˘ ˇ ˆ˙ - Comptroller and Auditor General of Indiaaghp.cag.gov.in/pag/sites/pag/files/Rupee_Trail_Fifth.pdf · ``Trail January– March 2012 From the desk of the Dy.C&AG(CRA& Finance)

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`̀̀̀ Trail January– March 2012

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Message Message Message Message

It gives me immense pleasure to unveil the fifth edition of ` Trail-

e-journal of Revenue Audit. As we mark the anniversary of the e-journal, it is time to recognize the efforts of the officials who shared their views by contributing to the journal. The dedication and commitment of readers has provided an enabling environment for this in-house knowledge sharing initiative that was envisaged a year ago.

We live in times of significant change. There is a paradigm shift in the society, economy and governance. In order to be more competent and professional, auditors need to keep pace with rapid changes that are taking place. It is vital that a Supreme Audit Institution operates at high quality. Quality involves a process of continuous improvement. Auditors should possess adequate professional proficiency to perform their tasks effectively. Professional proficiency is ensured through continuous education in the subjects related to functional areas to be audited.

"Knowledge is power. It controls access to opportunity and advancement". The e-

journal is an effective medium of knowledge sharing. The coverage of issues is wide ranging and includes auditing practices, insights and legal and administrative updates.

I appreciate the work of the Editorial Board and the contributors for providing a treasure of knowledge.

I wish this journal success. Vinod RaiVinod RaiVinod RaiVinod Rai

Comptroller and Auditor General of IndiaComptroller and Auditor General of IndiaComptroller and Auditor General of IndiaComptroller and Auditor General of India

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From the desk of the Dy.C&AG(CRA& Finance)From the desk of the Dy.C&AG(CRA& Finance)From the desk of the Dy.C&AG(CRA& Finance)From the desk of the Dy.C&AG(CRA& Finance)

The Indian Audit and Accounts Department has undergone a major restructuring

lately. A major outcome of this exercise has been the setting up of new offices of

Principal Directors of Audit (Central) in different stations. Some of the previously

existing offices have been reorganized and their charges have been consolidated. This

exercise is sure to improve our expertise in the field of Central Revenue Audit. This

provides officers of the hitherto relatively less important stations an opportunity to be

part of specialized offices dealing with Central Revenue Audit.

On the other hand, state revenue now becomes a part of the ‘Sector specific’

offices in each state. This provides an immense opportunity for a holistic understanding

of the working of the different departments of the state governments both from the

point of view of receipts as well as expenditure. Undoubtedly it will lead to better

appreciation of issues pertaining to State Revenue Audit.

It is in this backdrop that we are bringing out the first anniversary issue of

‘’` Trail’. Needless to mention, this issue and all the previous issues bring out the ethos

of the Revenue Audit function of the Comptroller and Auditor General of India. The

officers belonging to this stream of work have time and again exemplified their vibrant

and enthusiastic approach to work by contributing to the journal. The series of

workshops, seminars and reports are further supplemented by initiatives like this. I am

sure that this endeavour would continue in the years to come with the wholehearted

support of all officers at headquarters and field offices.

With Best Wishes,

Jai Narain GuptaJai Narain GuptaJai Narain GuptaJai Narain Gupta�

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EditorialEditorialEditorialEditorial

‘` Trail’ was started as a knowledge sharing initiative in March 2011 by the

Revenue Audit wing of the Office of the Comptroller and Auditor General of India. The

focus was on improving the audit practices through discussions involving audit techniques

and profiles of the audited entities. The Journal was intended to serve as an enabling tool

for discussing technical and other aspects of Revenue Audit.

We have brought out four issues in last one year of inception. This has been possible

with the overwhelming support from all concerned at the headquarters and field offices.

Articles have been contributed by officials belonging to different offices. This has

strengthened our resolve to continue with the journal in its second year.

The current issue has been brought out as the anniversary issue. In this issue, we

have incorporated articles on the provisions in the Finance Bill 2012 and other current

developments in the field of Income Tax and Service Tax. We have incorporated an

overview of Customs Audit in India. The recent judgement by the Supreme Court on the

‘Vodafone case’ has engaged everyone’s attention. We have incorporated an article on the

same. Like the previous issues, this issue has the regular features like a write up on other

Supreme Audit Institutions. This time we have covered the United Kingdom. We are

proud of our rich heritage spanning over fifty years. In this issue, we have reproduced some

paras from the C&AG’s Revenue Audit Report for the year 1964-65. We have also covered

the Circulars issued by the respective boards and Judicial Pronouncements pertaining to

the power sector over the last year.

We look forward to your continued support.

Chief EditorChief EditorChief EditorChief Editor�

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Index

Sl. No. Title Page

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Audit of Customs Duties in India By L.V.Sudhir Kumar

Testing the limits of tax avoidance By Dr. S.C.Pandey

Income and Loss-some interpretations By Utpal Kumar Majumdar

Finance Bill-2012 By Prem Prakash

Negative List of Services By Sandeep Chadha

Supreme Audit Institution – United

Kingdom By R.K.Sharma

From the Archives

Circulars & Instructions by CBDT

Judicial Pronouncements on Assessees

engaged in Power Sector

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7-15

16-20

21-27

28-35

36-42

43

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45-48

Editorial Board-

Chairman:

Shri Jai Narain Gupta

Chief Editor:

Ms. Meenakshi Gupta

Editor:

Shri Shourjo Chatterjee

Advisors to the Editorial Board:

Shri Subir Mallick

Ms. Sandhya Shukla

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Disclaimer: The views expressed in the articles by various authors are their own and

do not in any way represent or reflect the official policy or views of the SAI-India.�

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Audit of Customs Duties in India

By L. V. Sudhir Kumar

Introduction

A duty or1 tax levied by sovereign government on goods entering or

leaving the country by sea, air or land is Customs duty. It is as old as

international trade and ancient civilizations.

In modern India, levy and collection of Customs Duties started with the

formation of the Board of Revenue in Calcutta in 1786 when British

Trading Companies acquired control over some of the territories.

Customs Duties Act came in 1859 when the Nation became a British

Colony. This was followed by the Sea Customs Act in 1878, the Indian

Tariff Act in 1894, Land Customs Act in 1924, Indian Aircrafts Customs

Act in 1911 and Indian Customs Act in 1934. In 1889, Collectors of

Customs used to look after the administration of Customs and also Taxes

on Production of Salt and Spirits, which evolved into Central Excise and

State (Provincial/Sub-National) Excise Duties, respectively, in 1938.

Match boxes came under Central Excise levy in 1934.

Efforts of the Government to neutralize the incidence of some of

these production/consumption taxes on exports and countervail the

effect of such taxes on imports on selected commodities contributes

to the complexity of Tax Administration.

Customs Duties in India

In Independent India, the Customs Act came in 1962 and the Customs

Tariff Act in 1975, which have been amended from time to time. Imports

and Exports are also governed by other related Acts. Rules and

Regulations help operationalise these Acts. There are also notifications,

public notices, circulars, instructions, prescribed forms, etc.

Since 1990, tax reforms have resulted in simplification of procedures and

reduction of tax rates and duties. The share of Customs Duties in total

tax revenue has came down from 20% to 10%.

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Customs duties on imports during last ten years as an average came down from about

20% to 5%.

From late 1990s, there is progressive use of Information Technology(IT)

by the Customs Department aimed at reducing transaction time and

transaction costs.

Simplification of procedures and increasing use of IT are aimed at ‘Trade

facilitation’. Overall objective is to improve the country’s foreign trade

and in turn its economic growth. At the same time, the Department has

to protect the Government’s revenue and safeguard resources through

consistent implementation of these Acts and Rules.

Efforts of customs department signify a trade off in their efforts to

seek ‘compliance to related Acts and Rules’ to minimize misuse, and

at the same time ‘trade facilitation for economic development’ which

contributes to the complexity of Tax Administration.

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Customs Audit in India

Audit of customs by the Auditor General in India started in 1926. This

was coordinated by Maritime Accountants General. Audit of production

and consumption taxes (other indirect taxes) started from 1961. Customs

audit approach was reoriented after enactment of the Customs Act in

1962. It is also influenced by other factors in the last 50 years, like the

1988 Bali Declaration of ASOSAI, tax reforms, use of IT since 1990, etc.

Financial Audit

Accounting of customs receipts is very systematic with regular flow of

financial information and reconciliation between concerned public

sector banks, pay and accounts offices and division/circle offices at

initial level and RBI (CAS, Nagpur) and Chief Controller of Accounts of

the Department at higher level. Financial Audit is carried out through

test check of a small sample and assurance level has been very high.

Compliance Audit

Compliance audit concentrates on consistency in application of customs

laws and rules to safeguard Government revenue from any possible

revenue loss. It is the main activity of our Customs Audit. Duties are

mostly applied on imports. Import duties are of different types. Basic

Customs Duty (BCD) at specific rate or ad-valorem rate, Countervailing

Duty (CVD), Additional Customs Duty (ACD), Anti Dumping Duty (ADD),

other protective safeguard duties, etc. These duties, particularly CVD

(which corresponds to Central Excise) and ACD (which corresponds to

VAT) are selectively applied or exempted, depending on the rules in

force at a particular point of time. Export duties are levied only on a

few commodities with the purpose to restrict their exports. Compliance

audit covers audit of receipts, refunds and exemptions.

The following is the list of some of the issues detected in Compliance

Audit in Customs:

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Performance audit

Performance Audits in Customs are often a kind of extension of

Compliance Audit where compliance to one set of Rules in a particular

area is systematically reviewed and commented. Some of the

Performance Audits are reviews of an aspect of functioning of the

Customs.

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•Non-levy of Antidumping and Safeguard duties:Non-levy of safeguard duty on ‘Phthalic Anhydride’:Non levy of Anti-dumping duty on picture tubes, PVC resin, Vitamin A, Sodium Ascorbate, CDs, Synthetic rubber, etc.

•Non-levy of penalty under the Customs Act'62

Drawback Payments

•Excess payment of drawback

•Irregular payment of drawback after expiry of stipulated period of re-export

•Drawback paid recoverable due to non-realisation of export proceeds

Export Credits

•Incorrect grant of DEPB (Duty Entitlement Pass Book) credit due to (i) non-realisation of export proceeds (ii) counting exports made through non-specified ports (iii) adoption of incorrect exchange rate for determing value of exports

•Incorrect fixation/ non-revision of DEPB rates

Export Promotion

Schemes(FTP)

•Irregular Domestic Tariff Area(DTA) sale on clearance of goods at concessional rate of duty in excess of entitlement by EOU

•Irregular DTA sale of waste generated during manufacture

•Short/non-levy of Education Cess on DTA clearances

Valuation

•Non inclusion of Freight and Insurance in Assessable Value of imported goods

•Non-consideration of High Sea Sale Agreement Value for duty assessment

•Non-inclusion of value of engineering drawings and technical documents in value of imported Plant

•Incorrect fixation / Non-revision of Tariff Values

•Short levy due to non-adoption of Retail Sale Price(RSP) for assessing additional duty of customs (CVD)

Classification

•Short levy due to incorrect classification of insecticides as 'other organic compounds, Plasma TV sets as computer monitors, Camcorders as still limage cameras, Ice cream candy making machine as dairy machine

•Classification of goods without chemical testing to allow concessional rate

•Incorrect grant of exemption due to misclassification

Rate of Duty and computation

•Undue financial benefit to importer due to allowance of delay in presentation of Bill of Entry

•Short levy due to adoption of ad valoremrate of duty where specific rate was higher

•Over-assessment of export duty due to levy of Education Cess on exports

•Short levy due to non-adoption of higher rate of duty after expiration of exemption notification

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Since, on an average, every year the Government foregoes 60% of

realisable customs revenue under various export promotion schemes, our

performance audit engagements of late have concentrated on reviewing

such schemes.

A summary of such schemes is given in the following table.

Duty Draw Back Scheme –only scheme administered by Finance Ministry; Exporters reimbursed for customs and/or central excise duty paid on

Inputs used in exports and for re-export of duty paid goods

Export Promotion schemes administered by the Ministry of Commerce

Pre-export exemptions through Licenses issues for import of goods such as :

Post Export duty credit certificates to be used for duty

waiver on subsequent imports

DEPB Duty Entitlement Pass Book- similar to Duty Drawback scheme

EPCG Export Promotion of Capital Goods

AA - Advanced Authorisations

DIFA- Duty Free Import Authorisation

REP License scheme- scheme for Gems and Jewellery sector

FMS Focus Market Scheme- for exports to specified countries

FPS Focus Product Scheme- for export of specified products

SFIS Served From India Scheme - giving benefits to service providers earning Foreign exchange

SHIS Status Holder Incentives Scheme – a special additional incentive for existing export performers

MLFPS Marked Linked Focus – special scheme for certain products when exported to countries not covered under the FMS scheme.

Unit as a whole is given export incentives

in the form of exemption from customs, central excise and also VAT in certain cases

SEZ – Special Economic Zone

EOU- Export Oriented Units, and their specialized forms like:

STP –Software Technology Park Scheme, EHTP-Electronic Hardware Technology Park Scheme, Bio Technology Park Scheme, etc.

Performance Audit looks at the way a scheme is implemented by The

Ministry of Finance and the Ministry of Commerce It is about the extent

of efficiency of those Departments in implementation of such schemes.

Each scheme has certain minimum performance indicators like export

targets to be achieved, net foreign exchange to be earned, and time

period in which these targets are to be achieved.

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A recently conducted review of Export Promotion Capital Goods (EPCG)

Scheme revealed that due to incorrect application of Policy guidelines

on the Scheme, there was Short fixation of average EO in 94 licences to

the extent of Rs. 1082 crore and short fixation of specific EO of Rs. 145

crore in 26 cases. Licensing Authorities were not exercising any key

controls like post verification of declarations, verification of addresses,

monitoring of installations, monitoring of progress of achieving export

obligations and receipt of redemption applications at the conclusion of

the export obligation period. Consequently, the compliance of

manufacturers to various requirements and conditions of the scheme was

very low.

Can we find a way to measure the impact of export promotion

schemes and find the reasons of success or failure? Performance

Audit - Customs may like to take up this challenge.

IT Audit

The Custom Department’s IT system, Indian Customs Electronic Data

Interchange System (ICES), was subject of IT Audit in 2007. Important

findings were: (i) deficiencies in the system design leading to incomplete

capture of data leading to manual interventions and incorrect levy of

customs duty; (ii) incorrect mapping of the business rules leading to

excess sanctions of drawback, DEPB credits and short levy of

‘countervailing duty (CVD)’; (iii) absence of appropriate input controls

leading to entry of incorrect and invalid data for freight/insurance

resulting in undervaluation and incorrect assessment of duty forgone;

(iv) absence of validation between ‘customs tariff heading (CTH)’ and

the serial number of the notification to check for ensuring the eligibility

for the benefit of exemptions; (v) absence of validation between

licenses and scheme codes which enabled multiple debiting of schemes

such as DEPB, Duty Free Replacement Certificate(DFRC) and Target Plus

Scheme(TPS) in the licences. The short levy, non-levy, etc. of customs

duties due to these system deficiencies noticed in the cases test

checked, was Rs. 220.50 crore.

To conduct audit online and to persuade Department to improve the

audit module where audit can contribute to its design through clear

user requirements is one of the challenges.

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Testing the limits of tax avoidance

By Dr.S.C.Pandey

The2 Honourable Supreme Court of India in its order dated 20 January 2012

disposed off Civil appeal no.733 of 2012 (arising out of SLP (c) no. 26529 of

2010) relating to Vodafone International Holdings B.V. [Appellant(s)] v Union

of India & Anr. [Respondent(s)]

Supreme Court verdict on applicability of capital gains tax in the VODAFONE CASE

1. Vodafone Group Plc. entered India in 2007 through a subsidiary based in the Netherlands, which acquired Hutchison Telecommunications International Ltd’s (HTIL) Hutchison Telecommunications International Limited stake in Hutchison Essar Ltd (HEL)—the joint venture that held and operated telecom licences in India. This Cayman Islands transaction, along with several related agreements, gave Vodafone control over 67% of HEL and extinguished Hong Kong-based Hutchison’s rights of control in India, a deal that cost the world’s largest telco $11.2 billion at that time. Vodafone had maintained from the outset that it is not liable to pay tax in India, and even if tax were somehow payable, then Hutchison should bear the tax liability.

2. Vodafone has been embroiled in a $2.5 billion tax dispute with the Indian Income Tax authorities over its ‘purchase’ of Hutchison Essar Telecom services in April 2007. The Tax authorities contended that the transfer of shares of CGP (CGP Investment Holdings Ltd, which is incorporated in Cayman Islands) outside India resulted into indirect transfer of shares of Indian Company and therefore the transfer is liable to tax in India. The tax authorities held that the transaction involved indirect purchase of assets of an Indian Company, and therefore the transaction, or part thereof was liable to be taxed in India. Cayman Islands is one of the famous tax havens and ranks high above the similar tax havens.

3. On 20th January 2012, the Supreme Court passed judgement [Vodafone International Holdings B.V. v/s. Union of India [2012]

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17 taxmann.com 202(SC) ] in favor of Vodafone, saying that the Income tax department had "no jurisdiction" to levy tax on overseas transaction of transfer of shares between companies incorporated outside India. Accordingly, it set aside the tax demand of $2.5 billion, overturning a Bombay High Court’s ruling. Shorn of distracting details, the gist of relevant facts and issues involved in this judgmentare discussed below.

4. The share transferor was a foreign company - a company incorporated offshore – which was holding controlling stake in an Indian subsidiary company through a maze of 100% subsidiaries (investment companies) incorporated in various foreign countries. The transferor sought to divest this stake in the Indian subsidiary by transferring shares in an upstream foreign subsidiary company to another foreign company (transferee foreign company) through an offshore transaction (i.e. sale outside India). Indisputably, the effect of this share transfer is indirect transfer of the control and ownership of assets situated in India legally owned by the Indian subsidiary. On this basis, the Income Tax Department of the Government of India sought to impose Capital Gains tax on an offshore transaction of share transfer. Bombay High Court ruled in favour of the Government of India. On appeal by Vodafone, the aggrieved company the Supreme Court overturned the Bombay High Court’s ruling on January 20, 2012.

5. The Supreme Court held that the consideration of an offshore sale of shares cannot be taxed by Indian tax authorities merely on the basis of the fact that the share transfer indirectly resulted in transfer of the control and ownership of valuable assets situated in India. The huge consideration exchanged between the parties to the share transfer deal reflected the value of the underlying asset situated in India. The Supreme Court held that the capital gains tax would be leviable only in the case of DIRECT transfer of the title to assets situated in India. A transaction taking place outside India for sale of shares between two foreign companies cannot be taxed in India, regardless of the worth, actual or notional, of the real physical assets situated in India whose effective control changes hands in the process of share transfer.

6. The case involves interpretation of Section 9(1)(i) of the Income-tax Act, 1961 reproduced below;

“9. Income deemed to accrue or arise in India. —(1)The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in

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India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.”

7. The SC has interpreted the above provision to conclude that the phrase “whether directly or indirectly” applies to the preceding phrase “all income accruing or arising” and not to succeeding phrases. In SC’s reckoning, the phrase “whether directly or indirectly” does not apply” the transfer of a capital asset situate in India”. Hence, the SC has held as follows:

• INCOME accruing or arising INDIRECTLY through or from any business connection in India or through or from any property in India, or through or from any asset or source of income in India is taxable. BUT

• Income accruing or arising through the transfer of a capital asset is taxable ONLY IF the transferred capital asset is situated in India. The tax liability in case on income from transfer of assets does not apply to INDIRECT transfers.

8. It is an accepted principle that every tax jurisdiction is entitled to tax anybody – resident, non-resident, citizen or foreigner – who draws any benefit from the goods, services and assets which are owned by persons situated within that tax jurisdiction or who are otherwise under its protection. Every tax jurisdiction has unlimited [legally] power to tax all its citizens, domestic companies or other legal entities created under its laws. However, a tax jurisdiction’s authority to tax foreigners depends on the nexus between the foreigner and the tax jurisdiction. If a foreigner draws any benefit from the goods, services and assets which are owned by persons situated within that tax jurisdiction.

9. The methods of taxation vary. Generally the tax has a direct nexus and the tax is collected in small doses in tandem with the pace of actual enjoyment of the benefits provided by the tax jurisdiction. The pre-tax price of goods and services is loaded with various taxes/levies. The profits / regular business income are separately taxed giving rise to indirect and direct taxes. This is what in professional circles is known as taxing the ‘revenue stream’. In addition, tax is also sought to be levied on non-recurring, windfall gains on sale etc of assets from which the revenue streams flow like the share yielding streams of dividends or bonds yielding recurring interest income or house/ business premises/plants & machinery yielding rental income.

10.The Supreme Court appears to have inter alia taken note of the distinction, widely accepted in taxation and accounting parlance, between taxing the recurring income from use of an asset

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[popularly called the income tax] and the non-recurring income made while transferring an asset [popularly called the capital gains tax]. The methods of computation of the tax on the two types of incomes are quite different. The gross amount of consideration for asset transfer’ is reduced by suitable allowances based on the acquisition cost of the asset and the period elapsed since last transfer of the asset. The income [rather ‘capital gain’] which the taxman seeks to tax is determined by taking into account these considerations. In the case of recurring incomes like salaries, rents, interest, dividends, royalties, technical fees, net operating surplus of a company, the taxman is not so much concerned with past history of the source of income.

11.In so interpreting S. 9(1)(i) of the IT Act, the Supreme Court drew support from the provisions of Direct Tax Code (DTC) Bill, 2010 which proposes to tax income from transfer of shares of a foreign company by a non-resident, where at any time during 12 months preceding the transfer, the fair market value of the assets in India, owned directly or indirectly, by the company, represents at least 50% of the fair market value of all assets owned by the company. This reading of the DTC Bill, 2010 indicates that the government is cognizant of the existent non-taxability of offshore share sales and is seeking to bring offshore share transfers within the tax net. The DTC Bill was used to read and reinforce the idea that offshore transfer of shares between two foreign companies (that may involve indirect transfers of control over Indian assets) are not covered by the existing section 9(1)(i) of the Act.

12.Following this distinction, the SC verdict implies that any direct/indirect income of a foreigner which flow from the use of an Indian asset is taxable by Indian government but insofar as CAPITAL GAINS TAX is concerned, the tax liability would arise only if the Indian asset is DIRECTLY transferred.

13.It has been contended by tax authorities that the whole arrangement of sale of shares was designed to avoid the CAPITAL GAINS TAX that would have been indisputably payable had the share of the Indian company controlling the Indian assets had been alienated. The transaction was structured on the understanding that such offshore sale would not attract Indian capital gains tax. The SC verdict endorses this understanding and without going into the ulterior motives of the companies involved in the share transfer, the SC Court has held that the tax law as it stands now keeps such transactions outside the tax net. The Court’s considered judgment is that INDIRECT / DE FACTO transfer of Indian assets does not attract CAPITAL GAINS TAX as this is not provided in the tax law as interpreted by it. If the competent

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Legislature in their wisdom decide that even INDIRECT / DE FACTO transfer of Indian assets would attract CAPITAL GAINS TAX and amends the tax law [even retrospectively, which is legally permissible], the judgment would stand nullified.

14.The theory of looking at the form and appearance of a TRANSFER transaction rather than the ‘underlying tangible/intangible assets' has important implications say in a case of non-transferable licenses. The licenses themselves may not be the subject matter of sale but the controlling interest in the license holder company may be sold. This is the line of argument being advanced to bring more accused in the ongoing '2G scam trial'. Contrary view is that the sale of shares does not legally amount to alienation of underlying assets. Legally they stand on a different footing covered by different statutes with correspondingly different context of interpretation but the essence remains the same: indirect transfer of assets by putting a corporate boundary around the asset. Such tax avoidance/planning tactics has for example used in evading property taxes by having the asset (say a house or other building premises) owned by a company whose only business activity is to be the owner of the asset. Thereafter, the control of the underlying real estate can be transferred by sale of shares of the company on which the incidence of taxation may be much less than the tax on direct sale of house/building!

15.This case thus takes us to the text-book distinction between “Tax avoidance” which is legally permissible and “Tax evasion” which is not. It is manifest that the whole share transfer deal sought to be taxed was structured as an innovative tax avoidance scheme.

16.The continuous tussle between businesses adopting ways and means to avoid paying taxes and the taxmen updating the tax laws (often retrospectively) to plug the tax avoidance routes has given rise to a whole tribe of professionals advising both sides of the taxation battle. For example, companies started giving more benefits in kind to their employees to minimize indisputably taxable cash salary component of the overall remuneration package prompting the tax authorities to bring the Fringe Benefit Tax on the statute book. Likewise, artificial suppression of indisputably taxable factory gate price through arrangements of inflated value addition services outside the Central Excise tax net led to MRP-linked assessment, introduction of Service tax and now eventual taxation of whole value addition chain through the Goods and Services Tax.

17.Use of ‘tax heavens’ is an ingenious expedient designed by transnational companies to avoid call to pay taxes by main tax jurisdictions which are the source of generating the income

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sought to be taxed. Many small countries with small populations having little alternative means of creating jobs for their nationals or having a low-tax, hands-off government find it lucrative to invite the companies to register shadow holding companies with them – assured of little or no taxation – and there create a downstream chain of inter-connected subsidiary companies with downstream companies carrying out the real business in big countries and sucking out the profits from this long straw protected in a tax-proof sheath. For the ‘tax heavens’ as the countries hosting such upstream holding companies are called, the gain may be as little as the job for a receptionist – cum-office clerk and remuneration to the lawyers/government/court officials involved in the paperwork involved in such registering such companies. Typically the number of such companies [and ships for they carry the flag of country of registration] run into thousands. The gain to such companies like Vodafone in terms of taxes avoided is so huge that it would not perhaps even blink in giving lifetime free connections to all the citizens of say Cayman Islands! The tax heavens have become major eyesores for the humongous tax-and-spend governments in both the developed and developing world. OECD has launched a major international campaign against concerted action to curb tax avoidance through the mechanism of tax heavens.

18.From a purely legal standpoint, once it is authoritatively interpreted by the Supreme Court that offshore sale of shares between two foreign companies does not attract capital gains tax under Indian law, the verdict would have perhaps been the same if the tax notice had been issued to the Indian company, the seller-through-intermediary, instead of to Vodafone, the purchaser because the logic of the verdict is that a sale-purchase transaction between two foreigners is not subject to Indian tax jurisdiction even if the subject matter of sale is controlling interest in Indian assets. No Indian company sold any asset directly.

19.Primarily, the tax liability attaches to assessesbased on their nationality. A government may tax its nationals (citizens and the companies registered under its national laws). A government’s tax jurisdiction also extends to foreigners who derive income from the country whose government seeks to tax them! Thus, the extra-territorial application of tax laws of a country depends on both the nationality of the person who is sought to be taxed as well as the nexus of the income sought to be taxed with the country which is the source of that income and hence seeks to tax it even in the hands of foreigners.

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20.In disallowing taxation of offshore sale of shares on the ground that this is not provided for in the Income Tax, the Supreme Court has refused to look at the intent and consequences behind the sale transaction. The Court has not been persuaded by the arguments to ‘look through’ the transaction rather than merely ‘Look at’ the transaction. Lifting the corporate veil was not allowed in the absence of specific legislative provision. The Supreme Court observed: “whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises”. Applying this test the Supreme Court concluded that “the Offshore Transaction herein is a bonafide structured FDI investment into India which fell outside India’s territorial tax jurisdiction and hence not taxable.” The Supreme Court held that we have to look at the transaction as a whole and take into consideration various factors such as the duration of time during which the holding structure existed, the period of business operations in India, the generation of taxable revenue in India, the continuity of business, etc. Considering all these factors, the Supreme Court held that the transaction cannot be termed as sham.

21.The substance of the judgement is that tax planning can be done

provided it is permitted within the law and the activity to avoid

the tax is not just a sham (a colourable device) but a genuine

transaction. Interpretation to be given by a judge should not be to

encourage evasion but it can allow avoidance within the law. It

has to be judged on the basis of facts in each case. Some have

criticized the Supreme Court's opinion as exceedingly mindful of

form over substance. However, it is a fundamental principle that

courts should refrain from legislating. They should focus on

enforcing the applicable law as it stands.

22.Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner However, legally the government has the option to fill the legislative gap with retrospective effect as has been done earlier in some cases (Forfeiture of ‘unjust enrichment’ due to Excise refunds not refunded to buyers.)The Government of India is clearly unhappy at being denied revenue to the extent of $2.5 billion. We may not term it as ‘revenue loss’ because the court has held that the revenue is not legally due and the tax demand is bad in law. Had the Supreme Court upheld the Bombay High

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Court’s verdict, path would have been paved for the Government to tax many other similar share transfer transactions. The Government is now seeking to retrospectively amend the Income Tax Act through the Finance Bill introduced in Lok Sabha along with the Budget for 2012-13 to plug the loopholes in the tax law, which formed the basis of the SC judgment terming the authorities’ tax demand as not in accordance with the law, as interpreted by the SC.

23.However, I would like to highlight some of the broader questions of fiscal policy and foreign investment policy. India needs inflow of foreign capital not only for the sake of foreigners’ savings being used to finance our requirements but also to usher in advanced technology and management practices. This is the whole rationale and officially articulated purpose of our FDI policy. Driven by profit maximization motive, the internationally mobile capital seeks destinations that provide an opportunity to earn a reasonable post tax income over long periods. Certainty of tax regimes adds to the investor confidence. On the other hand, it is also unfair to let the foreign entities exploit loopholes in national tax laws to deny the host government a fair share of the gains from the economic activity so generated within its boundary.

24.The specifics of this particular case aside, if share sale between two companies is sought to be taxed by a foreign government [foreign to both the companies] on the plea that the share transfer involved indirect transfer of control/ownership of assets situated in that foreign country, a practical problem would arise in case the underlying assets belonging to the companies are spread over multiple tax jurisdictions.

25.Answer for tax avoidance by transnational companies does not lie in national tax laws but in global cooperation in dealing with tax heavens, a deeply political issue. How can the ‘tax-and-spend’ governments impose their ideology on nations following “minimalist government” political ideology? As usual, expediency lurks behind the mask of ideology. One country’s ‘black money’ is source of survival for another. That is how ‘tax heavens’ flourish. If there could be international agreement and cooperation in enforcement, “tax-and-share” could be put in place but the interminable debate on limits of taxation, sovereignty and protection to criminals, acceptability of national laws on crime and taxation by outsiders, unfair/unjust/excessive taxation and fair end-use of tax proceeds will block any such agreement coming into existence. The larger question is whether tax policy is in sync with larger objective of FDI policy and economic growth and the ideology that is driving it. The ideology question is very

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relevant because pragmatism demands being color-blind to money so long as it is invested where you want it.

26.Hence, a related important policy question is whether an investment per se [whether domestic or foreign] be taxed at all. Why not tax only the revenue arising from the investment? What was the idea behind virtual abandonment of wealth tax and estate duty? To promote investment! The shares were bought in the instant case to get control on revenue streams from Indian consumers. Why not limit taxation to only the revenue stream? Why try to fish in the glacier? Why not fish in the river? Some glaciers remain frozen and don’t bring any streams! Why not introduce more tax slabs for capital gains tax to segregate extremely large capital gains for special treatment? The answers to these questions lie in the state of public finances, not in law. The tax law merely reflects government’s desire and desperation to tax. An ideal condition would have perhaps been to only intercept the revenue stream for tax but the logic of capital gains taxation is to target those who do not have a long-term stake in the asset that is the subject matter of transfer. Their main interest is to buy and sell assets at opportune times and make windfall gains [and also face market risks]. Once this underlying logic is accepted, the capital gains tax may not be levied provided there is a certain long-term lock-in period for holding the asset. In part, this logic is accepted in Indian law by differently taxing short-term and long-term capital gains. It can be further refined in case of very large share transfer transactions of the type involved in the court case being discussed here.

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Income and Loss-some interpretations

By Utpal Kumar Majumdar�

Income and its chargeability

Income for 3the purpose of chargeability to tax is defined in section

2(24) of the Income Tax Act, 1961. Under section 2(24) of the Income

Tax Act, 1961, as amended from time to time, the term “income”

specifically includes –

(i) Profits and Gains,

(ii) Dividend excluding the cases mentioned under section 2(22)(e).

(iii) Voluntary contributions received by Trust.

(iv) Perquisites in the hands of employees.

(v) Any special allowance or benefit to an assessee necessarily and

exclusively granted for performance of his duties of an office or

employment.

(vi) City Compensatory Allowance.

(vii) Any benefit or perquisite to a Director of a Company.

(viii) Any benefit or perquisite to a Representative Assessee.

(ix) Any Sum chargeable under section 28, 41 and 59 of the Income

Tax Act, 1961.

(x) Capital Gains.

(xi) Any Insurance profit computed under section 44 of the Income Tax

Act, 1961.

(xii) Income of banking of a Co-operative Society.

(xiii) Winning from Lotteries, Crossword Puzzles, Races, Card games,

Gambling, Betting etc.

(xiv) Employees’ contributions towards Provident Fund received by the

Employer

(xv) Amount received under Keyman Insurance Policy.

��Shri Utpal Kumar Majumdar is working as a Senior Audit Officer in the Office of the Director General of Audit (Central), Kolkata.

This article seeks to highlight the issues related to certain incomes which

may not be subject to the tax treatment and losses which may be used in

the favour of the assessee for the computation of total taxable income.

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(xvi) Gift exceeding ` 50,000 for non-relatives.

This definition of the term ‘Income’ is inclusive and not exclusive.

Therefore, the term “income” includes not only those items which are

included in Section 2(24), but also includes such items which the term

signifies according to its general and natural meaning. The word

‘Income’ used in the Act is fluid to an extent. It is not controlled or

limited by the use of the words ‘Profits and Gains’. The diverse forms

which ‘income’ may assume cannot be exhaustively enumerated, and so

in each case the decision as to whether any particular receipt is income

or not must depend upon the nature of the receipt and the true scope

and effect of the relevant taxing provision. A receipt may be an income

for the purpose of taxation though it may not amount to profit4. In this

pronouncement the question under consideration was “Is bamboo,

thatch, fuel, etc., grown by the assessee company and utilised for its

own benefits in its tea business, agricultural income within the meaning

of the Bengal Agricultural Income-tax Act? And can such income be

computed under rule 4 of the rules framed under the Act?” The

Honourable Supreme Court replied in the affirmative.

Income for its chargeability to tax should be real and not fictional. A

person cannot make a profit of trading with himself or out of transfer of

funds/ assets from one pocket to another5. Similarly, income does not

arise in a transaction between Head Office and Branch Office, even if

goods are invoiced at a price higher than cost price. Income also does

not arise or accrue at the time of revaluation of assets. Whether an

accrual of income has taken place or not must be judged, in appropriate

cases, on the principle of real income theory. In determining the

question whether it is hypothetical income or whether real income has

materialized or not, various factors will have to be taken into account.

Any income does not imply that the same is taxable. Where, by an

obligation income is diverted before it reaches to the assessee, it is not

taxable. However, the income is required to be applied to discharge an

obligation after such income reaches the assessee. In the event of the

obligation not being met, it is taxable6. The Income Tax Act does not

permit an assessee to treat a part of income as deferred income and to

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offer it for taxation as per his own sweet will. ITAT Madras has ruled

that the concept of deferred income is alien to the Indian Income Tax7.

Income on its coming into existence attracts tax.

Any extra amount received on account of devaluation of currency is

taxable. If the fund is utilized in the course of business for trading

purposes, there would be realization of the profit arising on devaluation

and the same is taxable. If, on the other hand, the fund is not utilized in

the course of business for trading purposes (i.e, for non-trading

purpose), there would not be any profit and the extra amount is not

subjected to tax8. The amount of loan received by an assessee is not an

income in the hands of the assessee, but is a liability. But, if the loan

liability payable by loanee is waived then it is taxable in the hands of

the loanee. Further, Loan issued to an employee at concessional rate is

the perquisite in the hands of the employee. Again, in the case of

Sahney Steel and Press Works Limited and others vs. CIT [228 ITR 253]

the Honorable Supreme Court has held that the Govt. subsidy or

incentive is allowed to the assessee only as an assistance for efficient

and profitable running of industry and this type of assistance is revenue

receipt and taxable.

The refund of Sales tax on purchase of raw materials and sale of finished

goods, Subsidy for power consumed for production, Refund of water rate

in respect of water drawn from a Govt. source or from the source

maintained by local body, Exemption from payment of water rate on

water drawn from sources not maintained at the cost of the Govt. or any

local body are some other examples of incentives which are revenue in

nature and taxable. According to the decision [in a case of Kesoram

Industries and Cotton Mills Ltd. Vs. CIT reported in 191 ITR 518] of the

Division Bench of the Calcutta High Court, the subsidies received from

the Govt. by way of refund of sales tax after setting up of plant is

incidental to carrying on the business of the assessee and is not intended

to be a contribution towards capital outlay of the industry. Therefore,

the same cannot be regarded as anything but a revenue receipt.

Thus it can be seen from the above discussion that Income assumes

different forms and its definition needs to be adequately supplemented

by judicial pronouncements towards proper interpretation of the

provisions of the Income Tax Act. ��)�2��3!��

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Loss and its treatment

The foregoing paragraphs are related to positive income. Positive

income arises where the receipt overtakes the expenditure. But where

the expenditure overtakes the receipt, loss arises. It is also termed

‘negative income’. In the case of CIT vs. Haraprasad & Co (P) Ltd9. the

Supreme Court has held that loss is a negative income and in calculation

of total income of an assessee both negative and positive income should

be taken into account. But how this negative income is brought to tax?

The provisions of the Income Tax Act allow carry forward of certain

losses and setting off of the same up to some years. Sections 70,

71,72,73,74,71B,72A,72AB,72AA,79,58(4) and 94 of the Income Tax Act

deal with the carry forward and set off of losses incurred by an assessee.

The entire process of carrying forward and setting off of losses is

summarized as below:

Step I: Inter-source adjustments under the same head of income (except

some cases, e,g (i) Losses from speculation business can only be set off

against speculation profits, (ii) Long Term Capital Loss can only be set

off against Long Term Capital Gain, (iii) Losses from the activities of

owning and maintaining of race horses can only be set off against the

profits from same business, (iv) Losses from specified business (u/s

35AD) can only be set off against the profits from same business, (v) If

the income from any particular source is exempt from taxation, losses

from such sources cannot be set off).

Step II: Inter-head adjustment if the loss cannot be set off under step I

(except some cases, e,g (i) losses from speculation business can only be

set off against speculation profits, (ii) Capital Loss can only be set off

against Capital Gain, (iii) Losses from the activities of owning and

maintaining of race horses can only be set off against the profits from

same business, (iv) Losses from specified business (u/s 35AD) can only be

set off against the profits from same business, (v) Business loss cannot

be set off against Salary income).

Step III: Carry forward of loss is applied only if a loss cannot be set off

under step I and Step II above. The conditions governing carry forward of

loss is highlighted in the table below:-

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Types of losses which can

be carried forward to the

next year

Income against

which it can be

set off

No. of

Years

allowed to

be carried

forward

Should

the

Business

be

continued

Whether return

to be filed in

due date of

submission of

return

Loss from House Property Income from House

Property

8 NA No

Speculation Loss Speculation

Income

4 Not

necessary

Yes

Non-speculation business

loss (Depreciation, Capital

Expenditure on scientific

research etc.)

Any income except

Salary

No limit Do No

Remaining business loss Business profits 8 Do Yes

Short Term Capital Loss Capital Gain 8 Do Yes

Long Term Capital Loss Long Term Capital

gain

8 Do Yes

Losses from the activities

of owning and maintaining

of race horses

Income from

owning and

maintaining of

race horses

4 Yes yes

Thus, in the year in which the loss occurs, no taxes are liable to be paid

for incurring such loss. In other words, such negative income is kept tax-

free. On the other hand, in the future year in which it is set off, tax is

also not required to be paid on positive income to that extent because

of setting off of negative income against positive income.

Interpretation of Loss-is inefficiency rewarded?

As seen above, the assessee is allowed a direct benefit for such negative

income. This benefit is as good as subsidy being granted by the Govt. for

inefficient and non-profitable running of business or transactions. This is

incidental to carrying on the activities of the assessee. Moreover, this

benefit is a real benefit and not fictional one.

Therefore, it may be said that incurring loss in business is also rewarding

for the companies.

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Finance Bill-2012 By Prem Prakash�

The Union Finance Minister presented the Union Budget for 2012-13 on

15 March 2012. Certain important proposals indicated in the Finance Bill

are given in the following paragraphs.

A. Provisions relevant to Individual assessees

1. Rates of Taxes, Basic Exemption Limit and Income Slabs

The rates 10of Basic Tax, Education Cess and Higher Secondary Education

Cess have been kept unaltered for all assesses.

The Income Slabs limit for Individual Hindu Undivided Family (‘HUF’),

Association of Persons (‘AOP’) and Body of Individuals (‘BOI’) have been

further increased, the features of which are provided in the table below:

Assessee Existing basic exemption and Income

Slabs Proposed basic exemption and

Income Slabs

Total Income Tax Rate Total Income Tax Rate

All

Individuals,

HUF, AOP

and

BOI(except

Sr. citizens

etc.)

uptoRs.1,80,000/- Nil uptoRs.2,00,000/- Nil

Rs.1,80,001/-

toRs.5,00,000/-

10% of income

above Rs.1,80,000/-

Rs.2,00,001/-

toRs.5,00,000/-

10% of income above

Rs.2,00,000/-

Rs.5,00,001/-

toRs.8,00,000/-

Rs.32,000/- plus 20%

of income above

Rs.5,00,000/-

Rs.5,00,001/-

toRs.10,00,000/-

Rs.30,000/- plus 20%

of income above

Rs.5,00,000/-

AboveRs.8,00,000/-

Rs.92,000/- plus 30%

of income above

Rs.8,00,000/- AboveRs.10,00,000/-

Rs.1,30,000/- plus

30% of income above

Rs.10,00,000/-

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This article throws light upon the amendments as proposed in the Finance

Bill-2012 in relation to the Direct Taxes.

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2. Exemption in respect of Long Term Capital Gain

Section 54 GA is proposed to be inserted so as to provide exemption of

long term capital gains arising to individuals and HUFs from transfer of

residential property (house or a plot of land) between 1st April 2012 and

31st March 2017, proportionate to the sale consideration thereof

invested in a newly incorporated Indian company (to be owned at least

50% by the concerned assessee, and engage in the business of

manufacture and covered as small or medium business enterprise under

Micro, Small and Medium Enterprises Act, 2006) from which such

company purchases new plant or machinery; subject to fulfillment of the

other conditions as prescribed therein.

3. Age limit for Senior Citizen

The age limit for senior citizens in section 80D and 80DDB (deduction on

expenditure incurred for medical treatment of prescribed diseases) are

proposed to be brought down from 65 years to 60 years, in line with

other provisions of the Act.

4. Deduction in respect of Donation

Section 80G allows deduction in respect of donations made to

specified/approved trusts/institutions etc. Section 80GGA allows

deduction in respect of donations for scientific research or rural

development. It is proposed to amend these sections to allow deductions

in respect of such donations exceeding Rs.10,000 only if the same is paid

by any mode other than cash.

5. Non taxability of interest income

Section 80TTA is proposed to be inserted so as to allow deduction up to

Rs.10000 to individuals and HUFs in respect of interest on savings bank

account with banks (including co-operative banks) or post office.

B. Provisions relevant to resident Corporates

Certain Industry/ Sector specific proposals are listed in the

following paragraphs:

1. Exemption to Venture Capital Fund/ Company

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Section 10(23FB) provides for exemption of income of a Venture Capital

Fund/Company from investments in a Venture Capital Undertaking

(‘VCU’).

However, VCU was defined to be an unlisted company engaged only in

certain specified businesses. It has now been proposed to modify the

definition of VCU so as to do away with such restriction of only specified

businesses i.e. a VCU can now be in any business, subject to fulfillment

of other conditions as may be prescribed by SEBI (Venture Capital Funds)

Regulations, 1996.

2. Share issue proceeds above fair market value received

from resident-taxable

Section 56(viib) is proposed to be inserted so as to tax as ‘Income from

Other Sources’ any amount received by a company (not being a company

in which public are substantially interested) from a resident person, as

consideration for issue of shares that exceeds the face value thereof,

unless such consideration is equal to or less than the fair market value of

such shares.

The provisions therefore, would not apply to any such amount received

in excess of the fair market value from a non-resident.

3. Dividend Distribution Tax (DDT)

Section 115O providing for DDT, allows credit in respect of the dividend

received by the dividend paying company from its subsidiary, provided

the dividend distributing company itself is not a subsidiary of any other

company. This restricts such benefit only to holding companies.

It is now proposed to do away with this provision and provide credit of

dividend received from a subsidiary, irrespective of whether or not the

dividend distributing company is itself a subsidiary of another company.

4. Additional depreciation for power industry

Section 32(1) (iia) allows an additional depreciation of 25% on plant and

machinery acquired and installed by an assessee engaged in the business

of manufacture of article or thing. Such additional depreciation is now

proposed to be allowed to assessee engaged in the business of

generation or generation and distribution of power.

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5. Extension of sunset clause for power sector

Section 80IA provides for deduction of 100% of the profits and gains from

various businesses specified therein, subject to fulfillment of other

conditions prescribed. The said section allows such deduction, inter alia,

to the undertakings set up for generation/distribution/transmission of

power before 31st March 2012. It is now proposed to extend the benefit

of this deduction to such undertakings set up before 31st March 2013.

6. Extension of weighted deduction to bio-tech and

manufacturing industry

Section 35(2AB) allows weighted deduction of two times of the

expenditure incurred on scientific research on in-house research and

development facility as approved, to a company engaged in the business

of bio-technology or manufacture of article or thing (barring certain

items).The sun-set provision for such weighted deduction is proposed to

be extended from 31st March 2012 to 31st March 2017.

7. Weighted deduction for notified agricultural

development project

Section 35CCC is proposed to be inserted so as to allow 150% deduction

of any expenditure incurred by any assessee on notified agricultural

extension project. Similarly, section 35CCD is proposed to be inserted so

as to allow 150% deduction of any expenditure incurred by a company on

notified skill development project.

8. Extension of the benefits of 100% deduction of capital

expenditure to certain specified businesses

Section 35AD allows deduction of capital expenditure incurred wholly

and exclusively for certain specified businesses, subject to fulfillment of

other conditions prescribed therein.

It is proposed to allow deduction of 150% of the capital expenditure

incurred after 31st March 2012 for the specified business.

C. Proposals relevant to International Taxation and non-

resident assessees

1. Amendments related to DTAA provisions

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Section 90(3) provides that where certain term is not defined either in

the DTAA or the Act, then the same shall have the meaning assigned to it

by notification issued in that respect.

It is now proposed to provide, effective from 1st October 2009, that

when such notification assigning meaning to any term is issued, then the

same shall be effective in interpreting the DTAA, from the date such

DTAA became effective.

2. Transfer Pricing

The following are some amendments that have been proposed to the

Transfer Pricing provisions, which would have far reaching implications,

not only on cross-border transactions between Associated Enterprises,

but also on large value transactions between domestic related parties:

i. Definition of ‘international transactions’ to be expanded so as to

specifically include therein business restructuring, financing and

guarantee arrangements etc., retrospectively from April 2002;

ii. Extensive definition of ‘intangible property’ to include all types of

rights, licenses etc. within its fold, again retrospectively from April

2002;

iii. Section 92C(2) to be amended retrospectively for cases pending

before Assessing Officer as on 1st October 2009, so as to undo judicial

decisions favoring the assessees with respect to allowing +-5%

adjustment to mean comparable price, for determining arm’s length

price; however, cases completed before 1st October 2009 cannot be

reopened;

iv. Arm’s length range to be restricted to 3% of the actual price

undertaken, with effect from 1 April 2013;

3. Exemption to foreign company from sale of crude oil

It is proposed to insert section 10(48) to allow exemption to a foreign

company, of income received in Indian currency, on account of sale of

crude oil to any person in India, under an agreement/arrangement

entered into by/approved by and notified by the Central Government,

provided that such foreign company is not engaged in any other activity

in India.

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D. Miscellaneous proposals

1. Alternate Minimum Tax (AMT)

Last year, through introduction of Chapter XII-BA containing sections

115JC through 115JF, Limited Liability Partnership (LLP) were made

liable to minimum tax called Alternate Minimum Tax (AMT).

The provisions made an LLP liable to pay tax @ 18.5% (plus Education

Cess) on its total income (as computed under the provisions of the Act

itself) before deductions u/s.80 (in respect incomes from specified

businesses/sources) and u/s.10AA (profits of SEZ units); in case where

such amount exceeds the regular tax on its total income after such

deductions. Provisions for carry forward and set-off of AMT credit for a

10-year period are also available.

These provisions are now proposed to be made applicable to other

persons also, who or which claims deduction u/s. 80 (in respect incomes

from specified businesses/sources) and/or section10AA (profits of SEZ

units); and in cases of individuals, HUFs, AOPs, BOIs and artificial

juridical persons claiming such deduction/s, only where the adjusted

total income (i.e. income before such deductions) is Rs.20 lacs or more.

2. TDS

Section 194J, providing for TDS on professional/technical fee is proposed

to be amended to now provide TDS @10% on director’s

fees/commission/remuneration, which is not taxable as salary, effective

1st July 2012.

Section 194LAA is proposed to be inserted to provide for TDS at the rate

of 1% by the purchaser of immoveable property (land or building, other

than agricultural land) from the consideration payable to a resident

seller thereof, where such consideration is Rs.50 lacs/Rs.20 lacs or more

depending on the location of the immoveable property. There are other

related provisions including no registration of such property being

carried out unless the challan of TDS is produced before the registering

authority. This would be effective from 1st October 2012.

3. Limits for requirement of Tax Audits

Section 44AB provides for mandatory tax audit for businesses with

sales/turnover exceeding Rs.60 lacs and professionals with gross receipts

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exceeding 15 lacs. It is now proposed to enhance these limits from Rs.60

lacs to Rs.1 crore and Rs.15 lacs to Rs.25 lacs respectively.

4. Sale value where consideration not ascertainable

Section 50D is proposed to be inserted to provide that where the

consideration received or accruing on transfer of capital asset is not

ascertainable or cannot be determined, then the fair market value of

the said asset on the date of transfer shall be considered as its sale

consideration, for the purpose of computing capital gains.

5. Unexplained Cash Credit

It is proposed that where any company (not being a company in which

public are substantially interested), any amount credited as share

application, share capital, share premium or any such amount by

whatever name called, then any explanation offered shall not be

deemed to be satisfactory unless the resident person in whose name the

entry is made also offers explanation about the nature and source of

such amount and the Assessing Officer finds such explanation

satisfactory.

6. General Anti Avoidance Rules (GAAR)

The GAAR that the FM has proposed (through Chapter X-A) amount to

tough measures, as these extensive provisions (applicable to all

assesses), whether international or domestic would virtually take within

its fold every transaction where there could be a possibility of higher tax

than what is actually paid.

Section 90 (2) provides that in case of a person resident in any country

with which India has a Double Tax Avoidance Agreement (DTAA), the

more beneficial provisions between such DTAA and the Act shall apply.

It is proposed that the GAAR will override the DTAA provisions, even if

they are less beneficial than the DTAA.

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Negative list of Services � � By Sandeep Chadha�

Introduction

Service tax was started with three basic services in 1994, which

expanded considerably and reached to 119 last reached. This is one of

the most rapidly growing tax regimes and expected to grow at a much

faster pace once GST is launched. It had been debated for quite long

that instead of having incremental additions every year, a negative list

may be introduced, whereby all services will be taxed unless they are

covered by way of any of the entries in the negative list or are otherwise

exempted. Such an approach will not only address one of the most

important concern areas of service tax regime i.e. bringing the untapped

sectors into the service tax net but also will be conducive for the

proposed Goods and Service tax regime.

The budget proposal 2012-13 described Negative list as a list of services

which will not be subject to service tax. Thus other than the services

mentioned in the negative list, all other services which fall within the

definition of the ‘supply of services’ will become taxable. The reasons

cited in the concept paper for not continuing with the reliance on

positive list were administrative challenges, overlapping definitions and

unintended taxation requiring either clarifications or exemptions.

Definition of Service

The Negative List does not provide any definition of a specific taxable

service, nor is there a need thereof. This made the need to generally

define ‘Service’ all the more important. The term ‘Services’ had so far

remained un-defined in the Finance Act 1994 or any Rules made there

under leading to various interpretations and disputes about the inclusion

or exclusion of activities supposed to be categorised as services for the

sake of taxability.

The Budget has introduced a new Section 65B, clause 44 of which

describes the word “service” as “Service” means any activity carried out

This article is an attempt to address some important issues of having a

negative list of services for the taxation of services as proposed in the Union

Budget 2012-13.

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by a person for another for consideration and includes declared service,

but shall not include (a) an activity which constitutes merely (i) a

transfer of title in goods or immovable property by way of sale, gift, or

in any other manner (ii)a transaction in money or actionable claim (b) a

provision of service by an employee to the employer in the course of or

in relation to employment (c) fees taken in any court or tribunal

established under any law for time being in force.

Inclusion clause

Thus, for any service to be a taxable service, the following conditions

are required to be fulfilled:

- The service must be an activity,

- The service must be provided by a person and there must be more

than one person involved in the transaction,

- The service must be provided for consideration

- The service has to be a declared service.

The term ‘Activity’ has not been defined. Nor is the term ‘consideration’

though for definition of this term, the Indian Contract Act, 1872 may be

referred to, which when applied here means ‘everything received in

return for a provision of service which includes monetary payment and

any consideration of non- monetary nature as well as deferred

consideration’.

For a service to be taxable service there has to be more than one

person. Thus, there must be a person who is a service provider and

another person who is a service recipient. However, if one of the

persons is in a taxable territory and the other person is in non-taxable

territory, specific mention is made in Explanation 2 of the Clause 44

treating them as two distinct persons and hence such activity is a

taxable service.

The term ‘Person’ is defined in Section 65 B and includes an individual, a

Hindu undivided family, a company, a society, a limited liability

partnership, a firm, an association or body of individuals, whether

incorporated or not, Government (Central and State Governments, will

be separate persons), a local authority, or every artificial juridical

person, not falling within any of the preceding sub-clauses.

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Declared Services are activities that have been specified in Section 66 E

of the Act. When such activities are carried out by one person for

another person in the taxable territory for a consideration, then such

activities shall be taxable services.

Exclusion clause

The exclusive portion of the definition includes activity that involves

merely transfer of title in goods or immovable property. The key word

here is ‘merely’. Thus, if there is a transaction that involves only

transfer of title of goods or immovable property, the said activity shall

not be a taxable service. If there is any other activity involved in the

same transaction, the activity may become liable for tax.

Other key words in the definition are ‘Goods’ and ‘Immovable property’.

According to Sale of Goods Act, 1920, “Goods” means every kind of

movable property other than actionable claims and money; and includes

stock and shares, growing crops, grass, and things attached to or forming

part of the land which are agreed to be severed before sale or under the

contract of sale.

Supplies which are deemed to be sale of goods in terms of Article 366

(29A) of the Constitution in the case of specified contracts will stand

excluded as goods. The remaining portion of the supply in the specified

composite contracts shall be considered as supply of service. Under the

proposed negative list, where supplies of services are bundled along with

supply of goods in situations other than those stated in Article 366 of the

constitution, nature of the transaction will have to be judged by what

the Honorable Supreme Court has called the “dominant nature test” in

the case of Bharat Sanchar Nigam Ltd. Vs UOI [2006(2) STR 161 (SC) para

43]. The test requires: “did the parties have in mind or intend separate

rights arising out of the sale of goods. If there was no such intention

there is no sale (of goods) even if the contract could be

disintegrated.”Thus, if a service provider provides service while using

some of the goods, it needs to be analysed as to what was the dominant

nature of the transaction.

Till now, the assessee would take shelter under the Notification 12/2003

in cases where the composite contract could not be segregated. In the

current proposal, the said notification is proposed for deletion. This

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move by the Government removes the anomaly that led to litigation in

many a cases in past.

The other inclusion in the exclusive portion of the definition is “a

transaction in money or actionable claim”. The word ‘merely’ is

applicable here too, obviously. Thus, if any activity involves only a

transaction in money or actionable claims, such activity shall not be a

taxable service.

As per section 3 of the Transfer of Property Act, 1893 actionable claims

means a claim to any debt, other than a debt secured by mortgage of

immovable property or by hypothecation or pledge of movable property

or to any beneficial interest in movable property not in the possession,

either actual or constructive, of the claimant, which the Civil Courts

recognize as affording grounds for relief, whether such debt or

beneficial interest be existent, accruing, conditional or contingent.

Unsecured debts are a good example of actionable claims. Any

transaction involving only actionable claim is outside the ambit of

service tax.

Another exclusion is the services provided by an employee to the

employer in the course of employment. For this exclusion, there must be

an employee-employer relationship. Any service provided on a contract

basis, which is on principal to principal basis, is not covered by this

exclusion and hence taxable. Any service provided outside the ambit of

employment is also taxable.

Fees taken in any court or tribunal established under any law for time

being in force is, but obviously, outside the purview of service tax.

Taxability of service

The taxability of services or the charge of service tax has been specified

in section 66B of the Act. To be taxable a service should be (a) provided

or agreed to be provided by a person to another (b) in the taxable

territory and (c) should not be specified in the negative list. This ensures

that the tax is payable on advances received (services to be provided).

The Point of Taxation Rules, off course, has to be referred to along with

the proposed definition.

The proposed definition includes as service a ‘right to use an immovable

property (Renting of property for commercial purposes), construction of

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a complex, civil structure or a part thereof (Commercial and residential

construction), temporary transfer of any Intellectual Property Right (IPR

Services), leasing or hiring of goods (Banking and Financial Services/

Leasing of movable goods). Sale of immovable property before the

issuance of completion certificate tantamount to supply of service,

whereas sale of property after the issuance of completion certificate

remains a ‘sale’ and hence not a service.

Negative List

Section 66D of the Act specifies the Negative List of services. There are

seventeen heads of services that have been specified in the negative

list. Following services are being included in negative list and thus shall

not be liable to taxation.

(1)Services provided by government or local authority excluding

certain services:

It is proposed to tax the services provided by the Government or Govt

agencies in fields where it competes with private entities. Deposit works

undertaken by CPWD for autonomous bodies for which departmental

charges are recovered from the client is one such case where such

departmental charges recovered by CPWD are taxable under “Consulting

Engineer or Management Consultant service”. This clause will also take

care of bringing under tax net Government departments which were

attempting to avoid getting registered as they would not find themselves

mentioned in the definition of ‘person’ in the Act. Though the fact

remains that in spite of efforts to avoid registration due to above

mentioned reason, departments like Mumbai police, CRPF and CISF got

Show Cause Notices from the Service Tax commissionerates, for which

audit deserves the credit for initiating the debate to cover them under

tax net. The catch here is that in certain cases where tax is payable on

activities such as infrastructural, operational, administrative, logistic

marketing or any other support of any kind comprising functions that the

Government entities carry out in ordinary course of operations

themselves but may obtain as services by outsourcing from others for

any reason whatsoever and shall include advertisement and promotion,

construction or works contract, renting of movable or immovable

property, security, testing and analysis’ the Service tax is liable to be

paid by the Service recipient and not the Govt entity.

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(2) Services provided by Reserve Bank of India remain out of the

Service Tax though services provided to the RBI are taxable, with the

only exclusion as prevalent at present being that the cases where

liability to pay tax is on RBI remain excluded from service tax payment.

(3) Services by a foreign diplomatic mission located in India remain

excluded from Service Tax. 21

(4) Services relating to agriculture : Services directly used for growing,

cultivation, harvesting of the agricultural produce, horticulture, animal

husbandry, forestry, dairy, poultry farming and pisciculture are included

in negative list. The key word here is ‘Directly used” though services by

APMCs and farmer training etc are also covered in the negative list.

(5) Trading of goods is finally defined as non-taxable activity. The long

debate is now laid to rest. While dealing in futures trading and

commodities futures is included in negative list, activities of commission

agents continue to be taxable.

(6) Any process amounting to manufacture or production of goods :

Any service that amounts to manufacture or is includible in the value of

goods under the Central Excise Act was outside the purview of definition

of service as this was liable to Central Excise duty as goods. The scope is

proposed to be extended to State Acts too. Thus, any process that

amounts to manufacture of goods leviable to Central Excise Duty or even

State Excise Duty is included in the Negative List. The key word here is

‘leviable’. Thus even if an excisable good is exempted from excise duty

by way of notification, but the process amounts to manufacture, the said

process shall not be a taxable service.

(7) Selling of space or time slots for advertisement other than

advertisements broadcast by radio or television : Selling of space or

time slots for advertisements on Billboards, print media, Out of Home

(OOH) media, internet etc are not taxable now. Reason or logic behind

this remains out of purview of a common man’s logic!

(8) Service by way of access to road or a bridge or payment of toll

charges : Toll charges are not liable to Service Tax but sub-contracting

the collection of toll charges on behalf the authorised agency is taxable.

(9) Betting, gambling or lottery may be illegal activities but the same

have been kept out of Service Tax net!!

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(10) Admission to entertainment events or access to entertainment

facilities.

(11) Transmission or distribution of electricity by an electric

transmission or distribution utility: It was never viewed or demanded

to be covered under Service Tax net. Still it has been included in the

Negative list of services.

(12) Services by way of (a) Pre–school education and education up to

higher secondary school or equivalent (b) education as part of

curriculum for obtaining a qualification recognised by any law for

time being in force (c ) Education as a part of approved educational

vocational course : Service provided by Education institutions are not

required to pay Service tax though Service provided to these institutes

are liable for service tax payment unless specifically exempted.

(13) Services by way of residential dwelling for use as residence.

(14) Services by way of (a) Extending deposit, loans or advances in so

far as the consideration is represented by way of interest or discount

(b) Inter – se sale or purchase of foreign currency among banks or

authorised dealers of foreign exchange or amongst bank and such

dealers : Interest and Discounts are included in the Negative list. Any

other charges over and above interest and discount such as

administrative charges, foreclosure charges etc are liable for service

tax.

(15) Service of transportation of passengers with or without

accompanied belongings by (a) by stage carriage (b) railways in a class

other than first class and an air conditioned coach (c) metro,

monorail or tramway (d) Inland waterways (e) Public transport other

than predominantly for tourism purpose in a vessel of less than

15 tonne net (f) Metered cabs, radio taxis or auto rickshaws:

Transportation of passengers by the specified modes of transportation

are included in the negative list. The same were, hitherto, not covered

under Service Tax. The cabs that are excluded are metered cabs.

(16) Services by way of transportation of goods (a) by road except

services of GTA or Courier agency (b) by an aircraft or a vessel from a

place outside India (c) by inland water ways: The transportation of

Goods by road is included in Negative list except those provided by a

GTA or by a courier. What is left? What are the other services of

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transport of goods by road, needs to be explained by Government in

detail.

(17) funeral, burial, crematorium or mortuary services including

transporation of deceased.

Conclusion

The proposed Negative list is a step in positive direction by the

Government considering the onset of GST in near future, and

Government expects an increase in the revenue collection. Rules such as

Cenvat Credit Rules, Service Tax Valuation Rules, Service Tax Rules etc

are also being amended to be in sync with the new approach. While the

proposal to bring Negative list is intended to increase the tax base, the

tax base at present also need to be tapped and revenue collection needs

to be enforced. Cases of tax evasions, non-registered service providers,

stop-filers are brought to notice of department by audit every year.

There are cases of service providers providing taxable services to Govt

organisations and not collecting or paying service tax. While the

Government agencies do share the information with tax authorities by

deducting TDS from such contractors, the said information remains

unheeded and hence untapped by Service Tax authorities. Attempts for

inter-departmental sharing of data base needs to be strengthened.

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Supreme Audit Institution – United Kingdom

National Audit Office-United Kingdom

History

The National 11Audit Office of U.K. has existed in its present form since

1983. The 1983 National Audit Act established the position of

Comptroller and Auditor General (C&AG) and an Exchequer and Audit

Department (E&AD) to provide supporting staff from within the civil

service.

It was in 1860 that the first major steps towards proper financial

accounting to Parliament were taken. Chancellor of the Exchequer (from

1859-1866) initiated major reforms of public finance and parliamentary

accountability which later on became the Exchequer and Audit

Department Act 1866. The Act established the position of Comptroller

and Auditor General(C&AG) and an Exchequer and Audit Department

(E&AD). The Act also required all departments to produce annual

accounts known as appropriation accounts.

Exchequer and Audit Departments Act 1921

The 1921 legislation allowed the C&AG to rely in part on departmental

systems of control and thus examine a sample of transactions, rather

than all of them. This Act also required the C&AG to report to

Parliament that money had been spent in accordance with Parliament’s

wishes.

Role and Functioning

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This international corner features information about structure, roles and practices being followed by other SAI’s particularly in the field of revenue

audit. SAI United Kingdom is being presented as fifth in the series.

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The National Audit Office (NAO) scrutinizes public spending on behalf of

Parliament. The Audit and inspection rights are vested in the head of the

National Audit Office, the Comptroller and Auditor General (C&AG). The

staff of the NAO carries out these tasks on his behalf.

Independence

• The Comptroller and Auditor General is an Officer of the House of

Commons. Both CAG and his staff at the NAO are totally

independent of government. They are not civil servants and do

not report to any Minister.

• Oversight of the NAO is carried out by a Parliamentary

committee, the Public Accounts Commission, which appoints the

external auditors and scrutinizes the performance.

Audit by NAO

The audit work has two strands:

• Audit of the financial statements of all central government

departments, agencies and other public bodies and report the

results to Parliament.

• Value for money studies: NAO publishes about 60 major reports

for value for money studies each year. These reports mainly focus

on how government projects, programmes and initiatives have

been implemented and contain recommendations on how services

can be improved.

Taxation in United Kingdom

HMRC (the Department) is the principal revenue-collecting department

in the United Kingdom. Its purpose is to make sure that money is

available to fund the UK’s public services, by collecting UK taxes. It also

helps families and individuals with targeted financial support.

Organizational set up of the Taxation Department

HMRC is organized into operational groups (Personal Tax, Business Tax,

Benefits and Credits, Enforcement and Compliance) and departmental

wide support groups that report to the Executive Committee. HMRC has

one Executive Agency, the Valuation Office Agency. The non-executive

Chairman leads the Board, which is attended by HMRC’s non-executive

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directors and HMRC’s top officials. The Board provides strategic

leadership and is responsible for the effective governance of HMRC.

NAO’s reports on HMRC

In addition to formal reports to Parliament, NAO also produces a range

of other outputs from the financial audit and VFM work. In 2011 it

produced the following Reports:

• Core skills at HM Revenue & Customs

• The expansion of online filing of tax returns

• Departmental Overview: A summary of the NAO's work on HM

Revenue & Customs

• Reducing Costs in HM Revenue & Customs

• Pace Setter: HMRC's programme to improve business operations

• HM Revenue & Customs 2010-11 report and accounts (Annual

Report of the NAO on Taxation Department).

NAO’s recommendations on Annual Report of the Taxation Department are discussed below:

Report by the Comptroller and Auditor General on HM Revenue & Customs 2010-11 Accounts

Scope of the audit

Section 2 of the Exchequer and Audit Departments Act 1921 requires the

Comptroller and Auditor General (C&AG) to examine the accounts of HM

Revenue & Customs (the Department) to ascertain that adequate

regulations and procedure have been framed to secure an effective

check on the assessment, collection and proper allocation of revenue,

and that they are being duly carried out. The report sets out overall

conclusions from this examination, and audit findings and

recommendations in three areas which were a priority for the

Department in 2010-11:

The resolution of tax disputes

Tax disputes between the Department and major businesses are an

inevitable consequence of the complexity of modern business

transactions.

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In November 2010, the Committee of Public Accounts examined the Department on its arrangements for settling tax disputes with large companies. In the light of this, the Comptroller and Auditor General decided to undertake a review of these arrangements. The Audit review considered two questions

1. Are the Department’s processes for resolving tax disputes adequate to secure an effective check on the assessment and collection of tax revenue?

2. Has the Department complied with its processes for resolving tax disputes?

Important audit findings are as under:

1. The Department has attracted criticism from Parliament and its own staff because of the absence of adequate separation between the analysis, negotiation and approval processes for major tax settlements.

2. Audit also noticed that there is currently a difference between the criteria for referral of decisions to the Programme Board and those for referral to Commissioners. The threshold for referral to the Programme Board is based on the total value of a settlement with a taxpayer, which usually covers more than one issue. The threshold for a referral to Commissioners is, however, based on the value of individual issues.

3. Audit found settlements totalling more than £400 million conceded by the Department as it considered its position to be weak. However, these were not referred to Commissioners because no single issue exceeded £250 million.

4. Audit found that a case was settled before the Department recognized that it should have been referred to the programme board. In another case the settlement proposal was agreed even though not all Board members responded by the deadline.

Recommendations

In order to provide confidence to internal and external stakeholders on

the appropriateness of settlements of major tax disputes, the

Department should ensure that the separation between the analysis &

negotiation, and the approval of large tax settlements is fully in place in

the resolution of every major tax dispute.

The criteria for referring proposed settlements to Commissioners should

take into account the overall settlement value as well as the value of

individual issues.

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The Department should ensure that there is clarity on when to apply

discretionary powers to resolving tax disputes, and each proposal to use

these powers in settling major tax disputes should be supported by

appropriate legal advice.

Stabilizing the PAYE Service

Historically the Department faced a number of challenges in its

administration of income tax through the Pay as You Earn system.

Pay As You Earn (PAYE) is the Department’s largest tax collection process. In 2010-11, the Department collected nearly 90 per cent through PAYE.

The PAYE process embraces the Department, employers and pension scheme administrators (collectively referred to as employers), and individuals. Employers administer PAYE by ensuring that the correct amounts of tax and National Insurance contributions are deducted from employees’ earnings and paid over to the Department each month.

This Part of the report examines the Department’s administration of PAYE by considering: the improvements in PAYE processing that are intended under the new National Insurance and PAYE Service (NPS); the difficulties encountered in the operation of PAYE following the introduction of NPS; the short-term progress made in stabilising the delivery of PAYE in 2010-11, including the progress in clearing the backlog of cases pre-dating NPS; and the plans for stabilising the delivery of the PAYE service by 2013. Some of the audit findings are as under:

1. Operational difficulties following NPS implementation. The problems encountered in the annual coding for 2010-11, the delay in reconciling the 2008-09 tax year and the backlog of cases from previous years has resulted in reputational damage for the Department.

2. The Committee of Public Accounts (In October and November 2010) examined the implementation of NPS and concluded that the Department had failed in its duty to process PAYE accurately and on time, deliver an acceptable standard of service to PAYE taxpayers, and to understand the risks of poor quality data.

3. The stabilisation of PAYE was initially managed under two programmes, one to stabilise NPS and the other to clear legacy open cases.

4. The Department plans to introduce Real Time Information (RTI), where employers will be required to report employees’ Income Tax and National Insurance deductions at the same time as they

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pay them rather than at year end. All employers will be under RTI from October 2013.

Recommendations

The Department has significant work to complete in stabilizing PAYE on

the new NPS platform by 2013, which is an essential foundation for the

introduction of RTI and the headcount reductions in its Personal Tax

business area by April 2015. It should define its operating model for

PAYE and how it plans to transform that model as it moves to the RTI

environment.

In the light of its experience with NPS, the Department needs to

thoroughly test the adequacy of its plans for implementing RTI and in

particular its capacity to manage the risks presented by poor data

quality and their impact on processing.

Tax credits error and fraud

Based on the latest information available, the Department estimates

that in 2009-10. It overpaid to tax credits claimants due to error and

fraud and underpaid to claimants due to error.

Child and Working Tax Credits (tax credits) offer financial support to more than seven million families, supporting around 10 million children. Tax credits form part of the personal tax system. The Department accounts for this expenditure in its Trust Statement for taxes, duties and other revenues and related expenditure.

As this expenditure has not been applied to the purposes intended by Parliament and does not conform to the requirements of the Tax Credits Act 2002, the Comptroller and Auditor General qualified his opinion on the regularity of the tax credits expenditure reported in the 2010-11 Trust Statement. Some of the audit findings are discussed below:

1. In April 2009, the Department launched a revised strategy to reduce the level of error and fraud in tax credits. The strategy is based on getting a better understanding of tax credits claimants and their behaviours to support a tailored approach to reducing error and fraud.

2. Audit found that high risk awards selected for intervention prior to processing resulted in the identification of error or fraud. Audit also found that rules-based guidance applied to support the selection of high risk change of circumstances and renewal cases did not allow the Department to identify which of its risk criteria were most likely to target error or fraud.

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3. The Department has not met its target to reduce the overall level of debt. The majority of the debt for which collection is assessed as doubtful relates to the terminated tax credits awards which have been passed to the Department’s Debt Management and Banking directorate for direct recovery. Tax credits debt will continue to increase if the Department does not take any further steps to improve the recovery and clearance of debt.

4. The Department also sought to identify uneconomic and unenforceable tax credits debt and assess the scope for remission.

Recommendations

The Department needs to ensure that results of interventions are

accurately measured and recorded in its systems.

The measurement of losses prevented will be central to the assessment

of its performance. To inform this assessment, it should develop its

existing assurance activities on the measurement of its interventions to

support a statistical evaluation of the level of uncertainty in the

estimate of error and fraud identified against the proxy target.

The Department faces a significant increase in tax credits debt without

further intervention. It should reassess its plan for reducing tax credits

debt.

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The fourth separate Revenue Audit report of the Central Government was

brought out in 1966. This series provides a glimpse of the fourth Revenue

Audit Report (Civil), 1964-65 sourced from our organizational archives. Some

illustrative paras are reproduced here.

From the Archives

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Sl.

No.

Circular No. Subject/ (Letter reference vide which Instruction was issued)

1 8/ 2011

In the course of the proceedings before any court or tribunal,

the court directs to the litigant that a specified amount be

deposited in the bank and such deposits are kept in the bank

in the names of Registrar/Prothonotary or any other name as

per the order of the court.

Vide the Circular, Board has clarified that bank shall in

accordance with the provisions of the act, deduct tax at

source on the interest accruing on the deposit(s) at the rates

in force. Bank will issue certificate of deduction of tax in the

name of ‘the depositor’ and if more than one person has

been directed to deposit any specified amount, TDS

certificates shall be issued by the bank to each such

depositor for the portion of interest accrued in respective

share in the total amount deposited.

The depositor(s) shall submit a prescribed declaration with

the court at the time of making deposit. The Registrar/

Prothonotary and Senior Master or any person authorized by

the court will pass the information furnished therein to the

bank concerned for TDS in the name of the depositor(s).

(F.No. 275/30/2011- IT (B) dated 14-10-2011)

Important Circulars issued by the CBDT during October 2011 to December 2011

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Income Tax Judicial Rulings

Sl

No

Citation Case Brief of case & judgement

1.

High Court

of Delhi,

ITA No.

950/2008

Decided

On:

11.07.201

1

The

Commissioner

Of Income Tax

v. Madhya

Bharat Energy

Corpn. Ltd.

A. Whether, Tribunal was correct in law in holding that reassessment order was invalidly made for assessment years 1999-2000 and 2000-2001 as no notice under Section 143(2) was issued

B. Whether, ITAT was correct in law in holding that interest income on FDRs was not to be treated as income from other sources and was to be reduced from pre-production expenses

Held :No Intimation with regard to assessment made u/s 143 (1) (a) of the Act was not an assessment. The impugned assessment was in response to notice u/s 148 of the Act and the Act did not specifically provide that assessment made u/s 147 of the Act would be after issue of notice u/s 143 (2). The Assessing Officer had basic jurisdiction to assess income u/s 147 and 148, where he had reason to believe that income had escaped assessment. Thus, on submissions of non issuance of notice under Section 143 (2) of the Act, findings of Tribunal was not correct in law as per scheme of provisions of Section 147 and 148. Assessee had retained money received from investing company without any purpose as bid of Assessee had already been rejected by MPSEB - Though, Assessee was contesting rejection of bid in High Court, amount was kept deposited in shape of F Ds only to earn interest till such time issues with MPSEB and investing company were resolved. Interest earned on these investments could not be related to setting up of business or setting up of a unit - Thus, it was a case of depositing unutilized and surplus money to earn interest and interest earned by Assessee being revenue in nature was liable to be assessed as "income from other sources". Hence, any set off of same could not be

Judgements on assessees engaged in Power Sector-I�

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given to Assessee as pre-operative expenses In view of above discussion, we answer both the questions in negative and in favour of the revenue and against the Assessee. The appeal is accordingly allowed

2. ITAT

VISAKHAP

ATNAM

Bench 132

ITD 568

Decision

Dated

14/3/2011

Eastern Power

Distribution

Company Of

Andhra

Pradesh

Limited v.

ACIT

(A) Whether the learned CIT(A) is justified in holding that the amount of Rs. 1,12,38,786 is the income of the assessee. (B) Whether the learned CIT(A) is justified in confirming the disallowance of Rs. 9,08,06,966 relating to the provisions made for terminal benefits of employees.

The assessee a State Government undertaking engaged in the business of procurement and distribution of electricity was incorporated on 30th March, 2000 and commenced its operations w.e.f. 1st April, 2000. In the Profit and Loss account, the assessee first determined the profit for the year at Rs. 1.12 crore and the same was reduced to nil by booking expenditure of equal amount under the head "Net prior period credits/charges". Thus the net profit after the above-said expenditure was declared nil. Hence, the assessee company did not compute income chargeable under s. 115JB of the Act. However, the AO was of the view that the profit of the assessee should be taken as Rs. 1.12 crore for the purposes of s. 115JB, as he did not accept the claim of "Net prior period credits/charges" treating it as unascertained liability. CIT(A) confirmed the disallowance. the annual accounts have been prepared in the forms prescribed under the Electricity (Supply) (Annual Accounts) Rules, 1985 (ESSAR, 1985), as notified by the Central Government in Electricity Supply Act, 1948. Thus, the accounts of the assessee, as presented, are in accordance with the provisions of s. 211 of the Companies Act and are deemed to have complied with the provisions of Parts II and III of Sch. VI. In fact, the assessee has no business to recast its P&L a/c as per the format prescribed for formal companies i.e. other than the exceptions provided in the proviso to s. 211(2). Moreover as per the first proviso to s. 115JB(2) the P&L a/c has to be the same as have been laid before its annual general meeting. Accordingly, the revenue account prepared by the assessee has to be taken as the P&L a/c prepared in accordance with Parts II and III of Sch. VI to the Companies Act. The Hyderabad Bench of Hon'ble Tribunal in the case of Dy. CIT vs. Northern Power Distribution Co. of AP Ltd., in ITA Nos. 239 and 240/Hyd/2006 and the Tribunal, vide its order dt. 6th June, 2008 has decided this issue

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against the assessee

The judgment in the case of Appollo Tyres Ltd. laid down that the AO cannot dispute the accounts maintained in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act. The power of the AO to decide whether or not the accounts were prepared in accordance with Part II and Part III of Sch. VI to Companies Act has not been affected by the judgment. In case the AO found the P&L a/c has not been prepared in accordance with the provisions of Part II and Part III of Sch. VI to the Companies Act and also that the P&L a/c prepared by the assessee is fraudulent or misleading giving figures which are found to be false, the AO is entitled to verify and satisfy himself by recasting the P&L a/c if the circumstances so required.

Sub-s. (6) of s. 211 of the Companies Act, provides that except where the context otherwise requires any reference to a balance sheet or P&L a/c shall include the notes thereon or documents annexed thereto. If the P&L a/c account and the balance sheet do not comply with the Accounting Standards, such companies are required to disclose about the deviation, reasons thereof and the financial impact thereon

Such kinds of deviations are acceptable under the Companies Act, however they are not always acceptable to the IT authorities. Under the income-tax, the AO is entitled to examine the said deviations, particularly when it has an impact on the book profit. Taking such a view only, it was held in the cases of Sain Processing & Weavings and Hindustan Shipyard Ltd. that the AO shall be entitled to adjust the book profit with the financial implications of such kind of deviations for the purposes of s. 115J/115JA.

Besides, the assessee also could not substantiate the said claim with a legally tenable explanation. From the contradictory explanations furnished by the assessee, it is evident that the assessee has passed the entry for "net prior period credits/charges" only to ensure that the final "profit" (surplus) is shown at nil figures.

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Central Excise and Service Tax related Judicial Rulings

Sl.

No

Citation Case Brief of judgement

1 Civil Appeal

No.4530-4532 of

2005 with CA

Nos.8048 of 2004

M/s Indian Oil

Corporation Ltd

Appellant versus

Commissioner of

Central Excise

Vadodara

Respondent

(A) Reduced Crude Oil (RCO) which was exempted from excise duty under certain conditions was supplied by IOC to Ahmedabad Electricity Company Ltd (AECL) during 1996 claiming concession under Rule 192 of Central Excise Rules, 1944. The appellant did not have a registration certificate in form CT-2 under Rule 192, RCO supplied to AECL was not exempt from CE duty. (B) The appellant supplied Naphtha to Indo Gulf Corporation Ltd (IGCL) and while clearing from its factory did not make any payment of CE duty .for availing the benefit of concession under Rule 3 of Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001.The procedure set out under Rule was not followed, the appellant was not entitled to exemption. The duty was charged along with equal amount of penalty.

Judgements on assessees engaged in Power Sector-II

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Documents

˘ ˇ ˆ˙ - Comptroller and Auditor General of Indiaaghp.cag.gov.in/pag/sites/pag/files/Rupee_Trail_Fifth.pdf · ``Trail January– March 2012 From the desk of the Dy.C&AG(CRA& Finance)