Importance Of Functions, Assets & Risk (FAR) Analysis In Transfer Pricing
Introduction
Transfer pricing has become the most significant source of litigation in India and is increasingly becoming a regular discussion point in the board room of large Indian and Global Multinational enterprises ("MNEs"). Indian Tribunals have issued around 650 rulings over the past decade on transfer pricing issues, setting precedents for taxpayers on a wide range of issues.
In dealing with two independent enterprises, the price charged usually reflects the function that each enterprise performs (taking into account assets used and risk assumed). Therefore, comparison of the functions performed, assets used and risk assumed by the parties is necessary in determining whether the prices of controlled and uncontrolled transactions are comparable. This exercise is known as Function, Asses and Risk ("FAR") analysis. This analysis forms the basis and provides a framework for comparability study and subsequent determination of the most appropriate method. It assists in proper assessment of comparability for the purpose of Arm's length study.
Rule 10B of the Income Tax rules require a functional analysis to determine whether controlled and uncontrolled transactions are comparable as well as to establish a factual standard on the basis of which adjustments may be made to the results of comparable transactions or companies. A functional analysis in most cases is an essential tool for finding and organising facts about a business in terms of its functions, risk and intangibles. Functional analysis identifies how the economically significant activities undertaken by a multinational are divided between each member involved in the transaction under review, for which respective members should expect to be rewarded.
Economic theory predicts that the enterprise that provides most of the effort, and more particularly, the rare or unique functions, should earn most of the profit. Further, in the open market, the assumption is that increased risk will be compensated by increase in expected return. An appraisal f risk is therefore important in determining ALP.
Landmark judgements relating to Importance of FAR
The Supreme Court in the case of Morgan Stanley and Company Inc. [292 ITR 416] emphasized on FAR analysis (analysis of the functions performed, and associated resources employed, by the taxpayer in the controlled and uncontrolled transactions) for benchmarking exercise for determination of arm's length price of an international transaction. The Benches of the Tribunal have also laid emphasis on a systematic functional analysis for determination of arm's length price of international transaction.
Importance of FAR was pointed out by the Tribunal in Hoganas India (P.) Ltd. V. Dy. CIT [2013, 30 taxman.com, 390] in respect of a matter, where the parent company received commission at the rate of U.S dollars 30 per MT on sales directly made to parent company in India, which worked out to 1.49% of the corresponding sales achieved by parent company in India. TNMM was adopted for determining arm's length price and comparison was made by commission received by assessee for marketing its own product in India showing that it was not on par with standard rate of commission received for distribution of parent's products. Since the internal rate of return attributable to marketing function was 4.44%, an addition of difference of 1.49% was added by the TPO. It was found that in view of the difference between parameters of risk involved in distribution of parents products and own products, the benchmark adopted by TPO was found unacceptable.
FAR was the subject matter of discussion in Wrigley India (P.) Ltd. V. Addl. CIT [2011], where in case of a business of manufacturer and selling confectionary products by the Indian company to its associated enterprises in the Middle East and Spain, TNMM was adopted, but the Transfer Pricing officer preferred cost plus method on the comparison of domestic segment with export segment, which was challenged, on the allegation of significant dissimilarity between these two segments. The tribunal, however held that FAR profiles of both segments were of same nature with commonality of manufacturing and administrative infrastructure with no substantial product difference. The tribunal, therefore allowed relief to the extent of 4%, which was based on relative profitability more by way of thumb rule deviating from its own working of FAR profile. Geographical location was also not given due weight, besides the differences arising in matters of business development, sales promotion, advertising and marketing, maintaining distribution network, inventory management and realisation of debts involving credit risk. This case is a bad example of application of half-hearted FAR analysis.
Conclusion
The importance of FAR can be summarised in the following points:
- Critical to have robust annual TP documentation with in depth FAR analysis and sound economic analysis (including adjustments);
- Comparability strictly based on FAR- intangibles, risks play important role;
- Adjustments to comparables necessary to account for differences in FAR;
- Carefully analyse service operations in India – identify High Value/ IP generating services;
- Evaluate marketing activities and business restructuring in detail;
- PE attribution – focus on FAR analysis and attribution of profits using TP principles by way of upfront analysis; and
- Upfront documentation of a comprehensive FAR analysis followed by a sound economic/ comparability analysis -key to mitigation of risks, passes the onus on Revenue authorities.
(CA Deepanshu Bansal, Partner | Transfer Pricing, Legal Quotient Consultants, Email: bansal.deepanshu@gmail.com, Ph: +91-9873681488)
Suhrith Parthasarathy
CONSTITUTIONAL CONUNDRUMS — Challenges to India's Democratic Process: V. Venkatesan
The Indian Constitution, a document of immense political significance, is both complex and prone to tremendous incongruities. This demands that each of the state's three limbs — Parliament, the Executive and the Judiciary — indulge in an interpretive exercise. Because the Constitution, as an act of the people, lays down mandatory rules for governance, these incongruities are often at the forefront of the very functioning of the Indian democracy. Some of these concerns that are often overlooked in the hubbub of our 24X7 news culture find focus in V. Venkatesan's new book.
Venkatesan, a journalist with the Frontline magazine, and a lawyer by qualification, has imbued into topics of substantial legal intricacy a journalistic and academic rigour. The aim of the book, in the author's words, is to "overcome [the] limitation of periodical journalism, by seriously reflecting and following up themes," which has interested him during the past decade. This, one can conclude on reading the book, Venkatesan achieves.
Divided into four parts that broadly deal with the separation of power between the Executive and Parliament, federalist tensions between the states and the Union, judicial activism, and the Election Commission's role, Constitutional Conundrums is a collection of 24 essays. Each covers a topic of current significance, and Venkatesan both introduces the urgency of the subject to the reader, and delves into a constitutional analysis of the issues using both the practice of government and the Supreme Court's case law.
For instance, when writing about the then President APJ Abdul Kalam's decision to return to Parliament for reconsideration the Parliament (Prevention of Disqualification) Amendment Bill, 2006, Venkatesan includes an analysis of Article 111 of the Constitution, which allowed the President such a prerogative. Here, he probes into the Constituent Assembly's debates on the provision, which is so rarely used that it was almost forgotten by presidents preceding and succeeding Kalam.
What's more, Venkatesen also considers the scope of the phrase "office of profit" in Article 102, which had formed the subject matter of Parliament's amendment, as well as the decision of the Supreme Court in Consumer Education and Research Society v. Union of India, where the constitutional validity of the Act, as ultimately enacted, was upheld. In so doing, Venkatesan travels beyond the constraints of regular journalism to analyse an important issue of political significance with care.
Venkatesan's essays on India's higher judiciary, which he believes has been excessively meddlesome in some areas, while far too placid in other areas, are of particular value to the reader. In invoking, for example, an aside from Justice O Chinnappa Reddy's autobiography, where the judge expresses a concern that the Supreme Court has never had occasion to rule over a journalist's right to express his or her views freely, Venkatesan argues that in-house use of prior restraint can often have a chilling effect on professional independence. "… The control exercised by the editors of newspapers and magazines over the free expression of views by the journalists," he writes, "…flies in the face of Constitutional guarantees of liberty of thought and expression."
In his essay on freedom of expression, Venkatesan examines case law pertaining not merely to prior restraint of speech, as was the case when the Delhi High Court recently injuncted the media from publishing headlines associating Justice Swatanter Kumar with allegations made by an intern, but also with the more significantly disturbing effects that 'blasphemy' laws such as Section 153A of the Indian Penal Code tend to produce.
Here, he also analyses the ban against the publication of James Laine's book on Shivaji, rightly overturned by the Supreme Court, as also the ban on the Kannada novel Dharmakaarana, which was upheld by the court in what Venkatesen describes as a "deeply flawed judgment." Through his analysis, Venkatesen presents the fractured free speech jurisprudence of India's courts, which, in being inconsistent, tends to curtail democracy as opposed to promoting its most cherished values of inclusiveness.
Venkatesan also devotes an essay to showcasing how the Supreme Court is often more activist in matters pertaining to civil and political rights, while showing less interest in matters that impinge on the enforcement of economic and social rights.
With the welfarist role of the State having diminished in neo-liberal India, Venkatesen argues that there is a particular challenge that the judiciary is today faced with in developing a jurisprudence of economic and social rights in keeping with the goals of our Constitution. This essay is a microcosm of the book as a whole: it adds perspective to a subject often examined with little depth and seriousness by the news media.
CONSTITUTIONAL CONUNDRUMS — Challenges to India's Democratic Process: V. Venkatesan; LexisNexis; 14th Floor, Building No. 10, Tower B, DLF Cyber City, Phase II, Gurgaon-122002. Rs. 495.
ICAI – Renewal of MRA between Australian Accounting Bodies – ICAA & CPA
The Institute of Chartered Accountants of India signed an Addendum to the existing MRA with the Institute of Chartered Accountants-Australia and Certified Practicing Accountant (CPA) Australia on September 19, 2014 coinciding with the 3rd Annual International Conference "Australia India: Changing Perspective". The MRA was signed by CA.K. Raghu, President, ICAI, Mr. Alex Malley, CEO, CPA Australia and Mr. Lee White, CEO, ICAA (CA Australia). The event was graced by Hon. Dominic Perrottet, NSW Finance & Services Minister and Hon. Charles Cassucelli, MP. The event was witnessed by 125 delegates, representatives of centers in Perth, Adelaide and Canberra and Singapore & Abu Dhabi Chapters and participants from Sydney.
The landmark MRA renewal by ICAI (CA India) with both the institutes CA Australia – 1 year and CPA Australia 5 years recognizes the qualification, training of each other's registered members in good standing by prescribing a bridging mechanism on principles of reciprocity. All the three accounting bodies strongly believe that the renewal of the MRA will accelerate the growth between the two countries at a new level.
A brief introduction of the three institutes:
ICAI (CA India) known as The Institute of Chartered Accountants of India is a statutory body established by an Act of Parliament passing CA enactment of 1949 which monitors the chartered accountancy profession in India operating under the ministry of Corporate Affairs. The ICAI has five Regional Councils and 147 branches covering the entire geographical location and 23 chapters overseas. The main functions of the Institute of the ICAI is to establish and maintain a chartered accountancy qualification an operational framework , arranging practical training for chartered accountant, carrying on activities for development of the profession and regulation and maintenance of status and standard of professional qualification of the members represents the interests of members to government.
About ICAA (CA Australia) The Institute of Chartered Accountants in Australia (the Institute) constituted by Royal Charter in 1928, is the professional body representing Chartered Accountants in Australia. The Institute has more than 62,000 members. Its members work in diverse roles across commerce and industry, academia, government, and public practice throughout Australia and in 107 countries around the world by actively connecting to local and international bodies on public policy, government legislation and regulatory issue.
CPA Australia CPA Australia is one of the world's largest accounting bodies with a membership of more than 150,000 finance, accounting and business professionals in 121 countries across the globe. CPA Australia's core services to Members include education, training, technical support and advocacy. Employees and Members work together with local and international bodies to represent the views and concerns of the profession to governments, regulators, industries, academia and the general public.
Source- ICAI
Service Tax on Joint Venture transactions – CBEC clarifies
CA Sumit Grover
Vide Circular no. 179/5/2014-ST dated 24th Sep'14, CBEC has clarified following aspects with respect to service tax applicability on the transactions of Joint Ventures(JV):
1) Whether cash calls(i.e. capital contributions) received by JV from its members are consideration or not , would vary from case to case, therefore, each case needs to be examined in depth;
2) Payments made by JV(out of cash calls received) to members or third party towards taxable service received from them, would fall under ambit of service tax;
3) Support service by member to JV may get squarely covered under definition of consideration
Full Notification is as follows : -
Circular No. 179/5/2014-ST
F. No. 354/187/2013-TRU
24th September, 2014
Subject: Service Tax –- Joint Venture – reg.
Certain doubts have been raised regarding the levy of service tax on taxable services provided (i) by the members of the Joint Venture (JV) to the JV and vice versa; and (ii) inter se between the members of the JV. In addition, doubts have also been raised regarding taxation of cash calls or capital contribution made by the members to the JV and also administrative services provided by a member to the JV.
2. The issue has been examined. With effect from 1st July, 2012, under the negative list approach, all services are taxable subject to the definition of the service [available in section 65B (44) of the Finance Act, 1994], other than the services specified in the negative list [section 66D] and exemption notification [Notification No. 25/2012-ST]. According to Explanation 3(a) of the definition of service, "an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons". In accordance with the above explanation, JV and the members of the JV are treated as distinct persons and therefore, taxable services provided for consideration, by the JV to its members or vice versa and between the members of the JV are taxable.
3. In the context of a JV project, cash calls are capital contributions made by the members of JV to the JV. If cash calls are merely a transaction in money, they are excluded from the definition of service provided in section 65B(44) of the Finance Act, 1994. Whether a 'cash call' is 'merely… a transaction in money' [in terms of section 65B(44) of the Finance Act, 1994] and hence not in the nature of consideration for taxable service, would depend on the terms of the Joint Venture Agreement, which may vary from case to case.
4. Detailed and close scrutiny of the terms of JV agreement may be required in each case, to determine the service tax treatment of cash calls. Some important aspects, by way of illustration, which could be examined in this regard, are:-
4.1 Taxable service provided by a JV to its members:
Cash calls, sometimes, could be in the nature of advance payments made by members towards taxable services to be received from the JV. For instance, JV which receives the cash call from its members may in return agree to do something of direct benefit either to the member or on the behest of a member to a third party, such as granting of right, reserving production capacity or providing an option on future supplies.
4.1.1 Taxable services received by a JV from its members or third party:
Payments made out of cash calls pooled by a JV, towards taxable services received from a member or a third party is in the nature of consideration and hence attracts service tax.
4.2 Taxable services provided by members to the JV:
Usually responsibility of managing the cash calls of the JV is assigned to one or some of the members of the JV, by way of a contractual agreement, for which he/they may receive a consideration either in cash or kind (say, goods or services).
A member of JV may provide support services (for example, administrative service in the form of setting up/management of a project office/site office) to the JV for a consideration either in cash or kind (say, goods or services).
5. JV being an unincorporated temporary association constituted for the limited purpose of carrying out a specified project within a time frame, a comprehensive examination of the various JV agreements (at times, there could be number of inter se agreements between members of the JV) holds the key to understanding of the taxation of transactions involving taxable services between the JV and its members or inter-se between the members of a JV. Therefore officers in the field formations are advised to carefully examine the leviability of service tax with reference to the specific terms/clauses of each JV agreement.
6. All concerned are requested to acknowledge the receipt of this circular.
7. Hindi version to follow.
[Dr. Abhishek Chandra Gupta]
Technical Officer, TRU
Tel. no.: 011-23093075
Appearance of CA before NTT as representative is unconstitutional; SC quashes law for setting up NTT
CA Sandeep Kanoi
Madras Bar AssociationVs. Union of India (Supreme Court), Civil Appeal No. 3850/2006, Date of Order- 25.09.2014
Constitutional Bench of Hon'ble Supreme Court comprising Chief Justice RM Lodha, Justices JS Kehar, Jasti Chelameswar, AK Sikri and RF Nariman has struck down National Tax Tribunal set up vide NTT Act, 2005. It held the same as unconstitutional as the National Tax Tribunal (NTT) encroaches upon the power of higher judiciary, which can only decide issuesinvolving substantial laws and not a tribunal.
One more Blow to Chartered Accountants
Honorable Supreme Court held that the provisions regarding appearance of CAs before NTT, is unconstitutional and not acceptable in law. It held as follows :-
78. Keeping in mind the fact, that in terms of Section 15 of the NTT Act, the NTT would hear appeals from the Income Tax Appellate Tribunal and the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) only on "substantial questions of law", it is difficult for us to appreciate the propriety of representation, on behalf of a party to an appeal, through either Chartered Accountants or Company Secretaries, before the NTT. The determination at the hands of the NTT is shorn of factual disputes. It has to decide only "substantial questions of law". In our understanding, Chartered Accountants and Company Secretaries would at best be specialists in understanding and explaining issues pertaining to accounts. These issues would, fall purely within the realm of facts. We find it difficult to accept the prayer made by the Company Secretaries to allow them, to represent a party to an appeal before the NTT. Even insofar as the Chartered Accountants are concerned, we are constrained to hold that allowing them to appear on behalf of a party before the NTT, would be unacceptable in law. We accordingly reject the claim of Company Secretaries, to represent a party before the NTT. Accordingly the prayer made by Company Secretaries in Writ Petition (Civil) no. 621 of 2007 is hereby declined. While recording the above conclusion, we simultaneously hold Section 13(1), insofar as it allows Chartered Accountants to represent a party to an appeal before the NTT, as unconstitutional and unsustainable in law.
For the sake of convenience, the said verdict has been enclosed herewith for reference.
The Bench quashed Sections 5, 6, 7, 8 and 13 of the National Tax Tribunal Act, 2005 rendering the law ineffective for all practical purposes.
Text of the above sections is as follows :-
5. Constitution and jurisdiction of Benches-
(1) the jurisdiction of the National Tax Tribunal may be exercised by the Benches thereof to be constituted by the Chairperson.
(2) The Benches of the National Tax Tribunal shall ordinarily sit at any place in the National Capital Territory of Delhi or such other places as the Central Government may, in consultation with the Chairperson, notify:
Provided that the Chairperson may for adequate reasons permit a Bench to hold its temporary sitting for a period not exceeding fifteen days at a place other than its ordinary place of seat.
(3) The Central Government shall notify the areas in relation to which each bench of the National Tax Tribunal may exercise its jurisdiction.
(4) The Central Government shall determine the number of Benches and each Bench shall consist of two members.
(5) The Central Government may transfer a Member from headquarters of one Bench in one State to the headquarters of another Bench in another State or to the headquarters of any other Bench within a State:
Provided that no member shall be transferred without the concurrence of the Chairperson.
6. Qualifications for appointment of Chairperson and other Members –
(1) The Chairperson of the National Tax Tribunal shall be a person who has been a Judge of the Supreme Court or the Chief Justice of a High Court.
(2) A person shall not be qualified for appointment as Member unless he
(a) is, or has been, or is eligible to be, a Judge of a High Court; or
(b) is, or has been, a Member of the Income-tax Appellate Tribunal or of the Customs, Excise and Service Tax Appellate
Tribunal for at least five years.
Tribunal for at least five years.
7. Appointment of Chairperson and other Members
(1) Subject to the provisions of sub-section (2), the Chairperson and every other Member shall be appointed by the Central Government.
(2) The Chairperson and the other Members shall be appointed by the Central Government on the recommendations of a Selection Committee consisting of
(a) the Chief Justice of India or a Judge of the Supreme Court nominated by him;
(b) the Secretary in the Ministry of Law and Justice (Department of Legal Affairs);
(c) the Secretary in the Ministry of Finance (Department of Revenue).
(3) No appointment of the Chairperson or of any other Member shall be invalidated merely by reason of any vacancy or any defect in the constitution of the Selection Committee.
8. Terms of office of Chairperson and other Members
The Chairperson and every other Member shall hold office as such for a term of five years from the date on which he enters upon his office but shall be eligible for re-appointment:
Provided that no Chairperson or other Member shall hold office as such after he has attained, -
(a) in the case of Chairperson, the age of sixty-eight years; and
(b) in the case of any other Member, the age of sixty-five years.
13. Appearance before National Tax Tribunal
(1) A party to an appeal other than Government may either appear in person or authorize one or more chartered accountants or legal practitioners to present his or its case before the National Tax Tribunal.
(2) The Government may authorize one or more legal practitioners or any of its officers to present its case before the National Tax Tribunal.
Explanation – For the purposes of this Section,-
(a) "chartered accountant" means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;
(b) "legal practitioner" means an advocate, a vakil or any attorney of any High Court, and includes a pleader in practice.
Extension Of Due Date Of ITR- A Talk with CA Rajni Shah – The Gujarat High Court Petitioner
CA Suhdir Halakhandi
Friends, at Last the Date of Filing of Income Tax Returns is extended to match it with the date of Tax audit report and this is the natural requirement of the Income Tax Act, 1961 and also the only practically possible solution of the Problem which was created by the Central Board of Direct taxes by introducing the New performs of Tax audit report in middle of the year.This was a very simple problem and it requires a very simple solution but that was not easy and it came only after intervention of the courts from Gujarat, Andhra Pradesh, Madras and Mumbai, High courts have instructed our lawmakers to the needful and the biggest question is why for so simple problem so many efforts were needed.
The first base of the extension of due date as mentioned by CBDT is the verdict of Gujarat High court and today we have with us , the Gujarat petitioner CA RAJNI SHAH from Ahemdabad , Let us have a talk with him :-
1. CA SUDHIR HALAKHANDI:-
Sir, why you have filed the petition was asked by me in interview with you and CA Mahesh Kumar, the other petitioner on the same matter at Delhi HC, now you have proved your point and it is a great relief for all the professionals and Lakhs of tax payers, how do you feel?
CA RAJNI SHAH:-
I am experiencing some mixed feelings. I am satisfied that at last the mission for which I have worked is achieved. In retrospect, I am disappointed with CBDT for such a simple matter which could have been solved across the table was stretched too far. Also, our Institute should have reacted expeditiously when their representation to the CBDT was wrongly interpreted. But, what matters is that our judicial system provided us with the relief by a "fair verdict".
2. CA SUDHIR HALAKHANDI:-
Sir, The extension of date is given with the 234A rider and there is a view of large number of experts that it is not permitted in the Income tax Act 1961, what is your opinion in this respect?
CA RAJNI SHAH:-
Yes Sudhir , at the outset I completely endorse the opinions and views of the experts that such a rider cannot be permitted under the Income Tax Act 1961 as Explanation (1) to Section 234A(1) clearly provides that the due date as referred to in section 234A(1) is the due date u/s 139(1). Hon. Gujarat High Court has observed at para 65 that "… It would, however, be open for the board to qualify such relaxation by extending due date for all purposes, except for the purpose of Explanation (1) to Section 234A of the Act".
In my humble view, the Board should have inserted the rider of interest u/s 234A in the latest notification after considering its legality.
3. CA SUDHIR HALAKHANDI:-
Rajni Sir, It is wide ranging talk in professional circle that there was what's group MISSION TAR DEFERMENT -2014 which was mainly responsible for this much needed relief to the taxpayers and especially base of your relief. Say something about this group, its Admin and the members who made it possible.
CA RAJNI SHAH:-
Social Net Working has completely changed the dynamics of distance and time through the said watsapp group "TAR DEFERMENT-2014" people from across the country were virtually with me at every stage of my mission. They were a constant source of motivation and encouragement. I take this opportunity to thank all the members of the group for their valuable inputs and whole hearted support and Kudos to the admin CA Shiv Khatry for taking this initiative. Special thanks to you, Sudhir, for providing us the platform of Taxguru and spreading awareness and giving prompt updates.
- CA SUDHIR HALAKHANDI:-
I have written so much on this matter on various sites and Social Media and we here at Taxguru given the concept of "Black out of 25 days" which was mentioned in the order of the Gujarat HC also. Do you believe that there is an impact of social media impact on this type of matters?
CA RAJNI SHAH:-
As said previously the social media had played a pivotal role in getting the solution fast. The phrase "Black Out of 25 days" was used in our arguments at the Court. This is the reason that the fact of reduction of days from 180 (provided by the Act for filing ITR and TAR) to app. 37 days, got highlighted everywhere.
- CA SUDHIR HALAKHANDI:-
Sir, you have done a great thing and we can refer to as a "Hero" in the whole matter so please share with us your back ground, your education, practice and family here sir for the benefit of our readers.
CA RAJNI SHAH:-
I am sorry to accept the word Hero used by you for me. I always believe that undue respect should not be given to those who do not deserve the same and there has to be a purpose of your own existence. Frankly I have not been able to find out the reason for what or from whom all our leaders were afraid of while asking for a solution for such a small matter affecting all business and professional communities across the country. I still believe that undue complaint must be avoided but at the same time your voice should be loud and clear against hardship and harassment. I am sure no such opportunity will be given to us in days to come.
I am B. Com from city of Ahmedabad. I did my CA, CS and ICWA courses and DISA (ICAI). We are a large united family of more than 75 members, though leaving in different cities of the country. I am sorry not to say much on my personal counts but take this opportunity to publicly thank my family for allowing me to show the required "COURAGE" and my GURU who is my brother too, CA Bhupendra M Shah, a bright and genius professional and a torch bearer, not only to me but to hundreds of professionals.
- CA SUDHIR HALAKHANDI:-
Thanks Rajni Sir, for talking so nicely for our readers. Thanks once again.
CA RAJNI SHAH:-
Thanks and Best of Luck Sudhir to you and your readers.
The Force behind ITR Date Extension – Interview of CA Shiv Khatry
THE FORCE BEHIND ITR DATE EXTENSION – TAR DEFERMENT 2014 – CA SHIV KHATRY THE ADMIN OF THE HISTORIC WHATSAPP GROUP NAMELY 'MISSION TAR DEFERMENT 2014′
CA SUDHIR HALAKHANDI
At the Last the Date of Filing of Income Tax Returns is extended to match it with the date of Tax audit report and this is the natural requirement of the Income Tax Act, 1961 and also the only practically possible solution of the Problem which was created by the Central Board of Direct taxes by introducing the New format of Tax audit report in middle of the year.The basis of the extension of date by CBDT was verdict of Gujarat High court and we have talked with the petitioner of Gujarat High court CA RAJNI SHAH and in his talk he mentioned the role of WhatsApp Group 'MISSION TAR DEFERMENT 2014'.
Let us have a Look at this group which included 50 Chartered Accountants from all over the country as its members comprising from the cities Like Mumbai, Delhi, Pune, Ahemdabad, Lacknow and since group was formed from CA SHIV KHATRY Bikaner city of Rajasthan hence the CAs from Rajasthan were also active members of this Group.
The Group which was established first for "Deferment" of the Midyear Introduction of the Tax audit report on 9th Aug 2014 by CA SHIV KHATRY of Bikaner but the motive of the Group was changed when the Date of Audit report was extended without extending the date of "Income tax returns" and mission of the group was accomplished on 26th Sept 2014 when the date of Income tax returns was also extended
We have with us the "creator and admin" of the Group CA SHIV KHATRY with us , Let us have a talk with him to know something more about the 'MISSION TAR DEFERMENT 2014′ group :-
1. CA SUDHIR HALAKHANDI:-
SHIV SIR, What was your Motivation of starting a group with respect to such a serious matter.
CA SHIV KHATRY:-
Sudhir Sir, my motto has always been service to the profession, service to the society and service to the Tax payers at large. I was distressed on witnessing the problem faced by Trade & Industry, Taxpayers and professionals. To overcome this problem I decided to start this group to raise the point for the attention of the Lawmakers and ICAI. With the grace of God and support of all my group members the group formed by me was gaining strength to strength and the mission of the group was accomplished.2. CA SUDHIR HALAKHANDI:-
Shiv Sir, Say something about the members and especially most active members of your group and plus the conversation of the group.
CA SHIV KHATRY:-
The group was established on 9th Aug 2014 and the total conversation of the Group which was measured by me on 26th Sept. 2014 was running into 365 A-4 pages. There were 50 Members on the group but the most active members were CA Rajni Shah (the petitioner of the Gujarat High court) and CA Durgesh Buch (the Guiding force of the Gujarat HC petition) from Ahemdabad, CA Dilip Khetan from Gorakhpur, CA Amresh Vashisht from Meerut, CA Vivek Khurana (the versatile commentator from Delhi HC) from New Delhi, CA (Dr.) Sunil Ram Gupta from Ghaziabad (Guiding force of Delhi HC petition), CA Archna Yadav (the sole lady member on the group ), CA Ameet Patel , CA Paras Salva (Guiding force of Mumbai HC Petition), CA Sandeep Kanoi, CA Sanjeev Lalan from Mumbai, , CA RA Sharma from Jaipur, CA Atul Modani , CA Sarosh Irani and CA Arul Giri (first to announce that the date has been extended) from Pune and Tushar Nagar from Lacknow.
The motivators of Rajasthan HC petition CA Satish Gupta and adv. Pankaj Ghiya was also on the group.
Past president of the ICAI CA Sunil Talati was the guiding force of the group and further CA G Sekar, the chairman of the Direct Tax committee of ICAI has also actively contributed at the later stage on the group.
Our Members also included Current President of ICAI, Vice president of ICAI, Central Council Members of ICAI, and Regional council members of ICAI and some renowned Tax experts.
You can say that it was a power packed group in terms of motivation, knowledge, inspiration and action to which you CA Sudhir Halakhandi was also a member since its creation on 09/08/2014 and your write ups on social media and Taxguru on this subject were also a guiding force for the group.
3. CA SUDHIR HALAKHANDI:-
SHIV sir let us go ahead, are you satisfied with the results of you and your group's efforts
CA SHIV KHATRY:-
Sir, certainly I am very much satisfied but according to me this is not the end. I with all my friends would never hesitate to raise voice on various other grave and untouched matters of common interest of the profession.
4. CA SUDHIR HALAKHANDI:-
SHIV sir, How to you feel about achievement of your group and what is your opinion about such a big work from Living in not so big city of Bikaner from Rajasthan.
CA SHIV KHATRY:-
Sir, I would like to say that the electronic media has brought us so much connected with each other that it hardly matters where you belong to. Further, willingness to do something for the Taxpayers of the country, society and Profession paved the path to the accomplishment of my/our goal. Undoubtedly, the great achievement of the group has made us feel proud. It was the unity and hard work that gave me strength to move ahead.
5. CA SUDHIR HALAKHANDI:-
Very Nice Shiv sir, Please give a brief about you , your education , practice and family etc. for the benefit of the our readers.
CA SHIV KHATRY:-
Sir, I am an ordinary person who believes in simplicity. I always intend to be goal-oriented and strive to achieve it. I am a friend of friends and am always by their side in need. I am B.com, FCA, DISA and a practicing chartered accountant since 1988 in Bikaner. My grandfather and father were leading lawyers of Bikaner. My wife Mrs. Nita Khatry is serving as an English teacher in a renowned convent school of Bikaner and my son Samarth Khatry is an IITian who is serving in an MNC in Mumbai.
6. CA SUDHIR HALAKHANDI:-
Thanks Shiv Sir for a nice talk with me for our readers, Have a Nice Day.
CA SHIV KHATRY:-
Thanks Sudhir Sir and Good wishes to your readers and Taxguru from my side.
Also Read- Extension Of Due Date Of ITR- A Talk with CA Rajni Shah – The Gujarat High Court Petitioner
Read Other Articles from CA SUDHIR HALAKHANDI
Department legally obligated to preserve seized goods seized
Department is legally obligated to preserve the seized goods seized and return in the same condition to the assessee or pay equivalent compensation
Ashupatinath Dhandania Vs. Union of India [2014 (9) TM! 578- Calcutta High Court]
In the instant case, Ashupatinath Dhandania (the Petitioner) has filed a writ petition before the Calcutta High Court complaining about the in action on the part of the authorities for not releasing the goods confiscated by the Revenue.
The goods of the Petitioner were seized by the authorities. However, on appeal the Petitioner succeeded and the order relating to seizure of the goods was set aside. The Petitioner approached the Department for return of the seized goods. The authorities did not release the seized goods.
The Hon'ble Calcutta High Court has held that action of the authority concerned was not justified in withholding the seized goods since the order relating to the seizure of goods was set aside. The Hon'ble High Court relied on the case of State of Gujarat Vs. M.M. Hazi Hasan [AIR 1967 SC 1885] and ordered the Revenue to hand over the exact quantity of the goods seized to the Petitioner as shown in the seizure list or pay equivalent money for the quantity of the seized goods at the present market rate to the Petitioner.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)
BANGALORE, SEPT 29, 2014: THE issue before the Bench is - Whether when the assessee has been showing certain expenditure towards 'work-in-progress' for two years but not in the year of filing return because its contract was terminated and bank guarantee encashed, the expenditure written off in books is to be allowed. And the answer is YES.
Facts of the case
The assessee company was awarded a contract by Madhya Pradesh Electricity Board for rehabilitation job for the Amarkantak Thermal Power Station near Jabalpur in MP. An amount of Rs.9,29,20,000/- was paid as advance. The assessee gave a bank guarantee for the said amount. The assessee commenced the work and incurred expenditure on the project. The total amount of expenditure incurred on the project was Rs..6,64,01,149/-. Assessee contended that MPEB arbitrarily terminated the contract and invoked the bank guarantee. The said contract was terminated by letter dated 8.10.2002. The assessee invoked the arbitration clause and put forth a claim. The amount of Rs..6,64,01,149/- included money spent on raw materials like tubes and pressure parts, consumables, freight and carriage and also bank charges, professional charges etc., in addition to the expenses on personnel, transport and communication and administrative expenses. However, more than 50% of the total amount was debited towards the material consumed for the contract work. The assessee debited the said amount being the cost of abandoned project towards the profit and loss account. In the notes appended, it was stated that the said amount had been charged as expenditure on abandoned project. The assessee also mentioned that the assessee had contested the invocation of bank guarantee by the MPEB before the court of Jabalpur. On the date of assessment order the arbitration award also had been passed on 23.9.2004 under which the assessee was granted substantial damages for the illegal invocation of the bank guarantee, cancellation of the contract etc., However, no amount had been paid by MPEB in terms of the award as they were contesting the award in an appeal before the court of Jabalpur. The AO was of the view that the assessee has been following mercantile method of accounting. As and when any expenditure was incurred on a contract, it should either result in corresponding receipts from the contract or it should be represented as WIP. The assessee had neither received any amount from MPEB nor was showing any WIP. The expenditure on a particular project cannot be merely allowed as an expenditure unless there is a corresponding credit in the form of contract receipt or work-in-progress. The assessee was claiming the entire expenditure as deductible expenditure since the contract had been abandoned. Although the assessee had abandoned the contract, the fact remains that they had made a claim in arbitration in respect of the expenditure incurred and had also claimed damages for the termination of the contract. This being the case, it cannot be said that the assessee was not entitled for any amount from MPEB. In fact, the amount spent should have been shown as WIP which was recoverable from the MPEB on the arbitration award. The assessee company had only debited the expenditure. The assessee had not shown the said amount as expenditure towards work-in-progress. The debit of expenditure was disallowed since there was no corresponding credit either by way of contract receipts or at the least equivalent amount of WIP.
On appeal, CIT(A) was of the view, though the assessee had shown in the accounts the amount spent towards expenditure for the AYs 1999-2000, 2000-2001 as WIP for the concerned years, yet the cost to the tune of Rs. 2,57,74,199/- incurred during the previous year 2001-2002 relevant to the AY in question had not been reflected as WIP. Instead the entire cumulative expenditure incurred up to 31.3.2002 on the impugned project amounting to Rs..6,64,01,150/- inclusive of expenditure of Rs..2,57,74,199/- incurred towards the previous year relevant to the AY had been written off as expenditure on abandoned project. This according to CIT(A) was improper. The assessee was not following any specific method of accounting. In any case the non reflection of the expenditure incurred on the said project as WIP during the previous year relevant to the assessment year in question was not in accordance with the mercantile system of accounting, thus resulting in a distorted disclosure of the profit/income from the said project. Therefore, CIT(A) dismissed the appeal. On further appeal, Tribunal held that the expenditure on a particular project cannot be merely allowed as an expenditure unless there was a corresponding credit in the form of contract receipt or WIP. The assessee had claimed that since the contract had been abandoned, the entire expenditure was a deductible expenditure. Although the assessee had abandoned the contract, the fact remains that they had made a claim in the arbitration case in respect of the expenditure incurred and had also claimed damages for the termination of the contract. Thus, it cannot be said that the assessee was not entitled for any amount from MPEB. Tribunal was of the view the assessee had not met its own consistent system of accounting to be followed for rightfully becoming the claimant for loss of three years in one year without incorporating the corresponding receivables to become entitled for write off under the provisions of section 36(i)(vii) and not u/s 37(1).
Before HC, the assessee's counsel had contended that the facts are not in dispute. The assessee has spent in all a sum of Rs..6,64,01,149/- towards the expenditure under the contract. Admittedly, it has not raised any bills nor payment is made. MPEB terminated the contract illegally, invoked the bank guarantee and received back the entire amount given as deposit. The amounts spent for the assessment years 2000-2001 and 2001-2002 was shown as work-in-progress. But in the year 2002-2003 when the contract was terminated including the amount spent during the said period the entire amount was claimed as expenditure. Though the assessee has succeeded in getting an award before the arbitrator, as it is under challenge before the High Court, it has not received any money even in terms of the award. It is only when assessee gets the amount in that assessment year, it could be taxed. Therefore, all the three authorities committed a serious error in not realizing that when the assessee has not received any payments and the payment made was taken back by encashment of bank guarantee, the contract was terminated, the assessee was entitled to claim the amounts spent towards contract as expenditure in law u/s 37(1) r/w 28 of the Act and therefore, he submits that the impugned orders are unsustainable. On the other hand, the counsel for the revenue submitted unless the assessee shows in his books of accounts the expenditure incurred in terms of the contract "as work-in-progress" it is not entitled to claim the said amounts as expenditure and therefore, he submits the order passed by the authorities is strictly in accordance with law and do not call for interference.
Held that,
++ as could be seen from the orders passed by the authorities, the Assessing Authority and the Tribunal proceeded on the assumption that the Assessing Authority has not shown in its accounts the expenditure incurred as representing work-in-progress. However, the first Appellate Authority has looked into the profit and loss account and was convinced that for the first two years the expenditure is shown as "work-in-progress" but for the year in question as the expenditure was not shown as work-in-progress and the entire expenditure was shown as expenditure the assessee is not entitled to the said benefit. The statement filed by the assessee before the first Appellate court showing the year wise cost of Amarkantak project is not disputed. Therefore, it clearly shows that for the years 1999-2000, 2000-2001 the amount spent towards expenditure is shown as "work-in-progress" in the books of accounts. It is only for the previous year 2001-02 the expenditure incurred is not shown as work-in-progress. The reason is, the contract was terminated. The bank guarantees had been invoked. No doubt the claim was put forth before the arbitrator. But in the near future there was no chance of getting any amount in that particular previous year and the amount paid had been taken away. Therefore, the assessee in that previous year has shown the entire amount incurred as expenditure and sought for writing off as business expenditure. This aspect has been missed by the first Appellate Authority. It is only in the relevant year the assessee has not shown the amount spent towards expenditure as work-in-progress. It is during that year the contract was terminated and he put forth the present claim. He could not have shown it as work-in-progress. Therefore, the finding that he is not entitled to the benefit is ex-facie illegal and cannot be sustained;
++ the Punjab & Haryana High Court in the case of Laxmi Ginning and Oil mills Vs CIT, Patiala, reported in (1971) 82 ITR page 959 in some what similar situation has held that the pendency of the litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee-firm during the accounting year in question. The amount of that loss cannot be postponed in view of the pendency of the litigation referred to above. The Madras High Court in the case of George Maijo and Co. Vs. CIT (2003) 231 ITR page.237 held when there is a direct intimate connection between the business operation of the assessee and the loss that has fallen on the assessee, though the loss was occasioned by the act done by the seller, since the assessee is not stated to be a party to the fraud committed by the foreign seller, the loss would be allowable as deduction as the loss is incidental to the business carried on by the assessee. SC in the case of Ramchandar Shivnarayan Vs. CIT (1978) 111 ITR 263 has held that it is open to the assessee to claim the loss if it has a proximate connection with its business. Similarly it was held by the Apex Court in the case of Madras Industrial Investment Corporation Limited Vs CIT 2002-TIOL-290-SC-IT-LB that, where the liability was incurred which has to be discharged in a future date it will be a liability but however a contingent liability which may have to be discharged in future cannot be considered as expenditure. Therefore, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the contract or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off u/s 37(1) r/w 28 of the Act. In view of the aforesaid provision, though the assessee has incurred expenditure during the assessment years 2000-2001, 2001-02 and 2002-2003 during which period he has not received any amount as against the expenditure, if and when he receives the money in pursuance of the award which is already passed, if it is upheld by the High Court, the said amount is chargeable to income tax as the income of that previous year in which he receives the said amount whether the business in respect of which the deduction has been made is in existence in that year or not. Therefore, the interest of the revenue is fully protected. All the three authorities have not applied their mind to the factual aspects of the case and have not kept in mind the statutory provisions and thus committed a serious illegality in passing the impugned orders. The orders are not sustainable. Therefore, substantial questions of law raised in this appeal are answered in favour of the assessee and against the revenue. Thus, the appeal is allowed. The impugned orders passed by the three authorities are hereby set aside. The Assessing Authority is directed to allow the aforesaid amount as set off.
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