[aaykarbhavan] Business standard news and legal digest updates 28-1-2013

Nature of service determines its purpose

The Consumer Protection Act excludes from its purview disputes which relate to a commercial purpose. The only exception is commercial transactions which help buyers earn their livelihood. So, traders and business houses often try to camouflage a dispute and file a consumer complaint. This is done to save on court fees and get faster justice. But, this is not permissible. What exactly is meant by the term "commercial purpose" and " livelihood"? These terms are neither defined under the Consumer Protection Act or under the Rules. Consequently, there are times when athin line of distinction is drawn between commercial purpose and commercial activity. Commercial purpose is considered to be one where the goods or services are directly involved in generating profit. In contrast, commercial activity is considered to be any other business activity which does not directly result in profit- making. When this distinction is drawn, complaints regarding " commercial purpose" are excluded but complaints regarding " commercial activities" are considered maintainable under the Consumer Protection Act. Since the distinction is very fine, it results in a lot of confusion, and there are conflicting views and judgements. Puran Murti Education Society in Kami Village at Sonepat in Haryana had a dispute regarding electricity supply. It filed a consumer complaint before the Sonepat District Forum against the electricity supply board. The District Forum allowed the complaint and granted relief to the Society. The electricity board appealed against this order to the Haryana State Commission, which set aside the order on the sole ground that the education society could not be termed a consumer under the Consumer Protection Act. The State Commission arrived at this conclusion because the connection provided was a nondomestic one, installed at the college run by the Society. The Society approached the National Commission. The Society argued the State Commissions order was incorrect because it was an educational institution imparting knowledge to students. Electricity was not being consumed for the manufacture of any product meant for sale in the market but for providing facilities/ benefits to students. The Society claimed the electricity consumption was thus, for a social and benevolent objective, not for commercial purpose. The Society also claimed the electrical connection was not a commercial connection, but a non- domestic one. It argued the term ' non domestic' is not the same as 'commercial' and hence, the State Commission had erred in rejecting the complaint. Rejecting these arguments, the National Commission observed the education society was running an engineering college. The non- domestic connection was for supply of electricity to this college. There was no evidence to show the college was being run for a purely philanthropic or charitable purpose. When questioned, the Society admitted it was not providing free education but charging its students. In view of this, the bench of Justice JM Malik and Vinay Kumar held the connection was for a commercial purpose, though it was termed a non- domestic connection. Accordingly, it upheld the order of the State Commission holding that it was not a consumer dispute and the complaint was not maintainable under the Consumer Protection Act. The law on the subject is not clear and is based on judicial interpretations which differ from time to time. In the present interpretation, disputes regarding insurance claims filed by business establishments are maintainable, as insurance is not for profit but for indemnification of loss. Likewise, livelihood has been interpreted as a person applying goods or services for his own use to generate income for his sustenance. Thus, generally, when there is large scale activity, or when there are persons employed in business, it would not be treated as a consumer dispute. The author is a consumer activist CONSUMER IS KING JEHANGIR GAI Traders and business houses often try to camouflage a dispute and file aconsumer complaint

 

Tribunal's transfer pricing blowfor MNCs NSUNDARESHA SUBRAMANIAN New Delhi, 27 January In a severe blow to multinational corporations ( MNCs) operating in India, a special bench of the Income Tax Appellate Tribunal ( ITAT) has ruled that a significant portion of advertising, marketing and promotional ( AMP) expenses incurred by their Indian arms to promote the brand and trademarks of the MNC will be taxable in India. In a majority decision, the bench ruled in favour of the tax department that the taxpayer incurring AMP expenses in excess of amounts spent by comparable companies ought to have been compensated for creation or enhancement of such brand by its associated enterprise ( AE), which owns the brand. The decision will be binding on other division benches of the tribunal unless overruled by a high court. The tribunal invoked the retrospective amendment to Section 92CA( 2B) inserted by the Finance Act, 2012, effective from June 1, 2002, which grants powers to the transfer pricing officer to look into the transactions that are not reported by the taxpayer and which come to his notice during the course of assessment proceedings. It also upheld the usage of the Bright Line test, which uses the expenses incurred by comparable companies, to decide arms' length pricing. The ruling came on an appeal by LG Electronics, which faced transfer pricing adjustments of ₹ 162 crore for assessment year 2007- 08. However, 14 other Indian arms of MNCs also argued as " interveners" against the decision of the transfer pricing officer, which was earlier upheld by a dispute resolution panel. Pepsi Foods, Maruti Suzuki, Glaxosmithkline, Goodyear India, Bausch & Lomb, Amadeus, Canon, Fujifilm, Star India, Sony, Haier Telecom, Haier Appliances, LVMH Watch and Jewellery and Daikin Airconditioning also faced transfer pricing adjustments on excessive AMP. Of these 15 entities ( including LG), only three were listed, all of which fell sharply following the decision on January 23. Maruti shares fell about four per cent from ₹ 1,590- levels on January 22 to ₹ 1,530 on January 24. However, it recovered on Friday. Goodyear shares fell nearly four per cent from ₹ 328 to ₹ 316 between January 22 and January 25. Glaxo fell from ₹ 3,780 to ₹ 3,766. In the LG Electronics case, the transfer pricing officer observed that the assessee's AMP expenses were 3.85 per cent of sales at ₹ 6,553.36 crore. The officer considered similar expenses incurred by Videocon Appliances ( 0.12 per cent) and Whirlpool of India (2.66 per cent) and computed their arithmetic mean at 1.39 per cent. It was opined that the assessee was promoting LG brand owned by its foreign AE and hence, should have been adequately compensated by the foreign AE. Applying the Bright Line test, the transfer pricing officer held that expenses up to 1.39 per cent of sales should be considered as having been incurred for the assessee's own business and the remaining, at 2.46 per cent (3.85 per cent- 1.39 per cent) on brand promotion of the foreign AE. Such excess at ₹ 161.22 crore was proposed as atransfer pricing adjustment on account of AMP expenses for brand building. According to the tribunal, incurring proportionately higher AMP expenses coupled with the advertisement of brand or logo of the AE, gives inference of the existence of some informal or implied agreement. Also, the fact that the taxpayer's marketing strategy was under the directions, guidance and control of the parent implied that it had full control over the AMP expenses of the taxpayer. The tribunal thus, held that there is atransaction between the taxpayer and the AE under which the taxpayer incurred AMP expenses towards promotion of brand, which is legally owned by the AE. "This ruling of special bench has far reaching consequences on MNCs operating in India. It is now imperative for such MNCs to review the current policies and arrangements and be geared up for more challenges from Indian transfer pricing authorities," alawyer in consulting firm SKP said. Experts said it is not easy to pick the right comparables, which may skew the results of the Bright Line test. Samir Gandhi, Deloitte Haskins and Sells, said, "Determination of whether there is a transaction of promotion of brand legally owned by a foreign enterprise is a factual excercise. One is required to consider what an independent enterprise behaving in a commercially rational manner would incur such extent of AMP expenses as the taxpayer." The application of Bright Line test depends on several factors, e. g., whether or not the brand is an established one. For example, a newly introduced brand normally will require higher AMP expenses than an established brand. However, SKP said not all is lost for the taxpayer. According to the SB, what constitutes AMP has to be decided on facts of each case and cannot include expenses in connection with sales promotion. It also held that there is aneed to look at the right comparables for the application of the Bright Line test. The Central Board of Direct Taxes should issue guidelines with illustrations on this issue after consultations with all stakeholders — OECD discussion draft on intangibles is a good example to resolve the issue to a great extent, said Gandhi of Deloitte. According to the special bench, what constitutes AMP has to be decided on facts of each case and cannot include expenses on sales promotion Rules in favour of tax department in the matter of levy on advertising and marketing expenses in brand building Key elements in Bright Line test |Identifying proper comparables |Whether the brand is an established one or new |Understanding the market place, consumer preferences and taxpayer business plans |Characterisation of the taxpayer - whether entrepreneur, licensee or distributor |The profit margin earned by the taxpayer against that of comparables Source: Deloitte |I- T dept had raised adjustments of ₹ 161 cr on LG's brand building exercise |15 MNCs, including LG, were fighting the I- T dept in the case |Invokes retrospective amendments to uphold transfer pricing officer's powers |Approves usage of Bright Line test |Decision binding on other tribunals CALL FOR ADJUSTMENTS The ruling came on an appeal by LG Electronics, which faced transfer pricing adjustments of over ₹ 162 crore for AY 2007- 08 LEGAL DIGEST Depreciation of leased vehicles The Supreme Court ruled last week that a leasing company is entitled to the benefit of depreciation under Section 32 of the Income Tax Act for vehicles it had let out to its customers. In this batch of cases involving non- banking finance companies, the assessees bought vehicles from manufacturers and leased them out to its customers as part of business. The lessees were registered as owners under the Motor Vehicles Act. When the companies claimed depreciation, the revenue authorities denied it on the ground that they were neither owners of the vehicles nor users. The dispute travelled to various appellate forums. In the lead case, ICDS Ltd vs Commissioner of IT, the Karnataka high court agreed with the revenue department. Reversing this view, the Supreme Court stated that the leasing firm was the owner as well as the user. The registration in the name of the lessee was only to fulfil the requirement of the Motor Vehicles Act. Otherwise, the leasing firms fulfilled the requirements of the IT Act, the court said. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> TDS doesn't showtotal income Payment of advance tax by an assessee firm would not by itself amount to disclosure of income. Also, mere deduction of tax at source could not be taken as disclosure of income, the Supreme Court stated last week while allowing the appeal of the revenue authorities in the case, Asst CIT vs AR Enterprises. It set aside the judgment of the Madras high court on this point. The dispute arose when the authorities searched the premises of another firm, AR Mercantile ( P) Ltd and found some documents related to AR Enterprises. Based on that, the department found that AR Enterprises had not filed returns for the income. The assessee stated that it had paid advance tax and it amounted to disclosure of income. The assessing officer did not accept it, but the tribunal did. The high court also agreed with the assessee. Reversing the Supreme Court stated that advance tax and TDS deduction did not amount to disclosure of income. " Since TDS is computed on the estimated income, such deduction cannot result in the disclosure of total income," the judgment said. Similarly, advance tax is also based on estimated income and does not disclose the total income which must be declared in the returns. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Qatar Airways has no immunity A division bench of the Bombay high court has dismissed the appeal of Qatar Airways challenging the demand of Shapoorji Pallonji &Co for dues on the ground that it was a 'foreign state' and permission of the Union Government under Section 86 of the Civil Procedure Code has not been obtained to file a lawsuit. According to Qatar Airways, it is owned and controlled by the State of Qatar and by its ruling family. On that basis it was asserted that it was a " foreign state". Earlier, the Indian company had asked for clarification from the External Affairs Ministry and it had replied that no sanction was necessary to file a suit. Rejecting the airline's argument on the maintainability of the suit, the high court said: "The airline is not a foreign state within the meaning of Section 86( 1). It has a distinct legal personality of its own which finds recognition in the contractual relationships into which it enters. Those contractual relationships occasioned by its business activities in India would be subject to the jurisdiction of a competent court in this country." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Missing arbitration clause The Delhi high court last week appointed a former judge of the court as arbitrator in the dispute between Indeen Bio Power Ltd and Dalkia India Ltd, a subsidiary of a French corporation. There was a contract to set up a mustard residue biomass plant in Rajasthan. The French firm is alleged to have withdrawn from the project midway, starting the dispute. It disputed there was any arbitration clause in the agreement and did not name its arbitrator. Therefore the Indian company moved the high court for appointment of an arbitrator. The high court did so without going into the question whether there was an arbitration clause as the issue has to be determined by the arbitrator, under Section 16 of the Arbitration and Conciliation Act. The judgment said that where the existence or non- existence of arbitration agreement was not clear from exchange of documents between the parties, it was proper for the arbitrator to decide such question. The court's power is administrative in nature. It is initially for the arbitral tribunal to decided its jurisdiction. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> No evidence of tyre cartel The Competition Commission of India has stated that there was no sufficient evidence to show that there was a cartel of major tyre manufacturers, namely Apollo, MRF, J. K. Tyre, Birla, Ceat and their association. The All- India Tyre Dealers Federation had complained that they have been " reeling under the exploitative behaviour of a handful of domestic tyre majors." After investigation by the director general of the commission it stated that " on a superficial basis the industry displays some characteristics of a cartel" but there has been no substantative evidence of it." MJ ANTONY THINKSTOCK

 

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CS A  RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
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CS A  RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai

CONVENOR, CHENNAI WEST STUDY CIRCLE ICSI-SIRC
email csarengarajan@gmail.com

http://www.csarengarajan.blogspot.com

http://companysecretarytalent.blogspot.com/

http://companysecretarybenevolentfund.blogspot.com/

http://csvacancies.blogspot.com/

mobile 093810 11200

CS Benevolent Fund is a collective effort towards extending the much needed financial support to the community of Company Secretaries in times of distress  Let us lend support and join for noble cause.

SHARING KNOWLEDGE SKY IS THE LIMIT

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