Chartered Accountant Finance

Sunday, September 1, 2013

[aaykarbhavan] ITAT Explains Transfer Pricing Implications Of Contract Assignment

Dear Subscriber,

The following important judgement is available for download at itatonline.org.

Tellabs India Private Ltd vs. ACIT (ITAT Bangalore)

Transfer Pricing: Assignment of contract by AE is an international transaction and should be at arms length price

The assessee's AE, Tellabs Denmark, was awarded a contract by Power Grid Corporation for the supply, installation and commissioning of telecommunication equipments. The work was to be performed both outside India (manufacture and supply of telecom equipments from Denmark- offshore) and in India (customs clearance in India and installation of the equipments – onshore). The Off-shore and Onshore contracts were independent contracts. Pursuant to a corporate restructuring, Tellabs Denmark assigned a portion of the On-shore contract relating to freight, insurance and installation to the assessee. Power Grid consented to the assignment on the condition that Tellabs Denmark will continue to be liable for due performance of all contracts. The AO & TPO held that as Tellabs Denmark continued to be liable to Power Grid for the onshore contract, the assignment of the said contract by Tellabs Denmark to the assessee constituted a sub-contract (and not an independent contract) and that for the work of customs clearance and installation of equipment performed thereby the assessee ought to have earned an arms length profit margin of PBIT/Sales of 9.49%. On appeal by the assessee to the Tribunal HELD:

The assessee's claim that the effect of the assignment of the work of customs clearance and installation by Tellabs Denmark to the assessee is that an independent contract came into existence between the assessee and Power Grid and that as both parties were residents, the transfer pricing provisions cannot apply is not acceptable because it is clear from the various agreements that there has been only an assignment of the portion of an onshore contract by Tellabs Denmark to the assessee and not a novation of the portion of the onshore contract between Tellabs Denmark and PGCIL. The consequences in the event of an assignment and novation are different. Since there has only been an assignment and not novation of the contract in the present case, the transaction of assignment between the assessee and Tellabs Denmark cannot be said to be a transaction between two persons either or both of them were not non-residents. It is a very strange situation because if Tellabs Denmark had not assigned the portion of the onshore contract, the transfer pricing provisions would not have been applicable because Tellabs Denmark and PGCIL are not Associated Enterprises. Though the assignment of the portion of the onshore contract has taken place exactly at the same consideration for which Tellabs Denmark agreed to render services to PGCIL, nevertheless, the assignment agreement between Tellabs Denmark and the assessee has all the ingredients of an international transaction within the meaning of s.92 of the Act. However, the ALP will have to be determined afresh because the international transaction is the assignment between Tellabs Denmark and the assessee and not the agreement between the assessee and PGCIL. The TPO should also consider whether as the assignment of the contract had taken place due to business restructuring and on the same terms as agreed between Tellabs Denmark and PGCIL, it could be said that this transaction itself would constitute a comparable uncontrolled transaction (Swarnandhra IJMII Integrated Township (ITAT Hyd) distinguished).

See also analysis by Ernst & Young of this judgement (pdf)

(Click Here To Read More)

Regards,

Editor,

itatonline.org

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Latest: Monthly (July 2013) + Consolidated (Jan to July 2013) Digest Of Imp Case Laws

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[aaykarbhavan] Business standard news and legal digest 2-9-2013

Complain against the actual service provider

When a complaint is filed, care has to be taken to ensure it fits within the four corners of the law under which it is filed. Otherwise, regardless of whether the grievance is legitimate or not, the complaint is bound to fail. Forgetting this, a complaint is often filed against the individual who is perceived by the consumer as being responsible for the deficiency in service, rather than against the actual service provider. This can have disastrous consequences, as happened in the case of Hasmukh Mehta.

Mehta is a member of Mount Everest Co- op. Housing Society. He had corresponded with the Society on various matters but did not receive any reply. Mehta claimed a secretary of aco- operative housing society who fails to reply to a member's letter is negligent in performing his duties, which constitutes a deficiency of service under the Consumer Protection Act. So, he filed a consumer complaint against Sanjeev Shah, honorary secretary of the Society.

In his complaint on May 11, 2009, Mehta pointed out various instances of the secretary's failure to reply to his letters. When he made a written application to the Society for a no- objection certificate to sell his flat, it was not issued. So, he lost an excellent offer for the sale of his flat. In another instance, Mehta made a written request for aresident certificate required for the passport renewal of his son, Pratik, who was residing with him since birth but the Society failed to issue it. In September 2008, Mehta had wanted to avail of the government's ' amnesty scheme' for registration of the agreement for the flat but the Society initially failed to issue the certificate, and later issued it without the supporting documents.

Consequently, Mehta could not get the benefit of the amnesty scheme. When he tried to lodge the nomination form, it was returned to him because the managing committee considered him to be a defaulter. For these alleged deficiencies, Mehta claimed Shah as the secretary should be personally liable to pay a compensation of ₹ 20,000, with 18 per cent interest.

Shah contested it, saying there was no complaint against the Society, so this would not be maintainable for non- joinder of necessary parties. Mehta countered that his grievance was only against Shah and that he did not want to proceed against the Society or the other officebearers who were giving their time and energy for the work on an honorary basis.

Shah denied the allegations and claimed Mehta was in the habit of filing frivolous litigation against the Society or its committee members. He pointed out that of the seven cases filed by Mehta over 14 years, six had been dismissed and only one was pending.

SM Ratnakar, delivering the judgement on behalf of the bench, with S S Patil, observed Mehta had failed to join the Society as a necessary party, despite the objection to the maintainability of the complaint. Mehta had not paid any fees or charges to Shah. So there is neither a consumer and service provider relationship, nor privity of contract between Mehta and Shah. The Society is the service provider. Since the Society is not a party to the dispute, a complaint against Shah in his individual capacity is not maintainable.

Accordingly, the consumer forum, by its order dated June 15, 2013, refused to consider the complaint on merits, and dismissed it as untenable.

The consumer forum noted Mehta had earlier filed a similar complaint, dismissed for identical reasons. It indicted Mehta of filing a false and frivolous complaint despite knowing the correct legal position.

Observing that unfair complaints require to be curbed, the Forum imposed costs of ₹ 2,000 to be paid by Mehta to Shah. Thus, after four years of litigation, the complaint came to be dismissed as the service provider was not joined as a party.

Consumers often make similar mistakes by filing complaints against the divisional officer of an insurance company who is a separate and distinct legal entity from the insurance company which is the service provider.

When the proper person is not a party before the forum, the complaint gets dismissed on technicalities, regardless of merit.

The author is a consumer activist

CONSUMER IS KING

JEHANGIR GAI Consumers often complain against the divisional officer of an insurance company who is a separate legal entity

Companies bill enhances responsibilities.

Finally when after years of deliberations and procrastinations and peripatetic peregrinations across long stretches of skepticisms and uncertainties, the Companies Bill is set to become law, the rhetorical question of

Charles Ludwig Dodgson " Which form of proverb do you prefer — " Better late than never," or " Better never than late" can be confidently answered. Notwithstanding the protestations of the critics about of the shortcomings in the Bill, which more often than not, are a function of the interests they serve, there are several reasons to applaud the " much of the muchness" of the newness in the Bill.

The Bill has been widely discussed, and the sections on the mandatory rotation of auditors and their firms ( India being one of the few countries globally to make this law), mandatory spending by companies of two per cent of the net profits on corporate social responsibility programmes, women directors on boards, restrictions on directorships more discussed than others. But the sections of the Bill which form the " heart of internal governance" of companies seem to have by and large remained undiscussed. The intention of this piece is to discuss a few of these.

The boards of companies, because they are central to their governance have to carry the cross; the difference now is that the Bill has made the burden several times heavier for the Indian companies.

For example, the Bill lays a strong emphasis on the internal controls, risk management and internal audit and includes these concepts for the first time in a legislation. The Directors' Responsibility Statement ( DRS) in the Board's report ( section 134 ( 5) ( e)) for the listed companies will now have to include astatement from the directors that " they had laid down internal financial controls to be followed by the company and that

such internal financial controls are adequate and were operating effectively. The explanation of " internal financial controls" in the Bill is elaborate and covers in abroad sweep most of the critical elements of the Integrated COSO Framework. The companies should treat this statement in the DRS far more seriously than a weather report or the disclaimer about smoking on cigarette packets and because of the grave penal consequences for the contravention of this section. The management and the directors would also need to figure out the basis on which the boards would be able to give such a definitive declaration.

Till now, only the audit committee was mandatory under the clause 49 of the Listing Agreement. It and three other committees have been included in the Bill and all have become mandatory for all companies. The Bill has extended some of the responsibilities laid down for the committee under the clause 49. For example, under the Bill, the committee is required to evaluate ( instead of reviewing as in clause 49) the internal controls and risk management systems. The committee can also obtain professional advice from external sources on certain matters specified in section 177 of the Bill. By implication, the committee will be liable to be questioned if it does not exercise this right in matters in which it feels itself to be inadequate. The burden on the audit committee has only increased.

The business judgment rule is a judicially developed doctrine that presumes that directors acted on an informed basis, in good faith and with the best interests of the company in mind; it provides a strong deference to the integrity of those decisions in the face of claims of malfeasance or negligence. This doctrine and the fiduciary duties of a director to act in good faith, with due care and diligence and avoid conflicts of interest have now become a part of the Bill. This is a doubleedged sword, which gives protection to the directors on the one hand and enhances their responsibilities on the other.

Then there is the section 149 of the Bill and the schedule IV on the Code for Independent Directors dealing with the roles and responsibilities of the independent directors. Under these the performance of the board, the board chairman and non- independent and non- executive directors and of the independent directors prior to re- appointment would have to be evaluated. These concepts have been fiercely resisted by the corporate sector in India since the time clause 49 sought to make them mandatory.

The last point in this article is about the governance of the frameworks of corporate governance. The Bill incorporates most of the areas covered by clause 49 and even goes beyond it. There are difference in the compositions and constitutions of the boards and the committees as well. It needs to be seriously deliberated if there is a need to retain both the frameworks on the same subject and if so is there a scope of efficacious harmonisation.

The Bill has attempted to overhaul a 57- year- old corporate legislation which had fallen behind the changes in business practices. But it will be quite some time for the new legislation to become effective, for the rules, which are much too many, are to be notified. Writing the final rules will not be easy and quick, even though a large part of the exercise may have been completed informally. There are two views on the Bill – an optimistic view which holds that the Bill when it becomes a law, will help reform some of the arcane systems. The other which says that all the provisions will lay waste as we, as Indians, are good at box ticking compliance. The sceptics who hold this would like to believe that the Bill may seek to increase the overall responsibilities of the board and directors, but for many companies it will still be business as usual even in the future, because of the proverbial laxity in enforcement in this country.

But given the rise of investor advisory services, class action suits becoming a possibility under certain sections of the Bill and growing media pressure, shareholder activism should see a rise and when that happens. When that happens, reliance on laxity and sluggishness of enforcement action would unlikely remain a dependable refuge for the companies.

But good governance always would. The design of the Bill is wise and just; that ascertained, let us pursue it resolutely.

(The author was formerly executive director of Sebi and is currently an advisor and consultant to Deloitte Tohmatsu Touche India Pvt Ltd and the World Bank.

pratipkar21@ gmail. com)

The Bill lays strong emphasis on internal governance, the boards need to be alive to these needs

PRATIP KAR

DECODING THE NEW COMPANIES BILL

|Bill lays a strong emphasis on internal controls, risk management and internal audit and includes these concepts for the first time in a legislation |The Directors' Responsibility Statement in the board's report ( section 134 ( 5) ( e)) for listed companies will now have to include a statement from the directors saying they had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively |Section 149 of the Bill and the schedule IV on the Code for Independent Directors deal with the roles and responsibilities of the independent directors. Under these, the performance of the board, the board chairman and non- independent and non- executive directors and of the independent directors prior to re- appointment would have to be evaluated |There are differences in the compositions and constitutions of the boards and the committees as well. It needs to be seriously deliberated if there is a need to retain both the frameworks on the same subject and if so is there a scope of efficacious harmonisation |The Bill attempts to overhaul a 57- year- old corporate legislation which had fallen behind the changes in business practices. But it will be quite some time for the new legislation to become effective, for the rules, which are much too many, are to be notified |There are two views on the Bill — an optimistic view which holds that the Bill when it becomes a law, will help reform some of the arcane systems. The other says that all the provisions will lay waste as we, as Indians, are good at box- ticking compliance

>LEGAL DIGEST

HC cannot cancel auction sale

The Supreme Court has stated that high courts should not set aside auction sale conducted under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, ( SARFAESI Act) exercising its writ powers. In this case, GM, Sri Siddeshwara Co- operative Bank Ltd vs Sri Ikbal, the borrower of a housing loan was a " chronic defaulter" and therefore, the property was auctioned and it was sold in the presence of the borrower. After four years, the borrower challenged the sale certificate of the auction purchase in the Karnataka High Court in a writ petition. The high court quashed the auction sale and ordered a fresh auction. It further made certain observations against the bank officer and directed its registrar to refer the matter to the Superintendent of Lokayukta police at Bijapur for further action in accordance with law. The high court's view was that the mandatory rules were not followed. The bank and the auction purchaser moved the Supreme Court. While quashing the high court order, it stated that the Act provided a remedy for the borrower and there was no reason to bypass it and move the high court with a writ petition.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Insurance co held liable

The Supreme Court has ruled that the insurance company is liable to pay compensation to a road accident victim when it informed the insured that his cheque was dishonoured after the mishap. In this appeal, National Insurance Company vs Balkar Ram, the motor accident tribunal had ordered compensation to the victim. The company appealed against it, arguing that the cover note for the policy was issued against a cheque which was dishonoured even before the accident. On the other hand, the victim argued that the intimation regarding the dishonour of the cheque and cancellation of the policy was communicated to him after the date of the accident. The cheque bounced on April 17, the accident took place two days later and the intimation of the dishonour was conveyed on April 26. The court ruled that till then the insured was holding a valid policy and therefore the insurer must pay compensation.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Doubt on bounced cheque settled

Resolving doubts over two differing interpretations of the Supreme Court in the matter of Negotiable Instruments Act, a larger Bench last week stated that for the purpose of calculating the period of limitation of one month, which is prescribed under Section 142( b) of the Act, the period has to be calculated by excluding the date on which the cheque was dishonoured. A division Bench had referred the question to the larger Bench as the principle laid down in the case, in Saketh India Ltd vs India Securities Ltd, and in the case, SIL Import, USA vs Exim Aides Silk Exporters, differed with each other. The new judgment, Econ Antri Ltd vs Rom Industries Ltd, settled the question by holding that the first case laid down the correct principle and should be followed by all courts below.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Higher sum for displaced persons

The Supreme Court has directed the Vidharbha Irrigation Development Corporation to pay ₹ 3.70 lakh each to project affected persons, without discrimination. In this case, Daulat Sitaram vs state of Maharashtra, lands of villagers in Bhandara district were submerged due to Gosikhurd irrigation project in 1997. They were declared project affected persons under the Maharashtra Project Affected Persons Rehabilitation Act. They were allotted plots in another village, but they did not accept it as they lacked basic amenities. They were instead given ₹ 50,000 in compensation. In 2006, another set of villagers affected by the same project were given ₹ 3.70 lakh in compensation. Therefore those who got ₹ 50,000 moved the high court for equal amount. The corporation argued that the earlier group had a binding agreement with the government while accepting the amount and they cannot ask for modification of it. The Bombay High Court accepted the government's argument and rejected their plea. They moved the Supreme Court. It asked the government to pay the same amount, pointing out that under contract law any agreement which was unconscionable and against public policy was invalid. Such unconscionable terms imposed on the people are " Henry VIII clause", named after the imperious English king.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Land acquisition for coal quashed

The Supreme Court last week dismissed the appeal of Singareni Collieries Co against the Andhra Pradesh High Court judgment which had quashed the land acquisition proceedings in favour of the government company. The coal firm wanted 35 acres in three districts and the collector notified it in 1992. However, proceedings dragged on. When some land owners moved the high court, it held that the collector who acquired the land made the award beyond the period of two years stipulated in section 11- A of the Land Acquisition Act, and therefore the acquisition lapsed. This view was upheld by the Supreme Court.

MJ ANTONY

Transfer pricing deals: Compulsory scrutiny limit tripled to ~ 15 cr

It is a well known fact that transfer pricing ( TP) provisions have fuelled unprecedented litigation in India.

TP provisions were introduced in India by the Finance Act, 2001, so as to protect India's right to collect afair share of tax in respect of cross- border transactions. In simpler terms, TP provisions were introduced to ensure that an international transaction between two associated enterprises is made at arm's length price ( ALP) so that both the countries involved get a proper share of tax revenue in their respective jurisdiction.

It should be appreciated that India is a developing country with alot of constraints. The international transactions in India are susceptible to international economic pressure. The profit margin in India does not often compare favourably with international margins. Therefore, the transfer pricing provisions in India have to take into consideration the economic realities prevailing in the country. However, the revenue authorities generally take a view which is against the tax payers. This results in litigation in thousands of cases. Going by the figures of fiscal 2011- 12, TP additions were made in 1,338 cases creating an additional tax demand of ₹ 44,500 crore.

The aforesaid position and the difficulties of the tax payers have also been fully recognised by the government. The memorandum explaining the Finance Bill 2009 specifically took note of the difficulties faced by the assessees as under:

"Section 92C of the Income- tax Act provides for adjustment in the transfer price of an international transaction with an associated enterprise if the transfer price is not equal to the arm's length price. As a result, a large number of such transactions are being subjected to adjustment giving rise to considerable dispute." Determination of arm's length price ( ALP) in an international transaction is a specialist's job. Therefore, section 92CA provides that where the assessing officer considers it necessary or expedient so to do, he may refer the computation of ALP in relation to an international transaction to the transfer pricing officer ( TPO).

In the initial years of implementation of TP provisions and pending development of adequate data base for determining ALP, the Central Board of Direct Taxes ( CBDT) rightly decided that it would be appropriate if a small number of cases are selected for scrutiny of transfer price. The CBDT, therefore, decided that only where the aggregate value of international transaction exceeds ₹ 5 crore, the case should be picked up for scrutiny and reference be made to the TPO.

It was, however, soon realised by the government that the limit of ₹ 5 crore for making reference to TPO is hardly adequate. Therefore, in a welcome move, the CBDT vide instruction no. 10/ 2013 dated August 5, 2013, have further relaxed the monetary limit for selection of TP cases for compulsory scrutiny. Under the new instructions, the following categories of cases/ returns shall be compulsorily scrutinised: —Cases where value of international transaction as defined u/ s 92B of Income- tax Act exceeds ₹ 15 crore.

—Cases involving addition in an earlier assessment year on the issue of TP in excess of ₹ 10 crore which is confirmed in appeal or is pending before an appellate authority.

It may be clarified here that the limit of ₹ 15 crore for selection of TP cases for scrutiny was prevailing earlier also. But the said limit was only by way of internal instructions.

The above relaxation made by the government will certainly help a large number of tax payers who are involved in international transactions. In this context CBDT is also requested to find an appropriate mechanism so as to reduce the element of time in settling TP disputes. It will be recalled that creation of Dispute Resolution Panel ( DRP) for expeditious disposal of TP cases has not fulfilled its objective.

Whenever a reference is made by an assessing officer ( AO) to a transfer pricing officer ( TPO), AO gets an additional time of 12 months to complete a ' draft' assessment order. Then upon reference to DRP, a further time of nine months is allowed to DRP and one month to AO to complete assessment. Thus the assessment procedure takes around 22 extra months. For example, the assessment for AY 2010- 11 should be made latest by March 2013. But if reference is made to TPO, draft assessment order will be allowed to be completed by March, 2014 and final assessment order ( after DRP order) by January, 2015. A large number of foreign companies were tempted to opt for DRP route rather than routine CIT( A) route because of the declaration made by the finance minister in his budget speech that: " the dispute resolution mechanism presently in place is time consuming and finality in high demand cases is attained only after a long drawn litigation till the Supreme Court. Flow of foreign investment is extremely sensitive to a prolonged uncertainty in tax- related matter. Therefore, it is proposed to amend the Incometax Act to provide for an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes on a fast track basis." The government is urged to find some meaningful alternative to DRP so that foreign companies' tax disputes are settled expeditiously.

hp. agrawal@ sskmin. com a. gupta@ sskmin. com

FOREIGN ENTERPRISE

HP AGRAWAL

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

SHARING KNOWLEDGE SKY IS THE LIMIT

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[aaykarbhavan] Re: Free Press Journal

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[aaykarbhavan] Judgments

INSTRUCTION NO 11/2013, Dated: 27 August, 2013

Subject: – Action on Unmatched Challans reflected in Form 26AS – direction of the Hon'ble Delhi HC in the case 'Court on Its Own Motion vs. UOI & Ors in WP(C) 2659/2012 & WP(C) 5443/2012′- regarding

1. The. Hon'ble Delhi High Court vide its judgement in the case 'Court On its Own Motion vs. UOI and Ors' (W.P. (C) 2659/2012 & W.P. (C) 5443/2012 dated 14.03.2013) has issued seven mandamuses for necessary action by Income-tax Department, one of which is regarding the issue of 'Unmatched Challans' reflected in Form 26AS where the report by the deductor in the TDS statement are not found available in the OLTAS database resulting in TDS mismatch.

2. The unmatched challans belong to two categories of TDS statements, viz.-

(i) Statements pertaining to FY 2011-12 and earlier which have been processed by jurisdictional TDS Assessing Officers [hereinafter AOs(TDS)]

(ii) Statements pertaining to FY 2012-13 onwards, now processed by CPC(TDS)

3. The Hon'ble Delhi High Court (reference: para 42 of the order), has directed that

"…with regard to unverified TDS under the heading 'U' in form 26AS for verification and correcting unmatched challans within a time period, which should be fixed by the Boardkeeping in mind the date of filing of return and processing of return by the assessing officers."

4. In view of the above direction of the Hon'ble High Court, it has been decided by the Board that the CPC(TDS)/AOs(TDS) shall immediately issue letters to the deductors, in whose case TDS challans are unmatched, with a view to verify and correct these challans. If necessary, the deductors may be asked to file correction statements, as per the procedure laid down and necessary follow up action be taken. The task should be completed by 31st December, 2013 for FY 2012-13 in the case of CPC (TDS) and FYs 2011-12 & earlier in case of AOs (TDS).

5. This may be brought to notice of all Officers working under your jurisdiction for compliance.

6. Hindi version shall follow.

F. No. 275/0312013-IT(B)

(Anshu Prakash)

Director IT (Budget), CBDT

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Plug unimaginable leakage of service tax applicable on import of services

AUGUST 20, 2013

By TIOL Edit Team

REVENUE leakages due to shoddy collection of direct and indirect taxes is a perennial feature of the Indian taxation system. Shoddiness is due to varied reasons that include staff shortages, poor infrastructure and lack of information exchange and coordination between different regulatory authorities.

Comptroller and Auditor General (CAG) every year brings to light several instances of revenue leakages that the Revenue Department at times accepts and acts to recover the revenue lost or overlooked.

In the current monsoon session of Parliament, CAG has presented a clutch of reports on taxation issues. One of the reports that deserve highest priority and immediate attention relates to 'Levy and Collection of Service Tax on Import of Services'.

Import of services including payment of royalty for use of brand or technology owned by a foreign entity was brought under the ambit of service tax (ST) in April 2006.

Strict monitoring of import of services is required to not only prevent leakage of ST and income tax but to also to check money laundering. If a thorough investigation is made into all such imports, a scam may come to light.

Many analysts would harbour such apprehensions after reading CAG report. The suspicion becomes strong if one reckons the fact that services are relatively intangible and hard to verify their disclosed value or price.

That the revenue leakage through import of services is unimaginable and probably massive is evident from CAG's findings arrived on the basis of study of 37 of the 99 purpose codes specified by Reserve Bank of India (RBI) for reporting remittance of foreign exchanges.

The selected 37 codes prima facie relate to transactions that attract ST. CAG study is largely a sample survey of select registered manufacturers and service providers, authorized foreign exchange dealers (AFEDs) and ST commissionerates.

A whopping Rs 8 lakh crore was remitted by businesses for transactions that fall under 37 purpose codes during four years ending 31 March 2011.

CAG found that Revenue Department/Central Board of Excise and Customs (CBEC) does not have a mechanism to arrive at a reliable estimate of value of taxable services imported. It thus can't estimate the gap between collectible tax and tax actually collected.

As put by CAG, "the department did not have any prescribed specific accounting codes or any alternative mechanism to arrive at reliable figures of the taxes collected relating to import of services."

It is shocking to learn that CBEC neither has a system of calling for an annual information returns (AIRs) from identified parties such as AFEDs nor of utilizing data of high value transactions available with other authorities to check potential evasion of ST.

It is no wonder that CAG has listed several instances of tax evasion, under-estimation of tax liability and failure to collect taxes.

One of alleged case of evasion has resulted in ST show-cause notices demanding payment of Rs 900 crore. This might turn out to be case of fly-by-night operator.

A Mumbai-based company named Zoom Developers Limited remitted foreign currency equivalent to Rs 513.15 crore during 2007-08 to 2010-11 under the purpose codes that relate to import of services.

CAG report says: "The assessee could not be located at its registered premises. The Commissioner could not provide its ST returns for the above period or any prior period."

Unable to locate the company, the department has altered its field formations to prevent revenue leakages. It has also sought RBI's help to know about the whereabouts of the assessee.

CBEC has not even taken basic initiatives such as creating awareness through mass media among importers about their liability to pay ST on import of services.

It is disgusting to learn that CBEC requires nudging by CAG for performing such simple pro active role.

CAG has also advised CBEC to initiate steps to enable its staff to access the electronic data available with the Income Tax Department to maximize revenue collection through optimal use of resources.

The Finance Ministry has told CAG that a committee has been set up to work out modalities for sharing information between CBDT and CBEC.

If the Government puts in place a robust system of regular exchange of information between different regulatory agencies, then cases of evasions, under-assessment and non-collection would decline dramatically.

Exchange of information, flagging concerns on real-time basis and inter-agency cooperation requires strong intervention by ministers and bureaucrats at the highest level. In the absence of requisite the Executive's action, different regulatory agencies would continue to protect their turf.

The Government should perhaps institute handsome awards that should be jointly awarded to regulators concerned for successful plugging of revenue leakages, etc.

taxation of Industrial Alcohol: A knotty issue

AUGUST 28, 2013

THE business of dealing in alcohol based products has always been considered to be a res extra commercium activity in India. The Indian society in comparison to Western societies, typically, is one of the cliched 'dry' societies. In fact, a few States in India have prohibited the sale and purchase of alcohol, thus, famously referred to as dry States. The other State Governments officially declare dry days on certain festivals banning the consumption of alcohol.

This characteristic of the Indian society was duly noted by the framers of the Constitution, while drafting a Constitution for an Independent India. The fields of legislation specified and divided in three lists of the Seventh Schedule to the Constitution exhaustively cover industries dealing in all kinds of alcohol, potable or non-potable. The Constitution divides the subject in a manner which is compatible both with the Union as well as State Governments. The Directive Principles of State Policy also impose a duty on the State to improve public health, particularly prohibition on consumption, except for medicinal purposes, of intoxicating drinks and of drugs which are injurious to health.

Broadly, the power to legislate and levy taxes on alcohol not fit for human consumption rests with the Parliament and the levy of taxes on alcohol fit for human consumption falls within the power of State Legislatures. The State Legislatures are empowered to make laws regulating the production, manufacture, possession, transport, purchase and sale of intoxicating liquors as well as the fees in respect of any of the matters enumerated in List II of the Seventh Schedule, but not including fees taken in any court.

This division of fields of legislation between the Union and the States has been a matter of judicial scrutiny, the unsettled area being the difference between alcohol 'fit' for human consumption and that 'unfit' for human consumption. However, the Constitutional Courts, speaking through plethora of judgments, have always given a liberal construction to the constitutional provisions empowering the Parliament/ State Legislatures with respect to the alcohol industry in India. This article traces the approach of the Courts on the subject whilst highlighting some landmark decisions.

In State of Bombay v. F N Balsara, {AIR 1951 SC 318} certain provisions of the Bombay Prohibition Act, 1949 were sought to be declared unconstitutional. Construing Entry 35 of List II (which, inter-alia, deals with the production, manufacture, possession, transport, purchase and sale of intoxicating liquors), the Apex Court held that the word 'liquor' covered not only those alcoholic liquids which were generally used for beverage purposes and produce intoxication, but also all liquids containing alcohol. It may be that the latter meaning is not the meaning which is attributed to the word 'liquor' in common parlance especially when the word is prefixed by the qualifying word 'intoxicating', but having regard to the numerous statutory definitions of the word, such a meaning could not have been intended to be excluded from the scope of the term 'intoxicating liquor' as used in Entry 31 of List II.

The reservations regarding the power of the State Legislatures to regulate the misuse of industrial alcohol were addressed by a seven-judge bench of the Supreme Court inSynthetics & Chemicals Limited v. State of UP, (2002-TIOL-723-SC-CT). It is important to note down certain observations of the Supreme Court in this case which, in no uncertain terms, upheld the subject power of state legislatures.

The Court opined that the expression 'alcoholic liquor for human consumption' always meant and still refers to liquor which is consumable as such without any processing. Further, as a matter of fact, the fermentation industries producing alcohol are covered under the scope of the Industries (D&R) Act, 1951 [ a Central Act ].

Notwithstanding the above, the Court held that Entry 8 and 66 of List II and Article 47 of the Constitution confers on the State Legislatures to make laws regarding regulation of use of industrial alcohol for preventing its conversion into intoxicating or drinkable liquor. In exercise of such powers, the States may impose certain fees containing the element of quid pro quo.

Later, elaborating on this power of the State Legislatures, the Supreme Court, in State of UP v. Vam Organic Chemicals Limited, {AIR 2003 SC 4650} observed that in general, it is the potable liquor which is within the legislative domain of the States. The industrial alcohol may not be potable as such; however, the States may frame regulations to ensure that the industrial alcohol is not surreptitiously converted into potable alcohol. The Court reiterated that any fee imposed in the exercise of such power has to pass the test of quid pro quo, i.e. the fee must be in proportion to the cost incurred by the States to regulate the use of industrial alcohol. A similar observation was made by the Supreme Court in 2008 in Mohan Meakin Limited v. State of Himachal Pradesh, {2009 (3) SCC 157}.

The regulation of industrial alcohol by States with a view to prevent its conversion into potable liquor was recently reaffirmed by the High Court of Punjab & Haryana in Industrial Organics Limited v. State of Punjab, {2012 (1) ILR 658 (P&H)} wherein it struck down the increase in permit fee for denatured spirit on ground of being excessive, i.e. absence of quid pro quo.

To conclude, it is now well established that the State Legislatures can impose fee for the purposes of regulating the use of industrial alcohol and denatured spirits. However, under the garb of such constitutional power, no levy can be imposed without any element of quid pro quo.

Notwithstanding the clear position of law as laid down by the Constitutional Courts, these levies are expected to be a matter of judicial scrutiny on the basis of their constitutionality. If one goes for a reality check, the State Legislatures are also imposing unreasonable fees in the name of licenses and permits in relation to industrial alcohol, while being mindful of the fact of such fee being ultra vires in the absence of any quid pro quo.

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Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

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[aaykarbhavan] WEALTHCHECK

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[aaykarbhavan] SERVICE TAX FRAUD

Net 4 India may see selling pressure this week as the Service Tax Department has arrested its Managing Director, Jasjit Singh Sawhney, on the charge of not remitting the levy collected (estimated to be Rs 6-7 crore) to the Department. Arrested on Friday night, Sawhney was produced before the Metropolitan Magistrate in Patiala House Court on Saturday, and granted conditional bail till September 3 on payment of Rs 25 lakh. He has been asked to pay Rs 75 lakh within 15 days and Rs 1 crore within a month thereafter. The company, in which over 1,300 individual investors hold about 5.6 per cent stake, reported a loss of 9.6 lakh for the June quarter.

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[aaykarbhavan] Scrutiny

Dear Group Members,

One of assesse Mr. X sold Ancestral agricultural land and deposited sales proceeds to the tune of Rs 30 lacs in the joint account of his wife Mrs. A, his elder son Mr B and younger son Mr C. First name in the joint account is of Mr B. Later on the Sales proceeds were utilised for purchase of agri; land in the name of his wife Mrs. A, wife of elder son Mrs.D and wife of younger son Mrs. E.

Now Mr B have received notice u/s 148 for reopening of the case. Mr B have no taxable income. Mr C is in 30% tax slab.

Kindly Guide on following issues:

1. Can AO charge tax in the hands of Mr B?

2. Can AO treat the joint account holders as AOP and tax them accordingly?

3. What will be taxability situation of this transaction?

4. How can the assessee save hiself?

Regards

Anup Sharma

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