30 November 2013

Cenvat credit was allowable to assessee even if supplier hadn't discharged its duty

Requirement of taking "reasonable steps" does not mean that assessee is required to verify from department whether duty stands paid by supplier because that would be practically impossible and would lead to transactions getting delayed; therefore, assessee is entitled to credit even if supplier has not paid duty to department

In the instant case the assessee took deemed Modvat credit benefit under Notification No. 58/97-CE(NT) on basis of invoices issued by supplier of inputs, but on verification it was found that supplier had not paid duty. The Department opined that since rule 57A(6) required the assessee to take all reasonable steps to ensure that duty had been paid, no credit could be allowed if duty had not been paid on inputs supplied.
The Supreme Court held in favour of assessee as under:
1) In this case supplier of inputs had given declaration indicating that excise duty had been paid on said inputs. Fact that supplier had not discharged duty was a lapse on part of seller; it was different and not a condition or rather a precondition postulated in Notification;
2) When there was a prescribed procedure and that had been duly followed by the assessee, it could not be said that the assessee had not taken reasonable steps as prescribed in notification;
3) Due care and caution were taken by the assessee and it was not stated by Department what further care and caution could have been taken. Requirement of "reasonable care" does not mean verification from department whether duty stands paid by supplier because that would be travelling beyond notification and practically impossible and would lead to transactions getting delayed;
4) Thus, the Assessee was entitled to deemed credit under the Notification No. 58/97-CE(NT). - Commissioner of Central Excise, Jalandhar v. Kay Kay Industries (2013) 38 taxmann.com 336 (SC)

26 November 2013

Reduction of threshold limit for mandatory e-payment of service tax to Rupees One lakh from ten lakh

Reduction of threshold limit for mandatory e-payment of service tax to Rupees One lakh from ten lakh


16/2013 - ST., Dated: November 22, 2013

In exercise of the powers conferred by sub-section (1) read with sub-section (2) of section 94 of the Finance Act, 1994 ( 32 of 1994), the Central Government hereby makes the following rules further to amend the Service Tax Rules, 1994, namely:-

1. (1) These rules may be called the Service Tax Third ( Amendment) Rules, 2013.

(2) They shall come into force on the 1 st day of January, 2014.

2. In the Service Tax Rules, 1994 , in rule 6, in sub-rule (2), in the proviso, for the words "rupees ten lakh" , the words "rupees one lakh" shall be substituted.

F.No : 137/116/2012- Service Tax

17 November 2013

CBDT SOP on Defective Returns

CBDT Issues SOP For Handling E-filed Returns With Unpaid S. A. Tax

November 14th, 2013
Further to the letter dated 22.10.2013 regarding the processing of 1.46 lakh defective returns submitted for AY 2013-14 where the self-assessment tax is unpaid, the Directorate of Income-tax (Systems) has issued a letter dated 13.11.2013 setting out a detailed Standard Operating Procedure (SOP) for handling such E-filed Returns where self assessment tax is not paid

09 November 2013

CBDT on Revenue Audit Objections

CBDT Revises Procedure For Dealing With Revenue Audit Objections

The CBDT has issued Instruction No. 16/ 2013 dated 31.10.2013 in which it has noted that despite a comprehensive procedure prescribed earlier for action at different stages of Revenue Audit objections, settlement track record is unsatisfactory and remedial action is delayed. It is also pointed out that there is a need to provide that Internal Audit should normally precede Revenue Audit. The CBDT has, therefore, decided to fine tune the procedure and strengthen the role of supervisory authorities so that quick and effective remedial action can be taken to prevent loss of revenue.

Guidelines for Appointment of Statutory Auditors in Bank-2013-14

Guidelines for Appointment of Statutory Auditors in Public Sector Banks
Based on the recommendations of a Working Group (WG) to review the norms for empanelment of statutory auditors for public sector banks and other related issues and after seeking the approval of GoI, it has been decided to revise the guidelines on appointment of statutory auditors in public sector banks with effect from the year 2013-14. The revised eligibility norms for empanelment of SCAs as prescribed by RBI in consultation with the WG have been indicated in Annex 1. The categorization/eligibility norms for empanelment of branch auditors which have been kept unchanged are indicated in Annex 2.
The guidelines/instructions relating to the selection procedure to be followed for appointment of statutory auditors in PSBs and details thereof are furnished in Annex 3

CBDT on Cyprus

Finance Ministry Notifies Cyprus For Fraud / Tax Evasion Non-Compliance

The Ministry of Finance has issued a Notification dated 1.11.2013 notifying Cyprus as a "notified jurisdictional area" u/s 94A of the Income-tax Act, 1961.
The consequences of the Notification are draconian and are broadly the following:
(i) All transactions with a person in Cyprus will have to meet the rigors of transfer pricing;
(ii) A deduction in respect of any payment made to any financial institution in Cyrus and deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus is subject to specific conditions;
(iii) Sum received from a person located in Cyprus is deemed to be the income of the assessee unless the assessee satisfactorily explains the source of such money in the hands of the payer;
(iv) Payments to persons located in Cyprus is liable for TDS at 30 per cent


Supreme Court on Sec 271(1)(c)

Voluntary disclosure does not release assessee from mischief of penal proceedings under section 271(1)(c)
MAK Data (P.) Ltd.
Commissioner of Income-tax – II
OCTOBER  30, 2013 
Under Explanation 1 to s. 271(1)(c), voluntary disclosure of concealed income does not absolve assessee of s. 271(1)(c) penalty if the assessee fails to offer an explanation which is bona fide and proves that all the material facts have been disclosed
The assessee filed a return of income for AY 2004-05 declaring an income of Rs.16 lakhs. During the course of the assessment proceedings, the AO noticed certain documents comprising of share application forms, bank statements, blank share transfer deeds etc had been impounded in the course of s. 133A survey proceedings conducted in the case of the assessee's. The AO sought specific information regarding the documents from the assessee. In reply to the show-cause notice, the assessee made an offer to surrender Rs.40.74 lakhs with a view to avoid litigation and buy peace and to make an amicable settlement of the dispute. The AO assessed the said sum of Rs.40.74 lakhs to tax and levied penalty u/s 271(1)(c) for concealment of income and not furnishing true particulars. This was upheld by the CIT(A) though the Tribunal reversed it on the ground that the surrender was without admitting any concealment. On appeal by the department, the High Court (87 DTR 172 (Del)) reversed the Tribunal on the ground that as there was absolutely no explanation by the assessee for the concealed income of Rs.40.74 lakhs, the first part of clause (A) of Explanation 1 to s. 271(1)(c) is attracted. On appeal by the assessee to the Supreme Court HELD dismissing the appeal:
(i) The Tribunal has not properly understood or appreciated the scope of Explanation 1 to s. 271(1)(c). The AO shall not be carried away by the plea of the assessee like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to s. 271(1) raises a presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise;
(ii) The assessee has only stated that he had surrendered the additional sum of Rs.40.74 lakhs with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department. The statute does not recognize those types of defences under Explanation 1 to s. 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty;
(iii) On facts, the surrender of income is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements etc have been impounded in the course of survey proceedings u/s 133A conducted in the case of the assessee's sister concern. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed the return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it is clear that the assessee had no intention to declare its true income;
(iv) It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings u/s 271 read with s. 274 of the Act;
(v) The AO has to satisfy himself whether penalty proceedings be initiated or not during the course of the assessment proceedings. He is not required to record his satisfaction in a particular manner or reduce it into writing. The scope of s. 271(1)(c) has also been elaborately discussed by the Supreme Court in UOI vs. Dharmendra Textile Processors 306 ITR 277 (SC) and CIT vs. Atul Mohan Bindal 317 ITR 1 (SC). The principle laid down by this Court has been correctly followed by the Revenue and there is no illegality in the department initiating penalty proceedings in the instant case.

VCES Case Law

We are pleased to share with you the following tax alert:
Bombay High Court in the case of M/s. Verchaska Infotech private Ltd. vs. Union of India and ors. (WRIT PETITION NO.9920 OF 2013) has given a judgement on declaration made under VCES.
In this case the petitioner has challenged the notice dated 1 October 2013 issued by the Superintendent, Group X, Anti Evasion, Service Tax II, Mumbai (respondent No.2) under Section 87(b) of the Finance Act 1994. By the impugned notice dated 1 October 2013, the respondent No.2 has directed the petitioner bankers viz. Respondent Nos 5 to 8 banks not to allow any withdrawal from the account of the petitioner to the extent of Rs.1.22 crores as the same is due to the revenue from the petitioner.
Petitioner Contention
The petitioner has contested that part of the period i.e. April 2012 to Dec 2012 is covered by VCES 2013 and that they have already applied for the same on 10.10.2013 and thus 50% of the demand for that period is payable by 31st December 2013.
Respondent Contention:
The Respondent department on the other hand has contested that the petitioner has made application under the Scheme on10 October 2013 and therefore, respondent would take a decision thereon by 10 November 2013. However, it is contended that till the petitioner's application is accepted, it cannot be exempted from its liability to pay the amount of the service tax which has admittedly not been paid. It is submitted that the petitioner has collected the service tax from its customers though the petitioner claims the benefit of Rs.60,40,684/as cenvat credit the same is subject to verification by the revenue.
Observation of the HC
The Hon'ble High Court while noting the above contentions has directed the petitioner to deposit Rs. 8 lacs being 50% of the amount payable by 31st December 2013. The High Court also for the time being allowed the contention of the petitioner that they had a total amount of Rs. 60.40 lac as cenvat credit. The High Court also directed the petitioner to file an undertaking with the department that they would be discharging the service tax liability from the month of September 2013 onwards in accordance with law. Thus, both the above observations of the Court being fulfilled, the order for releasing the attachment of bank account would be operational. The Court also made it clear that this order would be valid only till a decision is taken on the application of settlement under VCES 2013.          
The copy of the order is attached for your ready reference..

CA Ankit Kanodia|Partner - Tax & Regulatory
S.K.Kanodia & Associates|Chartered Accountants
39A, Jorapukur Square Lane(Behind Girish Park),
Room # 202, Kolkata- 700006, WB, INDIA.

L & T-Supreme Court Case

L&T judgment opens a Pandora's box
Early implementation of Goods and Services Tax can help do away with uncertainty of tax costs for the real estate sector

Recently, the larger Bench of the apex court in the case of L&T vs state of Karnataka, held that any agreement to sell immovable property entered into prior to construction would fall within the purview of the term 'works contract', allowing state governments the power to levy value-added tax (VAT) on such contracts.

This issue has been a hot debate since the Raheja Development apex court judgment in 2005, which was with respect to real estate transaction structures in south India, wherein the sale of land was separate from the sale of flats unlike in most other parts of India.

The issue was also hotly contested in recent years by the real estate sector in Maharashtra, and in 2012, the Bombay High Court ruled that such real estate transactions wherein an agreement to sell immovable property was entered into prior to construction is subject to levy of VAT as 'works contract'. In fact, in recent months, states like Haryana have sought to issue trade notices to bring under purview such agreements to sell immovable property, entered into prior to construction within the purview of VAT as 'works contract'.

The L&T judgment has considered both the above judgments in arriving at the conclusion that states have the power to levy VAT on such transactions as 'works contracts'.

In the facts of this case, the main object/substance of the tripartite agreement was to sell and convey fraction of land with a fully constructed apartment. At no point was the construction for and on behalf of the purchaser, the apartment was to be sold as an apartment and not as an aggregate of its component parts. Even in the Bombay High Court case of MCHI, the agreement for sale is an agreement to transfer immovable property with no element of works contract.

Facts and well settled arguments such as even if there is a construction activity undertaken by a developer, he does not construct on behalf of the apartment owner; the owner of the apartment has no say in conceptualising the project or any control; that the ownership of materials used in construction in such cases remain with developer; and, that the accretion to the goods happens in the hand of the developer, allude to the fact that such an activity cannot be treated as a works contract. The fact and settled arguments that in a conventional sale, property of goods gets transferred as intended by the parties while in a works contract property in goods are transferred through accretion, have all been negated in coming to the conclusion by the apex court.

The apex court observes that though the ultimate transaction between parties may be a sale of flat, it cannot be said that characteristics of works contract are not involved in such a transaction. Hence, when a contract comprises both - a works contract and transfer of immovable property - it does not denude it of its character of 'works contract' and that Article 366(29-A)(b)) contemplates situations where goods may not be transferred in the form of goods, but maybe transferred in some other form which can even be in the form of immovable property.

This apex court judgment would be a matter of intense debate for years and will have wide implications on real estate transactions across states. The judgment is a challenge for the real estate industry and would bring about a plethora of complications on the ground for an industry already reeling from a slowdown and high interest rates.

The judgment will result in VAT authorities looking for recoveries from the industry within applicable limitation period. Further, this judgment is likely to trigger new valuation issues as the court has held that only the value addition made post-execution of an 'agreement to sell' an under construction flat would be subject to levy of VAT giving rise to practical difficulties in implementing at the ground level. Like in the case of Maharashtra, a practical solution can be a composition scheme with lower tax incidence of one per cent, though this judgment can embolden states to fix higher composition rates. Further, in situations where possession has been handed over by the developers against full and final settlements, the taxes may have to borne by the developer. This highlights the challenges of a long-drawn process of litigation in the country, which can produce outcomes creating a huge amount of uncertainty of tax costs for the industry, which may not be possible to recover.

Now a sale of an apartment would suffer stamp duty and VAT, both levied by state along with service tax levied by the Centre, making such apartments more expensive. The early implementation of the goods and service tax can be the only solution to such multiplicity of taxes and we hope the polity at large is seized of its importance.

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