Monday, February 29, 2016

Expectations from Union Budget 2016

The countdown for the Budget 2016 has begun. From average taxpayer to tax experts, all eyes are transfixed on the Union Budget 2016. Every year 'Taxmann' comes out with its expectations from the Union Budget. In our expectations for the Union Budget 2014 and 2015, we predicted as well as suggested certain changes consisting of substantive and procedural changes which were published in [2014] 47 120 (Article), [2015] 54 416 (Article) and [2015] 32 CPT 253 (Article). It is to our credit that many of our predictions came true in the Union Budget.

This time also we have recommended substantive/procedural changes and various other matters which CBDT should clarify to end the controversy and to bring about certainty in the Income-tax laws.

Thursday, February 25, 2016

Information Exchange on Tax Matters - Important Development in Indian legislation

As a part of a global drive to exchange information freely between countries, India has signed various agreements with other countries for information exchange. For instance, India has signed "Tax Information Exchange Agreements" with certain countries. Further, India has signed Inter-Governmental Agreement (IGA) and Memorandum of Understanding (MOU) on 9th July 2015 with the United States to improve international tax compliance and to implement FATCA. India has also joined Multilateral Competent Authority Agreement (MCAA) on 3rd June 2015.
The MCAA is a multilateral framework agreement that provides a standardized and efficient mechanism to facilitate the automatic exchange of information. As a step towards the implementation of FATCA provisions and with a view to provide automatic exchange of information to other countries under MCAA, necessary legislative changes have been made in India.1 

OECD and G20’s Guide to Low Value-Added Intra-Group Services

The OECD and the G20 provide specific guidance within the Transfer Pricing Guidelines for low value added intra-group services.1 Section D of Section VII within these Guidelines specifically addresses these low-value added intra-group services. The official text of these provisions refer to "value adding" activities rather than to "value added" activities. The authors of this piece use the more commonplace standard, value added. The OECD and G20, as transnational institutions, divide Section D into four parts:
 Section D1 contains the OECD and G20 definition of "low value added intra-group services."
 Section D2 provides for a simplified benefits test. This section sets out a simplified benefits election for the multinational enterprise. The simplified approach determines arm's length charges for low value added intra-group services.
 Section D3 contains guidance for the OECD and G20's documentation and reporting requirements. The multinational enterprise needs to meet these requirements when electing to apply this simplified transfer pricing approach.
 Section D4 addresses the levying of withholding taxes and customs issues that apply when the multinational enterprise provides low value added intra-group services.

Wednesday, February 24, 2016

Arrest could be made for evasion of excise even on basis of prima facie quantification of duty

1.    Petitioner was one of the Directors of an Industrial Unit engaged in manufacture and sale of Iron & Steel Product.
2.    A search and seizure operation was carried out by the officers of the Directorate General of Central Excise Intelligence, Jamshedpur at the factory site. Accordingly, the petitioner was summoned to give evidence and documents on several occasions.

3.    Petitioner claimed that in spite of all cooperation, he was arrested. It was submitted by him that evasion of excise duty is treated as cognizable offence only when amount exceed Rs. 1 crore. Further, arrest could be made only whenfinal quantification of the alleged evasion of duty is made by the department, which was not made in his case.

IndiGo's predatory recruitment of Air India's trained pilots is an employment issue: CCI

Mere recruitment of trained pilots of an airline by another airline will not bring about structural changes in the operations of the market. CCI rejected Air India's allegation of predatory recruitment of its trained pilots against IndiGo saying the matter is more of an employment issue Facts:

a) The informant, Air India Ltd. filed complaint against InterGlobe Aviation Limited (the ‘IndiGo’) under section19(1)(a) of the Competition Act, 2002 (the ‘Act’) alleging, interalia,
contravention of the provisions of section 4 of the Act

b) It was alleged that the IndiGo has systematically indulged in predatory recruitment of trained pilots of the Air India for its proposed expansion and inducing them to breach contractual and other obligations.

c) It is further alleged that the IndiGo, by indulging in unlawful predatory recruitment practice, acquired a 52% market share in the non-metro to non-metro flight sector, making it a monopoly in that sector.

d) The Informant also stated that the Director General of Civil Aviation (DGCA) had made it
mandatory for pilots to obtain ‘No Objection Certificate’ and, accordingly, all Airlines must

ensure that the pilots hired by them have to serve the required six month notice period however, the IndiGo continued to disregard this direction of DGCA

Monday, February 22, 2016

Investment in house property need not be sourced from capital gains only for availing of sec. 54F relief

Section 54F does not put any restriction on source of investment in new asset. Therefore, exemption couldn’t be denied on ground that investment was made out of loan and not from sale consideration received on transfer of original capital asset.

Whether it is mandatory for availing of benefit of section 54F that investment in new asset should be entirely sourced from capital gain?

Saturday, February 20, 2016

ITAT applies Sec. 50 to determine cost of shares allotted in pursuance of demutualization of BSE

Cost of shares allotted pursuant to corporatization of BSE would be calculated as per Section 50 and not as per Section 55(2(ab) if depreciation was claimed on BSE membership. Further, indexation benefit on sale of such share would be available from the date of corporatization of BSE and not from the date of acquisition of original membership of BSE.
a) Assessee, engaged in the business of share broking, earned long-term capital gain on sale of shares of BSE Limited.
b) The said shares were allotted to the assessee under the scheme of corporatization of Bombay Stock Exchange (BSE), in lieu of BSE membership card.
c) Assessee contended that the original cost of acquisition of BSE membership shall be taken as cost of acquisition of shares of BSE Ltd by virtue of Section 55(2)(ab) of the Income-tax Act (‘Act’). Further, the period of holding shall be reckoned from the date of acquisition of original membership of BSE by virtue of Explanation 1(ha) to Section 2(42A).
d) On the other hand, revenue contended that as the assessee was claiming depreciation on membership card of BSE, WDV of the membership card on the date of BSE shall be taken as the cost of acquisition of shares in view of the provisions of Section 50 of the Act. Further, period of holding for the indexation purposes shall also be reckoned from the date of corporatization of BSE and not from the date of acquisition of original membership of BSE by the assessee.
e) The stand taken by AO was affirmed by CIT(A). Aggrieved assessee filed the instant appeal before the tribunal.
The tribunal held in favour of revenue as under-
1) Section 55(2)(ab) stipulates that cost of acquisition of shares allotted pursuant to scheme of corporatization of a recognized stock exchange shall be deemed to be the cost of acquisition of original membership of the exchange.
2) Explanation 1(ha) to Section 2(42A) provides that in determining the period of holding of shares allotted in pursuance of the corporatization of the recognized stock exchange, there shall be included the period for which the person was a member of the recognized stock exchange immediately prior to such corporatization.
3) Section 50 stipulates that notwithstanding anything contained in Section 2(42A) of the Act, while computing capital gain in case of depreciable asset, the cost of acquisition of asset shall be deemed to be written down value of the block of asset as at the beginning of the previous year and actual cost of any asset falling with the block of asset acquired during the previous year. Further, the capital gain shall be deemed to arise from the transfer of short-term capital assets.
4) Section 50 is a special provision for computation of capital gain in case of depreciable asset. It is well-settled proposition that special provisions shall prevail on the general provisions.
5) As in the instant case depreciation was claimed on original membership of stock exchange, cost of acquisition of membership shall be computed as per section 50 and not as per section 55(2(ab).
6) Therefore, cost of acquisition of shares shall be taken as WDV of the membership card on the date of corporatization of BSE and not the original cost of membership paid by the assessee.
7) Further, it was held by the ITAT that as Section 50 overrules Section 2(42A), the benefit of indexation shall be available from the date of corporatization of BSE and not from the date of acquisition of original membership of BSE by the assessee. - [2016] 66 258 (Mumbai - Trib.)

Thursday, February 18, 2016

Amendments proposes by MCA to Ind ASs and ASs

MCA has proposed certain amendments to Indian Accounting Standards (Ind ASs) and Accounting Standards (ASs). These are as follows:-
1. Deferment ofInd AS 115 and introduction of new Ind AS 11 & 18
By accepting the proposal of the National Advisory Committee on Accounting Standards (NACAS), MCA has proposed to defer the applicability of Ind AS 115, ‘Revenue from Contracts with Customers’ to April 1, 2018. Further, two new standards on revenue recognition (Ind AS 11 and Ind AS 18) have been proposed. Companies to which Ind AS are applicable should follow Ind AS 11 & 18 for revenue recognition until Ind AS 115 comes into force.
Apart from above, MCA has also proposed amendments to:
(i)           Ind AS 1, ‘Presentation of Financial Statements’
(ii)          Ind AS 19, ‘Employee Benefits’
(iii)         Ind AS 28, ‘Investments in Associates and Joint Ventures’
(iv)         Ind AS 34, ‘Interim Financial Reporting’
(v)          Ind AS 101, ‘First-time Adoption of Indian Accounting Standards’
(vi)         Ind AS 105, ‘Non-current Assets Held for Sale and Discontinued Operations’
(vii)        Ind AS 107, ‘Financial Instruments: Disclosures’
(viii)       Ind AS 110, ‘Consolidated Financial Statements’ and
(ix)         Ind AS 112, ‘Disclosure of Interests in Other Entities’.

Click here for more details.

Wednesday, February 17, 2016

Projected profits of subsequent years can’t be considered for working out the PLI under TNMM

a)    Assessee, an Indian Company, entered into a transaction to provide software development services and IT enabled services to its foreign AE.
b)    Assessee used Transactional Net Margin Method (TNMM) to determine ALP of such transaction. The Operating Profit to Total Cost ratio was adopted as PLI and same was calculated by taking weighted average margin of four years, being the actual figures for the current financial year plus projected figures for the coming three years.
c)    The TPO accepted the TNMM as the most appropriate method. However, the assessee's PLI computed on the basis of profit of four years including projected profit of three years, was rejected.
d)    Accordingly, adjustment was made to assessee’s ALP by considering the operating profit margin of the assessee for the current year alone, calculated on the basis of actual figures.
e)    Aggrieved by the TP adjustment made by TPO, assessee filed the instant appeal before the tribunal.
The tribunal held in favour of revenue as under-
1)    Essence of the entire transfer pricing provisions is to compare the actual profit earned by the assessee from an international transaction with the profit earned from comparable uncontrolled transactions.
2)    It is totally impermissible to substitute actual profit earned by the assessee from an international transaction with any other profit base, either by considering the actual profits for the earlier years or by taking into account the projected profits of the subsequent years, for the purposes of determining the ALP of an international transaction.
3)    Hence, assessee was not right in working out PLI under TNMM by considering projected profits of subsequent years- [2016] 66 185 (Delhi - Trib.)

Tuesday, February 16, 2016

Guidance note issued on Depreciation as per Companies Act, 2013

Accounting for depreciation by Indian corporates is governed by the provision of Section 123 read with Schedule II of the Companies Act, 2013 and accounting standards, AS 6 and AS 10. To provide a practical guidance on accounting for depreciation (Schedule II) to preparers and auditors of the financial statements, the Institute of Chartered Accountants of India (ICAI) has released a guidance note on the same. Major guidance provided by the guidance note are as follows:
(i)           Depreciation should be charged on the basis of useful life. Useful life is specified in the Schedule II, but an entity may use different useful life subject to certain disclosures.

Monday, February 15, 2016

Assessee can change its claim of credit either as input or as capital goods at any stage of proceedings

1.    Assessee took CENVAT Credit on rails and other track materials, namely, sleepers, paints and crossings etc.Department denied credit on ground that same did not fall within definition of inputs, as they did not go in mainstream manufacture.
2.    Subsequently, during the appellate proceedings, assessee claimed credit of such goods as capital goods.The department argued that since ground of goods being 'capital goods' was not raised before lower authorities, same could not be raised for first time before Tribunal.

Subsidy received from AE for specific purpose can't be treated as income until it is spent

1)    Assessee was a wholly owned subsidiary of Canon Singapore Pvt. Ltd (hereafter ‘CSPL’). It was engaged in purchase and resale of 'Canon' products for its holding company ‘CSPL’ in India.
2)    Assessing Officer (AO) made certain additions to the income of assessee which reflected unutilised subsidy received by assessee from its holding company.
3)    AO observed that the subsidies received by the assessee become its property notwithstanding that the same had not been spent for the purposes for which they were received.
4)    On appeal, tribunal reversed the observation taken by AO; aggrieved-revenue filed instant appeal before the High Court.

MCA issues draft format for financial statements in line with Ind AS

On 9th February, 2016, Ministry of Corporate Affairs issued draft format for financial statements (Revised Schedule III) in line with Indian Accounting Standards (Ind AS). The said format, if approved, shall be applicable on companies who are applying Ind AS voluntarily or  shall apply mandatorily w.e.f 1st Aril 2016 or 1st April, 2017, as the case may be which is specified in Companies (Indian Accounting Standards) Rules, 2015.

Proposed revised Schedule III is similar to existing Schedule III of the Companies Act, 2013 subject to some differences. The major differences are as follows:

Guidance notes issued on fraud reporting and bank audit

Guidance note on fraud reporting
The Institute of Chartered Accountants of India (ICAI) has issued guidance note on fraud reporting under section 143(12) of the Companies Act, 2013. It provides guidance on how an auditor of a company can fulfill requirements of the aforesaid section. It clarifies that provisions of Section 143(12) apply to the auditor only when he is the first person to identify the instances of fraud during performance of his duties as an auditor. The auditor should report any fraud under section 143(12) even if the same is required to be/has been reported under any other statute or to any other regulator.

Govt. isn't abusing its powers if it requires employees to travel via Air India to avail of LTC

Where Government employees were asked by Government to undertake air travel under LTC from OP airlines, Government being consumer enjoyed liberty to exercise its choice of airlines and no case of contravention of sections 3 and 4 was made out against Government and OP airlines


a)  The informant, a Government employee, filed information against Air India, its subsidiaries and the Government of India alleging contravention of section 4 of Competition Act, 2012

Friday, February 5, 2016

No additional depreciation if manufactured goods were captively consumed for construction activity

Facts of the case:
a) The assessee was engaged in laying pile foundation on job work basis, which was required in construction activities.

b) Piling work was used to be done at the site itself by digging bores of required sizes and erecting concrete pipes inside the bore, hence, assessee purchased new machinery, which enabled him to fabricate piles of standard size.

c) He claimed additional depreciation under section 32(1)(iia) on machinery contending that the pre-cast or pre-fabricated piles manufactured by using the new machinery resulted in manufacture of new article or thing.

d) Assessing Officer rejected the claim holding that pile was constructed and it was not manufactured or produced and the business of civil construction would not amount to carrying on any manufacturing activity.

No withdrawal of sec. 54 relief if new house was transferred to daughter within 3 years

Facts of case:

a) Assessee sold his residential property and invested sale proceeds in another residential property. He claimed exemption under section 54 in respect of capital gains arising on sale of property.

b) Later on, he had settled the new property to his daughter out of love and affection.

c) He submitted that the settlement of property in favour of the daughter was a gift falling under section 47(iii) and was not taxable.

d) Assessing Officer held that settlement did not cover under section 54(i) or 54(ii) and accordingly denied exemption.

6 changes you must know for registration of company’s name under new Rules

The Govt. has notified the Companies (Incorporation) Amendment Rules, 2016 (‘Amended Incorporation Rules’). Now the process of reservation of name of companies has been simplified. Following changes have been made for ease of doing business in India: 

1) Name of company need not to be in consonance with principal object:

Under extant norms, the company’s name was necessarily required to be in consonance with principal object, if such name resembled any object of company. Now as per the amended Rules the name of company will not be considered undesirable even if it is not in consonance with the principal objects of the company as set out in Memorandum of association. Let us understand this condition with the help of an example. Suppose if a company wants to opt its name as ‘ABC Builders Pvt. Ltd.’ then it is not necessary that its principal object should be related to construction and development only. Thus, now company is free to choose such name which is not in consonance with principal object.

Employer not liable to deduct TDS at flat rate of 20% on nonfurnishing of PAN by employees: ITAT

Assessee-employer deducted TDS as per section 192 in respect of salary of the employees who failed to furnish their correct PAN.

AO applied a flat rate of 20% as per section 206AA and held assessee liable for short-deduction of TDS. ITAT held that as per section 206AA if the deductee fails to furnish PAN, then the deductor shall deduct tax at the rates which is higher of (i) at the rates specified in the relevant provisions of the Act, or (ii) at the rate or rates in force,

Payment of tax demand raised by the taxation authority is not an extra ordinary expenditure

A company (Y Ltd.) is engaged in the business of providing works contract service. Few days back, it had received a notice from excise authority raising a demand of service tax on works contract services provided by it of Rs. XXX. Recently Y Ltd. paid the demand. In the books the payment is being recorded as extra ordinary expenditure. 

Whether payment of tax demand raised by the taxation authority can recognise as extra ordinary item?

Deductor to get interest on TDS refund from date of filing claim and not from date of deposit of TDS

a)    The assessee, a steel manufacturing co., entered into an agreement with German company for transfer of technical know-how in order to establish an integrated steel plant.
b)    Assessee was required to make payment to German Co. in three installments after deducting tax at source under Section 195.
c)    Subsequently, since the German company was not able to fulfil its obligations, it agreed to waive the payment of third instalment of technical knowhow fee and treated the payment of first and second instalments as full and final payment against the contract.
d)    The petitioners subsequently filed an application (after 18 months from the date of waiver of third installment by German Company) claiming refund of the amount which was deposited as advance TDS towards the third instalment of the payment which was to be made to the German company.