5 Mistakes make your workplace the “worst place”

Shaifaly Girdharwal

Some years back I watch ‘Horrible Bosses‘ it was amazing to see the level of torture and I know so many employees should have feel relieved after watching that movie realising that their bosses are still bearable and they don’t need to plan any murder. There are so many articles on how to make work place better for employers but this one is for employees.What are the mistakes on our part that make our work places hell for us. I am listing here some of the behavioural controls that willmake your life better at workplace.

1. Don’t make friends or foes:

Why:

1) Office is a workplace and your are supposed to maintain it strictly professional.

2) When you list someone as friend or enemy you get biased . you may be required to coordinate and work with people you hate and this will make your life hell.

3) People change as per their own requirements.When you are a friend you will expect support and favour and this may hurt you because it may not be feasible for either if you to favour each other.

2. Discussing personal matters in office:

Why:

I am a girl and I know it is our weakness , when we are in stress we need someone to listen to us.Generally life partner and family is there but if the reason of stress is family itself then where to relieve our stress.We do that in office with our colleagues. I am not blaming ladies I know even man do this but proportion is very less. I will say 75:25. Ladies can’t help sharing their personal things and emotions in office. Soon people around you know all of your weakness and if they are self composed they will soon start using your own weaknesses against you. Then you will have no solution, control yourself.

3. How to handle this

If you are sufferring some deep stress use portal like www.shepokeme.com where you can share your stress anonimously and you will feel relieved without losing your secrets.

4. Mind your own business:

why:

1) Everybody have their own expectations, when they will be disgruntle they will come to you and speak a lot of negative about company and boss.If you will start to react on those things you will be in blacklist of company for no reason and worst part will be when that person will resolve his issues with management and will be back in good books and you will lose both of the relations.

2) Other people will also mind their business when you will need them and they should.

5. Get engage in any emotional or physical relation

Why:

1) If you know about Mr. Fanish murty of Infosys and Igate. Lost his position two time for his alleged relationship in office. For any emotional or physical desire choose people outside office.

2) It is highly unprofessional to have affair in office this will make life of others uncomfortable.

3) Whatever you will do people with take it as a favour to that person, that will destroy your image.

I am open for suggestions and feedback

(Author Shaifaly Girdharwal is a Cross border business set up and process outsourcing Consultant)

Kisan Vikas Patra- Is it a tool to convert Black Money into White? CA Umesh Sharma

Arjuna (Fictional Character): Krishna, recently the Government has reintroduced the investment scheme of “Kisan Vikas Patra”. There are many questions regarding this scheme but answer to the most important question is unascertainable. The earlier scheme of “Kisan Vikas Patra” was closed due to increasing black money from the scheme then why it is reintroduced?

Krishna (Fictional Character): Arjuna, Common Public invests in non-productive assets like Gold, Silver, properties etc. The intention of the government through this scheme is generation of funds for the development of the nation. People in the greed of having more returns get cheated by investing through Ponzi schemes and Private Investment schemes. The same should not happen is the motto of this scheme. Firstly you understand the scheme then we will discuss about the black money.        

Arjuna: Krishna, what are the characteristics of the scheme “Kisan Vikas Patra”?

Krishna: Arjuna, Kisan Vikas Patra is the option of investment for common public. Investment in this scheme can be made through Post office in cash or through cheque. After some days this scheme will also be made available through Public Banks. The maturity period of Kisan Vikas Patra is 100 months i.e. of 8 years and 4 months. The investment made will be doubled after this period. Investor will get 8.7% returns on the investment. Investor can make investment of Rs. 1,000, Rs. 5,000, Rs. 10,000, and Rs. 50,000 or in the multiple of this. There is no maximum limit for investing in this scheme. “Kisan Vikas Patra” certificates are transferrable from one person to other any number of times. The investor can avail loan by keeping these certificates with banks or any other financial Institutions. The scheme has lock in period 2 years and 6 months. Even though the name of scheme starts with Kisan, any Individual or HUF can invest in the scheme.

Arjuna: Krishna, which documents are required for making Investment in the scheme?

Krishna: Arjuna, Investor should have to submit the following documents for identity: 1) Passport size photo 2) Identity Card any one of the following i.e. Election card, Ration Card, Passport, Driving License, etc. 3) Address Proof any one of the following i.e. Light bill, Telephone bill, Bank passbook etc. Copy of PAN card is necessary if investment is above Rs. 50,000/-. All these documents should be self-attested.

Arjuna: Krishna, What is the treatment of Kisan Vikas Patra in Income Tax?

Krishna: Arjuna, Interest from investments is required to be considered under “Income from Other Sources” and income tax will have to be paid on it. E.g. if Rs.1 lakh is invested in Kisan Vikas Patra scheme then after 100 months the investor will get 2 lakhs. But the investor has to consider the interest income every year and has to pay income tax on it. Further it seems that in absence of PAN it is not possible for government to deduct TDS on Interest. But deduction under section 80C is not allowed on this investment.

Arjuna: Krishna, what about the question of Black money and what one should learn from this?

Krishna: Arjuna, many smart people can take disadvantage of the scheme. Because how the Income Tax Department will get information about the investment made is not clear. God knows how one will take benefit of no restriction of PAN and no TDS on Interest. Thus it has become difficult to find out whether these schemes will be beneficial to convert black money into white money. The period of 8 and half year for encashment and restriction of 6 years for Income Tax Department to re-open the case is hurdle for department. Thereby it becomes difficult to ascertain source of investment and tax it after 6 years. It is difficult for the Income Tax Department to find out the investor also in absence of PAN. It is a fact that every investor is not taxpayer but every taxpayer may be investor. According to this provision some may try to convert the black money to white. But if Government decides then restriction may be levied on it. The success or failure of the scheme depends on Government’s tax policy and Investor’s intention. Nothing can be said about the Government scheme and the intention of Public. Many times it is said Government’s schemes are good but the people’s implementation makes it bad. Kisan Vikas Patra se Kiska Vikas Hoga is not known

Installation & Commissioning Expenses not covered under definition of FTS u/s 9 of Income Tax Act, 1961

The issue is no longer res integra as it has been held by Hon’ble ITAT Mumbai in case of Bennet Coleman & Co. Ltd. Vs ITO(TDS) [ITA No. 7315/Mum/2008] pronounced on 12-11-2014 wherein the assesse (Times of India) has entered into an agreement with M/s FERAG AG for supply of heavy plant and machinery along with installation and commissioning of the same. The supplier was also under an obligation for training the employees of the plaintiff. Two separate contracts were entered, one for supply of machine and other for related services. The payment was made to M/s FERAG AG and no TDS was deducted on it. The AO issued notice u/s 201(1) and imposed interest under section 201(1A) of the Act.

The assesse being aggrieved appealed before the Learned CIT(A) who allowed the appeal partially in favour of the assesse. The assesse preferred an appeal before the Hon’ble ITAT against the said order. The assesse pleaded that although two separate contracts were entered but it was one comprehensive activity and thus the contract cannot be separated and it is not taxable under FTS. This argument was declined relying on the landmark judgement of Hon’ble Apex Court in case of Ishikawajima-Harima Heavy Industries wherein it was held that

“The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the assessee thereunder would also be different.”

The assesse then pleaded that the installation and commissioning would tantamount to assembly which is specifically excluded from the definition of FTS under Explanation 2 to Section 9(1)(vii) of the Act. This contention of the assesse was upheld by Hon’ble Tribunal. It was further held that by no stretch of imagination it can be held that training of employees of the assesse could fall within the meaning of assembly.

Further, it was observed that as per Article 14 of the India-Swiss Confederation DTAA, the said services (installation, commissioning and training) was taxable only in Switzerland. As per Article 14 of the DTAA which defines engineering services and thus the said services would not be taxable in India as the supplier does not have a PE in India. The tax would however be imposed on the training charges paid by the assesse. The appeal was partly allowed in favour of the assesse.

Why we should fear a failure but not to dis-respect it

Shaifaly Girdharwal

I know you are ambitious and you want to achieve exceptional things in life in a short time span. Ambition is desire to achieve something faster than the people of same calibre and position. These ambitions make us a believer in positive things. We love to read success stories as they motivate us. They create a sense of confidence that you will achieve your dream. Those success stories mix with your desire and become a confidence and definitely you feel good as people can see your confidence and they also start believing in you. But before starting your efforts, and if path of your ambition want you to take some risk, then before taking that risk have you sit down and think about what if it will be a failure. If thing will not go as you have planned them. Do you have a plan B if plan A don’t work?

I know you guys don’t want to think in this way and when some people raise doubt on your plans initially you try to convince but when you have no replies you leave the discussion but in your heart you console yourself and tell your heart that you will get success and this guy (raising questions on your plans) will feel shame for this behaviour and argument. But in real world only 5% of new ventures get success. Only 2% of them get huge success. Hey I know you are not enjoying this and you feel that I am trying to kill your faith and confidence. Trust me I am not. I just want to make you more strong, mentally and emotionally, because there will be a time when you will see your efforts are failing. When you target for let’s say $100 but result is 0, yes, then? If you want to be a part of those 5% you will need your confidence and strength at that time. This is my efforts in this article to make you mentally prepared for that time.

I don’t want to create a fake sense of confidence but I want my reader to be the strongest person to handle bad days. Trust me only those bad days will bring you success. Before you start, think a thousand times, give yourself proper time to analyse each and every aspect and the most important thing be ready for a failure. Accept that you may fail also and try hard from beginning to avoid any disaster. But when there will be actual failures and hurdles in your path, respect them, nurture them, make them a part of your journey and most important accept them with grace.

When you choose a different path from others you will get different life. Sometimes you will see that the people who haven’t tried anything, who haven’t taken any risk are having a better life than you, you choose to take risk and make extra efforts, and still your life is less blessed. It is because the aim you have chosen is not easy, believe in yourself. Life will pay you for extra efforts but not if you stop or you demand it on every step you take. You will have to continue your efforts till the time you achieve it. You will have to face and conquer every fall and pass through so many of hurdles every day.

I may be harsh for some people but life is also, success is also,ambitions are also……

Good Luck

(Author Shaifaly Girdharwal is a Cross border business set up and process outsourcing Consultant)

Transfer Pricing – Rate for benchmarking in respect of loan given to AE’s outside India?

Navneet Singal

Transfer Pricing: Rate for benchmarking in respect of the loan given to AE’s outside India – Whether it should be LIBOR or interest rate prevailing in India?

Whenever we look for a Transfer Pricing comparable in respect of the loan giving to AE’s outside India, it was always an issue that which party should be taken as Tested Party and what rate should be taken as benchmarking rate. Whether it should be LIBOR or interest rate prevailing in India?
In the Judgment of Aurionpro Solutions Ltd. vs. ACIT, Range – 4(3), Mumbai, ITA No. 7872 (Mum.) of 2011, ITAT Mumbai has held that for purpose of determination of Arm’s Length Price, tested party is always assessee and not its Associate Enterprise (AE), LIBOR is acceptable for benchmarking loans given by Indian company to its foreign AEs, instead of interest rates prevailing in India. However, it has been mentioned by the ITAT that in its view, the safest comparable, which can be taken as Arm’s Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans were given to the AEs.

It mentioned further that though in principle the view of DRP i.e. that only inbound loans taken by Indian entities from outside India were to be benchmarked with LIBOR and interest rate prevailing in India on corporate bond should be taken for benchmarking the loan transaction is acceptable, however, since the issue of LIBOR has been considered and decided by the Tribunal in various cases as relied upon by the assessee, therefore, to maintain the rule of consistency, the decision of the coordinate Benches of this Tribunal is followed and LIBOR is accepted for benchmarking interest on interest free loans to AEs.

Facts of the Case:

1. The assessee has given loans to its Associated Enterprises (AEs) in USA, Singapore and Bahrain. It is engaged in the business of software development and web designing services.

2. The assessee claimed that there was no relationship of lender and borrower as the advances were given to 100% subsidiaries and since the assessee got business from the AEs, the transaction were on commercial consideration and there was no motive to evade tax.

3. The assessee benchmarked the transactions at cost plus zero mark-up, using cost plus method, as no cost was claimed to be incurred by the assessee.

4. The TPO did not accept the contentions of the assessee and benchmarked the loans at dollar denominated LIBOR plus mark-up of 3 per cent.

5. DRP held that only inbound loans taken by Indian entities from outside India were to be benchmarked with LIBOR. It took interest rate prevailing in India on corporate bond for benchmarking the loan transaction, holding that the taxpayer was the tested party and prevalent interest rate that could have been earned by the taxpayer by advancing loan to an unrelated party in India with same financial health as that of the tax assessee’ s AE was to be considered.

The ITAT Mumbai held that

1. The first contention of the assessee was that the advance was given to the AEs towards working capital and the assessee was getting good business from the AEs; therefore, having commercial consideration, no adjustment of transfer price was justified. This contention of the assessee cannot be accepted because, though it may be an objective behind the Transfer Pricing Regulation that the profits taxable in India are not shifted out of India by manipulating the price charged between the AEs; however, as per the Transfer Pricing Regulations, there is no such condition of existence or non-existence of commercial consideration between the assessee and the AEs.

2. Further, in the case in hand, the advance does not represent the credit period extended to the AEs in respect of the business transaction; but it is a transaction of advancing loans to the AEs, which falls under the ambit of international transactions as per the terms of section 92B whereby the ‘international transaction’ means a transaction between two or more associated enterprises, inter alia lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

3. Having treated the transaction as international transaction, the only question which remains to be considered and adjudicated is Arm’s Length rate of interest. So far as the question of most appropriate method for determining the ALP is concerned, the same is also settled by the various decisions as relied upon by the assessee wherein it has been held that in case of benchmarking of interest on the loans to the AEs, CUP is the most appropriate method for determining the ALP. Even, the assessee has not challenged the method adopted by the authorities below for determination of the ALP in the case of the assessee.

4. The question arises whether LIBOR or prevailing market rate in India could be considered for determining the Arm’s Length interest rate in respect of the loans advanced by the assessee to the AEs. The TPO had adopted LIBOR plus 3 per cent as ALP for the rate of interest on the loan transaction in this case; whereas the DRP took the bond rate prevailing in Indian market and treated the AE as below BBB rating bond and, accordingly, determined the rate at 14 per cent as ALP. Under the Transfer Pricing Regulations, an international transaction has to be compared with an uncontrolled transaction between unrelated parties which means that an international transaction is tested with the transaction, if the assessee could have entered into a similar transaction with unrelated third party and thereby the income the assessee would have earned from a similar transaction with an uncontrolled party. Thus, the same income is expected or deemed to have been earned from the transaction with the AEs. The underlining principle of determining the ALP is based on the transaction between the unrelated parties. Therefore, tested party for the purpose of determination of ALP is the assessee and not the AEs.

5. In the case in hand, the assessee advanced loans to the AEs without charging any interest; therefore, the transaction has to be tested with a situation, had the assessee invested or advanced or deposited the said amount with an unrelated third party and thereby the income, which would have been earned by the assessee is expected to have been earned from the transaction of advancing loans to the AEs. Thus, the effect of transaction on the income of the assessee is to be seen and considered and not effect on the cost or income of the AE. Therefore, the tested party is always the taxpayer and not the AE. None of the factors under the Transfer Pricing Regulations require to consider whether the AEs would have incurred or earned more or less; but it is always considered whether the assessee had earned more or less by doing a similar transaction with an unrelated parties.

6. The factors prescribed for inclusion or exclusion of comparable to determine the ALP are also based on the comparison of the assessee with the chosen entities and the AE has no role in the exercise of selecting the comparable. Thus, in our view, the interest that would have been earned by the assessee by advancing or placing the said amount with unrelated parties would be the Arm’s Length interest in relation to the interest free loans/advances to the AE. The safest comparable, which can be taken as Arm’s Length interest rate in such a case would be the interest on FD with the bank for a term equivalent to the term for which the loans were given to the AEs.

7. That in case of FD with the Bank, the investment is safe as it is free from risk of credit and interest. On the other hand, if the loan/advance is given to the unrelated party, then always there is some risk of credit and interest involved in such transaction. There is one more reason for taking the FD as an appropriate and good comparable because the lending rate by financial institutions/bank varies depending upon the credit rating of the borrower and further on the guarantee and security provided to secure the loans.

8. The view of DRP on this issue is acceptable in principle, however, since the issue of LIBOR has been considered and decided by the Tribunal in various cases as relied upon by the assessee (supra); therefore, to maintain the rule of consistency, the decision of the coordinate Benches of this Tribunal is followed and LIBOR is accepted for benchmarking interest on interest free loans to AEs. Since the LIBOR is a rate applicable in the transactions between the banks and further the loans advanced by the bank to clients are secured by security and guarantee; therefore, a loan which has been advanced without any security or guarantee as in the case of the assessee has to be benchmarked by taking the Arm’s Length interest rate as LIBOR plus. Though the TPO took ALP as LIBOR + 3 per cent; however, the appropriate rate would be LIBOR plus 2 per cent. The Assessing Officer /TPO is directed to determine the Arm’s Length interest by considering the LIBOR plus 2 per cent on the monthly closing balance of advances during the financial year relevant to the Assessment year under consideration.

9. In the result, the appeal of the assessee is partly allowed.

Recently in the case of PMP Auto Components P. Ltd v. DCIT (ITA No. 1484/Mum/2014 & ITA No. 1506/Mum/2014), the Tribunal has directed the AO/TPO to consider LIBOR plus 2 % relying on the Tribunal ruling in Aurionpro Solutions Ltd.

(Author may be contacted at Navneet.Singal@gmrgroup.in)

Reversed Cenvat credit can be re-taken even after six months

CA Pratik Anand

The CBEC has issued circular No. 990/14/2014-CX-8 dt. 19/11/2014, wherein it has clarified that the cenvat reversed or amount paid for reversal in respect of cenvat credit wrongly availed where the conditions relating to availment of cenvat credit were not fulfilled, can again be claimed as input credit on the fulfilment of prescribed conditions even after six months from the date of issue of a document (i.e invoice challan etc) prescribed under rule 9(1) of Cenvat Credit Rules’2004.

The CBEC has clarified that the limit of availing cenvat credit within six months from date of the issue of document under rule 9(1) is applicable where cenvat credit is taken for the first time. It would not apply for taking re-credit of amount reversed, after meeting the conditions prescribed in the Cenvat Credit Rules’2004.

The situations wherein this clarification is applicable is as follows:

1) Newly inserted third proviso to Rule 4(7) provides that if the value of input service as well as service tax thereon is not paid within a period of three months from the date of the invoice etc., the manufacturer or the service provider who has taken credit on such input service has to make payment of an amount equal to the CENVAT Credit availed. It is further clarified that said payment of reversal may be made by cash or through debiting Cenvat credit. This proviso does not apply to cases where 100% of the service tax is to be paid by the recipient.

Therefore if a manufacturer or service provider could not pay the value of input service availed as well as the service tax thereon within 3 months of raising of invoice then the CCR has to be reversed. The CCR can be re-taken on payment of the amount of service as well as the service tax thereon even after expiry of six months from the date of invoice.

2) According to Rule 3(5B) of CCR, 2004, if the value of any input or capital goods before being put to use on which CENVAT Credit has been taken, is written off or such provisions made in Books of Account, the manufacturer or service provider is required to pay an amount equal to credit so taken. However, when the inputs or capital goods are subsequently used, the amount so paid can be re-credited in the account i.e cenvat credit can be re-taken even after expiry of six months from the date of invoice for the purchase of input or the capital good.

3) Rule 4(5)(a) of CCR, 2004 prescribes that in case inputs sent to job worker are not received back within 180 days, the manufacturer or service provider is required to pay an amount equal to credit taken on such inputs in the first instance. However, when the inputs are subsequently received back from job worker, the amount so paid can be re-credited in the cenvat credit account even though the goods are received back from the job-worker after expiry of six months from the date of original invoice.

Hope you find the above information relevant and useful in your daily practice.

(The author is a CA in practice at Delhi and can be contacted at: E-mail: capratikanand@gmail.com, Mobile: +91-9953199493)

Availment of Cenvat credit on Inputs/ Input Services after six months

CBEC clarification regarding availment of Cenvat credit on Inputs/ Input Services after six months

Background: The CBEC vide Notification No. 21/2014-CE (NT), dated July 11, 2014 (Applicable w.e.f September 1, 2014) [Notification No. 21], has amended Rule 4(1) and Rule 4(7) of the Cenvat Credit Rules, 2004 (the Credit Rules) to fix a time limit of six months from the date of issuance of any of the documents specified in Rule 9(1) thereof, for availment of the Cenvat Credit on Inputs and Input Services.

Clarification by the CBEC: The CBEC vide Circular No: 990/14/2014-CX-8 dated. November 19, 2014 (“the Circular”) has clarified that the purpose of the amendment made by Notification No. 21 is to ensure that after the issuance of a document under Rule 9(1) of the Credit Rules, Cenvat credit is taken for the first time within six months of the issue of the document. Once this condition is met, the limitation has no further application. The relevant text of the Circular is reproduced here in below:

“2. Concerns have been expressed by trade that in view of above changes, the re-credit taken in following three situations may be hit by the time limit of six months prescribed:

i. 3rd proviso to Rule 4(7) of CCR, 2004 prescribes that if the payment of value of input service and service tax payable is not made within three months of date of invoice, bill or challan, then the CENVAT Credit availed is required to be paid back by the manufacturer or service provider. Subsequently, when such payment of value of input service and service tax is made, the amount so paid back can be re-credited.

ii. According to Rule 3(5B) of CCR, 2004, if the value of any input or capital goods before being put to use on which CENVAT Credit has been taken, is written off or such provisions made in Books of Account, the manufacturer or service provider is required to pay an amount equal to credit so taken. However, when the inputs or capital goods are subsequently used, the amount so paid can be re-credited in the account.

iii. Rule 4(5)(a) of CCR, 2004 prescribes that in case inputs sent to job worker are not received back within 180 days, the manufacturer or service provider is required to pay an amount equal to credit taken on such inputs in the first instance. However, when the inputs are subsequently received back from job worker, the amount so paid can be re-credited in the account.

3. The matter has been examined. The purpose of the amendment made by Notification No. 21/2014-CE (NT) dated 11.07.2014 is to ensure that after the issue of a document under sub-rule (1) of Rule 9, credit is taken for the first time within six months of the issue of the document. Once this condition is met, the limitation has no further application. It is, therefore, clarified that in each of the three situations described above pertaining to Rule 4(7), Rule 3(5B) or Rule 4(5) (a) of CCR, 2004, the limitation of six months would apply when the credit is taken for the first time on an eligible document. It would not apply for taking re-credit of amount reversed, after meeting the conditions prescribed in these rules.”

Other Open issues – Not clarified:

Even though the CBEC has clarified non-applicability of six months time limit while availing re-credit in terms of the Credit Rules but, there are certain other issues still exists in this regard, which requires immediate attention of the Board:

(i) SSI Unit crossing Exemption limit: In terms of Rule 3(2) of the Credit Rules, a manufacturer or producer of final products is allowed to take Cenvat credit of the duty paid on inputs lying in stock or in process or inputs contained in the final products lying in stock, on the date on which any goods manufactured by the said manufacturer or producer cease to be exempted goods or any goods become excisable.

Issue: Where a manufacturer availing SSI exemption, crosses the exemption limit, whether transitional credit is available if the invoices under which the above category of inputs were purchased are beyond six months from the date of taking Cenvat credit?

(ii) Cenvat credit on goods received after re-conditioning, repairs, etc.: Under Rule 16 of the Central Excise Rules, 2002, where any goods on which duty had been paid at the time of removal are brought to any factory for being re-made, refined, re-conditioned or for any other reason, the assessee shall state the particulars of such receipt in his records and shall be entitled to take Cenvat credit of the duty paid as if the goods are received as inputs under the Credit Rules and utilize the Cenvat credit according to the Credit Rules.

Issue: Whether the newly added proviso to Rule 4(1) of the Credit Rules, which talks about inputs, would apply to Cenvat credit taken on finished goods received by the manufacturer in the factory beyond 6 moths of its removal from the factory?

(iii) Invoices issued prior to September 1, 2014: Notification No. 21 amending Rule 4(1) and Rule 4(7) of the Credit Rules is effective from September 1, 2014.

Issue: Whether the time limit of six months prescribed for availing Cenvat credit would apply to the invoices issued prior to September 1, 2014?

We request esteemed readers to write back to us for any other related issue(s) pertaining to time limit of 6 months for availing Cenvat credit on Inputs and Input Services in the light of Notification No. 21 read with the Circular issued by the CBEC.

 (Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com) Read Other Articles from CA Bimal Jain

Favourable Shell Verdict – A Launchpad for Restoring Global Investors’ Confidence?

Dr. Suresh Surana

Comment on Shell’s wins of transfer pricing tax dispute in Bombay HC

The aggressive approach of tax authorities and the earlier government in case of Vodafone and Shell led to erosion of confidence of global investors. In this context, the favourable decision of H’ble Bombay High Court in case of Shell India Markets Private Limited (‘Shell-India’), which has in substance followed its precedent set in the recent earlier judgement of Vodafone India concerning the issue of shares to Foreign Associated Enterprises (AE) has come as a major relief. The judgementhas revalidated and clarified that the transaction of issue of shares by an Indian entity to its foreign AE does not partake the character of income in hands of the Indian entity and as such is not subject to the Transfer Pricing regulations as prescribed under Chapter X of the Income Tax Act. 1961.

In the present case, Shell India had issued shares to the foreign AE (‘Shell Gas BV’) at Rs. 10 per share in the financial year 2008-09, which the tax department had contested and had revised the valuation at Rs. 180 per share. The difference resulting from the revaluation of shares was treated as income in the hands of the Shell-India. The High court has in the present facts of the case, ruled that the issue of shares by Shell-India does not result in income in its hands and the difference in the purported valuation as derived by the TPO, is not covered within the purview of the Transfer Pricing regulations in India and as such is not subject to tax.

This judgement would bring in the much needed relief to the global investors and shall instill the confidence about the improving business climate in India. However, in case the CBDT decides to pursue appeal with the H’ble Supreme Court, the relief can be short lived. The CBDT and the new government’s commitment for reducing the litigation can use this judgement as an opportunity to issue clarification that the issuance of shares to foreign AE shall not result in any transfer pricing adjustment. Further this judgement is based on legal provisions prior to 2012 and the amendment made in 2012 covers capital account transactions such as issue of shares. As such, there is still ambiguity on whether the reporting of issue of shares, which is a capital transaction, needs to be complied with in Form no. 3CEB.

As the deadline for filing of the Transfer Pricing Compliances for corporate tax payers for Financial year ended 31 March 2014, which is 30 November 2014, is fast approaching, it is pertinent for the CBDT to consider both the judgements of the H’ble Bombay High Court and issue clarification in respect of reporting of transactions pertaining to issue of shares to Foreign AEs as well as whether the same will result in transfer pricing adjustment.

The Row over Constitutional Validity of Service Tax on Restaurant Services

CA Manindar Kakarla

Introduction: Constitutional validity of service tax levy on restaurant services has turned out to be one of the contentious issues. This issue has its origin somewhere in early 1980’s, when States proceeded to levy VAT on supply of food in hotels/restaurants treating it as sale. Supreme Court has considered the issue of VAT levy on food supply in hotels and restaurants in separate judgments respectively, struck down the levy saying that the supply in these cases is part of service and there is no separate sale. Subsequently, with an objective to empower States to levy VAT on supply of food involved in these transactions, the definition of ‘Sale’ under Article 366(29A) of Constitution has been amended to insert the following sub-clause (f) vide The Constitution (Forty-Sixth Amendment)Act, 1982.

“A tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

Post insertion of this clause(f), Supreme Court has considered the issue whether VAT is payable on entire consideration for supplies in restaurant or on part excluding service component which was ruled against the assessees. Since then, trade has accustomed to the practice of paying VAT on entire consideration. It is for this reason, trade felt service tax levy as a bolt from the blue. Hence trade repudiating the Service Tax levy by challenging its constitutional validity. Kerala High Court and Mumbai High Court has considered this issue and expressed divergent views while Mumbai High Court upheld the levy and not so by Kerala High Court. In this backdrop, this article aims to highlight the collision between the views of these two Courts.

Divergent views of Kerala High Court & Mumbai High Court:

Initially, the Single Member bench of Kerala High Court in the case of Kerala Classified Hotels & Resorts Association vs. UOI, 2013-TIOL-533-HC-Kerala-ST has considered this issue and struck down the levy. Subsequently, the Revenue preferred appeal against this before two member bench in the case of CCE vs. Kerala Bar Hotels Association & Otrs, 2014-TIOL-1913-HC-Kerala-ST wherein the view of single member bench is upheld.

Clause (f) of Article 366(29A) has been interpreted by Supreme Court on two occasions in different contexts. Once in the case of K.Damodarasamy Naidu Vs. State of Tamil Nadu & Othrs AIR 1999 SC 3909 in the context of examining whether VAT is chargeable on entire consideration or not for restaurant sales which is ruled against the assessee. The second occasion is in the case of Tamil Nadu Kalyana Mandapam Association vs. UOI, 2004-TIOL-36-SC-ST in the context of examining Constitutional validity of levy of service tax on Mandap Keeper and Restaurant services which also went against assessee.

The Kerala High Court has examined the views expressed by Supreme Court in both the cases and relied upon K. Damodarsamy Naidu case(Supra).The reasoning given by the Kerala High Court for such reliance is that the Supreme Court in K.Damodarasamy Naidu (supra) has subsequent to insertion of Article 366(29A)(f) for the purpose of charging VAT, has considered the question, whether consideration received by the owner of restaurant from the Customer for supply of food can be split up between what was charged for the food and for other services or not.

In this case, the Supreme Court has interpreted the sub-clause (f) of Article 366(29A) wherein it was held that this clause permits States to impose tax on supply of food and drink. It is not of relevance whether the supply is by way of service or as part of service or it can be in any other manner whatsoever. Accordingly the Supreme Court has upheld the act of imposing VAT on entire consideration in restaurant sales.

Based on such reliance, the Kerala High Court has held that after the insertion of Article 366(29A)(f), the whole activity of supply of food and beverages in a restaurant is deemed to be sale of goods and it cannot be treated as service, thus making levy unconstitutional.

On the other hand the Mumbai High Court, has placed reliance on Tamil Nadu Kalyana Mandapam Association case. In this case, Supreme Court has considered the question of Constitutional Validity of service tax levy on Mandap Keeper and Catering services wherein it was held that Article 366(29A)(f) only permits the States to impose tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods. Held that this is particularly evident from the phrase ‘such transfer, delivery, or supply of any goods shall be deemed to be a sale of those goods.’ Accordingly, the Supreme Court has upheld the Constitutional validity of service tax levy on mandap keeper and catering services.

The Mumbai High Court refused to play reliance in the case of K. Damodarsamy Naidu (Supra) stating that while selling, supply thereof is contemplated and covered by Article 366(29A)(f) of the Constitution of India. It does not mean that the service during the course of or while supplying the goods is taxed, but the tax is and remains on sale of goods. This judgment no way decides the controversy of holding that the Parliament is incompetent to impose and levy a tax on services provided in an air conditioned Restaurant.

Snapshot of the Conflict between two High Court Decisions:

S.No	Kerala High Court	Bombay High Court
1.	Relied upon the view of K. Damodarasamy Naidu (supra) case that by virtue of Article 366(29A)(f), tax is on supply, therefore the entire consideration for such supply is chargeable to VAT	Refused to take such reliance stating that K.Damodarsamy Naidu (supra) case no way decides that Parliament is incompetent to levy service tax on services involved in supply at restaurants.
2	Refused to rely on Tamil Nadu Kalyana Mandapm case for the reason that Para 56 of it was dealing with variety of services extended by mandap keeper and caterer. The said judgment does not deal with supply of food in restaurant.	Relied on Tamil Nadu Kalyana Mandapam case to view that 366(29A)(f) only permits the States to impose tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods.

 Unconsidered Vital Observations of Supreme Court in both these cases:

With due respect to the view of the Mumbai High Court on this issue, vital observations of Supreme Court in each of the above two cases were not considered. In the case of K. Damodarasamy Naidu (Supra), the Supreme Court has considered the chargeability of VAT on both supplies made at restaurant and hotels. With respect to supplies of food/beverages along with hotel accommodation, it was held that only supply part is alone taxable, the services by way of accommodation are not chargeable to VAT. The Court has directed the States to frame rules for determining the supply component from the total composite charge for carrying out assessments.

On the other hand the Supreme Court itself in Tamil Nadu Kalayana Mandapam case (Supra) has made a categorical distinction between restaurants and outdoor catering services while upholding the levy of service tax on outdoor catering services, stating that in the case of outdoor catering service, the food/ eatables / drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer’s choice of foods is limited to the menu card. Again in the case of outdoor catering, customer is at liberty to choose the time and place where the food is to be served. Outdoor catering has an element of personalized service provided to the customer. Clearly the service elements are more weighty, visible and predominant in the case of outdoor catering. It cannot be considered as a case of sale of food and drink as in restaurant.

Thus the above distinction adopted by Supreme Court between outdoor catering services and restaurant services clearly spells out the view that what is liable for sales tax is the supply of food and beverages at restaurant.

The possible literal interpretation:

Further upon plain reading of this Article 366(29A)(f), the following is the possible literal interpretation.

o    A tax on supply.

o    The supply is by way of service or as a part of any service or in any other manner whatsoever.

o    The supply being food or any other article for human consumption or any drink for cash, deferred payment or other valuable consideration.

o    Such transfer, delivery or supply of goods shall be deemed to be a sale of those goods.

Thus essentially, levy of sale tax is on the supply of food/beverages. This supply is something different and is not akin to normal transfer of property in goods. Supply connotes making ‘available for use’ and is inherently involves some sort of service. The expressions ‘Tax on supply by way of or as part of any service’ and ‘such supply or service is for cash, deferred payment or other valuable consideration’ clearly suggest that though the tax is on supply, but the transaction may either be only supply involving incidental services (sales at restaurant) or supply being one element apart from service (food supply in hotel apart accommodation).

Interpretation based on the doctrine of ‘Contemporaneous Exposition’:

The doctrine of ‘contemporanea expositio’ is that the words of a statute must be construed as they would have been the day after the statute was passed. This is well established in our law especially when the wordings of a Statute lead to different interpretations, because construction of law made shortly after its enactment when the reasons for its passage is fresh in the minds of judges is considered as of great weight.

Infact immediately after the 46^th Constitutional Amendment, the Madras High Court has considered the Constitutional Validity of levy of Sales Tax on supply of food/beverages in hotels/restaurants in the case of K.Damodarsamy Naidu & Bros vs. State of Tamil Nadu & Another(WP Nos. 8516, 12718,12719 of 1989) dt. 08.02.2010. This case was not referred before the Mumbai High Court and Madras High Court.

The court has upheld the Constitutional Validity of levy of Sales Tax on Supply of food/beverages post 46^th Constitutional Amendment. In this case, the Court has considered the contention of petitioners that supply of food/beverages consists of two elements namely supply of material and service. The Court held that if due regard is given to the deeming clause found in sub-clause (f) of clause (29A) of article 366 of the Constitution which is to the effect that “such transfer, delivery or supply of any goods shall be deemed to be a sale of goods ………”. No distinction is made between the supply part and the service part in the supply of food and drinks in a hotel.

On the basis of the above wordings of Madras High Court, it has been clearly held that there is no distinction between supply part and the service part in the activity of supply of food and drinks in a hotel. Thus entire activity of supply of food/beverages in a hotel and restaurant is deemed to be a sale. Of course, in case of hotel, the supply may be as part of composite transaction i.e. room accommodation. Similarly in case of Outdoor Catering services also, the services elements are weightier and are not merely restricted to supply of food at a fixed establishment like a restaurant as opined by Supreme Court in Tamil Nadu Kalayana Mandapam case (Supra). While in case of restaurants, it is very difficult to contemplate any other services apart from those that form part of supply. It is this supply which is deemed to be a sale under Article 366(29A)(f).

Conclusion: In view of the above discussion, the two high courts have considered the issue in light of the Supreme Court Judgments but none of them are comprehensive and emphatic enough to form a conclusive opinion on the Constitutional validity of Service Tax levy on restaurants. But with the latest Kerala High Court decision, disagreeing with the views of Mumbai High Court has definitely given a new hope to the trade. Pendulum seems to be swinging in favor of assessee. Let’s us all hope this row may sooner or later relieves the poor consumer from the clutches of double taxation.

(The author is a Hyderabad based Indirect Tax Practitioner and he can be reached at camanindar@icai.org)