Work contract tax
Goods involved in works contract’ have been included in definition of ‘sale’ w.e.f. 11-5-2002. Note that the CST is on ‘goods involved in works contract’ and not on ‘works contract’ as such. This distinction is vital in deciding aspects of valuation and also whether a particular transaction is inter state sale.What is works contract - Some contracts are for contracts for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such. An air conditioner manufacturer may undertake a ‘works contract’ for designing, fitting and commissioning of air conditioning equipment. This is contract for sale of labour and material and not contract of sale. Property in air conditioning equipment passes as an incidental to the works contract. Here, there is no sale of ‘goods’. It is a ‘works contract’ and not liable to CST. – State of Madras v. Voltas Ltd. (1963) 14 STC 446 and 861 (Mad HC) – also indirectly approved in Batliboi v. STO (2000) 119 STC 583 (Guj HC DB).Laying of pipe line is yet another example of works contract, where passing of property in the pipe is incidental to works contract.It is difficult to establish whether a particular contract is ‘contract for work’ or ‘contract of sale’ and rigid and inflexible fast tests cannot be laid down. It depends on main object of the parties, circumstances and custom of trade. Generally, a contract of sale is a contract whose main object is the transfer of the property in, and delivery and possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work. The aspects like ownership of material, value of skill and labour compared to value of material can be considered, but these are not conclusive. - Halsbury’s Laws of England - quoted with approval in State of Gujarat v. Variety Body Builders - AIR 1976 SC 2108 = (1976) 38 STC 176 (SC). – same view in State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC) = AIR 1972 SC 1131 = 1972(2) SCR 937 = (1972) 1 SCC 472In Vanguard Rolling Shutters v. CST - (1977) 39 STC 372 (SC) = AIR 1977 SC 1505, it was observed that it is difficult to lay down any rule of universal application to decide whether a contract is a works contract or contract for sale of goods. If the contract is primarily for supply of materials at prices agreed and the work or service is incidental to the execution of contract, it will be contract for sale. On the other hand, where contract is primarily a contract of work and labour and materials are supplied in execution of such contract, it is a works contract.In Hindustan Aeronautics Ltd. v. State of Orissa (1984) 55 STC 327 (SC) = (1984) 1 SCC 706 = 1983(2) SCALE 1090 = AIR 1984 SC 744 (SC 3 members), HAL imported materials and components on behalf of Government of India and manufactured aircrafts on behalf of Government of India. The goods belonged to Government of India but were entrusted to HAL for manufacture of aircraft to be delivered to Air Force. It was held that it is a works contract. It was observed that in contract for work, person producing has no 'property' in the thing produced as a whole, even if part or even whole of material used by him may have been his property. In contract of sale, the thing produced as a whole has individual existence as sole property of the party who produces it some time before delivery and the property therein passes only under the contract relating thereto to the other party for a price. In State of Gujarat v. Kailash Engineering Co. (1967) 19 STC 13 (SC) = AIR 1976 SC 2108, it was held that if unfinished goods are held as property of buyer, it is a works contract. In UOI v. Central India Machinery Mfg Co. Ltd. (CIMMCO) AIR 1977 SC 1537 = (1977) 40 STC 246 (SC), it was held that if property in final article passes only after it is completed, the contract will be of sale, even if raw material is purchased on behalf of buyer.In State of Tamilnadu v. Anandam Viswanathan – (1989) 1 SCC 613 = (1989) 73 STC 1 (SC), it was observed that nature of contract can be found out only when intentions of parties are found out. The fact that in the execution of works contract some materials are used, and the property in the goods so used, passes to other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the materials. - - Primary difference between a contract of work or service and a contract for sale is that in the former, there is in the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. Where the finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, the transaction is only a works contract.In Hindustan Shipyard Ltd. v. State of Andhra Pradesh 2000 AIR SCW 2582 =(2000) 6 SCC 579 = 119 STC 533 = 2000(5) SCALE 216, after reviewing entire case law, following principles were evolved - (1) It is difficult to lay down any inflexible rule (2) Transfer of property of goods for a price is the linchpin of definition of sale. Main object of parties has to be found out. Substance of the contract and not form is to be looked into. (3) If the thing to be delivered has individual existence before the delivery as sole property of the party who is to deliver it, it is a sale. (4) If bulk of material used belongs to the manufacturer who sells the end product, it is strong pointer that the contract is for sale of goods and not of work and labour. However, the test is not decisive. Relative importance of material qua work is important. Supreme Court in a very old case - State of Madras v. Gannon Dunkerley & Co. - AIR 1958 SC 560 = 1959 SCR 379 = (1958) 9 STC 353 (SC), had held that no tax can be levied on works contract, as tax can be levied only on ‘sale of goods’ as defined in Sale of Goods Act. In an indivisible works contract, there is no sale of goods as there could be no agreement to sell materials as such and moreover, the property does not pass as movables. The material used therein becomes property of the other party on the theory of accretion and, as such, no sales tax can be levied on such material.‘Works Contract’ was one of the ways of avoiding sales tax. Hence, Constitution was amended on 2nd February, 1983 (46th amendment). Clause 29A was added to Article 366 to cover ‘transfer of property in goods involved in execution of works contract’. Subsequently, most of States have amended their sales tax laws to cover ‘works contract’, but Central Sales Tax Act was not amended till May 2002. Thus, till 11-5-2002, CST was not leviable on indivisible works contracts.In Builders' Association of India v. UOI - (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = (1989) 1 SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 (SC 5 member constitution bench), it has been observed : ‘After the 46th amendment, the works contract which was indivisible one, is by a legal fiction altered into one for sale of goods and the other for supply of labour and services. After 46th amendment, it has become possible for States to levy tax on value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of goods and materials supplied in a building contract which had been entered into two distinct and separate parts.’In Associated Cement Companies Ltd. v. CC 2001(1) SCALE 436 = (2001) 4 SCC 593 = 124 STC 59 = AIR 2001 SC 862 = 2001 AIR SCW 559 (SC 3 member bench), it was held that even if the dominant intention of the contract is rendering of service which will amount to a works contract, after forty-sixth amendment to Constitution, the State would now be empowered to levy sales tax on material used in such contract.Contract of skill & labour - Some contracts are essentially contracts of skill & labour e.g. tailoring work, printing or cyclostyling etc. These jobs are not covered under 'works contract'. - - A contract to paint a portrait is a contract for skill and labour and not a contract for sale of goods, as substance of contract is for artist’s skill and it is only ancillary to that there would pass to the customer some materials like paint and canvas. – Robinson v. Graves (1935) 1 KB 579. However, in Lee v. Griffn (1861) 30 LJ QB 252, when a dentist agreed to make set of false teeth for a lady and to fit them into mouth, it was held a contract for sale of goods [There can be two views on the issue].Mere supply of labour not covered – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability. – Ashok Kumar Garg v. UOI (2002) 128 STC 442 (P&H HC DB) * Rajiv Gumber v. S. (2002) 128 STC 494 (P&H HC DB). Contractor need not be owner if he sales flat before construction – The contractor need not be owner of property. He will be liable even if he never had absolute ownership of the flat. – Mittal Investment Corporation v. ACCT (2001) 121 STC 3 (Karn HC DB). The judgment was modified in Mittal Investment Corporation v. ACCT (2001) 121 STC 14 (Karn HC DB) to the extent that it was held that the contractor is not liable if he enters into agreement with buyer after construction of flat, but will be liable if he enters into contract before construction of flat. [Decision as per Karnataka Sales Tax Act, but principle may apply in other cases also.]Value liable for Works Contract Tax – Some important case law is discussed here.Builders Association of India v. UOI - This is a landmark judgment of Supreme Court on ‘works contract’. (1989) 2 SCR 320 = (1989) 1 CLA 332 (SC) = (1989) 73 STC 370 (SC) = 1989(1) SCALE 770 = (1989) 2 SCC 645 = AIR 1989 SC 1371 ( 5 member Constitution bench). The background of this case is that after amendment to Constitution in 1983, various State Governments imposed levy on works contract. The tax was levied by some State Governments on full value of contract which included the material cost and other costs like labour, supply of services etc. However, in the judgment, Hon. Supreme Court held that the power of States to levy tax on works contract is subject to limitation of Article 286 i.e. tax cannot be levied by State on (a) Outside the State (b) during import/export. (c) Restrictions placed on ‘declared goods’ are applicable even while levying tax on works contract. Further, tax cannot be imposed on full value of contract. The tax is on ‘transfer of property in goods involved in execution of works contract.’ Thus, tax on works contract can be levied only on ‘value of goods involved’ and not on whole value of works contract.Gannon Dunkerley and Co. v. State of Rajasthan - This is also an important judgment on ‘Works Contract' (1993) 66 Taxman 229 = (1993) 10 CLA 56 (SC) = 1992 (3) SCALE 173 = 1993 AIR SCW 2621 = (1993) 1 SCC 364 = (1993) 88 STC 204 (SC - 5 member bench judgment)]. Here, it was held that taxable event is the transfer of property in the goods involved in the execution of a works contract. The said transfer of property takes place when goods are incorporated in the works. Hence, value of goods at the time of incorporation in the works can constitute measure for levy of tax. However, cost of incorporation of the goods in works contract cannot be made part of measure for the levy of tax. It was held that value of goods involved in works contract would have to be considered for taxation on works contract. Charges for labour and services have to be deducted from total value of works contract. Moreover, tax cannot be levied on goods which are not taxable under sections 3, 4 and 5 of CST and goods covered under sections 14 and 15 of CST. If contractor is not able to give detailed break up, legislature can prescribe scales for deductions permissible on account of cost of labour and services for various types of works contract. It is permissible to have a uniform rate for works contract. This rate may be different from the rates applicable to individual goods. The judgment in this case was subsequently followed in Builders’ Association of India v. State of Karnataka - (1993) 88 STC 248 = AIR 1993 SC 991 = (1993) 1 SCC 409 = 1993 AIR SCW 152 (SC - 5 member bench).In Daelim Industrial Co. v. State of Assam (2003) 130) STC 53 (Gau HC), it was held that in case of works contract, tax is payable only of value of goods and not on cost of design and engineering.State of Kerala v. Builders Association - In State of Kerala v. Builders Association of India - 1996 (8) SCALE 730 = (1997) 104 STC 134 = (1997) 2 SCC 183 = AIR 1997 SC 3640 = 1997 AIR SCW 977 (SC), the position was that a convenient, hassle-free and simple method, which was 'rough and ready method' was evolved by State Government for collection of sales tax on Works Contract. This was optional to assessee. It was held that legislature can evolve such alternate, simplified and hassle-free methods of assessment, making it optional to assessee. - . - In the field of taxation, legislation must be allowed greater 'play in joints'. Allowance must be made for 'trial and error' by the legislature. - - In Mycon Construction v. State of Karnataka 2002 AIR SCW 2156 = 127 STC 105 (SC), it was held that a simplified composition scheme instead of regular assessment, can be evolved, if it is on optional basis. Validity of such provision has been upheld.Other judgments - In Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC), it was observed that State Legislature can tax all the goods involved in works contract at a uniform rate which may be different from the rates applicable to individual goods which are involved in execution of works contract.Government can make a provision allowing contractors option to opt for composition by paying a sum based on total consideration of contract. - Mytcon Construction v. State of Karnataka (1998) 111 STC 322 (Karn HC).Royalty payable can be included for purpose of works contract tax – If contractor has to pay royalty and property gets transferred to him, it can be included for purpose of works contract tax. – Cooch Bihar Contractors Assn v. State of West Bengal (1996) 103 STC 477 (SC) – followed in B Seenaiah v. CTO (2001) 124 STC 248 (AP HC DB). However, in ACTO v. R K Constructions (2001) 124 STC 701 (Raj HC), it was held that if material is supplied by Government to contractor for use in Government contract, there is no ‘transfer of property in goods’ to contractor and no sales tax is leviable, even if Government had collected royalty. Sale price for purpose of CST – So far, no specific provision has been made in CST and hence ‘sale price’ will have to be determined on basis of definition of ‘sale price’ as contained in section 2(h) of CST Act. As per this definition, freight or delivery or the cost of installation is not includible when separately charged. Thus, value of goods involved will have to be calculated excluding these charges.‘C’ form can be supplied/ received for purchases / sales for works contract - Many High Courts have held that ‘C’ form can be issued for purchase of goods which are used in works contract. The dealer is entitled to registration and he can receive sales tax forms in respect of his sales. See the discussions under ‘C Form’ in a later chapter. These judgments pertain to period prior to 11-5-2002.After amendment of definition of ‘sale’ w.e.f. 11-5-2002, now C form can certainly be issued as ‘works contract’ has been specifically included in definition of ‘sale’.CST on works contract - Central Sales Tax will be payable on goods involved in works contract, if goods move from one State to another on account of such works contract from 11th May 2002 onwards. Works contract of movable property - There can certainly be inter State works contract in case of movable property e.g. printing contracts. In fact, Central sales tax can be levied on any goods involved in works contract in case of movable property.Works contract in case of immovable property - One interesting question that is likely to arise is whether there can be ‘goods involved in works contract’ if finally the article becomes immovable property in other State. For example, if a dealer undertakes supply and erection of machinery in other State, whether it will be a ‘inter State works contract’. In the opinion of author, it will be held so, as the movement of goods from one State to another certainly occasions on account of the works contract. - - It must be remembered that in case of works contract, the sales tax is on ‘goods involved in the execution of contract’ whether the property passes as goods or in some other form. There is no CST on ‘works contract’ as such. Thus, CST on works contract is really only on goods involved, which certainly move from one State to another.It may be noted that a ‘sale’ can be inter-State even if property in goods is transferred in other State.
Friday, December 19, 2008
Work contract tax
REVERSE MORTGAGE SCHEME, 2008
The Central Government has brought out a scheme for the purpose of senior citizens to face monetary problems. In exercise of the powers conferred by Sec. 47(xvi) of the Income Tax Act, 1961 the Central Government made the scheme called as 'Reverse Mortgage Scheme, 2008' ('scheme' for short). The scheme came into force from the 1st day of April, 2008.
Reverse mortgage is defined as mortgage of a capital asset by an eligible person against a loan obtained by him from an approved lending institution. The scheme provides a list of approved lending institution as follows:
National Housing Bank established under Sec. 3 of the National Housing Bank Act, 1987;
· A scheduled bank included in the second schedule to the Reserve Bank of India Act, 1934; or
· A housing finance company registered with the National Housing bank.
The scheme defines the term 'reverse mortgagor' as the eligible person who has mortgaged the capital asset for the purpose of obtaining loan. Then the question arises who is the eligible person. The scheme also defines the term 'eligible person' as-
Any person, being an individual, who is of, or above, the age of sixty years; or
· Any married couple, if either of the husband or wife is of, or above, the age of sixty years.
Reverse Mortgage transaction, according to the scheme is a transaction in which the loan may be disbursed to the reverse mortgagor but does not include transaction of sale, or disposal of the property for settlement of loan.
PROCEDURE:
1. Any eligible person may enter into a reverse mortgage transaction by applying in writing to the approved lending institution, if the capital asset, being mortgaged is owned by him and free from encumbrances;
2. The approved lending institution on receipt of the application shall process the application received from the eligible person and it may charge nominal amount as processing fees;
3. The approved lending institution, before taking mortgage of capital asset and before disbursing any loan under reverse scheme shall enter into a loan agreement in writing with the reverse mortgagor and obtain and maintain the following particulars from the reverse mortgagor-
Name and address of the owner of the capital asset;
· Permanent Account Number of the owner of the capital asset;
· Total area, including built up or covered area, of the capital asset;
· Cost of acquisition and the year of acquisition of the capital asset;
· Cost of improvement and the year of improvement of the capital asset;
· Name, address and Permanent Account Number of all the legal heirs and estate of the owner of the capital asset;
· A copy of the registered will of the owner of the capital asset including any changes made therein during the currency of the term of the loan.
4. The approved lending institution may disburse the loan to the reverse mortgagor either by period payments to be decided mutually between the approved lending institution and the reverse mortgagor or lump sum payment in one more trenches, to the extent that the aggregate of the amount disbursed as lump sum payments does not exceed fifty per cent of the total loan amount sanctioned.
5. The period of mortgage shall not be exceeding twenty years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.
6. The reverse mortgagor, or his legal heirs or estate, shall be liable for repayment of the principal amount of loan along with the interest to the approved lending institution at the time of foreclosure of the loan agreement.
Tuesday, December 16, 2008
Limited Liability Partnership
Parliament Passes Limited Liability Partnership (LLP) Bill 2008
15/12/2008
Parliament has passed the Limited Liability Partnership (LLP) Bill 2008. Lok Sabha today gave its assent to the Bill which was earlier passed by the Rajya Sabha. Replying to the debate on the Bill in the Lok Sabha, Shri Prem Chand Gupta, Minister for Corporate Affairs, expressed the hope that the first ever LLP in the country would be registered by the first day of the new Financial Year i.e. 1.4.2009. In this context he informed the Hose that concept LLP Rules have already been placed on the website of the Ministry. Shri Gupta also assured the House that registration of LLPs will also be a paperless affair as it will also be covered under MCA-21 e-governance program of the Ministry. Regarding taxation, Shri Gupta said that as the matter relates to the Finance Ministry, this concern will be taken care of by that Ministry, but he assured the House that Indian LLPs will in no way be put to any disadvantage and our LLPs will have a level playing field with other similar bodies outside the country.
LLP is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner.
For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost.
The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals.
In our country, several expert groups have examined the need for such a concept since 1972 and recommended from time to time, the enactment of a law that would enable the setting up and functioning of the LLPs. These include the Abid Hussain Committee 1997, the Naresh Chandra Committee on Private Companies and Partnerships 2003 and the Irani Committee for new Company Law, 2005.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Today, the world is in the grip of an unprecedented financial crisis, which is adversely affecting economies of most of the countries, including our own. In such a situation, availability of LLP as an alternative business vehicle to our trade and industry will be an important step. Service industry has grown considerably in India and it accounts for nearly half of our GDP. We believe that the LLPs would further contribute to the growth of the service industry in the future.
An earlier version of the LLP Bill was introduced in the Rajya Sabha around 2 years ago on 15th December, 2006 and was referred to the Parliamentary Standing Committee on Finance. The Standing Committee submitted its report on 27th November, 2007. Taking into consideration the suggestions of the August Committee, the revised Bill, namely the Limited Liability Partnership Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. The House passed it on 24th October, 2008.
The salient features of the LLP Bill, 2008 are as under:‑
(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
(ii) The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
(iii)While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
(iv) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners can not exceed 20.
(iv) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.
(v) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.
(vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.
Monday, December 15, 2008
New Companies Bill
Sapna Dogra Singh / New Delhi December 12, 2008, 0:48 IST
The new Companies Bill 2008, which is before the standing committee of Parliament, for the first time has fixed responsibility and accountability on the top management instead of leaving it loose and broad-based as in the existing Companies Act. The draft Companies Bill 2008 has identified the three key managerial positions as chief executive officer (CEO), chief finance officer (CFO) and company secretary (CS).
By recognising these three key managerial positions, the Bill is fixing responsibility to bring out a system which is more accountable, transparent and workable, according to an official at the Ministry of Corporate Affairs (MCA). It would be mandatory to mention the names of people holding these three positions in the annual report of the company.
In the present system, it is the ‘officer in default’ who is held responsible for offences committed by a company. However, the definition of ‘officer in default’ is so vast in the Companies Act of 1956 that it is virtually impossible to put the blame on anyone.
“This is an era of self regulation where you need a team of competent professionals at helm who can be held responsible,” said NK Jain, secretary and CEO of the Institute of Companies Secretaries of India (ICSI). This will have a positive impact, added Jain.
Besides bringing accountability and transparency in companies, by recognising the three key managerial personnel, the draft Bill has provided relief to the honorary directors and independent directors and the non-executive members of the company.
In the existing Companies Act, the term ‘officer in default’ encompasses all the senior officials in a company, which include all directors both executive, non-executive and independent. In case of any offence or lapse, any one of them could be made responsible even if they have nothing to do with the actual business of the company, stated Pawan Jain, company secretary of the Abhishek Industries — a leading textiles company in the country.
He cites a recent example in which a leading Bollywood star was implicated because a cheque, issued by a company where the actor was an honorary director, got bounced and the person reportedly filed a suit against the actor.
Also, said Jain, in cases where companies have not filed their returns, action can be taken against anyone in the company under the definition of ‘offer in default’ and hence the new draft Bill will give respite to companies from such incidents.
The draft Bill aims to ensure financial integrity, corporate governance and risk management in the companies, said E Balaji, CEO of Ma Foi Management Consultants.
Many public sector companies feel that this would bring good governance in the companies. The bill is a good step in bringing corporate responsibility by giving statutory recognition to the role of CFO, said DK Saraf, CFO of Oil and Natural Gas Corporation.
Another important step that the draft Bill has proposed is doing away with the need for central government approval for appointments and fixing remuneration of the key managerial positions. It also envisage removal of the ceiling on managerial remuneration based on net profits.
However, AK Singhal, director (finance) NTPC, feels that this wouldn’t be applicable to state-owned companies as the government would continue to fix their remuneration.
360 degree feedback
Performance-appraisal data collected from 'all around' an employee-his or her peers, subordinates, supervisors, and sometimes, from internal and external customers. Its main objective usually is to assess training and development needs and to provide competence-related information for succession planning-not promotion or pay increase. Also called multi-rater assessment, multi-source assessment, multi-source feedback.
Thursday, December 11, 2008
Deflation
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.
Advance tax versus TDS
Advance tax versus TDS
The tax deductible at source has to be excluded while computing the advance tax liability, even if the tax had not actually been deducted.
The Income-Tax Appellate Tribunal (ITAT), G-Bench, Delhi, in the DCIT vs Pride Foramer SAS (2008 24(II) ITCL 259) case has decided an interesting issue concerning tax deducted at source (TDS), advance tax and charging of interest under Section 234B of the Income-Tax Act, 1961.
The assessee before the assessing officer (AO) was a non-resident French company, which had engaged employees of an associate company for providing technical services in connection with offshore drilling in India.
Tax not deducted at source
The AO noticed that these employees drew salaries exceeding the exemption limit and, therefore, passed an order under Section 163(1), read with Section 143(3), treating the French company as agent of the technicians and made assessments on it on income from salary and perquisites received by these technicians.
Since no tax was deducted at source from the salaries paid and no advance tax was paid for such employees, the AO charged interest under Section 234B(1) of the Act also.
On appeal, the CIT(A) observed that the entire income of the foreign technicians was liable to TDS and, therefore, as per Section 209(1)(d) the tax payable for the purpose of advance tax was required to be reduced by the tax ‘deductible at source’.
Since the entire tax payable was deductible at source, there was no advance tax payable by the assessees and, hence, the AO was directed to delete the interest charged under Section 234B. Against this order of the CIT(A), the I-T Department went on appeal before the ITAT.
The Revenue’s contention before the ITAT was that the Section 191 was not overridden by Section 209 and, therefore, once the tax had not been deducted at source, the same was payable as advance tax.
Tribunal’s view
The Tribunal did not agree with this view of the Department. It held that Section 191 along with Section 190 falls in Part-A of Chapter XII, which relates to collection and recovery of tax.
Section 190 relates to deduction at source and advance payment, and provides that notwithstanding that regular assessment in respect of any income is to be made in a later assessment year, tax on such income shall be payable by deduction or collection at source or by advance payment, as the case may be, in accordance with the provisions of the chapter. Section 191 provides for another mode of collection of tax by way of direct payment.
Therefore, even if Section 191 is not overridden by Section 209, the amount payable by the assessee direct under Section 191 in cases where tax had not been deducted at source, is not the amount payable as advance tax.
The amount payable as advance tax has to be computed under Section 209, which is a specific provision for this purpose. Under clause (d) of sub-section (1) of Section 209, the tax deductible at source has to be excluded while computing the advance tax payable.
Had the legislature wanted that only the tax actually deducted at source or collected at source should be excluded, it would not have used the words ‘tax deductible at source’ or ‘collectible at source’.
‘Deductible at source’
The phrase ‘deductible at source’ has not been used casually or without any purpose. There is a reasoning for excluding the ‘tax deductible at source’ because in cases where tax has not been deducted at source by the person responsible, the said person is deemed to be assessee-in-default under Section 201 in respect of whole or any part of tax, which had not been deducted at source and he is also liable for payment of interest and penalty under the said section.
Since the ‘tax deductible at source’, in case not deducted, could be recovered with interest from the person responsible for deducting the same at source, the ‘tax deductible’ has been excluded from the advance tax liability of the assessee.
Section 191 contains only an alternative mode of recovery so that in case tax could not be recovered from the person responsible in case of default, it could be collected from the assessee, who is primarily responsible for paying the tax. The section does not say that the same is payable as advance tax. The tax deductible at source has to be excluded while computing the advance tax liability as provided in Section 209(1)(d), even if the tax had not actually been deducted. In the case before the ITAT, the entire income of the assessee was deductible at source.
Therefore, no advance tax was payable by the technician employees and, as a result, there would be no case for charging interest under Section 234B of the Act. Hence, the ITAT has held that the order of the CIT(A), directing the AO to delete the interest charged under Section 234B, is correct.
ITAT to decide on tax cases within three months
HC directs ITAT to decide on tax cases within three months
MUMBAI: Corporate taxpayers can now hope for speedy justice. The Bombay High Court has set aside an order of the Income Tax
Appellate Tribunal
(ITAT) on the ground that the tribunal took four months to deliver the order. Delivering the order, a division bench comprising Justice VC Daga and Justice S Radhakrishnan observed that justice delayed is justice denied, but justice withheld is even worse. Observing that often orders are passed four to 10 months after the tax cases have been heard, the court issued a guideline to the ITAT asking it not to take more than three months to give an order. The division bench also directed ITAT that its order should be self-containing and reasoned. HC gave this order on an appeal filed by Shivsagar Veg Restaurant. The appeal was based on the inordinate delay by ITAT in giving out the order. The taxpayer also alleged non-application of mind as the order did not furnish reasons in detail, did not discuss the issues raised by the taxpayer and did not cite the case laws. The HC said that since ITAT is the final authority on facts, the tribunal is required to appreciate the evidence, consider the reasons of the authorities below and assign its own reasons as to why it disagreed with the findings of the authority below. This would help the HC, where appeals are filed on questions of law, to have a clearer understanding of the issues that come up before it, the division bench said. “Merely because the tribunal happens to be an appellate authority, it does not get the right to brush aside reasons or the findings recorded by the first authority or the lower appellate authority. It has to examine the validity of the reasons and findings recorded,” the bench added. K Shivram, who appeared for Shivsagar Veg Restaurant told ET: “ITAT president Vimal Gandhi had issued detailed guidelines (on speedy clearance) to ITAT members sometime ago. However, those guidelines are not being followed by the ITAT members.”
Rent -a -Cab is Input Service
The answer is yes.
While referring the meaning of Input Service assigned to rule 2(l) of the Cenvat Credit Rules, 2004, honorable tribunal has held that:
"From the above definition, it is very clear that the input services besides being used in or in relation to the manufacture of final products and clearances of final products from the place of removal includes a plethora of other services such as service used in relation to setting up, modernization, renovation or repairs of factory, premises of provider of input service or an office relating to such factory or premises, advertisement or sales, activities of business, accounting, auditing, financing, recruitment, quality control, training and coaching etc. and therefore its scope is much larger than being used directly or indirectly in relation to manufacture. The decision cited by Revenue are therefore not relevant as those decisions have not considered the inclusive part of input service as defined under rule 2(l) of Cenvat Credit Rules and these decisions have only considered the term in or in relation to the manufacture. Since Rent-a-Cab service is used for bringing employees to work in the factory for manufacture of goods it has to be considered as being used indirectly in relation to the manufacture or as part of business activity for promoting the business as any facility given to the employees will result in greater efficiency and promotion of business."
Refund of Service Tax paid in excess wrongly
Where it is found that that service tax has been paid in excess wrongly - department should refund the same on making an application for refund the same.
In the instant case, CESTAT has refused to allow the claim of refund on the ground that
"…..that since the assessee had not challenged the assessment order, the claim of refund cannot be entertained, so as to indirectly challenge the assessment order, without filing statutory appeal, against the assessment order. It was also found, that in the case in hand, the order is appelable and no appeal having been filed, the claim of refund has no merit, and the appeal was dismissed."
In this matter, Honorable High Court of Rajasthan held that:"At the outset, it may be observed, that under the scheme of things, starting from Section 73 onwards it is clear, that the assessee himself is to deposit service tax in form ST-3, there is no provision for assessment. Passing of assessment order is contemplated only in cases where the notice is issued under Section 73, and it is found, that service tax is not levied or paid, or has been short levied or short paid etc. In that view of the matter, the very basis/reasonings given by the learned Tribunal, simply have no legs to stand. Admittedly, the appeal under Section 85 lies against a specific order of the concerned authority in Form ST-4, which requires to disclose, designation and address of the officer passing the decision or order appealed against, and the date of decision or order, so also the date of communication of the decision or order appealed against to the appellant. Admittedly, when no order capable of being appealed against, had ever been passed, it cannot be said that the assessee could file appeal against the assessment order, and not having so filed appeal he cannot lay the claim of refund. Thus, the order of the Tribunal cannot sustain."
Friday, November 28, 2008
Overseas securities
Publication:Economic Times Delhi;
Date:Nov 28, 2008;
Section:EFM;
Page Number:7
Our Bureau NEW DELHI THE government on Thursday loosened rules covering the pricing of securities issued overseas by Indian companies in a move which is seen helping corporates and underwriters in difficult stock market conditions. The finance ministry said it has changed the rules so that companies can price their overseas securities to reflect the most recent value of their shares in the local market: it will now be at least an average of the highest and lowest price of the share in the two weeks preceding the decision to raise capital abroad. Earlier, it was the average share price covering the preceding two months or six months, with the higher of the two prices being the floor price for the overseas issue. The new regulation covers shares issued by Indian companies in the US and Europe as well as convertible bonds denominated in a foreign currency. Overseas investors have pulled out a record $13.5 billion from Indian stocks so far this year, causing the benchmark Sensex index on the Bombay Stock Exchange to drop by 56%. This contrasts with the sharp rise in stock prices last year, when foreign investors bought a record $17.2 billion. Introducing more market-driven rules will help generate greater interest among underwriters, besides helping the companies, the head of the Indian unit of top European bank said. Underwriters pay the share issuer in advance and assume the risk of selling the securities to investors for a profit. Another rule which required share issuers to not count the 30 days preceding the decision to raise capital has been scrapped. Aimed mainly to prevent price manipulation in the domestic market, the rule is seen as not relevant in a bearish market
Solve issues on taxability of AEs
Vivek Mishra UNDERthe service tax law, the liability to pay service tax arises on collection of service charges. Therefore, accrual of income or recording of book entries were not relevant for service tax purposes. However, through the amendments introduced by the Finance Act, 2008, it has been provided that for transactions between associated enterprises (AEs), the liability to pay service tax will arise on accrual or collection basis, whichever is earlier. This amendment is apparently an anti-avoidance measure. It seeks to cover transactions between AEs wherein service tax has not been paid on the ground of non-receipt of payment even though the transaction has been recognised as revenue/expenditure in the statement of profit and loss account. The concept of AE has been borrowed from the transfer pricing provisions under the Income Tax Act. These provisions broadly provide that two entities would qualify as AEs if one entity is managed or controlled by the other or if the two entities are under common control or management. Further, the amendments to the service tax rules provide that in case of transactions between AEs, payment received for the taxable service would include any amount debited or credited to any account in the books of account of a person liable to pay service tax. This would have a significant impact on the cash flow of the AE providing the taxable services. Take this example. Company X and company Y are AEs. X provides taxable services to Y in June 2008 worth Rs 1 million and passes an entry debiting Y for this amount on July 1 2008. The amount is received by X on November 1 2008. Prior to this amendment, X would have been liable to pay tax on this amount by 5 December 2008. However, as a result of the amendment, X is liable to pay service tax on Rs 1 million by 5 August 2008, the due date for payment of service tax for July 2008. Further, this would set back the cash flow of X as it would need to deposit service tax on Rs 1 million without having collected such amount from Y. The amendment has ostensibly been introduced as an anti-avoidance measure. However, the amendment has created certain ambiguities in the operation of service tax provisions which should be clarified at the earliest to avoid unnecessary litigation. Some of these ambiguities are discussed below. 1. One of the conditions to qualify as export of services under the Export of Service Rules, 2005 is that payment for the service should have been received in convertible foreign currency. Now, in case of export of services between AE, the liability to pay service tax has been shifted from collections to accrual basis. At the time of such accrual, the service may not qualify as export as the payment for the service has not been received. Thus, the issue that arises is whether on such accrual the Indian entity would be required to pay service tax and subsequently on receipt of payment initiate refund proceeding to recover output service tax paid or whether such accrual would be treated as a receipt of convertible foreign currency for the purpose of export rules. 2. With regard to accrual entries made in relation to AE, would the Indian entity be required to pay service tax on the opening balance in the account of the AE as on 10 May 2008 or does this amendment apply only to accrual entries made post 10 May 2008. As per the Cenvat Credit Rules, 2004 credit of service tax paid on input services is available only if the value of input service and service tax has been paid. Given that in case of import of taxable service from an AE, service tax is payable on an accrual basis, an issue that arises is whether the Indian enterprise would be permitted to avail credit of service tax paid on such input service imported though the payment for the value of input service has not been made. Provisions permitting a service provider to adjust excess service tax deposited, where the service charges and service tax thereon is refunded to the service recipient, will not be applicable since there will be no refund of these amounts in case the tax is paid on accrual basis. So, the introduction of the deeming fiction in relation to AE has resulted in various anomalies which should be clarified at the earliest to avoid unnecessary litigation.
Thursday, November 27, 2008
norms for SEZs eased
Social infrastructure norms for SEZs eased
New Delhi: In a move that would help developers of special economic zones, particularly of IT/ITeS SEZs, enhance the commercial viability of projects, the government has allowed them to build more and larger housing facilities, offices and other required social infrastructure in the ‘non-processing area’ and avail tax benefits for it.
Half the total area of each SEZ comprises the non-processing area that houses only social amenities, while the other half is the processing area where industrial units are located.
The ceilings on housing and office space in the non-processing area of SEZs were imposed to prevent SEZs from becoming a pure-play realty business. But the curbs were affecting the commercial viability of SEZs, according to the commerce ministry.
The ministry had even mooted amendments to the rules saying developers should be permitted to build over and above the ceiling limits, but by forgoing the tax and duty exemptions for such extra constructions.
After several rounds of inter-ministerial deliberations and Empowered Group of Ministers (EGoM) meetings in August and October this year, the government has now decided that the Board of Approval (BoA) for SEZs can approve the construction of social amenities according to the enlarged overall ceilings in each category of social infrastructure. As per the new norms, developers would even be able to claim the duty drawback, and benefits of tax exemption or concessions, sources said.
However, there are some riders. Construction of social amenities as per the relaxed norms would be permitted only in a phased manner and would depend on the employment generation, increased focus on exports and building of infrastructure in the area housing industrial units.
Besides, the BoA will apply the new norms on a case-by-case basis, depending on the location of the zone and the projected number of employees. Earlier, due to the differences between the commerce and finance ministries on the easing of such norms, the government had asked Delhi Development Authority (DDA) for its expert opinion to help in arriving at a consensus.
As per the suggestions of the DDA, the overall ceilings in each category will be revised upwards in proportion with the available area of land and the floor area ratio as well as the norms prescribed by the local town planning authorities.
The ceiling on social amenities has been causing problems to SEZ developers. For instance, an IT/ITeS SEZ, with a minimum area of 10 hectares, could allocate only...
10,000 square metres (sq m) for housing and 1,000 sq m for office space. Since most IT/ITeS SEZ have around 15,000-20,000 employees, they would need much more floor area than these limits.
The scene was no different for sector specific (with a minimum area of 100 hectares) and multi-product SEZs (minimum area of 1,000 hectares). While sector specific SEZs could allocate only a maximum of 750,000 sq.m (or 7,500 units) of housing space and 50,000 sq m of office space, for multi-product SEZs it was 25 lakh sq m (or 25,000 units) for housing and 200,000 sq m for office space.
“If all the employees of SEZ were to be settled inside the zone, then the permitted floor area for housing and other facilities should be much higher. These ceilings on the number and size of social amenities are limiting factors. Many employees who cannot be accommodated inside the zone will settle outside, creating a burden on the existing housing and infrastructure facilities,” a representative of the Export Promotion Council for EOUs and SEZs Panel for SEZ Developers.
The commerce ministry had said the curbs on social amenities would prevent developers from fully using the permissible construction on the SEZ land as per individual state policies. More over, such restrictions would also result in higher prices of the available built up space, the ministry had said.
But the revenue department had objected to allowing developers to build social amenities (like entertainment and recreational facilities, shopping malls, hotels, business and residential complexes, hospitals and educational institutions) in excess of what is permitted. The department had said removal of these restrictions would lead to increased real estate development activities in SEZs, which are mainly meant for boosting exports and generating employment....
disclose info on processing fees
Mumbai, Nov. 26
The Reserve Bank of India has asked all banks/ financial institutions to ensure that all information relating to charges/fees for processing are always disclosed in the loan application forms.
Further, banks must inform ‘all-in-cost’ to the customer to enable him compare the rates charged with other sources of finance.
Under its guidelines on ‘Fair Practices Code for Lenders — Disclosing all information relating to processing fees / charges,’ the RBI said, loan application forms should include information about the fees/charges, if any, payable for processing; the amount of such fees refundable in the case of non-acceptance of application; pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower.
The RBI’s directive comes in the wake of it coming across some banks levying, in addition to a processing fee, certain charges which are not initially disclosed to the borrower.
warrant conversion norm
NEW DELHI: Companies looking to raise funds from foreign investors by way of convertible warrants may soon be allowed to issue shares against these
instruments at any time up to 18 months, under a relaxation of rules being considered by the Reserve Bank of India (RBI). Convertible warrants are loans that are subsequently exchanged for shares on pre-agreed terms. Like an option, a warrant gives its holder or buyer the choice to purchase a fixed quantity of shares of the issuing company at an agreed price at or before a future date. The central bank had, last December, made it mandatory for companies to issue shares within 180 days of receiving money from foreign investors. Its move was aimed at plugging a loophole in foreign exchange regulations which was being misused by mainly real estate companies. RBI’s decision, however, created confusion for companies that planned to issue convertible warrants. This is because the stock market
regulator Sebi’s guidelines allowed warrants to be converted into shares in 18 months. Some companies had requested the finance ministry to clarify the rules following the RBI order. The finance ministry has written to the central bank asking it to make an exception in the case of convertible warrants, a ministry official said, adding the central bank was expected to issue a clarification. “The matter requires clarification. In fact, the government or RBI should come out with separate guidelines dealing with the issue,” said Punit Shah, executive director, tax and regulatory services for PricewaterhouseCoopers’ financial services practice. Mr Shah said clear rules on the conversion of warrants into shares were absent under current foreign direct investment (FDI) regulations or under Foreign Exchange Management Act (FEMA) rules. The RBI move was primarily aimed at plugging a loophole in the FEMA regulations being misused by real estate firms to raise funds abroad when the government’s rules clearly barred real estate companies from raising foreign debt.
guidelines for smaller exchanges
Chandigarh: The guidelines and procedures for setting up of smaller exchanges to cater the financial requirement of small and medium enterprises are being given final touches by the Sebi and are likely to be announced towards middle of December 2008 to actively provide alternate finance window.
Addressing the Assocham Conference on “Financing the Future Giants” on Wednesday in Chandigarh, T C Nair, wholetime member, Sebi said in the initial phase, three-four licences will be provided to the companies who have the net worth income of Rs100 crore.
He said the BSE and NSE have evinced their desire to set up such exchanges and the objective would be to mobilise resources from the public on the lines of the Alternate Investment Market (AIM) set up in London.
Nair further said, “The downswing in the stock market is an high opportunity for the investors and there was no reason to have panic. In last October, there were 1,100 FIIs operating in India which had raised to 1,500 FIIs in October 2008. It is true that they have withdrawn their money to meet their global requirements, yet keeping in view the strong fundamentals of the Indian economy, the stock markets are bound to be recovering sooner than later.”
However, he said the biggest threat due to global meltdown is to the small and medium enterprises whose contribution has been as high as 47% of the manufacturing sector and 8% of the progress are truly innovative.
Job Working Activity
November 27, 2008
For the purpose of "Business Auxiliary Service" the definition of section 65(19)(v) of Finance Act, 1994 (Service Tax) provides that an activity of "production or processing of goods for, or on behalf of, the client" is a taxable activity. However an activity which is amounting to manufacture within the meaning of section 2(f) of Central Excise Act, 1944 is excluded from the scope of service tax under "Business Auxiliary Service"
There is a wide confusion over applicability and taxability of job working activity because, there is wide gap in different interpretation of provisions of the provisions of service tax relating to Job working activity under Business Auxiliary Service.
It happens in generally that a principle who buys excise duty paid material (goods) and send the same to job worker for further processing. Many times the activity undertaken by the job worker is not amounting to manufacture.
In the present case the job worker was engaged in the following FBE Coating activities:
The process of FBE coating undertaken by the appellant is as under:
(a) Duty paid bars received from the customers, are cleaned in Short Blasting Machine using steel shot of abrasives.
(b) Bars are heated to around 220 to 240 C in induction heater.
(c) Epoxy powder is sprayed over the heated bars by Electrostatic Spray guns housed inside the Coating Booth.
(d) Epoxy powder on contact with hot bars melts and fuses with the shot blasted heated bar surface making a strong corrosion protection bond with bars.
(e) Bars are then cooled in a free flowing water quench tunnel.
(f) Thereafter Coated Bars are inspected to check quality of Coating and then dispatched back to the respective customers.
The FBE coated bars are returned to their customers and used in civil construction job like construction of dams, bridges, canals, channels, pipelines etc. The said coating is essentially carried out on the bars for the purpose of protecting them from corrosion.
After hearing the arguments and analyzing the provisions in details with reference to amendments made in the provisions with effect from June 2005, honorable CESTAT held that:
"…..In the present case, the appellant is a company having expertise in the FBE coating and are professional in the fields. Their services are being used by the main contractors in furtherance of providing their service to the State Road Development Corporation Ltd. As such, the said main contractors instead of themselves doing the job of epoxy coating are getting the same done from the appellants by utilizing their services.
….Having discussed the various issues in the preceding paragraphs, we hold that the appellants are liable to pay service tax in respect of the activity undertaken by them during the relevant period."
However, having the facts of the case, CESTAT gave the following reliefs to the appellant:
1 Benefit of Cenvat credit as per Cenvat Credit Rules, 2004 allowed on inputs and input services.
2 Penalty is waived by invoking the provisions of section 80
PARTNERSHIP
INTRODUCTION:
Sec.2 (d) of the Limited Liability Partnership Bill 2008 ('Bill' for short) includes the limited liability partnership registered under the Limited Liability Partnership Act in the definition of a body corporate. Chapter III of the bill provides for the incorporation of the limited liability partnership.
INCORPORATION DOCUMENT:
Sec. 11(1) provides that for incorporation of a limited liability partnership, two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation document. The incorporation document shall-
Be in a form as may be prescribed;
· State the name of the limited liability partnership;
· State the proposed business of the limited liability partnership;
· State the address of the registered office of the limited liability partnership;
· State the name and address of each of the persons who are to be partners of the limited liability partnership of incorporation;
· State the name and address of the persons who are to be designated partners of the limited liability partnership on incorporation;
· Contain such other information concerning the proposed limited liability partnership as may be prescribed.
Besides there shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto. The incorporation document is similar that of the document prescribed for the companies to be registered under the Companies Act, 1956. The Companies Act provides that the Memorandum and Articles of the Association shall be accompanied along with the incorporation document. Even though the bill provides for the limited liability partnership agreement, the same is not made compulsory to file along with the incorporation document. The partnership agreement is necessarily to be filed along with the incorporation document. The Government has to consider this aspect while giving shape this bill as an act.
NAME OF LIMITED LIABILITY PARTNERSHIP:
Every limited liability partnership shall have either the words 'limited liability partnership' or the acronym 'LLP' as the last words of its name. No limited liability partnership shall be registered by a name which, in the opinion of the Central Government is-
Undesirable; or
· Identical or too nearly resembles to that of any other partnership firm or limited liability partnership or body corporate or a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999.
As like in the Companies Act, the name is to be reserved for limited liability partnership. A person may apply in such form and manner and accompanied by such fee as may be prescribed to the Registrar for the reservation of a name set out in the application as-
The name of a proposed limited liability partnership; or
· The name to which a limited liability partnership proposes to change its name.
Upon receipt of an application and on payment of prescribed fee, the Registrar may, if he is satisfied, subject to the rules prescribed by the Central Government in the matter, that the name to be reserved is not one which may be rejected on any ground reserve the name for a period of three months from the date of intimation by the Registrar.
REGISTERED OFFICE:
Every limited liability partnership shall have a registered office to which all communications and notices may be addressed and where they shall be received. A document may be served on a limited liability partnership or a partner or designated partner thereof by sending it by post under a certificate of posting or by registered post or by any other manner, as may be prescribed, at the registered office and any other address specifically declared by the limited liability partnership for the purpose in such form and manner as may be prescribed.
DESIGNATED PARTNERS:
Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India. In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners. If the incorporation document specifies who are to be designated partners, such person shall be designated partners on incorporation, or states that each of the partners from time to time of limited liability partnership is to be designated partner, every partner shall be a designated partner.
An individual shall not become a designated partner unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed. His consent shall be filed with the Registrar by the limited liability partnership in such form and manner as may be prescribed within thirty days of his appointment. An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.
INCORPORATION:
The incorporation document shall be filed in such manner and with such fees, as may be prescribed with the Registrar or the State in which the registered office of the limited liability partnership is to be situated. The incorporation document may also be filed electronically. The Registrar under the Companies Act shall be Registrar for this purpose.
When all the requirements have been complied with the Registrar shall retain the incorporation document and register the incorporation document and give a certificate that the limited liability partnership is incorporated by the name specified therein. The Registrar may accept the statement filed along with the incorporation document as sufficient evidence that the requirements have been complied with. The certificate shall be signed by the Registrar and authenticated by his official seal. The certificate shall be conclusive evidence that the limited liability partnership is incorporated by the name specified therein.
EFFECT OF REGISTRATION:
On registration, a limited liability partnership shall by its name, be capable of-
Suing and being sued;
· Acquiring, owning, holding and developing or disposing of property, whether moveable or immovable, tangible or intangible;
· Having a common seal, if it decides to have one; and
· Doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.
CONCLUSION:
The process of incorporation of a limited liability partnership is the simplified one and the professionals may play a vital role in this work. The professionals are to be careful in making the statement which is to be attached with the incorporation document since the bill provides for punishment. The bill provides that if a person makes a statement which he knows to be false or does not believe to be true shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than ten thousand rupees but which may extend to five lakh rupees.
replacement cost
The amount it would cost to replace an asset at current prices. If the cost of replacing an asset in its current physical condition is lower than the cost of replacing the asset so as to obtain the level of services enjoyed when the asset was bought, then the asset is in poor condition and the firm would probably not want to replace it.
Wednesday, November 26, 2008
Hypothetical tax not an income
In a recent judgment involving a foreign national, the Mumbai Income Tax Tribunal has held that hypothetical tax paid by an employer on behalf of the taxpayer is not an income accruing in India and can be claimed as a deduction by the employee from the gross salary.
The assessee, Roy Marshall, was an employee of British Airways. In the computation of total income in the tax return, the assessee deducted hypothetical tax withheld by his employer from gross salary. According to the contract agreement, the company had to bear additional tax burden arising out of his services in India and the assessee would bear only that part of the tax which he would have required to pay in his home country.
During the year, the assessee’s salary income was Rs 77 lakh and the company reimbursed Rs 35 lakh towards tax liability. Total income of the assessee thus became Rs 1.12 crore and with the maximum marginal rate of 44.8 per cent, the total tax liability came to Rs 50 lakh. The company had paid Rs 35 lakh, so the balance tax liability of Rs 15 lakh was borne by the assessee.
Though the taxpayer had paid his total tax dues in India, the income-tax assessing officer held that the hypothetical tax (Rs 35 lakh) should also form a part of the salary income. This became a bone of contention as the assessee may take a hit in his home country. According to the provisions of the Double Taxation Avoidance Agreement, the person may have taken a credit of Rs 15 lakh Indian taxes paid on an income of Rs 77 lakh in his home country tax return. However, if he would have to show that his salary income was Rs 1.12 crore in India, there could have been additional tax burden on him in his home country.
The tribunal relied on the judgment on a similar case of Jaydev H Raja, wherein it was held that the hypothetical tax does not form a part of the salary income taxable in India and the appellant was justified in reducing the same from his taxable salary.
It was held by the tribunal that income arising in India in the hands of the taxpayer is the actual salary plus the incremental tax liability arising on account of the Indian assignment. The amount of hypothetical tax withheld from the salary of the taxpayer is not an income accruing to him in India.
The ruling further held that as long as tax is paid on the income accruing in India, it is not relevant if the taxpayer takes credit of Indian taxes in his home country tax return.
Accordingly, the tribunal held that no deduction was actually claimed by the assessee on account of hypo tax as otherwise misconceived by the revenue authorities and deleted the addition made on this count.
cat among the pigeons
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Commercial paper’s back
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
risk premium
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
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Monday, November 24, 2008
shoe makers turn to India
T E Narasimhan / Chennai November 24, 2008, 0:14 IST
The country's shoe making units in Tamil Nadu and Uttar Pradesh are abuzz with activity. European shoe makers, who were sourcing from China, have now turned to India. Indian units have started getting enquiries and orders from European companies, some of whom have also announced setting up their own manufacturing facility in the country.
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According to industry representatives, Chinese products, which used to be cheaper by around 10 per cent compared to Indian products, are no more cheaper due to the increase in labour costs in China. The costs of labour have risen by around 40 per cent since January 2008 in China. Implementation of the European Union (EU) anti-dumping duty and Chinese currency Yuan appreciating against the US dollar are other reasons stated.
This tilt towards is already reflecting. According to statistics for the first seven months of the current year, European imports of footwear from China fell by 1.7 per cent compared to the same period last year, whereas from India, it rose by 3.5 per cent.
During 2007-08, footwear exports from India was valued at $1,475 million (around Rs 7,300 crore) compared to $1,236.91 million (around Rs 6,150 crore) in the same period last year, an increase of 19 per cent.
Some of the footwear majors now looking at India include Nike, Addidas and Puma, which are expected to route parts of their production and purchase out from China to India.
Growth-Link Overseas, the Hong Kong-based subsidiary of Taiwanese sports shoe major Feng Tay Enterprise, is planning to invest around Rs 300 crore for setting up a manufacturing facility in 275 acres at the Cheyyar Industrial Complex in Tamil Nadu to make Nike footwear. The unit will produce 1 million pairs of footwear every year.
A recent report quoted Herbert Hainer, president, Adidas, saying that as the wage level in China was increasing, the firm plans to transfer part of its manufacture and purchase from China to other countries.
The report added the company had sent its representatives to South East Asian countries including India, where prospects are high.
At present, around 50 per cent of adidas' products are made in China and the company has 264 factories across the country.
Another of Europe's leading shoe brand Fly Flot is also planning to set up a manufacturing plant in India along with Mauritius-based Pavers Foresight Smart Ventures. The new plant is coming up in Tamil Nadu and will produce 1 million pairs in the first phase, with the possibility of raising this to 2 million pairs by 2012.
According to a representative of an Italy-based company, labour costs increased by 40 per cent to an average of $160 (around Rs 8,000) a month. But, in India, it is around Rs 3,500 to Rs 4,000. He noted a recent survey by the China Leather Industry Association (CLIA) estimates labour costs will increase by another 20 per cent
Debt fund norms to be overhauled
Debt fund norms to be overhauled
Joydeep Ghosh & Priya Nadkarni / Mumbai November 24, 2008, 0:07 IST
Sebi meets mutual fund body today to consider changes Fixed Maturity Plans (FMPs) may no longer be permitted to announce indicative portfolios and indicative yields to investors if the Securities and Exchange Board of India (Sebi) accepts the recommendations of the Association of Mutual Funds in India (Amfi) at a meeting here on Monday.
This is part of a package of recommendations that Amfi is making to boost investor confidence in FMPs that invest in debt and liquid and liquid- plus funds.
FMPs saw average assets under management (AAUM) fall by Rs 10,718 crore in October, the first time in the last six months.
The proposal to scrap “indicative portfolios” has arisen because investors have sometimes found deviations of as much as 80 per cent between the indicative and actual portfolios. In some cases, the entire corpus has been invested in a single instrument.
Sebi will also consider Amfi’s suggestion of a 3 to 6 per cent exit load for FMPs, a minimum tenure of three months and a faster processing of redemption payouts at transaction (T) plus five days against T+10 specified in the rules (although some smaller redemptions are processed as soon as T+1 or 2).
The draft proposal also includes a host of measures intended to reduce volatility and force fund managers to play safe by reducing the asset-liability mismatch. For instance, the Amfi committee has suggested that liquid funds, which have a maturity between one and three months, must have a minimum 30 per cent allocation to cash, collateralised borrowing and lending obligations (CBLO), bank fixed deposits, treasury bills and others — all safe and liquid instruments.
Amfi has also recommended that 30 per cent of the investment can be made in bank fixed deposits (FDs). At present, funds are allowed to invest up to 15 per cent in bank FDs, 20 per cent with board approval.
Amfi has also said the exit option should be preferred over listing FMPs because the latter does not provide the investor with liquidity. Also, the maturity-mismatch has to be contained at 10 per cent of the tenure of the instrument or one month, whichever is lower
Besides the safety of liquid fund instruments, Amfi has suggested extending their duration to a maximum of 90 days.
Amfi has also recommended that all fixed-rate instruments above three months should be marked to market. Today, all fixed rate instruments beyond six months are marked to market.
For debt funds, the valuation of the underlying papers is currently based on Crisil’s valuation matrix. Amfi has proposed outsourcing these valuations to an independent third party.
Fund managers, however, are divided over these proposals. For instance, most Amfi members felt that the practice of announcing indicative returns should continue.
Others felt some of these moves could make the funds more illiquid. “According to RBI regulations, banks can refuse the overdraft facility against their own FDs. So it doesn’t really make sense to increase the overall exposure cap to FDs,” said a debt fund manager