SC on scope of arbitration proceedings.

Posted on 27 January 2014 by Vineet Kumar

Court

Supreme Court of India

Brief

The bench comprising of Justice A.K. Patnaik and Justice Fakkir Mohamed Ibrahim Kalifulla set aside the order passed by Bombay High Court restraining World Sport Group from proceeding with arbitration against MSM Satellite over dispute of facilitation fee for acquiring broadcast rights of the Indian Premier League (IPL)

Citation

SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] Premium Nafta Products Ltd. v. Fili Shipping Company Ltd. & Ors. [2007] UKHL 40] N. Radhakrishnan v. Maestro Engineers & Ors. [(2010) 1 SCC 72] Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak [AIR 1962 SC 406]

Judgement

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 895 OF 2014

(Arising out of S.L.P. (C) No. 34978 of 2010)

Reportable

World Sport Group (Mauritius) Ltd. … Appellants

Versus

MSM Satellite (Singapore) Pte. Ltd. …

Respondent

A. K. PATNAIK, J.

Leave granted.

J U D G M E N T

2. This is an appeal against the order dated 17.09.2010

of the Division Bench of the Bombay High Court in

Appeal (Lodging) No.534 of 2010.

Facts:

3. The facts very briefly are that on 30.11.2007 the

Board of Control for Cricket in India (for short 'BCCI')

invited tenders for IPL (Indian Premier League) Media

Rights for a period of ten years from 2008 to 2017 on

a worldwide basis. Amongst the tenders submitted,

the bid of World Sports Group India (for short 'WSG

India') was accepted by BCCI. By a pre-bid

arrangement, however, the respondent was to get

the media rights for the sub-continent for the period

from 2008 to 2010. Accordingly, on 21.01.2008 BCCI

and the respondent entered into a Media Rights

License Agreement for the period from 2008 to 2012

for a sum of US$274.50 million. After the first IPL

season, the BCCI terminated the agreement dated

21.01.2008 between BCCI and the respondent for the

Indian sub-continent and commenced negotiations

with WSG India. On 14.03.2009, the respondent filed

a petition under Section 9 of the Arbitration and

Conciliation Act, 1996 (for short 'the Act') against the

BCCI before the Bombay High Court praying for

injunction against the BCCI from acting on the

termination letter dated 14.03.2009 and for

preventing BCCI from granting the rights under the

agreement dated 21.01.2008 to any third party.

Pursuant to the negotiations between BCCI and WSG

India, BCCI entered into an agreement with the

appellant whereunder the media rights for the Indian

sub-continent for the period 2009 to 2017 was

awarded to the appellant for a value of Rs.4,791.08

crores. To operate the media rights in India, the

appellant was required to seek a sub-licensee within

seventy two hours. Though, this time period was

extended twice, the appellant was not able to get a

sub-licensee. Thereafter, the appellant claimed to

have allowed media rights in India to have lapsed

and then facilitated on 25.03.2009, a new Media

Rights License Agreement between the BCCI and the

respondent for the Indian sub-continent for the same

contract value of Rs.4,791.08 crores. BCCI and WSG

India, however, were to continue with the Rest of the

World media rights.

4. On 25.03.2009, the appellant and the respondent

also executed the Deed for Provision of Facilitation

Services (hereinafter referred to as 'the Facilitation

Deed') whereunder the respondent was to pay a sum

of Rs.425 crores to the appellant as facilitation fees.

Clause 9 of the Facilitation Deed dated 25.03.2009

between the appellant and the respondent was titled

'Governing Law' and read as follows:

"9. GOVERNING LAW

This Deed shall be governed by and construed

in accordance with the laws of England and

Wales, without regard to choice of law

principles. All actions or proceedings arising in

connection with, touching upon or relating to

this Deed, the breach thereof and/or the scope

of the provisions of this Section shall be

submitted to the International Chamber of

Commerce (the "Chamber") for final and

binding arbitration under its Rules of

Arbitration, to be held in Singapore, in the

English language before a single arbitrator

who shall be a retired judge with at least ten

years of commercial experience. The

arbitrator shall be selected by mutual

agreement of the Parties, or, if the Parties

cannot agree, then by striking from a list of

arbitrators supplied by the Chamber. If the

Parties are unable to agree on the arbitrator,

the Chamber shall choose one for them. The

arbitration shall be a confidential proceeding,

closed to the general public. The arbitrator

shall assess the cost of the arbitration against

the losing party. In addition, the prevailing

party in any arbitration or legal proceeding

relating to this Deed shall be entitled to all

reasonable expenses (including, without

limitation, reasonable attorney's fees).

Notwithstanding the foregoing, the arbitrator

may require that such fees be borne in such

other manner as the arbitrator determines is

required in order for this arbitration provision

to be enforceable under applicable law. The

arbitrator shall issue a written opinion stating

the essential findings and conclusions upon

which the arbitrator's award is based. The

arbitrator shall have the power to enter

temporary restraining orders and preliminary

and permanent injunctions. No party shall be

entitled or permitted to commence or

maintain any action in a court of law with

respect to any matter in dispute until such

matter shall have been submitted to

arbitration as herein provided and then only

for the enforcement of the arbitrator's award;

provided, however, that prior to the

appointment of the arbitrator or for remedies

beyond the jurisdiction of an arbitrator, at any

time, any party may seek equitable relief in a

court of competent jurisdiction in Singapore,

or such other court that may have jurisdiction

over the Parties, without thereby waiving its

right to arbitration of the dispute or

controversy under this section. THE PARTIES

HEREBY WAIVE THEIR RIGHT TO JURY TRIAL

WITH RESPECT TO ALL CLAIMS AND ISSUES

ARISING UNDER, IN CONNECTION WITH,

TOUCHING UPON OR RELATING TO THIS DEED,

THE BREACH THEREOF AND/OR THE SCOPE OF

THE PROVISIONS OF THIS SECTION, WHETHER

SOUNDING IN CONTRACT OR TORT, AND

INCLUDING ANY CLAIM FOR FRAUDULENT

INDUCEMENT THEREOF."

5. The respondent made three payments totaling

Rs.125 crores to the appellant under the Facilitation Deed

during 2009 and did not make the balance payment.

Instead, on 25.06.2010, the respondent wrote to the

appellant rescinding the Facilitation Deed on the ground

that it was voidable on account of misrepresentation and

fraud. On 25.06.2010, the respondent also filed Suit

No.1869 of 2010 for inter alia a declaration that the

Facilitation Deed was void and for recovery of Rs.125

crores already paid to the appellant. On 28.06.2010, the

appellant acting under Clause 9 of the Facilitation Deed

sent a request for arbitration to ICC Singapore and the ICC

issued a notice to the respondent to file its answer to the

request for arbitration. In the meanwhile, on 30.06.2010,

the respondent filed a second suit, Suit No.1828 of 2010,

before the Bombay High Court against the appellant for

inter alia a declaration that as the Facilitation Deed stood

rescinded, the appellant was not entitled to invoke the

arbitration clause in the Facilitation Deed. The respondent

also filed an application for temporary injunction against

the appellant from continuing with the arbitration

proceedings commenced by the appellant under the aegis

of ICC.

6. On 09.08.2010, the learned Single Judge of the

Bombay High Court dismissed the application for

temporary injunction of the respondent saying that it

would be for the arbitrator to consider whether the

Facilitation Deed was void on account of fraud and

misrepresentation and that the arbitration must,

therefore, proceed and the Court could not intervene in

matters governed by the arbitration clause. The

respondent challenged the order of the learned Single

Judge before the Division Bench of the Bombay High Court

and by the impugned order, the Division Bench of the

Bombay High Court allowed the appeal, set aside the

order of the learned Single Judge and passed an order of

temporary injunction restraining the arbitration by ICC.

Aggrieved, the appellant has filed this appeal.

Contentions on behalf of the appellant:

7. Mr. K.K. Venugopal, learned senior counsel for the

appellant, submitted that the Division Bench of the High

Court failed to appreciate that the Bombay High Court had

no jurisdiction to pass an order of injunction restraining a

foreign seated international arbitration at Singapore

between the parties, who were not residents of India. In

this context, he referred to Clause 9 of the Facilitation

Deed which stipulated that any party may seek equitable

relief in a court of competent jurisdiction in Singapore, or

such other court that may have jurisdiction over the

parties. He submitted that on the principle of Comity of

Courts, the Bombay High Court should have refused to

interfere in the matter and should have allowed the

parties to resolve their dispute through ICC arbitration,

subject to the jurisdiction of the Singapore courts in

accordance with Clause 9 of the Facilitation Deed.

8. Mr. Venugopal next submitted that the Division

Bench of the High Court failed to appreciate that under

Section 45 of the Act, the Court seized of an action in a

matter in respect of which the parties have made an

agreement referred to in Section 44 has to refer the

parties to arbitration, unless it finds that the agreement

referred to in Section 44 is null and void, inoperative or

incapable of being performed. He submitted that the

agreement referred to in Section 44 of the Act is 'an

agreement in writing for arbitration' and, therefore, unless

the Court finds that the agreement in writing for

arbitration is null and void, inoperative or incapable of

being performed, the Court will not entertain a dispute

covered by the arbitration agreement and refer the parties

to the arbitration. In support of this submission, he relied

on the decision of this Court in Chloro Controls India

Private Limited v. Seven Trent Water Purification Inc. &

Ors. [(2013) 1 SCC 641].

9. Mr. Venugopal submitted that the Division Bench of

the High Court, instead of examining whether the

agreement in writing for arbitration was null and void,

inoperative or incapable of being performed, has held that

the entire Facilitation Deed was vitiated by fraud and

misrepresentation and was, therefore, void. He

vehemently submitted that it was for the arbitrator to

decide whether the Facilitation Deed was void on account

of fraud and misrepresentation as has been rightly held by

the learned Single Judge and it was not for the Court to

pronounce on whether the Facilitation Deed was void on

account of fraud and misrepresentation. He referred to

Article 6(4) of the ICC Rules of Arbitration which permits

the Arbitral Tribunal to continue to exercise jurisdiction

and adjudicate the claims even if the main contract is

alleged to be null and void or non-existent because the

arbitration clause is an independent and distinct

agreement. He submitted that this principle of

Kompetenz Kompetenz has been recognized in Section 16

of the Act under which the Arbitral Tribunal has the

competence to rule on its own jurisdiction and on this

point relied on National Insurance Co. Ltd. v. Boghara

Polyfab Pvt. Ltd. [(2009) 1 SCC 267] and Reva Electric Car

Company Private Ltd. v. Green Mobil [(2012) 2 SCC 93].

He submitted that as a corollary to this principle, Courts

have also held that unless the arbitration clause itself,

apart from the underlying contract, is assailed as vitiated

by fraud or misrepresentation, the Arbitral Tribunal will

have jurisdiction to decide all issues including the validity

and scope of the arbitration agreement. He submitted

that in the present case, the arbitration clause itself was

not assailed as vitiated by fraud or misrepresentation. In

support of this argument, he relied on the decision of the

House of Lords in Premium Nafta Products Ltd. v. Fili

Shipping Company Ltd. & Ors. [2007] UKHL 40], the

decision of the Supreme Court of United States in Buckeye

Check Cashing, Inc. v. John Cardegna et al [546 US 440

(2006)] and the decision of this Court in Branch Manager,

Magma Leasing and Finance Ltd. & Anr. v. Potluri

Madhavilata & Anr. [(2009) 10 SCC 103].

10. Mr. Venugopal submitted that the Division Bench of

the High Court relied on the decision in N. Radhakrishnan

v. Maestro Engineers & Ors. [(2010) 1 SCC 72] to hold that

serious allegations of fraud can only be enquired by a

Court and not by an arbitrator, but the Division Bench

failed to appreciate that in N. Radhakrishnan v. Maestro

Engineers & Ors. (supra) this Court relied on Abdul Kadir

Shamsuddin Bubere v. Madhav Prabhakar Oak [AIR 1962

SC 406] in which it was observed that it is only a party

against whom a fraud is alleged who can request the

Court to inquire into the allegations of fraud instead of

allowing the arbitrator to decide on the allegations of

fraud. In the present case, the respondent has alleged

fraud against the appellant and thus it was for the

appellant to make a request to the Court to decide on the

allegations of fraud instead of referring the same to the

arbitrator, and no such request has been made by the

appellant. He further submitted that in any case the

judgment of this Court in N. Radhakrishnan v. Maestro

Engineers & Ors. (supra) was rendered in the context of

domestic arbitration in reference to the provisions of

Section 8 of the Act. He submitted that the language of

Section 45 of the Act, which applies to an international

arbitration, is substantially different from the language of

Section 8 of the Act and it will be clear from the language

of Section 45 of the Act that unless the arbitration

agreement is null and void, inoperative or incapable of

being performed, the parties will have to be referred to

arbitration by the Court. In the present case, the

respondent has not made out that the arbitration

agreement is null and void, inoperative or incapable of

being performed.

11. Mr. Venugopal submitted that the High Court has

taken a view that Clause 9 forecloses an open trial in a

court of law except to the extent permitted therein and

the parties have to necessarily submit themselves to a

confidential proceeding which is closed to the general

public. He submitted that the Bombay High Court thus

appears to have held that Clause 9 is opposed to public

policy and, in particular, Sections 23 and 28 of the Indian

Contract Act, 1872. He submitted that in any case the

arbitration agreement contained in Clause 9 of the

Facilitation Deed cannot be held to be opposed to public

policy and void under Sections 23 and 28 of the Indian

Contract Act, 1872. This will be clear from Exception 1 of

Section 28 of the Indian Contract Act, 1872, which says

that the section shall not render illegal a contract, by

which two or more persons agree that any dispute which

may arise between them in respect of any subject or class

of subjects shall be referred to arbitration and that only

the amount awarded in such arbitration shall be

recoverable in respect of the dispute so referred. He

explained that under the American Law, in a suit for

common law where the value of claim is more than US$20,

the right to jury trial is preserved and this applies even in

relation to claims for breach of contract and for this

reason, the parties made a provision in Clause 9 of the

Facilitation Deed waiving their right to jury trial with

respect to all claims and issues arising under, in

connection with, touching upon or relating to the

Facilitation Deed. He submitted that this provision in

Clause 9 of the Facilitation Deed cannot, therefore, be

held to be opposed to public policy.

12. Mr. Venugopal next submitted that the crux of the

case of the respondent is set out in its letter dated

25.06.2010 to the appellant in which it was alleged that

'in view of the false misrepresentations and fraud played

by WSGM the deed is voidable at the option of our client

and thus our client rescinds the deed with immediate

effect'. In other words, the respondent's case is that it

was induced to enter into the Facilitation Deed on account

of the misrepresentation by the appellant and was led to

believe that it was paying the facilitation fees to the

appellant to allow the rights of the appellant under an

alleged agreement dated 23.03.2009 to lapse, but the

respondent subsequently discovered that there was no

agreement dated 23.03.2009 and the rights of the

appellant had come to an end on 24.03.2009. He

submitted that the appellant has denied these allegations

of the respondent in its affidavit-in-reply filed before the

Bombay High Court and that there was no false

representation and fraud as alleged by the respondent.

He submitted that the Facilitation Deed was executed by

the senior executives of the parties and in the case of

respondent, it was signed by Michael Grindon, President,

International, Sony Picture Television, and the appellant

and the respondent had entered into the Facilitation Deed

after consulting their sports media experts and after a lot

of negotiations. He submitted that in fact a Press Release

was issued by the respondent on 23.04.2010, which will

go to show that there was no misrepresentation and fraud

by the appellant before the Facilitation Deed was signed

by the parties, and thus the entire case of the respondent

that the Facilitation Deed was vitiated by

misrepresentation and fraud is false.

13. Mr. Venugopal finally submitted that it will be clear

from the language of the letter dated 25.06.2010 of the

respondent to the appellant that according to the

respondent the Facilitation Deed was voidable at the

option of the respondent. He submitted that under

Section 45 of the Act, the Court will have to refer the

parties to the arbitration unless it finds that the arbitration

agreement is 'null and void'. He argued that an

agreement which is voidable at the option of one of the

parties is not the same as the agreement which is void

and, therefore, the Division Bench of the High Court

should have referred the parties to arbitration instead of

restraining the arbitration. According to Mr. Venugopal,

this is a fit case in which this Court should set aside the

impugned order of the Division bench of the High Court

and restore the order of the learned Single Judge of the

High Court.

Contentions on behalf of the respondent:

14. In reply, Mr. Gopal Subramanium, learned senior

counsel appearing for the respondent, submitted that

the Division Bench of the Bombay High Court has

rightly restrained the arbitration proceedings under the

aegis of ICC as the Facilitation Deed, which also

contains the arbitration agreement in Clause 9, is void

because of fraud and misrepresentation by the

appellant. He submitted that Section 45 of the Act

makes it clear that the Court will not refer the parties

to arbitration if the arbitration agreement is null and

void, inoperative or incapable of being performed and

as the respondent has taken the plea that the

Facilitation Deed, which contained the arbitration

agreement, is null and void on account of

misrepresentation and fraud, the Court will have to

decide whether the Facilitation Deed including the

arbitration agreement in Clause 9 was void on account

of fraud and misrepresentation by the appellant. He

submitted that the respondent filed the first suit in the

Bombay High Court (Suit No.1869 of 2010) for

declaring the Facilitation Deed as null and void but in

the said suit, the appellant did not file a written

statement and instead issued the notice for arbitration

only to frustrate the first suit and in the circumstances

the respondent was compelled to file the second suit

(Suit No.1828 of 2010) for an injunction restraining the

arbitration.

15. Mr. Subramanium submitted that Section 9 of the

Code of Civil Procedure, 1908 (for short 'the CPC')

confers upon the court jurisdiction to try all civil suits

except suits which are either expressly or impliedly

barred. He submitted that the Bombay High Court,

therefore, had the jurisdiction to try both the first suit

and the second suit and there was no express or

implied bar in Section 45 of the Act restraining the

Bombay High Court to try the first suit and the second

suit. He submitted that in India as well as in England,

Courts have power to issue injunctions to restrain

parties from proceeding with arbitration proceedings in

foreign countries. In support of this submission, he

relied on V.O. Tractoroexport, Moscow v. Tarapore &

Company and Anr. [(1969) 3 SCC 562] and Oil and

Natural Gas Commission v. Western Company of North

America [(1987) 1 SCC 496]. He also relied on Russel

on Arbitration, para 7-056, 7-058, and Claxton

Engineering v. Txm olaj – es gaz Kutao Ktf [2011]

EWHC 345 (COMM.).

16. Mr. Subramanium relying on the decision of this Court

in Chloro Controls India Private Limited v. Seven Trent

Water Purification Inc. & Ors. (supra) submitted that

Section 45 of the Act casts an obligation on the court to

determine the validity of the agreement at the

threshold itself because this is an issue which goes to

the root of the matter and a decision on this issue will

prevent a futile exercise of proceedings before the

arbitrator. He submitted that under Section 45 of the

Act the Court is required to consider not only a

challenge to the arbitration agreement but also a

serious challenge to the substantive contract

containing the arbitration agreement. He cited the

decision of this Court in SMS Tea Estates (P) Ltd. v.

Chandmari Tea Co. (P) Ltd. [(2011) 14 SCC 66] in

support of this argument. He submitted that the

contention on behalf of the appellant that the Court

has to determine only whether the arbitration

agreement contained in the main agreement is void is,

therefore, not correct.

17. Mr. Subramanium next submitted that in cases where

allegations of fraud are prima facie made out, the

judicial trend in India has been to have them

adjudicated by the Court. In this context, he referred

to the decisions of this Court in Abdul Kadir

Shamsuddin Bubere v. Madhav Prabhakar Oak (supra),

Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.

[(1999) 5 SCC 688] and N. Radhakrishnan v. Maestro

Engineers & Ors. (supra). In reply to the submission of

Mr. Venugopal that it was only the parties against

whom the allegations are made who can insist on the

allegations being decided by the Court, Mr.

Subramanium submitted that in the decision of the

Madras High Court in H.G. Oomor Sait v. O Aslam Sait

[(2001) 3 CTC 269 (Mad)] referred to in N.

Radhakrishnan v. Maestro Engineers & Ors. (supra) the

situation was reverse.

18. Mr. Subramanium next submitted that the facts in this

case prima facie establish that a grave fraud was

played by the appellant not only upon the respondent

but also on the BCCI. He argued that the Facilitation

Deed ultimately deals with media rights belonging to

the BCCI and it has been held by this Court in M/s Zee

Tele Films Ltd. & Anr. v. Union of India & Ors. [AIR 2005

SC 2677] that BCCI is a public body. He submitted that

the Division Bench of the Bombay High Court has,

therefore, rightly taken the view that the disputes in

this case cannot be kept outside the purview of the

Indian Courts and if arbitration is allowed to go on

without BCCI, the interest of BCCI will be adversely

affected. He submitted that having regard to the

magnitude of fraud alleged in the present case, the

disputes were incapable of being arbitrated. Relying

on Booz Allen & Hamilton v. SBI Home Finance [(2011)

5 SCC 532], Haryana Telecom Ltd. v. Sterlite Industries

(India) Ltd. (Supra), India Household and Healthcare

Ltd. v. LG Household and Healthcare Ltd. [(2007) 5 SCC

510] and N. Radhakrishnan v. Maestro Engineers &

Ors. (supra), he submitted that such allegations of

fraud can only be inquired into by the court and not by

the arbitrator.

Findings of the Court:

19. The question that we have to decide is whether the

Division Bench of the Bombay High Court could have

passed the order of injunction restraining the arbitration at

Singapore between the parties. As various contentions

have been raised by Mr. Venugopal, learned counsel for

the appellant, in support of the case of the appellant that

the Division Bench of the Bombay High Court could not

have passed the order of injunction restraining the

arbitration at Singapore, we may deal with each of these

contentions separately and record our findings. While

recording our findings, we will also deal with the

submissions made by Mr. Gopal Subramanium on behalf of

respondent in reply to the contentions of Mr. Venugopal.

We will also consider the correctness of the findings of the

Division Bench of the Bombay High Court separately.

20. We are unable to accept the first contention of Mr.

Venugopal that as Clause 9 of the Facilitation Deed

provides that any party may seek equitable relief in a

court of competent jurisdiction in Singapore, or such other

court that may have jurisdiction over the parties, the

Bombay High Court had no jurisdiction to entertain the

suit and restrain the arbitration proceedings at Singapore

because of the principle of Comity of Courts. In Black's

Law Dictionary, 5

Edition, Judicial Comity, has been

explained in the following words:

"Judicial comity. The principle in accordance

with which the courts of one state or

jurisdiction will give effect to the laws and

judicial decisions of another, not as a matter

of obligation, but out of deference and

respect."

Thus, what is meant by the principle of "comity" is that

courts of one state or jurisdiction will give effect to the

laws and judicial decisions of another state or jurisdiction,

not as a matter of obligation but out of deference and

mutual respect. In the present case no decision of a court

of foreign country or no law of a foreign country has been

cited on behalf of the appellant to contend that the courts

in India out of deference to such decision of the foreign

court or foreign law must not assume jurisdiction to

restrain arbitration proceedings at Singapore. On the

other hand, as has been rightly submitted by Mr.

Subramanium, under Section 9 of the CPC, the courts in

India have jurisdiction to try all suits of a civil nature

excepting suits of which cognizance is either expressly or

impliedly barred. Thus, the appropriate civil court in India

has jurisdiction to entertain the suit and pass appropriate

orders in the suit by virtue of Section 9 of the CPC and

Clause 9 of the Facilitation Deed providing that courts in

Singapore or any other court having jurisdiction over the

parties can be approached for equitable relief could not

oust the jurisdiction of the appropriate civil court

conferred by Section 9 of the CPC. We find that in para 64

of the plaint in Suit No.1828 of 2010 filed before the

Bombay High Court by the respondent, it is stated that the

Facilitation Deed in which the arbitration clause is

incorporated came to be executed by the defendant at

Mumbai and the fraudulent inducement on the part of the

defendant resulting in the plaintiff entering into the

Facilitation Deed took place in Mumbai and the rescission

of the Facilitation Deed on the ground that it was induced

by fraud of defendant has also been issued from Mumbai.

Thus, the cause of action for filing the suit arose within the

jurisdiction of the Bombay High Court and the Bombay

High Court had territorial jurisdiction to entertain the suit

under Section 20 of the CPC.

21. Any civil court in India which entertains a suit,

however, has to follow the mandate of the legislature in

Sections 44 and 45 in Chapter I of Part II of the Act, which

are quoted hereinbelow:

"CHAPTER I

NEW YORK CONVENTION AWARDS

44. Definition. In this Chapter, unless the

context otherwise requires, "foreign award"

means an arbitral award on differences

between persons arising out of legal

relationships, whether contractual or not,

considered as commercial under the law in

force in India, made on or after the 11th day of

October, 1960 -

(a) in pursuance of an agreement in writing

for arbitration to which the Convention set

forth in the First Schedule applies, and

(b) in one of such territories as the Central

Government, being satisfied that

reciprocal provisions have been made

may, by notification in the Official

Gazette, declare to be territories to which

the said Convention applies.

45. Power of judicial authority to refer

parties to arbitration.- Notwithstanding

anything contained in Part I or in the Code of

Civil Procedure, a judicial authority, when

seized of an action in a matter in respect of

which the parties have made an agreement

referred to in section 44, shall, at the request

of one of the parties or any person claiming

through or under him, refer the parties to

arbitration, unless it finds that the said

agreement is null and void, inoperative or

incapable of being performed."

The language of Section 45 of the Act quoted above

makes it clear that notwithstanding anything contained in

Part I or in the Code of Civil Procedure, a judicial authority,

when seized of an action in a matter in respect of which

the parties have made an agreement referred to in

Section 44, shall, at the request of one of the parties or

any person claiming through or under him, refer the

parties to arbitration, unless it finds that the said

agreement is null and void, inoperative or incapable of

being performed. Thus, even if, under Section 9 read with

Section 20 of the CPC, the Bombay High Court had the

jurisdiction to entertain the suit, once a request is made

by one of the parties or any person claiming through or

under him to refer the parties to arbitration, the Bombay

High Court was obliged to refer the parties to arbitration

unless it found that the agreement referred to in Section

44 of the Act was null and void, inoperative or incapable of

being performed. In the present case, the appellant may

not have made an application to refer the parties to

arbitration, but Section 45 of the Act does not refer to any

application as such. Instead, it refers to the request of

one of the parties or any person claiming through or under

him to refer the parties to arbitration. In this case, the

appellant may not have made an application to refer the

parties to arbitration at Singapore but has filed an affidavit

in reply to the notice of motion and has stated in

paragraphs 3, 4 and 5 of this affidavit that the defendant

had already invoked the arbitration agreement in the

Facilitation Deed and the arbitration proceedings have

commenced and that the suit was an abuse of the process

of court. The appellant had thus made a request to refer

the parties to arbitration at Singapore which had already

commenced.

22. Section 45 of the Act quoted above also makes it

clear that even where such request is made by a party, it

will not refer the parties to arbitration, if it finds that the

agreement is null and void, inoperative or incapable of

being performed. As the very language of Section 45 of

the Act clarifies the word "agreement" would mean the

agreement referred to in Section 44 of the Act. Clause (a)

of Section 44 of the Act refers to "an agreement in writing

for arbitration to which the Convention set forth in the

First Schedule applies." The First Schedule of the Act sets

out the different Articles of the New York Convention on

the Recognition and Enforcement of Foreign Arbitral

Awards, 1958. Article II of the New York Convention is

extracted hereinbelow:

"1. Each Contracting State shall recognize an

agreement in writing under which the parties

undertake to submit to arbitration all or any

differences which have arisen or which may

arise between them in respect of defined legal

relationship, whether contractual or not,

concerning a subject-matter capable of

settlement by arbitration.

2. The term "agreement in writing" shall

include an arbitral clause in a contract or an

arbitration agreement, signed by the parties

or contained in an exchange of letters or

telegrams.

3. The court of a Contracting State, when

seized of an action in a matter in respect of

which the parties have made an agreement

within the meaning of this article, shall, at the

request of one of the parties, refer the parties

to arbitration, unless it finds that the said

agreement is null and void, inoperative or

incapable of being performed."

It will be clear from clauses 1, 2 and 3 of the New York

Convention as set out in the First Schedule of the Act that

the agreement referred to in Section 44 of the Act is an

agreement in writing under which the parties undertake to

submit to arbitration all or any differences which have

arisen or which may arise between them. Thus, the court

will decline to refer the parties to arbitration only if it finds

that the arbitration agreement is null and void, inoperative

or incapable of being performed.

23. According to Mr. Subramanium, however, as the main

agreement is voidable on account of fraud and

misrepresentation by the appellant, clause 9 of the main

agreement which contains the arbitration agreement in

writing is also null and void. In support of his submission,

he cited the decision of this Court in SMS Tea Estates (P)

Ltd. v. Chandmari Tea Co. (P) Ltd. (supra). Paragraphs 12

and 13 of the judgment of this Court in SMS Tea Estates

(P) Ltd. v. Chandmari Tea Co. (P) Ltd. (supra) are quoted

hereinbelow:

"12. When a contract contains an arbitration

agreement, it is a collateral term relating to

the resolution of disputes, unrelated to the

performance of the contract. It is as if two

contracts—one in regard to the substantive

terms of the main contract and the other

relating to resolution of disputes—had been

rolled into one, for purposes of convenience.

An arbitration clause is therefore an

agreement independent of the other terms of

the contract or the instrument. Resultantly,

even if the contract or its performance is

terminated or comes to an end on account of

repudiation, frustration or breach of contract,

the arbitration agreement would survive for

the purpose of resolution of disputes arising

under or in connection with the contract.

13. Similarly, when an instrument or deed of

transfer (or a document affecting immovable

property) contains an arbitration agreement, it

is a collateral term relating to resolution of

disputes, unrelated to the transfer or

transaction affecting the immovable property.

It is as if two documents—one affecting the

immovable property requiring registration and

the other relating to resolution of disputes

which is not compulsorily registerable—are

rolled into a single instrument. Therefore,

even if a deed of transfer of immovable

property is challenged as not valid or

enforceable, the arbitration agreement would

remain unaffected for the purpose of

resolution of disputes arising with reference to

the deed of transfer."

In the aforesaid case, this Court has held that if the

document containing the main agreement is not found to

be duly stamped, even if it contains arbitration clause, it

cannot be acted upon because Section 35 of the Stamp

Act bars the said document from being acted upon, but if

the document is found to be duly stamped but not

registered though required to be compulsorily registered,

the court can act upon the arbitration agreement which is

a collateral term of the main agreement and is saved by

the proviso to Section 49 of the Registration Act. Thus, as

per the aforesaid decision of this Court in SMS Tea Estates

(P) Ltd. v. Chandmari Tea Co. (P) Ltd. (supra), the court

will have to see in each case whether the arbitration

agreement is also void, unenforceable or inoperative along

with the main agreement or whether the arbitration

agreement stands apart from the main agreement and is

not null and void.

24. The House of Lords has explained this principle of

separability in Premium Nafta Products Ltd. v. Fili Shipping

Company Ltd. & Ors. (supra) thus:

"17. The principle of separability enacted in

section 7 means that the invalidity or

rescission of the main contract does not

necessarily entail the invalidity or rescission

of the arbitration agreement. The arbitration

agreement must be treated as a "distinct

agreement" and can be void or voidable only

on grounds which relate directly to the

arbitration agreement. Of course there may

be cases in which the ground upon which the

main agreement is invalid is identical with

the ground upon which the arbitration

agreement is invalid. For example, if the

main agreement and the arbitration

agreement are contained in the same

document and one of the parties claims that

he never agreed to anything in the document

and that his signature was forged, that will be

an attack on the validity of the arbitration

agreement. But the ground of attack is not

that the main agreement was invalid. It is

that the signature to the arbitration

agreement, as a "distinct agreement", was

forged. Similarly, if a party alleges that

someone who purported to sign as agent on

his behalf had no authority whatever to

conclude any agreement on his behalf, that is

an attack on both the main agreement and

the arbitration agreement.

18. On the other hand, if (as in this case) the

allegation is that the agent exceeded his

authority by entering into a main agreement

in terms which were not authorized or for

improper reasons, that is not necessarily an

attack on the arbitration agreement. It would

have to be shown that whatever the terms of

the main agreement or the reasons for which

the agent concluded it, he would have had no

authority to enter into an arbitration

agreement. Even if the allegation is that

there was no concluded agreement (for

example, that terms of the main agreement

remained to be agreed) that is not

necessarily an attack on the arbitration

agreement. If the arbitration clause has been

agreed, the patties will be presumed to have

intended the question of whether there was a

concluded main agreement to be decided by

arbitration."

25. Applying the principle of separability to the facts of

this case, the respondent rescinded the Facilitation Deed

by notice dated 25.06.2010 to the appellant on the

following grounds stated in the said notice by its lawyers:

"1. Reference is made to the Deed for the

Provison of Facilitation Services dated March

25, 2009 (the "Deed") between World Sport

Group (Mauritius) Limited ("WSGM") and our

client. Under the Deed, which is styled as a

facilitation agreement, our client agreed to

pay WSGM "facilitation" fees for the

"facilitation" services stated thereunder to

have been provided by WSGM. The

underlying consideration for the payments by

our client to WSGM, in fact were the

representation made by WSGM that : (a)

WSGM, had executed in India ("BCCI")

whereunder WSGM had been unfettered

Global Media Rights ("the said rights"),

including the Indian Subcontinent (implying

thereby as natural corollary that the earlier

Media Rights agreement dated March 15,

2009 between WSGM and BCCI along with its

restrictive conditions had been mutually

terminated); (b) WSGM could thereafter

relinquish the Media Rights for the Indian

Subcontinent in favour of our client for said

valuable consideration to enable our client to

enter into a direct agreement with BCCI; (c)

the said rights were subsisting with WSGM at

the time of execution of the Deed, i.e, March

25, 2009; and (d) WSGM had relinquished

those rights in favour of BCCI to enable BCCI

and our client to execute a direct Media Rights

License Agreement for the Indian

Subcontinent.

2. BCCI has recently brought to the attention

of our client that the Global Media Rights

agreement between WSGM and BCCI dated

March 23, 2009 does not exist and in terms of

Clause 13.5 of the agreement dated March 15,

2009, after expiry of the 2

extension the

media rights had automatically reverted to

BCCI at 3 a.m. on March 24, 2009 and thus at

the time of execution of the Deed, WSGM did

not have any rights to relinquish and/or to

facilitate the procurement of India

Subcontinent media rights for the IPL from

BCCI and thus no facilitation services could

have been provided by WSGM.

3. In view of the above, it is evident that the

representation by WSGM that WSGM

relinquished its Indian Subcontinent media

rights for the IPL in favour of our client to pay

the "facilitation" fees under the Deed.

4. Taking cognizance of the same, BCCI's

Governing council at its meeting held at

Mumbai, India on June 25, 2010 appropriately

executed an amendment to Media Rights

License Agreement dated March 25, 2009

between BCCI and our client by deleting, inter

alia, clause 10.4 thereof.

5. On its part, and in view of the false

representations and fraud played by WSGM,

the Deed is voidable at the option of our client

and thus our client rescinds the Deed with

immediate effect."

The ground taken by respondent to rescind the Facilitation

Deed thus is that the appellant did not have any right to

relinquish and/or to facilitate the procurement of Indian

subcontinent media rights for the IPL from BCCI and no

facilitation services could have been provided by the

appellant and therefore the representation by the

appellant that the appellant relinquished its Indian

subcontinent media rights for the IPL in favour of the

respondent for which the appellant had to be paid the

facilitation fee under the deed was false and accordingly

the Facilitation Deed was voidable at the option of the

respondent on account of false representation and fraud.

This ground of challenge to the Facilitation Deed does not

in any manner affect the arbitration agreement contained

in Clause 9 of the Facilitation Deed, which is independent

of and separate from the main Facilitation Deed and does

not get rescinded as void by the letter dated 25.06.2010

of the respondent. The Division Bench of the Bombay

High Court, therefore, could not have refused to refer the

parties to arbitration on the ground that the arbitration

agreement was also void along with the main agreement.

26. Mr. Gopal Subramanium's contention, however, is

also that the arbitration agreement was inoperative or

incapable of being performed as allegations of fraud could

be enquired into by the court and not by the arbitrator.

The authorities on the meaning of the words "inoperative

or incapable of being performed" do not support this

contention of Mr. Subramanium. The words "inoperative

or incapable of being performed" in Section 45 of the Act

have been taken from Article II (3) of the New York

Convention as set out in para 22 of this judgment.

Redfern and Hunter on International Arbitration (Fifth

Edition) published by the Oxford University Press has

explained the meaning of these words "inoperative or

incapable of being performed" used in the New York

Convention at page 148, thus:

"At first sight it is difficult to see a

distinction between the terms

'inoperative' and 'incapable of being

performed'. However, an arbitration

clause is inoperative where it has ceased

to have effect as a result, for example, of

a failure by the parties to comply with a

time limit, or where the parties have by

their conduct impliedly revoked the

arbitration agreement. By contrast, the

expression 'incapable of being

performed' appears to refer to more

practical aspects of the prospective

arbitration proceedings. It applies, for

example, if for some reason it is

impossible to establish the arbitral

tribunal."

27. Albert Jan Van Den Berg in an article titled "The

New York Convention, 1958 – An Overview" published in

the website of ICCA [www.arbitration-

icca.org/media/0/12125884227980/new_york_convention_

of-1958_overview.pdf], referring to Article II(3) of the New

York Convention, states:

"The words "null and void" may be

interpreted as referring to those cases

where the arbitration agreement is

affected by some invalidity right from the

beginning, such as lack of consent due to

misrepresentation, duress, fraud or

undue influence.

The word "inoperative" can be said to

cover those cases where the arbitration

agreement has ceased to have effect,

such as revocation by the parties.

The words "incapable of being

performed" would seem to apply to those

cases where the arbitration cannot be

effectively set into motion. This may

happen where the arbitration clause is

too vaguely worded, or other terms of

the contract contradict the parties'

intention to arbitrate, as in the case of

the so-called co-equal forum selection

clauses. Even in these cases, the courts

interpret the contract provisions in favour

of arbitration."

28. The book 'Recognition and Conferment of Foreign

Arbitral Awards: A Global Commentary on the New York

Convention' by Kronke, Nacimiento, et al.(ed.) (2010) at

page 82 says:

"Most authorities hold that the same

schools of thought and approaches

regarding the term null and void also

apply to the terms inoperative and

incapable of being performed.

Consequently, the majority of authorities

do not interpret these terms uniformly,

resulting in an unfortunate lack of

uniformity. With that caveat, we shall

give an overview of typical examples

where arbitration agreements were held

to be (or not to be) inoperative or

incapable of being performed.

The terms inoperative refers to cases

where the arbitration agreement has

ceased to have effect by the time the

court is asked to refer the parties to

arbitration. For example, the arbitration

agreement ceases to have effect if there

has already been an arbitral award or a

court decision with res judicata effect

concerning the same subject matter and

parties. However, the mere existence of

multiple proceedings is not sufficient to

render the arbitration agreement

inoperative. Additionally, the arbitration

agreement can cease to have effect if

the time limit for initiating the arbitration

or rendering the award has expired,

provided that it was the parties' intent no

longer to be bound by the arbitration

agreement due to the expiration of this

time limit.

Finally, several authorities have held that

the arbitration agreement ceases to have

effect if the parties waive arbitration.

There are many possible ways of waiving

a right to arbitrate. Most commonly, a

party will waive the right to arbitrate if, in

a court proceeding, it fails to properly

invoke the arbitration agreement or if it

actively pursues claims covered by the

arbitration agreement."

29. Thus, the arbitration agreement does not become

"inoperative or incapable of being performed" where

allegations of fraud have to be inquired into and the court

cannot refuse to refer the parties to arbitration as

provided in Section 45 of the Act on the ground that

allegations of fraud have been made by the party which

can only be inquired into by the court and not by the

arbitrator. N. Radhakrishnan v. Maestro Engineers & Ors.

(supra) and Abdul Kadir Shamsuddin Bubere v. Madhav

Prabhakar Oak (supra) were decisions rendered in the

context of domestic arbitration and not in the context of

arbitrations under the New York Convention to which

Section 45 of the Act applies. In the case of such

arbitrations covered by the New York Convention, the

Court can decline to make a reference of a dispute

covered by the arbitration agreement only if it comes to

the conclusion that the arbitration agreement is null and

void, inoperative or incapable of being performed, and not

on the ground that allegations of fraud or

misrepresentation have to be inquired into while deciding

the disputes between the parties.

30. We may now consider the correctness of the findings

of the Division Bench of the High Court in the impugned

judgment. The Division Bench of the High Court has held

that the Facilitation Deed was part of several agreements

entered into amongst different parties commencing from

25.03.2009 and, therefore, cannot be considered as stand

apart agreement between the appellant and the

respondent and so considered the Facilitation Deed as

contrary to public policy of India because it is linked with

the finances, funds and rights of the BCCI, which is a

public body. This approach of the Division Bench of the

High Court is not in consonance with the provisions of

Section 45 of the Act, which mandates that in the case of

arbitration agreements covered by the New York

Convention, the Court which is seized of the matter will

refer the parties to arbitration unless the arbitration

agreement is null and void, inoperative or incapable of

being performed. In view of the provisions of Section 45

of the Act, the Division Bench of the High Court was

required to only consider in this case whether Clause 9 of

the Facilitation Deed which contained the arbitration

agreement was null and void, inoperative or incapable of

being performed.

31. The Division Bench of the High Court has further held

that Clause 9 of the Facilitation Deed insofar as it

restricted the right of the parties to move the courts for

appropriate relief and also barred the right to trial by a

jury was void for being opposed to public policy as

provided in Section 23 of the Indian Contract Act, 1872

and was also void for being an agreement in restraint of

the legal proceedings in view of Section 28 of the said Act.

Parliament has made the Arbitration and Conciliation Act,

1996 providing domestic arbitration and international

arbitration as a mode of resolution of disputes between

the parties and Exception 1 to Section 28 of the Indian

Contract Act, 1872 clearly states that Section 28 shall not

render illegal a contract, by which two or more persons

agree that any dispute which may arise between them in

respect of any subject or class of subjects shall be referred

to arbitration and that only the amount awarded in such

arbitration shall be recoverable in respect of the dispute

so referred. Clause 9 of the Facilitation Deed is consistent

with this policy of the legislature as reflected in the

Arbitration and Conciliation Act, 1996 and is saved by

Exception 1 to Section 28 of the Indian Contract Act, 1872.

The right to jury trial is not available under Indian laws.

The finding of the Division Bench of the High Court,

therefore, that Clause 9 of the Facilitation Deed is opposed

to public policy and is void under Sections 23 and 28 of

the Indian Contract Act, 1872 is clearly erroneous.

32. The Division Bench of the High Court has also held

that as allegations of fraud and serious malpractices on

the part of the appellant are in issue, it is only the court

which can decide these issues through furtherance of

judicial evidence by either party and these issues cannot

be properly gone into by the arbitrator. As we have

already held, Section 45 of the Act does not provide that

the court will not refer the parties to arbitration if the

allegations of fraud have to be inquired into. Section 45

provides that only if the court finds that the arbitration

agreement is null and void, inoperative or incapable of

being performed, it will decline to refer the parties to

arbitration.

33. The Division Bench of the High court has further

held that since the earlier suit (Suit No.1869 of 2010) was

pending in court since 25.06.2010 and that suit was inter-

connected and inter-related with the second suit (Suit

No.1828 of 2010), the court could not allow splitting of the

matters and disputes to be decided by the court in India in

the first suit and by arbitration abroad in regard to the

second suit and invite conflicting verdicts on the issues

which are inter-related. This reasoning adopted by the

Division Bench of the Bombay High Court in the impugned

judgment is alien to the provisions of Section 45 of the Act

which does not empower the court to decline a reference

to arbitration on the ground that another suit on the same

issue is pending in the Indian court.

34. We make it clear that we have not expressed any

opinion on the dispute between the appellant and the

respondent as to whether the Facilitation Deed was

voidable or not on account of fraud and misrepresentation.

Clause 9 of the Facilitation Deed states inter alia that all

actions or proceedings arising in connection with, touching

upon or relating to the Facilitation Deed, the breach

thereof and/or the scope of the provisions of the Section

shall be submitted to the ICC for final and binding

arbitration under its Rules of Arbitration. This arbitration

agreement in Clause 9 is wide enough to bring this dispute

within the scope of arbitration. To quote Redfern And

Hunter On International Arbitration (Fifth Edition page 134

para 2.141)

"Where allegations of fraud in the

procurement or performance of a contract

are alleged, there appears to be no reason

for the arbitral tribunal to decline

jurisdiction."

Hence, it has been rightly held by the learned Single Judge

of the Bombay High Court that it is for the arbitrator to

decide this dispute in accordance with the arbitration

agreement.

35. For the aforesaid reasons, we allow the appeal, set

aside the impugned judgment of the Division Bench of the

High Court and restore the order of the learned Single

Judge. The parties shall bear their own costs.

.....……………..……………………….J.

(A. K. Patnaik)

…....…………..………………………..J.

(Fakkir Mohamed Ibrahim Kalifulla)

New Delhi,

January 24, 2014.

Kejriwal's Delhi Dharna – This is not anarchy, Mr Home Minister, This is Revolution

By Avay Shukla, Retired IAS

http://hillpost.in/2014/01/kejriwals-delhi-dharna-this-is-not-anarchy-mr-home-minister-this-is-revolution/97741/

What we are witnessing in Delhi today is historic – for the first time since Independence a legitimate political party has refused to play by the rules that all political parties in India have battened on for sixty-five years; for the first time a State Government has taken on the Central Government at its own doorstep; for the first time a Chief Minister and his entire Cabinet are sitting in protest in their own capital; for the first time their own police force is ranged against them in their thousands.

The immediate reason for this may be the demand for the suspension of five police officials, but the actual reason is more basic, and fundamental to any democracy — accountability of the rulers to the ruled.

The rulers are not just the politicians and the bureaucrats – they are also the larger constituency that benefits from the present status quo: the industrialists, the TV and news organisations, the "cognoscenti", the "glitterati", the South Delhi socialites, the "intelligentsia" that makes a nice living by appearing nightly on TV panel discussions: in short, all those who are comfortable with the status quo.

They have, with the assistance of disgruntled elements like Kiran Bedi and Captain Gopinath, unleashed a veritable barrage of abuse and condemnation against Kejriwal and his party over the last week, terming him a Dictator, Anarchist, Chief Protestor, Law-breaker and so on.

It is because they feel genuinely threatened by the forces that the AAP has unleashed, the ethical standards that it has prescribed and demonstrated, the personal examples that its leaders have shown. Because they know that if these paradigms become the norm of a new India then the sand castles that these privileged reside in shall come crumbling down in no time.

And so they accuse Kejriwal of not following prescribed conventions, protocol or procedure and thus encouraging anarchy. Let us look at just three of these alleged transgressions:

1. Law Minister Somnath Bharti asking for a meeting of judicial officers of Delhi. What is improper about this? Isn't the judiciary a part of the government – funded, staffed, appointed by the state.
Yes, it is operationally independent of the government (as it should be) but it is certainly not a holy cow whose performance cannot be questioned, or monitored, by the people of this country through their elected representatives.
The judiciary is meant to serve the people, just as the bureaucracy is, and it cannot have internal accountability only. An elected government has to have the right to review its performance, especially given the pathetic state of the disposal of cases in courts.

In my view Mr. Bharti was within his rights to take a meeting of judicial officers to assess the shortcomings of the system (which is the first step to removing these shortcomings). Yes, he could have routed the request through the High Court, but this was a trivial error and certainly not the grievous violation that the media made it out to be.
To the contrary, the Law Minister should be lauded for his initiative in seeking to address the issue instead of washing his hands of it as ALL LAW MINISTERS OF THIS COUNTRY HAVE DONE SO FAR, as if the collapse of the judicial redressal system was no concern of the government!
——-
2. Subsidies on water and power to small consumers in Delhi (something for which Kejriwal has been contemptuously branded a populist). Really?
The Central Government dishes out more than 160000 crores worth of subsidy every year on just three schemes (Mid-day Meals, MNREGA and Sarv Shiksha Abhiyan). Just about every state gives subsidies on water and power.

Here's something Mr. Arnab Goswami and his kind should consider: the Golf Club in New Delhi which has about 4000 privileged members (all of whom are now arraigned against Kejriwal) has been given 250 acres of the most expensive real estate in the country worth 60000 crores for a paltry lease of about Rs. 15 lakhs per annum.
The annual return on Rs. 60000 crores should be at the very least Rs. 6000 crores: in effect, what this means is that every member of the Golf Club is being given a subsidy of Rs. 1.50 crores every year! The same is the case with the Gymkhana Club, another watering hole for the rich, the famous, and the now scared.

According to the latest report of the RBI, the total non-performing assets (NPA) of the Banks in India is more than Rs. 1.60 lakh crores.
NPA is just a euphemism for what the Vijay Mallyas and the Captain Gopinaths of the world owe to the aam aadmi (and refuse to pay) while flying all over the world in their private jets and pontificating in TV studios on the correct form of governance. Is it "populism" if indulged in by Kejriwal, and "entitlement" and "economic surge" when practiced by others ?
——-
3. Somnath Bharti's (Kejriwal's Law Minister) mid-night visit to Khirkee village has generated so much misinformation, ignorance of the law, reverse racism and hypocritical harangues that it is sickening.
Shorne of all this, what does the entire incident amount to? Merely this: a Minister, in response to complaints by residents (which are on record, as is the police inaction on them for months) of a locality personally visits the spot and asks the police to take immediate action by raiding the building where illegal activities are taking place.

The police refuse and insult the Minister. This is the essence of the matter.

All the rest – search warrants, lack of female police, racism, urinating in public, cavity search(!) [the latest addition to the shrinking vocabulary of Ms. Meenakshi Lekhi] etc.- are red herrings and a smoke screen which no doubt the judicial Inquiry Commission shall see through.
How was the Minister wrong in asking the police to take action? Is it a Minister's job to simply sit in an air-conditioned office and write on files? (a question which Kejriwal has asked and to which we are still waiting for an enlightened response from Ms. Barkha Dutt and gang).

Does the police require a search warrant to enter a place where they have reason to believe that illegal activities are going on? Really, Mr. Salve?

If so, then how do you explain their barging into the house in the Batla House encounter and shooting three people, WITHOUT A SEARCH WARRANT? Or their constant nocturnal forays into the poor whore-houses of GB Road whenever they are short of spending money?

——-

No, sir, the opposition to Kejriwal from the BJP and the Congress, from the Arnab Goswamis, Rajdeep Sardesais, the Barkha Dutts, the Kiran Bedis, from the Editors of English dailies, from the captains of industry, from the Single Malts and Bloody Marys of Gymkhana and Golf Clubs, does not stem from any illegality or impropriety on his part, or from any ideological differences between them.

It stems from their complete and total failure to comprehend what Kejriwal is and what he stands for. It stems also from the deep social divide between the upper crust of society( who are happy with the status quo where their money, power and contacts can ensure them a comfortable life) and the masses below them who have to daily bear the brunt of the system inspired corruption, harassment, inconvenience and indignity that the present dispensation guarantees them.

This (hitherto unacknowledged and invisible) divide becomes clear when we compare the editorial slants of the English and Hindi channels in the coverage of the ongoing protests: the former are virulently anti AAP and only pop up panelists who support that view, while the latter appear to be more understanding of what AAP is trying to do.

Those who are denouncing Kejriwal for being an autocrat, anarchist, activist and for protesting at Raisina Road are missing the most obvious point of his movement – THAT KEJRIWAL WILL NOT PLAY BY THEIR RULES ANY MORE.

As they say in Las Vegas – you can't beat the house, because the dice are loaded against you. Everyone wants him to play with their set of dice which they mysteriously call the Constitution and the CRPC!) but Kejriwal wants to play with his own dice, hence the confrontation.

They want him to pass a joint resolution of the Assembly for bringing the police under the Delhi govt.-he's smart enough to see that the resolution will be thrown into the same waste paper basket where presumably the Ordinance on protecting convicted MPs was consigned by Rahul Gandhi.

They want him to be a good boy and take his dharna to Jantar Mantar where all civilised protests begin and inevitably end, while the govt. of the day can get on with its gerrymandering uninterrupted-he knows that unless he disrupts the comfortable existence of the bourgeois he may as well relieve himself in the Yamuna for all the difference he will make.

They want him to sit in the Secretariat and be guided by his bureaucrats and lose all touch with reality- he won't fall for this Pavlovian routine. They desperately want him to become one of them, red light, siren, gun-toting commandos, Lutyen's bungalow and all- he knows that if he falls for this he loses his USP and becomes just an intern in this hoary club of gnarled sinners.

They want him to follow the script co-authored by all the political parties of the day, not one excluded, because this script contains an agreed-upon plot, wherein politicians make noises but don't act against each other, wherein corruption is just a sound-bite, where dynastic succession is a silently accepted sine qua non, where no one is interested in finding out whether the hundreds of proved Swiss bank accounts contain anything other than Swiss chocolates – Kejriwal, however, wants to write his own script with substantial inputs from the aam aadmi, not from the Ambanis or the Radias or the Shobhna Bhartias.

They want him to talk about corruption but not do anything about it, something Manish Tewari's poetic flair would term "willing to wound but afraid to strike", an attitude as old as Chanakya and Kautilya which offers all of us a catharsis via the good offices of Arnab Goswami and little else- but Kejriwal is no respecter of Machiavelli or Chanakya, his vocabulary is limited because he can only call a spade a spade, he is colour blind because he can only see in black and white (the shades of greys can be left for the likes of Manu Singhvi), and therefore he insists on striking, not just talking.

Is there any cause for surprise, therefore, at why the present dispensation, both in and out of government, is rattled by this five foot four inch "insect" from Ghaziabad? He is neither fish nor fowl, he defies understanding.

The establishment has made the supreme mistake of trying to counter him by quoting the rules of the game (loaded in the former's favour, naturally!) they are past masters of- but Kejriwal has changed the rules, and now they don't know how to control him or neutralise him.

For the time being only Kejriwal knows the new rules, and he is springing them on the carpet baggers one by one, catching them by surprise all the time.

Forget the English TV channels-they rarely get anything right. Forget the Manish Tewaris, the Kiran Bedis, the FICCI spokespersons, the Minakshi Lekhis- they are either scared witless or rank opportunists. What they all do have in common, however, is that they have failed to see how the common man-the aam aadmi-are gathering behind this dimunitive man with the perpetual cough.

The sincerity, integrity and commitment of this man is phenomenal, his capacity to harness the anger and frustration of the people is limitless. His defiance of accepted conventions and interpretations is not anarchy – it is nothing short of a revolution. When the people have had enough of injustice, callousness and indignity, they will not play by the rules of the rulers-they will make new rules.

The French Revolution would not have happened if the existing rules had been followed. Tehrir Square would not have happened if everyone swore by the old rules. Changing the rules, Mr. Home Minister, is not anarchy – it is the beginning of a people's revolution.

The sooner we realise this the less pain in the transition, the less violence. No matter how the stand-off in Delhi ends – capitulation by the Home Minister and the Police, withdrawal of support by the Congress, imposition of President's Rule, police violence on the protesters and their eviction – one thing is certain: Kejriwal is going nowhere.

He, and his paradigms, are here to stay and haunt our rulers. With his uncanny understanding of the pulse of the people he has re-written the rules of politics and governance.

There are now only two options Kejriwal has left the ruling class – either they change, or the people will change them.

Avay Shukla retired from the Indian Administrative Service in December 2010. He is a keen environmentalist and loves the mountains- he has made them his home.

Section 40 A ( 3)

You may refer to the decision of Chennai Bench of ITAT in the case of DCIT Vs. Kirtilal Kalidas Jewellers (P.) Ltd. [Citation - (2012) 27 taxmann.com 341 (Chennai) / (2012) 54 SOT 529 (Chennai). It may help you.

IT : Where pursuant to search proceedings, assessee filed an application seeking copy of impounded documents so as to file revised return of income and Assessing Officer passed assessment order on basis of original return without supplying said copies, order so passed by Assessing Officer was not sustianable

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[2013] 40 taxmann.com 425 (Gujarat)

HIGH COURT OF GUJARAT

Purvesh Mansukhbhai Shah

Additional Commissioner of Income-tax, Circle & 1*

AKIL KURESHI AND MS. HARSHA DEVANI, JJ.

SPECIAL CIVIL APPLICATION NO. 3724 OF 2012

OCTOBER 8, 2012

Section 143, read with section 133A, of the Income-tax Act, 1961 - Assessment [Natural justice] - A survey was carried out at assessee's premises wherein certain documents were impounded - Thereupon, assessee filed a return declaring certain income - Assessee's claim was that return was filed on insistence of department and did not truly reflect its income for year under consideration - Assessee thus filed a revised return - Assessee also filed an application for supplying copies of impounded documents - Assessing Officer directed assessee to visit his office personally on a particular date and take copies of documents impounded - However, before date so fixed, Assessing Officer passed assessment order on basis of original return of income filed by assessee - Assessee thus filed instant petition challenging validity of assessment order - Whether on facts, Assessing Officer passed impugned assessment order in undue haste which was not sustainable in law - Held, yes - Whether, therefore, matter was to be remanded back for disposal afresh - Held, yes [Paras 8 & 9] [Matter remanded]

R.K. Patel and B D Karia for the Petitioner. K.M. Parikh for the Respondent.

ORDER

Akil Kureshi, J. - The petitioner has filed this petition initially with a prayer for supplying copies of impounded documents or seized material taken during the survey at petitioner's cost or to permit the petitioner to copy such documents at his cost. During the pendency of the petition, the respondent No.2 -Assessing Officer finalised the assessment on 12-4-2012. The petitioner has, therefore, challenged such assessment order also by way of amendment.

2. Briefly stated, the facts are as follows. Survey operation was carried out at the business premises of the petitioner and at the office of the father of the petitioner. Statement of the petitioner was recorded, certain documents were seized. The petitioner filed a return of income for the assessment year 2011-2012 declaring total income of Rs.22,19,48,960/-. It is the case of the petitioner that such return was filed under the insistence of the Department and did not truly reflect the petitioner's income for the year under consideration.

3. The petitioner approached the respondent authorities asking for copies of the impounded documents and other materials. The respondents did not supply such documents. The/case of the petitioner is that having realised that such material will not be made available, he filed a revised return on 16-3-2012 declaring income of Rs.17,23,963/-. In such return, the assessee put a footnote that

"6. In my effort to get the copy of the impounded material, I met higher authorities but it did not yield result. On the other hand, the pressure exerted on me to pay demand is increasing without any indication as to when I will be given copy of impounded material from which I can refer the basis of question in reply to which disclosure was recorded. The most recent notice u/s 221 issued on 14/03/2012 is the example thereof.

7. In the above background, what I was guided to do viz. filing revised return of income after referring to the impounded material, I am compelled to do now. This revised return is filed in the context of the above facts and circumstances. I understand I will have option of filing revised return after reference to impounded material as and when it is provided to me."

4. When the petitioner approached this court initially with the sole prayer of being supplied the necessary documents, this court issued notice on 26-3-2012 making it returnable on 9-4-2012. The grievance of the petitioner is that the Assessing Officer called the petitioner to inspect/take copies of the documents on 19-4-2012. He, in fact, relies on a letter dated 10-4-2012 written by the Assessing Officer calling upon the petitioner to remain personally present in his office on 19-4-2012 in connection with the request for copies of the impounded documents.

5. It is not in dispute that on 12-4-2012, the Assessing Officer finalised the assessment accepting the original return of the petitioner dated 30-9-2011.

6. Counsel for the petitioner submitted that the respondent finalised the assessment without taking into account the revised return. The original return was nonest. The only return valid in the eye of law was the subsequent return. This was done without hearing the petitioner and without supplying copies of the documents. He pointed out that when the Assessing Officer had called the petitioner on 19-4-2012 by issuing a letter dated 10-4-2012 to discuss the issue of supplying the copies of the documents and when the time limit for framing the assessment was expiring on 31-12-2013, there was no apparent reason why he should have finalised the assessment on 12-4-2012.

7. On the other hand, learned counsel Shri Parikh for the Department contended that the original return was a valid return. The petitioner had no right to file revised return. The Assessing Officer, therefore, discarded such revised return. When the Assessing Officer accepted the return income, there was thereafter nothing further to be done. There was no need to supply any documents.

8. We are of the opinion that the Assessing Officer showed undue haste in finalising the assessment on 12-4-2012. We may recall that on 10-4-2012, the Assessing Officer called upon the petitioner to remain present on 19-4-2012 to discuss the issue of supplying documents as demanded by the petitioner. On 12-4-2012, he finalised the return thereby making the meeting of 19-4-2012 a fait accompli. In the meantime, the court had already issued notice on the present petition which was also served on the Assessing Officer on 9-4-2012. Under such circumstances, particularly looking to the time available for finalising assessment, the Assessing Officer should have stayed his hands off atleast till the court could gather full facts from him. Further, we find that the question whether the petitioner's original return was valid return and whether he had any right thereafter to file a revised return are questions which need to be decided by the Assessing Officer after bipartite hearing. The petitioner had no right to participate before the Assessing Officer framed an opinion that the original return was the only valid return in the eye of law and the petitioner's subsequently revising such return was not permissible.

9. Under the circumstances, we are inclined to remand the proceedings to the Assessing Officer for fresh consideration and disposal in accordance with law. For such purpose, the impugned assessment order dated 12-4-2012 is set aside. There are, however, further directions to follow which are as follows:—

(1)		The petitioner shall give a precise list of documents which he wants to be supplied copies of. This shall be done latest by 30-10-2012.
(2)		The Assessing Officer shall either supply copies of such documents or convey to the petitioner recording brief reasons why copies of any of these documents cannot be made available. This shall be done latest by 30-11-2012.

10. After this exercise is completed, it will be open for the Assessing Officer to proceed further with the assessment. We express no opinion on any of the controversies including whether the original return of the petitioner was valid or not and whether he had any right to file a revised return in the facts of the case.

11. The petition is disposed of in above terms. Direct Service is permitted.

SUNIL

*Matter remanded

IT: Where it was apparent from records that assessee's investment in plant and machinery after excluding cost of gas fire equipment falling in category of 'gas producer plant', did not exceed Rs. one crore, it was to be treated as small scale industry and, therefore, its claim for deduction under section 80-IB was to be allowed

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[2013] 40 taxmann.com 487 (Gujarat)

HIGH COURT OF GUJARAT

Commissioner of Income-tax - II

Refoil Earth (P.) Ltd.*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 787 OF 2012†

JUNE 18, 2013

Section 80-IB of the Income-tax Act, 1961 - Deduction - Profits and gains from industrial undertakings other than infrastructure development undertakings [Small Scale Industrial undertaking] - Assessee claiming to be a small scale industry (SSI) filed its return claiming deduction under section 80-IB - Assessing Officer rejected assessee's claim holding that investment made by assessee in plant and machinery was more than Rs. One crore and, therefore, assessee could not be treated as SSI - Commissioner (Appeals) noted that Assessing Officer had wrongly included cost of gas fire equipment falling in category of 'gas producer plant', in cost of plant and machinery - Commissioner (Appeals) finding that if cost of gas fire equipment was excluded, then investment in plant and machinery would not exceed Rs. One crore, allowed assessee's claim - Tribunal upheld order of Commissioner (Appeals) - Whether on facts, no substantial question of law arose from Tribunal's order - Held, yes [Para 4.1] [In favour of assessee]

K.M. Parikh for the Appellant.

ORDER

M.R. Shah, J. - Present Tax Appeal under Section 260A of the Income-tax, 1961 (hereinafter referred to as "IT Act") has been preferred by the appellant herein - Revenue challenging the impugned order dated 20-04-2012 passed by the Income-tax Appellate Tribunal Ahmedabad Bench 'D' Ahmedabad (hereinafter referred to as "Appellate Tribunal") by which the Appellate Tribunal has dismissed the said appeal preferred by the Revenue and confirmed the order passed by the Commissioner of Income-tax (Appeals) - III, Vadodara [hereinafter referred to as "CIT(A)"].

2. Facts leading to the present Tax Appeal in nut-shell are as under:

2.1 That the respondent herein - assessee (hereinafter referred to as "assessee") claiming to be a Small Scale Industry (SSI) filed the return of income declaring total income of Rs. 76,53,500/-. That the assessment was made under Section 143(3) of the IT Act determining the total income of Rs. 1,09,35,928/-. Aggrieved by the assessment order, the assessee preferred the appeal before the CIT(A), who allowed the appeal of the assessee and allowed deduction under Section 80-IB of the IT Act amounting to Rs. 31,10,312/- which was confirmed by the Appellate Tribunal. It appears that after the appeal effect, the income was reduced to Rs. 78,25,616/-. Subsequently, the case was reopened by the Assessing Officer (AO) on the ground that investment made by the assessee in plant and machinery was more than Rs. 1 Crore and therefore, the assessee cannot be treated as SSI and the assessee was not entitled for any deduction under Section 80-IB of the IT Act and the claim of the assessee was rejected and addition of Rs. 31,10,312/- was made to the total income in the order under Section 143(3) read with Section 147 of the IT Act.

2.2 That being aggrieved and dissatisfied with the order of the AO, the assessee preferred appeal before the CIT(A). It was contended on behalf of the assessee that assessee company is a SSI unit as per the provisional registration certificate dated 19-06-1993 and the production was started on and from 13-08-1996. That the permanent registration was granted on 01-07-1998 and the limit of investment in plant and machinery was Rs. 3 crore to qualify as SSI unit as per the notification No.S.O.857(E) dated 10-12-1997. It was submitted that further clarification was issued by circulars dated 27-03-2000 and 19-10-2000 in which it was clarified that if any unit has obtained any provisional registration on the basis of the notification dated 10-12-1997 and have taken concrete steps for implementing the projects prior to 24-12-1999, it would continue the SSI status so long as the investment in plant and machinery does not exceed Rs. 3 Crore. In the alternative it was submitted that AO while calculating the value of plant and machinery has wrongly added the cost of Gas Fire of Rs. 17,62,620/-, cost of Effluent Treatment Plant of Rs. 3,10,290/- and cost of Pipe Line of Rs. 2,40,875/- aggregating to Rs. 23,13,785/- and arrived at a total value of Rs. 1,09,64,791/- which is totally incorrect. It was submitted that as per the aforesaid notification dated 10-12-1997, the cost of Gas Producer Plant and Effluent Treatment Plant including Pipe Line are to be excluded while calculating the value of Plant and Machinery and therefore, the value of plant and machinery was required to be considered at Rs. 86,51,006/-. It was submitted that therefore the assessee is entitled to deduction under Section 80-IB of IT Act. Accepting above submissions the CIT(A) passed an order that the AO wrongly included the cost of Gas Fire which is as such Gas Producer Plant and therefore, as the cost of plant and machinery is less than Rs. 1 Crore, the assessee shall be entitled to the deduction under Section 80-IB of the IT Act as SSI unit and accordingly, the directed to allow the deduction under Section 80-IB of the IT Act as claimed by the assessee.

2.3 Feeling aggrieved and dissatisfied with the order dated 24-11-2011 passed by the CIT(A), the Revenue/Department preferred appeal before the ITAT, and by impugned judgment and order the ITAT has dismissed the said appeal confirming the order passed by the CIT(A).

2.4 Feeling aggrieved and dissatisfied with the order passed by the ITAT as well as CIT(A), the appellant - Revenue/Department has preferred the present appeal.

3. Shri Parikh, learned counsel has vehemently submitted that the ITAT as well as the CIT(A) have materially erred in considering the assessee as SSI unit and consequently granting the benefit of deduction under Section 80-IB of the IT Act. It is submitted that ITAT as well as CIT(A) have materially erred in considering the notifications of 1997 and 1999 by which the limit for investment in plant and machinery to qualify as SSI unit was raised from Rs. 1 Crore to Rs. 3 Crore. It is submitted that as such assessee was not entitled to claim deduction under Section 80-IB of the IT Act as total value of plant and machinery exceeded the prescribed limit.

Making above submissions and proposing the following questions of law, it is requested to allow the present appeal.

'(1)		Whether the ITAT was justified in law in upholding the decision of the CIT(A) in deleting the addition made on account of disallowance of deduction claimed u/S 80-IB of the Act despite the fact that the total value of Plant & Machinery exceeded the limit of Rs. 1 Crore as per the instruction prevailing when the company had started production and therefore, the assessee company ceased to be SSI?
(2)		Whether the ITAT was justified in law in upholding the decision of the CIT(A) by taking recourse of circulars S.O.857(E) dated 10/12/1997 and S.O. No.1288(E) dated 24/12/1999 without appreciating the fact that the assessee had been granted provisional registration certificate under No.04/18/10926/Temp SSI dated 19/06/1993 and the assessee had already started production from 13/08/1996 therefore the assessee would not qualify as "SSI" as it was not registered between the period 10/12/1997 to 24/12/1999 and since the said circular SO 857(E) dated 10/12/1997 is not applicable, no cognizance whatever contained therein could be lawfully taken, neither the issue of difference between "Gas Producer" & "Gasifier" though they are two different things makes the difference as mandated in the above circulars?'

4. Heard Shri Parikh, learned counsel appearing on behalf of the appellant and perused the impugned order passed by the ITAT as well as CIT(A).

4.1 At the outset, it is required to be noted that even as per the earlier notification [even prior to 1997], an SSI undertaking in which the investment in fixed assets whether held on ownership terms or lease or on hire does not exceed Rs.1 Crore shall be regarded as SSI undertaking. As per the said notification in calculating the value of plant and machinery the cost of Gas Producer Plant was required to be excluded. It appears that subsequently by notification of 1997, the limit of Rs. 1 Crore is increased to Rs. 3 Crore. As per the circulars dated 27-03-2000 and 19-12-2000 it was clarified that if any unit has obtained any provisional registration on the basis of the registration dated 10-12-1997 and has taken concrete steps for implementing projects prior to 24-12-1999, it would continue the SSI status so long as investment in plant and machinery does not exceed Rs. 3 Crore. On appreciation of evidence and documents on record, CIT(A) held that gas fire equipment falls in the category of gas producer plants and therefore, while considering the limit of Rs. 1 Crore/3 Crore, the cost of gas fire - gas producer plant is to be excluded i.e. Rs. 17,62,620/-. Therefore, without even considering whether the limit of Rs. 3 Crore [as per the subsequent notification] is to be considered or not, if the cost of gas fire/gas producer plant i.e.Rs. 17,62,620/- is excluded, in that case, the cost of plant and machinery for the purpose of SSI unit does not exceed Rs. 1 Crore and therefore, as rightly held by the CIT(A), confirmed by the ITAT, the assessee would be entitled to deductions under Section 80-IB of the IT Act as SSI unit.

5. Considering the aforesaid facts and circumstances, we do not see any substantial question of law raising in the present appeal. Under the circumstances, present appeal fails and the same deserves to be dismissed and is, accordingly, dismissed.

SUNIL

*In favour of assessee.

†Arising out of order of order of ITAT, Ahmedabad, dated 20-4-2012.

GST : Where assessee's factory had been sealed/taken over by State Industrial Development Corporation towards its dues and assessee had left India and assessment proceedings were initiated only thereafter, delay of 11 years caused in filing appeal on account of consequent lack of awareness should be condoned on payment of costs

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[2014] 41 taxmann.com 102 (Gujarat)

HIGH COURT OF GUJARAT

Giriraj Oil Mills

State of Gujarat*

M.R. SHAH AND MS. SONIA GOKANI, JJ.

TAX APPEAL NO. 493 OF 2013

AUGUST 30, 2013

Section 84 of the Gujarat Value Added Tax Act, 2003, read with section 86 of the Finance Act, 1994, section 35B of the Central Excise Act, 1944 and section 129A of the Customs Act, 1962 - Appeals - Condonation of delay - Appellate Tribunal - Assessee's factory premises/oil mill was sealed in 1994 by GIDC for non-payment of its dues and assessee left country in 1995 - In 1997, possession of oil mill was taken over by GIDC - Assessment proceedings for assessment year 1993-94 commenced in year 2000 for which notice could not be served upon assessee (sole proprietor) as he had settled in USA and accordingly, notice was affixed at said premises - Accordingly, assessment order was passed - Assessee filed an appeal against said assessment order after expiry of 10 years and 9 months seeking condonation of delay on ground that it was unaware of any such order on account of having been settled outside India - Department argued that during intervening period assessee had come to India on number of occasions and he ought to have verified and/or known proceedings at that time - HELD : Factory premises/oil mill was sealed by GIDC in year 1994 and entire record was in oil mill/factory premises, which was sealed by GIDC - Since possession was taken over in 1997 and assessment proceedings commenced only thereafter in year 2000, hence, despite visiting India on several occasions, there might not have been any reason and/or occasion for assessee to go to factory premises where notice had been affixed, as factory was already sealed - Thus, there was not any belated delay and there was no mala fide intention on part of assessee in not preferring appeal within period of limitation and/or by not preferring appeal within period of limitation, assessee was going to be benefited - Hence, delay was condoned imposing reasonable costs of Rs. 10,000 to Department [Paras 9 to 12] [In favour of assessee]

EDITOR'S NOTE

■		If cause of delay is 'sufficient', delay must be condoned irrespective of quantum of delay and vice versa. Imposition of costs for condonation of delay is unwarranted if there is sufficient cause for delay.
■		In this case, assessee himself proposed imposition of costs and, therefore, imposition of costs cannot be taken to be a rule of law so as to be a binding precedent.

Ms. Maithili Mehta for the Respondent.

JUDGMENT

M.R. Shah, J. - The present Tax Appeal is ADMITTED to consider the following substantial questions of law;

"(i)		Whether in the facts and the circumstances of the case, the appellate tribunal was justified, in summarily disposing the application for condonation of delay and the appeal filed by the appellant?
(ii)		Whether in the present facts and circumstances, service by affixation of notice would amount to a valid service under the Gujarat Sales Tax Act, 1969?"

2. Ms. Maithili Mehta, learned AGP waives service of notice of admission on behalf of the opponent.

3. In the facts and circumstances of the case and with the consent of the learned advocates appearing on behalf of the respective parties, the present application is taken up for final hearing today.

4. The present Tax Appeal has been preferred by the appellant-assessee challenging the impugned judgment and order passed by the Gujarat Value Added Tax Tribunal (for short 'the tribunal') dated 22/02/2013 in Second Appeal No. Shri Jaimin Gandhi/2012 by which the tribunal has dismissed the said appeal confirming the order passed by the Deputy Commissioner of Commercial Tax, Appeal - 3, Gandhinagar dismissing the appeal preferred by the appellant against the order passed by the Assessing Officer on the ground of delay.

5. The facts leading to the present appeal in a nutshell are as under;

5.1. The issue involved is with respect to the Assessment Year 1993-94. The assessment proceedings commenced in the year 2000. It appears that prior thereto in the year 1994, the factory premises/oil mill of the appellant was sealed by GIDC for non-payment of its dues. The sole proprietor of the appellant left the country in the year 1995. It also appears that in the year 1997, the possession of the oil mill was taken over by GIDC and thereafter the assessment proceedings with respect to the Assessment Year 1993-94 commenced in the year 2000. Notices for the same were issued by the Assessing Officer, however, notice upon the appellant/sole proprietor could not be served as the sole proprietor had settled in USA. Thereafter the Assessing Officer issued notice upon the appellant, which was affixed at the premises. Treating the same as valid service, the Assessing Officer passed the final assessment order and thereafter, the appellant preferred the appeal before the first appellate authority i.e. Deputy Commissioner of Commercial Tax, Appeal - 3, Gandhinagar. The Commissioner of Commercial Tax, Modasa issued notice dated 03/01/2011 calling upon the appellant to pay the amount due and payable. There was a delay of approximately 10 years and 9 months in preferring the appeal. The appellant submitted the delay condonation application submitting that since 1994 the business is closed as GIDC has already taken over possession of the oil mills. The sole proprietor then shifted to USA and settled there since 19/11/1995 and thereafter they came to know about the proceedings only when they returned. It was submitted that nobody was aware of the aforesaid assessment proceedings and, therefore, it was requested to condone the delay.

5.2. Vide order dated 04/10/2012 the first appellate authority i.e. the Deputy Commercial Tax Commissioner, Appeal - 3, Gandhinagar dismissed the application for condonation of delay and consequently dismissed the appeal on the ground of limitation. Being aggrieved and dissatisfied with the order passed by the first appellate authority of not condoning the delay and dismissing the appeal on the ground of limitation, the appellant preferred Second Appeal No. Shri Jaimin Gandhi/2012 before the tribunal and the tribunal by impugned judgment and order has dismissed the said appeal confirming the order passed by the first appellate authority in rejecting the delay condone application and consequently dismissing the appeal on the ground of limitation. Being aggrieved and dissatisfied with the impugned judgment and order passed by the tribunal in dismissing the appeal and confirming the order passed by the first appellate authority in not condoning the delay and consequently dismissing the appeal on the ground of limitation, the applicant has preferred the present Tax Appeal raising the aforesaid questions of law.

6. Ms. Gargie Vyas, learned advocate has appeared for Wadia Ghandy & Co. for the appellant and Ms. Maithili Mehta, learned AGP has appeared for the opponent.

7. Ms. Gargie Vyas, learned advocate appearing on behalf of the appellant has vehemently submitted that in the facts and circumstances of the case, the tribunal has materially erred in dismissing the appeal and confirming the order passed by the first appellate authority in not condoning the delay and consequently dismissing the appeal on the ground of limitation. It is submitted by Ms. Vyas, learned advocate appearing on behalf of the appellant that the tribunal has materially erred in not properly appreciating the fact that there was no deliberate delay on the part of the appellant in preferring the appeal belatedly. It is submitted that the tribunal has not properly appreciated that by not preferring the appeal within the period of limitation, the appellant was not going to be benefited at all.

7.1. It is further submitted by Ms. Vyas, learned advocate appearing on behalf of the appellant that the tribunal has not appreciated the fact that the factory was closed since 1994 and the possession of the oil mill was taken over by GIDC in the year 1997 and since 1995 the sole proprietor i.e. the appellant had settled in USA. It is submitted that the tribunal has not properly appreciated the fact that in view of the fact that the factory was closed since 1994 and possession of which was taken over by GIDC in the year 1997 and in fact the property was sealed, there was no reason for the proprietor to come to the factory premises at which the notice with respect to the assessment was reported to be affixed. It is submitted that in view of the aforesaid facts and circumstances, the tribunal has material erred in holding that the notice by affixation on the factory premises was a valid notice. It is submitted that in any case and considering the aforesaid facts and circumstances of the case, the tribunal ought to have directed to condone the delay and ought to have remanded the matter to the first appellate authority to consider the appeal on merits. It is submitted by Ms. Vyas, learned advocate appearing on behalf of the appellant that on imposing reasonable cost, the tribunal ought to have condoned the delay in preferring the appeal before the first appellate authority. It is submitted that the appellant is ready and willing to pay reasonable cost towards the delay condonation. Making the above submission, it is requested to allow the present application.

8. The present Tax Appeal is opposed by Ms. Maithili Mehta, learned AGP appearing on behalf of the opponent. It is submitted that in the facts and circumstances of the case, more particularly, when there is a huge delay of 10 years and 9 months in preferring the appeal, no error has been committed by the tribunal in dismissing the appeal and confirming the order passed by the first appellate authority dismissing the appeal on the ground of limitation. It is submitted that when it was found that between 2000 and till the appeal was preferred, the proprietor had come to India on number of occasions, at that time he ought to have verified and/or known the proceedings. It is submitted that as such for the Assessment Year 1993-94 the proceedings were already initiated prior to 1994 and, therefore, as such the proprietor was aware of the assessment proceedings and, therefore, as and when he visited India he ought to have verified and/or known the process of the assessment proceedings. It is submitted that service of notice with respect to the assessment by affixing on the last known address is a known procedure and, therefore, when the said procedure was followed, the appellant cannot plead ignorance. It is submitted that therefore in the facts and circumstances of the case, no error has been committed by the tribunal in not condoning the huge delay of approximately 10 years and 9 months in preferring the appeal before the first appellate authority and, therefore, it is requested to dismiss the present appeal.

9. Heard the learned advocates appearing on behalf of the respective parties at length and perused the impugned judgment and order passed by the tribunal as well as the order passed by the first appellate authority. It is true that as such there is a delay of approximately ten years in preferring the appeal before the first appellate authority against the assessment order. However, it is required to be noted that the assessment order is with respect to the Assessment Year 1993-94 and the assessment proceedings commenced in the year 2000. It is the case on behalf of the appellant that the factory premises/oil mill was sealed by GIDC in the year 1994. Even according to the appellant and the department, the entire record was in the oil mill/factory premises, which was sealed by GIDC. It is also the case on behalf of the appellant that because of the financial difficulty, he closed the business in the year 1993-94 and left India and settled in USA in the year 1995. It has also come on record that in the year 1997 possession of the oil mill/factory premises was taken over by GIDC in the year 1997. As stated hereinabove, thereafter the assessment proceedings for the Assessment Year 1993-94 commenced in the year 2000 and the show cause notice with respect to the assessment came to be affixed on the factory premises. It is true that between 1995 till filing of the appeal the proprietor of the appellant might have visited India on number of occasions. However, there might not had any reason and/or occasion for the proprietor to go to the factory premises, which was already sealed in the year 1993-94 and possession of which was taken over by GIDC in the year 1997. In the year 2011 the appellant came to know about the order of assessment and immediately the appeal has been preferred and by the time there is delay of approximately 10 years. Considering the aforesaid facts and circumstances of the case, it cannot be said that there is any belated delay. It cannot be said that there is any mala fide intention on the part of the appellant in not preferring the appeal within the period of limitation and/or by not preferring the appeal within the period of limitation the appellant was going to be benefited.

9.1. In the facts and circumstances of the case, we are of the opinion that on imposing reasonable cost the delay caused in preferring the appeal before the first appellate authority should be condoned and the appellant should be given an opportunity to submit the case on merits, which will be in the interest of justice and it will meet the ends of justice.

10. In view of the above and in the facts and circumstances of the case, the tribunal has materially erred in dismissing the appeal and not condoning the delay in preferring the appeal before the first appellate authority. The tribunal has not exercised the discretion judiciously and, therefore, the interference of this Court is called for.

11. In view of the above and for the reasons stated hereinabove, in the facts and circumstances of the case, the present Tax Appeal is allowed. The impugned order passed by the Income Tax Appellate Tribunal dated 22/02/2013 in Second Appeal No. 1054/2012 as well as the order passed by the first appellate authority i.e. Deputy Commissioner of Commercial Tax, Appeal - 3, Gandhinagar in not condoning the delay in preferring the appeal against the order of assessment with respect to the Assessment Year 1993-94 are hereby quashed and set aside and the delay caused in preferring the appeal before the first appellate authority i.e. Deputy Commissioner of Commercial Tax against the order of assessment with respect to the Assessment Year 1993-94 is hereby quashed and set aside and the first appellate authority is directed entertain the appeal on condition that the appellant shall pay the cost to the Department, which is quantified at Rs.10,000/- to be paid by Demand Draft within a period of three weeks from today and on such deposit the first appellate authority to entertain the said appeal and decide and dispose of the same in accordance with law and on its own merits, however, subject to compliance of the pre-deposit of the amount, which may be passed by the first appellate authority. It is made clear that the aforesaid amount of cost is towards the condonation of the delay, which has nothing to do with the pre-deposit and other requirements of pre-deposit, while entertaining the appeal by the first appellate authority and the same is kept open, which shall be considered by the first appellate authority in accordance with law and on its own merits, without, in any way, being influenced by any of the observations made in the present order. It is also clarified that all the contentions, which may be available to the respective parties in the appeal, are kept open, inclusive of whether the affixing of notice on the factory premises of the assessee was a valid service of notice or not and any observations made by this Court be construed while considering the application for delay only.

12. With this, the present Tax Appeal is allowed to the aforesaid extent.

■■

*In favour of assessee.

--
Regards,

Pawan Singla , LLB

M. No. 9825829075

R.A. Chandroo

Ideas Indian? Gurumurthy at his Chennai office

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Balancing The Ledger

In the BJP's mood for market economics, how will this Modi pal's swadeshi fare?

Arindam Mukherjee on S. Gurumurthy

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Crusader, Mediator

The Gadkari Clean Chit In 2012, when investments into Gadkari's company came into question, he examined its books and declared them legal and exonerated Gadkari.
Black Money In 2010-11, as convenor of a BJP task force to assess black money owned by Indians, he criticised the UPA government for its failure in checking this.
Bofors & the Gandhi Family In 2010-11, the BJP came out with fresh revelations and charges against the Gandhi family based on his investigations. The BJP later removed Sonia's name from it.
The Bajaj Dispute In 2008, he mediated between Rahul and Shishir Bajaj to settle a six-year dispute over control of the Bajaj group companies and assets.
Enron In 2003, he campaigned for a probe against Enron's Dabhol project. He had alleged that Enron had been unduly favoured.
The Ambanis In 1987, through a series of articles, he carried out a crusade against alleged irregularities committed by Reliance Industries.

"The BJP, which will follow a market-led approach to the economy, will have no place for the Gurumurthy school."

K.N. Govindacharya
Ex-RSS ideologue

"He's a CA and knows how to fix accounts, spot subterfuge, see where money's hidden. But he is not an economist."

Mohan Guruswamy
Centre for Policy Alternatives

***

For many long decades now, Swaminathan Gurumurthy has openly been a friend, philosopher and economic guide of the Bharatiya Janata Party (BJP). But he has always cast himself as a behind-the-scenes operator, making a virtue of shunning the limelight. On his Twitter handle (@sgurumurthy), he has a photograph of Swami Chandrasekhara Saraswati of Kanchi, and says "Mahaswami, in whom I saw God, told me to avoid electoral politics". Yet, as the BJP's Narendra Modi looms large over the pre-electoral landscape, many believe the Chennai-based Gurumurthy will play an important role in crafting India's economic thinking. The chartered accountant and political commentator has been close to Modi for decades. Though not officially with the BJP, Gurumurthy, a hardcore RSS member since his college days, has been increasingly playing a direct role in its affairs. In 2012, he famously gave then BJP president Nitin Gadkari a clean chit in the controversy over investments in the latter's Purti Group. This helped Gadkari complete his term in the post.

Given this long association, when Gadkari recently announced some tax reform proposals, involving the replacement of income tax with a banking transactions tax, many believed it was the Gurumurthy school of economics at play.(Widely panned by critics, it remains a "proposal".) For Gurumurthy and new BJP entrant Subramanian Swamy have long supported this view, and have, along with former RSS ideologue K.N. Govindacharya, always donned the mantle of warriors looking for ways to curb black money and tackle corruption.

What's working in his favour is his proximity to Modi, whose need for idea inputs have only gone up. Says M.R. Venkatesh, a Chennai-based CA and political analyst who has worked closely with Gurumurthy, "He is at the centrestage of modern economic thinking. Though he is not from the BJP, he is too precious a talent for Modi to ignore."

Gurumurthy is considered highly networked: some think he is the BJP's bridge to Tamil Nadu chief minister Jayalalitha and her AIADMK. Not everyone agrees with this perception, though. In fact, he is close to Jayalalitha's advisor Cho Ramaswamy, a well-known political commentator. "Gurumurthy's proximity to the AIADMK is an exaggeration. He has no particular line with the chief minister. But he is close to Modi and has been in touch with him for a number of years. He saw Modi entering the national scene much before others did," says N. Ram, former editor-in-chief of The Hindu.


	This BJP backroom boy shuns the limelight but keeps his network alive. That's what makes him useful to the party.

On one point there's no ambiguity: on issues of national interest, Gurumurthy holds strong, radical views. He is also a successful mediator at the highest levels of industry and politics. His mediation in the Bajaj family dispute has become part of corporate folklore, as has been his late-1980s crusade against the Ambanis in which, backed by media baron Ramnath Goenka, he sought to expose alleged irregularities in the working of Reliance Industries through a series of articles in the Indian Express.

Gurumurthy did not respond to Outlook's requests to take questions for this story. A few weeks ago, he had sent this text to a request by Outlook for an interview on the BJP's economic philosophy: "Would it not be better to ask someone in BJP...than me...in distant Chennai, a grown-up village? Can't talk for BJP."

Interestingly, many of Gurumurthy's associates and friends believe that his radical economic thoughts and beliefs might not necessarily be in sync with what Modi is thinking. K.N. Govindacharya, a close friend of Gurumurthy, feels that his development model is diametrically opposite to the market-led economy that is being pursued by the BJP. "The BJP, which will follow a market-led approach for the economy, will have no place for the Gurumurthy school of economic thought that supports a swadeshi model," he says.

The swadeshi concept of growth is essentially a warmed-over Gandhian line professed by the RSS and its wing, the Swadeshi Jagaran Manch, of which Gurumurthy was co-convenor. "He has a clear line on economic issues, which may be different from the BJP, especially in the context of reforms," says N. Ram.

Gurumurthy has certainly been active in matters of economic policy—many of them at the BJP's behest. In 2011, as the head of a task force set up by the BJP, he exposed the failure of the UPA government to check black money parked by politicians and industrialists in Swiss banks and pushed for legislation that would force holders of black money to bring it back to India. In 2012, his views on monetising India's domestic gold assets made headlines: he said India had over 5,000 tonnes of non-ornament gold which could be sold, bringing returns for the government and the economy.

As can be expected, his take-no-prisoners approach has won him many critics. Says Mohan Guruswamy, himself a part of the BJP's economic team during the NDA regime and founder-chairman of Centre for Policy Alternatives, "He is a CA and is familiar with how to fix accounts and an expert on corporate subterfuge. But that does not make him a policy specialist or economist. Gurumurthy wouldn't know anything about Keynesian economics or supply-side economics. But he can read a balancesheet and tell you where the money is hidden. So he thinks he has all the answers."

Indeed, Gurumurthy's strong swadeshi views haven't been accepted readily even in the BJP. He is viewed by an influential section as "full of quaint and far-fetched ideas". In Gurumurthy's worldview, there is untold wealth in India and trillions of dollars worth of gold. He feels the country has all the capital it needs and needs no foreign capital, overseas expertise and technology: everything is here, within the country.

But there are two factors in his favour: one, his strong links with the corporate sector, the single most important consideration for Modi. Second, there's no denying that the firebrand Tam-Brahm has been the most important backroom ideologue and go-to person for many BJP leaders for many years. Given all this, it's safe to assume that Gurumurthy will continue to perform an important behind-the-scenes role in the new BJP dispensation, if it comes to power. If so, his friends feel it will be the moment when Gurumurthy's school of economics will find expression.

MIS- "Place of Removal" in Notification No. 41/2012-ST

Posted In Service Tax | Articles | 2 Comments »

Rishi Chanan, B.A., LL.B, Advocate

The divisions falling under Central Excise Commissionerate, Ludhiana (Punjab) has started issuing show cause notices to the exporters who are claiming refund claim under Para 3 of Notification No. 41/2012 ST dated 29.06.2012 in respect of services utilized used in the export of excisable goods. The said notification provides refund of service tax paid on specified services used in exports of goods beyond place of removal.

The department is alleging that in case of export transaction where FOB price is the consideration the goods have to be delivered on the vessel which means the place of delivery is the port of shipment. Therefore, the services availed upto that point would become service availed upto the place of removal and not service availed beyond place of removal. As per Section 4(3)(c)(iii) stipulates the "any other place or premises from where excisable goods are to be sold after their clearance from the factory" assumes importance in the instant case. Hence, the services availed by the assessee are upto place of removal (i.e port of export) and not beyond the place of removal and refund not admissible.

The pleas taken by the exporters are that the prices charged by them are ex-factory. The place of removal is factory gate since the transaction of sale, payment of price and handling over possession of the goods to the carrier after clearance is at the factory and falls under the Section 4(3)(c)(i) of the Central Excise Act, 1944 which reads as under:

(c) "place of removal" means -

(i) a factory or any other place or premises of production or manufacture of the excisable goods;

(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;

(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory;

The reading of above Section clearly stipulates that place of removal is the factory gate in the case of excisable goods manufactured. Mere fact that transportation has been arranged by the seller does not mean it has changed the place of removal. It is emphasis that a place from goods is sold and an invoice issued is the place of removal & not the place where the property in goods delivers from buyer to seller. The goods are removed for sale from the factory of manufacture or place of production so the 'place of removal' in the instant case has to be the factory gate.

Also, in terms of Section 23(2) of the Sale of Goods Act which stated that 'where, in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract.' The sale is completed on delivery of goods and documents to the transporter. Therefore, in terms of this section, the goods are deemed to have been delivered to the customer when the goods were handed over to the transporter. Even in terms of Section 2(b) of the Central Excise Act, the transfer of the possession of goods by one person to another in the ordinary course of trade or business in cash or deferred payment and other valuable consideration is deemed to be sale and purchase.

The goods handed over to carrier/transporter are as good as delivery to the buyer in terms of Section 39 of the Sale of Goods Act, apart from the terms and conditions of sale.

The possession of the sold goods is handed over to the buyer at the factory gate. The transaction is full and complete and nothing remains to be done after the goods leave the factory premises. It is stated that place of removal depends upon circumstance of each and particular case. It varies from case to case.

The Hon'ble Supreme Court in the case of CCE vs. M/s Accurate Meters – 2009(235) ELT 581 (SC) has held that delivery to transporter is prima facie is delivery of goods, though the freight has been arranged by the seller.

The Hon'ble Supreme Court in the case of Escorts JCB Ltd. Vs CCE- 2002 (146) ELT 31(SC) has held that as per Section 39 of the Sale of Goods Act, delivery of goods to carrier is delivery to buyer. The ownership in the property has not any relevance in so far as insurance and freight of goods sold during the sale is concerned. It is not the necessary that insurance of the goods and ownership of goods must go together. The sales are ex-factory and place of removal is the factory premises.

In the instant situation, the removal of the final product takes place at the factory gate and the liability to duty arises at the time and place of removal. There is no legal requirement that the exporter should undertake transportation and transit insurance cover and deliver at the port except as part of the contract between the exporter and the foreign buyer. The excise invoices and the commercial invoices are raised with reference to removal from the factory gate of the exporter. The liability to duty is at the place of removal and the value for excise purposes clearly excludes cost of transportation and cost of transit insurance whether the removal is for domestic consumption or for export. The goods are cleared on the basis of invoices prepared from the place of removal namely, the factory and no sale invoice is prepared from the port area which is claimed to be place of removal.

Supposing, the goods meant for export have to be move under bond without payment of duty. In such a situation, the exporter is required to execute bond and the value for the purpose of bond has to be determined under Section 4 of the Central Excise Act and the same does not include transport cost. In case the goods cleared for export under bond is not actually exported then, the duty becomes payable on value not including cost of transportation from the factory to the port area. If the goods cleared from the factory on payment of duty on FOB basis get destroyed after clearance, the question of seeking remission of duty involved does not arise as liability to duty is not dependent on any event after clearance from the place of removal which is the factory in such a situation.

The Central Excise Valuation Law is common for goods cleared for export and goods cleared for domestic consumption. In either case the transport charges incurred for transport of the goods from the place of removal is to be excluded. The ownership of the goods is not the relevant criteria for determining the liability to duty which is at the time and place of removal. The claim that the port area is the place of removal and from the said point sales takes place is contrary to the facts and legal positions involved in sales activity. The commercial invoices are also issued with reference to "place of removal" and not at port area.

It is emphasized that, in varied facts and circumstances and subject to the statutory provisions of contract, it is possible to ensure the interest of another. In 1947 K.B 685- Prudential Staff Union V. Hall, it is observed that a seller in possession of the goods when the property and risks have passed may insure its buyer's interest.

It is also worthwhile to mention here that prior to insertion of Negative based Service Tax regime department is of the view that place is removal is the factory gate and service used from place of removal to place of delivery cannot be considered as input credit and eligible for refund. In earlier Notification No. 18/2009 ST dated 07.07.2009 the factory gate had been considered as place of removal for the purpose of refund.

Therefore, to resolve the issue of place of removal and to reduce the litigation for eligibility of input credit. The Central Board of Excise & Customs issued the notification under reference to made available the drawback/rebate of services used after factory gate used services. It is stated that if refunds are not allowed then the intention behind the issuance of notification become redundant and infructious. If the port of export is to be considered as place of removal, then there is no service used between ports of shipment to destination. Moreover, the Notification No. 41/2012 also provides drawback as per specified rates of service tax components. It has been learnt that there is no show cause has been issued to that exporters who are availing drawback of service tax.

Alias! The litigation is increasing day by day.

Empanelment with Can Fin Homes Ltd.(CFHL) for Internal Audit

Posted In CA CS ICWA | News | No Comments »

Can Fin Homes Ltd. (CFHL), invites applications from the eligible/interested Firms/ Companies for empanelment as External Auditors for conducting Internal Audit of 8 identified branches at intervals for the period covering from 01.10.2013 to 30.09.2016, subject to the norms of the Company.

In this connection, we furnish the following:

Annexure 1 – List of 8 branches identified for audit &Fee structure

Annexure 2- Application format for Empanelment

Annexure 3 -Terms and conditions for Appointment, Fee structure, Selection Procedure, Methodology for conducting audit,reporting and system for review of performance of the selected auditors.

Annexure 4 – Undertaking letter to be submitted by the auditors upon selection.

Eligible/interested Audit Firms / Companies, who are agreeable to the above terms & conditions, may submit their application in the prescribed format in duplicate to the respective branches, on or before 15/02/14 in person or through the authorised person.

Registered Office, CFHL will not entertain any correspondence/ communication from the Audit firms directly. However, the firms may contact local Branch Manager for clarifications, if any.

Increase in responsibility of TIN FCs issuing PAN without Increase in Remuneration

Posted In Income Tax | Articles | 7 Comments »

Another responsibility on TIN_FCs.

Poor TIN_FCs are required to fulfill all obligations without expecting adequate considerations/remunerations in return. At the top of above they are exposed to all kind of penalties by NSDL for not meeting their standards.

What a pity for them.

A pan Card cost Rs. 66.00 in January 2005 which was adjusted to Rs. 67.00 in April 2006 for increase in ST.

Cost of PAN was increased to Rs. 94.00 in April 2009 to adjust increased cost of Printing and Dispatch.

The same was revised to Rs. 96.00 from April 2012 and it is now Rs. 105.00 from Jan 2014.

Commission Payable to TIN_FC in 2005 was around Rs. 5.50-6.50 (depending of number of application processed by TIN_FC in a month) and unfortunately it is the same in 2014.

Cost of dispatch of physical application forms to upload center is more than the commission payable per application, leave aside cost of acceptance, printing of acknowledgement, connectivity and other establishment expenses.

Now they are asked to verify and attest original documents, forcing a TIN_FC to make a responsible person available in office through-out the day. Front office staff cannot be delegated responsibility which is more likely to be mis-used causing penal actions against TIN_FC.

ITD and NSDL believe that the TIN_FCs are most efficient of businessmen and can control and manage their costs permanently. They are not effected by the outside environment and are free of escalations, inflation of cost.

I request all professional collegues to raise the voice against discrimination of TIN_FCs and help get their dues.

Hope this reaches the right platform and people.

–

Submitted by :- Advocate C. P. Chugh

Top Arguments in HR Process Outsourcing

Posted In Corporate Law | No Comments »

Human Resources form a skeletal part of any business organization. There are various functions involved in HR, as a process. These include recruitment, payroll, statutory compliance, employee engagement and performance assessment in broad angles. Some of these functions are easier to handle while some require a lot of keen attention, accuracy and repeated investigation to ensure timely and quality in deliveries. For example, if you take payroll as a function, the HR manager needs to ensure the employees get their right salary in the right time. Also there are various factors related to payroll such as time tracking, employee attendance, statutory compliance and related aspects. Such functions are monotonous and involve much labor. Also in a situation where there is a new HR manager, there are many chances that this person can make mistakes since he has very less knowledge about the organization. All these factors have led to the advent of HR outsourcing as a trend in the market.

HR process outsourcing can help in addressing issues related to staffing and skills of employees. These issues could sometimes be cost-related aspects of the organization which are considered non-profits. As per the modern business organization concept, the role of the HR manager is purely related to ensuring employee productivity, satisfaction and in turn retention.

Ultimately, HR outsourcing enables organizations to focus on their core mission by entrusting the HR functions to professional partners who can handle these with the right level of expertise in the right time that is measured and decided based on the organization's situation. For example, if your business falls in the manufacturing division, HR function is your non-core activity since your organization's mission is different, while your profession HR partner's business is to enable you to manage your HR functions, being their core activity.

Argument 1: The Cost Aspect

The modern day organizations look at saving on all costs related to operations, manpower, technology and other related elements. When it comes to HR outsourcing, in organizations where HR is not a core function, obviously there is a lot of argument in the cost aspect. The services need to be unmatched to any other player in the market and the life of the contract depends purely on the fact whether the expectations is being met by the HR partner or not for the cost that is being incurred on the service. The organization needs to clearly decide on what proportion of their HR activity needs to be outsourced, based on which the cost aspect needs to be looked at. For example, if an organization opts to outsource payroll, it is wise to choose a partner who can handle all the related aspects of payroll, holistically. This would save much cost and time for the organization.

Argument 2: Realistic Expectations

Every organization, in this business world understands that realistic expectations matters a lot for any vendor. For every single rupee that is being spent on a service from the vendor, there is an expected outcome in terms of the value for the cost. Many organizations, if they get hurt in the first business transaction in terms of service from the vendor such as any delay in delivery or lesser quality, then they come to a conclusion of opting for an in-house solution. But that is where there are unstable expectations being met. If the HR manager resigns from his job, then again there are all chances of mistakes and delays till the new person sets in. So it is always better to choose the right partner and set the realistic expectations and understand how far he can deliver for your business.

Argument 3: Creativity & Flexibility

During earlier days, it was a scenario where one size would fit for all, but now it is not the scenario. In the modern day scenario there is a need for creativity and flexibility, which is a prime expectation for every business in every function. Especially when it comes to the human resources function, the market changes are phenomenal since it revolves around skills. Based on this, the creativity and innovation is required for the HR services provider, especially in the technology perspective.

Argument 4: Chances for Success

Every business needs 100% chances for success. With the complexity involved in the HR processes such as payroll, statutory compliance and attendance tracking, it is preferred that a professional service provider can handle your requirements in the best possible way. Thus, chances of success are high when outsourcing is opted for. With the attrition rate being high, having a single HR manager handle all your processes throughout is not possible. When there is a change that occurs, it creates some gaps that will create some % of failure which is not the case when outsourced.

Conclusions

To conclude, HR process outsourcing helps for functions such as payroll, statutory compliance, and time & attendance management. But, in all of these cases you need to keep a track of all the background data management to keep the sensitive data safe. Thus, it is important to choose an efficient service provider to handle such functions in a safe and secure manner to prevent any discrepancies.

Stella Lauren is a guest writer, who writes such interesting and useful posts that help businesses to plan all related aspects of Payroll Processing Company.

Section 43B and PF Contribution – Controversy snowballed

Posted In Income Tax | Articles | No Comments »

Anuja Garg

Background

Section 43B of the Income-tax Act, 1961 ("the Act") allows certain expenses on the basis of actual payment made within the stipulated time period, i.e. before the due date of filing return of income. In other words, deduction of such expenses is allowed in the year of actual payment and not in the year in which the liability to pay the same gets incurred. Following are the expenses which the said section covers by way of six clauses:

a. Any tax, duty, cess or fee under any law;

b. Contribution made by employer to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees;

c. Bonus or commission to employees;

d. Interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation;

e. Interest on any loan or advances from a scheduled bank;

f. Sum payable by the assessee as an employer by way of leave-encashment.

Out of the aforesaid, clause (b) covering contributions of employer towards provident fund, superannuation fund or gratuity fund has always been a minefield of litigation due to conflicting decisions of Tribunals/Courts, since the said section does not cover contributions made by the employees towards provident fund, superannuation fund or gratuity fund which are dealt with by section 36(1)(va) of the Act. Section 36(1)(va), on the contrary, mandates deposit of such contributions before the due date stipulated in the respective statutes governing such contributions. This is where the dispute has stepped in. The recent contradictory judgmentsof Rajasthan High Court in the case of CIT v. Jaipur Vidyut Vitran Nigam Ltd: ITA No. 278/2011 and Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corp: ITA No. 637/2013 on the issue whether employees' provident fund/ESI contribution is covered by section 43B of the have again sparked off this smoldering controversy. The present article seeks to address this simmering controversy in light of the judgments that have been pronounced till date on the subject.

Section 43B of the Actwas inserted by the Finance Act 1983, with effect from 1.04.1984. The objective behind the introduction ofsection 43B was explained in Circular No.372 dated 08-12-1983, which is reproduced hereunder:

"Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid. To curb this practice, the Finance Act has inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee".

A bare perusal of the aforesaid circular will make it patently clear that the intention of the legislature was to ensure that the employers do not withhold the remittance of statutory liabilities, viz. excise duty, contributions to provident fund/ employees' state insurance scheme since the liability gets accounted for in the books of accounts on mercantile basis and thus, deduction of the same could be claimed even though actual remittance had not been made. To plug this loophole, the legislature inserted section 43B in the Act. It is to be observed that the said sectionstarts with a non-obstante clause by way of the expression – "notwithstanding anything contained in any provision of this Act". Thus certain deductions covered by this section are available only on actual payment of the sums by the taxpayer, irrespective of the method of accounting being followed.

Amendment made by the Finance Act, 2003 and the present scenario

Prior to the amendment made by the Finance Act, 2003, employer's contribution to various funds was allowed as deduction if the same was paid on or before the due date for making such contribution to the fund.The first proviso gave extended time for making payment and allowance of deduction for the preceding financial year. It covered all the payments except clause (b) viz. employer's contribution to provident fund or superannuation fund or gratuity fund.

Thespecific reference to various clauses of section 43B was omitted by the Finance Act, 2003 and hence from assessment year 2004-05, all payments covered by section 43B, if made before the "due date" specified in section 139(1), satisfied the eligibility for deduction. The second proviso which provided that the contribution of the employer to provident fund or superannuation fund or gratuity fund etc. to be paid on or before the "due date" mentioned in section 36(1)(va) was omitted by the Finance Act, 2003. Hence, from the assessment year 2004-05, employers' contribution to the welfare funds of the employees is eligible for deduction even if remitted belatedly, although contribution from employees, however, still remains covered by section 36(1)(va) of the Act.

In other words, section 43B, as it stands presently, covers only employer's contribution to gratuity fund or superannuation fund or provident fund, meant for the welfare of employees. Employees' contribution (by way of deduction from their salary) is treated as income of the employer under section 2(24)(x) of the Act. If the payment is delayed in terms of section 36(1)(va), the deduction gets denied and the amount recovered from employees' salary is chargeable to tax as income of the employer.

Controversy

In the aforesaid backdrop, the Courts have, time and again, rendered conflicting views on whether the employees' contribution to provident fund and other funds stands covered by section 43B of the Act and whether deduction at all should be allowed if the same is deposited before the due date of filing of return of income.

The view that section 43B is a general provision which merely bars deduction of specified sums, unless they are actually paid and whereas provisions of section 36(1)(va) specifically deal with deduction in respect of payment of employees' contribution to provident fund and other funds; therefore, the provisions of section 36(1)(va), being special provisions enacted to deal with specific matter would prevail over the general provisions of section 43B has been upheld in the catena of judgments mentioned hereinbelow –

JCIT v. ITC Ltd: 299 ITR (AT) 341 (Kol-Trib);
DCIT v. Ashika Stock Broking Ltd.: 44 SOT 556 (Kol-Trib);
South Eastern Coalfields Ltd. v. JCIT: 85 ITD 608 (Nag-Trib);
ITO v. LKP Securities Ltd.: ITA No. 638/2012 (Mum-Trib)

The decision of the Gujarat High Court in the case of Gujarat State Road Transport Corp. (mentioned supra) is a recent addition to this list in which the High Court observed as follows:

"Merely because Second Proviso to Section 43B of the Act in which there was a reference to due date as defined in explanation below clause (va) of sub-section (1) of section 36, it cannot be held that even section 36(1)(va) is amended and/or even explanation below clause (va) of sub-section (1) of section 36 is also deleted. It can be said that there was a reference toexplanation below clause (va) of sub-section (1) of section 36 in second proviso of section 43B (which has been deleted by Finance Act, 2003), only for the purpose of defining due date as per explanation below clause (va) of sub-section (1) of section 36. Therefore, by deleting Second Proviso to section43B by Finance Act, 2003, it cannot be said that Section 36(1)(va) is amended and/or explanation below clause (va) of subsection (1) of section 36 is deleted, which is with respect to employees' contribution.

……….xxx…………xxx………..

In view of the above and for the reasons stated above, and considering section 36(1)(va) of the Income Tax Act, 1961 read with sub-clause (x) of clause 24 of section 2, it is held that with respect to the sum received by the assessee from any of his employees to which provisions of sub-clause (x)of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees' account in the relevant fund or funds on or before the "due date" mentioned in explanation to section36(1)(va)."

The Courts, however, in the catena of judgments listed below, have taken a contrary view that section 43B covers employees' contribution as well and the same should be allowed if deposited before the due date of filing of return of income:

CIT v. Jaipur VidyutVitran Nigam Ltd: ITA No. 278/2011 (Raj.)
CIT v. Sabari Enterprises: 298 ITR 141 (Kar.)
CIT v. Kichha Sugar Company Ltd.: 356 ITR 351 (Uttarakhand)
CIT v. AIMIL Ltd.: 321 ITR 508 (Del)
CIT v. NipsoPolyfabriks Ltd.: 350 ITR 327 (HP)
CIT v. Alembic Glass Industries Ltd: 279 ITR 331 (Guj.)
CIT v. Hemla Embroidery Mills (P) Ltd.: 37 Taxmann 160 (P&H)
CIT v. Udaipur DugdhUtpadakSahakariSangh Ltd.:35 Taxmann 616 (Raj.)

The Karnataka High Court, in the case of CIT v. Spectrum Consultants India Pvt. Ltd: WA No. 4077/2013, recently had an occasion to pronounce its judgment on this matter, wherein the High Court, ruling in favour of the assessee, held that the word "contribution" should be interpreted in view of the relevant provisions of the PF Act, which means contribution from employer as well as from the employees.

Thus, in view of the conflicting judicial precedents mentioned supra, it is pertinent to observe as to whether this means that the provisions of section 36(1)(va) are otiose and redundant. To clarify this, it is imperative to analyze the provisions of section 36(1)(va) as well.

The said section contemplates that any sum covered under section 2(24)(x) of the Act would be allowed as a deduction, only if the same is deposited in the relevant fund on or before the due date.Reference, in this context, is made to section 2(24)(x) of the Act, since section 36(1)(va) is applicable in respect of sums covered under the former section.

Section 2(24) of the Act provides an inclusive definition of "income". Clause (x) of the said section includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 or any other fund for the welfare of such employees in the definition of "income". The said clause was inserted by the Finance Act, 1987 with effect from 01.04.1988 to prevent assessee employers from mis-utilizing the contributions to provident and other funds deducted from the salary of the employees. Circular No. 495 dated 22.09.1987 which explains the intent of the legislature for the amendments made vide Finance Act, 1987 reads as -

12.2 In addition, contribution of the employees to the various funds which are deducted by the employer from the salaries or wages of the employees will be taxed as income [insertion of new sub-clause (x) in clause (24) of section 2] of the employer, if such contribution is not credited by employer in the account of the employee in the relevant fund by the "due date". Where such income is not chargeable to tax under the head "Profits and gains of business or profession", it will be assessed under the head "Income from other sources".

Thus, the legislative intent was not to bring contributions made by employees' towards provident and other funds within the ambit of the definition of income, but to penalize the assessee-employers in cases where such contribution is not deposited in the respective funds in time. That apart, even otherwise, such contributions can never be brought within the scope of income, since such sums are not earned by the assessee employer; the same are received by the employer in a fiduciary capacity for remitting such sum in the respective fund for the retirement benefits of the employees. The Supreme Court, in the case of CIT v. G.R. Karthikeyan: 201 ITR 866, has held that the word "income" should be given its natural and grammatical meaning. Therefore, any sum of money received as a trustee on behalf of another person for remitting the same, cannot,by any stretch of imagination, be considered as income.

Therefore, it is for such reason that the Explanation to section 36(1)(va) of the Act defines "due date" as – 'the date by which the assessee is required as an employer…'. In other words, it means that the due date for depositing such contribution would be the date by which the employer is obliged to deposit such contributions which invariably gets covered by the due date mentioned in section 43B of the Act.

Furthermore, the amendment to section 43B of the Act, extending the availability of deduction to PF/ESI contributions if deposited within the due date of filing the return of income was carried out with the very purpose of mitigating the difficulties caused to employers under section 43B of the Act.

The intent of enacting a special provision for employees' contribution was only to ensure that the employer acts reasonably in respect of the moneys received from the employees' and there is no failure to deposit such contributions or else the same would result in penalizing the assessee-employer by way of bringing such contributions to tax as income of the employer.

The aforesaid issue, however, does not remain free from doubt. The evolving jurisprudence can be settled only by the dictum of the apex Court.

(Author is working as Senior Executive – Corporate Tax with Wipro Limited at Bangalore)

FAQ on Housing Loan & Income tax benefit

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Q-1What are Income tax benefits of taking and repaying a housing loan under EMI Plan?

You will be eligible to claim both the interest and principal components of your repayment during the year.

Interest can be claimed as a deductionunder Section 24. You can claim up to Rs. 150,000 or the actual interest repaid whichever is lower. (You can claim this interest only when you are inpossession of the house)
Principal can be claimed up to the maximum of Rs. 100,000 under Section 80C. This is subject to the maximum level of Rs 100,000 across all 80C investments.
You will need to show the statement provided by the lender showing the repayment for the year as well as the interest & principal components of the same.

Q-2 If I buy a house jointly with my wife and take a joint home loan, Can we both claim income tax deduction?

Ans:-Yes, if your wife is working and has a separate source of income, both of you can claim separate deductions in your income tax returns.The repayment of principal amount of the loan can be claimed as a deduction under section 80C up to a maximum amount of Rs.1 lakh individually by each co-owner.

In cases where the house is owned by more than one person and is also self-occupied by each co-owner, each co-owner shall be entitled to the deduction individually on account of interest onborrowed money up to a maximum amount of Rs. 1.5 lakh. If the house is given on rent, there is no restriction on this amount. Both co-owners can claim deductions in the ratio of ownership.

Q-3 My husband and I have jointly taken a home loan. He pays 75 percent of the EMI. What will be our individual tax benefits?

Ans: – As you have taken a joint home loan, both of you are eligible for tax exemption for your share of the EMI paid. For claiming income tax deduction, the EMI amount is divided into the principal and interest components. The repayment of the principal amount of loan is claimed as adeduction under section 80C of the Income Tax Act up to a maximum amount of Rs. 1lakh individually by each co-owner. The repayment of the interest portion of the EMI is also allowed as adeduction under section 24 of the Act, which is given under the head "income from house property". In case you are living in the house for which home loan is taken, both of you shall be entitled todeduction in the ratio (3:1) on account of interest on borrowed money up to a maximum of Rs. 1.5 lakh individually. If the house is given on rent, there is no restriction on this amount and both co-owners can claim deduction in the ratio of ownership- 3:1 in your case.

Q- 4 plan to buy a house by raising loans from friends and relatives. Will I be eligible for tax benefit from all sources?

Ans: – Interest payment to friends and relatives can be claimed u/s 24 but only against a certificate received from them. In the absence of the certificate, you would not be eligible for the deduction. The recipient of interest income who issues the certificate is liable to pay tax on the interest income that he receives. As far as the principal payments are concerned, they would not qualify for tax benefit as loans only from notified institutions and banks are eligible for such deductions.

Q- 5 What are the tax benefits that I can avail of for repaying a home loan ?

You will be eligible to claim both the interest and principal components of your repayment during the year.

Interest can be claimed as a deduction under Section 24. You can claim up to Rs. 150,000 or the actual interest repaid whichever is lower. (You can claim this interest only when you are inpossession of the house)
Principal can be claimed up to the maximum of Rs. 100,000 under Section 80C. This is subject to the maximum level of Rs 100,000 across all 80C investments.
You will need to show the statement provided by the lender showing the repayment for the year as well as the interest & principal components of the same.

Q- 6 . Can I take advantage of tax benefits from a home loan as well as claim House Rent Allowance (HRA) ?

If you took a home loan and are still living in a rented place, you will be entitled to:

Tax benefit on principal repayment under Section 80C
Tax benefit on interest payment under Section 24
HRA benefit

Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops. If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above. However, in this case, the rent you receive would be considered as your taxable income.

Q- 7. I have a home loan in which I am a co-applicant. However, the total EMI amount is paid by me. What is the total income tax exemption that I can avail of ?

Yes, you can claim income tax exemption if you are a co applicant in a housing loan as long as you are also the owner or co owner of the property in question. If you are only person repaying the loan, you can claim the entire tax benefit for yourself (provided you are an owner or co-owner). You should enter into a simple agreement with the other borrowers stating that you will be repaying the entire loan. If you are paying part of the EMI, you will get tax benefits in the proportion to your share in the loan.

Q- 8. I have two housing loans on two different properties. Can I get tax rebate under sec 80 C of both the loans?

Yes, you can get the 80C benefit on both loans. However, the total amount that you will be entitled to will be a total of Rs 100,000 across both the homes.

The interest paid on a home loan is not directly deductible from your salary income for either of your flat loans. Income from house property will be calculated for each flat you own. If either of theses calculations shows a loss, this loss can be set off against your income from other heads.

As for Section 24 deduction, on your self occupied house you can take advantage of interest payments up to Rs.1,50,000. For the other property, you can claim actual interest repaid, there is no limit for the same.

Q- 9.I live in Delhi in my own house. In 2008, I took a housing loan to fund the purchase of an under-construction flat in another city (Faridabad which comes under National Capital Region of Delhi but otherwise falls in Haryana). It is expected to be completed in FY14. I haven't claimed any tax benefit so far. What happens to the loan installments I have paid so far? Can they also be claimed for tax benefit?

According to the Income-tax Act, 1961, where the property has been acquired or constructed with borrowed capital, the interest payable on such capital for the period prior to the year in which the property has been acquired shall be allowed as deduction in five equal instalments beginning from the year in which the property is acquired. Thus, the interest included in the loan instalment paid by you during the construction period shall be eligible for deduction from the year in which the flat is acquired/construction is completed.

The principal amount of the loan repaid till date shall not be available as a deduction under section 80C till the time the construction of the flat gets completed. Once the flat is completed and thepossession is handed over to you, you will be eligible to claim deduction for interest paid on the loan under section 24(b) and principal amount of loan under section 80C. The total amount ofdeduction available under section 80C shall be limited to Rs. 1 lakh. Thus, as of now, you are not eligible for any tax benefit on such loan repayments.

Q. 10 Is there any additional deduction which I can claim in respect of Interest on Housingloan in addition to interest Under Section 24(b)?

Ans. Finance Minister inserted a new section relating to the additional deduction in respect of interest on loan taken for residential house property. Assessee can avail the benefits of this section in two A.Y. 2014-15 & 2015-16.Purpose of this section is to promote house ownership & give a fillip to a number of industries like steel, cement, brick, wood etc. besides jobs to thousands of construction workers. to get more information on the please read the Full Article - Section 80EE Income Tax Benefit on Home Loan Interest

Regards,

Pawan Singla , LLB

M. No. 9825829075

Taxability Of Incomes And Expenses Under Foreign Collaborations

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The globalisation of economic reforms throughout the world has led to an increasing degree of inter-dependence between countries in the fields of technology, manpower, finance, etc. While drafting foreign collaboration agreements both parties have to necessarily take into consideration the tax laws in the respective countries. This is necessary so as to ensure, on the one hand, that the statutory requirements under the various tax laws in India and the other country are met, as also, on the other hand, to minimise the burden of tax which falls on the income, profits and gains arising from the collaboration. The present article discusses the various facets in which foreign collaborations may be made and the tax implications involved therein.

1. Taxability of different kinds of income under Foreign Collaborations

1.1 Interest

Under section 2(28A) of the Income Tax Act, 1961, 'interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. The definition of interest also includes any service fee or other charges in respect of loans, debts, deposits, etc. as well as commitment charges on non-utilised portion of credit facilities.

Section 9(1)(v) provides that income by way of interest payable by the Government, or by a person who is resident or by a person who is a non-resident, shall be income deemed to accrue or arise in India, subject to the following exceptions:

(i) interest payable by a resident in respect of any debt incurred or any moneys borrowed and used for the purposes of a business or profession carried on by him outside India;

(ii) interest payable by a resident in respect of any debt incurred or any moneys borrowed and used for the purpose of making or earning any income from any source outside India;

(iii) interest payable by a non-resident in respect of any debt incurred or money borrowed and used for the purpose of a business or profession carried on by him outside India.

1.2 Royalty

Royalty has been defined in Explanation 2 to section 9(1)(vi) to mean the consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'capital gains') for:

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of or the use of patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, secret formula or process or trade mark or similar property;

(iv) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(v) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(vi) the transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vii) the rendering of any service in connection with the activities referred to in (I) to (v) above. Further, CBDT Circular No. 202 dated 5.7.1976 has clarified that 'royalty' would include both industrial royalties and copyright royalties.

Section 9(1)(vi) deems income by way of royalty as accruing or arising in India in the following three cases:

(i) Royalty payable by the Central Government or any State Government must be deemed to accrue in India regardless of who is the payee and what is the amount of royalty and also irrespective of the purpose of the payment;

(ii) Royalty payable by any resident taxpayer to any person, whether resident or non- resident, would be deemed to accrue in India in every case except where the payment is relatable to a business or profession carried on by the resident outside India or for the purpose of making or earning any income from any other source outside India; and

(iii) Royalty payable even by a non-resident would be deemed to accrue in India in cases where the payment is relatable to any business or profession carried on by the non- resident in India or to any other sources of the non-resident's income in India.

However, the definition excludes any income which might otherwise be chargeable as capital gains. Thus, a receipt of a capital nature for the total change in ownership of the patents, invention, model, design, drawings, specifications, trade mark, secret formula or process, data, documentation, etc. representing technical know-how provided by foreign collaborators to Indian taxpayers would not give rise to income by way of royalty while the authority given under the collaboration agreement to the Indian taxpayer to use for the purpose of his business the drawings, designs, patents, etc., representing technical know-how which would continue to belong to the foreign collaborator would come within the purview of royalty for purposes of deeming the same accruing in India, thus, making the non-resident liable to tax under this provision. For this purpose, it is immaterial whether the royalty is paid as a lump sum or as a recurring payment; it is also immaterial whether the royalty is described as such under the collaboration agreement or is known as licence fees, copyright charges or by any other name.

Amendments brought in by the Finance Act, 2012:

Consideration for use or right to use of computer software is royalty within the meaning of section 9(1)(vi):

As per section 9(1) (vi), any income payable by way of royalty in respect of any right, property or information is deemed to accrue or arise in India. The term "royalty" means consideration for transfer of all or any right in respect of certain rights, property or information. There have been conflicting court rulings on the interpretation of the definition of royalty, on account of which there was a need to resolve the following issues –

Does consideration for use of computer software constitute royalty?

(i) Is it necessary that the right, property or information has to be used directly by the payer?

(ii) Is it necessary that the right, property or information has to be located in India or control or possession of it has to be with the payer?

(iii) What is the meaning of the term "process"?

In order to resolve the above issues arising on account of conflicting judicial decisions and to clarify the true legislative intent, Explanations 4, 5 & 6 have been inserted with retrospective effect from 1st June, 1976.

Explanation 4 clarifies that the consideration for use or right to use of computer software is royalty by clarifying that, transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Consequently, the provisions of tax deduction at source under section 194J and section 195 would be attracted in respect of consideration for use or right to use computer software since the same falls within the definition of royalty.

The Central Government has, vide Notification No.21/2012 dated 13.6.2012 to be effective from 1st July, 2012, exempted certain software payments from the applicability of tax deduction under section 194J. Accordingly, where payment is made by the transferee for acquisition of software from a resident-transferor, the provisions of section 194J would not be attracted if –

(1) the software is acquired in a subsequent transfer without any modification by the transferor;

(2) tax has been deducted either under section 194J or under section 195 on payment for any previous transfer of such software; and

(3) the transferee obtains a declaration from the transferor that tax has been so deducted along with the PAN of the transferor.

Explanation 5 clarifies that royalty includes and has always included consideration in respect of any right, property or information, whether or not,

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

Explanation 6 clarifies that the term "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

Under section 115A(1)(b)(A), royalty income is taxable in the hands of non-corporate non- residents and foreign companies at the rate of 10% if it is received in pursuance of an agreement made after 31st May, 2005, 20% if it is received in pursuance of an agreement made after 31st May, 1997 but before 1st June, 2005, and at the rate of 30% if such agreement is made on or before 31st May, 1997. The conditions attached to this provision are as follows:

(i) The recipient of the royalty should be a foreign company or a non-corporate non-resident.

(ii) The royalty may be received from the Government or an Indian concern.

(iii) The royalty should be received in pursuance of an agreement made by the foreign company with the Government or the Indian concern after 31st March, 1976.

(iv) Where the agreement is with an Indian concern, it should be approved by the Central Government.

(v) Where the agreement relates to a matter included in the industrial policy (prevailing at that time) of the Central Government, the agreement should be in accordance with that policy.

(vi) The conditions (iv) and (v) shall not apply where the royalty is received in consideration for the transfer to an Indian concern, all or any rights in respect of copyright in any book, or for the transfer to a person resident in India, any computer software.

(viii) In computing the royalty income, no deduction shall be allowed under sections 28 to 44C and section 57.

It is to be noted that section 115A is not applicable in respect of royalty income covered under section 44DA (1).

1.2.1 Source Rule for "royalty" – section 9 (1) (vi) [CBDT Circular 202, dated May 7, 1976]

A non-resident taxpayer is chargeable to tax in India in respect of income by way of royalty which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. The Income-tax Act, however, does not contain any definition of the term "royalty" nor is there any clear cut source rule specifying the circumstances in which royalty income can be regarded as accruing or arising in India. Further, lump sum payments made for the supply of know-how are not chargeable to tax where such know-how is supplied from abroad and the payment therefor is made outside India even though the know-how is used in India, if no part thereof is attributable to any services rendered in India.

The Finance Act, 1976 has inserted a new clause (vi) in section 9(1) clearly specifying the circumstances in which the royalty income will be deemed to accrue or arise in India and also defining the term "royalty".

Under the new provision, royalty income of the following types will be deemed to accrue or arise in India:

(a) royalty payable by the Central Government or any State Government;

(b) royalty payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and

(c) royalty payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India.

In view of the aforesaid amendment royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, will ordinarily become chargeable to tax in India. In order, however, to ensure that foreign suppliers of technical know-how who had entered into agreements or had finalised proposals for the receipt of such lump sum royalties with the approval of the Central Government on the understanding that such payments would be exempt from income-tax, it has been provided that such lump sum payments received under approved agreements made before 1-4-1976 will not be deemed to accrue or arise in India, and for this purpose, an agreement made on or after 1-4-1976 will be deemed to have been made before that date if the following conditions are fulfilled:

(i) In the case of a taxpayer other than a foreign company, if the agreement is made in accordance with proposals approved by the Central Government before that date.

(ii) In the case of a foreign company, if the condition referred to in (a) above is satisfied, and the foreign company exercises an option by furnishing a declaration in writing to the Income-tax Officer that the agreement may be regarded as having been made before 1-4-1976. The option in this behalf will have to be exercised before the expiry of the time allowed under section 139(1) or section 139(2) (whether fixed originally or on extension) for furnishing the return of income for the assessment year 1977-78 or the assessment year in which the royalty income first became chargeable to tax, whichever assessment year is later. The option so exercised will be final not only for the assessment year in relation to which it is made but also for every subsequent year.

[The intention of giving an option to foreign companies to claim that agreements made on or after 1-4-1976 may be regarded as agreements made before that date is that where exemption from income-tax in respect of lump sum royalty is allowed, the balance of the royalty income should be charged to tax at the rates applicable in the case of such income derived under approved agreements made before that date. In other words, taxpayers exercising the option will be placed on a par with taxpayers deriving royalty income under approved agreements made before 1-4-1976 in all respects. This aspect has been explained in detail in paragraph 36.1 of the circular.]

For the purposes of the aforesaid source rule, "royalty" has been defined in Explanation 2 to section 9(1)(vi). It will be seen that the definition is wide enough to cover both industrial royalties as well as copyright royalties.

Further, the definition specifically excludes income which would be chargeable to tax under the head "Capital gains" and, accordingly, such income will be charged to tax as capital gains on a net basis under the relevant provisions of the law. The amendments referred to in this paragraph have come into force with effect from 1-6-1976, and will apply in relation to the assessment year 1977-78 and subsequent years. [Section 4(b) (Part) of the Finance Act]

1.3. Fees for technical services

Explanation 2 to section 9(1)(vii) defines 'fees for technical services' as any consideration (including lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient. Further, any income of the recipient chargeable under the head "salaries" will also not form part of fees for technical services.

The taxability of fees received for technical services is on similar lines as royalty income. Under section 115A(1)(b)(B), income-tax shall be charged at 10% if the technical fees has been received in pursuance of an agreement made after 31st May, 2005, at 20% if such fees are received in pursuance of an agreement made after 31st May, 1997 but before 1st June, 2005, and at 30% if the said agreement was made on or before 31st May 1997. No deduction shall be allowed under sections 28 to 44C and section 57 in respect of any expenditure or allowance, for the purpose of computing the aforesaid income. In this regard, the following issues are relevant. Section 115A, however, does not apply in respect of fees for technical services covered under section 44DA (1).

Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fee for technical services to be taxed irrespective of territorial nexus (Explanation to section 9): Income by way of interest, royalty or fee for technical services which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be included in the total income of the non-resident, whether or not –

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.

In effect, the income by way of fee for technical services, interest or royalty, from services utilized in India would be deemed to accrue or arise in India in case of a non-resident and be included in his total income, whether or not such services were rendered in India.

1.3.1 Source Rule for 'fees for technical services' – section 9(1)(vii) [CBDT Circular 202, dated May 7, 1976]

As in the case of royalty, the Finance Act, 1976 has amended the Income-tax Act clearly specifying the circumstances in which income by way of "fees for technical services" will be deemed to accrue or arise in India and also defining the expression "fees for technical services". For this purpose, a new clause (vii) has been inserted in section 9(1).

Under the new provision, income by way of "fees for technical services" of the following types will be deemed to accrue or arise in India:

(a) fees for technical services payable by the Central Government or any State Government;

(b) fees for technical services payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and

(c) fees for technical services payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India.

The expression "fees for technical services" has been defined to mean any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services, including the provision of services of technical or other personnel. It, however, does not include fees of the following types, namely:

1. Any consideration received for any construction, assembly, mining or like project undertaken by the recipient. Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly, it will not be fair to tax such consideration in the hands of a foreign company on gross basis or to restrict the expenditure incurred for earning the same to 20 per cent of the gross amount as provided in new section 44D. Consideration for any construction, assembly, mining or like project will, therefore, be chargeable to tax on net basis, i.e., after allowing deduction in respect of costs and expenditure incurred for earning the same and charged to tax at the rates applicable to the ordinary income of non-resident as specified in the relevant Finance Act.

2. Consideration which will be chargeable to tax in the hands of the recipient under the head "Salaries".

The aforesaid amendment has come into force with effect from 1-6-1976, and will apply in relation to the assessment year 1977-78 and subsequent years.

1.4 Transfer of know-how

Royalty payments may be in exchange for something in addition to the mere use of the invention. Usually the licence contracts include "know-how" provisions. In other words, the licensor not only grants the right to use the invention but also undertakes to supply the licensee with technical `know-how'. The Madras High Court in Fenner Woodroffe & Co., v CIT (1976) 102 ITR 665 (Mad.) has explained that know-how may be taken as comprehending within it the fund of knowledge or experience gained by a manufacturer during the long number of years in which they had been manufacturing on the formulae, the engineering drawings and specifications, mechanical details or processes and general knowledge that is associated with the production and development which is in the exclusive knowledge of the trade.

Know-how is also referred to as a manufacturing technique. It is an intangible asset. The House of Lords in Moriarty v Evans Medical Supply Ltd. (1959) 35 ITR 707 laid down the criteria to be applied to determine whether the transaction involving dealings in know-how would constitute a receipt of payment of a capital or revenue nature. If the assessee sells its know-how and realises the price for the same, the money realised for providing the know-how would be a receipt of a capital nature. On the other hand, in a case where the assessee who owns the know-how continues to own it and allows the other person only the right of use of such know-how the payments received towards the use of the know-how by another person would be a revenue receipt liable to tax. The question whether the transaction involved is one of purchase or sale of know-how or is that of allowing the other person the right to use it will have to be determined with reference to the facts and circumstances of the case. Where the receipt is of a capital nature, it would be wholly outside the purview of tax under section 9(1)(vi) as royalty. Further, receipts of a capital nature which would otherwise have been liable to tax under the head "capital gains" (e.g. on transfer of patents, designs, drawings, secret formula, etc. forming part of the know-how) would not be liable to tax in the hands of the collaborator in India particularly when the transfer does not take place in India. Therefore, only if the transfer takes place in India, the non-resident collaborator would attract liability to capital gains tax in respect of the transfer of know-how, but not otherwise.

1.5 Export of goods from India by non-residents

Clause (b) of the Explanation to section 9(1)(i) provides that in the case of every non-resident, no income should be regarded as being deemed to accrue or arise to him in India through or from operations which are confined to the purchase of goods in India for the purpose of export. Thus, even in cases where the non-resident has an agency or office in India but the agent or branch office in India does nothing more than the purchase of the goods for their export, there would be no question of income accruing to the non-resident under the deeming provisions although in effect the non-resident may derive income outside India from the goods so exported ultimately on their sale outside India and the profits arising from such export are traceable to the business connection in India through the agency, branch or office. The exemption is, however, subject to the non-resident taking precaution to ensure that even a negligible part of the goods purchased are not sold in India and the whole of the goods purchased are only exported. The country to which the export is made is immaterial for the purpose. Of course, care should be taken in every case to secure that no part of the sale proceeds for the goods exported is received directly or indirectly, in cash or in kind in India by or on behalf of the non-resident. In view of this benefit of total exemption from income-tax without any monetary or other limits and conditions, every possible export should be made by foreign collaborators and their Indian counterparts to secure that the benefit of exemption under clause (b) of the Explanation to section 9(1)(i) is obtained, wherever practicable.

2. Tax treatment of payments made for expenses, etc.

2.1 Nature and amount of expenses dependent upon various factors

The carrying on of a business in India by different categories of taxpayers involves a variety of expenses being incurred by them both in India and outside. The nature and amount of the expenses would, however, depend on the nature of the business, the purpose of incurring the expenditure and the stage at which it is incurred.

2.2 Expenses incurred prior to the setting up of the business do not qualify for any allowance or deduction

In general, a substantial portion of the expenditure is incurred after the business of the taxpayer in India is actually set up. The expenses incurred prior to the setting up of the business do not qualify for any allowance or deduction in computing the taxable profits of the business in India since the previous year of the business cannot be regarded as having commenced until the business is actually set up. Therefore, expenses which are incurred prior to the setting up of business and which are directly related to the acquisition of capital assets including their installation, whichever necessary, have to be capitalised and the assessee would become entitled to claim depreciation allowance and investment allowance (where applicable) in respect thereof from the time the business commences its normal operations by virtue of the commercial production being started.

2.3 Foreign collaborators need to be careful about allowance or disallowance of various expenses

Wherever the expenditure is disallowable because of the restrictions under section 37(1) read with section 28 of the Income-tax Act, 1961, the Indian taxpayers will have to be extremely careful to examine, before entering into the foreign collaboration agreement whether the scheme of foreign collaboration could be modified suitably to secure that such a disallowance is not attracted. This is because of the fact that the incurring of any expenditure which is disallowable would effectively mean that the Indian taxpayers' financial position would be substantially weakened by virtue of the agreement under which the disallowable expenditure becomes liable to be incurred. The reason for this is not far to seek. Under the scheme of the Income-tax law in India, any expenditure which is incurred by a taxpayer carrying on business and which is disallowed in computing the taxable profits would result in an addition to the real income of the assessee to the extent of the disallowed expenditure. Consequently, the taxpayer in India will not only be having the commitment of paying the amount of expenditure but also be faced with the problem of having to pay a sizeable amount towards income-tax with interest on the amount of notional income attributable to the disallowed expenditure in his income-tax assessment.

Section 37(1) would be the primary guiding provision for the purpose of determining the admissibility or otherwise of the expenditure incurred by the Indian taxpayer. Under this section, it is obligatory for the assessee to establish, for the purpose of obtaining an allowance in respect of the expenditure incurred by him, that the expenditure is of a revenue nature and has been incurred wholly and exclusively for the purpose of the business or profession carried on during the previous year, the income of which is assessable to tax in India.

2.4 Principles for determining whether expenditure is of capital or revenue nature

The criteria for deciding the nature of the expenditure to ascertain whether it is capital or revenue is not one of universal application and the decision in each case will have to depend on the facts and circumstances of the case. The question whether a particular expenditure is capital or revenue in nature and is accordingly deductible or not for purpose of computing the taxable profits is essentially a mixed question of law and fact. The broad principles for making a distinction between capital and revenue expenditure were outlined by the Andhra Pradesh High Court in Hylam Ltd. v CIT (1973) 87 ITR 310 are mentioned as follows:

1. If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on or for the extension of the business that is going on or for substantial replacement of an existing business asset, it would be capital expenditure.

2. If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage is for running the business or for working out that asset with a view to producing profit, it would be revenue expenditure.

3. If the outgoing is related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit earning process or operations and not for acquisition of an of an asset of a permanent character, possession of which is a condition precedent for the running of the business, then it would be expenditure of a revenue nature.

4. Special knowledge or technical knowledge or a patent or a trademark is an asset and if it is acquired for payment for use and exploitation for a limited period and what is acquired is not an asset or advantage of an enduring nature and at the end of the agreed period that advantage or asset reverts back intact to the giver of the special knowledge or the owner of the patents or trademarks, it would be expenditure of a revenue nature.

5. If it is intrinsically a capital asset, it is immaterial whether the price of it is paid once and for all or periodically or whether it is paid out of the capital or income or linked up with net sales; the outgoing in such a case would be of the nature of capital expenditure.

6. If the amount paid for the acquisition of an asset of an enduring nature is settled for the mere fact that the amount so settled is chalked out into various small amounts or periodic installments, the capital nature of the expenditure would not cease to be so or be altered it into the nature of revenue expenditure.

7. A lump sum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over a number of years. It is the intention and object with which the asset is acquired that determines the nature of the expenditure incurred over it and not the method or the manner in which the payment is made or the source of such payment.

8. If the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure.

9. An asset or advantage of an enduring nature does not mean that it should last forever. If the capital asset is in its nature a short-lived one, the expenditure incurred over it does not for that reason cease to be a capital expenditure.

10. It is not the law that if an enduring advantage is obtained the expenditure for securing it must always be treated as capital expenditure. If the advantage acquired is to get any stock-in-trade of the business then it would be revenue expenditure. But if what is acquired is not the advantage of getting any stock-in-trade directly but of something which has to be dressed up or processed before it is converted into stock-in-trade, the expenditure incurred over it would be capital expenditure".

Compiled by FCA Kamal Garg. He is the fellow member of ICAI. He is engaged in IFRS – Audit and Advisory, FEMA, Valuation and International Taxation services. For any queries and suggestions, he can be approached at cakamalgarg@gmail.com

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Chartered Accountant Finance

Tuesday, January 28, 2014

[aaykarbhavan] Judgments and Information [1 Attachment]

SC on scope of arbitration proceedings.

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Brief

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Judgement

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