CARO 2016 in a new Avatar

It’s an attempt to provide a brief synopsis of the rationale for issuing the revised version of the CARO, its revised applicability and clause by clause comparison between CARO 2015 and CARO 2016. 

There were various reasons for modifying the already issued CARO 2015, which may be categorized as follows:

2. Brief Summary

2.1 The need: There were various reasons for modifying the already issued CARO 2015, which may be categorized as follows:

2.1.1 Compatibility with the Companies Act, 2013  (the Act 2013): The Companies Act, 1956 had largely ceased to be in force effective from 1 April, 2014 (barring those sections which are still applicable) and, consequently, CARO 2003 (as amended), issued under section 227(4A) of the said Act also lost its validity from the said date. With the introduction of the Act 2013, CARO 2015 was issued; however, a need was felt to further revise the same in such a short span of time for making it more compatible with the Act 2013.  Consequently, following changes have been done to CARO 2015:

§  Reporting on Internal Control Systems deleted, due to a separate reporting on Internal Financial Controls, as mandated by the Act 2013.

§  Reporting with respect to loans, investments, guarantees and security under sections 185 and 186 of the Act 2013 added.

§  Reporting of the fraud by the company and on the company by its officers or employees is mandated now, as against all the frauds on or by the company earlier.

§  Reporting on managerial remuneration added as per the Act 2013.

§  Reporting on compliance with section 177 (Audit Committee) and section188 (Related Party Transactions) of the Act 2013 added.

§  Reporting on non-cash transactions with directors, etc., as per the provisions of section 192 of the Act 2013 added.

2.1.2 Further improvements

§  Increasing of the applicability limits for private companies for scoping out small sized companies

§  Adding new provisions for more transparency or complete reporting, e.g.,

o    Reporting on holding the title deeds of immovable properties in the name of the company.

o    Reporting of loan, etc., given to Limited Liability Partnerships.

o    Reporting on schedule of repayment of loans.

o    Reporting on lender-wise details to be made with respect to defaults on dues.

o    Reporting on moneys raised by way of IPO or further public offer.

2.1.3 Applicability: Every statutory audit report issued by an auditor under section 143 of the Act 2013 on the financial statements of a company, having CARO 2016 applicable for the FY commencing on or after 1 April 2015, shall report matters specified under CARO 2016.

Order 2016 shall not apply to the auditor’s report on consolidated financial statements.

CARO 2016 is applicable to every company including a foreign company, barring following companies:

§  a banking company;

§  an insurance company;

§  a company licensed to operate under section 8 of the Act 2013;

§  an OPC and a Small Company as defined under the Act 2013; and

§  a private limited company (not being a subsidiary or holding company of a public company) with:

o    a paid-up capital and reserves and surplus not more than Rs. 1 crore as on the balance sheet date;

o    which does not have total borrowings exceeding ` 1 crore from any bank or financial institution at any point of time during the financial year; and

o    Which does not have a total revenue as disclosed in Scheduled III to the Act 2013 (including revenue from discontinuing operations) exceeding RS. 10 crore during the financial year as per the financial statements.

2.1.4 Reporting on adverse comments by the auditors: In case the answer to any of the clauses under CARO 2016 is unfavorable or qualified, the auditor shall also provide the basis for such unfavorable or qualified responses. However, in those instances where the auditor is unable to express any opinion on a specified matter, he shall indicate this fact along with the reasons for the same.

For more, please refer Taxmann’s Corporate Professionals Today nVolume 35 nIssue 7 nApril 1 to 15, 2016

AO’s order under Sec. 195(2) determining amount of TDS to be deducted isn’t appealable

Facts

a)    Assessee (Bangalore International Airport Limited) was required to make payment to non-resident for the preparation of the bid papers and project proposal with regard to an Airport Project undertaken by it.

b)    It approached the Assessing Officer (AO) under Section 195(2) by filing the application for seeking permission to make the said payment without deduction of tax at source.

c)    AO passed the respective order by holding that the payment in question was in the nature of Fees for Technical Services ('FTS'). Therefore, the assessee was liable to deduct the tax before making such payment.

d)    Assessee challenged the order of the AO before the CIT (Appeals). CIT (Appeals) confirmed the order of the AO. 

Amendment in Forms DVAT-16, 17, 30 & 31

Notification No. F.3(30)/Fin(Rev-1)/2015-16/dsvi/121 dated 12.4.2016 w.e.f. 12.4.2016 (1) Forms #DVAT-30 and DVAT-31 have been amended. Dealers are now required to maintain their records in a manner to provide details of purchases and sales along with the description of goods and their codes. (2) Simultaneously, Return Forms DVAT-16 and DVAT-17 have been amended. Dealers are now required to furnish details of purchases and sales in Annexure 2A and 2B along with the description of goods and their codes. Further, in respect of sales made to unregistered dealers/persons, person-wise details including their PAN shall also be furnished wherever these details have been obtained by the seller in compliance to the provisions contained under the Income Tax Act. As per Rule 114B of the #IncomeTaxRules, every person shall quote his permanent account number (PAN), inter alia, in the following documents pertaining to the transactions relating to sales and purchases:- Sl. No. Nature of Transaction Value of Transaction 1. Sale or purchase of a motor vehicle or vehicle, as defined in section 2(28) of the Motor Vehicles Act, 1988, which requires registration by a registering authority under Chapter IV of that Act, other than two wheeled vehicles. All such transactions. 2. Payment to a hotel or restaurant against a bill or bills at any one time. Payment in cash of an amount exceeding Rs. 20,000/-. 3. Sale or purchase, by any person, of goods or services of any nature other than those specified above. Amount exceeding Rs. 2 lacs per transaction

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Queries on Secretarial Audit

The present paper elaborates five most common queries relating to the Secretarial Audit. It relates to the applicability, number of audits, a PCS may undertake, scope of the audit and penal provisions.

1. ABC Pvt Ltd. was incorporated in the year 2010 as Private Company. Its paid up capital is Rs 35 crore, but the annual turnover for the financial year ended on 31^stMarch, 2016, first time crossed from Rs 240 crores to Rs 300 crores. XVY Ltd, a public company, controls the composition of the Board of Directors of ABC Pvt Ltd, hence in terms of Section 2(87) of Companies Act, 2013, ABC Pvt Ltd is treated as subsidiary company of XYZ Ltd. A newly appointed Company Secretary of ABC Pvt Ltd suggested the Board of Directors to get the Secretarial Audit of this company. Whether the Secretarial Audit of a Private Limited Company is mandatory as per the provisions of the Companies Act, 2013.

Section 204(1) of the Companies Act, 2013 (CA 2013) provides secretarial audit for bigger companies. In terms this section, "Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board's report made in terms of sub-section (3) of section 134, a secretarial audit report given by a company secretary in practice, in such form as may be prescribed'.

Pass-through entities can pass on income as well as corresponding expenditure to their investors

Venture Capital Company and Venture Capital Fund (VCF) are given status of pass through vehicles for purpose of treatment of income received on account of investment made in venture capital undertaking. Therefore, assessee, which invests in a VCF, would be entitled to book expenditure incurred by VCF as if same had been incurred directly by assessee.

Facts:

a)    The assessee-company received interest in respect of investment made in SARA fund, a SEBI registered VCF.

b)    It offered interest to tax on net basis after claiming the deduction of its share of expenditure incurred by SARA fund.

c)    Assessing Officer (AO) taxed interest income received by assessee from VCF on gross basis without giving deduction of assessee’s share of expenses incurred by VCF for earning said income.

d)    The contention of the AO was that the said expenses were incurred by VCF and not by assessee.

e)    The Commissioner (Appeals) confirmed the order of the AO. Aggrieved assessee filed the instant appeal before the tribunal.

FAQs on Taxability of Services provided by Govt. to Business Entities

FAQs on Taxability of Services provided by Govt. to Business Entities

1.    Which services provided by Government to business entities are taxable?

With effect from April 1, 2016 all services provided by a Government or a Local Authority to business entities are taxable. Earlier only support services provided by them to business entities were taxable.

2.    Which services provided by Government covered under the negative list?

Services provided by Government are covered under the negative list. But following services are not covered under the negative list:

                              i)   Specified services by Department of Post,

                            ii)   Services in relation to aircraft or vessel,

                           iii)   Transport of goods or passengers,

                           iv)   Services provided to business entities.

3.    Which services have been exempted from service tax under Mega-exemption 25/2012?

Following services are exempt under Mega-exemption 25/2012:

i)      Services provided by Government or a local authority to a business entity with a turnover upto rupees ten lakhs in the preceding financial year.

ii)    Services provided by Government or a local authority to another Government or a local authority.

iii)   Services provided by Government or a local authority to an individual by way of grant of passport, visa, driving license, birth or death certificate.

iv)   Fines or liquidated damages payable to Government or a local authority for non-performance of contract.

v)    Services provided by Government or a local authority by way of registration required under the law or testing, safety check or certification relating to safety of consumers, etc.

vi)   Services in nature of allocation of natural resources to individual farmers or in relation to any function entrusted to Panchayat.

Note: Services provided by Government or a local authority would be exempted from service-tax if the gross amount charged for such service does not exceed Rs.5000. This exemption does not cover-

                                 i)      Specified services by postal department.

                               ii)      Services in relation to aircraft or vessel.

                              iii)      Transportation of goods or passengers

4.    What would be the Point of taxation of services provided by Government or Local Authority?

In case of services provided by Government or a local authority, the point of taxation shall be the date:

                           i)   when payment in part or full in respect of such services become due or,

                         ii)   when payment for such services is made

-    whichever is earlier.

5.    How services provided by government should be valued?

The amount charged by Government or a local authority for providing services will be considered as a value of taxable service. It has been specifically provided that amount of interest or any consideration charged for allowing deferred payment is includible in value of service.

6.    Who is liable to pay tax on services provided by Government or Local Authority?

The recipient of services are required to pay service tax on services received from Government or a Local Authority under reverse charge basis.

7.    On basis of which documents can Cenvat Credit be availed in respect of services provided by Government or a Local Authority?

Cenvat Credit can be availed on the basis of challan evidencing payment of Service Tax by the service recipient.

India - US intergovernmental agreement on FATCA

India's avidity for exchange of information

In this era of digitalisation where the world has become a global village and distances are no longer a challenge, flow of capital has become easier and faster. Albeit, this globalisation fuelled by technological advancement has led to seamless transfer of goods, services, money and man, the same has also stimulated international tax evasion and avoidance, in particular through tax havens and non-co-operative jurisdictions.

Where the world has recently witnessed the illegitimate stashing of money in foreign jurisdictions and banking scandals, co-operation between tax administrations of different sovereigns has been considered to be critical in this fight against tax-evasion and in protecting the integrity of tax systems.

A key aspect of such co-operation shall be the effective and seamless exchange ofinformation ('EOI'), between the jurisdictions, to curb the practice of tax evasion followed by taxpayers around world.

The 1998 OECD report 'Harmful Tax Competition: An Emerging Global Issue'¹ identified the lack of effective exchange information as one of the key characteristics of harmful tax practices and recommended member countries to remove impediments to the access of bank information.

Sum received by UK based Co. for allowing Indian telecom operators to use its Virtual Voice Network wasn’t FTS

Facts

a)    Assessee (Interroute Communications Ltd.), a UK based Company, was engaged in the business of providing international telecommunication network connectivity to various telecom operators around the world.

b)    It entered into an agreement with the Indian telecom operators, viz., Vodafone Essar South Limited and Tata Telecommunications Ltd to allow them to use its Virtual Voice Network (VVN), i.e., a facility used to connect the call to the end-operators.

c)    Assessee contended that sum received by it under the aforesaid agreement was in nature of business income and should not be taxable in India in absence of its permanent establishment in India.

d)    Assessing Officer (AO) opined that the payment received by the assessee for allowing Indian telecom operators to use its VVN should be taxable as royalty or FTS as per Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA).

e)    The CIT(A) confirmed the order of the AO. Aggrieved assessee filed the instant appeal before the tribunal.

Hike in Stamp Duty on Syndicate Loan Financing

Introduction

1. Financing of infrastructure projects by means of syndicate loan arrangements is a common practice. Syndicate financing refers to a practice wherein a loan is sanctioned to a single borrower jointly by a group of lenders generally on the same terms. These lenders are usually banks, but they can also include other financial institutions. One amongst all these lenders is designated as the lead lender who provides probable participants with a memorandum including borrower specific information. The lead lender also acts as the security trustee on behalf of all other lenders, therefore, it holds the mortgaged property for and on behalf of all other lenders.

StampDuty is a type of government tax which is attracted on every instrument in form of a document by which any rights or liabilities are to be created, transferred, limited, extended, extinguished or recorded. A mortgage deed for the purpose of the Stamp Act is an instrument, hence, applicable, stamp duty is applicable. Therefore, in the syndicate loan financing model the single mortgage deed executed between the borrower and the security trustee (lead lender) would be constituted as an instrument, hence, amenable to stamp duty. Whether such instrument would constitute to encompass only one transaction or whether such instrument shall encompass to include multiple transactions with all other lender banks was the question raised before the Supreme Court.

Facts of the Case

2. In the present case of Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd.[C.A. No. 6054 of 2015, dated 11-8-2015] the respondent Coastal Gujarat Power Ltd. ("CGPL") needed financial assistance for setting-up an ultra-mega power project in the area of Kutch-Bhuj. For that purpose it secured assistance from a few lenders. The lenders, i.e., financial institutions, which were thirteen in number, formed a consortium as a trust and executed a security trustee agreement ("STA") inter se appointing one banker, viz,. the SBI as the security trustee.

CGPL had executed an 'Indenture of Mortgage for Delayed After Assets Deed' ("Mortgage Deed") with the SBI, mortgaging its assets as mentioned in the deed itself. The said document was presented for registration by paying stamp duty of Rs. 4,21,000/- and the deed was registered. However, according to the Stamp Authority, CGPL was liable to pay Rs. 54,62,000/- as stamp duty on the said deed and, hence, demanded the balance amount of Rs. 50,41,000/- from CGPL.

2.1 Applicable Law - For the purpose of this case the following provisions of the Stamp Act are relevant:

2.1-1 Section 2(1) - Defines "instrument" to include every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit policy of insurance, transfer of share, debenture, proxy and receipt.

2.1-2 Section 5 deals with - Instrument relating to several distinct matters or distinct transactions: Any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instrument, each comprising or relating to one of such matters or distinct transactions, would be chargeable under this Act.

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ICSI allows 10 secretarial audits for practicing Company Secretaries for F.Y. 2016-17

The Council of Institute of Company Secretaries of India (ICSI) has reviewed the existing limit for issue of ‘Secretarial Audit Report’ by ‘Practicing Company Secretaries’ (PCS). The Council has also issued set of FAQs to clarify questions relating to the limits of Secretarial Audit. The key takeaways from revised limits are enumerated hereunder:

1.  10 Secretarial Audits allowed per PCS for F.Y. 2016-17 : The Council has fixed 10 Secretarial Audits per partner/Practicing Company Secretary (‘PCS’) for financial year 2016-17.        

Additional 5 Secretarial Audit Reports for peer reviewed unit : The council has allowed PCS to carry out an additional 5 Secretarial Audits in case he has been peer reviewed. With regard to queries as to whom the 5 additional secretarial audit reports would be allowed-whether to individual partners or the practice unit as whole? And whether there is any overall cap on limit on issuing of Secretarial Audit Report? The council clarified that the limit of 5 additional secretarial audits of Peer Reviewed Unit is to be considered as 5 secretarial audits for each individual partner, subject to overall limit of 15 secretarial audits per individual