003 declaring a loss of Rs.21,75,246/ -.
In the said return, receipts were shown by the assessee company from sale/licensing of the software. According to the AO, the said receipts having regard to the nature of services rendered by the assessee company were in the nature of royalty. He, therefore, required the assessee to show cause as to why the said receipts should not be taxed as royalty as per Article 13 of DTAA and Section 44D read with Section 115A of the Income-tax Act, 1961. In reply, it was submitted on behalf of the assessee company before the AO that the moment copies of software program are made and marketed, the same become goods which are chargeable to sales tax. In support of this submission, reliance was placed on behalf of the assessee company on the decision of Supreme Court in the case of Tata Consultancy Services Vs. State of Andhra Pradesh wherein it was held that software, both canned and uncanned, is intellectual property put on a media and answers the definition of “goods”. It was contended that when the software is goods as held by Supreme Court, the assessee company is entitled to deduction of purchase cost of software as well as other expenses incurred and the net profit alone can be taxed and that too, as business profits as per Article 7 of the DTAA between UK and India. It was also contended that even if the receipts of the assessee are to be treated as royalties or fees for technical services, the same having been arisen through a permanent establishment in India, it was chargeable to tax as business profit as per the said Article 7. As regards the applicability of Section 44D, it was submitted on behalf of the assessee company that Section 44D has been inserted by the Finance Act, 2003 making all the expenditure incurred for earning royalty or fees for technical services allowable and although the same has been made effective from 1.4.2004, it can still be applied in the case of the assessee involving AY 2003-04 going by the legislative intention behind inserting the provisions of Section 44D.
AO did not accept the submissions. As regards the decision of Supreme Court in the case of Tata Consultancy Services cited by the assessee company, he held that the same was rendered in the context of Sales Tax Act and the definition of “goods” as given in the relevant Sales Tax Act was interpreted by the SC in order to decide as to whether the software recorded on computer disk was covered within the said definition or not. He held that the said decision rendered in an altogether different context thus was not applicable and the reliance of the assessee on the said decision was clearly misplaced. As regards the provisions of Section 44D relied upon by the assessee, he held that the said provisions inserted in the statute specifically w.e.f. 1.4.2004 are applicable prospectively and the same, therefore, were not applicable in the case of the assessee involving AY 2003-04.
The Assessing Officer then considered the definition of ‘royalty’ given in Section 9(1)(vi) of the Income tax Act as well as in Article 13 of the DTAA and came to the conclusion that the amount received by the assessee company from licensing of software was qualified to be royalty as per the said definitions.
The issue went to the CIT(A) who gave a detailed findings which are,
++ As per provisions of section 9(1)(vi) the royalty income should satisfy twin conditions that there has to be consideration, and this consideration should be for transfer of all or any right (including the granting of the licence) in respect of the copyright, patent, invention, design, secret formula or process, scientific work. In this case the payment under software license agreement has fulfilled both the conditions and the income from software license was taxable in India as royalty.
++ As per provision of section 9 the payment made for import of software are royalty payment and the only exception provided is in the form of second proviso to section 9(1)(vi) of the Act which excludes such royalty income from purview of section 9(1)(vi) only when the computer software is supplied by a non-resident manufacturer along with computer or computer based equipment under any scheme approved under the policy of computer software export, software development and training 1986 of the Government of India. However, this exception is not applicable to the facts of this case where appellant had granted software licence to various Indian customers.
++ The characterization taxability of income from import of software has been made amply clear in the Income-tax Act through section 115A of the Act which specifically refers to cases where royalties are paid to non-resident for the transfer of all or any right (including the granting of the license) in respect of any computer software to a person resident in India.
++ A copy of software supplied by the appellant did not amount to a sale but it is a licence to use the software. This is because software is an intellectual property right (IPR) which can be licensed to one user and can be given further to any number of user. In other words the IPR in software still remain intact with the supplier. Thus effectively the consideration paid is only for license use. It is pertinent to mention here that the Finance Act, 2004 has inserted Category No.55B to include “intellectual property services” to mean
“(a) transferring whether permanent or otherwise or
(b) permitting use or enjoyment of any intellectual property right” for levy of service tax. This amendment has been noticed by the CESTAT in Araco Corporation v. CCE
++ By the expedient of “deeming fiction” or “inclusive definition” Parliament and State Legislatures are competent to give a specific definition to a particular transaction. Such definition is confined to the specific statute only. Such definition cannot be imported into a different statute which defines the same transaction differently. The necessary corollary is that “sales treatment” of computer software under sales tax law, does not, per se, influence income-tax treatment of software transactions, as income-tax law defines this transaction differently.
++ OECD recommendations remain mere recommendations unless they are incorporated into domestic law and/or DTAAs. The distinction between “copyright right” and “program copy” recommended by the OECD has been dissented from even by several member States (discussed supra) not to speak of India which is no Tribunal even a member of the OECD. Indian laws and India’s DTAA recognize only two types of transactions in respect of computer software: sale and licence (letting). No further dissection of licensing (on the lines of the OECD commentary) is permitted under the Indian Copyright Act, Income-tax Act and Indian DTAAs. Therefore, notwithstanding attractive phraseology and nomenclature, any computer software licence fees, where the vendor retains ownership and grants user rights only to the licensee are, without an iota of doubt, taxable as royalties having an Indian source.”
Having heard the parties the Tribunal observed that,
++ the material facts involved in the present case relevant to the issue under consideration are similar to the facts involved in the case of Motorola Inc. inasmuch as the relevant clauses of the concerned agreements as referred to by the Special Bench and analyzed to come to the conclusion in the case of Motorola Inc. are almost identical. For example, the license granted to the licensee by the assessee company to use the software was a non-exclusive and non-transferable license as stipulated in clause 2(a) of the license agreement. The licensee was also allowed to make only one copy of the software and associated support information for back up purposes with a condition that such copy shall include Infrasoft copyright and all copies of the software shall be the exclusive property of Infrasoft as per clause 2(d) of the license agreement.
++ As per clause 2(f) of the license agreement, the licensee was allowed to use the software only for his own business as specifically identified and was not allowed to loan, rent, sale, sub-licenses or transfer the copy of software to any third party without the consent of Infrasoft. The licensee was also prohibited from copying, de-compiling, de-assembling or reverse engineering the software without the written consent of Infrasoft as per clause 2(h) of the license agreement.
++ It was also stipulated in clause 5(a) of the license agreement that all copyrights and intellectual property rights in and to the software and copies made by the licensee are owned by Infrasoft and only Infrasoft has the power to grant the license rights for the use of the software. Clause 7(b) of the license agreement also provided that upon termination of the said agreement for any reason, licensee shall return the software including supporting information and license authorization devices to Infrasoft.
++ The sum and substance of the relevant clauses material in this context of the agreement entered into by the assessee with the licensee in the present case thus were similar to that of the agreement analyzed and relied upon by the Special Bench in the case of Motorola Inc. (supra) to come to the conclusion that the payment made for transfer of right to use the software was not for any copyright in the software but only for the software as such as a copyrighted article and the same, therefore, could not be considered as royalty within the meaning of explanation (2) below Section 9(1) of the Income-tax Act or Article 13.3 of the relevant DTAA.
++ A perusal of the impugned order of the learned CIT(A), however, shows that the decision of Special Bench of ITAT in the case of Motorola Inc. (supra) cited on behalf of the assessee was distinguished by him on the basis that the assessee in that case had purchased an integrated electronic switching system consisting of both hardware as well as software whereas the assessee in the present case has licensed only the software to Indian customers without there being any sale of integrated hardware. The decision of the Special Bench in the case of Motorola Inc. on this issue as discussed by us in the foregoing portion of this order, however, shows that this aspect of the matter was not at all taken as basis by the Tribunal to come to the conclusion as it ultimately did. There is nothing whatsoever in the order of the Special Bench to indicate or even suggest that this was in any way the material aspect on the basis of which the Tribunal had proceeded or had rendered its decision.
++ We also fail to understand how this aspect of the matter is so material to distinguish the well-considered and well-discussed decision of the Special Bench rendered after taking into consideration all the relevant aspects. Even the impugned order of the learned CIT(A) does not throw any light on the issue as to how this difference in factual position was so material to justify his action in not following the decision of the Special Bench of the Tribunal which was binding on him. In our opinion, the material facts of the present case relevant to the issue on the other hand were exactly similar to that of the case of Motorola Lac. (supra) as already pointed out by us and the ratio decidendi of the decision of the Tribunal thus was directly applicable in the present case. The difference in facts sought to be pointed out by the learned CIT(A) was actually immaterial or insignificant in this context and the learned CIT(A), in our opinion, ought to have followed and applied the decision of the Special Bench of ITAT in the present case being a binding precedent.
++ heavy reliance has been placed by the CIT(A) in support of his conclusion on the report of the high powered committee stated to be set up by Ministry of Finance, Government of India in the year 1999. This report has been relied upon by the learned CIT(A) for categorization of the software payment as royalty which is different from the revised OECD Commentary. As submitted by the learned counsel for the assessee in this regard, there is, however, nothing either in the order of the learned CIT(A) or even brought on record by the learned DR during the course of appellate proceedings before the Tribunal that the said report of the high powered committee has been accepted by the Government. In any case, the said report or more particularly the recommendation or suggestion of the high powered committee as contained in the said report have not been incorporated anywhere in the relevant provisions of the Income-tax Act. We also see no basis on which the said report can justifiably be preferred to the decision of Special Bench of the Tribunal in the case of Motorola Inc. (supra) which is directly on the point in issue and which is binding on us.
++ The CIT(A) has also relied on the decisions rendered by the courts of other countries wherein software payments have been characterized as royalty in contradistinction to the revised OECD Commentary. He, however, has overlooked the fact that in the decisions rendered by the Courts as well as by the Tribunal in India including especially the Special Bench and Division Bench of the ITAT, the similar payments have been held to be not in the nature of royalty and the same being binding on him, there was no justification to prefer the decisions of the Courts from other countries in preference to the said binding precedent.
++ Even the decision of Supreme Court in the case of Tata Consultancy Services (supra) cited on behalf of the assessee before him was distinguished by him on the ground that the same was rendered in the context of Sales-tax Act and the software was held to be goods liable to sales tax relying on the extended definition of “goods” as given in the Sales Tax Act. According to the learned CIT(A), when different statutes by different phraseology treat the same transaction differently, the attempt at importing the meaning assigned in one statute into a different statute is prohibited.
++ He, however, overlooked that in the case of Tata Consultancy Services (supra), Supreme Court had not only considered the issue from the angle of whether the software was goods for the purpose of Andhra Pradesh Sales Tax Act but the computer software was held to be goods by the Apex Court even under Article 366(12) of the Constitution of India. As held by the Supreme Court in this context, the term “goods” as used in Article 366(12) of the Constitution of India is very wide and includes all types of movable properties, whether those properties be tangible or intangible.
++ It was also held by the Supreme Court that a software program may consist of various commands which enable the computer to perform the designated task and the copyright in that program may retain with the originator of the program. However, the moment copies are made and marketed, they become goods which are susceptible to sales tax. It was further held that even intellectual property once it is put on the media whether it is in the form of books or canvas or computer discs or cassette and marketed would become goods. It was held that in all such cases the intellectual property is incorporated on a media for purposes of transfer and when the sale is made it is not just that of media which by itself has very little value. What the buyer purchases and pays for is not the disc or CD. A perusal of the other case laws relied upon by the CIT(A) in his impugned order as well as those cited by the DR at the time of hearing before us also shows that the decisions rendered therein are not directly applicable to the point in issue.
Thus the Tribunal finally held that the amount received by the assessee under the license agreement for allowing use of the software was not ‘royalty’ either under the Income-tax Act or under DTAA. It also held that the other receipts on account of maintenance charges and training fees being incidental to the software receipts assume the same character as that of software receipts and the same are liable to be taxed accordingly.
Related Party Transactions & Legal Provisions
Investment is one of the major decisions in finance. Analysis of Financial information provided by the entity is one of the significant task to take right decisions. To protect the interest of the investors, transparency in the books of account is essential. Indian companies have been viewed by the outside world as family controlled and not professionally managed.
Family controlled businesses represent almost 80% of the listed companies. These companies carry on their business through subsidiaries, associates and acquire interest in other enterprises. The transactions between these entities play very important role in analyzing the investment feasibility of an entity. If these transactions are unchecked, companies will use this opportunity for tax evasion and cheat the investor. One more instance where we can find these types of transactions are directors entering into transactions with the company and gain personal benefit. To avoid these types of transactions and to bring transparency, stringent provisions are introduced in various laws.
In this article an attempt has been made to make a analysis of provisions under different laws relating to Related Party Transactions. An awareness of various provisions is very much required so as to take adequate care while entering into related party transaction and disclosing the same in the Financial Statements.
In a corporate world, the real owners are different from the management. So there is possibility that, management by using their powers may cheat the investors.
Companies Act
To have control on all these activities the Companies Act imposes certain conditions through various sections, when a company entering into any transaction in which directors are interested.
Section 297 of the Companies Act 1956 requires board approval for entering into any contract or arrangement with the related parties. However this section will cover only transactions relating to sale, purchase or supply of any goods, materials and services or for underwriting the subscription of any shares in, or debentures of, the company.
Further, there is a requirement to take central Governament approval if the company has more than one crore paid up capital.
At the same time section 297 (2) provides exemption to get approvals if (a) purchase/sale is for cash and at prevailing market prices or (b) Contract relates to goods, materials and services regularly traded or done business provided the contract is less than Rs. 5000/- (c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company
Section 299 imposes duty on directors to disclose their interest in other concerns to the Board of Directors before entering into any contract with the related parties. Sec 299 is much wider than sec 297 since it covers any contract or arrangement with entities in which director is concerned or interested. Only exception is where directors of one company taken together have less than 2 % of paid up capital of another company.
Sec 299 (1) requires that notice of such interest be disclosed by the directors. Section 299 (3) allows for a general notice of interest, which shall be valid for a year and can be renewed for a further period of one year in the last month of the Financial year. Such general notice & renewal should also be given in the Board Meeting.
Section 300 disallows the director to participate in voting when the board resolution is passed relating to any business in which he is interested. The main intentions behind these sections are to avoid personal gain by the interested director. But mere taking approval from the board to enter into transaction is not serve the purpose as outside world can’t know about this transactions.
Accounting Standard
To make investor aware about these transactions the Institute of Chartered Accountants of India Introduced Accounting Standard 18- ‘Related Party Disclosures’ and made it mandatory for companies to disclose related party transactions in the financial statements.
Indian investors may find that details of relevant related party transactions are available in a few places other than the section on related party disclosures. The section on managerial remuneration, loans/advances due from directors and subsidiaries and the auditor’s report (which may certify/qualify certain transactions) may provide important supplementary information.
In their present form, the related party disclosures (as detailed by Accounting Standard 18) may leave investors in public companies more enlightened about how the company is managed. However, there still appears to be considerable room for improving the present disclosures.
In general, the related party disclosures presented by companies to meet with the requirements of the US GAAP have been far more detailed than those presented to meet the requirements of AS-18. There are several gaps that need to be bridged.
Income Tax
A disclosure that a related party transaction was made during the year serves little purpose, unless one is apprised of the terms of the transaction and tax implication. Section 40 A (2) of the Income tax Act disallows the expenditure incurred in respect of specified persons (Related Parties) if it is the opinion of the Assessing officer that the expenditure is excessive and unreasonable. These expenditures are (a) the fair market value of goods, services or facilities for which the payment is made or persons (Related Parties) or (b) legitimate needs of business or profession of the assessee or (c) the benefit derived by or accruing to the assessee from the payment.
After having discussion on the various provisions, we move our discussion on who will be consider as related party? For this different law gives different meaning.
Companies Act
Section 297 of the Companies Act 1956, describes the transaction with the following persons as related party transaction.
a director of the company
relative of the director
a firm in which such a director or relative is a partner
any other partner in such a firm
a private company of which the director is a member or director
Accounting Standard
As per Accounting Standard 18-’Related Party Disclosures’ issued by the ICAI, Related party means “Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions” and Related Party transaction means “a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. The following are the related parties as per AS-18
Holding companies, subsidiaries and fellow subsidiaries
Associates and joint ventures
Individuals (incl. their relatives) - having voting power giving them control or significant influence
Key management personnel including their relatives
Enterprises where controlling individual or key managerial personnel has significant influence
However, disclosure is mandatory for the following categories of companies.
Companies which are listed or are in process of listing
Banks, financial institutions and insurance companies
Enterprises having turnover > Rs. 50 cr.
Enterprises having borrowings > Rs. 10 cr.
Holding / subsidiary company of any of the above
If any company does not fall in any of these categories, after having been applicable earlier, then it shall continue to apply unless it is not covered in any category for 2 consecutive years.
Further, Auditing and Assurance Standard 23- Related Parties impose duty on auditor to identify and disclose the related party transaction in the financial statements.
If we make comparison between these two definitions, we will come to know that AS-18 is wider than Companies Act. The Companies Act requires approval only when a director and his/her relatives involve in the transaction. However it if the key management personnel, who is not a director involved in any transaction, the approvals are not required, even though interest is involved. However, AS 18 makes it mandatory to disclose the transaction with the key management personnel also.
Income Tax
The scope of word related party under The Income Tax Act is included the following.
(i) Where the assessee is an any relative of the assessee; individual(ii) Where the assessee is a any director of the company, company, firm, association partner of the firm, or member of persons or Hindu undivided the association or family, or any family relative of such director, partner or member;(iii) Any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) A company, firm, association of persons or Hindu undivided family having substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) A company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) Any person who carries on a business or profession, - (A) Where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
The word relative in relation to individuals includes different persons under various laws. Schedule 1A of the companies Act 1956 gives list of 22 persons as relatives. As per the AS-18, relative means spouse, son, daughter, brother, sister, father and mother. If we compare these two acts Companies Act is wider term. The Income tax Act defines the word relative as spouse, son, and daughter, brother, sister or any lineal ascendant or descendent.
Clearly, there are more reasons than one to go through the section in the company’s annual report which details related party disclosures. It will provide a better understanding of the company’s operations.
Family controlled businesses represent almost 80% of the listed companies. These companies carry on their business through subsidiaries, associates and acquire interest in other enterprises. The transactions between these entities play very important role in analyzing the investment feasibility of an entity. If these transactions are unchecked, companies will use this opportunity for tax evasion and cheat the investor. One more instance where we can find these types of transactions are directors entering into transactions with the company and gain personal benefit. To avoid these types of transactions and to bring transparency, stringent provisions are introduced in various laws.
In this article an attempt has been made to make a analysis of provisions under different laws relating to Related Party Transactions. An awareness of various provisions is very much required so as to take adequate care while entering into related party transaction and disclosing the same in the Financial Statements.
In a corporate world, the real owners are different from the management. So there is possibility that, management by using their powers may cheat the investors.
Companies Act
To have control on all these activities the Companies Act imposes certain conditions through various sections, when a company entering into any transaction in which directors are interested.
Section 297 of the Companies Act 1956 requires board approval for entering into any contract or arrangement with the related parties. However this section will cover only transactions relating to sale, purchase or supply of any goods, materials and services or for underwriting the subscription of any shares in, or debentures of, the company.
Further, there is a requirement to take central Governament approval if the company has more than one crore paid up capital.
At the same time section 297 (2) provides exemption to get approvals if (a) purchase/sale is for cash and at prevailing market prices or (b) Contract relates to goods, materials and services regularly traded or done business provided the contract is less than Rs. 5000/- (c) in the case of a banking or insurance company any transaction in the ordinary course of business of such company
Section 299 imposes duty on directors to disclose their interest in other concerns to the Board of Directors before entering into any contract with the related parties. Sec 299 is much wider than sec 297 since it covers any contract or arrangement with entities in which director is concerned or interested. Only exception is where directors of one company taken together have less than 2 % of paid up capital of another company.
Sec 299 (1) requires that notice of such interest be disclosed by the directors. Section 299 (3) allows for a general notice of interest, which shall be valid for a year and can be renewed for a further period of one year in the last month of the Financial year. Such general notice & renewal should also be given in the Board Meeting.
Section 300 disallows the director to participate in voting when the board resolution is passed relating to any business in which he is interested. The main intentions behind these sections are to avoid personal gain by the interested director. But mere taking approval from the board to enter into transaction is not serve the purpose as outside world can’t know about this transactions.
Accounting Standard
To make investor aware about these transactions the Institute of Chartered Accountants of India Introduced Accounting Standard 18- ‘Related Party Disclosures’ and made it mandatory for companies to disclose related party transactions in the financial statements.
Indian investors may find that details of relevant related party transactions are available in a few places other than the section on related party disclosures. The section on managerial remuneration, loans/advances due from directors and subsidiaries and the auditor’s report (which may certify/qualify certain transactions) may provide important supplementary information.
In their present form, the related party disclosures (as detailed by Accounting Standard 18) may leave investors in public companies more enlightened about how the company is managed. However, there still appears to be considerable room for improving the present disclosures.
In general, the related party disclosures presented by companies to meet with the requirements of the US GAAP have been far more detailed than those presented to meet the requirements of AS-18. There are several gaps that need to be bridged.
Income Tax
A disclosure that a related party transaction was made during the year serves little purpose, unless one is apprised of the terms of the transaction and tax implication. Section 40 A (2) of the Income tax Act disallows the expenditure incurred in respect of specified persons (Related Parties) if it is the opinion of the Assessing officer that the expenditure is excessive and unreasonable. These expenditures are (a) the fair market value of goods, services or facilities for which the payment is made or persons (Related Parties) or (b) legitimate needs of business or profession of the assessee or (c) the benefit derived by or accruing to the assessee from the payment.
After having discussion on the various provisions, we move our discussion on who will be consider as related party? For this different law gives different meaning.
Companies Act
Section 297 of the Companies Act 1956, describes the transaction with the following persons as related party transaction.
a director of the company
relative of the director
a firm in which such a director or relative is a partner
any other partner in such a firm
a private company of which the director is a member or director
Accounting Standard
As per Accounting Standard 18-’Related Party Disclosures’ issued by the ICAI, Related party means “Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions” and Related Party transaction means “a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. The following are the related parties as per AS-18
Holding companies, subsidiaries and fellow subsidiaries
Associates and joint ventures
Individuals (incl. their relatives) - having voting power giving them control or significant influence
Key management personnel including their relatives
Enterprises where controlling individual or key managerial personnel has significant influence
However, disclosure is mandatory for the following categories of companies.
Companies which are listed or are in process of listing
Banks, financial institutions and insurance companies
Enterprises having turnover > Rs. 50 cr.
Enterprises having borrowings > Rs. 10 cr.
Holding / subsidiary company of any of the above
If any company does not fall in any of these categories, after having been applicable earlier, then it shall continue to apply unless it is not covered in any category for 2 consecutive years.
Further, Auditing and Assurance Standard 23- Related Parties impose duty on auditor to identify and disclose the related party transaction in the financial statements.
If we make comparison between these two definitions, we will come to know that AS-18 is wider than Companies Act. The Companies Act requires approval only when a director and his/her relatives involve in the transaction. However it if the key management personnel, who is not a director involved in any transaction, the approvals are not required, even though interest is involved. However, AS 18 makes it mandatory to disclose the transaction with the key management personnel also.
Income Tax
The scope of word related party under The Income Tax Act is included the following.
(i) Where the assessee is an any relative of the assessee; individual(ii) Where the assessee is a any director of the company, company, firm, association partner of the firm, or member of persons or Hindu undivided the association or family, or any family relative of such director, partner or member;(iii) Any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) A company, firm, association of persons or Hindu undivided family having substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) A company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) Any person who carries on a business or profession, - (A) Where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or
The word relative in relation to individuals includes different persons under various laws. Schedule 1A of the companies Act 1956 gives list of 22 persons as relatives. As per the AS-18, relative means spouse, son, daughter, brother, sister, father and mother. If we compare these two acts Companies Act is wider term. The Income tax Act defines the word relative as spouse, son, and daughter, brother, sister or any lineal ascendant or descendent.
Clearly, there are more reasons than one to go through the section in the company’s annual report which details related party disclosures. It will provide a better understanding of the company’s operations.
CARO, 2003 & Fixed Assets
Reporting is an integral part of any audit through which an Auditor expresses his opinion. In case of Companies, the auditor of the company is required to report on the 21 clauses as given in the Companies (Auditor’s Report) Order (CARO), 2003 issued by Central Government u/s227 (4A) of the Companies Act, 1956.
In this article an effort has been made to discuss some of the issues relating to the paragraph 4(i) of the Order. Under this Clause the Auditor is required to report on maintenance of proper records, physical verification, and substantial disposal of Fixed Assets.
Under the First part of the above clause an Auditor is required to report/comment on whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets.
Now the question arises as to what are proper records? Neither The Companies Act nor the Order prescribes as to what are “proper records” in this regard. However in general terms, proper records should make available the following information namely,
Sufficient description of the asset for identification purposes.
Categorization, Situation/Location.
Purchase Details.
Depreciation Details.
Revaluation /Impairment details.
Details relating to sale, discarding, destruction etc.
Even though the above list seems to be illustrative in nature, it need not in particular be subjected on the auditor, who is at his discretion as to ascertain the nature of proper records based on his Professional judgment, after considering the complexity and nature of the business.
Under the Second part of the above clause an Auditor is required to report/comment whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so whether the same have been properly dealt within the books of account.
The physical verification has to be made by the management and not by the auditor. The auditor should satisfy himself that such verification was done and the method of verification was reasonable in the circumstances of each asset. He should satisfy that there is adequate evidence on the basis of which he can arrive at such conclusion.
Now the question arises, what can be construed as a reasonable interval? Reasonable interval has not been defined either in the Companies Act or under the Order. This again varies from company to company as well as the nature of the underlining asset like number of assets, difficulty in verification, situation and spread of the asset.
Reasonable Interval again revolves around the Professional judgment of the auditor taking into account the strength of Internal Controls and the complexity of the Industry.
Under the Third part of the said clause the Auditor is required to state whether the Going concern has been affected due to a substantial disposal of fixed assets during the year
As per AS -1, “The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations”.
It is not mentioned in the order as to what constitutes a substantial part. It again depends upon the facts and circumstances of each case. The auditor based on his professional judgment and experience has to decide and report whether the disposal of fixed asset is substantial as to affect the going concern.
In our opinion, the CARO does not offer a clear cut explanation as to what the proper records or what are the reasonable intervals or which consist of the substantial part, it is upon the auditor to apply his professional judgment and experience in addressing to the clauses as stated in the CARO, 2003. While the order on the other hand, increases the standard of Reporting and places a statutory responsibility on the Auditor
In this article an effort has been made to discuss some of the issues relating to the paragraph 4(i) of the Order. Under this Clause the Auditor is required to report on maintenance of proper records, physical verification, and substantial disposal of Fixed Assets.
Under the First part of the above clause an Auditor is required to report/comment on whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets.
Now the question arises as to what are proper records? Neither The Companies Act nor the Order prescribes as to what are “proper records” in this regard. However in general terms, proper records should make available the following information namely,
Sufficient description of the asset for identification purposes.
Categorization, Situation/Location.
Purchase Details.
Depreciation Details.
Revaluation /Impairment details.
Details relating to sale, discarding, destruction etc.
Even though the above list seems to be illustrative in nature, it need not in particular be subjected on the auditor, who is at his discretion as to ascertain the nature of proper records based on his Professional judgment, after considering the complexity and nature of the business.
Under the Second part of the above clause an Auditor is required to report/comment whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so whether the same have been properly dealt within the books of account.
The physical verification has to be made by the management and not by the auditor. The auditor should satisfy himself that such verification was done and the method of verification was reasonable in the circumstances of each asset. He should satisfy that there is adequate evidence on the basis of which he can arrive at such conclusion.
Now the question arises, what can be construed as a reasonable interval? Reasonable interval has not been defined either in the Companies Act or under the Order. This again varies from company to company as well as the nature of the underlining asset like number of assets, difficulty in verification, situation and spread of the asset.
Reasonable Interval again revolves around the Professional judgment of the auditor taking into account the strength of Internal Controls and the complexity of the Industry.
Under the Third part of the said clause the Auditor is required to state whether the Going concern has been affected due to a substantial disposal of fixed assets during the year
As per AS -1, “The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations”.
It is not mentioned in the order as to what constitutes a substantial part. It again depends upon the facts and circumstances of each case. The auditor based on his professional judgment and experience has to decide and report whether the disposal of fixed asset is substantial as to affect the going concern.
In our opinion, the CARO does not offer a clear cut explanation as to what the proper records or what are the reasonable intervals or which consist of the substantial part, it is upon the auditor to apply his professional judgment and experience in addressing to the clauses as stated in the CARO, 2003. While the order on the other hand, increases the standard of Reporting and places a statutory responsibility on the Auditor
Applicability of transfer pricing provisions for reopening of assessment under section 147 of IT Act
The provision of section 147 is not, in any manner, controlled by section 92 nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income; requirement of section 147 is fulfilled if the AO can legitimately form an opinion that income chargeable to tax has escaped assessment; for forming such opinion, any relevant material can be considered and the order of TPO can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment; in such a situation, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of TPO.
HIGH COURT OF PUNJAB AND HARYANA
Coca Cola India Inc. v ACI , (CWP No. 16681 of 2005) Date: December 17, 2008
RELEVANT EXTRACTS:
47 We have already reproduced section 147 of the Act above and its applicability requires formation of opinion that income escaped assessment. The said provision is not in any manner controlled by section 92 of the Act nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer has given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment is irrelevant. Whether or not the said material should be finally taken into account for reassessment is a matter which has to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. We can only mention that having regard to relationship of the petitioner to its associate company, it cannot be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.
51. As regards the question whether order of the Transfer Pricing Officer could be taken into account, we do not find any objection to the same being done. As already observed, requirement of section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant materials can be considered. Order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. In the present case, the said material came to the notice of the Assessing officer
subsequent to the assessment. There is no grievance that provisions of sections 148 to 153 of the Act have not been followed. In such a situation, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of Transfer Pricing Officer.
52. We have already reproduced the amended provisions of Chapter X. According to the petitioner, the same should be held to be inapplicable, as making the same applicable will render them unconstitutional. The petitioner has not challenged their validity.
We do not find any substance in the submission that if the said provisions are made applicable to the petitioner, the same would be unconstitutional. There is no lack of Legislative competence for enacting the said provisions and making them applicable to the petitioner or to a class of persons falling in the category of the petitioner. Potential of multinational companies to allocate profits in inter groups transactions to outside jurisdiction or resulting in tax evasion is an acknowledged fact and is duly recognized in Legislation, nor only in India but elsewhere also. Keeping in view this mischief to be remedied and to advance the object of taxing the real income, provisions have been enacted. The amended provisions certainly advance the declared object by laying down the requirement of and mechanism for determination of arm’s length price. `International transaction’ and `associated enterprises’ have been well defined under sections 92B and 92A of the Act.
International transaction is a transaction between two or more associated enterprises, either or both of whom are non-residents. Associated enterprises, either or both of whom are non-residents. Associated enterprises is an enterprises which participates in management or control of capital or other gains. The provision for computing arm’s length price has been applied to income arising from international transactions. The Statute is, thus, applicable to well defined class which meets the test of intelligible differentia. It also meets the test of rational relationship to the object i.e. to determine the real income. The income arising from international transaction is to be computed having regard to arm’s length price as per guidelines laid down in section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority. Mere fact that the assessee has chosen one of the said methods, does not take away the discretion to select any other method which may be considered to be more appropriate for the purpose of determining the true income. Proviso to section 92C(3) of the Act provides for an opportunity to the assessee as to why arm’s length price should not be determined as proposed. Under section 92CA of the Act, the Assessing Officer can make a reference on the issue of computation of arm’s length price to a Transfer Pricing Officer. The Transfer Pricing Officer is required to issue notice to the assessee to lead evidence for determining what was the arm’s length price.
HIGH COURT OF PUNJAB AND HARYANA
Coca Cola India Inc. v ACI , (CWP No. 16681 of 2005) Date: December 17, 2008
RELEVANT EXTRACTS:
47 We have already reproduced section 147 of the Act above and its applicability requires formation of opinion that income escaped assessment. The said provision is not in any manner controlled by section 92 of the Act nor there is any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer has given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment is irrelevant. Whether or not the said material should be finally taken into account for reassessment is a matter which has to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. We can only mention that having regard to relationship of the petitioner to its associate company, it cannot be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.
51. As regards the question whether order of the Transfer Pricing Officer could be taken into account, we do not find any objection to the same being done. As already observed, requirement of section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant materials can be considered. Order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. In the present case, the said material came to the notice of the Assessing officer
subsequent to the assessment. There is no grievance that provisions of sections 148 to 153 of the Act have not been followed. In such a situation, it cannot be held that the notice proposing reassessment is vitiated merely because one of the reasons referred to order of Transfer Pricing Officer.
52. We have already reproduced the amended provisions of Chapter X. According to the petitioner, the same should be held to be inapplicable, as making the same applicable will render them unconstitutional. The petitioner has not challenged their validity.
We do not find any substance in the submission that if the said provisions are made applicable to the petitioner, the same would be unconstitutional. There is no lack of Legislative competence for enacting the said provisions and making them applicable to the petitioner or to a class of persons falling in the category of the petitioner. Potential of multinational companies to allocate profits in inter groups transactions to outside jurisdiction or resulting in tax evasion is an acknowledged fact and is duly recognized in Legislation, nor only in India but elsewhere also. Keeping in view this mischief to be remedied and to advance the object of taxing the real income, provisions have been enacted. The amended provisions certainly advance the declared object by laying down the requirement of and mechanism for determination of arm’s length price. `International transaction’ and `associated enterprises’ have been well defined under sections 92B and 92A of the Act.
International transaction is a transaction between two or more associated enterprises, either or both of whom are non-residents. Associated enterprises, either or both of whom are non-residents. Associated enterprises is an enterprises which participates in management or control of capital or other gains. The provision for computing arm’s length price has been applied to income arising from international transactions. The Statute is, thus, applicable to well defined class which meets the test of intelligible differentia. It also meets the test of rational relationship to the object i.e. to determine the real income. The income arising from international transaction is to be computed having regard to arm’s length price as per guidelines laid down in section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority. Mere fact that the assessee has chosen one of the said methods, does not take away the discretion to select any other method which may be considered to be more appropriate for the purpose of determining the true income. Proviso to section 92C(3) of the Act provides for an opportunity to the assessee as to why arm’s length price should not be determined as proposed. Under section 92CA of the Act, the Assessing Officer can make a reference on the issue of computation of arm’s length price to a Transfer Pricing Officer. The Transfer Pricing Officer is required to issue notice to the assessee to lead evidence for determining what was the arm’s length price.
How Satyam May have Inflated Cash & Bank Balance
We all are still in disbelief mood as far as cash & bank balance fraud is concerned. Although there is no confirmed news, but the information gathered from some of sources of the investigating agencies (ICAI, SEBI etc.) are as under:
The Company had put an FD with bank A initially for 5 years for say Rs. 100. Then Company applied for the duplicate FD certificate saying they lost the original and did the premature withdrawal after 3 months – Rs 102 (including interest) using the duplicate FD certificates. Then on the next day Rs. 102 for 5 years was put as an FD with Bank B. Following the same modus operandi, he put the FD with Bank C, D & E. Then at the end of the year he shows the original FD certificates of Banks A, B, C, D & E to the auditors. Auditors did not get the bank confirmation from the banks A to E (which we must do, but some of us are not doing) regarding these FDs. The Company merrily carried on with the practice over 10 years and so. That’s how the cash and bank balance and accrue.
The Company had put an FD with bank A initially for 5 years for say Rs. 100. Then Company applied for the duplicate FD certificate saying they lost the original and did the premature withdrawal after 3 months – Rs 102 (including interest) using the duplicate FD certificates. Then on the next day Rs. 102 for 5 years was put as an FD with Bank B. Following the same modus operandi, he put the FD with Bank C, D & E. Then at the end of the year he shows the original FD certificates of Banks A, B, C, D & E to the auditors. Auditors did not get the bank confirmation from the banks A to E (which we must do, but some of us are not doing) regarding these FDs. The Company merrily carried on with the practice over 10 years and so. That’s how the cash and bank balance and accrue.
Big 4 Audit Firms - Status
The Big Four are the four largest international accountancy and professional services firms, which handle the vast majority of audits for publicly traded companies as well as many private companies. The Big Four firms are shown below, with their latest publicly available data:
FirmRevenuesEmployeesFiscal Year
PricewaterhouseCoopers $28.2bn146,7002008
Deloitte Touche Tohmatsu $27.4bn165,0002008
Ernst & Young$24.5bn135,0002008
KPMG$22.7bn137,0002008
TypeLimited Liability Partnership
Founded1849, London (in 1998, firm took on current name)
HeadquartersNew York City, United States
Key peopleSam DiPiazza, CEO
IndustryProfessional Services
ProductsAccounting
Audit
Consulting
Financial advisory
Tax
Revenue$28.2 Billion USD (2008)
Employees155,693
Websitewww.pwc.com
TypeSwiss Verein
FoundedLondon, United Kingdom (1845)
HeadquartersNew York, New York, United States
Key peopleJohn Connolly, Chairman
Jim Quigley, CEO
IndustryProfessional services
ServicesAudit
Tax
Consulting
Financial advisory
Revenue▲US$27.4 billion (2008)
Employees165,000 (May 2008)
Websitewww.deloitte.com
TypeMember firms have different legal structures, USA and UK: Limited Liability Partnership
Founded1989; individual components from 1849
HeadquartersLondon, England, UK (EY Global)
Key peopleJim S. Turley, Chairman and CEO
IndustryProfessional services
ServicesAudit
Tax
Financial advisory
Revenue$24,523 million USD (2008)
Employees135,730 (Global)
DivisionsAssurance, Advisory, Tax, Transaction
Websitewww.ey.com
TypeSwiss Cooperative
Founded1987; merger of Peat Marwick International and Klynveld Main Goerdeler
HeadquartersNew York, NY (global)
Key peopleTim Flynn (Chairman and CEO)
John B. Harrison, Chairman KPMG Asia Pacific Region
Ben van der Veer, Chairman KPMG Europe, Middle East and Africa Region
IndustryProfessional services
ServicesAudit
Tax
Advisory
Revenue▲$22.7 billion USD (2008)
Employees136,896+
Websitewww.kpmg.com
FirmRevenuesEmployeesFiscal Year
PricewaterhouseCoopers $28.2bn146,7002008
Deloitte Touche Tohmatsu $27.4bn165,0002008
Ernst & Young$24.5bn135,0002008
KPMG$22.7bn137,0002008
TypeLimited Liability Partnership
Founded1849, London (in 1998, firm took on current name)
HeadquartersNew York City, United States
Key peopleSam DiPiazza, CEO
IndustryProfessional Services
ProductsAccounting
Audit
Consulting
Financial advisory
Tax
Revenue$28.2 Billion USD (2008)
Employees155,693
Websitewww.pwc.com
TypeSwiss Verein
FoundedLondon, United Kingdom (1845)
HeadquartersNew York, New York, United States
Key peopleJohn Connolly, Chairman
Jim Quigley, CEO
IndustryProfessional services
ServicesAudit
Tax
Consulting
Financial advisory
Revenue▲US$27.4 billion (2008)
Employees165,000 (May 2008)
Websitewww.deloitte.com
TypeMember firms have different legal structures, USA and UK: Limited Liability Partnership
Founded1989; individual components from 1849
HeadquartersLondon, England, UK (EY Global)
Key peopleJim S. Turley, Chairman and CEO
IndustryProfessional services
ServicesAudit
Tax
Financial advisory
Revenue$24,523 million USD (2008)
Employees135,730 (Global)
DivisionsAssurance, Advisory, Tax, Transaction
Websitewww.ey.com
TypeSwiss Cooperative
Founded1987; merger of Peat Marwick International and Klynveld Main Goerdeler
HeadquartersNew York, NY (global)
Key peopleTim Flynn (Chairman and CEO)
John B. Harrison, Chairman KPMG Asia Pacific Region
Ben van der Veer, Chairman KPMG Europe, Middle East and Africa Region
IndustryProfessional services
ServicesAudit
Tax
Advisory
Revenue▲$22.7 billion USD (2008)
Employees136,896+
Websitewww.kpmg.com
Sunday, January 18, 2009
Indian stock markets already showing signs of resilience
The capital market in India may continue to spring many a surprise in 2009, but smart investors have begun to increase their exposure to a few
selective sectors which may outsmart others during this year. Most market gurus, who have been tracking the volatile equity markets across the globe and guessing the intensity of the damage in the real economy, have advised investors to go defensive and be highly disciplined in choosing the right sectors.
Analysts largely accept the view that there is not much downside to October lows for the Indian equity market. But none is sure how long this bear phase will continue, though everyone is convinced that stocks will begin to shine six months ahead of the recovery of the real economy.
So, what should be the investors’ strategy now? Should they map the right sectors which will survive this meltdown, or at least try to spot a few sectors which will provide the leadership in the next bull run?
Saurabh Srivastava, chairman of the Indian Venture Capital Association and founder Indian Angel Network, has a few tips for venture capital investors. “There are some recession-proof sectors such as healthcare and consumer durables. Besides, in IT services too India will continue to remain a value proposition even as valuations — which had gone through the roof — come down. IT-enabled services will do well as western economies, that are seeing recessionary trends, will have to outsource. Moreover, I think that the later part of the year will see economic revival in India as domestic consumption picks up,” he explains.
Yes, a few sectors or at times, a few individual stocks will give the leadership to the market which has now become largely range-bound. But if the market is linked to the recovery of the real economy, is there any way to guess the next economic cycle?
SundayET made an attempt to get a macro economic outlook from Nobel laureate Dr Amartya Sen when he was in New Delhi recently. “I won’t like to give any outlook for 2009. I am not a predictive economist,” he said. In fact, most economists have stopped predicting when will the global economy recover. Yet, for common investors, right cues on macro indicators will help a lot during these difficult times.
Another economist Prof Gary S Fields of Cornell University says that stimulus packages being provided by various governments would act as boosters to the economy, but the problem lies in non-availability of scientific methods to predict when the real economy will shine. “Frankly speaking, there are no tools available for anyone to predict how long this downturn will continue. But I am sure, many more stimulus packages will follow sooner or later, and that would stop the economy from deteriorating further,” he explains.
In fact, if equity market investors take a cue from venture capitalists, the BPO and eCommerce segments could outperform others. Ashish Gupta, MD and investment advisor, Helion Venture Partners says that platform-enabled BPO sectors such as KPO will attract VC investments in 2009.
“In these sectors, investors will seek the advantage of leveraging technology to gain higher margins. In 2009, eCommerce, too, will increase substantially and looks promising as a sector. For smaller VC investors, it could be eCommerce derivative areas that could offer them higher returns, since here the big players already have a serious advantage over others,” he elaborates. Agrees Naren Gupta of Nexus India Capital. “A broad range of sectors continue to be attractive. These include technology with focus on low-cost and ease of use, consumer services, business services that help manage costs, healthcare, and cleantech,” he says
selective sectors which may outsmart others during this year. Most market gurus, who have been tracking the volatile equity markets across the globe and guessing the intensity of the damage in the real economy, have advised investors to go defensive and be highly disciplined in choosing the right sectors.
Analysts largely accept the view that there is not much downside to October lows for the Indian equity market. But none is sure how long this bear phase will continue, though everyone is convinced that stocks will begin to shine six months ahead of the recovery of the real economy.
So, what should be the investors’ strategy now? Should they map the right sectors which will survive this meltdown, or at least try to spot a few sectors which will provide the leadership in the next bull run?
Saurabh Srivastava, chairman of the Indian Venture Capital Association and founder Indian Angel Network, has a few tips for venture capital investors. “There are some recession-proof sectors such as healthcare and consumer durables. Besides, in IT services too India will continue to remain a value proposition even as valuations — which had gone through the roof — come down. IT-enabled services will do well as western economies, that are seeing recessionary trends, will have to outsource. Moreover, I think that the later part of the year will see economic revival in India as domestic consumption picks up,” he explains.
Yes, a few sectors or at times, a few individual stocks will give the leadership to the market which has now become largely range-bound. But if the market is linked to the recovery of the real economy, is there any way to guess the next economic cycle?
SundayET made an attempt to get a macro economic outlook from Nobel laureate Dr Amartya Sen when he was in New Delhi recently. “I won’t like to give any outlook for 2009. I am not a predictive economist,” he said. In fact, most economists have stopped predicting when will the global economy recover. Yet, for common investors, right cues on macro indicators will help a lot during these difficult times.
Another economist Prof Gary S Fields of Cornell University says that stimulus packages being provided by various governments would act as boosters to the economy, but the problem lies in non-availability of scientific methods to predict when the real economy will shine. “Frankly speaking, there are no tools available for anyone to predict how long this downturn will continue. But I am sure, many more stimulus packages will follow sooner or later, and that would stop the economy from deteriorating further,” he explains.
In fact, if equity market investors take a cue from venture capitalists, the BPO and eCommerce segments could outperform others. Ashish Gupta, MD and investment advisor, Helion Venture Partners says that platform-enabled BPO sectors such as KPO will attract VC investments in 2009.
“In these sectors, investors will seek the advantage of leveraging technology to gain higher margins. In 2009, eCommerce, too, will increase substantially and looks promising as a sector. For smaller VC investors, it could be eCommerce derivative areas that could offer them higher returns, since here the big players already have a serious advantage over others,” he elaborates. Agrees Naren Gupta of Nexus India Capital. “A broad range of sectors continue to be attractive. These include technology with focus on low-cost and ease of use, consumer services, business services that help manage costs, healthcare, and cleantech,” he says
Why read an annual report?
Now that you've acquired the MBS degree (Master of the Balance sheet), you need to turn your attention to post-MBS studies. A company's annual report has reams of matter apart from the actual balance sheet and Profit & Loss figures, much of which could aid you in forming an opinion about the company.
The Auditor's Report & the Notes to the Accounts
Let's start with the Auditor's Report and the "Notes to the Accounts." The Auditor's Report will tell you what the auditor thinks about how the accounts have been drawn up. If he thinks that some accounting treatment is a bit dicey, and would affect the profits, he makes what is called a qualification to the accounts. In plain words, what he's doing is drawing your attention to the fact that the profit would have been different if the accounts had not been massaged. Usually, the auditor also tells you what impact the faulty accounting policy has on the firm's profits.
The Notes to the Accounts contain some fine print that is well worth studying. For instance, the notes to Reliance Industries' accounts point out that inter-divisional sales of Rs3929cr are included in the company's sales figure. Inter-divisional transfers are sales between one division of the company to another. This amount, therefore, should not be included in the total sales figure. Or take another example. The Notes point out that RIL has changed its method of depreciation, with the result that the profit for the year has been understated. So if you didn't look at the Notes, you could be misled.
Also included is quantitative information such as installed capacity, its utilisation, volumes sold etc. This will enable you to find out whether an increase in sales, for example, is due merely to higher prices, or to increase in volume of goods sold. Since the quantities of products produced are given, you will be able to get information about the trends in volumes of the different products.
Spare a glance at the figures for imports and the foreign exchange earned. That'll enable you to gauge the impact, for instance, of a depreciation in the currency.
The Cash Flow Statement
The cash flow statement reconciles the opening balance of cash (and money in the bank) with the closing balance. It shows the effect on cash of the various transactions. Since profit is often dependent upon the accounting policies you adopt, the cash flow statement is a more transparent way of showing a company's operations than the P&L account. It provides additional data. For instance, while the change in the debt outstanding can be gleaned from the balance sheet, the cash flow statement will tell you how much of borrowings have been repaid and how much fresh borrowing has been resorted to.
The cash generated from operations is an important indicator. If that figure is negative, it means that cash is being sourced from external sources to fund existing operations. That's certainly not sustainable in the long run.
Chairman's Communication and Director's Report
This is sometimes a mere PR exercise, but it could also be a source of insight into a company's strategy. An example would be Subhash Chandra's vision for Zee, which clearly charts out the way he wants the group to grow. The Directors' Report and, in some cases, the Management Discussion and Analysis, sets out the management's view of the operations of the company during the year. In a multi-divisional company, the performance of the various divisions are analysed in some detail. This would enable you to know which businesses are doing well and which not so well.
Reconciliation with US GAAP
Thee days, with an eye on the ADR market, many companies have started reconciling their accounts with the accounts according to the US generally accepted accounting principles (GAAP). For Reliance Industries, you will notice that the profit under US GAAP is much lower than the profit under Indian accounting norms. That's because of deferred tax. There is sometimes a difference between the year in which a transaction affects taxable income and the year in which it enters into pre-tax income. For instance, higher depreciation is permitted under tax laws as compared to the Companies Act. Over time, however, such differences are ironed out. The benefits of higher depreciation, for instance, are lost over a period of time. So unless accounting is made for deferred taxes, there could be sudden shock in the year when the tax shelter is withdrawn. Accounting for deferred tax smoothens out such fluctuations.
Now that you've progressed to the stage where you understand the concept behind deferred tax accounting, you can award yourself the title" Doctor of the Annual Report".
The Auditor's Report & the Notes to the Accounts
Let's start with the Auditor's Report and the "Notes to the Accounts." The Auditor's Report will tell you what the auditor thinks about how the accounts have been drawn up. If he thinks that some accounting treatment is a bit dicey, and would affect the profits, he makes what is called a qualification to the accounts. In plain words, what he's doing is drawing your attention to the fact that the profit would have been different if the accounts had not been massaged. Usually, the auditor also tells you what impact the faulty accounting policy has on the firm's profits.
The Notes to the Accounts contain some fine print that is well worth studying. For instance, the notes to Reliance Industries' accounts point out that inter-divisional sales of Rs3929cr are included in the company's sales figure. Inter-divisional transfers are sales between one division of the company to another. This amount, therefore, should not be included in the total sales figure. Or take another example. The Notes point out that RIL has changed its method of depreciation, with the result that the profit for the year has been understated. So if you didn't look at the Notes, you could be misled.
Also included is quantitative information such as installed capacity, its utilisation, volumes sold etc. This will enable you to find out whether an increase in sales, for example, is due merely to higher prices, or to increase in volume of goods sold. Since the quantities of products produced are given, you will be able to get information about the trends in volumes of the different products.
Spare a glance at the figures for imports and the foreign exchange earned. That'll enable you to gauge the impact, for instance, of a depreciation in the currency.
The Cash Flow Statement
The cash flow statement reconciles the opening balance of cash (and money in the bank) with the closing balance. It shows the effect on cash of the various transactions. Since profit is often dependent upon the accounting policies you adopt, the cash flow statement is a more transparent way of showing a company's operations than the P&L account. It provides additional data. For instance, while the change in the debt outstanding can be gleaned from the balance sheet, the cash flow statement will tell you how much of borrowings have been repaid and how much fresh borrowing has been resorted to.
The cash generated from operations is an important indicator. If that figure is negative, it means that cash is being sourced from external sources to fund existing operations. That's certainly not sustainable in the long run.
Chairman's Communication and Director's Report
This is sometimes a mere PR exercise, but it could also be a source of insight into a company's strategy. An example would be Subhash Chandra's vision for Zee, which clearly charts out the way he wants the group to grow. The Directors' Report and, in some cases, the Management Discussion and Analysis, sets out the management's view of the operations of the company during the year. In a multi-divisional company, the performance of the various divisions are analysed in some detail. This would enable you to know which businesses are doing well and which not so well.
Reconciliation with US GAAP
Thee days, with an eye on the ADR market, many companies have started reconciling their accounts with the accounts according to the US generally accepted accounting principles (GAAP). For Reliance Industries, you will notice that the profit under US GAAP is much lower than the profit under Indian accounting norms. That's because of deferred tax. There is sometimes a difference between the year in which a transaction affects taxable income and the year in which it enters into pre-tax income. For instance, higher depreciation is permitted under tax laws as compared to the Companies Act. Over time, however, such differences are ironed out. The benefits of higher depreciation, for instance, are lost over a period of time. So unless accounting is made for deferred taxes, there could be sudden shock in the year when the tax shelter is withdrawn. Accounting for deferred tax smoothens out such fluctuations.
Now that you've progressed to the stage where you understand the concept behind deferred tax accounting, you can award yourself the title" Doctor of the Annual Report".
SWOT ANALYSIS
Strengths, weaknesses, opportunities and threats analysis. SWOT analysis definitions, descriptions, SWOT templates, examples and explanations. SWOT profiling & analysis in market & competitive intelligence. Tools and utilities in support of final SWOT analysis. Winword templates, screen shots, PowerPoint slides and word files.
A standard marketing tool for market and especially company profiling and intelligence, SWOT analysis has proven extremely effective as a quick yet substantial tool to identify strengths, weaknesses, opportunities and threats of companies, markets and products or services in any given market place.
Market & competitive intelligence knows and uses SWOT analysis as a standard analysis instrument and base of major decisions even before utilizing other analysis methods as this analysis or profiling might provide a very early indication of which further intelligence analysis tools to derive in general and for further analysis steps
What is SWOT analysis?
SWOT definition by Vernon Prior (The Language of Business Intelligence): “SWOT analysis is the evaluation of available Information concerning the Business environment in order to identify internal strengths and weaknesses, and external Threats and Opportunities.
SWOT analysis is also known as Situational analysis and, when applied to competitors, as Competitor profiling.”
SWOT analysis is otherwise also defined as a structured approach to evaluating the strategic position of a business by identifying its strengths, weaknesses, opportunities and threats.
Objective
SWOT goals should be to identify a company’s strengths that the company can use to make use of opportunities in the operating environment and to become aware of that company’s or product’s weaknesses and what threats to the operations can be found in the market and competitive environment.
Internal analysis and external company analysis should be applied and synthesized in order to achieve these analysis objectives.
Methods
In order to analyze strengths, weaknesses (SW analysis) of any company or organization (or product or service) and opportunities and threats (OW analysis) in the given business environment, a matrix should be used to evaluate and illustrate all findings. The following questions should be asked (and answered) to extract important SWOT identifiers:
What are the main things that you think the company or product is better in than any given competitor?
What are the main things that you think the analyzed company is worse in than any given competitor?
What are the really big threats facing the analyzed company in the analyzed environment?
What are the major opportunities that are being presented to the analyzed company?
Oftentimes SWOT analysis is conducted by profiling the own organization or product or service against any other, reversely the questions should be re-phrased in this case:
What are the main things that you think your company is better in than your competitors?
What are the main things that you think your company is worse in than your competitors?
What are the really big threats facing your company in the environment?
What are the major opportunities that are being presented to your company?
SWOT Matrix Examples
The SWOT matrix is an easy to use and to present analysis tool.
STRENGTHS
High quality
High profitability
…
WEAKNESSES
Long delivery times
Poor flexibility
…
OPPORTUNITIES
Accelerating market growth
Government subsidies
…
THREATS
New entrants to the industry
Risk of economic downturn
A standard marketing tool for market and especially company profiling and intelligence, SWOT analysis has proven extremely effective as a quick yet substantial tool to identify strengths, weaknesses, opportunities and threats of companies, markets and products or services in any given market place.
Market & competitive intelligence knows and uses SWOT analysis as a standard analysis instrument and base of major decisions even before utilizing other analysis methods as this analysis or profiling might provide a very early indication of which further intelligence analysis tools to derive in general and for further analysis steps
What is SWOT analysis?
SWOT definition by Vernon Prior (The Language of Business Intelligence): “SWOT analysis is the evaluation of available Information concerning the Business environment in order to identify internal strengths and weaknesses, and external Threats and Opportunities.
SWOT analysis is also known as Situational analysis and, when applied to competitors, as Competitor profiling.”
SWOT analysis is otherwise also defined as a structured approach to evaluating the strategic position of a business by identifying its strengths, weaknesses, opportunities and threats.
Objective
SWOT goals should be to identify a company’s strengths that the company can use to make use of opportunities in the operating environment and to become aware of that company’s or product’s weaknesses and what threats to the operations can be found in the market and competitive environment.
Internal analysis and external company analysis should be applied and synthesized in order to achieve these analysis objectives.
Methods
In order to analyze strengths, weaknesses (SW analysis) of any company or organization (or product or service) and opportunities and threats (OW analysis) in the given business environment, a matrix should be used to evaluate and illustrate all findings. The following questions should be asked (and answered) to extract important SWOT identifiers:
What are the main things that you think the company or product is better in than any given competitor?
What are the main things that you think the analyzed company is worse in than any given competitor?
What are the really big threats facing the analyzed company in the analyzed environment?
What are the major opportunities that are being presented to the analyzed company?
Oftentimes SWOT analysis is conducted by profiling the own organization or product or service against any other, reversely the questions should be re-phrased in this case:
What are the main things that you think your company is better in than your competitors?
What are the main things that you think your company is worse in than your competitors?
What are the really big threats facing your company in the environment?
What are the major opportunities that are being presented to your company?
SWOT Matrix Examples
The SWOT matrix is an easy to use and to present analysis tool.
STRENGTHS
High quality
High profitability
…
WEAKNESSES
Long delivery times
Poor flexibility
…
OPPORTUNITIES
Accelerating market growth
Government subsidies
…
THREATS
New entrants to the industry
Risk of economic downturn
Corporate Governance in Indian Companies
Professor Sudhakar V Balachandran mentioned in one of his article who teaches accounting at the Columbia Business School, where he is the faculty director of the executive programs "Finance & Accounting for Non-Financial Executives" and "Essentials of Financial Management, that we teach a course called Performance Measurement in which we study some of the dynamics that lead to this type of accounting scandal. In our course, we study the fraud committed at WorldCom and Kidder Peabody in detail. In our studies, a distinct pattern emerges.
It starts small. Typically, executives do not wake up one morning and say, "I feel like adding 5 billion rupees to our revenue today." They usually start by fudging the number a little--and then it grows.
It is usually a response to competitive pressures. Companies have targets that they need to reach every month, quarter and year. And they start playing with figures, It gets out of control When the company is unable to make up the gap, a larger distortion is needed to cover it up. This in turn creates pressure to deliver even better results--which leads to bigger cover-ups, and so on. In his letter to his board, Satyam's Raju, rightly said that the process is as "like riding a tiger, not knowing how to get off without being eaten."
Typically, we rely on corporate governance, audit and legal consequences. Satyam, for example, had a reputation of excellent corporate governance. In fact, the World Council for Corporate Governance awarded Satyam its Golden Peacock Award for Corporate Governance in 2008. This suggests that we need to fundamentally rethink the criteria that we require in order for boards to provide effective governance.
Finally, we also need stiffer penalties. Simply put, "white collar" crime cannot be viewed as less of an evil than any other form of crime. The fact that white collar crime continues to occur, and seemingly at an increasing rate, suggests that the expected costs do not outweigh the expected benefits from cheating. Stronger penalties are needed.
Despite improvements in governance, audit and legal penalties, At the end of the day, the actions at Satyam were perpetrated by one or two individuals who simply may not have realized that the small distortions they created in the past would lead to massive problems today. Hopefully, creating an awareness of the large consequences of small lies may help some to avoid this trap.
Actions such as those of Satyam are being observed all over the world, and their effects are not simply localized to their executives, employees or even their countries. Whether it is accounting fraud, excessive trading risks, a Ponzi scheme or making loans to those who can't pay, many are hurt by corporate improprieties. These types of actions affect the global economy. In other words, they affect us all. If there isn't sufficient belief in the notion that business will act in good faith, then the capitalist system is itself at risk.
It starts small. Typically, executives do not wake up one morning and say, "I feel like adding 5 billion rupees to our revenue today." They usually start by fudging the number a little--and then it grows.
It is usually a response to competitive pressures. Companies have targets that they need to reach every month, quarter and year. And they start playing with figures, It gets out of control When the company is unable to make up the gap, a larger distortion is needed to cover it up. This in turn creates pressure to deliver even better results--which leads to bigger cover-ups, and so on. In his letter to his board, Satyam's Raju, rightly said that the process is as "like riding a tiger, not knowing how to get off without being eaten."
Typically, we rely on corporate governance, audit and legal consequences. Satyam, for example, had a reputation of excellent corporate governance. In fact, the World Council for Corporate Governance awarded Satyam its Golden Peacock Award for Corporate Governance in 2008. This suggests that we need to fundamentally rethink the criteria that we require in order for boards to provide effective governance.
Finally, we also need stiffer penalties. Simply put, "white collar" crime cannot be viewed as less of an evil than any other form of crime. The fact that white collar crime continues to occur, and seemingly at an increasing rate, suggests that the expected costs do not outweigh the expected benefits from cheating. Stronger penalties are needed.
Despite improvements in governance, audit and legal penalties, At the end of the day, the actions at Satyam were perpetrated by one or two individuals who simply may not have realized that the small distortions they created in the past would lead to massive problems today. Hopefully, creating an awareness of the large consequences of small lies may help some to avoid this trap.
Actions such as those of Satyam are being observed all over the world, and their effects are not simply localized to their executives, employees or even their countries. Whether it is accounting fraud, excessive trading risks, a Ponzi scheme or making loans to those who can't pay, many are hurt by corporate improprieties. These types of actions affect the global economy. In other words, they affect us all. If there isn't sufficient belief in the notion that business will act in good faith, then the capitalist system is itself at risk.
No penal action on e-Returns with date stamp of 1st October 2008
PIB Release BSC/SS/GN-338 Dated 22-12-2008
CBDT has ordered that any return of income for the assessment year 2008-09 filed electronically on 30th September 2008, in respect f which the electronic acknowledgement bears the date stamp of 1st October 2008, shall be treated as having been filed within the due date, i.e. 30th September 2008.
Accordingly, such returns of income shall be eligible for all benefits of filing of tax returns by the due date and no penal consequence shall be attracted for failure to file the return by the due date.
Comments
Over 2.56 Lakh returns were received on the last date . Out of this 13437 returns were filed between 11 Pm and 12 mid night. However, this release now clarifies that even if the date stamp is 1st October ,these will be treated as being submitted on 30th September 2008.
CBDT has ordered that any return of income for the assessment year 2008-09 filed electronically on 30th September 2008, in respect f which the electronic acknowledgement bears the date stamp of 1st October 2008, shall be treated as having been filed within the due date, i.e. 30th September 2008.
Accordingly, such returns of income shall be eligible for all benefits of filing of tax returns by the due date and no penal consequence shall be attracted for failure to file the return by the due date.
Comments
Over 2.56 Lakh returns were received on the last date . Out of this 13437 returns were filed between 11 Pm and 12 mid night. However, this release now clarifies that even if the date stamp is 1st October ,these will be treated as being submitted on 30th September 2008.
TAX RECENT NOTIFICATIONS
Source: Notification No. 1/2009, dated 5.1.2009
Government notifies conditions for pre-paid meal cards for the purpose of FBT
As per section 115WB(2)(B)(iii), inserted from the assessment year 2009-10, hospitality expenditure for the purpose of levy of FBT, does not include any expenditure on or payment through non-transferable pre-paid electronic meal card usable only at eating joints or outlets and which fulfils other prescribed conditions. CBDT has now notified Rule 40E prescribing such conditions. Following conditions have been prescribed:
(i) The card shall be granted by the employer to its employees under a scheme framed by the employer specifying therein the circumstances under which the meal card can be used by the employee.
(ii) The card shall be issued by the issuing bank.
(iii) An employee shall not be issued more than one card.
(iv) The card shall bear the name of the employer along with the name, photograph and signature of the employee to whom the card is issued.
(v) The card shall be used only by the employee to whom the card is issued.
(vi) The card shall be used by the employee only for the purpose of purchasing ready to eat food or non-alcoholic beverage from a member establishment.
(vii) The aggregate amount of ready to eat food or non-alcoholic beverage purchased during a day by an employee shall not exceed one hundred rupees.
(viii) The details of each transaction of purchases made by the employee against the card shall be maintained by the employer and the member establishment in such manner and for such period as is required under the Act for any other similar transaction.
Source: Notification No. 2/2009, dated 5.1.2009
Additional statement to be furnished for approval u/s 35
The Government has amended Rules 5D and 5E pertaining to conditions for approval to a scientific research association u/s 35(1)(ii) or to a university, college or other institution u/s 35(1)(ii)/(iii), to provide that such association shall, by the due date of furnishing the return of income u/s 139(1), furnish a statement to CIT/DIT containing (i) a detailed note on the research work undertaken by it during the previous year; (ii) a summary of research articles published in national or international journals during the year; (iii) any patent or other similar rights applied for or registered during the year; (iv) programme of research projects to be undertaken during the forthcoming year and the financial allocation for such programme.
Source: Notification No. 3/2009, dated 5.1.2009
Government notifies NHB Deposit Scheme u/s 80C
The Government has notified that subscription to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008 shall qualify for deduction under section 80C.
Government notifies conditions for pre-paid meal cards for the purpose of FBT
As per section 115WB(2)(B)(iii), inserted from the assessment year 2009-10, hospitality expenditure for the purpose of levy of FBT, does not include any expenditure on or payment through non-transferable pre-paid electronic meal card usable only at eating joints or outlets and which fulfils other prescribed conditions. CBDT has now notified Rule 40E prescribing such conditions. Following conditions have been prescribed:
(i) The card shall be granted by the employer to its employees under a scheme framed by the employer specifying therein the circumstances under which the meal card can be used by the employee.
(ii) The card shall be issued by the issuing bank.
(iii) An employee shall not be issued more than one card.
(iv) The card shall bear the name of the employer along with the name, photograph and signature of the employee to whom the card is issued.
(v) The card shall be used only by the employee to whom the card is issued.
(vi) The card shall be used by the employee only for the purpose of purchasing ready to eat food or non-alcoholic beverage from a member establishment.
(vii) The aggregate amount of ready to eat food or non-alcoholic beverage purchased during a day by an employee shall not exceed one hundred rupees.
(viii) The details of each transaction of purchases made by the employee against the card shall be maintained by the employer and the member establishment in such manner and for such period as is required under the Act for any other similar transaction.
Source: Notification No. 2/2009, dated 5.1.2009
Additional statement to be furnished for approval u/s 35
The Government has amended Rules 5D and 5E pertaining to conditions for approval to a scientific research association u/s 35(1)(ii) or to a university, college or other institution u/s 35(1)(ii)/(iii), to provide that such association shall, by the due date of furnishing the return of income u/s 139(1), furnish a statement to CIT/DIT containing (i) a detailed note on the research work undertaken by it during the previous year; (ii) a summary of research articles published in national or international journals during the year; (iii) any patent or other similar rights applied for or registered during the year; (iv) programme of research projects to be undertaken during the forthcoming year and the financial allocation for such programme.
Source: Notification No. 3/2009, dated 5.1.2009
Government notifies NHB Deposit Scheme u/s 80C
The Government has notified that subscription to National Housing Bank (Tax Saving) Term Deposit Scheme, 2008 shall qualify for deduction under section 80C.
Income Tax department's website to get new address
New Delhi, Jan 2: The income tax department website which is used by lakhs of tax payers to file their returns online will soon be revamped along with a new website address or URL.
The new online facility will host of several user-friendly features.
The department's Uniform Resource Locator (URL)-- www.incometaxindia.Gov.In -- is undergoing pilot tests and would be changed, probably with a "small address" change in a few months' time.
"A lot of new features are being added to the website and as soon as the tests are over the old website address may give way to a totally new URL," a senior IT department officer involved in the process said.
The new website would be able to handle a lot of new features, including tax rules, notifications and other circulars.
"An online grievances section for the taxpayers would be the latest feature. The website's hyperlink (URL) would also be small and crispier," the officer added.
The new website will come secured with advanced anti-hacking and anti-virus applications, the officer said.
Tax payers as of now, have facilities of e-payment of taxes and filing of TDS returns among others on the existing website.
A repository of legal tax cases and their decisions, currently being compiled by the department, will also be hosted as a maiden venture on the new facility. The trial run of the online grievance facility named 'Sevottam' is already on a pilot test in Mumbai and Udaipur.
While registering online complaints, the tax payer will also receive an acknowledgment number which would have a fixed time limit that will ensure that it is redressed within a stipulated duration.
The IT department's online facilities currently feature services like Annual Information Returns, Online Tax Accounting System (OLTAS), Tax Return Prepares Scheme (TRPS), Tax Information Network and help desk, as well as tax payers queries and feedback section.
The departmental section, for the use of department officials and the tenders section, will also be given further hyperlinks for better usage, the officer added.
The new online facility will host of several user-friendly features.
The department's Uniform Resource Locator (URL)-- www.incometaxindia.Gov.In -- is undergoing pilot tests and would be changed, probably with a "small address" change in a few months' time.
"A lot of new features are being added to the website and as soon as the tests are over the old website address may give way to a totally new URL," a senior IT department officer involved in the process said.
The new website would be able to handle a lot of new features, including tax rules, notifications and other circulars.
"An online grievances section for the taxpayers would be the latest feature. The website's hyperlink (URL) would also be small and crispier," the officer added.
The new website will come secured with advanced anti-hacking and anti-virus applications, the officer said.
Tax payers as of now, have facilities of e-payment of taxes and filing of TDS returns among others on the existing website.
A repository of legal tax cases and their decisions, currently being compiled by the department, will also be hosted as a maiden venture on the new facility. The trial run of the online grievance facility named 'Sevottam' is already on a pilot test in Mumbai and Udaipur.
While registering online complaints, the tax payer will also receive an acknowledgment number which would have a fixed time limit that will ensure that it is redressed within a stipulated duration.
The IT department's online facilities currently feature services like Annual Information Returns, Online Tax Accounting System (OLTAS), Tax Return Prepares Scheme (TRPS), Tax Information Network and help desk, as well as tax payers queries and feedback section.
The departmental section, for the use of department officials and the tenders section, will also be given further hyperlinks for better usage, the officer added.
115JB
In arriving at the book profit under Section 115JB, lower of brought forward loss or unabsorbed depreciation as per books of account is allowed, irrespective of whether it is allowable or not allowed to be carried forward under section 79 of the Act
Fascel Ltd. v. ITO / DCIT v. Fascel Ltd. [2008] 305 ITR 368 (AT)
The taxpayer sought deduction of brought forward book loss relating to the assessment year (AY) 2000-01 and earlier years in computing the liability under section 115JB of the Act. According to the books of account of the taxpayer, there was a loss relating to earlier years.
The AO held that the brought forward loss was not allowable under section 115JB as it included a part of the loss relating to the AY 2000-01 and earlier years which was not allowable under section 79 of the Act since there was change in the shareholding in that year.
The CIT(A) held that section 115JB(5)14 read with section 79 permitted the taxpayer to avail of set off of book losses only in respect of the AY 2001-02 and subsequently and not for the earlier AYs being prior to the substantial change in shareholding.
The Tribunal held that from a combined reading of section 115JB(1), (2) and the Explanation provided thereunder, it was evident that the loss according to the books of account had to be considered and the admissibility of loss according to the other provisions of the Act was not relevant for the computation of book profit.
The Tribunal held that section 115JB(5) reincorporates only those provisions of the Act which are not otherwise provided in section 115JB. The Tribunal further held that clause (iii) of the Explanation to section 115JB specifically provides for the allowance of brought forward loss or unabsorbed depreciation and, therefore, the other provisions of the Act relating to earlier years’ loss or unabsorbed depreciation would not be applicable. The Tribunal further relied on Circular no. 1315 and held that the abovementioned clause applies only to provisions other than computation and since the loss or unabsorbed depreciation is a part of the computation of book profit under section 115JB, the provisions of section 115JB(5) would not include other provisions of the Act. Accordingly, it was held that in arriving at the book profit, the lower of the amount of brought forward loss or unabsorbed depreciation as per the books of account had to be allowed irrespective of whether it was allowable or not under the provisions of the Act.
Therefore, the amount of loss brought forward or unabsorbed depreciation for AY 2000-01 and earlier years was allowable irrespective of the fact that such loss was not allowed to be carried forward under section 79 of the Act.
Fascel Ltd. v. ITO / DCIT v. Fascel Ltd. [2008] 305 ITR 368 (AT)
The taxpayer sought deduction of brought forward book loss relating to the assessment year (AY) 2000-01 and earlier years in computing the liability under section 115JB of the Act. According to the books of account of the taxpayer, there was a loss relating to earlier years.
The AO held that the brought forward loss was not allowable under section 115JB as it included a part of the loss relating to the AY 2000-01 and earlier years which was not allowable under section 79 of the Act since there was change in the shareholding in that year.
The CIT(A) held that section 115JB(5)14 read with section 79 permitted the taxpayer to avail of set off of book losses only in respect of the AY 2001-02 and subsequently and not for the earlier AYs being prior to the substantial change in shareholding.
The Tribunal held that from a combined reading of section 115JB(1), (2) and the Explanation provided thereunder, it was evident that the loss according to the books of account had to be considered and the admissibility of loss according to the other provisions of the Act was not relevant for the computation of book profit.
The Tribunal held that section 115JB(5) reincorporates only those provisions of the Act which are not otherwise provided in section 115JB. The Tribunal further held that clause (iii) of the Explanation to section 115JB specifically provides for the allowance of brought forward loss or unabsorbed depreciation and, therefore, the other provisions of the Act relating to earlier years’ loss or unabsorbed depreciation would not be applicable. The Tribunal further relied on Circular no. 1315 and held that the abovementioned clause applies only to provisions other than computation and since the loss or unabsorbed depreciation is a part of the computation of book profit under section 115JB, the provisions of section 115JB(5) would not include other provisions of the Act. Accordingly, it was held that in arriving at the book profit, the lower of the amount of brought forward loss or unabsorbed depreciation as per the books of account had to be allowed irrespective of whether it was allowable or not under the provisions of the Act.
Therefore, the amount of loss brought forward or unabsorbed depreciation for AY 2000-01 and earlier years was allowable irrespective of the fact that such loss was not allowed to be carried forward under section 79 of the Act.
Deloitte, KPMG have no license to do audit work in India
KPMG and Deloitte, the two firms entrusted by the new three-member board of Satyam Computer Services to audit the company’s accounts, are not allowed to do audit work in India —a point that has not escaped the attention of the Institute of Chartered Accountants of India (ICAI), the regulatory body for accountants in the country. According to ICAI president Ved Jain: “KPMG is not allowed to practice in India. They are not registered with us.”
KPMG carries out its auditing work in India through BSR & Co, an Indian chartered accountant firm that also signs on the balance sheets of Indian companies. Deloitte on the other hand does auditing through CC Chokshi & Co.
ICAI has over 145,841 registered members, of which fellow members total 61,288, while
associates are 84,193 in number. According to ICAI regulations framed in 1984, foreign audit firms are not allowed to practice in India. Some of the other auditors contacted by ET said that KPMG and Deloitte cannot be appointed as statutory auditors as such a body can only be appointed by the shareholders at an annual general meeting.
On Wednesday, the Satyam board appointed KPMG and Deloitte to look at and restate the accounts of the beleagured software firm. KPMG’s presence in India is through KPMG India Pvt. Ltd (an investment banking firm) and KPMG Consulting (management and consulting). The chartered accountancy firm, BSR & Co, formerly Bharat S Raut, is part of KPMG’s domestic and international network for auditing.
KPMG carries out its auditing work in India through BSR & Co, an Indian chartered accountant firm that also signs on the balance sheets of Indian companies. Deloitte on the other hand does auditing through CC Chokshi & Co.
ICAI has over 145,841 registered members, of which fellow members total 61,288, while
associates are 84,193 in number. According to ICAI regulations framed in 1984, foreign audit firms are not allowed to practice in India. Some of the other auditors contacted by ET said that KPMG and Deloitte cannot be appointed as statutory auditors as such a body can only be appointed by the shareholders at an annual general meeting.
On Wednesday, the Satyam board appointed KPMG and Deloitte to look at and restate the accounts of the beleagured software firm. KPMG’s presence in India is through KPMG India Pvt. Ltd (an investment banking firm) and KPMG Consulting (management and consulting). The chartered accountancy firm, BSR & Co, formerly Bharat S Raut, is part of KPMG’s domestic and international network for auditing.
DEPRECIATION - Avoid Last Moment Purchase
Depreciation for assets ‘owned’ by assessee and ‘used’ by him in the business can be claimed and allowed if the asset is purchased and used or if it is kept ready for use at any time during the previous year. Therefore, if an asset is purchased and put to use or even if it is kept ready for use as on the last day of the previous year i.e. 31st March, depreciation can be claimed. However, if the asset is purchased, delivered and claimed to be used on the last day or just few days prior to end of the previous year, a reason of suspicious situation can arise. Similar will be case when full years depreciation is claimed on new assets acquired just on or few days prior to 2nd October of say 2008.
Full and half rate depreciation:
Earlier, even in respect of new assets purchased and used any time even on the last date, full year’s depreciation was allowable. However, w.e.f. 1.4.1992 the provision was made that in case of any asset acquired by the assessee during the previous year if it is put to use for business or profession for a period of less than 180 days in that previous year the deduction shall be restricted at half of the normal rate. Therefore w.e.f. 1.4.1992 if an asset is purchased and put to use for less than 180 days i.e. prior to 2nd October (3rd October in case of leap financial year) of the previous year, depreciation at full rate is allowed and if it is purchased after 2nd October, (3rd October, in case of leap year) depreciation at ½ of normal rate is allowed.
Last moment rush should be avoided:
It seems that many time depreciable assets are purchased just on the crucial date (taken generally as 30th September or 31st March) or a few days earlier, this naturally creates doubt in the mind of the Assessing Officer. Unfortunately, in some cases it was noticed that the assets was not put to use on or before the crucial date and therefore, depreciation was not allowable as claimed by the assessee. Under some circumstances, it can also be established by the Assessing Officer that the assessee attempted to claim higher depreciation. This is not good for honest taxpayer. However, by mistake, just considering the date of invoice for the assets purchased may claim higher depreciation. Therefore, care should be taken to find out actual date of starting use of the asset.
Advance planning is required:
It is desirable that the assessee must plan in advance and assets should be purchased, delivered and put to use well in time after taking into account reasonable time for putting the assets to use before crucial date to claim depreciation allowance.
Specific requirement for use of certain assets:
Some assets can be put to use immediately after unpacking the assets like some furniture, tools, portable equipments etc. However, even in case of some portable equipment, some electrical fittings, cabling, wiring, some installation devices, some furniture and fittings for proper use are required.
In case of some assets, specific permission from concerned authority is required by way of registration, certificate of fitness, authority to use by way of registration or licence etc. For example- motor vehicle requires registration, some electrical generators require registration for excise duty on electricity, large weighing scale (bridges) requires inspection certificate and registration from concerned authorities. Therefore, in such case necessary licence or registration should be obtained prior to crucial date to establish that the assets was ready for use.
It is always advisable to establish actual use and certification for the same from managers and government authorities wherever required. There should also be circumstantial evidence as to use for example- consumption of raw material, electricity, necessary process materials, production of goods or services rendered etc.
CIT -vs- Air Travel Enterprise India Ltd. (2004) 136 Taxman 194 (KER):
In this case, the assessee purchased vehicle for carrying person for hire. The purchase was made on 30th March 1992 and delivery was taken.
Application for a temporary registration was made on the same day and registration was granted on 03.04.1992 w.e.f. 30.03.1992 and it was valid up to 24th April 1992. This registration entitled the assessee to run vehicle from 30th March 1992. The assessee took the vehicle from Ernakulam to Thiruvanthapuram under this registration.
The assessee also applied on 30th March 1992 for registration as a non-transport vehicle and the registration was granted on 3rd April 1992 for the period from 30th March 1992 to 29th March 2007.
The assessee operated vehicle from April 1, 1992 for taking tourist party.
However, the vehicle was registered as a contract carriage only on 5th May 1992.
The Assessing Officer disallowed the claim for depreciation on the ground that the assessee has not used or kept the vehicle ready for use on or before 31st March 1992; the CIT (A) confirmed the disallowance. However, the Tribunal allowed the claim of the assessee.
It is not clear on what ground and basis the Tribunal allowed depreciation. Most probably it must be on the basis that vehicle was run from 30.03.1992 on the basis of application made for registration and it was run to take the vehicle from Ernakulam To Thiruvanthapuram and put for display for booking tourist party which went on trip on 01.04.1992.
On appeal by the Commissioner, the High Court held that since the contract carriage permit was obtained for vehicle only on 5th May, 1992 it could not be said legally that the vehicle was kept ready for use as ‘contract carriage’, on or before 31st March, 1992 and therefore revising the order of the Tribunal, the High Court held that the assessee was not entitled to get depreciation on the vehicle for the assessment year 1992-93.
The arguments placed before the authorities and Court:
It appears that the Court restricted its consideration on the basis of reasoning for which the AO disallowed the depreciation. This is apparent from the following observations of the Court.
“It is not necessary to refer to the provisions of section 34, for, the only ground on which the Assessing Officer has disallowed depreciation is that the assessee has not used or kept ready for use the vehicle at any time prior to March 31, 1992. So the only question for consideration is as to whether the assessee had used the vehicle or kept ready for use the vehicle on any day during the previous year relevant to the assessment year 1992-93. Admittedly, the assessee took delivery of the vehicle on March 30, 1992, and the vehicle was taken from Ernakulam to Thiruvananthapuram on the basis of a temporary permit valid up to April 24, 1992. The assessee got registration as a non-transport vehicle on April 3, 1992, with retrospective effect from March 30, 1992. The assessee had applied for and obtained a contract carriage licence only on May 5, 1992. The assessee has a case that the vehicle was run on April 1, 1992, for taking a tourist party. As the Assessing Officer himself had noted the expression “used for the purpose of the business” occurring in section 32 will take in vehicle kept ready for use. So the question is whether it can be said that the vehicle was kept ready for use on March 30, 1992, or March 31, 1992, when the regular contract carriage licence was issued only on May 5, 1992.”
From the order of the High Court, it is not clear on what basis the tribunal allowed depreciation. However, considering the provision only the finding of tribunal ought to be the vehicle was used before 31st March 1992. The Court has given weight-age to the point that the vehicle was registered as carriage vehicle only on 5th May 1992. However, in view of the author, the following uses are also to be considered:
1) Carrying vehicle from the vendor’s show room to the place of the assessee. This is usually on a temporary permit and some time only on a dealer’s licence and insurance. Therefore, the fact that the vehicle was taken from Ernakulam to Thiruvananthapuram is a necessary factor so as to establish the use of vehicle on 30th and 31st March.
2) The assessee took a tourist party of 13 persons on 1st April 1992. Therefore, it is evident that on 30th and 31st March, 1992 the assessee has shown the vehicle to prospective customers for taking a trip and made out a tour party for the purpose of booking. Therefore, it could be said that the vehicle having been shown to customer on 30th and / or 31st March or even giving assurance that the vehicle is on the way from Ernakulam and it will be available on 1st April, it can be said that the vehicle was used on 30th and 31st March.
3) The main intention and business of the assessee might be to use the vehicle for contract carriage but it is also recorded the fact that the vehicle was registered w.e.f. 30th March 1992 entitling the assessee to run the vehicle.
4) In practice it is found that for few days vehicle may run even on dealers licence after submission of application and inspection of the vehicle, the owner takes the vehicle to his place. Therefore, running of vehicle from the show room to the registering authority for inspection and then to the owner’s place and running the vehicle on dealers registration also amounts to use of the vehicle for the purpose of business.
5) In this case these arguments were not placed and from the reading of question, it appears that the assessee had admitted that the vehicle was run only on 1st April 1992 - the High Court disallowed the depreciation. However, it appears that the assessee’s admission was only in respect of running of vehicle from 1st April, 1992 for booking tourist party with 13 passengers for which the arrangement had been made before that date.
6) Therefore it seems that in view of certificate of registration granted on 03.04.1992 with retrospective effect from 30.03.1992 the assets was capable of being used after making application and particularly when the assessee obtained facility of dealers license to run the vehicle as temporary registration which permitted the assessee to run the vehicle from Ernakulam to Thiruvananthapuram, it can be said that the vehicle was used on 30th and 31st March, as a general vehicle and therefore the assessee was entitled to depreciation applicable to a general vehicle and not as a contract carriage vehicle.
CONCLUSION:
In view of the above discussion it is always advisable that any assets should be timely purchased, steps should be taken for the purpose of putting the assets to its proper and main business use well in advance. Necessary permission and licenses from the Govt. authorities must be obtained well before the crucial date.
Now 3rd October is approaching fast, therefore, if full years depreciation is intended to be claimed on any asset to be purchased, immediate steps should be taken to place order, purchase, take delivery, obtain necessary permits/ licenses if required, or install and put to use the asset well before the crucial date of 3rd October, to avoid doubtful situations.
In case of assets which require some other accessories, attachments, supporting equipments and other paraphernalia to put to use, it must be ensured that all such items are also installed before the crucial date, otherwise an intelligent A.O. (particularly who is a technocrat, engineer or have strong commonsense- which most of them have when a matter to disallow a claim comes) , can make enquiry and establish lack of necessary circumstances in which an asset can be put to use
Full and half rate depreciation:
Earlier, even in respect of new assets purchased and used any time even on the last date, full year’s depreciation was allowable. However, w.e.f. 1.4.1992 the provision was made that in case of any asset acquired by the assessee during the previous year if it is put to use for business or profession for a period of less than 180 days in that previous year the deduction shall be restricted at half of the normal rate. Therefore w.e.f. 1.4.1992 if an asset is purchased and put to use for less than 180 days i.e. prior to 2nd October (3rd October in case of leap financial year) of the previous year, depreciation at full rate is allowed and if it is purchased after 2nd October, (3rd October, in case of leap year) depreciation at ½ of normal rate is allowed.
Last moment rush should be avoided:
It seems that many time depreciable assets are purchased just on the crucial date (taken generally as 30th September or 31st March) or a few days earlier, this naturally creates doubt in the mind of the Assessing Officer. Unfortunately, in some cases it was noticed that the assets was not put to use on or before the crucial date and therefore, depreciation was not allowable as claimed by the assessee. Under some circumstances, it can also be established by the Assessing Officer that the assessee attempted to claim higher depreciation. This is not good for honest taxpayer. However, by mistake, just considering the date of invoice for the assets purchased may claim higher depreciation. Therefore, care should be taken to find out actual date of starting use of the asset.
Advance planning is required:
It is desirable that the assessee must plan in advance and assets should be purchased, delivered and put to use well in time after taking into account reasonable time for putting the assets to use before crucial date to claim depreciation allowance.
Specific requirement for use of certain assets:
Some assets can be put to use immediately after unpacking the assets like some furniture, tools, portable equipments etc. However, even in case of some portable equipment, some electrical fittings, cabling, wiring, some installation devices, some furniture and fittings for proper use are required.
In case of some assets, specific permission from concerned authority is required by way of registration, certificate of fitness, authority to use by way of registration or licence etc. For example- motor vehicle requires registration, some electrical generators require registration for excise duty on electricity, large weighing scale (bridges) requires inspection certificate and registration from concerned authorities. Therefore, in such case necessary licence or registration should be obtained prior to crucial date to establish that the assets was ready for use.
It is always advisable to establish actual use and certification for the same from managers and government authorities wherever required. There should also be circumstantial evidence as to use for example- consumption of raw material, electricity, necessary process materials, production of goods or services rendered etc.
CIT -vs- Air Travel Enterprise India Ltd. (2004) 136 Taxman 194 (KER):
In this case, the assessee purchased vehicle for carrying person for hire. The purchase was made on 30th March 1992 and delivery was taken.
Application for a temporary registration was made on the same day and registration was granted on 03.04.1992 w.e.f. 30.03.1992 and it was valid up to 24th April 1992. This registration entitled the assessee to run vehicle from 30th March 1992. The assessee took the vehicle from Ernakulam to Thiruvanthapuram under this registration.
The assessee also applied on 30th March 1992 for registration as a non-transport vehicle and the registration was granted on 3rd April 1992 for the period from 30th March 1992 to 29th March 2007.
The assessee operated vehicle from April 1, 1992 for taking tourist party.
However, the vehicle was registered as a contract carriage only on 5th May 1992.
The Assessing Officer disallowed the claim for depreciation on the ground that the assessee has not used or kept the vehicle ready for use on or before 31st March 1992; the CIT (A) confirmed the disallowance. However, the Tribunal allowed the claim of the assessee.
It is not clear on what ground and basis the Tribunal allowed depreciation. Most probably it must be on the basis that vehicle was run from 30.03.1992 on the basis of application made for registration and it was run to take the vehicle from Ernakulam To Thiruvanthapuram and put for display for booking tourist party which went on trip on 01.04.1992.
On appeal by the Commissioner, the High Court held that since the contract carriage permit was obtained for vehicle only on 5th May, 1992 it could not be said legally that the vehicle was kept ready for use as ‘contract carriage’, on or before 31st March, 1992 and therefore revising the order of the Tribunal, the High Court held that the assessee was not entitled to get depreciation on the vehicle for the assessment year 1992-93.
The arguments placed before the authorities and Court:
It appears that the Court restricted its consideration on the basis of reasoning for which the AO disallowed the depreciation. This is apparent from the following observations of the Court.
“It is not necessary to refer to the provisions of section 34, for, the only ground on which the Assessing Officer has disallowed depreciation is that the assessee has not used or kept ready for use the vehicle at any time prior to March 31, 1992. So the only question for consideration is as to whether the assessee had used the vehicle or kept ready for use the vehicle on any day during the previous year relevant to the assessment year 1992-93. Admittedly, the assessee took delivery of the vehicle on March 30, 1992, and the vehicle was taken from Ernakulam to Thiruvananthapuram on the basis of a temporary permit valid up to April 24, 1992. The assessee got registration as a non-transport vehicle on April 3, 1992, with retrospective effect from March 30, 1992. The assessee had applied for and obtained a contract carriage licence only on May 5, 1992. The assessee has a case that the vehicle was run on April 1, 1992, for taking a tourist party. As the Assessing Officer himself had noted the expression “used for the purpose of the business” occurring in section 32 will take in vehicle kept ready for use. So the question is whether it can be said that the vehicle was kept ready for use on March 30, 1992, or March 31, 1992, when the regular contract carriage licence was issued only on May 5, 1992.”
From the order of the High Court, it is not clear on what basis the tribunal allowed depreciation. However, considering the provision only the finding of tribunal ought to be the vehicle was used before 31st March 1992. The Court has given weight-age to the point that the vehicle was registered as carriage vehicle only on 5th May 1992. However, in view of the author, the following uses are also to be considered:
1) Carrying vehicle from the vendor’s show room to the place of the assessee. This is usually on a temporary permit and some time only on a dealer’s licence and insurance. Therefore, the fact that the vehicle was taken from Ernakulam to Thiruvananthapuram is a necessary factor so as to establish the use of vehicle on 30th and 31st March.
2) The assessee took a tourist party of 13 persons on 1st April 1992. Therefore, it is evident that on 30th and 31st March, 1992 the assessee has shown the vehicle to prospective customers for taking a trip and made out a tour party for the purpose of booking. Therefore, it could be said that the vehicle having been shown to customer on 30th and / or 31st March or even giving assurance that the vehicle is on the way from Ernakulam and it will be available on 1st April, it can be said that the vehicle was used on 30th and 31st March.
3) The main intention and business of the assessee might be to use the vehicle for contract carriage but it is also recorded the fact that the vehicle was registered w.e.f. 30th March 1992 entitling the assessee to run the vehicle.
4) In practice it is found that for few days vehicle may run even on dealers licence after submission of application and inspection of the vehicle, the owner takes the vehicle to his place. Therefore, running of vehicle from the show room to the registering authority for inspection and then to the owner’s place and running the vehicle on dealers registration also amounts to use of the vehicle for the purpose of business.
5) In this case these arguments were not placed and from the reading of question, it appears that the assessee had admitted that the vehicle was run only on 1st April 1992 - the High Court disallowed the depreciation. However, it appears that the assessee’s admission was only in respect of running of vehicle from 1st April, 1992 for booking tourist party with 13 passengers for which the arrangement had been made before that date.
6) Therefore it seems that in view of certificate of registration granted on 03.04.1992 with retrospective effect from 30.03.1992 the assets was capable of being used after making application and particularly when the assessee obtained facility of dealers license to run the vehicle as temporary registration which permitted the assessee to run the vehicle from Ernakulam to Thiruvananthapuram, it can be said that the vehicle was used on 30th and 31st March, as a general vehicle and therefore the assessee was entitled to depreciation applicable to a general vehicle and not as a contract carriage vehicle.
CONCLUSION:
In view of the above discussion it is always advisable that any assets should be timely purchased, steps should be taken for the purpose of putting the assets to its proper and main business use well in advance. Necessary permission and licenses from the Govt. authorities must be obtained well before the crucial date.
Now 3rd October is approaching fast, therefore, if full years depreciation is intended to be claimed on any asset to be purchased, immediate steps should be taken to place order, purchase, take delivery, obtain necessary permits/ licenses if required, or install and put to use the asset well before the crucial date of 3rd October, to avoid doubtful situations.
In case of assets which require some other accessories, attachments, supporting equipments and other paraphernalia to put to use, it must be ensured that all such items are also installed before the crucial date, otherwise an intelligent A.O. (particularly who is a technocrat, engineer or have strong commonsense- which most of them have when a matter to disallow a claim comes) , can make enquiry and establish lack of necessary circumstances in which an asset can be put to use
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