LEGAL DIGEST
>No third parties in Railway tribunal
The Supreme Court last week ruled that in a petition against railways
before the Railway Claims Tribunal, third parties cannot intervene
with contractual claims of their own. In this case, a Tamil Nadu sugar
manufacturer demanded from Southern and Eastern Central Railways
~9,46,85,726 together with 12 per cent interest. The sugar
consignments sent to Bihar were delivered improperly to some parties.
Since the goods passed through several railway units, and criminal
cases were involved, Central Railway also wanted to intervene with
three more parties. The tribunal rejected all of them, in the case,
Shree Shyam Agency vs Union of India. It remarked that the Railway
Administration, through those parties, was trying to linger on with
the proceedings and more parties cannot be allowed to intervene. The
Madras high court dismissed their appeal for intervention in the
claims tribunal. On further appeal, the Supreme Court upheld the view
of the courts below. It said: "the tribunal has to inquire into and
determine the claim against the Railway Administration, that is,
whether it is at fault in discharging its responsibilities and not the
inter se disputes between the claimants and third parties."
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Delhi HCto decide Dhabol dispute
The Supreme Court last week remanded to the Delhi High Court the
dispute between Ratnagiri Gas and Power Projects and RDS Projects over
the international bidding for a project to revive the Dhabol power
project. In view of the national importance of the project, the high
court was asked to decide afresh within four months the question of
eligibility of RDS to complete the works and other related questions.
The high court last year had allowed the petition filed by RDS and
quashed the rejection of the company's tender. The high court further
asked Ratnagiri to take a fresh decision in the matter. The Supreme
Court stated that the findings recorded by the high court that the
process of annulment of the tender process or the rejection of the
tender submitted by RDS was vitiated by mala fides was unsustainable.
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Bankmanagerto stand trial
Disciplinary proceedings against a bank officer can be continued even
if he has been posted in another administrative jurisdiction, the
Supreme Court ruled last week in the case, UCO Bank vs Sushil Kumar.
In this case, the Calcutta High Court held that it was only the deputy
general manager who could initiate disciplinary proceedings against
the senior manager as he was under the jurisdiction of the DGM at the
time of committing alleged offences. Since the assistant general
manager initiated proceedings, the high court quashed the charge
sheet, inquiry report and punishment. Setting aside the high court
decision, the Supreme Court stated that the high court committed an
error, and forgot to note that the purpose of the regulations is
"speedy and expeditious disposal of cases with regard to disciplinary
proceedings against erring officials."
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Kerala HCrapped in cheque case
The Supreme Court last week set aside the jail sentence and fine
imposed on a woman who had issued a cheque which was dishonoured for
insufficiency of funds in the account. According to the holder of the
cheque, he had contracted to construct an old age home but the cheque
bounced. The drawer maintained that no amount was due and the cheque
was removed from her custody and it was presented for clearance with a
forged signature. The trial court accepted the explanation. But the
Kerala High Court imposed fine and jail sentence under the Negotiable
Instruments Act. Reversing the decision, the Supreme Court criticised
the high court for interfering in the trial court order, "displaying a
total perversity in its approach." Quashing the proceedings and
sentence in the case, Rev Mother Marykutty vs Reni Kottaram, the
Supreme Court stated that the high court had not examined the
voluminous evidence before the trial court and interfered with the
acquittal without proper reasoning.
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Excise relief forgarmentdesigners
The Delhi High Court last week dismissed the appeal of Commissioner of
Central Excise and accepted the argument of Diwan Sahib Fashions Ltd
and other readymade garment manufacturers ruling that they were not
liable to pay excise duty in respect of garments stitched by them from
fabric either brought by the customers themselves or bought by the
customers from the firm for stitching purpose. The dispute pertained
to whether the tailoring activity of the manufacturers invited excise
duty. The revenue authorities argued that when goods are manufactured
through a job worker, the latter is the manufacturer and not those
supplying raw material. In this case, counsel submitted, the job
worker was the manufacturer and not the customer who gave the fabric.
The manufacturing activity is therefore liable to excise duty. On the
other hand, the manufacturers argued that liability to pay excise duty
is that of those who supply the raw materials. The appellate tribunal
rejected the department's argument. The high court upheld it.
MJ ANTONY
THINKSTOCK
Service tax on branches overseas: Incomplete fiction
VIVEK MISHRA
An earlier article in this series on Negative list regime discussed
the definition of 'service' as applicable in the new service tax
regime. We would like to further explore one of the detailed aspects
of this definition. This is covered by the third explanation to the
definition. This explanation creates the legal fiction that two
establishments of a person located each in the taxable and non-taxable
territory should be treated and taxed as two separate persons. The
deeming provision intends to tax the transactions between two branches
or between head office and branch office, where one of either is
located in the non-taxable territory and the other is located in the
taxable territory.
There could be two aspects of the transactions between two such
establishments, one where there would be inward remittance of funds
into India and the second would be of outward remittance from India.
Let's build a hypothesis to understand the inward remittances received
by a call centre, operating out of India, from a branch located in the
non-taxable territory. If it was not for the fiction created by
explanation 3, the call centre would be providing services to its
client, through a branch office. The transaction would take place
between the call centre and the client. This would be an export of
services, with all the benefits under service tax that are applicable
to exports. However, explanation 3 creates the fiction that the
transactions between the call centre and the branch would be treated
as transactions between two separate persons.
If we put the above service revenue to test under the place of
provision rules the place of provision of the services would fall in
the non-taxable territory and the service would have qualified as an
export. A similar service for a subsidiary company would qualify as an
export of services. However, the service tax rules specifically
provide that services provided between branches of an enterprise would
not be treated as exports, even if they otherwise qualify.
Therefore, the law has a fiction that provides that transactions
between head office and branches will be treated as if they were
between separate persons; however the benefit of treatment as export
of service would be denied to such transactions, even if it were
otherwise available. This seems extremely unfair and results in
'export of taxes', which is against the very basic tenets of any
consumption based taxation regime.
If we go to the second aspect of our original discussion where there
are outward remittances. For example, an Indian company has a branch
overseas and sends money to its branch for day-today expenses which
could be rental, employee salaries, telephone bills, etc.
The service tax law specifically excludes services by employees from
the definition of service. The fiction in explanation 3 of the
definition of service that the branch and head office be treated as
two separate entities does not have the result that the salary
payments would somehow become something else. Therefore, most branches
which are supported by remittances from the head office have salaries
as the largest head of expenses. As per the definition of service,
salaries are not subject to service tax. One could argue that if these
are two different entities, then clearly one entity cannot pay the
salaries of another entity. Therefore, these payments should be
treated as service payments. However, this would be quite a farfetched
conjecture, and create afiction even though one is not provided in the
law.
However, let's take another example. Let's say that a manufacturing
company in India intends to penetrate overseas markets. They open
branches and sell their goods at these branches at a loss as a market
penetration strategy. To make good the losses incurred by the
branches, the manufacturing company remits money to those stores.
Could we, by any stretch of imagination, use this deeming fiction to
conclude that these remittances would take the nature of service
revenue for overseas departmental stores simply because they are
deemed to be two companies? It seems that legislature intends to tax
such payments, yet asingle fiction of treating such establishments as
two distinct persons clearly is not sufficient. To bring these
payments under the tax net perhaps would require aseries of fictions
to be created, specifying how each type of remittance between the
branches would be treated.
However, this would create a parallel taxation regime within the
service tax law that deals with branches in India and head offices
overseas (or vice versa) in quite a different way from the reality of
the transactions that may take place. It is not at all clear whether
this complexity is really required and whether it would achieve some
legitimate objective of the Government. Therefore, even where the
Government has created a comprehensive and simple regime for service
tax, there are some areas that remain unclear, even baffling.
(Supported by Tajinder Singh)
The Author is Leader, Indirect Tax Practice – PwC India pwctls.nd@in.pwc.com
THINKSTOCK
Even where the governmenthas created a comprehensive and simple regime
for service tax, there are some areas thatremain unclear, even
baffling
--
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
http://www.csarengarajan.blogspot.com
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