No tax break to SEZ units if over 20 pc capital goods second-hand
In an attempt to finally resolve any misgivings about the use of second-hand or used capital goods while setting up an SEZ unit, the government has issued an instruction saying that a company can now bring in as much second-hand capital equipment to a new special economic zone unit as it wants. The SEZ unit, however, will not be eligible for tax exemption if the ratio of used equipment exceeds 20 per cent of the overall capital investment. This is the third time the government has issued such a notification pertaining to the treatment of second-hand capital goods used in SEZs with respect to tax exemption under the Income Tax Act.
In its instruction dated May 27, the commerce ministry outlined the guidelines for procurement of used capital goods from domestic tariff area (DTA) to SEZ units. Apart from clarifying that the developer is free to transfer as many second-hand capital goods as he wants, it also stated that prior approval of the Development Commissioner of that particular zone would be required. That, however, is just a formality, according to Vikram Bapat, executive director with international consultancy PricewaterhouseCoopers (PwC). “This instruction is important especially for old IT companies setting up IT/ITES SEZs across the country, who might want to consolidate their existing software and technology parks (STPIs) — on which they’ve reaped tax benefits for the past 8-10 years — with their new SEZs,” he added. “Given that these STPIs have already been suffering in the face of the ongoing global recession, it only makes sense to ease the cost burden of these companies by allowing them to transfer their existing capital goods from their STPIs, which are a part of the DTA to their SEZs.” These SEZs will, however, still be able to avail of service tax benefits, if not income tax.
The government hadn’t stipulated any guidelines for the use of second hand capital goods when the SEZ Act had first come into being. It was only in August 2006 that it introduced a rule saying banning any use of second hand capital goods in SEZs. That rule, however, lasted only a year and the government issued another clarifications in October 2007 saying that the Income Tax Act, in its Section 10AA, already deals with the treatment of used capital goods and hence the earlier rule was invalidated. According to Section 10AA of the IT Act, used capital goods would be allowed only if they did not exceed 20 per cent of total capital goods. Hence, prior to this notification, used capital goods were only partially allowed in SEZs.
Monday, June 8, 2009
Companies bill 2008 approved by Cabinet
Government of India today approved the introduction of a new single, comprehensive law to govern the Indian corporate sector. The Bill is expected to be tabled in Parliament during the upcoming October session.
As per PIB Press Release, The Union Cabinet today (27th May-09) gave its approval for introduction of the Companies Bill, 2008 in the Parliament to replace the Companies Act, 1956, the existing statute for regulation of companies in the country and considered to be in need of comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally.
The Ministry of Corporate Affairs took up a comprehensive revision of the Companies Act, 1956 (the Act) in 2004 keeping in view that not only had the number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. In doing so, they were emerging internationally as efficient providers of a wide range of goods and services while increasing employment opportunities at home. At the same time, the increasing number of options and avenues for international business, trade and capital flows had imposed a requirement not only for harnessing entrepreneurial and economic resources efficiently but also to be competitive in attracting investment for growth. These developments necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner.
2. Earlier, a Bill called Companies (Amendment) Bill, 2003 had been introduced by M/o Corporate Affairs (MCA) (then Department of Company Affairs) in the Rajya Sabha on 7.5.2003. Later on, a large number of changes were found to be necessary in the Bill. A decision was, therefore, taken to carry out a comprehensive review of the Companies Act, 1956 and to introduce a new Companies Bill for the consideration of the Parliament.
3. The review and redrafting of the Companies Act, 1956 was taken up by the Ministry of Corporate Affairs on the basis of a detailed consultative process. A `Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th August, 2004. The inputs received were put to a detailed examination in the Ministry. The Government also constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advise on new Companies Bill. The Committee submitted its report to the Government on 31st May 2005. Detailed consultations were also taken up with various Ministries, Departments and Government Regulators. The Bill was thereafter drafted in consultation with the Legislative Department of the Central Government.
4. The Companies Bill, 2008 seeks to enable the corporate sector in India to operate in a regulatory environment of best international practices that fosters entrepreneurship, investment and growth and provides for :-
(i) The basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive, legal framework administered by the Central Government. In doing so, the Bill also harmonizes the Company law framework with the imperative of specialized sectoral regulation
(ii) Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes and decisions by shareholder control. It also provides for shares with differential voting rights to be done away with and valuation of non-cash considerations for allotment of shares through independent valuers.
(iii) Easy transition of companies operating under the Companies Act, 1956, to the new framework as also from one type of company to another.
(iv) A new entity in the form of One-Person Company (OPC) while empowering Government to provide a simpler compliance regime for small companies. Retains the concept of Producer Companies, while providing a more stringent regime for not-for–profit companies to check misuse. No restriction proposed on the number of subsidiary companies that a company may have, subject to disclosure in respect of their relationship and transactions/dealings between them.
(iv) Application of the successful e-Governance initiative of the Ministry of Corporate Affairs (MCA-21) to all the processes involved in meeting compliance obligations. Company processes, also to be enabled to be carried out through electronic mode. The proposed e-Governance regime is intended to provide for ease of operation for filing and access to corporate data over the internet to all stakeholders, on round the clock basis.
(v) Speedy incorporation process, with detailed declarations/ disclosures about the promoters, directors etc. at the time of incorporation itself. Every company director would be required to acquire a unique Directors identification number.
(vi) Facilitates joint ventures and relaxes restrictions limiting the number of partners in entities such as partnership firms, banking companies etc. to a maximum 100 with no ceiling as to professions regulated by Special Acts.
(vii) Duties and liabilities of the directors and for every company to have at least one director resident in India. The Bill also provides for independent directors to be appointed on the Boards of such companies as may be prescribed, along with attributes determining independence. The requirement to appoint independent directors, where applicable, is a minimum of 33% of the total number of directors.
(ix) Statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company Secretary as Key Managerial Personnel (KMP).
(x) Companies not to be allowed to raise deposits from the public except on the basis of permission available to them through other Special Acts. The Bill recognizes insider trading by company directors/KMPs as an offence with criminal liability.
(xi) Recognition of both accounting and auditing standards. The role, rights and duties of the auditors defined as to maintain integrity and independence of the audit process. Consolidation of financial statements of subsidiaries with those of holding companies is proposed to be made mandatory.
(xii) A single forum for approval of mergers and acquisitions, along with concept of deemed approval in certain situations.
(xiii) A separate framework for enabling fair valuations in companies for various purposes. Appointment of valuers is proposed to be made by audit committees.
(xiii) Claim of an investor over a dividend or a security not claimed for more than a period of seven years not being extinguished, and Investor Education and Protection Fund (IEPF) to be administered by a statutory Authority.
(xv) Shareholders Associations/Group of Shareholders to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and ‘Class Action Suits’. (xvi) A revised framework for regulation of insolvency, including rehabilitation, winding up and liquidation of companies with the process to be completed in a time bound manner. Incorporates international best practices based on the models suggested by the United Nations Commission on International Trade Law (UNCITRAL).
(xvii) Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to entitlements to draw money in a situation of insolvency.
(xviii) A more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum quantum of penalty for each offence with suitable deterrence for repeat offences. Company is identified as a separate entity for imposition of monetary penalties from the officers in default. In case of fraudulent activities/actions, provisions for recovery and disgorgement have been included.
(xix) Levy of additional fee in a non-discretionary manner for procedural offences, such as late filing of statutory documents, to be enabled through rules. Defaults of procedural nature to be penalized by levy of monetary penalties by the Registrars of Companies. The appeals against such orders of Registrars of Companies to lie with suitably designated higher authorities.
(xx) Special Courts to deal with offences under the Bill. Company matters such as mergers and amalgamations, reduction of capital, insolvency including rehabilitation, liquidations and winding up are proposed to be addressed by the National Company Law Tribunal/ National Company Law Appellate Tribunal.
As per PIB Press Release, The Union Cabinet today (27th May-09) gave its approval for introduction of the Companies Bill, 2008 in the Parliament to replace the Companies Act, 1956, the existing statute for regulation of companies in the country and considered to be in need of comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally.
The Ministry of Corporate Affairs took up a comprehensive revision of the Companies Act, 1956 (the Act) in 2004 keeping in view that not only had the number of companies in India expanded from about 30,000 in 1956 to nearly 7 lakhs, Indian companies were also mobilizing resources at a scale unimaginable even a decade ago, continuously entering into and bringing new activities into the fold of the Indian economy. In doing so, they were emerging internationally as efficient providers of a wide range of goods and services while increasing employment opportunities at home. At the same time, the increasing number of options and avenues for international business, trade and capital flows had imposed a requirement not only for harnessing entrepreneurial and economic resources efficiently but also to be competitive in attracting investment for growth. These developments necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner.
2. Earlier, a Bill called Companies (Amendment) Bill, 2003 had been introduced by M/o Corporate Affairs (MCA) (then Department of Company Affairs) in the Rajya Sabha on 7.5.2003. Later on, a large number of changes were found to be necessary in the Bill. A decision was, therefore, taken to carry out a comprehensive review of the Companies Act, 1956 and to introduce a new Companies Bill for the consideration of the Parliament.
3. The review and redrafting of the Companies Act, 1956 was taken up by the Ministry of Corporate Affairs on the basis of a detailed consultative process. A `Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th August, 2004. The inputs received were put to a detailed examination in the Ministry. The Government also constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advise on new Companies Bill. The Committee submitted its report to the Government on 31st May 2005. Detailed consultations were also taken up with various Ministries, Departments and Government Regulators. The Bill was thereafter drafted in consultation with the Legislative Department of the Central Government.
4. The Companies Bill, 2008 seeks to enable the corporate sector in India to operate in a regulatory environment of best international practices that fosters entrepreneurship, investment and growth and provides for :-
(i) The basic principles for all aspects of internal governance of corporate entities and a framework for their regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive, legal framework administered by the Central Government. In doing so, the Bill also harmonizes the Company law framework with the imperative of specialized sectoral regulation
(ii) Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes and decisions by shareholder control. It also provides for shares with differential voting rights to be done away with and valuation of non-cash considerations for allotment of shares through independent valuers.
(iii) Easy transition of companies operating under the Companies Act, 1956, to the new framework as also from one type of company to another.
(iv) A new entity in the form of One-Person Company (OPC) while empowering Government to provide a simpler compliance regime for small companies. Retains the concept of Producer Companies, while providing a more stringent regime for not-for–profit companies to check misuse. No restriction proposed on the number of subsidiary companies that a company may have, subject to disclosure in respect of their relationship and transactions/dealings between them.
(iv) Application of the successful e-Governance initiative of the Ministry of Corporate Affairs (MCA-21) to all the processes involved in meeting compliance obligations. Company processes, also to be enabled to be carried out through electronic mode. The proposed e-Governance regime is intended to provide for ease of operation for filing and access to corporate data over the internet to all stakeholders, on round the clock basis.
(v) Speedy incorporation process, with detailed declarations/ disclosures about the promoters, directors etc. at the time of incorporation itself. Every company director would be required to acquire a unique Directors identification number.
(vi) Facilitates joint ventures and relaxes restrictions limiting the number of partners in entities such as partnership firms, banking companies etc. to a maximum 100 with no ceiling as to professions regulated by Special Acts.
(vii) Duties and liabilities of the directors and for every company to have at least one director resident in India. The Bill also provides for independent directors to be appointed on the Boards of such companies as may be prescribed, along with attributes determining independence. The requirement to appoint independent directors, where applicable, is a minimum of 33% of the total number of directors.
(ix) Statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company Secretary as Key Managerial Personnel (KMP).
(x) Companies not to be allowed to raise deposits from the public except on the basis of permission available to them through other Special Acts. The Bill recognizes insider trading by company directors/KMPs as an offence with criminal liability.
(xi) Recognition of both accounting and auditing standards. The role, rights and duties of the auditors defined as to maintain integrity and independence of the audit process. Consolidation of financial statements of subsidiaries with those of holding companies is proposed to be made mandatory.
(xii) A single forum for approval of mergers and acquisitions, along with concept of deemed approval in certain situations.
(xiii) A separate framework for enabling fair valuations in companies for various purposes. Appointment of valuers is proposed to be made by audit committees.
(xiii) Claim of an investor over a dividend or a security not claimed for more than a period of seven years not being extinguished, and Investor Education and Protection Fund (IEPF) to be administered by a statutory Authority.
(xv) Shareholders Associations/Group of Shareholders to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and ‘Class Action Suits’. (xvi) A revised framework for regulation of insolvency, including rehabilitation, winding up and liquidation of companies with the process to be completed in a time bound manner. Incorporates international best practices based on the models suggested by the United Nations Commission on International Trade Law (UNCITRAL).
(xvii) Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to entitlements to draw money in a situation of insolvency.
(xviii) A more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum quantum of penalty for each offence with suitable deterrence for repeat offences. Company is identified as a separate entity for imposition of monetary penalties from the officers in default. In case of fraudulent activities/actions, provisions for recovery and disgorgement have been included.
(xix) Levy of additional fee in a non-discretionary manner for procedural offences, such as late filing of statutory documents, to be enabled through rules. Defaults of procedural nature to be penalized by levy of monetary penalties by the Registrars of Companies. The appeals against such orders of Registrars of Companies to lie with suitably designated higher authorities.
(xx) Special Courts to deal with offences under the Bill. Company matters such as mergers and amalgamations, reduction of capital, insolvency including rehabilitation, liquidations and winding up are proposed to be addressed by the National Company Law Tribunal/ National Company Law Appellate Tribunal.
FBT Credit
Under the provisions of the Income tax Act, the employer is required to pay FBT on the benefit arising on allotment of shares made under an ESOP to its employees.
As per the Central Board of Direct Taxes (‘CBDT’) guidelines, FBT is a surrogate tax on the employer. As such, the FBT paid by the employer in respect of an expatriate employee based in India and subsequently recovered from him, effectively becomes the employee’s cost burden. In a way therefore, FBT can be compared with the extant withholding tax provisions, wherein the employer is required to withhold tax on payments made to employees that comprise of income taxable under the Act.
However, the apparent difference in FBT provisions is that the benefit derived on allotment of shares by the employer to the employees, is currently, not taxable in the hands of the employees. Hence, it is challenging to term the amount recovered by the employer from the employee, as “income tax”.
CBDT ESOP’s guidelines (vide Circular No 9 dated December 20, 2007) prescribe that it will be possible for the expatriate employee to claim credit of such amount on account of shares allotted or transferred under ESOPs by the employer in India. For this purpose, even though no specific form has been prescribed, the employer will have to issue a certificate certifying the amount recovered from the employee without any corresponding disclosures in his return of income.
In India, the tax on such ESOP benefits is paid by the employer, but in many foreign countries the expatriate employees themselves are liable to pay tax on the benefit arising. With different taxpayers, the expatriate employee would have difficulty in claiming credit of such tax in his home country.
Besides, in most of the tax treaties that India has signed, the term ‘tax’ is defined to mean “income tax including surcharge thereon”. There are certain treaties, which cover identical or substantially similar taxes in the definition of the term of ‘tax’. But, none of the treaties specifically cover FBT. Hence, this could lead to a situation where the foreign country may not allow the credit for amount recovered from the expatriate employee in India against taxes actually payable by them.
Then, the question that arises is whether the foreign employer who has paid FBT on ESOPs can claim credit in respect of the FBT paid in India against income tax payable in his own country. Here too, the situation is no different, as the foreign employer will encounter a similar problem, given the non-inclusion of the term FBT in the definition of ‘tax’ in treaties. Hence, it would be difficult for the employer to claim credit for FBT paid in their country of residence. Interestingly, even in the tax treaties, which were recently entered by India with some countries like Iceland and Kuwait, FBT has not been included in the meaning of the term ‘tax’. Given the above uncertainties, perhaps there is an urgent need for proper clarification by the tax authorities on how to deal with the issue surrounding FBT credits, both for employees as well as for the employers
As per the Central Board of Direct Taxes (‘CBDT’) guidelines, FBT is a surrogate tax on the employer. As such, the FBT paid by the employer in respect of an expatriate employee based in India and subsequently recovered from him, effectively becomes the employee’s cost burden. In a way therefore, FBT can be compared with the extant withholding tax provisions, wherein the employer is required to withhold tax on payments made to employees that comprise of income taxable under the Act.
However, the apparent difference in FBT provisions is that the benefit derived on allotment of shares by the employer to the employees, is currently, not taxable in the hands of the employees. Hence, it is challenging to term the amount recovered by the employer from the employee, as “income tax”.
CBDT ESOP’s guidelines (vide Circular No 9 dated December 20, 2007) prescribe that it will be possible for the expatriate employee to claim credit of such amount on account of shares allotted or transferred under ESOPs by the employer in India. For this purpose, even though no specific form has been prescribed, the employer will have to issue a certificate certifying the amount recovered from the employee without any corresponding disclosures in his return of income.
In India, the tax on such ESOP benefits is paid by the employer, but in many foreign countries the expatriate employees themselves are liable to pay tax on the benefit arising. With different taxpayers, the expatriate employee would have difficulty in claiming credit of such tax in his home country.
Besides, in most of the tax treaties that India has signed, the term ‘tax’ is defined to mean “income tax including surcharge thereon”. There are certain treaties, which cover identical or substantially similar taxes in the definition of the term of ‘tax’. But, none of the treaties specifically cover FBT. Hence, this could lead to a situation where the foreign country may not allow the credit for amount recovered from the expatriate employee in India against taxes actually payable by them.
Then, the question that arises is whether the foreign employer who has paid FBT on ESOPs can claim credit in respect of the FBT paid in India against income tax payable in his own country. Here too, the situation is no different, as the foreign employer will encounter a similar problem, given the non-inclusion of the term FBT in the definition of ‘tax’ in treaties. Hence, it would be difficult for the employer to claim credit for FBT paid in their country of residence. Interestingly, even in the tax treaties, which were recently entered by India with some countries like Iceland and Kuwait, FBT has not been included in the meaning of the term ‘tax’. Given the above uncertainties, perhaps there is an urgent need for proper clarification by the tax authorities on how to deal with the issue surrounding FBT credits, both for employees as well as for the employers
Stamp paper has no validity period
Brief: According to a recent Supreme Court judgement dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr, THE STAMP PAPERS DO NOT HAVE ANY EXPIRY PERIOD.
Citation: Thiruvengada Pillai Vs Navaneethammal and Anr.
Judgment:
According to a recent Supreme Court judgment dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr, the stamp papers do not have any expiry period. Relevant extract from SC Judgment is reproduced herein below:
"The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper. Section 54 merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector provided it was purchased within the period of six months next preceding the date on which it was so surrendered. The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months.
Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document
Citation: Thiruvengada Pillai Vs Navaneethammal and Anr.
Judgment:
According to a recent Supreme Court judgment dated 19/02/2008 in the case of Thiruvengada Pillai Vs Navaneethammal and Anr, the stamp papers do not have any expiry period. Relevant extract from SC Judgment is reproduced herein below:
"The Indian Stamp Act, 1899 nowhere prescribes any expiry date for use of a stamp paper. Section 54 merely provides that a person possessing a stamp paper for which he has no immediate use (which is not spoiled or rendered unfit or useless), can seek refund of the value thereof by surrendering such stamp paper to the Collector provided it was purchased within the period of six months next preceding the date on which it was so surrendered. The stipulation of the period of six months prescribed in section 54 is only for the purpose of seeking refund of the value of the unused stamp paper, and not for use of the stamp paper. Section 54 does not require the person who has purchased a stamp paper, to use it within six months.
Therefore, there is no impediment for a stamp paper purchased more than six months prior to the proposed date of execution, being used for a document
Highvalue Cheque Limit increased to 5 Lakh
One lakh rupees is no longer considered ‘high value’ in banking parlance. Until recently, a cheque amounting to over a lakh was considered high value and would be swiftly cleared on the same day itself, if deposited before 11 am. Now that a lakh is no longer what it used to be, although it can still buy you a car, the Reserve Bank of India has raised the bar.
As of May 2, a cheque will have to be above Rs 5 lakh, and after August 1, above Rs 10 lakh for it to qualify as ‘high value’. From November 1, there will be no high value clearing. For same-day clearance, banks are advising their customers to fill in a special form and use RTGF (Real Time Gross Settlement) or NEFT (National Electronic Funds Transfer).
“The idea is to facilitate easier transactions by getting into electronic clearing,” says a RBI spokesperson. “Earlier, we made the transfer of amounts over Rs 1 crore mandatory through electronic clearing. We are gradually moving towards all transactions being cleared electronically.”
“As a retail investor, you should make sure your broker and your financial advisor both have your RTGF or NEFT number (the eleven digit number printed on your check) so that you can be sure that the transfer of money is quick,” says wealth manager Sujata Kabraji. “From experience, I have found a glitch in using RTGF because the transfer takes place directly and you have no proof that the money has been credited until you check your bank statement.”
As of May 2, a cheque will have to be above Rs 5 lakh, and after August 1, above Rs 10 lakh for it to qualify as ‘high value’. From November 1, there will be no high value clearing. For same-day clearance, banks are advising their customers to fill in a special form and use RTGF (Real Time Gross Settlement) or NEFT (National Electronic Funds Transfer).
“The idea is to facilitate easier transactions by getting into electronic clearing,” says a RBI spokesperson. “Earlier, we made the transfer of amounts over Rs 1 crore mandatory through electronic clearing. We are gradually moving towards all transactions being cleared electronically.”
“As a retail investor, you should make sure your broker and your financial advisor both have your RTGF or NEFT number (the eleven digit number printed on your check) so that you can be sure that the transfer of money is quick,” says wealth manager Sujata Kabraji. “From experience, I have found a glitch in using RTGF because the transfer takes place directly and you have no proof that the money has been credited until you check your bank statement.”
Estimated expenditure towards warranty is allowable u/s 37 (1): SC
Rotork Controls vs. CIT (Supreme Court)
The assessee sold valve actuators. At the time of sale, the assessee provided standard warranty that if the product was defective within the stated period, the product would be rectified or replaced free of charge. For AY 1991-92, the assessee made a provision for warranty at Rs.10,18,800 at the rate of 1.5% of the turnover. As the actual expenditure was only Rs. 5,18,554, the excess provision of Rs.5,00,246 was reversed and only the net provision was claimed. The Tribunal allowed the claim on the basis that the provision had been consistently made and on a realistic manner. The High Court reversed the Tribunal on the basis that the liability was contingent and not allowable u/s 37 (1). HELD, reversing the High Court that:
(1) A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized;
(2) A Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits;
(3) A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole;
(4) In the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction u/s 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation;
(5) On facts, the assessee has been manufacturing and selling Valve Actuators in large numbers since 1983-84 onwards. Statistical data indicates that every year some Actuators are found to be defective. The data over the years also indicates that being sophisticated item no customer is prepared to buy the Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty was allowable.
The assessee sold valve actuators. At the time of sale, the assessee provided standard warranty that if the product was defective within the stated period, the product would be rectified or replaced free of charge. For AY 1991-92, the assessee made a provision for warranty at Rs.10,18,800 at the rate of 1.5% of the turnover. As the actual expenditure was only Rs. 5,18,554, the excess provision of Rs.5,00,246 was reversed and only the net provision was claimed. The Tribunal allowed the claim on the basis that the provision had been consistently made and on a realistic manner. The High Court reversed the Tribunal on the basis that the liability was contingent and not allowable u/s 37 (1). HELD, reversing the High Court that:
(1) A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized;
(2) A Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits;
(3) A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole;
(4) In the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction u/s 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation;
(5) On facts, the assessee has been manufacturing and selling Valve Actuators in large numbers since 1983-84 onwards. Statistical data indicates that every year some Actuators are found to be defective. The data over the years also indicates that being sophisticated item no customer is prepared to buy the Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product and a reliable estimate of the expenditure towards such warranty was allowable.
Now Expect Income Tax Refund in Four Months
Individual and small corporate taxpayers will get income or corporate tax refunds in four months, with the refund banker scheme spreading across the country soon. The refunds, arising out of tax payments and TDS collections, usually take more than a year to reach the average taxpayer.
“Tax and TDS refunds will now reach the individual and small (corporate) taxpayers in about four months (by August 2009). The refund banker scheme may also be implemented across the country,” a senior Finance Ministry official said.
Taxpayers who have filed their returns for the assessment year 2008-09 should now write to their area Income-Tax Assessment Officers quoting their magnetic ink character recognition (MICR) codes (used in the banking industry to facilitate cheque processing) and vital bank account details.
This will help the department to send refunds quickly in any part of the country, the official added. Officials in the Income-Tax department also added that fast and quick refunds have been made possible this time as the department has finished the process of “data migration” to its central servers from its offices across the country
“Tax and TDS refunds will now reach the individual and small (corporate) taxpayers in about four months (by August 2009). The refund banker scheme may also be implemented across the country,” a senior Finance Ministry official said.
Taxpayers who have filed their returns for the assessment year 2008-09 should now write to their area Income-Tax Assessment Officers quoting their magnetic ink character recognition (MICR) codes (used in the banking industry to facilitate cheque processing) and vital bank account details.
This will help the department to send refunds quickly in any part of the country, the official added. Officials in the Income-Tax department also added that fast and quick refunds have been made possible this time as the department has finished the process of “data migration” to its central servers from its offices across the country
Direct Taxes May Come Down
Direct tax rates may be tinkered by new government that may present its first budget later next month, according to a study. This may be in line with changed taxation policies followed by most governments worldwide to beat slowdown and recession that set in following global financial turmoil.
In February this year, when stand-in finance minister Pranab Mukherjee presented the interim budget, he did not make any changes in either corporate or individual tax rates.
Even in the stimulus packages, India concentrated on increased government spending and indirect tax rate cuts. In this scenario, tax measures will assume greater significance for the next government, Ernst & Young (E&Y) said on Monday in a report on tax trends in fiscal stimulus packages across the world.
“The new government would do well to introduce measures such as providing for carry back of losses, possible reduction in corporate and personal tax rates—perhaps by doing away with surcharge, accelerated bonus depreciation for new plant and machinery, among others. Such measures will accelerate investments, boost productivity and employment,” says Satya Poddar, partner, E&Y.
Other analysts, when contacted by Financial Chronicle to get their views on tax policy of the next government, said a lot would depend on which political parties are going to constitute the new government.
Pratik Jain, executive director, KPMG, said though the tax policy would be driven by the new government’s focus, every government would like to align the existing tax rates if the goods and services tax has to be introduced by 2010.
“Depending on the prevailing situation, the government may consider increasing the service tax rate, while excise duty may continue at the same rate till economy revives.”
Rahul Garg, executive director, Pricewa-terhouseCoo pers, said, “Cut in tax rates or change in tax slabs does not lead to more demand as people prefer to save rather than spend and create demand. The government would rather provide money through the monetary policy. It cannot compromise on tax collections, as it needs money for immediate funding of infrastructure projects.” .
Poddar said the depreciation rates in India are very restrictive and the government could have used this opportunity to increase the depreciation rate. Like in many nations, India could have provided tax incentives to equipment and technology used in promoting green energy, he added.
In February this year, when stand-in finance minister Pranab Mukherjee presented the interim budget, he did not make any changes in either corporate or individual tax rates.
Even in the stimulus packages, India concentrated on increased government spending and indirect tax rate cuts. In this scenario, tax measures will assume greater significance for the next government, Ernst & Young (E&Y) said on Monday in a report on tax trends in fiscal stimulus packages across the world.
“The new government would do well to introduce measures such as providing for carry back of losses, possible reduction in corporate and personal tax rates—perhaps by doing away with surcharge, accelerated bonus depreciation for new plant and machinery, among others. Such measures will accelerate investments, boost productivity and employment,” says Satya Poddar, partner, E&Y.
Other analysts, when contacted by Financial Chronicle to get their views on tax policy of the next government, said a lot would depend on which political parties are going to constitute the new government.
Pratik Jain, executive director, KPMG, said though the tax policy would be driven by the new government’s focus, every government would like to align the existing tax rates if the goods and services tax has to be introduced by 2010.
“Depending on the prevailing situation, the government may consider increasing the service tax rate, while excise duty may continue at the same rate till economy revives.”
Rahul Garg, executive director, Pricewa-terhouseCoo pers, said, “Cut in tax rates or change in tax slabs does not lead to more demand as people prefer to save rather than spend and create demand. The government would rather provide money through the monetary policy. It cannot compromise on tax collections, as it needs money for immediate funding of infrastructure projects.” .
Poddar said the depreciation rates in India are very restrictive and the government could have used this opportunity to increase the depreciation rate. Like in many nations, India could have provided tax incentives to equipment and technology used in promoting green energy, he added.
CBDT postponed payment of TDS in form No. 17 to 1st July 2009
No.402/92/2006- MC (11 of 2009)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
PRESS RELEASE
The Central Board of Direct Taxes have decided to defer the implementation of Notification No.31/2009 dated 25.3.2009 amending or substituting Rules 30, 31, 31A and 31AA of the Income Tax Rules, 1962. The amended / substituted Rules will now come into effect on 1st July 2009 instead of 1st April 2009.
Tax deductors / collectors may continue to deposit TDS / TCS tax and file TDS / TCS returns as per the pre-amended provisions in the interim period.
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
PRESS RELEASE
The Central Board of Direct Taxes have decided to defer the implementation of Notification No.31/2009 dated 25.3.2009 amending or substituting Rules 30, 31, 31A and 31AA of the Income Tax Rules, 1962. The amended / substituted Rules will now come into effect on 1st July 2009 instead of 1st April 2009.
Tax deductors / collectors may continue to deposit TDS / TCS tax and file TDS / TCS returns as per the pre-amended provisions in the interim period.
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