CASE LAW DETAILS
Decided by:. ITAT, BENCH `A’ CHENNAI, In The case of: ITO v Medicorp Technologies India Ltd., Appeal No. : ITA No. 2328/Mds/2007, Decided on: January 16, 2009
SUMMARY OF CASE LAW
Capability to have a market value, assignability, transferability, diminution in value, are no more the touch stones on which the admissibility for depreciation under section 32 has to be tested; consequently, if the business/commercial right of a patent, copy right, trade mark, license and franchise fulfills the conditions of being intangible asset as mentioned in clause (ii) of section 32(1), then surely the business/commercial right by way of non-compete right acquired by the assessee also fulfills that condition, by way of a logical corollary.
RELEVENT PARAGRAPH
12.2 One can see very clearly that the clause (ii), introduced in section 32(1), w.e.f.01-04- 1999, not only extended the benefit of section 32 to the `intangible assets’ but also gave therein an `inclusive’ definition of the `intangible assets’, for this purpose.
15.4 It becomes clear from the above discussion that capability to have a market value, assignability, transferability, diminution in value, are no more the `touch stones’ on which the admissibility for depreciation u/s 32 of the Act has to be tested. We are living in the commercial world of `e-banking’, `e-commerce’ , and `e-governance’ , the old, archaic, traditional concepts have undergone a sea change, and our law-makers have truly kept pace with the change.
21. It is an admitted fact that the payment of Rs. 2 crores was made by the assessee-company to ward off competition in the export business which was acquired by it from MS. The relevant clause (6) of paragraph III of the agreement dated 12-07-2000, reads as under
`IIII——- ——— —–
(6) Non-compete obligation: MS shall not, for a period of 10 years from the date of this agreement-
(a) directly or indirectly sell, market, initiate steps for registration of products in foreign markets-
(b) conduct business outside India on its own, or with a partner-in-bulk drugs, pharmaceuticals products and formulations” .
21.1 There is no ambiguity or controversy with regard to these facts. Therefore, it can be safely concluded, without any further discussion, that what was acquired by the assessee by paying this amount of Rs. 2 crores was a business/commercial right.
22. It is clear from the language of the clause (ii) to section 32(1) that each the terms, know-how, patents, copyright, trade mark, licenses, or franchise, represents a `business or a commercial right’. Our job will be to examine the `nature’ of these business/ commercial rights and compare with the `nature’ of the impugned business/commercial right which was acquired by the assessee, and see whether there is a `similarity’ . It is like comparing the shade of the colour of two objects. In this exercise we will take the help of the principle of ejusdem generic.
23. The principle of ejusdem generic applies where the mention of specific items of the same genus is followed by an expression of a general or a residuary nature pertaining to the same genus. The scope of this rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. It signifies a principle of construction.
28. In the case of copy right, trade mark, license, and franchises also the owners have exclusive business/commercial rights, and if there is a breach they can sue.
29. And, consequently, if the business/commercial right, of a patent, copy right, trade mark, license, and franchise, fulfills the conditions of `being intangible asset’, then surely the impugned business/commercial right acquired by the assessee also fulfills that condition, by way of a logical corollary.
31. We, therefore, hold that the impugned `non-compete right’ acquired by the assessee-company, was eligible for depreciation under clause (ii) of section 32(1) of the Act. The order of Commissioner (Appeals) is, accordingly, upheld
Monday, May 11, 2009
Mere fact of confirmation of addition cannot per se lead to confirmation of penalty U/s. 271(1)(c) of IT Act
CASE LAW DETAILS
Decided by:. ITAT, MUMBAI BENCH `A’, MUMBAI
In The case of: ACIT v. VIP Industries Ltd.
Appeal No. : ITA No. 4524/Mum/2006
Decided on: March 20, 2009
SUMMARY OF CASE LAW
Where an assessee genuinely makes claim for a particular deduction by disclosing all the necessary facts relating to the same, that will not amount to concealment even if the assessee’s claim is rejected.
RELEVENT PARAGRAPH
8. We have heard the rival submissions and perused the relevant material on record. A great deal of emphasis had been laid by he Id. DR on the fact that since the addition has been upheld by the tribunal, then the penalty should also be confirmed. In our considered opinion the mere fact of confirmation of addition cannot per se lead to the confirmation of the penalty. It is obvious that both the quantum and the penalty proceedings are independent of each other. In the penalty proceedings the assessee is given chance to show that why the penalty be not imposed with reference to the addition made or confirmed in the quantum proceedings. If the assessee succeeds in explaining his case then no penalty with follow and vice versa. It is, therefore, amply clear that the confirmation of the addition by the Tribunal in quantum proceedings cannot mean that the penalty be automatically confirmed. If the contention of the Id. DR is taken to the logical conclusion then the penalty proceedings would require obliteration from the statute and the very act of making addition in quantum should entitled the AO to impose penalty simultaneously.
9. Section 271(1)(c) provides that if the Assessing Officer or the Commissioner (Appeals) or the Commissioner, in the course of the proceedings in this Act, in satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income. Seven Explanations are there to section 271(1). Explanation (1) states that where in respect of any facts material to the computation of the total income of any person under this Act, such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. The effect of this Explanation is that if the necessary ingredients as staled herein are satisfied then the amount disallowed in computing the total income shall for the purposes of clause (c) of this section, be deemed to represent the income in respect of which the particulars have been concealed. The necessary elements for attracting this Explanation are three-fold.
(a) the person fails to offer the explanation, or
(b) he offers the explanation which is found by the authorities to be false, or
(c) the person offers explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same have been disclosed by him.
If the case falls in any of these three ingredients, then the deeming provision comes into play and the amount added or disallowed in computing the total income is considered as the income in respect of which particulars have been concealed for the purposes of clause (c) of section 271(1) and the penalty follows. If the assessee successfully comes out of the above three constituents then he cannot be deemed to have concealed the particulars of his income with reference to the amount added or disallowed in computation of total income.
Undisputedly engaged in the R&D activity, for which deduction u/s.35 was claimed at Rs.47.40 lakhs, which included a sum of Rs.3.23 lakhs towards purchase of Maruti car for the R&D staff. The Assessing Officer allowed the deduction u/s.35 in entirety except for disallowing 80% of Rs.3.23 lakhs by treating it as not used for R&D activity. The facts that the assessee had carried out R&D activity and the car was also purchased by it for the use by the R&D staff have not been denied by the AO. The explanation of the assessee for claiming full deduction u/s.35 cannot be said to be fanciful. Further the assessee disclosed all the facts relating to its claim by way of Statement No. 6 annexed to the Audit report, which forms part and parcel of the return of income, in which it has been specifically mentioned about the R&D expenses debited to the P&L account “(including depreciation) ‘. Hence the case of the assessee cannot be covered in the third category also. Under these circumstances it is patent that the necessary conditions for invoking Explanation 1 to section 271(1 )(c) are lacking.
11. The Hon’ble Supreme Court in Dharmendra Textiles Processors and Ors. (supra) has held that the penalty u/s.271(l)(c) is a civil liability and the “willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s.276C of the Income-tax Act.” It has further been held that the mens rea is not an essential ingredient for imposing penalty under this section. On the circumspection of this case we find that it has been laid down that willful concealment is not necessary and hence mens rea (guilty mind) is not essential for invoking provisions of section 271(l)(c). The Hon’ble Summit Court has not held that in all cases where addition is confirmed, the penalty shall mechanically follow. The ratio decidendi of the judgement is confined to treating the willful concealment as not vital for imposing penalty u/s.271(l)(c) . It is austere from the language of section 271(l)(c) that the penalty is imposable for the concealment of the particulars of income or furnishing of inaccurate particulars of such income. The literal meaning of the word “conceal’ is ‘to hide’. Be that as it may, in order to be covered within the mischief of this section, the act (intentional or unintentional) of the assessee should result into the concealment of income. Where an assessee genuinely makes claim for a particular deduction by disclosing all the necessary facts relating to the same, that will not amount to concealment even if the assessee’s claim is rejected. There may be a situation in which the assessee earns income but unintentionally fails to disclose the same in the return. Such types of cases are covered by the judgment in Dharamendra Textiles (supra). So the scope of this judgment extends to roping in the cases of concealment of income even if the assessee did not have the guilty mind but still there is failure to disclose the income. For example an assessee may have ten bank accounts from which interest income is received. The assessee files a return by declaring interest income from nine bank accounts but omits to include such interest income from the tenth bank account and further this omission is and not willful. Such would be the cases caught within the sweep of the ratio laid down in the case of Dhannendra Textiles Processors and Ors. (supra). In this case the concealment of income by not offering the interest income for taxation from the tenth bank account is there, even though inadvertently, and the penalty will follow notwithstanding the fact that the assessee was not aware of having earned interest income from the tenth bank account. But in a case where a genuine claim is made for deduction which is not accepted by the Revenue but all the necessary particulars are declared by the assessee in the return of income, it cannot be said by-any stretch of imagination that the assessee has concealed his income or furnished inaccurate particulars of income in respect of the claim of deduction which stands repelled by the authorities. If penalty is imposed under such circumstances also then probably there will remain no course open to the assessee for genuinely claiming a deduction which in his opinion is admissible, because the fear of such claim being rejected in eventuality will expose him to the rigor of penalty. Obviously such a proposition is beyond any recognized canon of law.
12. We have noted above that the penalty proceedings are distinct from the ” assessment proceedings and hence it becomes amply clear that any addition made does not automatically lead to the imposition of penalty u/s.271(l)(c) . In the penalty proceedings the assessee is given a chance to explain his case. If he successfully explains his position and is not trapped within the parameters of clause (c) of section 271(1) along with the Explanations deeming the concealment of income, the penalty cannot be imposed. Adverting to the facts of the instant case we find that the assessee had bonafldely made a claim for deduction u/s. 35 in respect of cost of car purchased for the purpose of R&D activity by disclosing all the necessary particulars in the audit report. The facts that the car was purchased by the assessee and also used for the. purpose of the business have not been controverted by the AO. Further the granting of depreciation at 20% instead of hundred percent deduction claimed by the assessee shows that there was a genuine difference of opinion between the assessee and the AO on this aspect of the matter. It cannot be said that the assessee, under such circumstances, has concealed his income and is caught within the from corners of section 271(l)(c), We, therefore, hold that the learned CIT(A) has rightly not imposed penalty on this addition.
Decided by:. ITAT, MUMBAI BENCH `A’, MUMBAI
In The case of: ACIT v. VIP Industries Ltd.
Appeal No. : ITA No. 4524/Mum/2006
Decided on: March 20, 2009
SUMMARY OF CASE LAW
Where an assessee genuinely makes claim for a particular deduction by disclosing all the necessary facts relating to the same, that will not amount to concealment even if the assessee’s claim is rejected.
RELEVENT PARAGRAPH
8. We have heard the rival submissions and perused the relevant material on record. A great deal of emphasis had been laid by he Id. DR on the fact that since the addition has been upheld by the tribunal, then the penalty should also be confirmed. In our considered opinion the mere fact of confirmation of addition cannot per se lead to the confirmation of the penalty. It is obvious that both the quantum and the penalty proceedings are independent of each other. In the penalty proceedings the assessee is given chance to show that why the penalty be not imposed with reference to the addition made or confirmed in the quantum proceedings. If the assessee succeeds in explaining his case then no penalty with follow and vice versa. It is, therefore, amply clear that the confirmation of the addition by the Tribunal in quantum proceedings cannot mean that the penalty be automatically confirmed. If the contention of the Id. DR is taken to the logical conclusion then the penalty proceedings would require obliteration from the statute and the very act of making addition in quantum should entitled the AO to impose penalty simultaneously.
9. Section 271(1)(c) provides that if the Assessing Officer or the Commissioner (Appeals) or the Commissioner, in the course of the proceedings in this Act, in satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income. Seven Explanations are there to section 271(1). Explanation (1) states that where in respect of any facts material to the computation of the total income of any person under this Act, such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. The effect of this Explanation is that if the necessary ingredients as staled herein are satisfied then the amount disallowed in computing the total income shall for the purposes of clause (c) of this section, be deemed to represent the income in respect of which the particulars have been concealed. The necessary elements for attracting this Explanation are three-fold.
(a) the person fails to offer the explanation, or
(b) he offers the explanation which is found by the authorities to be false, or
(c) the person offers explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same have been disclosed by him.
If the case falls in any of these three ingredients, then the deeming provision comes into play and the amount added or disallowed in computing the total income is considered as the income in respect of which particulars have been concealed for the purposes of clause (c) of section 271(1) and the penalty follows. If the assessee successfully comes out of the above three constituents then he cannot be deemed to have concealed the particulars of his income with reference to the amount added or disallowed in computation of total income.
Undisputedly engaged in the R&D activity, for which deduction u/s.35 was claimed at Rs.47.40 lakhs, which included a sum of Rs.3.23 lakhs towards purchase of Maruti car for the R&D staff. The Assessing Officer allowed the deduction u/s.35 in entirety except for disallowing 80% of Rs.3.23 lakhs by treating it as not used for R&D activity. The facts that the assessee had carried out R&D activity and the car was also purchased by it for the use by the R&D staff have not been denied by the AO. The explanation of the assessee for claiming full deduction u/s.35 cannot be said to be fanciful. Further the assessee disclosed all the facts relating to its claim by way of Statement No. 6 annexed to the Audit report, which forms part and parcel of the return of income, in which it has been specifically mentioned about the R&D expenses debited to the P&L account “(including depreciation) ‘. Hence the case of the assessee cannot be covered in the third category also. Under these circumstances it is patent that the necessary conditions for invoking Explanation 1 to section 271(1 )(c) are lacking.
11. The Hon’ble Supreme Court in Dharmendra Textiles Processors and Ors. (supra) has held that the penalty u/s.271(l)(c) is a civil liability and the “willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s.276C of the Income-tax Act.” It has further been held that the mens rea is not an essential ingredient for imposing penalty under this section. On the circumspection of this case we find that it has been laid down that willful concealment is not necessary and hence mens rea (guilty mind) is not essential for invoking provisions of section 271(l)(c). The Hon’ble Summit Court has not held that in all cases where addition is confirmed, the penalty shall mechanically follow. The ratio decidendi of the judgement is confined to treating the willful concealment as not vital for imposing penalty u/s.271(l)(c) . It is austere from the language of section 271(l)(c) that the penalty is imposable for the concealment of the particulars of income or furnishing of inaccurate particulars of such income. The literal meaning of the word “conceal’ is ‘to hide’. Be that as it may, in order to be covered within the mischief of this section, the act (intentional or unintentional) of the assessee should result into the concealment of income. Where an assessee genuinely makes claim for a particular deduction by disclosing all the necessary facts relating to the same, that will not amount to concealment even if the assessee’s claim is rejected. There may be a situation in which the assessee earns income but unintentionally fails to disclose the same in the return. Such types of cases are covered by the judgment in Dharamendra Textiles (supra). So the scope of this judgment extends to roping in the cases of concealment of income even if the assessee did not have the guilty mind but still there is failure to disclose the income. For example an assessee may have ten bank accounts from which interest income is received. The assessee files a return by declaring interest income from nine bank accounts but omits to include such interest income from the tenth bank account and further this omission is and not willful. Such would be the cases caught within the sweep of the ratio laid down in the case of Dhannendra Textiles Processors and Ors. (supra). In this case the concealment of income by not offering the interest income for taxation from the tenth bank account is there, even though inadvertently, and the penalty will follow notwithstanding the fact that the assessee was not aware of having earned interest income from the tenth bank account. But in a case where a genuine claim is made for deduction which is not accepted by the Revenue but all the necessary particulars are declared by the assessee in the return of income, it cannot be said by-any stretch of imagination that the assessee has concealed his income or furnished inaccurate particulars of income in respect of the claim of deduction which stands repelled by the authorities. If penalty is imposed under such circumstances also then probably there will remain no course open to the assessee for genuinely claiming a deduction which in his opinion is admissible, because the fear of such claim being rejected in eventuality will expose him to the rigor of penalty. Obviously such a proposition is beyond any recognized canon of law.
12. We have noted above that the penalty proceedings are distinct from the ” assessment proceedings and hence it becomes amply clear that any addition made does not automatically lead to the imposition of penalty u/s.271(l)(c) . In the penalty proceedings the assessee is given a chance to explain his case. If he successfully explains his position and is not trapped within the parameters of clause (c) of section 271(1) along with the Explanations deeming the concealment of income, the penalty cannot be imposed. Adverting to the facts of the instant case we find that the assessee had bonafldely made a claim for deduction u/s. 35 in respect of cost of car purchased for the purpose of R&D activity by disclosing all the necessary particulars in the audit report. The facts that the car was purchased by the assessee and also used for the. purpose of the business have not been controverted by the AO. Further the granting of depreciation at 20% instead of hundred percent deduction claimed by the assessee shows that there was a genuine difference of opinion between the assessee and the AO on this aspect of the matter. It cannot be said that the assessee, under such circumstances, has concealed his income and is caught within the from corners of section 271(l)(c), We, therefore, hold that the learned CIT(A) has rightly not imposed penalty on this addition.
Contract for sale of goods will not be covered within ambit of section 194C of Income Tax Act, 1961
CASE LAW DETAILS
Decided by:. ITAT, MUMBAI BENCHES `G’ MUMBAI, In The case of: Glenmark Pharmaceuticals Ltd. v ITO (TDS),
Appeal No. : ITA NO. 935/Mum./2007, Decided on: March 5, 2009
SUMMARY OF CASE LAW
Simply because the assessee monitors the manufacturing process it does not change the character of the transaction
RELEVENT PARAGRAPH
23. After careful consideration of the above circular it is clear that the contract for the sale of goods will not be covered within the ambit of sec. 194 C. In the present case we find that the assessee placed orders with the manufacturers for manufacturing of the medicines strictly according to its specifications but the property in such goods passed to the assessee only after these were delivered to him. When the manufacturers were purchasing the raw material at their own cost under incurring other expenses subsequently the product is delivered to the assessee. If it is manufactured according lo the specifications made by the assessee and delivered to it that property in goods can be set to have passed to the assessee. In the present case the assessee has simply placed the orders for the manufacture of medicines according to its own specifications and nil other relevant decisions for the manufacturing have been left to the wisdom of the manufacturer. The assessee only interested in the output coming of to its standard. How that output is achieved is the job of the manufacturer. Simply because the assessee monitor the manufacturing process it does not change the character-of the transaction. ; When the manufacturers have their own establishment and their labour force, the raw material purchased by themselves, even the excise duty is also paid by them directly. Further when such manufacturers make the sale of such goods to the assessee the sales tax is also paid by them. Ultimately the manufacturers manufacturing the product by their own subjected to assessee’s specifications supervision , control and later on sold such goods to the assessee. The property in goods passes over to the assessee only when such goods are manufactured and delivered to it. Hence, these arc only contract for sale of goods and not works contracts.
24. The Hon’ble Bombay court in case of BDA Ltd. Vs ITO [2006 ]281 ITR 99 (BOM). In this case M/s BDA Ltd. had distillary at Aurangabad and it purchased materials required for bottling and marketing the foreign made Indian liquor including the printing and packing material. M/s.Mudranika, another establishment was supplying the printed labels to be rapped on the bottles to the assessee. The ITO has held that the payment made to M/s.Mudranika. the supplier of the printed material from whom the printed labels were purchased, executed the contract liable for of tax at source u/s 194 C of the Act. The Hon’ble High Court observes M/s.Mudranika was an independent establishment in the business of supplying packing material to various establishments and the assessee had issued a order in favour of M/s.Mudranika for supply of printed labels as per the specification; provided by it but the raw material was not supplied by the assessee. It was noted that when the printing work was being carried in the premises of M/s. Mudranika though as per the specifications of the assessee the supply was limited to the quantity specified in the purchase order. There was nothing on record to show that all other ancillary cost were not incurred by M/s. Mudranika. In this background of the facts of the case, the Hon’ble Bombay High Court has held that the supply of printed labels by M/s. Mudranika to the assessee was “contract for sale” it could not be deemed as “works contract”. Similar view has been taken by Delhi Bench of the Tribunal in DCIT Vs. Reebok India Company [2006] 100 TTJ 976(Del) which now stands approved by Hon’ble Delhi High Court in CIT Vs. Reebok India Company [2009] 221 CTR 508(Del). In another case Whirl Pool India Ltd Vs JCIT 16 SOT 435 Delhi Tribunal has held that where vendor purchases raw material on his own manufactured goods as per specifications of the assessee and the property in the goods passes to the assessee at the point of time goods are sold, it is a case of sale of goods not a job work.
25. Coining to instant case we find that there is a complete identity of facts with those considered by Hon’ble Jurisdictional High Court in as much as that the goods were manufactured by the manufacturers in their own establishments in accordance with the specifications given by the assessee. The raw material cost and other expenses incurred by their own. Even the excise duty was paid by them when the goods arc sold the sales tax also paid by the manufacturers. When the goods are sold to the assessee the property in them passed over to the assessee. Under these circumstances, we arc of the considered opinion that the agreements of the assessee with the manufacturers can not be termed as ‘works contract’. “Die impugned order is therefore set aside and the application of section 194 C is ruled out. That being the position there can not be any question of treating the assessee as in default u/s 201(1) or charging any interest u/s 201(1A).
Decided by:. ITAT, MUMBAI BENCHES `G’ MUMBAI, In The case of: Glenmark Pharmaceuticals Ltd. v ITO (TDS),
Appeal No. : ITA NO. 935/Mum./2007, Decided on: March 5, 2009
SUMMARY OF CASE LAW
Simply because the assessee monitors the manufacturing process it does not change the character of the transaction
RELEVENT PARAGRAPH
23. After careful consideration of the above circular it is clear that the contract for the sale of goods will not be covered within the ambit of sec. 194 C. In the present case we find that the assessee placed orders with the manufacturers for manufacturing of the medicines strictly according to its specifications but the property in such goods passed to the assessee only after these were delivered to him. When the manufacturers were purchasing the raw material at their own cost under incurring other expenses subsequently the product is delivered to the assessee. If it is manufactured according lo the specifications made by the assessee and delivered to it that property in goods can be set to have passed to the assessee. In the present case the assessee has simply placed the orders for the manufacture of medicines according to its own specifications and nil other relevant decisions for the manufacturing have been left to the wisdom of the manufacturer. The assessee only interested in the output coming of to its standard. How that output is achieved is the job of the manufacturer. Simply because the assessee monitor the manufacturing process it does not change the character-of the transaction. ; When the manufacturers have their own establishment and their labour force, the raw material purchased by themselves, even the excise duty is also paid by them directly. Further when such manufacturers make the sale of such goods to the assessee the sales tax is also paid by them. Ultimately the manufacturers manufacturing the product by their own subjected to assessee’s specifications supervision , control and later on sold such goods to the assessee. The property in goods passes over to the assessee only when such goods are manufactured and delivered to it. Hence, these arc only contract for sale of goods and not works contracts.
24. The Hon’ble Bombay court in case of BDA Ltd. Vs ITO [2006 ]281 ITR 99 (BOM). In this case M/s BDA Ltd. had distillary at Aurangabad and it purchased materials required for bottling and marketing the foreign made Indian liquor including the printing and packing material. M/s.Mudranika, another establishment was supplying the printed labels to be rapped on the bottles to the assessee. The ITO has held that the payment made to M/s.Mudranika. the supplier of the printed material from whom the printed labels were purchased, executed the contract liable for of tax at source u/s 194 C of the Act. The Hon’ble High Court observes M/s.Mudranika was an independent establishment in the business of supplying packing material to various establishments and the assessee had issued a order in favour of M/s.Mudranika for supply of printed labels as per the specification; provided by it but the raw material was not supplied by the assessee. It was noted that when the printing work was being carried in the premises of M/s. Mudranika though as per the specifications of the assessee the supply was limited to the quantity specified in the purchase order. There was nothing on record to show that all other ancillary cost were not incurred by M/s. Mudranika. In this background of the facts of the case, the Hon’ble Bombay High Court has held that the supply of printed labels by M/s. Mudranika to the assessee was “contract for sale” it could not be deemed as “works contract”. Similar view has been taken by Delhi Bench of the Tribunal in DCIT Vs. Reebok India Company [2006] 100 TTJ 976(Del) which now stands approved by Hon’ble Delhi High Court in CIT Vs. Reebok India Company [2009] 221 CTR 508(Del). In another case Whirl Pool India Ltd Vs JCIT 16 SOT 435 Delhi Tribunal has held that where vendor purchases raw material on his own manufactured goods as per specifications of the assessee and the property in the goods passes to the assessee at the point of time goods are sold, it is a case of sale of goods not a job work.
25. Coining to instant case we find that there is a complete identity of facts with those considered by Hon’ble Jurisdictional High Court in as much as that the goods were manufactured by the manufacturers in their own establishments in accordance with the specifications given by the assessee. The raw material cost and other expenses incurred by their own. Even the excise duty was paid by them when the goods arc sold the sales tax also paid by the manufacturers. When the goods are sold to the assessee the property in them passed over to the assessee. Under these circumstances, we arc of the considered opinion that the agreements of the assessee with the manufacturers can not be termed as ‘works contract’. “Die impugned order is therefore set aside and the application of section 194 C is ruled out. That being the position there can not be any question of treating the assessee as in default u/s 201(1) or charging any interest u/s 201(1A).
Limitation of time
Limitation of time is not a determining factor in matters relating to remission or cessation of liabilities
Decided by:. ITAT, `D’ BENCH, MUMBAI
In The case of: DSA Engineers (Bombay) v ITO
Appeal No. : ITA NO. 5354/Mum/2007
Decided on: March 12, 2009
SUMMARY OF CASE LAW
When the assessee continues to reflect or record the liabilities as still payable to the creditors and he decides to not to write them off unilaterally, the AO has higher levels of responsibility and has to establish with evidence that the said book entries are wrong or not bona fide for invoking the provisions of section 41(1) of the Income-tax Act, 1961.
RELEVENT PARAGRAPH
9. From the rival positions of both the parties as well as the provisions of section 41(1) and the legal propositions of various judicial fora, the following issues have emerged. They are: (a) the issue of limitation of period of three years; (b) the issue of discharge of onus, when the assessee has not unilaterally written them off; (c) the issue of unilateral write off for the assessments of the post amendment period i.e. 1.4.1997. We shall proceed to analyse one by one in the succeeding paragraphs.
(a). Regarding the issue of limitation of three years; it is noticed that there is no such limitation provided in section 41(1) or its Explanation 1. Most probably, the revenue has considered the period of 3 three years as reasonable duration for deciding the cessation of liabilities on ad-hoc basis. Other wise the revenue orders do not contain any rationale in support of such period. Delhi Bench decision in the case of M/s Himlaya Refrigeration & Air conditioning Co P Ltd (91 TTJ 296) (Del) is found relevant in this regard and the said order concluded by stating that in the absence of any evidence of cessation of liabilities, mere fact that the liabilities were outstanding for more than three years and were time barred, was not sufficient ground for addition under section 41(1) of the Act. Further, the Ahmadabad Bench of the Tribunal held in the case of New Commercial Mills Co Ltd (73 TTJ 893) that in the absence of cogent reason and material to come to conclusion that the liabilities outstanding for ten to fifteen years have ceased in the year under consideration and the same cannot be charged to tax u/s 41(1). Further, the Mumbai Bench Tribunal held in the case of Thomas cook (India) Ltd (103 ITD 119) that the amounts in the unclaimed balances accounts and suspense accounts, which had become time barred and unilaterally written back by the assessee are not chargeable to tax as there was no cessation of liabilities. Thus, in the light of the above, if the revenue’s proposal is favoured by us, it will effectively amounts to supporting a proposition that all the unclaimed liabilities, which are reflected in the books for the period longer than three years case, shall be the deemed profits of the assessee u/s 41(1) of the Act and this view does not have the support of the Income Tax Act. As such the limitation of time is not a determining factor in the matters relating to remission or cessation of liabilities, the view supported by the apex court’s judgment in the case of M/s Kesaria Tea Co Ltd (supra). This judgment in the case of M/s Kesaria Tea Co Ltd (supra) was delivered after the following the apex court judgment in the case of M/s Sagauli sugar Works Pvt. Ltd (supra) and after distinguishing the judgment in the case of T V S Sundaram Iyangar & Sons Ltd (222 TTR 344).
(b). Regarding the issue of discharging of the onus, it is noticed that the provisions of section 41(1) provides for charging of certain benefits, which are obtained by the assessee in an year as deemed profits. Under the circumstances, where the assessee disputes the obtaining of the benefits, the AO is under statutory obligation to establish the same by gathering evidences in favour of such accrual of benefits. Further, when, the assessee continues to reflect or record the liabilities as still payable to the creditors and assessee decided to not to write them off unilaterally, the AO has higher levels of responsibility and hence, he has to establish with evidence that the said book entries are wrong or not bona fide and thus, the AO is under the obligation to discharge the onus in this regard. This view is supported by the decisions of the Tribunal in the cases of Sri Vardhman Overseas Ltd (24 SOT 393) (Del) and Uttam Air Products P Ltd (99 TTJ 718) relied on by the assessee and said decisions contain are relevant for the proposition that the onus is on the revenue to prove that the liabilities have ceased finally and there is no possibility of their revival.
(c) Regarding the issue of unilateral write off for the assessments of the post amendment period i.e. 1.4.1997, it is noticed that the Explanation 1 was brought into statute by the Finance (No 2) Act 1996 w e f 1.4.1997. The judgments of apex court’s judgment in the case of M/s Kesaria Tea Co Ltd (supra) and Sugauli Sugar Works P Ltd (supra) or Jurisdictional high court’s judgment in the case of M/s Chougule and Co P Ltd (189ITR 473) and other cases cited by the assessee, were delivered involving the AYs prior to pre-amendment period. All the judgments uniformly conclude that the mere unilateral transfer entry in the accounts does not confer any benefit to the assessee and therefore, revenue cannot invoke section 41(1) of the Act. Further, the instant year, being the AY 2003-04, relates to the post amendment period and the said Explanation provides for including the case of obtaining of the benefit by way of remission or cessation of any liability by a unilateral act by way of writing off such liability in the accounts of the assessee, as the case of the deemed profits. In other wards, the assessee’s case, being the one where the alleged liabilities are not unilaterally writing off, the requirements of the Explanation is not met and therefore, it cannot be considered as the case of obtaining of the benefit during the year under consideration. Although the following is inapplicable to assessee’s case, the act of ‘unilateral write off’ of the liabilities assumes great significance for the post amendment assessments for deciding the finality of obtaining of the benefit specified in the section 41(1) of the Act. It is even more significant when the AO has not established that the liabilities have ceased and finally ceased and ceased with no chance of revival of the claim by the creditors in future.
10. On considering that the afore said judgments are delivered favoring the concerned assessees on the facts that they decided to write off unilaterally the liabilities in the books, the facts in the instant case are juxtapose to those cases, we find the said judgments have application to the present appeal in so far as the effect of such unilateral transfer entries in the books. In the absence such unilateral entries in books of the instant assessee, it cannot be held that the AO has correctly applied the provisions of section 14(1) and its Explanation 1. Further, the AO has neither disproved the assessee’s claims relating to the impugned liabilities nor discharged its onus to prove that there is cessation of liabilities and the assessee obtained the benefits finally. Therefore, the arguments of the revenue have to be dismissed. In such circumstances and when the assessee has not unilaterally written off the said liabilities, the question of taking such outstanding liabilities as deemed profits of the year does not arise. Therefore, the impugned order of the CTT (A) has to be set a side in this regard. Accordingly, grounds 1 & 2 of the appeal are allowed.
Decided by:. ITAT, `D’ BENCH, MUMBAI
In The case of: DSA Engineers (Bombay) v ITO
Appeal No. : ITA NO. 5354/Mum/2007
Decided on: March 12, 2009
SUMMARY OF CASE LAW
When the assessee continues to reflect or record the liabilities as still payable to the creditors and he decides to not to write them off unilaterally, the AO has higher levels of responsibility and has to establish with evidence that the said book entries are wrong or not bona fide for invoking the provisions of section 41(1) of the Income-tax Act, 1961.
RELEVENT PARAGRAPH
9. From the rival positions of both the parties as well as the provisions of section 41(1) and the legal propositions of various judicial fora, the following issues have emerged. They are: (a) the issue of limitation of period of three years; (b) the issue of discharge of onus, when the assessee has not unilaterally written them off; (c) the issue of unilateral write off for the assessments of the post amendment period i.e. 1.4.1997. We shall proceed to analyse one by one in the succeeding paragraphs.
(a). Regarding the issue of limitation of three years; it is noticed that there is no such limitation provided in section 41(1) or its Explanation 1. Most probably, the revenue has considered the period of 3 three years as reasonable duration for deciding the cessation of liabilities on ad-hoc basis. Other wise the revenue orders do not contain any rationale in support of such period. Delhi Bench decision in the case of M/s Himlaya Refrigeration & Air conditioning Co P Ltd (91 TTJ 296) (Del) is found relevant in this regard and the said order concluded by stating that in the absence of any evidence of cessation of liabilities, mere fact that the liabilities were outstanding for more than three years and were time barred, was not sufficient ground for addition under section 41(1) of the Act. Further, the Ahmadabad Bench of the Tribunal held in the case of New Commercial Mills Co Ltd (73 TTJ 893) that in the absence of cogent reason and material to come to conclusion that the liabilities outstanding for ten to fifteen years have ceased in the year under consideration and the same cannot be charged to tax u/s 41(1). Further, the Mumbai Bench Tribunal held in the case of Thomas cook (India) Ltd (103 ITD 119) that the amounts in the unclaimed balances accounts and suspense accounts, which had become time barred and unilaterally written back by the assessee are not chargeable to tax as there was no cessation of liabilities. Thus, in the light of the above, if the revenue’s proposal is favoured by us, it will effectively amounts to supporting a proposition that all the unclaimed liabilities, which are reflected in the books for the period longer than three years case, shall be the deemed profits of the assessee u/s 41(1) of the Act and this view does not have the support of the Income Tax Act. As such the limitation of time is not a determining factor in the matters relating to remission or cessation of liabilities, the view supported by the apex court’s judgment in the case of M/s Kesaria Tea Co Ltd (supra). This judgment in the case of M/s Kesaria Tea Co Ltd (supra) was delivered after the following the apex court judgment in the case of M/s Sagauli sugar Works Pvt. Ltd (supra) and after distinguishing the judgment in the case of T V S Sundaram Iyangar & Sons Ltd (222 TTR 344).
(b). Regarding the issue of discharging of the onus, it is noticed that the provisions of section 41(1) provides for charging of certain benefits, which are obtained by the assessee in an year as deemed profits. Under the circumstances, where the assessee disputes the obtaining of the benefits, the AO is under statutory obligation to establish the same by gathering evidences in favour of such accrual of benefits. Further, when, the assessee continues to reflect or record the liabilities as still payable to the creditors and assessee decided to not to write them off unilaterally, the AO has higher levels of responsibility and hence, he has to establish with evidence that the said book entries are wrong or not bona fide and thus, the AO is under the obligation to discharge the onus in this regard. This view is supported by the decisions of the Tribunal in the cases of Sri Vardhman Overseas Ltd (24 SOT 393) (Del) and Uttam Air Products P Ltd (99 TTJ 718) relied on by the assessee and said decisions contain are relevant for the proposition that the onus is on the revenue to prove that the liabilities have ceased finally and there is no possibility of their revival.
(c) Regarding the issue of unilateral write off for the assessments of the post amendment period i.e. 1.4.1997, it is noticed that the Explanation 1 was brought into statute by the Finance (No 2) Act 1996 w e f 1.4.1997. The judgments of apex court’s judgment in the case of M/s Kesaria Tea Co Ltd (supra) and Sugauli Sugar Works P Ltd (supra) or Jurisdictional high court’s judgment in the case of M/s Chougule and Co P Ltd (189ITR 473) and other cases cited by the assessee, were delivered involving the AYs prior to pre-amendment period. All the judgments uniformly conclude that the mere unilateral transfer entry in the accounts does not confer any benefit to the assessee and therefore, revenue cannot invoke section 41(1) of the Act. Further, the instant year, being the AY 2003-04, relates to the post amendment period and the said Explanation provides for including the case of obtaining of the benefit by way of remission or cessation of any liability by a unilateral act by way of writing off such liability in the accounts of the assessee, as the case of the deemed profits. In other wards, the assessee’s case, being the one where the alleged liabilities are not unilaterally writing off, the requirements of the Explanation is not met and therefore, it cannot be considered as the case of obtaining of the benefit during the year under consideration. Although the following is inapplicable to assessee’s case, the act of ‘unilateral write off’ of the liabilities assumes great significance for the post amendment assessments for deciding the finality of obtaining of the benefit specified in the section 41(1) of the Act. It is even more significant when the AO has not established that the liabilities have ceased and finally ceased and ceased with no chance of revival of the claim by the creditors in future.
10. On considering that the afore said judgments are delivered favoring the concerned assessees on the facts that they decided to write off unilaterally the liabilities in the books, the facts in the instant case are juxtapose to those cases, we find the said judgments have application to the present appeal in so far as the effect of such unilateral transfer entries in the books. In the absence such unilateral entries in books of the instant assessee, it cannot be held that the AO has correctly applied the provisions of section 14(1) and its Explanation 1. Further, the AO has neither disproved the assessee’s claims relating to the impugned liabilities nor discharged its onus to prove that there is cessation of liabilities and the assessee obtained the benefits finally. Therefore, the arguments of the revenue have to be dismissed. In such circumstances and when the assessee has not unilaterally written off the said liabilities, the question of taking such outstanding liabilities as deemed profits of the year does not arise. Therefore, the impugned order of the CTT (A) has to be set a side in this regard. Accordingly, grounds 1 & 2 of the appeal are allowed.
Wednesday, May 6, 2009
Analysis of relief provided in Forex accounting norm for companies
The Ministry of Corporate Affairs has vide notification1 dated 31 March 2009 relaxed the provisions of Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates2 in so far as they relate to the recognition of losses or gains arising on restatement of long-term foreign currency monetary items. By another notification3 consequential amendments to Schedule VI to the Companies Act, 1956 have also been made.
Option available
The notification gives companies an option in accounting for exchange differences arising on reporting of long-term foreign currency monetary items (assets as well as liabilities) other than those which form a part of the company’s net investment in a non-integral foreign operation.
As per the option, such exchange differences can now be
(a) Adjusted to the cost of the asset, where the long-term foreign currency monetary items relate to the acquisition of a depreciable capital asset (whether purchased within or outside India), and consequently depreciated over such asset’s balance life and
(b) Accumulated in ‘Foreign Currency Monetary Item Translation Difference Account’ (FCMITDA) and amortised over the balance period of long-term monetary asset/liability but not beyond 31 March, 2011, in cases other than those falling under (a) above.
A long-term foreign currency monetary item has been defined as an asset or liability expressed in foreign currency which has a term of 12 months or more at the date of origination of the asset or liability. Thus, foreign exchange differences on monetary items such as sundry creditors, debtors etc. with a term of less than 12 months would not qualify for accounting as per the option given in the notification. For determining the term of a monetary item, the period from the date of origination should be considered even if such a date was prior to the applicability date of the notification.
For determining the term of a monetary item, the period from the date of origination should be considered even if such a date was prior to the applicability date of the notification.
Safeguards built into the notification
The MCA has built in some specific safeguards into the notification to emphasise the ‘one time’ relief nature of these amendments:
1. The relaxation of the AS 11 provisions is only valid for the accounting periods commencing on or after 7 December, 2006 and ending on or immediately before 31 March, 2011.
2. If a company opts to follow the notification, such option has to be
• Irrevocable
• applied to all long-term foreign currency monetary items
3. Financial statements should include the disclosure of the fact of exercise of option and of the unamortised amount till such an exchange difference remains unamortised.
Effective date
The notification comes into effect on 31 March, 2009 but applies retrospectively i.e. from accounting periods commencing on or after 7 December, 2006 and ending on or immediately before 31 March, 2011.
Transitional provisions
If the option (as mentioned earlier) provided by the notification is exercised, the relevant exchange differences, for accounting periods commencing on or after 7 December, 2006, recognised in profit and loss account prior to exercise of option, have to be reversed:
• by adjustment to the cost of the asset to the extent they relate to the acquisition of depreciable capital assets, and
• in other cases, by transfer to ‘Foreign Currency Monetary Item Translation Difference Account’.
In both cases, the corresponding adjustment (debit or credit) has to be made to the general reserve.
In case the company does not have any general reserve or the balance is inadequate, the corresponding adjustment should be recognised as debit/credit balance of profit and loss account.
Implementation issues
Based on our initial analysis of the notification, the following are some of the implications that can be considered by preparers of financial statements as they approach the reporting season for March 2009 financial statements.
• A company now has the option to capitalise the foreign exchange fluctuation on a long-term monetary liability to acquire a depreciable capital asset
• The option is available whether or not the monetary item is denominated in the same currency in which the asset is purchased. For example, if a company has taken a US Dollar (USD) loan to purchase machinery in India or outside it, the foreign exchange fluctuation on the USD loan can be capitalised. Similarly, if a company has taken a Japanese Yen (JPY) loan to buy a ship in USD, the company can capitalise the JPY-INR exchange rate movements
• Derivatives that are within the scope of AS 11 and which are intended to establish the amount of reporting currency required or available at the settlement date of a long-term foreign currency monetary item are covered by the notification. However, other derivatives (including hedges of highly probable forecast transactions and firm commitments) are not impacted by this notification
• The option has to be applied retrospectively, i.e. from the first financial year commencing or after 7 December, 2006
• In case the company opts to follow the accounting treatment as per the notification, it should follow the same approach for tax financials in case the tax year is different from the statutory financial year
• FCMITDA should be shown as part of reserves and surplus on the balance sheet. It is similar in nature to the ‘Foreign currency translation reserve’ (see paragraph 24 of AS 11)
• If there has been a refinancing of a foreign exchange liability such that the total term gets extended beyond 12 months due to refinancing, the fresh liability should not be treated as long-term, unless its term is 12 months or more
• Any extension of repayment period does not make the liability long-term if the original term was less than 12 months
• The notification is applicable only to companies registered under the Companies Act. Unless ICAI states to the contrary, other entities are required to follow AS 11 as issued by the ICAI (i.e. without the amendments made by the notification.)
• Retrospective application of the option under the notification will mean that even for the relevant foreign currency loans that have already been repaid in periods beginning on or after 7 December, 2006, the related foreign currency differences should be added to the depreciable capital asset
• As regards consolidated financial statements, it appears that the accounting policy as followed by the parent company would have to be followed for the subsidiaries/joint ventures/associates even though their separate/stand alone financial statements may be based on a different accounting policy
• Even if the option is exercised by the company, the foreign exchange losses and gains would continue to be treated as per the present practice for determining the current tax liability. However, the accounting treatment as per the option in the notification may give rise to timing differences under AS 22, Accounting for Taxes on Income4
• Adjustment to the general reserves under the transitional provisions should be made on a net of tax basis. This is supported by the approach taken by the ICAI in the transitional provisions while issuing new or revised standards. Thus, the deferred tax asset/liability arising in the event of the option being taken, is to be recognised against the corresponding net adjustment to the general reserves
• Companies may have paid Minimum Alternate Tax (MAT) based on book profits of the previous year. The transitional provisions may also have the impact of changing the book profits of not only the current and future years but also of the previous year. If the expert advice is that the MAT liability can not be revised, since as per the tax laws it is based on the financial statements for that year as per Schedule VI (and if the financial statements for the previous year are not restated) the MAT liability for the previous year should not be revised • AS 16, Borrowing Costs4, requires exchange differences arising from foreign currency borrowings to be capitalized as borrowing costs for qualifying assets to the extent that they are regarded as an adjustment to interest costs. The notification would apply to exchange differences over and above those covered by AS 16
• If a company opts to follow the accounting treatment as per the notification, it should consider this as a change in accounting policy and make appropriate disclosure. As regards quarterly reporting, the requirements of the Listing Agreement for change in accounting policy should be followed
• In the case of some listed companies, their respective Board of Directors have approved the financial statements for the year ended 31 December, 2008 and published the audited results in the media, but the financial statements are yet to be adopted by the shareholders at the Annual General Meeting (AGM). The issue arises whether such companies can also avail the option under the notification. If the company so decides, it seems that the Board of Directors can amend the accounts and resubmit them to the statutory auditors for their report before the accounts are placed before the AGM. The report issued by the statutory auditor on such amended accounts will be in substitution of the report issued on the accounts before amendment. Considering that the financial results have already been put in the public domain, adequate disclosure of the fact and the reason for revision should be made in the financial statements as well as in the audit report. The requirements of the listing agreement should also be followed.
AS 11 vs AS 30
ICAI has issued AS 30, Financial Instruments: Recognition and Measurement5, which is a comprehensive standard that addresses derivatives and most other financial instruments. It deals with a large number of issues, the suggested resolution of some of which would require changes in law and regulations. The standard is recommendatory with effect from financial years commencing on or after 1 April, 2009. However, pursuant to an earlier ICAI announcement of March 20086 some of the companies earlier adopted AS 30 even for the financial year ended 31 March, 2008 (only in relation to areas which are not covered by legal or regulatory requirements, notified accounting standards and other authoritative pronouncements).
Thus, to the extent transactions are covered by AS 11, a company would not be able to adopt the principles of AS 30 till AS 30 is notified accompanied by consequential revision to AS 11.
Implications in an individual case
The implications of the notification are varied. While it has been issued with the intention of providing relief to companies in these challenging economic times, adopting it is not an easy decision. Companies should carefully consider the various aspects of the notification including the fact that this choice once made is irrevocable, before deciding on their course of action. Moreover, each individual case may have certain unique features. Hence, the above analysis is meant primarily to facilitate the understanding of the implications of the notification. The details of each case and its fine nuances need to be considered in greater depth.
Option available
The notification gives companies an option in accounting for exchange differences arising on reporting of long-term foreign currency monetary items (assets as well as liabilities) other than those which form a part of the company’s net investment in a non-integral foreign operation.
As per the option, such exchange differences can now be
(a) Adjusted to the cost of the asset, where the long-term foreign currency monetary items relate to the acquisition of a depreciable capital asset (whether purchased within or outside India), and consequently depreciated over such asset’s balance life and
(b) Accumulated in ‘Foreign Currency Monetary Item Translation Difference Account’ (FCMITDA) and amortised over the balance period of long-term monetary asset/liability but not beyond 31 March, 2011, in cases other than those falling under (a) above.
A long-term foreign currency monetary item has been defined as an asset or liability expressed in foreign currency which has a term of 12 months or more at the date of origination of the asset or liability. Thus, foreign exchange differences on monetary items such as sundry creditors, debtors etc. with a term of less than 12 months would not qualify for accounting as per the option given in the notification. For determining the term of a monetary item, the period from the date of origination should be considered even if such a date was prior to the applicability date of the notification.
For determining the term of a monetary item, the period from the date of origination should be considered even if such a date was prior to the applicability date of the notification.
Safeguards built into the notification
The MCA has built in some specific safeguards into the notification to emphasise the ‘one time’ relief nature of these amendments:
1. The relaxation of the AS 11 provisions is only valid for the accounting periods commencing on or after 7 December, 2006 and ending on or immediately before 31 March, 2011.
2. If a company opts to follow the notification, such option has to be
• Irrevocable
• applied to all long-term foreign currency monetary items
3. Financial statements should include the disclosure of the fact of exercise of option and of the unamortised amount till such an exchange difference remains unamortised.
Effective date
The notification comes into effect on 31 March, 2009 but applies retrospectively i.e. from accounting periods commencing on or after 7 December, 2006 and ending on or immediately before 31 March, 2011.
Transitional provisions
If the option (as mentioned earlier) provided by the notification is exercised, the relevant exchange differences, for accounting periods commencing on or after 7 December, 2006, recognised in profit and loss account prior to exercise of option, have to be reversed:
• by adjustment to the cost of the asset to the extent they relate to the acquisition of depreciable capital assets, and
• in other cases, by transfer to ‘Foreign Currency Monetary Item Translation Difference Account’.
In both cases, the corresponding adjustment (debit or credit) has to be made to the general reserve.
In case the company does not have any general reserve or the balance is inadequate, the corresponding adjustment should be recognised as debit/credit balance of profit and loss account.
Implementation issues
Based on our initial analysis of the notification, the following are some of the implications that can be considered by preparers of financial statements as they approach the reporting season for March 2009 financial statements.
• A company now has the option to capitalise the foreign exchange fluctuation on a long-term monetary liability to acquire a depreciable capital asset
• The option is available whether or not the monetary item is denominated in the same currency in which the asset is purchased. For example, if a company has taken a US Dollar (USD) loan to purchase machinery in India or outside it, the foreign exchange fluctuation on the USD loan can be capitalised. Similarly, if a company has taken a Japanese Yen (JPY) loan to buy a ship in USD, the company can capitalise the JPY-INR exchange rate movements
• Derivatives that are within the scope of AS 11 and which are intended to establish the amount of reporting currency required or available at the settlement date of a long-term foreign currency monetary item are covered by the notification. However, other derivatives (including hedges of highly probable forecast transactions and firm commitments) are not impacted by this notification
• The option has to be applied retrospectively, i.e. from the first financial year commencing or after 7 December, 2006
• In case the company opts to follow the accounting treatment as per the notification, it should follow the same approach for tax financials in case the tax year is different from the statutory financial year
• FCMITDA should be shown as part of reserves and surplus on the balance sheet. It is similar in nature to the ‘Foreign currency translation reserve’ (see paragraph 24 of AS 11)
• If there has been a refinancing of a foreign exchange liability such that the total term gets extended beyond 12 months due to refinancing, the fresh liability should not be treated as long-term, unless its term is 12 months or more
• Any extension of repayment period does not make the liability long-term if the original term was less than 12 months
• The notification is applicable only to companies registered under the Companies Act. Unless ICAI states to the contrary, other entities are required to follow AS 11 as issued by the ICAI (i.e. without the amendments made by the notification.)
• Retrospective application of the option under the notification will mean that even for the relevant foreign currency loans that have already been repaid in periods beginning on or after 7 December, 2006, the related foreign currency differences should be added to the depreciable capital asset
• As regards consolidated financial statements, it appears that the accounting policy as followed by the parent company would have to be followed for the subsidiaries/joint ventures/associates even though their separate/stand alone financial statements may be based on a different accounting policy
• Even if the option is exercised by the company, the foreign exchange losses and gains would continue to be treated as per the present practice for determining the current tax liability. However, the accounting treatment as per the option in the notification may give rise to timing differences under AS 22, Accounting for Taxes on Income4
• Adjustment to the general reserves under the transitional provisions should be made on a net of tax basis. This is supported by the approach taken by the ICAI in the transitional provisions while issuing new or revised standards. Thus, the deferred tax asset/liability arising in the event of the option being taken, is to be recognised against the corresponding net adjustment to the general reserves
• Companies may have paid Minimum Alternate Tax (MAT) based on book profits of the previous year. The transitional provisions may also have the impact of changing the book profits of not only the current and future years but also of the previous year. If the expert advice is that the MAT liability can not be revised, since as per the tax laws it is based on the financial statements for that year as per Schedule VI (and if the financial statements for the previous year are not restated) the MAT liability for the previous year should not be revised • AS 16, Borrowing Costs4, requires exchange differences arising from foreign currency borrowings to be capitalized as borrowing costs for qualifying assets to the extent that they are regarded as an adjustment to interest costs. The notification would apply to exchange differences over and above those covered by AS 16
• If a company opts to follow the accounting treatment as per the notification, it should consider this as a change in accounting policy and make appropriate disclosure. As regards quarterly reporting, the requirements of the Listing Agreement for change in accounting policy should be followed
• In the case of some listed companies, their respective Board of Directors have approved the financial statements for the year ended 31 December, 2008 and published the audited results in the media, but the financial statements are yet to be adopted by the shareholders at the Annual General Meeting (AGM). The issue arises whether such companies can also avail the option under the notification. If the company so decides, it seems that the Board of Directors can amend the accounts and resubmit them to the statutory auditors for their report before the accounts are placed before the AGM. The report issued by the statutory auditor on such amended accounts will be in substitution of the report issued on the accounts before amendment. Considering that the financial results have already been put in the public domain, adequate disclosure of the fact and the reason for revision should be made in the financial statements as well as in the audit report. The requirements of the listing agreement should also be followed.
AS 11 vs AS 30
ICAI has issued AS 30, Financial Instruments: Recognition and Measurement5, which is a comprehensive standard that addresses derivatives and most other financial instruments. It deals with a large number of issues, the suggested resolution of some of which would require changes in law and regulations. The standard is recommendatory with effect from financial years commencing on or after 1 April, 2009. However, pursuant to an earlier ICAI announcement of March 20086 some of the companies earlier adopted AS 30 even for the financial year ended 31 March, 2008 (only in relation to areas which are not covered by legal or regulatory requirements, notified accounting standards and other authoritative pronouncements).
Thus, to the extent transactions are covered by AS 11, a company would not be able to adopt the principles of AS 30 till AS 30 is notified accompanied by consequential revision to AS 11.
Implications in an individual case
The implications of the notification are varied. While it has been issued with the intention of providing relief to companies in these challenging economic times, adopting it is not an easy decision. Companies should carefully consider the various aspects of the notification including the fact that this choice once made is irrevocable, before deciding on their course of action. Moreover, each individual case may have certain unique features. Hence, the above analysis is meant primarily to facilitate the understanding of the implications of the notification. The details of each case and its fine nuances need to be considered in greater depth.
New Pension System : A study in question answer mode
What is the New Pension System (NPS)?
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail creditrisk (C), including corporate bonds and fixed deposits.
These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
Where can people sign up for the NPS?
People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyerwould live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.
What kind of returns would the NPS generate?
The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail creditrisk (C), including corporate bonds and fixed deposits.
These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
Where can people sign up for the NPS?
People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyerwould live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.
What kind of returns would the NPS generate?
The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.
Can the contents required in ITR (Income Tax Returns) be contrary to the statutory provisions of Income Tax Act, 1961?
Can the contents required in ITR (Income Tax Returns) be contrary to the statutory provisions of Income Tax Act, 1961?
In a landmark judgment Commissioner of Income Tax, Chennai Versus Chemplast Sanmar Limited - 2009 -TMI - 33295 - MADRAS HIGH COURT involving a question of law Honorable Court of Madras (Chennai) has upheld the decision of honorable Tribunal in the matter of CHEMPLAST SANMAR LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.
Facts of the Case:
Assessee is a company engaged in the manufacture and sale of PVC resins, caustic soda, chloromethane, refrigerant gases, promotion of new ventures, undertakings, companies and operation of ships, etc.
For the asst. yr. 2002-03 the assessee filed its return of income on 31st Oct., 2002, admitting a taxable income of Rs. 32,90,54,720 and the tax payable thereon was determined at Rs. 11,76,77,896 including
the interest under s. 234C of Rs. 2,05,361.
The AO processed the return under s. 143(1) by intimation dt. 21st Feb., 2003, accepting the income returned. While computing the tax, the AO has not adjusted the carry forward MAT credit available to the assessee before charging interest under s. 234B of Rs. 1,17,64,830 and under s. 234C of Rs. 56,31,754 and raised a tax demand of Rs. 1,64,86,519. Further, the AO had not given credit for TDS of Rs. 4,49,527.
Contention of the Assessee:
As per Section 115JAA(4) tax credit shall be allowed to be set off in a year when tax becomes payable on normal computation and that the provision of Section 115JAA had to be applied first as it is a tax credit or prepaid taxes with the Government available to the assessee for set off, before applying the provisions of ss. 234B and 234C.
Contention of the Department
Department contended that the order of priority of adjustment of TDS, advance tax and tax credit under s. 115JA had not been spelt out in the Act, that one had to take recourse to the IT Rules, 1962, for this purpose, that rule 12(1)(a) of the IT Rules, 1962, lays down that in the case of a company the return of income required to be furnished shall be in Form No. 1.
Schedule G to Form No. 1 lays down the manner of computing the total tax payable by the assessee, that it also gives the order in which TDS, advance tax and tax credit under s. 115JAA, shall be given effect to, that Form no. 1 has been substituted by Income-tax (19th Amendment) Rules, 2001, w.e.f. 17th Aug., 2001, and that, therefore, there was no ambiguity w.e.f. 17th Aug., 2001, that interest under section 234B or 234C shall be first deducted and thereafter tax credit under s. 115JAA shall be given.
Decision of the ITAT
Whether rule can prescribe order of priority of adjustment of TDS, advance tax and tax credit under s. 115JAA. The Act is silent about the same.
The CBDT gets the power of making rules by virtue of s. 295 of the IT Act. Generally, while various provisions of the legislative enactments contain the law broadly, principles and the main policy of the legislature on the relevant subject, the minute details and procedural matter are delegated to some authority for making subordinate legislation.
This is for the simple reason that procedural matters are best handled by the implementing authority and the Parliament can give its precious time for more important matters. Thus, the rule making power of the Board (Central Board of Direct Taxes) is the delegated or subordinate legislation only. In delegating powers to an administrative authority such authority cannot be given an arbitrary and uncontrolled discretion to make Rules.
The Rules made under the rule making power should strictly conform to the intention of the main provisions of the statute and be consistent therewith. A delegate is not entitled to exercise powers in excess of or in contravention of the delegated powers. If the aforesaid principles are not followed such rules are illegal, void or ultra vires.
It can be seen from the above section that the statute intends to allow set off in respect of brought forward tax credit (MAT credit) and it has to be allowed to the extent of the difference between the tax on its total income and the tax which would have been payable under the provisions of sub-s. (1) of s. 115JA. It may be seen that in this section the legislature has used the word ‘tax’ and not ‘tax and interest under ss. 234B and 234C of the Act’.
In such circumstances it is to be inferred that the intention of the legislature is to allow set off of the MAT credit from the ‘tax’ and not from the total amount including ‘tax and interest’.
Had it been the intention of the legislature it would have been specifically stated in the section itself. By exercising the delegated authority, the CBDT has framed the forms for filing the returns of income for the companies and while framing Form No. 1, the delegated authority, namely, the CBDT, has included Sch. G (statement of tax) to Form No. 1. While drafting this Schedule the Board has given the order of preference of adjustment of TDS, advance tax and tax credit under s. 115JAA. While doing so the Board has first prescribed charging of interest under ss. 234A and 234B and then has prescribed to give credit for MAT credit available under s. 115JAA of the Act.
In our considered view this method of prescribing the order of priority of adjustment of TDS, advance tax and MAT credit is totally against the intention of the legislature because the legislature by insertion of sub-s. (5) to s. 115JAA has intended to give set off of MAT credit against the difference between the tax on total income of the assessee and the tax which would have been payable under the provisions of sub-s. (1) of s. 115JA, and not on the total amount of tax and interest under ss. 234B and 234C as understood by the rule-making authority.
Hence in our considered opinion, Sch. G to Form No. 1 is totally against the intention of the legislature which has been clearly prescribed in s. 115JAA.
Decision of Madras High Court
While deciding the departmental appeal against the Judgment of ITAT, honorable High Court of Madras held that:
In the present case, the intention of the legislature is to give tax credit to tax and not to the tax and interest. Once the intention is clear, the revenue cannot rely on the Form-I to say that the MAT credit under Section 115JAA should be given only after tax and interest. Further we have answered the first question of law in favour of the assessee i.e. the MAT credit under Section 115JAA should be given effect to before charging the interest under Section 234B and 234C. Rule 12(1)(a) and Form-I cannot go beyond the provisions of the Act. Form-I cannot lay down the order of priority of adjustment of TDS, advance Tax, MAT credit under Section 115JAA which is contrary to the provisions of the Act. The order passed by the Tribunal is in accordance with law and we do not find any error or illegality in the order of the Tribunal so as to warrant interference.
Similar Decision of Delhi High Court
Honorable High Court of Delhi has also decided the similar matter in favor of assessee in the matter of COMMISSIONER OF INCOME TAX Versus JINDAL EXPORTS LIMITED and others decided by DELHI HIGH COURT.
This discussion leads us to the conclusion that interest under sections 234B and 234C is to be charged after the tax credit (MAT credit) available under section 115JAA is set off against tax payable on the total income of the year in question. This being the position and rival stands taken by the revenue and the respondents as well as the decisions of benches of the Tribunal do indicate that the Tribunal was correct in law in holding that rectification could not be made by the Assessing Officer under Section 154 of the Income Tax Act, 1961 as the issue regarding charging of interest under Section 234-B of the Act without giving set off of MAT credit available to the Assessee was highly debatable. Consequently, we answer both the questions against the revenue and in favour of the respondents / assessees. The appeals are dismissed. The parties are left to bear their own costs
In a landmark judgment Commissioner of Income Tax, Chennai Versus Chemplast Sanmar Limited - 2009 -TMI - 33295 - MADRAS HIGH COURT involving a question of law Honorable Court of Madras (Chennai) has upheld the decision of honorable Tribunal in the matter of CHEMPLAST SANMAR LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.
Facts of the Case:
Assessee is a company engaged in the manufacture and sale of PVC resins, caustic soda, chloromethane, refrigerant gases, promotion of new ventures, undertakings, companies and operation of ships, etc.
For the asst. yr. 2002-03 the assessee filed its return of income on 31st Oct., 2002, admitting a taxable income of Rs. 32,90,54,720 and the tax payable thereon was determined at Rs. 11,76,77,896 including
the interest under s. 234C of Rs. 2,05,361.
The AO processed the return under s. 143(1) by intimation dt. 21st Feb., 2003, accepting the income returned. While computing the tax, the AO has not adjusted the carry forward MAT credit available to the assessee before charging interest under s. 234B of Rs. 1,17,64,830 and under s. 234C of Rs. 56,31,754 and raised a tax demand of Rs. 1,64,86,519. Further, the AO had not given credit for TDS of Rs. 4,49,527.
Contention of the Assessee:
As per Section 115JAA(4) tax credit shall be allowed to be set off in a year when tax becomes payable on normal computation and that the provision of Section 115JAA had to be applied first as it is a tax credit or prepaid taxes with the Government available to the assessee for set off, before applying the provisions of ss. 234B and 234C.
Contention of the Department
Department contended that the order of priority of adjustment of TDS, advance tax and tax credit under s. 115JA had not been spelt out in the Act, that one had to take recourse to the IT Rules, 1962, for this purpose, that rule 12(1)(a) of the IT Rules, 1962, lays down that in the case of a company the return of income required to be furnished shall be in Form No. 1.
Schedule G to Form No. 1 lays down the manner of computing the total tax payable by the assessee, that it also gives the order in which TDS, advance tax and tax credit under s. 115JAA, shall be given effect to, that Form no. 1 has been substituted by Income-tax (19th Amendment) Rules, 2001, w.e.f. 17th Aug., 2001, and that, therefore, there was no ambiguity w.e.f. 17th Aug., 2001, that interest under section 234B or 234C shall be first deducted and thereafter tax credit under s. 115JAA shall be given.
Decision of the ITAT
Whether rule can prescribe order of priority of adjustment of TDS, advance tax and tax credit under s. 115JAA. The Act is silent about the same.
The CBDT gets the power of making rules by virtue of s. 295 of the IT Act. Generally, while various provisions of the legislative enactments contain the law broadly, principles and the main policy of the legislature on the relevant subject, the minute details and procedural matter are delegated to some authority for making subordinate legislation.
This is for the simple reason that procedural matters are best handled by the implementing authority and the Parliament can give its precious time for more important matters. Thus, the rule making power of the Board (Central Board of Direct Taxes) is the delegated or subordinate legislation only. In delegating powers to an administrative authority such authority cannot be given an arbitrary and uncontrolled discretion to make Rules.
The Rules made under the rule making power should strictly conform to the intention of the main provisions of the statute and be consistent therewith. A delegate is not entitled to exercise powers in excess of or in contravention of the delegated powers. If the aforesaid principles are not followed such rules are illegal, void or ultra vires.
It can be seen from the above section that the statute intends to allow set off in respect of brought forward tax credit (MAT credit) and it has to be allowed to the extent of the difference between the tax on its total income and the tax which would have been payable under the provisions of sub-s. (1) of s. 115JA. It may be seen that in this section the legislature has used the word ‘tax’ and not ‘tax and interest under ss. 234B and 234C of the Act’.
In such circumstances it is to be inferred that the intention of the legislature is to allow set off of the MAT credit from the ‘tax’ and not from the total amount including ‘tax and interest’.
Had it been the intention of the legislature it would have been specifically stated in the section itself. By exercising the delegated authority, the CBDT has framed the forms for filing the returns of income for the companies and while framing Form No. 1, the delegated authority, namely, the CBDT, has included Sch. G (statement of tax) to Form No. 1. While drafting this Schedule the Board has given the order of preference of adjustment of TDS, advance tax and tax credit under s. 115JAA. While doing so the Board has first prescribed charging of interest under ss. 234A and 234B and then has prescribed to give credit for MAT credit available under s. 115JAA of the Act.
In our considered view this method of prescribing the order of priority of adjustment of TDS, advance tax and MAT credit is totally against the intention of the legislature because the legislature by insertion of sub-s. (5) to s. 115JAA has intended to give set off of MAT credit against the difference between the tax on total income of the assessee and the tax which would have been payable under the provisions of sub-s. (1) of s. 115JA, and not on the total amount of tax and interest under ss. 234B and 234C as understood by the rule-making authority.
Hence in our considered opinion, Sch. G to Form No. 1 is totally against the intention of the legislature which has been clearly prescribed in s. 115JAA.
Decision of Madras High Court
While deciding the departmental appeal against the Judgment of ITAT, honorable High Court of Madras held that:
In the present case, the intention of the legislature is to give tax credit to tax and not to the tax and interest. Once the intention is clear, the revenue cannot rely on the Form-I to say that the MAT credit under Section 115JAA should be given only after tax and interest. Further we have answered the first question of law in favour of the assessee i.e. the MAT credit under Section 115JAA should be given effect to before charging the interest under Section 234B and 234C. Rule 12(1)(a) and Form-I cannot go beyond the provisions of the Act. Form-I cannot lay down the order of priority of adjustment of TDS, advance Tax, MAT credit under Section 115JAA which is contrary to the provisions of the Act. The order passed by the Tribunal is in accordance with law and we do not find any error or illegality in the order of the Tribunal so as to warrant interference.
Similar Decision of Delhi High Court
Honorable High Court of Delhi has also decided the similar matter in favor of assessee in the matter of COMMISSIONER OF INCOME TAX Versus JINDAL EXPORTS LIMITED and others decided by DELHI HIGH COURT.
This discussion leads us to the conclusion that interest under sections 234B and 234C is to be charged after the tax credit (MAT credit) available under section 115JAA is set off against tax payable on the total income of the year in question. This being the position and rival stands taken by the revenue and the respondents as well as the decisions of benches of the Tribunal do indicate that the Tribunal was correct in law in holding that rectification could not be made by the Assessing Officer under Section 154 of the Income Tax Act, 1961 as the issue regarding charging of interest under Section 234-B of the Act without giving set off of MAT credit available to the Assessee was highly debatable. Consequently, we answer both the questions against the revenue and in favour of the respondents / assessees. The appeals are dismissed. The parties are left to bear their own costs
SEZ policy set for overhaul after polls
Irrespective of whichever party or coalition comes to power at the Centre, the investment-magnet Special Economic Zone (SEZ) policy will be in for some major changes. Anticipating this, the commerce ministry has begun an exercise to gather suggestions from developers, units and stakeholders to improve the functioning of these tax-free enclaves. On the basis of the feedback, the government will also hold an inter-ministerial meeting to sort out policy and operational issues.
A lot is at stake as these zones have so far attracted over Rs 90,000-crore investments and given direct employment to around 2.3-lakh people — as per data culled from the ministry. Despite global slowdown, exports from SEZs had recorded 33% growth to touch Rs 89,000 crore last fiscal, much above the growth of shipments from the rest of the country at 3.4%. SEZ exports also formed close to 10.8% of India’s total exports. So far, around 572 SEZ projects have received formal approval, of which 282 have formally been notified.
Bibek Debroy, economist, working with the Centre for Policy Research in New Delhi, said the changes need not involve a new legislation to rewrite the Special Economic Zones Act of 2005. “A lot of the changes could be of rules. But it is certain that the policy would be reworked, as one of the first things the new government would undertake”.
The performance of the SEZs will help the new government contend with the problems of land grab, that some of them have been accused of.
While the UPA has not mentioned SEZ in its manifesto, Debroy said as the composition of the coalition is expected to change, a fresh examination of SEZs is fairly certain.
The BJP, in its manifesto, has clearly criticised the SEZ policy saying these tax-free enclaves “spells disaster for the farm sector.” The party said if voted to power, it would amend existing laws to rectify anomalies pertaining to land acquisition. The CPI(M) manifesto says it will amend the SEZ Act and rules to eliminate the tax concessions and regulate land use and labour policies in the zones.
Simultaneously, the commerce ministry is examining another set of issues that have emerged for the developers that could seriously impact the viability of the zones. One of the aspects that has put the government in a spot is the impact of the 20-odd free trade agreements, that India has inked or is negotiating with different trading partner countries and regions, on SEZs and units in the domestic tariff area (or DTA—the area outside the tax-free zones subjected to normal taxes and duties).
Under FTA rules, imports of agreed products from partner countries to India enjoy nil or negligible duties. But the DTA units importing from SEZ (SEZ is a tax-free zone and a foreign territory for tax purposes) has to pay the full range of duties (basic customs duty, additional customs duty/excise duty, education/ higher education cess)on the imports.
This would encourage DTA units to import from FTA countries instead of from SEZ units. It would indirectly mean that the government is encouraging manufacturing in FTA partner countries and not in SEZs in the country, especially at a time when domestic demand is much higher than in markets abroad.
Therefore, the government might resolve the problem by at least temporarily doing away with duties for DTA units while importing from SEZ units, on the condition that the goods will be exported. If the DTA unit adds value to the product and ships it abroad, the value addition also should be taken into account while determining the duty component. On their part, the SEZs will continue to pay income tax on the profits from sales to DTA units.
Another problem that the government is facing is income tax on intra/inter-SEZ transactions or the tax paid by vendors within an SEZ unit while supplying to the main manufacturing unit in the SEZ.
For instance, in an SEZ of a major telecom company, the vendors within the SEZ unit have no incentive to sell their wares to that telecom company, as they have to pay income tax on the profit from transaction.
This is because intra/inter-SEZ transactions are not considered physical export/import.
While on the other hand, the vendor gets tax benefits on his profits for exporting his ware outside the country. This makes it better for the vendor to house his unit in the DTA rather than in the SEZ. Also, the telecom company can get duty-free benefits if it imports the components or parts from outside the country.
This not only discourages intra/inter-SEZ transaction but also prevents the ‘just-in-time’ supply chain from vendors to the main company. The just-in-time concept saves time and money as well as encourage vendors to set up shops near the main company - promoting manufacturing and generating employment in India.
Therefore, in order to have more vendors set up shop in an SEZ, the government is now considering a proposal to make the main exporter in the SEZ (in this case the telecom company) give a certificate detailing the proportionate benefits that the vendor should get for contributing the components of their export. However, intra/inter-SEZ transactions are deemed exports and therefore does notattract duties.
The third aspect is regarding treating certain services, consumed within the SEZ and earning foreign exchange, as exports and according it tax benefits. For instance, medical, education and hospitality services to foreign nationals in SEZs as well as maintenance, repair and operation (MRO) services in aviation units in SEZs earn valuable foreign exchange is not considered deemed export now as they are not physical exports. Medical tourism, education, hospitality and MRO are growing sectors in India due to the affordability in services and its quality.
Regarding the huge tax and revenue losses, earlier cited by the finance ministry, these were proved to be notional by the commerce ministry. This is because, without these benefits, India would not have got that particular investment and would not have resulted in multiplier effects of employment generation and exports. The revenue losses are therefore compensated by this additional economic activity.
But at a time when every country is competing with each other to attract foreign investors, if India loses that investment, it will also lose the subsequent benefits of economic activity forever, industry sources said.
Also, at a time when port-based SEZs too are coming up, the commerce ministry is deliberating on whether to accord tax-benefits to new ports that are built inside the new SEZs or provide the same to the ones situated outside too to ensure a level playing field.
Besides the government is expected to ask the Reserve Bank of India to notify an empowered group of ministers recommendation that SEZs should be classified as infrastructure projects. “Despite the EGoM decision, the RBI has not notified the same,” said L B Singhal, director general, Export Promotion Council for Export Oriented Units and SEZs.
Singhal said the central bank’s stand is denying SEZ developers the ability to access external commercial borrowings and cheaper domestic credit. RBI treats SEZs as commercial realty projects and lending rates for such projects are considerably higher than core sector projects. As per the SEZ policy, these zones are social, commercial and industrial infrastructure projects, Singhal said. Lack of funds have forced developers to delay in the implementation of their SEZ projects and in some cases even surrender some of these projects.
A lot is at stake as these zones have so far attracted over Rs 90,000-crore investments and given direct employment to around 2.3-lakh people — as per data culled from the ministry. Despite global slowdown, exports from SEZs had recorded 33% growth to touch Rs 89,000 crore last fiscal, much above the growth of shipments from the rest of the country at 3.4%. SEZ exports also formed close to 10.8% of India’s total exports. So far, around 572 SEZ projects have received formal approval, of which 282 have formally been notified.
Bibek Debroy, economist, working with the Centre for Policy Research in New Delhi, said the changes need not involve a new legislation to rewrite the Special Economic Zones Act of 2005. “A lot of the changes could be of rules. But it is certain that the policy would be reworked, as one of the first things the new government would undertake”.
The performance of the SEZs will help the new government contend with the problems of land grab, that some of them have been accused of.
While the UPA has not mentioned SEZ in its manifesto, Debroy said as the composition of the coalition is expected to change, a fresh examination of SEZs is fairly certain.
The BJP, in its manifesto, has clearly criticised the SEZ policy saying these tax-free enclaves “spells disaster for the farm sector.” The party said if voted to power, it would amend existing laws to rectify anomalies pertaining to land acquisition. The CPI(M) manifesto says it will amend the SEZ Act and rules to eliminate the tax concessions and regulate land use and labour policies in the zones.
Simultaneously, the commerce ministry is examining another set of issues that have emerged for the developers that could seriously impact the viability of the zones. One of the aspects that has put the government in a spot is the impact of the 20-odd free trade agreements, that India has inked or is negotiating with different trading partner countries and regions, on SEZs and units in the domestic tariff area (or DTA—the area outside the tax-free zones subjected to normal taxes and duties).
Under FTA rules, imports of agreed products from partner countries to India enjoy nil or negligible duties. But the DTA units importing from SEZ (SEZ is a tax-free zone and a foreign territory for tax purposes) has to pay the full range of duties (basic customs duty, additional customs duty/excise duty, education/ higher education cess)on the imports.
This would encourage DTA units to import from FTA countries instead of from SEZ units. It would indirectly mean that the government is encouraging manufacturing in FTA partner countries and not in SEZs in the country, especially at a time when domestic demand is much higher than in markets abroad.
Therefore, the government might resolve the problem by at least temporarily doing away with duties for DTA units while importing from SEZ units, on the condition that the goods will be exported. If the DTA unit adds value to the product and ships it abroad, the value addition also should be taken into account while determining the duty component. On their part, the SEZs will continue to pay income tax on the profits from sales to DTA units.
Another problem that the government is facing is income tax on intra/inter-SEZ transactions or the tax paid by vendors within an SEZ unit while supplying to the main manufacturing unit in the SEZ.
For instance, in an SEZ of a major telecom company, the vendors within the SEZ unit have no incentive to sell their wares to that telecom company, as they have to pay income tax on the profit from transaction.
This is because intra/inter-SEZ transactions are not considered physical export/import.
While on the other hand, the vendor gets tax benefits on his profits for exporting his ware outside the country. This makes it better for the vendor to house his unit in the DTA rather than in the SEZ. Also, the telecom company can get duty-free benefits if it imports the components or parts from outside the country.
This not only discourages intra/inter-SEZ transaction but also prevents the ‘just-in-time’ supply chain from vendors to the main company. The just-in-time concept saves time and money as well as encourage vendors to set up shops near the main company - promoting manufacturing and generating employment in India.
Therefore, in order to have more vendors set up shop in an SEZ, the government is now considering a proposal to make the main exporter in the SEZ (in this case the telecom company) give a certificate detailing the proportionate benefits that the vendor should get for contributing the components of their export. However, intra/inter-SEZ transactions are deemed exports and therefore does notattract duties.
The third aspect is regarding treating certain services, consumed within the SEZ and earning foreign exchange, as exports and according it tax benefits. For instance, medical, education and hospitality services to foreign nationals in SEZs as well as maintenance, repair and operation (MRO) services in aviation units in SEZs earn valuable foreign exchange is not considered deemed export now as they are not physical exports. Medical tourism, education, hospitality and MRO are growing sectors in India due to the affordability in services and its quality.
Regarding the huge tax and revenue losses, earlier cited by the finance ministry, these were proved to be notional by the commerce ministry. This is because, without these benefits, India would not have got that particular investment and would not have resulted in multiplier effects of employment generation and exports. The revenue losses are therefore compensated by this additional economic activity.
But at a time when every country is competing with each other to attract foreign investors, if India loses that investment, it will also lose the subsequent benefits of economic activity forever, industry sources said.
Also, at a time when port-based SEZs too are coming up, the commerce ministry is deliberating on whether to accord tax-benefits to new ports that are built inside the new SEZs or provide the same to the ones situated outside too to ensure a level playing field.
Besides the government is expected to ask the Reserve Bank of India to notify an empowered group of ministers recommendation that SEZs should be classified as infrastructure projects. “Despite the EGoM decision, the RBI has not notified the same,” said L B Singhal, director general, Export Promotion Council for Export Oriented Units and SEZs.
Singhal said the central bank’s stand is denying SEZ developers the ability to access external commercial borrowings and cheaper domestic credit. RBI treats SEZs as commercial realty projects and lending rates for such projects are considerably higher than core sector projects. As per the SEZ policy, these zones are social, commercial and industrial infrastructure projects, Singhal said. Lack of funds have forced developers to delay in the implementation of their SEZ projects and in some cases even surrender some of these projects.
What Obama’s tax plan means for US, Indian firms
US president Barack Obama is proposing to raise about $210 billion over the next decade by outlawing offshore tax avoidance techniques used by American companies. He is also planning to put curbs on Americans stashing money in tax havens.
Infosys CFO V Balakrishnan said the US president is trying to bring in proposals that will help garner greater taxes for the country by plugging loopholes in tax collection. “While Indian IT companies pay full taxes in the US, several multinational IT companies in the US find ways and means to save taxes by floating subsidiaries,” he said.
“US multinationals float subsidiaries outside their country to avoid paying taxes. The only time they pay tax is when they have to pay dividends. But Obama’s new proposal will put an end to this by deducting taxes when they register profits and not just when they declare dividends,” he added. “Obama will also have to find a way to put an end to companies gaining from tax havens.”
KPMG executive director and head (US Gaap) Jamil Khatri said companies such as Microsoft, IBM and Accenture pay taxes in India out of their revenues generated from here. “But they are protected from double taxation and hence do not need to pay taxes in the US. Obama’s proposal may well look into this aspect as well,” he said.
Harish H V, partner at Grant Thorton, said US firms don’t enjoy any specific tax benefits in India other than the ones offered to Indian firms. For instance, US software companies enjoy same benefits as the Indian IT providers including the 100 per cent tax exemption on exports under STPI scheme (valid till 2009-10) and SEZ policy. However, IT companies are paying taxes for the STPI units that they had set up 10 or more years ago.
Under the Indian income tax rules, income is taxed at a flat rate of 30 per cent for Indian companies, with a 10 per cent surcharge applied on the tax paid by companies with gross turnover over Rs 1 crore. Foreign companies pay 40 per cent. An education cess of 3 per cent (on both the tax and the surcharge) is payable yielding effective tax rates of 33.99 per cent for domestic companies and 41.2 per cent for foreign companies.
On the other hand, in the US, Indian companies pay almost full taxes.
Akila Krishnakumar, CEO of US IT major Sungard in India, said, “Obama’s intent is honorable. He is trying to abolish tax havens and ensure that money flows back into the US.”
Spokespersons from IBM and Oracle said they have no comments to make.
Infosys CFO V Balakrishnan said the US president is trying to bring in proposals that will help garner greater taxes for the country by plugging loopholes in tax collection. “While Indian IT companies pay full taxes in the US, several multinational IT companies in the US find ways and means to save taxes by floating subsidiaries,” he said.
“US multinationals float subsidiaries outside their country to avoid paying taxes. The only time they pay tax is when they have to pay dividends. But Obama’s new proposal will put an end to this by deducting taxes when they register profits and not just when they declare dividends,” he added. “Obama will also have to find a way to put an end to companies gaining from tax havens.”
KPMG executive director and head (US Gaap) Jamil Khatri said companies such as Microsoft, IBM and Accenture pay taxes in India out of their revenues generated from here. “But they are protected from double taxation and hence do not need to pay taxes in the US. Obama’s proposal may well look into this aspect as well,” he said.
Harish H V, partner at Grant Thorton, said US firms don’t enjoy any specific tax benefits in India other than the ones offered to Indian firms. For instance, US software companies enjoy same benefits as the Indian IT providers including the 100 per cent tax exemption on exports under STPI scheme (valid till 2009-10) and SEZ policy. However, IT companies are paying taxes for the STPI units that they had set up 10 or more years ago.
Under the Indian income tax rules, income is taxed at a flat rate of 30 per cent for Indian companies, with a 10 per cent surcharge applied on the tax paid by companies with gross turnover over Rs 1 crore. Foreign companies pay 40 per cent. An education cess of 3 per cent (on both the tax and the surcharge) is payable yielding effective tax rates of 33.99 per cent for domestic companies and 41.2 per cent for foreign companies.
On the other hand, in the US, Indian companies pay almost full taxes.
Akila Krishnakumar, CEO of US IT major Sungard in India, said, “Obama’s intent is honorable. He is trying to abolish tax havens and ensure that money flows back into the US.”
Spokespersons from IBM and Oracle said they have no comments to make.
Inspection Charges - whether forming part of Transaction value
Confusion still prevails with the manufacturers & Buyers about the inclusion of “Inspection Charges” in the assessable value. In this Article an attempt has been made to clarify on various issues in line with the decided case laws.
At the outset, a brief reference is made to the relevant provisions of the Central Excise Act, 1944 regarding valuation of excisable goods, for the purpose of charging excise duty.
Sec 4 of the Central Excise Act, 1944 dealing with valuation of excisable goods for purpose of charging of duty of excise provides that:
Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –
a. in case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;
b. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
Sec 4(3)(d) of the Central Excise Act, 1944 states that:
“transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter, but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
In this context a question that normally arises is, whether the amount payable towards “inspection charges” are to be included in the assessable value and whether it comes within the scope of the definition of “transaction value”
The includibility or non-includibility of “inspection charges” in the assessable value can be determined in different situation as follows:-
i. 3rd party inspection at the instance of the buyers:
Where 3rd party inspection is carried out at the instance of the buyers and the buyers meet the expenses for the same. Merely because the manufacturers initially paid the amount to the inspection agency, it will not be a part of the transaction value as the amount is being reimbursed to the manufacturer by the buyer, as held by the Tribunal in the case of M/s. A.Infrastructure Ltd-2003(160) E.L.T.549 (Tr-Delhi)
Pre-delivery inspection charges are not includible in the assessable value of the goods (Refer Circular No. 681/72/2002-CX dated 10.12.2002).
Cost of additional testing concluded at the customer’s request and borne by the customer is not includible in the assessable value of the goods as held by the Tribunal in Bhaskar Ispat Pvt. Ltd -2004(167) ELT.189(Tri-LB), New Delhi.
ii. Inspection charges borne by the supplier:
If a manufacturer sets up a quality control unit to check the quality of the product or maintain a particular standard or comply with a particular standard like the ISS, the inspection or quality control charges from part of the overhead costs and thus becomes part of the manufacturing cost. The inspection charges should therefore be included while determining the assessable value of the goods.
(vide Circular No. 3/88-CX-1 dated 16.02.1988- From F.No. 6/3/85-CX-1)
iii. Inspection charges paid to outside Agency:
Relevant portion of the Minutes of 19th East Zone Tariff cum General Conference, 1985 is reproduced herewith:
“The Conference observed that the inspection charges were not included in the assessable value on the ground that the manufacturing firm was an independent manufacturer manufacturing the products with its own plants and machines and labour. The firm could not be said to have manufactured the goods on behalf of railways although the raw materials were supplied to them free of cost and the goods were manufactured as per the specifications of the railways. In this connection the Supreme Court judgment in the case of M/s. Cibatul was also referred to which would support the interpretation that railways could not be regarded as a manufacturer in this case and charges such as inspection charges paid to an outside agency may not, therefore, be includible in the assessable value. Once railways are not treated as a manufacturer the fabricator would then have to be considered as a manufacturer and since the benefit of payment of inspection charges does not go to them, the Conference felt that such charges should not be included in the assessable value”. (F. No. 6/3/85-CX.1, dated 13-1-1986)
iv. Determining factor:
In the case of Advance Steel Tubes Ltd, 2004 (174) E.L.T. 275 (Sett. Comm.), the Revenue has relied on the meaning given to the phrase “transaction value” under Clause (d) under sub-section (3) of Section 4 of the Act. However, the Bench finds that so long as the amount charged towards inspection charges do not accrue to the assessee, the same cannot be included in the assessable value.
Conclusion:
On the basis of the above decided cases, it is crystal clear that so long as the amount charged towards inspection charges do not accrue to the assessee, the same cannot form part of the transaction value and hence is not assessable to duty.
At the outset, a brief reference is made to the relevant provisions of the Central Excise Act, 1944 regarding valuation of excisable goods, for the purpose of charging excise duty.
Sec 4 of the Central Excise Act, 1944 dealing with valuation of excisable goods for purpose of charging of duty of excise provides that:
Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall –
a. in case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value;
b. in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed.
Sec 4(3)(d) of the Central Excise Act, 1944 states that:
“transaction value” means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter, but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
In this context a question that normally arises is, whether the amount payable towards “inspection charges” are to be included in the assessable value and whether it comes within the scope of the definition of “transaction value”
The includibility or non-includibility of “inspection charges” in the assessable value can be determined in different situation as follows:-
i. 3rd party inspection at the instance of the buyers:
Where 3rd party inspection is carried out at the instance of the buyers and the buyers meet the expenses for the same. Merely because the manufacturers initially paid the amount to the inspection agency, it will not be a part of the transaction value as the amount is being reimbursed to the manufacturer by the buyer, as held by the Tribunal in the case of M/s. A.Infrastructure Ltd-2003(160) E.L.T.549 (Tr-Delhi)
Pre-delivery inspection charges are not includible in the assessable value of the goods (Refer Circular No. 681/72/2002-CX dated 10.12.2002).
Cost of additional testing concluded at the customer’s request and borne by the customer is not includible in the assessable value of the goods as held by the Tribunal in Bhaskar Ispat Pvt. Ltd -2004(167) ELT.189(Tri-LB), New Delhi.
ii. Inspection charges borne by the supplier:
If a manufacturer sets up a quality control unit to check the quality of the product or maintain a particular standard or comply with a particular standard like the ISS, the inspection or quality control charges from part of the overhead costs and thus becomes part of the manufacturing cost. The inspection charges should therefore be included while determining the assessable value of the goods.
(vide Circular No. 3/88-CX-1 dated 16.02.1988- From F.No. 6/3/85-CX-1)
iii. Inspection charges paid to outside Agency:
Relevant portion of the Minutes of 19th East Zone Tariff cum General Conference, 1985 is reproduced herewith:
“The Conference observed that the inspection charges were not included in the assessable value on the ground that the manufacturing firm was an independent manufacturer manufacturing the products with its own plants and machines and labour. The firm could not be said to have manufactured the goods on behalf of railways although the raw materials were supplied to them free of cost and the goods were manufactured as per the specifications of the railways. In this connection the Supreme Court judgment in the case of M/s. Cibatul was also referred to which would support the interpretation that railways could not be regarded as a manufacturer in this case and charges such as inspection charges paid to an outside agency may not, therefore, be includible in the assessable value. Once railways are not treated as a manufacturer the fabricator would then have to be considered as a manufacturer and since the benefit of payment of inspection charges does not go to them, the Conference felt that such charges should not be included in the assessable value”. (F. No. 6/3/85-CX.1, dated 13-1-1986)
iv. Determining factor:
In the case of Advance Steel Tubes Ltd, 2004 (174) E.L.T. 275 (Sett. Comm.), the Revenue has relied on the meaning given to the phrase “transaction value” under Clause (d) under sub-section (3) of Section 4 of the Act. However, the Bench finds that so long as the amount charged towards inspection charges do not accrue to the assessee, the same cannot be included in the assessable value.
Conclusion:
On the basis of the above decided cases, it is crystal clear that so long as the amount charged towards inspection charges do not accrue to the assessee, the same cannot form part of the transaction value and hence is not assessable to duty.
Withholding tax provisions
Withholding tax provisions cannot be applied to payments
representing reimbursement of expenses. Further when
income is computed as per the special provisions (section 42),
no disallowance of expenditure can be made (under section
40(a)(i) of the Income-tax Act).
The Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal)
in the case of M/s. Cairn Energy India Pty. Ltd.1 held that the
withholding tax provisions under section 195 of the Income-tax Act,
1961 (the Act) cannot be applied to payments representing
reimbursement of expenses having no element of income.
Further it was held that when income is computed as per the special
provisions of section 42, no disallowance can be made under section
40(a)(i) as it is a settled law that general provisions cannot override
special provisions.
Facts of the case
The taxpayer, a non-resident company, incorporated in Australia was
engaged in prospecting for and production of mineral oils in India. It
carried out its activities under a Production Sharing Contract (PSC),
approved by the Parliament as per the requirements of section 42 of the
Act.
The taxpayer had made certain reimbursements to its non-resident
parent company in respect of expenditure incurred by the parent
company in connection with the business activity carried on by the
taxpayer in India and these amounts were claimed as revenue
expenditure by the taxpayer under section 42.
The Assessing Officer (AO) disallowed the above expenditure under
section 40(a)(i) of the Act on the ground that the taxpayer failed to
deduct the tax at source under section 195 of the Act. The
Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the order of
the AO.
Issue raised before the Tribunal
Whether the expenditure is disallowed under section 40(a)(i) of the Act
on the ground that the taxpayer had failed to deduct tax at source under
section 195 of the Act?
Taxpayer’s contentions
• Section 40 has to be strictly interpreted and its application has to be
restricted only to those provisions over which it has the overriding
effect i.e. sections 30 to 38 of the Act.
• Section 42 of the Act is a special provision2 and therefore the
computation of income had to be made in accordance with that
section only and provisions of a section 40 being a general section
cannot be applied to section 42.
• The payments represented reimbursement of the expenditure
incurred by the parent company and had no element of profit in it3;
consequently the provisions of section 195 could not be applied. In
this context, attention was drawn towards the clauses of the PSC and
the auditor’s certificate of the parent company to stress that the
payments represented actual expenditure.
• Neither the services were rendered in India nor the payment was
received in India by the parent company and therefore the provisions
of section 44BB could not be applied. Consequently the parent
company was not chargeable to tax as per the provisions of the Act
and therefore even on this ground the provisions of section 195
could not be applied.
• Alternatively, it was contended that in respect of assessment years
1998-99 and 1999-00 tax has been paid in the subsequent year and
therefore deduction should be allowed in the year of payment.
Tax Department’s contentions
• The provisions of sections 195 as well as section 40(a)(i) are
applicable for all kinds of payments irrespective of the element of
profit4 and that profit element is not required for deduction of taxes
at source5.
• Section 42 is only a provision enabling special deductions and not a
special provision, therefore the payments covered by section 42 are
subject to application of section 40(a)(i), and section 42 does not
have an overriding effect on section 40(a)(i).
• It is for the AO to decide the applicability of section 195 and not for
the taxpayer6. If the taxpayer was of the view that no profit element
was there, then it should have applied to the AO under section
195(2) and in absence of the same the provisions of section 195
became applicable.
• The taxpayer has not adduced any evidence to prove that the
recharges by the parent company were made at cost and there may
be income hidden or otherwise embedded therein.
• The taxpayer is deducting tax for and from the AY 2001-02 on
similar payments and since there is no change in law and
circumstances in the AY 2001-02, the taxpayer cannot argue now
that it is not liable for deducting taxes at source7.
Tribunal’s ruling
• A sum can be chargeable to tax only when it contains element of
profit, if there is no element of profit embedded, then provisions of
section 195 would not apply. The Tribunal referred to various
rulings to hold that no income accrued to the parent company from
payments by way of reimbursement of expenses and hence the
provisions of section 195 were not applicable8. The Tribunal while
discussing the rulings relied upon by the tax department held that all
the decisions were distinguishable and therefore cannot be applied
to the present case.
• The Tribunal referred to the clauses of the PSC and the auditor’s
certificate of the parent company and agreed with the taxpayer’s
expenditure and there was no profit element embedded therein.
• The argument of the tax department that the taxpayer has himself
deducted taxes at source on similar payments in subsequent years
and that the taxpayer cannot argue now that it is not liable for
deducting taxes at source, was not accepted by the Tribunal in light
of the Supreme Court’s decision in the case of National Thermal
Power Co. Ltd. (229 ITR 383), wherein it has been held that even if
the taxpayer has returned an income, the same can be challenged
before the appellate authority on the ground that it is not taxable.
• The Tribunal further held that scheme of the Act makes it clear that
the provisions of section 42 would prevail over the general
provisions9 of computing income contained in section 30 to 38.
Provisions of section 40 cannot be invoked when the income is to be
computed under section 42 of the Act as it is a settled law that
general provisions must give way to the special provisions10.
representing reimbursement of expenses. Further when
income is computed as per the special provisions (section 42),
no disallowance of expenditure can be made (under section
40(a)(i) of the Income-tax Act).
The Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal)
in the case of M/s. Cairn Energy India Pty. Ltd.1 held that the
withholding tax provisions under section 195 of the Income-tax Act,
1961 (the Act) cannot be applied to payments representing
reimbursement of expenses having no element of income.
Further it was held that when income is computed as per the special
provisions of section 42, no disallowance can be made under section
40(a)(i) as it is a settled law that general provisions cannot override
special provisions.
Facts of the case
The taxpayer, a non-resident company, incorporated in Australia was
engaged in prospecting for and production of mineral oils in India. It
carried out its activities under a Production Sharing Contract (PSC),
approved by the Parliament as per the requirements of section 42 of the
Act.
The taxpayer had made certain reimbursements to its non-resident
parent company in respect of expenditure incurred by the parent
company in connection with the business activity carried on by the
taxpayer in India and these amounts were claimed as revenue
expenditure by the taxpayer under section 42.
The Assessing Officer (AO) disallowed the above expenditure under
section 40(a)(i) of the Act on the ground that the taxpayer failed to
deduct the tax at source under section 195 of the Act. The
Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the order of
the AO.
Issue raised before the Tribunal
Whether the expenditure is disallowed under section 40(a)(i) of the Act
on the ground that the taxpayer had failed to deduct tax at source under
section 195 of the Act?
Taxpayer’s contentions
• Section 40 has to be strictly interpreted and its application has to be
restricted only to those provisions over which it has the overriding
effect i.e. sections 30 to 38 of the Act.
• Section 42 of the Act is a special provision2 and therefore the
computation of income had to be made in accordance with that
section only and provisions of a section 40 being a general section
cannot be applied to section 42.
• The payments represented reimbursement of the expenditure
incurred by the parent company and had no element of profit in it3;
consequently the provisions of section 195 could not be applied. In
this context, attention was drawn towards the clauses of the PSC and
the auditor’s certificate of the parent company to stress that the
payments represented actual expenditure.
• Neither the services were rendered in India nor the payment was
received in India by the parent company and therefore the provisions
of section 44BB could not be applied. Consequently the parent
company was not chargeable to tax as per the provisions of the Act
and therefore even on this ground the provisions of section 195
could not be applied.
• Alternatively, it was contended that in respect of assessment years
1998-99 and 1999-00 tax has been paid in the subsequent year and
therefore deduction should be allowed in the year of payment.
Tax Department’s contentions
• The provisions of sections 195 as well as section 40(a)(i) are
applicable for all kinds of payments irrespective of the element of
profit4 and that profit element is not required for deduction of taxes
at source5.
• Section 42 is only a provision enabling special deductions and not a
special provision, therefore the payments covered by section 42 are
subject to application of section 40(a)(i), and section 42 does not
have an overriding effect on section 40(a)(i).
• It is for the AO to decide the applicability of section 195 and not for
the taxpayer6. If the taxpayer was of the view that no profit element
was there, then it should have applied to the AO under section
195(2) and in absence of the same the provisions of section 195
became applicable.
• The taxpayer has not adduced any evidence to prove that the
recharges by the parent company were made at cost and there may
be income hidden or otherwise embedded therein.
• The taxpayer is deducting tax for and from the AY 2001-02 on
similar payments and since there is no change in law and
circumstances in the AY 2001-02, the taxpayer cannot argue now
that it is not liable for deducting taxes at source7.
Tribunal’s ruling
• A sum can be chargeable to tax only when it contains element of
profit, if there is no element of profit embedded, then provisions of
section 195 would not apply. The Tribunal referred to various
rulings to hold that no income accrued to the parent company from
payments by way of reimbursement of expenses and hence the
provisions of section 195 were not applicable8. The Tribunal while
discussing the rulings relied upon by the tax department held that all
the decisions were distinguishable and therefore cannot be applied
to the present case.
• The Tribunal referred to the clauses of the PSC and the auditor’s
certificate of the parent company and agreed with the taxpayer’s
expenditure and there was no profit element embedded therein.
• The argument of the tax department that the taxpayer has himself
deducted taxes at source on similar payments in subsequent years
and that the taxpayer cannot argue now that it is not liable for
deducting taxes at source, was not accepted by the Tribunal in light
of the Supreme Court’s decision in the case of National Thermal
Power Co. Ltd. (229 ITR 383), wherein it has been held that even if
the taxpayer has returned an income, the same can be challenged
before the appellate authority on the ground that it is not taxable.
• The Tribunal further held that scheme of the Act makes it clear that
the provisions of section 42 would prevail over the general
provisions9 of computing income contained in section 30 to 38.
Provisions of section 40 cannot be invoked when the income is to be
computed under section 42 of the Act as it is a settled law that
general provisions must give way to the special provisions10.
HC JUDGMENT ON DELHI RENTING OF IMMOVABLE PROPERTY - WHAT NEXT?
Recent decision of Delhi High Court that service tax cannot be imposed on renting of immovable property has raised hornets nest. The judgment has raised many issues and created numerous problems to landlords (service providers) and tenants (service receiver). In this article, attempt has been made to discuss various questions arising out of the judgment and possible plans of action.
1. Background
As per section 65(105)(zzzz) of Finance Act, 1994; any service provided or to be provided;to any person, by any other personin relationto renting of immovable property for use in the course or furtherance of business or commerce is a taxable service.
Many writ petitions were filed and all these were transferred to Supreme Court. It seems these were transferred by Supreme Court to Delhi High Court to consider the matter. Delhi High Court has passed order on 18-4-2009. However, the judghment nowhere mentions that all writ petitions were transferred to Delhi High Court. In any case, that decision cannot be taken as decision of Supreme Court on the issue.
InHome Solution Retail India Ltd. v.UOI(WP(C) 1659/2008 and others decided on 18-4-2009),Hon. Delhi High Court has observed, Service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz).
In short, servicein relation torenting of immovable property is taxable (e.g. air conditioning of immovable property given on rent), but renting of immovable property is a taxable service.
No decision about constitutional validity of the tax- It may be noted that Hon. High Court hasnotexpressed any view regarding constitutional validity of the service tax on renting of immovable property. It was observed, We have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above.
1.1 Various definitions using the term in relation to
In the judgment, Hon Delhi High Court observed, Sometimes, 'in relation to' would include the subject matter following it and on other occasions it would not. As in the case of the service of dry cleaning, the expression 'in relation to dry cleaning' also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65(105)(v), which refers to a service provided by a real estate agent 'in relation to real estate', does not, obviously, include the subject matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service.
There are many definitions of service where the term in relation to has been used where the subject matter itself is a taxable service.
For example, any service provided or to be provided to a client, by any personin relation tobusiness auxiliary service is a taxable service [section 65(105)(zzb)].This cannot be interpreted to mean thatbusiness auxiliary service itself would not be a taxable service.
As per the section 65(105)(zzq) of the Act, any service provided or to be provided to any person, by any other personin relation tocommercial or industrial construction service is a taxable service. As per section 65(105)(zzzh), any service provided or to be provided to any person, by any other person,in relation toconstruction of complex; will be taxable service.Thus, construction itself is a taxable service.
As persection 65(105)(zzzza),any service provided or to be provided; to any person, by any other personin relation tothe execution of a works contract is a taxable service. Does it mean that works contract service itself is not taxable?
Any servicein relation toinformation technology software is a taxable service [section 65(105)(zzzze)]. Thus, it can be argued that IT software itself is not taxable.
As per section 65(105)(zzzx), any servicein relation totelecommunication service is taxable service.
As per section 65(105)(o), any service provided or to be provided to any person, by a rent-a-cab scheme operator in relation tothe renting of a cab is taxable service.
As per section 65(105)(zzp), , any service,in relation totransport of goods by road in a goods carriage is a taxable service.
As per section 65(105)(zzg), any service provided or to be providedin relation tomanagement, maintenance or repair, is a taxable service.
There are over .60 definitions of services where the phrase in relation to is used to cover the subject matter itself for levy of service tax.
These services are - Air transport of passenger embarking in India for international journey, Automated teller machine operations, maintenance or management service, Asset management including portfolio management, Beauty parlour ,Auction of property, movable or immovable, tangible or intangible, Service, repair, reconditioning or restoration of motor cars, light motor vehicles or two wheeled motor vehicles, Banking and other financial services,Business exhi bition, Support services of business or commerce, Cable services, Cargo handling agency,Cleaning activity, Clearing and forwarding operations,Advice, consultancy or technical assistance by consulting engineer,Credit card, debit card, charge card or other payment card service, Credit rating of any financial obligation, instrument or security.,Design services., Development and supply of content , Dredging, will be taxable service., Dry cleaning., Erection, commissioning or installation., Event management.,Fashion designing.,Forward contract, Health and fitness services, Intellectual property service., Planning, design or beautification of spaces by interior decorator, Access of internet., Mailing list compilation and mailing., Use of a mandap in any manner., Manpower recruitment or supply , Market research of any product.,Mining of mineral, oil or gas.,On-line information and database access or retrieval , Opinion poll,Packaging activity., Pandal or shamiana, Photography, Port services., Programme service, Managing the public relations, Booking of passage for travel by rail, Sale of space or time for advertisement, Scientific or technical consultancy., Security of any property or person, Site formation and clearance, excavation and earthmoving and demolition, Any kind of sound recording, Sponsorship, Survey and exploration of mineral, Survey and map-making., Technical inspection and certification., Technical testing and analysis agency, Tour, Transport of goods by aircraft, Booking of passage for travel by travel agent., Underwriting., Video-tape production.
In all these cases, it will have to be examined whether there is any value addition!.
2. Meaning of in relation to
It is well settled that the term in relation to is expansive [That is the reason why it has been liberally used in service tax provisions].
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. -State Waqf Boardv.Abdul Azeer Sahib(1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression in relation to is of widest import. Thyssen Stahlunion GMBHv.Steel Authority of India1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
The expression in relation to (so also pertaining to) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - Relating to is equivalent to or synonymous with as to concerning with and pertaining to. The expression pertaining to is an expression of expansion and not of contraction -Doypack Systems P Ltd.v.UOI(1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 *Tamil Nadu Kalyana Mandapam Associationv.UOI2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9= 136 Taxman 596 = 135 STC 480 (SC)CCEv.Solaris Chemtech(2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC).
3. Rule of purposive construction
The rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 - 1999) has evolved this rule of construction.
Lord Denning had observed It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with approval inK P Varghesev.ITO- (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1) SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) *DLF Universal Ltd.v.Appropriate Authority243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) same view inAmrendra Pratap Singhv.Tej Bahadur Prajapati2004 AIR SCW 4103.
InPepperv.Hart(1993) 1 All ER 42 (HL), it was observed, The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted. quoted with approval inThyssen Stahlunion GMBHv.Steel Authority of India1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999(9) SCC 334.
If there exists some ambiguity in the language or the same is capable of two interpretations, it is trite that the interpretation which serves the object and purpose of the Act must be given effect to. In such a case, the doctrine of purposive construction should be adopted Nathi Deviv.Radha Devi GuptaAIR 2005 SC 648 = (2005) 2 SCC 271 (SC 5 member bench).
When an expression is cable of more than one meaning, the Court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the consequences of alternative constructions -Prakash Kumarv.State of GujaratAIR 2005 SC 1075 (SC 5 member bench) same view inSouth Eastern Coalfieldsv.CCE2006 (200) ELT 357 (SC).
Applying this rule, it is difficult to say that the purpose of legislation was not to tax renting of immovable property.
See the relevant definitions reproduced below-
As per section 65(105)(zzzz), any service provided or to be provided;to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce is a taxable service.
Explanation 1.-For the purposes of this sub-clause, immovable property includes -
(i)building and part of a building, and the land appurtenant thereto;
(ii)land incidental to the use of such building or part of a building;
(iii)the common or shared areas and facilities relating thereto; and
(iv)in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,
but does not include-
(a)vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;
(b)vacant land, whether or not having facilities clearly incidental to the use of such vacant land;
(c)land used for educational, sports, circus, entertainment and parking purposes; and
(d)building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Explanation 2. -For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce.
As per section 65(90a),renting of immovable property includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include -
(i)renting of immovable property by a religious body or to a religious body; or
(ii)renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching center;
Explanation 1 For the purposes of this clause, for use in the course or furtherance of business or commerce includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings.
Explanation 2 For the removal of doubts, it is hereby declared that for the purposes of this clause renting of immovable property includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property [explanation2 insertedvideFinance Act, 2008w.e.f. 16-5-2008].
The intention to levy service tax on renting of immovable property itself seems quite evident from aforesaid definitions.
4. Meaning of value addition
The term value addition is nowhere defined and in fact, nowhere used in the Finance Act, 1994 relating to service tax.
Value addition is a slippery and vague undefined term. The fact that someone is paying an amount for something means he is getting benefit out of that and hence it is value addition for him. Otherwise, why he should agree to pay something?
Further, when legislature itself defines an activity as a taxable service and when there is no constitutional bar, there should be no impediment in imposing a tax.
5. Binding nature of Delhi HC judgment
It is well settled that decision of High Court is binding on all tribunals and quasi-judicial authorities within jurisdiction of that High Court but is not binding on other High Courts.
One question is whether the decision of one High Court is binding on tribunals and other quasi-judicial bodies in other States, in cases where there is no binding decision of High Court of the State where the tribunal or quasi-judicial body is situated. In such cases, inCITv.Thana Electric Supply Ltd.(1994) 206 ITR 727 (Bom HC) - followed inConsolidated Pneumatic Tool Co. (I) Ltd.v.CIT- (1995) 79 Taxman 458 = (1994) 209 ITR 277 (Bom HC DB) *CITv.Highway Construction1999(105) ELT 14 (Gau HC DB) *Geoffrey Manners & Co. Ltd.v.CIT(1996) 89 Taxman 287 = 221 ITR 695 (Bom HC DB), where it has been held that decision of High Court is not binding precedent on Courts or Tribunals outside the jurisdiction of that High Court. It has only persuasive effect on courts and tribunals situated outside the jurisdiction of that High Court - same view inTaylor Instrument Co.v.CIT(1998) 99 Taxman 155 = 232 ITR 771 (Del HC DB) *CITv.Ved Prakash(1989) 178 ITR 332 = 44 Taxman 365 (P&H HC).
However, Tribunals have expressed different views.
InMadura Coatsv.CCE- (1996) 82 ELT 512 = 13 RLT 186 (CEGAT 3 member bench), it has been held that (a) decision of High Court having jurisdiction over the adjudication authority and assessee will have to be followed by Tribunals (b) When jurisdictional High Court has not taken a view and there are conflicting views of different High Courts, the Tribunal can formulate its own views (c) When there is decision of only one High Court (which is not connected with constitutional validity of a provision), the Tribunal is bound to follow that decision all over India. (d) However, when decision of one High Court is in respect ofviresof any provision i.e. its constitutional validity, the decision of High Court is binding only in jurisdiction of that High Court - decision confirmed and followed inCCEv.Kashmir Conductors1997 (96) ELT 257 = 22 RLT 343 (CEGAT 5 member bench).
InKhanbhai Esoofbhaiv.CCE1999(107) ELT 557 (CEGAT 5 member bench), it was held that in absence of any decision of a High Court holding a contrary view, decision given by a High Court is binding on Tribunal. (All over India - though these words were not used).
6. What assessee should do?
As discussed above, the decision of Delhi High Court is not on the basis of constitutional invalidly. It is only on the ground that in renting, there is no value addition.
It is reported in some articles that Central Government has 90 days time to file appeal or SLP before Supreme Court. Really, Delhi High Court has not specified any such limit and in fact, for fling SLP, there is no time limit.
The (so called) defect in legislation is no minor that it can be easily corrected by making retrospective amendment. Government can also approach Supreme Court for stay of the decision.
In any case, decision of Delhi High Court is not the last word and in my view, the decision will be unsettled either by Supreme Court or by retrospective amendment.
Action by landlord It should be noted that statutory liability is on landlord. Liability of tenant is only contractual. In my view, it is safe to collect and pay service tax, particularly if he is outside the jurisdiction of Delhi High Court, binding nature of decision outside jurisdiction of Deli High Court is weak. He should note that if tax is found to be payable later, it will have to be paid with interest @ 13%.
If possible, collect Deposit against possible service tax liability from tenant assuring that if final decision is in your favour, you will refund the amount or it can be adjusted against future rent.
In any case, the landlord must safeguard his interest at least by getting undertaking from tenant that he will pay service tax amount if finally decision goes against the landlord. [Of course, such undertaking can be enforced only through civil court and not through any statutory provision].
Renting within group companies Ifrenting is within the group companies itself, payment of service tax can be avoided (at least deferred) by informing department.
Action by tenant, if he is able to avail Cenvat credit If tenant is in position to avail Cenvat credit, better option is to ask landlord to continue charging service tax. It is well settled that once tax is paid, Cenvat credit can be availed whether tax was actually payable or not.InCCEv.CEGAT2006 (202) ELT 753 (Mad HC DB), it was held that the words used in rule 3(1) of Cenvat Credit Rules are excise duty and service tax paid and not payable. Thus, once duty is paid, Cenvat credit is available, whether duty was payable or not - same view inCCEv.Ranbaxy Labs Ltd.2006 (203) ELT 213 (P&H HC DB) *Manaksia Ltd. v.CCE(2008) 232 ELT 497 (CESTAT 2 v. 1 order) *Savera Pharmaceuticalsv.CCE(2008) 222 ELT 457 (CESTAT).
If tenant is in dictating position and not in position to avail Cenvat credit- If the tenant is not in position to avail Cenvat credit (and if he is in position to dictate terms to landlord), he can refuse to pay service tax (and let landlord suffer), since the tenant has no statutory liability to pay service tax or even interest.
6.1 Disclosure to department
Whatever you decide, it is highly advisable to write to department, so that charge of suppression of facts is avoided and your liability is restricted to service tax plus interest.
6.2. Can assessee or service receiver claim refund?
Assessee or service receiver claim refund, but chances of actually getting refund are negligible, in view of doctrine of unjust enrichment. Landlord cannot get refund if he has collected service tax from the tenant. The tenant can refund only if he can establish that he has not passed on the burden of tax to another person.
Refund claim beyond one year is anyway time barred even if it is found that the levy was illegal!
7. Conclusion
In my view, decision of Delhi High Court is not the last word on this issue, particularly because it is not on the basis of constitutional validity of a decision. It can be easily overturned by judgment of Supreme Court.
Central Government need not take even that trouble and can overturn the decision simply by making a minor retrospective amendment, particularly because the phrase in relation to has been used in at least 60 definitions of services.
In any case, landlord should take steps to protect his liability and should make full disclosure to department.
1. Background
As per section 65(105)(zzzz) of Finance Act, 1994; any service provided or to be provided;to any person, by any other personin relationto renting of immovable property for use in the course or furtherance of business or commerce is a taxable service.
Many writ petitions were filed and all these were transferred to Supreme Court. It seems these were transferred by Supreme Court to Delhi High Court to consider the matter. Delhi High Court has passed order on 18-4-2009. However, the judghment nowhere mentions that all writ petitions were transferred to Delhi High Court. In any case, that decision cannot be taken as decision of Supreme Court on the issue.
InHome Solution Retail India Ltd. v.UOI(WP(C) 1659/2008 and others decided on 18-4-2009),Hon. Delhi High Court has observed, Service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within Section 65(105)(zzzz).
In short, servicein relation torenting of immovable property is taxable (e.g. air conditioning of immovable property given on rent), but renting of immovable property is a taxable service.
No decision about constitutional validity of the tax- It may be noted that Hon. High Court hasnotexpressed any view regarding constitutional validity of the service tax on renting of immovable property. It was observed, We have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above.
1.1 Various definitions using the term in relation to
In the judgment, Hon Delhi High Court observed, Sometimes, 'in relation to' would include the subject matter following it and on other occasions it would not. As in the case of the service of dry cleaning, the expression 'in relation to dry cleaning' also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65(105)(v), which refers to a service provided by a real estate agent 'in relation to real estate', does not, obviously, include the subject matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service.
There are many definitions of service where the term in relation to has been used where the subject matter itself is a taxable service.
For example, any service provided or to be provided to a client, by any personin relation tobusiness auxiliary service is a taxable service [section 65(105)(zzb)].This cannot be interpreted to mean thatbusiness auxiliary service itself would not be a taxable service.
As per the section 65(105)(zzq) of the Act, any service provided or to be provided to any person, by any other personin relation tocommercial or industrial construction service is a taxable service. As per section 65(105)(zzzh), any service provided or to be provided to any person, by any other person,in relation toconstruction of complex; will be taxable service.Thus, construction itself is a taxable service.
As persection 65(105)(zzzza),any service provided or to be provided; to any person, by any other personin relation tothe execution of a works contract is a taxable service. Does it mean that works contract service itself is not taxable?
Any servicein relation toinformation technology software is a taxable service [section 65(105)(zzzze)]. Thus, it can be argued that IT software itself is not taxable.
As per section 65(105)(zzzx), any servicein relation totelecommunication service is taxable service.
As per section 65(105)(o), any service provided or to be provided to any person, by a rent-a-cab scheme operator in relation tothe renting of a cab is taxable service.
As per section 65(105)(zzp), , any service,in relation totransport of goods by road in a goods carriage is a taxable service.
As per section 65(105)(zzg), any service provided or to be providedin relation tomanagement, maintenance or repair, is a taxable service.
There are over .60 definitions of services where the phrase in relation to is used to cover the subject matter itself for levy of service tax.
These services are - Air transport of passenger embarking in India for international journey, Automated teller machine operations, maintenance or management service, Asset management including portfolio management, Beauty parlour ,Auction of property, movable or immovable, tangible or intangible, Service, repair, reconditioning or restoration of motor cars, light motor vehicles or two wheeled motor vehicles, Banking and other financial services,Business exhi bition, Support services of business or commerce, Cable services, Cargo handling agency,Cleaning activity, Clearing and forwarding operations,Advice, consultancy or technical assistance by consulting engineer,Credit card, debit card, charge card or other payment card service, Credit rating of any financial obligation, instrument or security.,Design services., Development and supply of content , Dredging, will be taxable service., Dry cleaning., Erection, commissioning or installation., Event management.,Fashion designing.,Forward contract, Health and fitness services, Intellectual property service., Planning, design or beautification of spaces by interior decorator, Access of internet., Mailing list compilation and mailing., Use of a mandap in any manner., Manpower recruitment or supply , Market research of any product.,Mining of mineral, oil or gas.,On-line information and database access or retrieval , Opinion poll,Packaging activity., Pandal or shamiana, Photography, Port services., Programme service, Managing the public relations, Booking of passage for travel by rail, Sale of space or time for advertisement, Scientific or technical consultancy., Security of any property or person, Site formation and clearance, excavation and earthmoving and demolition, Any kind of sound recording, Sponsorship, Survey and exploration of mineral, Survey and map-making., Technical inspection and certification., Technical testing and analysis agency, Tour, Transport of goods by aircraft, Booking of passage for travel by travel agent., Underwriting., Video-tape production.
In all these cases, it will have to be examined whether there is any value addition!.
2. Meaning of in relation to
It is well settled that the term in relation to is expansive [That is the reason why it has been liberally used in service tax provisions].
'In relation to' are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. -State Waqf Boardv.Abdul Azeer Sahib(1967) 1 MLJ 190 = AIR 1968 Mad 79.
The expression in relation to is of widest import. Thyssen Stahlunion GMBHv.Steel Authority of India1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.
The expression in relation to (so also pertaining to) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - Relating to is equivalent to or synonymous with as to concerning with and pertaining to. The expression pertaining to is an expression of expansion and not of contraction -Doypack Systems P Ltd.v.UOI(1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 *Tamil Nadu Kalyana Mandapam Associationv.UOI2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9= 136 Taxman 596 = 135 STC 480 (SC)CCEv.Solaris Chemtech(2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC).
3. Rule of purposive construction
The rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 - 1999) has evolved this rule of construction.
Lord Denning had observed It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with approval inK P Varghesev.ITO- (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1) SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) *DLF Universal Ltd.v.Appropriate Authority243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) same view inAmrendra Pratap Singhv.Tej Bahadur Prajapati2004 AIR SCW 4103.
InPepperv.Hart(1993) 1 All ER 42 (HL), it was observed, The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted. quoted with approval inThyssen Stahlunion GMBHv.Steel Authority of India1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999(9) SCC 334.
If there exists some ambiguity in the language or the same is capable of two interpretations, it is trite that the interpretation which serves the object and purpose of the Act must be given effect to. In such a case, the doctrine of purposive construction should be adopted Nathi Deviv.Radha Devi GuptaAIR 2005 SC 648 = (2005) 2 SCC 271 (SC 5 member bench).
When an expression is cable of more than one meaning, the Court would attempt to resolve the ambiguity in a manner consistent with the purpose of the provision, having regard to the consequences of alternative constructions -Prakash Kumarv.State of GujaratAIR 2005 SC 1075 (SC 5 member bench) same view inSouth Eastern Coalfieldsv.CCE2006 (200) ELT 357 (SC).
Applying this rule, it is difficult to say that the purpose of legislation was not to tax renting of immovable property.
See the relevant definitions reproduced below-
As per section 65(105)(zzzz), any service provided or to be provided;to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce is a taxable service.
Explanation 1.-For the purposes of this sub-clause, immovable property includes -
(i)building and part of a building, and the land appurtenant thereto;
(ii)land incidental to the use of such building or part of a building;
(iii)the common or shared areas and facilities relating thereto; and
(iv)in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,
but does not include-
(a)vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;
(b)vacant land, whether or not having facilities clearly incidental to the use of such vacant land;
(c)land used for educational, sports, circus, entertainment and parking purposes; and
(d)building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Explanation 2. -For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce.
As per section 65(90a),renting of immovable property includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include -
(i)renting of immovable property by a religious body or to a religious body; or
(ii)renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching center;
Explanation 1 For the purposes of this clause, for use in the course or furtherance of business or commerce includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings.
Explanation 2 For the removal of doubts, it is hereby declared that for the purposes of this clause renting of immovable property includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property [explanation2 insertedvideFinance Act, 2008w.e.f. 16-5-2008].
The intention to levy service tax on renting of immovable property itself seems quite evident from aforesaid definitions.
4. Meaning of value addition
The term value addition is nowhere defined and in fact, nowhere used in the Finance Act, 1994 relating to service tax.
Value addition is a slippery and vague undefined term. The fact that someone is paying an amount for something means he is getting benefit out of that and hence it is value addition for him. Otherwise, why he should agree to pay something?
Further, when legislature itself defines an activity as a taxable service and when there is no constitutional bar, there should be no impediment in imposing a tax.
5. Binding nature of Delhi HC judgment
It is well settled that decision of High Court is binding on all tribunals and quasi-judicial authorities within jurisdiction of that High Court but is not binding on other High Courts.
One question is whether the decision of one High Court is binding on tribunals and other quasi-judicial bodies in other States, in cases where there is no binding decision of High Court of the State where the tribunal or quasi-judicial body is situated. In such cases, inCITv.Thana Electric Supply Ltd.(1994) 206 ITR 727 (Bom HC) - followed inConsolidated Pneumatic Tool Co. (I) Ltd.v.CIT- (1995) 79 Taxman 458 = (1994) 209 ITR 277 (Bom HC DB) *CITv.Highway Construction1999(105) ELT 14 (Gau HC DB) *Geoffrey Manners & Co. Ltd.v.CIT(1996) 89 Taxman 287 = 221 ITR 695 (Bom HC DB), where it has been held that decision of High Court is not binding precedent on Courts or Tribunals outside the jurisdiction of that High Court. It has only persuasive effect on courts and tribunals situated outside the jurisdiction of that High Court - same view inTaylor Instrument Co.v.CIT(1998) 99 Taxman 155 = 232 ITR 771 (Del HC DB) *CITv.Ved Prakash(1989) 178 ITR 332 = 44 Taxman 365 (P&H HC).
However, Tribunals have expressed different views.
InMadura Coatsv.CCE- (1996) 82 ELT 512 = 13 RLT 186 (CEGAT 3 member bench), it has been held that (a) decision of High Court having jurisdiction over the adjudication authority and assessee will have to be followed by Tribunals (b) When jurisdictional High Court has not taken a view and there are conflicting views of different High Courts, the Tribunal can formulate its own views (c) When there is decision of only one High Court (which is not connected with constitutional validity of a provision), the Tribunal is bound to follow that decision all over India. (d) However, when decision of one High Court is in respect ofviresof any provision i.e. its constitutional validity, the decision of High Court is binding only in jurisdiction of that High Court - decision confirmed and followed inCCEv.Kashmir Conductors1997 (96) ELT 257 = 22 RLT 343 (CEGAT 5 member bench).
InKhanbhai Esoofbhaiv.CCE1999(107) ELT 557 (CEGAT 5 member bench), it was held that in absence of any decision of a High Court holding a contrary view, decision given by a High Court is binding on Tribunal. (All over India - though these words were not used).
6. What assessee should do?
As discussed above, the decision of Delhi High Court is not on the basis of constitutional invalidly. It is only on the ground that in renting, there is no value addition.
It is reported in some articles that Central Government has 90 days time to file appeal or SLP before Supreme Court. Really, Delhi High Court has not specified any such limit and in fact, for fling SLP, there is no time limit.
The (so called) defect in legislation is no minor that it can be easily corrected by making retrospective amendment. Government can also approach Supreme Court for stay of the decision.
In any case, decision of Delhi High Court is not the last word and in my view, the decision will be unsettled either by Supreme Court or by retrospective amendment.
Action by landlord It should be noted that statutory liability is on landlord. Liability of tenant is only contractual. In my view, it is safe to collect and pay service tax, particularly if he is outside the jurisdiction of Delhi High Court, binding nature of decision outside jurisdiction of Deli High Court is weak. He should note that if tax is found to be payable later, it will have to be paid with interest @ 13%.
If possible, collect Deposit against possible service tax liability from tenant assuring that if final decision is in your favour, you will refund the amount or it can be adjusted against future rent.
In any case, the landlord must safeguard his interest at least by getting undertaking from tenant that he will pay service tax amount if finally decision goes against the landlord. [Of course, such undertaking can be enforced only through civil court and not through any statutory provision].
Renting within group companies Ifrenting is within the group companies itself, payment of service tax can be avoided (at least deferred) by informing department.
Action by tenant, if he is able to avail Cenvat credit If tenant is in position to avail Cenvat credit, better option is to ask landlord to continue charging service tax. It is well settled that once tax is paid, Cenvat credit can be availed whether tax was actually payable or not.InCCEv.CEGAT2006 (202) ELT 753 (Mad HC DB), it was held that the words used in rule 3(1) of Cenvat Credit Rules are excise duty and service tax paid and not payable. Thus, once duty is paid, Cenvat credit is available, whether duty was payable or not - same view inCCEv.Ranbaxy Labs Ltd.2006 (203) ELT 213 (P&H HC DB) *Manaksia Ltd. v.CCE(2008) 232 ELT 497 (CESTAT 2 v. 1 order) *Savera Pharmaceuticalsv.CCE(2008) 222 ELT 457 (CESTAT).
If tenant is in dictating position and not in position to avail Cenvat credit- If the tenant is not in position to avail Cenvat credit (and if he is in position to dictate terms to landlord), he can refuse to pay service tax (and let landlord suffer), since the tenant has no statutory liability to pay service tax or even interest.
6.1 Disclosure to department
Whatever you decide, it is highly advisable to write to department, so that charge of suppression of facts is avoided and your liability is restricted to service tax plus interest.
6.2. Can assessee or service receiver claim refund?
Assessee or service receiver claim refund, but chances of actually getting refund are negligible, in view of doctrine of unjust enrichment. Landlord cannot get refund if he has collected service tax from the tenant. The tenant can refund only if he can establish that he has not passed on the burden of tax to another person.
Refund claim beyond one year is anyway time barred even if it is found that the levy was illegal!
7. Conclusion
In my view, decision of Delhi High Court is not the last word on this issue, particularly because it is not on the basis of constitutional validity of a decision. It can be easily overturned by judgment of Supreme Court.
Central Government need not take even that trouble and can overturn the decision simply by making a minor retrospective amendment, particularly because the phrase in relation to has been used in at least 60 definitions of services.
In any case, landlord should take steps to protect his liability and should make full disclosure to department.
RBI/2008-09/460 A.P. (DIR Series) Circular No. 64 Dated : April 28, 2009
Attention of Authorised Dealer Category - I (AD Category - I) banks is invited to the A.P. (DIR Series) Circular No. 46 dated January 2, 2009 relating to External Commercial Borrowings (ECB) and in terms of Para 2 of the circular, it was decided to dispense with the requirement of all-in-cost ceilings on ECB, under the approval route, until June 30, 2009. Accordingly, eligible borrowers, proposing to avail of ECB beyond the prescribed all-in-cost ceilings could approach the Reserve Bank, under the approval route.
2. As announced in Para 107 of the Annual Policy Statement 2009-10 and considering the continuing pressure on credit spreads in the international markets, it has been decided to extend the relaxation in all–in-cost ceilings, under the approval route, until December 31, 2009. This relaxation will be reviewed in December 2009.
3. The modifications to the ECB guidelines shall come into force with immediate effect. All other aspects of ECB policy, such as USD 500 million limit per company per financial year under the Automatic Route, eligible borrower, recognised lender, end-use, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged.
4. Necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated May 3, 2000 are being issued separately.
5. AD Category - I banks may bring the contents of this circular to the notice of their constituents and customers concerned.
6.The directions contained in this circular have been issued under sections 10(4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions/approvals, if any, required under any other law.
2. As announced in Para 107 of the Annual Policy Statement 2009-10 and considering the continuing pressure on credit spreads in the international markets, it has been decided to extend the relaxation in all–in-cost ceilings, under the approval route, until December 31, 2009. This relaxation will be reviewed in December 2009.
3. The modifications to the ECB guidelines shall come into force with immediate effect. All other aspects of ECB policy, such as USD 500 million limit per company per financial year under the Automatic Route, eligible borrower, recognised lender, end-use, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged.
4. Necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated May 3, 2000 are being issued separately.
5. AD Category - I banks may bring the contents of this circular to the notice of their constituents and customers concerned.
6.The directions contained in this circular have been issued under sections 10(4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions/approvals, if any, required under any other law.
Income Tax department asked to pay cost for retaining the books of Assessee for more then 15 days
The Income-Tax department routinely imposes cost on assesses for late filing of returns or delayed tax payment. For a change, it was at the receiving end when the high court imposed a cost of Rs 25,000 for retaining books of accounts impounded from a city builder for almost five years. Justice D V Shylendra Kumar, while disposing of the petition filed by Shubha & Prabha Builders Private Ltd, observed that the I-T department couldn‟t flout its own rules and regulations. “The department cannot hold back the books of accounts for such a long period without any tenable explanation or authority of law. They should immediately return those books and pay the cost to the petitioner,” the court observed. Kiran Kumar, counsel for the petitioner, told the court: “The department impounded those books for verification on October 7, 2005. They extended the retention period from time to time, saying the company could file an appeal. On March 16, 2009, the department issued a fresh order seeking to retain those books till 2010.
“Under Section 131(3) of the IT Act, the department at best can retain impounded books only for 15 days. Thereafter, with due permission from the commissioner, that period can be extended by a few days. Only one extension is available under the law.” Even a recent study by ratings agency Crisil noted that while bank NPAs would rise in light of the slowdown, yet, given their healthy capitalisation and cleaner balance sheets, the impact of rising delinquencies was likely to be within the stress tolerance levels. In India, according to Mr Mohan, the main fallout of the crisis was a sell-off by foreign institutional investors in domestic equity markets, leading to a sharp reduction in net capital inflows, which were also affected by slowing external demand. As a result of this, there were pressures in the foreign exchange market because of which the central bank had to sell dollars. Mr Mohan in his analysis of the impact of the crisis pointed that, “While foreign exchange sales attenuated the mismatch in the foreign exchange market, these operations drained liquidity from the rupee market and accentuated pressures on the rupee liquidity.
“Under Section 131(3) of the IT Act, the department at best can retain impounded books only for 15 days. Thereafter, with due permission from the commissioner, that period can be extended by a few days. Only one extension is available under the law.” Even a recent study by ratings agency Crisil noted that while bank NPAs would rise in light of the slowdown, yet, given their healthy capitalisation and cleaner balance sheets, the impact of rising delinquencies was likely to be within the stress tolerance levels. In India, according to Mr Mohan, the main fallout of the crisis was a sell-off by foreign institutional investors in domestic equity markets, leading to a sharp reduction in net capital inflows, which were also affected by slowing external demand. As a result of this, there were pressures in the foreign exchange market because of which the central bank had to sell dollars. Mr Mohan in his analysis of the impact of the crisis pointed that, “While foreign exchange sales attenuated the mismatch in the foreign exchange market, these operations drained liquidity from the rupee market and accentuated pressures on the rupee liquidity.
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