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Business Advisor (Fortnightly inputs for professionals and executives) Volume I Part 5

Volume I Part 5 December 25, 2012

December 25, 2012

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Contents Residence Certificate Rules - T. N. Pandey Secretarial Standards - Dr S. Chandrasekaran Vegetables on EMI - Bimbadhar Mishra Service tax on reimbursements ultra vires - Dr Sanjiv Agarwal Cooperative governance - Dr B. Yerram Raju Corporate Social Responsibility (CSR)  Rahul Pillai, Country Manager India, Interem Year-end observations        

Manish Garg, President, Everest Industries Ltd Ankur Bhatia, Executive Director, Bird Group Abhijita Kulshrestha, Gemstone Universe Sudarshan Boosupalli, GM-India, Ruckus Wireless Inc. Bijay Agarwal, Managing Director, Salarpuria Sattva Preenand Premachandran, CEO, Hebron Properties Suraj H. Asrani, COO, Cornerstone Properties Asif Upadhye, CFO, Never Grow Up

Information - Section 80CCG Case laws update - V. K. Subramani (Cover image: Toshiba Satellite laptop keyboard) Disclaimer: "Management and editors do not necessarily agree with the views of the authors in their articles and of the readers in their letters, and of the query editors in their replies. The editors, authors and / or publishers shall not be responsible for any kind of result generated out of any action taken on the basis of suggestions, etc., made in any of the write ups, interviews contained in any part of the magazine or for any error, omission, commission to any person, whether subscriber or otherwise. The copyright of all the materials printed herein including articles, queries and replies etc., rests with the publishers". Volume I Part 5 December 25, 2012

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Tax Residence Certificate Rules are halfbaked response to treaty-shopping T. N. Pandey The object of Double Taxation Avoidance Agreements (‘Treaties’ for short) is to eliminate the double taxation of certain incomes where residents of one country derive income from a source in another country and also aim to ensure facilitating international trade and commerce, flow of investments as also equitable collection of revenue. Obviously, benefits of such treaties can legitimately be availed of by the residents of the contracting States. However, the residents of other (third) States misuse the bilateral tax treaties through treaty-shopping which is done through the establishment of base companies solely for enjoying the benefits of tax treaty rules without being a party to these.

Treaty-shoppers have made Mauritius a preferred destination for investments in India.

Indo-Mauritius tax treaty

Indo-Mauritius tax treaty is a classical example to illustrate how treaties are abused. Treatyshoppers have made Mauritius a preferred destination for investments in India. Because of loopholes in the treaty, 40% of FDI comes to India through Mauritius! One major abuse of this treaty is that a mere certificate of residence from Mauritius, which cannot be questioned by the AO, confers tax exemption in respect of capital gains! Umpteen instances from the decisions of Courts and Rulings from Authority for Advance Rulings (AAR) have demonstrated misuse of the treaty. One instance of abuse can be seen from the recent ruling of AAR in SmithKline Beecham Port Louis Ltd., in re (2012) 209 Taxman 596. The company before the AAR claimed to be a tax resident of Mauritius. It is a part of ‘G’ group of companies. Its shares are held by a Company ‘S’ of United Kingdom. The applicant holds 99.9 per cent shares of an Indian company ‘GS’ which is also a part of ‘G;’ group. The applicant proposed to transfer its shares in ‘GS’ to ‘K’ a Singapore based company. It is also a part of ‘G’ group of company. The claim before the AAR was that the income derived by the proposed sale would be capital gains and though it is taxable in India under the Income-tax Act, it is not taxable in India in view of Article 13 of Double Taxation Avoidance Convention between India and Mauritius. On these facts and issues raised, the AAR held in favour of Volume I Part 5 December 25, 2012

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applicant deciding that since there is no material to rebut the presumption of tax residency of the applicant it is eligible for claiming the benefit of the India-Mauritius DTAC by invoking section 90(2). If so, it has to be ruled that article 13 is attracted and going by paragraph 4 thereof, the capital gains is not chargeable to tax in India. CBDT’s blessings to misuse of Mauritius treaty The CBDT issued Circular No. 789 dated 13.4.2000 to the effect that wherever a certificate of residence is issued by the Mauritius authorities, such certificate is to constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the Convention (Treaty). This test of residence is also to be applied in respect of income from capital gains on sale of shares. Accordingly, FIIs, etc., which are resident in Mauritius will not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of article 13 of the Convention of tax treaty between India and Mauritius on production of Conclusiveness of a residence certificate.

certificate of residence granted by the Mauritius tax authorities is not contemplated under the treaty or under the Act.

Delhi HC’s decision

The Delhi High Court in the case of Shiva Kant Jha (2002) 256 ITR 563(Del) did not consider CBDT’s circular valid. It observed that the function of an ITO is quasi-judicial in nature. It is for the purpose of finding out as to whether an assessee can take shelter under double taxation avoidance treaty or not; he is entitled to make such enquiries, which are permissible in law. For that purpose, it not only is entitled to lift the corporate veil but also is entitled to find that not only as to whether a company is actually a resident of Mauritius or not, and or whether it is paying income-tax in Mauritius or not, or in fact the company is not a resident of Mauritius at all. Conclusiveness of a certificate of residence granted by the Mauritius tax authorities is not contemplated under the treaty or under the Act. Taking undue advantage of a scheme only for the purpose of avoidance of tax cannot but be deprecated and this treatyshopping, which amounts to abuse of Indo-Mauritius bilateral treaty, may amount to fraudulent practice and cannot be encouraged. Unfortunately, this decision of the HC was contested by Government of India and the Circular was considered valid by the apex court not on merits but on technical ground that the CBDT is competent to issue such circular. Volume I Part 5 December 25, 2012

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Nonetheless, the Delhi HC’s decision indicates that the CBDT’s circular is not well-conceived. Such abuses have been continuing for years with the Government’s connivance. However, the FM took note of (or was forced to do so by adverse criticism) such practices only in the Finance Act, 2012 when sub-sections (4) [identically worded] were introduced in sections 90 and 90A of the Income-tax Act, 1961, barring availing of tax benefits under tax treaties without Tax Residence Certificate. The objective behind such provisions has been explained in the Explanatory Memorandum to Finance Bill, 2012 thus: “….It is noticed that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even third-party residents claim unintended treaty benefits… Therefore, it is proposed to amend Section 90 and Section 90A of the Act to make submission of Tax Residency Certificate containing prescribed particulars, as a necessary but not sufficient The Delhi HC’s condition for availing benefits of the agreements decision indicates referred to in these Sections.”

that the CBDT’s

These tax provisions have been supplemented by circular is not Rules and forms by promulgation of Income Tax (12th Amendment) Rules, 2012. These changes well-conceived. prescribe the furnishing of information for getting TRCs by non-resident and resident taxpayers and are intended to prevent third-party residents from taking unintended tax benefits. These, however, leave much to be desired. Certain issues concerning issue of TRCs need deliberation (A) In case of non-residents 

Such assessees need to give information regarding their activities. Without such information, the system can be misused by fly-by-night operators as is happening in the context of Mauritius treaty. The format in which certificate is to be given (in cases of nonresidents) to ensure uniformity and completeness, should be a part of tax treaties (DTAAs). It should be clarified that the AO getting the TRC can question the information given in it and its genuineness unlike as in the case of Mauritius where the CBDT has specifically barred any enquiry by its

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 

circular no. 789. The observation concerning TRC that “it is a necessary but not sufficient condition for availing benefits of the agreements” shows that the AO is not barred from making scrutiny. Clarity needs to be brought in this regard. Whether new TRCs would differ from those that are being issued by Mauritius? There is no case for making any discrimination in this regard? In view of new TRCs CBDT’s circular No. 789 loses its relevance and needs to be withdrawn. With the scheme of new TRCs coming into operation, the Shome Committee’s recommendation that (a) GAAR provisions should not apply where circular No. 789 is applicable; and (b) that circular no. 789 should continue to apply in cases of Mauritius taxpayers, become redundant. It may be so stated.

(B) TRC in the case of residents 

The format for application for TRC and certificate should be necessary only in cases of new taxpayers, as in the case of existing taxpayers, whether a person is resident or not is already available with the AO in the return filed. The existing taxpayers should not be burdened for applying for TRCs in an elaborate way. A simple application should do.  A time limit should be fixed within which TRC would be issued after receipt of application in cases of resident taxpayers.  Application fee needs to be charged for issuing TRCs to avoid infructuous work. The Government seems to have moved halfway reluctantly. To make the scheme to succeed, it needs to be fine-tuned on the lines indicated. (T. N. Pandey is former Chairman, Central Board of Direct Taxes)

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Secretarial Standards strengthen corporate governance Dr S. Chandrasekaran The clearance of the Companies Bill by Parliament on the night of 18th December, 2012, is a welcome move. The objectives of the Bill, inter alia, are enhanced disclosure and transparency, protection of interest of all stakeholders for good corporate governance, and at the same time omitting unwanted and obsolete compliance requirements. On its enactment, it would be corporate-friendly for proper compliance and at the same time have better regulation of corporate India. It is also interesting that the Government has felt the importance of introducing nonfinancial standards besides financial standards and has given due statutory recognition to Secretarial Standards. The Act provides broad parameters for proper compliance, but companies in the absence of clear-cut information follow divergent secretarial practices and compel the Government to issue circulars and clarifications from time to time.

The basic aim of Secretarial Standards is to integrate, harmonise and standardise all diverse secretarial practices for better corporate governance.

Secretarial Standards issued by ICSI In the changing economic and commercial climate, nationally as well as internationally, modern methods of convening meetings including audio and video visuals safeguard the interest of investors’ fraternity and all stakeholders, but divergent methods and practices are being followed by corporate professionals. In recognition of the practical difficulties being faced by professional members, the Institute of Company Secretaries of India (ICSI) constituted Secretarial Standards Board with the aim of preparing secretarial standards. The basic aim is to integrate, harmonise and standardise all diverse secretarial practices for better corporate governance and it was left to the corporate sector to adopt such secretarial standards voluntarily. Many of the listed companies follow the secretarial standards in letter and spirit for better corporate governance. The Standards are common for both listed and unlisted companies. Volume I Part 5 December 25, 2012

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Acceptance of suggested standards by Government Some of the recommendations made in the Standards has been given due importance by the Government and find place in the Companies Bill. Gap between two board meetings: The Act requires to have a proper board meeting once in a quarter thereby leaving a change to corporate to have a gap between two board meetings to the extent of just a few days short of six months. However, listed companies have to ensure that the gap between two board meetings does not go beyond 120 days. Secretarial Standards suggest that there should not be a gap of more than 120 days and in the Bill the same has been introduced. Length of Notice of Board Meeting: There being no mention about the length of notice for convening a board meeting, companies follow diverse practices and small companies tend to misuse such freedom. The suggestion of 15 days notice for convening a board meeting in the Standard has been considered and now it is kept that a minimum of seven days notice is to be given for convening a board meetings. Gifts at AGM: The recommendation made in the Standard for General Meeting that no gifts shall be given at the annual general meeting has already been considered by the Government and it has issued a draft circular in this regard. Recording of general meeting proceedings: Elaborate information on preparation and maintenance of general meeting’s proceedings has been provided in the Standard. The Government has now given a thought and introduced that a Report of all Annual General Meetings has to be filed with the Registrar of Companies. This would further strengthen the investors’ confidence and at the same time available in a public portal for their information. A place in the Companies Bill The ICSI has so far come out with following ten Secretarial Standards which are recommendatory in nature: SS-1 in relation to meetings of Board of Directors; SS-2 in relation to general meetings; SS-3 in relation to dividend; SS-4 in relation to registers and records;

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SS-5 in relation to minutes; SS-6 in relation to transmission of shares and debentures; SS-7 in relation to passing of resolutions by circulation; SS-8 in relation to affixing common seal; SS-9 in relation to forfeiture of shares; SS-10 in relation to Board’s report. The Secretarial Standards Board (SSB) was constituted with the objective of formulating Secretarial Standards with eminent and senior members of the profession as its members. Besides, SSB is represented by the Ministry of Corporate Affairs, the Securities and Exchange Board of India, Chambers of Commerce and by both professional bodies viz. the Institute of Chartered Accountants of India and the Institute of Cost Accountants of India. The Government, having considered the merits of Secretarial Standards, which would further strengthen the corporate governance, has now made it mandatory for the first two standards on Meetings of Board of Directors and General Meetings for compliance by the corporate India. No doubt, such an initiative would play a positive role and sooner or later all Secretarial Standards would be made mandatory as in the case of financial standards. (Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Company Secretaries, Delhi www.cacsindia.com)

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Service tax on reimbursements is now ultra vires Dr Sanjiv Agarwal Prologue Service providers and professionals are aware that Service Tax is payable @ 12.36 per cent on the value to taxable services which implies gross amount charged by the service provider for such service provided or agreed to be provided. The valuation of services is further governed by valuation rules wherein it has been provided that if some expenses or costs are incurred by the service provider in the course of provision of service, all such costs shall be treated as a part of the consideration and be included in the value for the purpose of Service Tax. However, if such expenses are incurred as a pure agent of the service receiver, they are excluded from the value, subject to seven The words stringent conditions so much so that even where it is a case of reimbursement, in most of the cases, it may ‘such service’ not get excluded.

are important for taxation.

Recent court verdict

As a major relief to all the service providers, the Delhi High Court in Intercontinental Consultants and Technocrats Pvt Ltd v. Union of India (2012) 12 TMI 150(Delhi); TIOL – 966- HC-DEL-ST has overruled this provision stating that imposing Service Tax on reimbursements is not in the scheme of law and such a provision is ultra vires (illegal) the Finance Act, 1994 itself. In this judgment, the court has held that what is to be taxed is the gross amount charged by the service provider ‘for such service’. The words ‘such service’ are important for taxation. It is only the value of ‘such service’ which can be taxed and nothing else. The value of service, to be taxed, can, therefore, never exceed the gross amount charged by the service provider for such service provided. Thus, there can be no Service Tax on reimbursements as such reimbursements (say, travelling, accommodation etc.) as it would amount to double taxation. The court has upheld that Service Tax cannot be levied on reimbursement of expenses, that too a case of consulting engineer’s services. It would also Volume I Part 5 December 25, 2012

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imply that such reimbursements cannot be taxed in case of other service providers also which may include architects, management consultants, chartered accountants, company secretaries, cost accountants, advocates, scientists or even a beautician. The issue of imposing Service Tax on reimbursement of expenses has always been a issue of debate and dispute both in pre- and post-2006 era when Service Tax (Determination of Value) Rules, 2006, were notified, and concept of ‘pure agent’ was brought in. ‘Pure agent’ in the rules has been so defined that service provider can never be called a pure agent so long as he utilises or consumes the services, for which reimbursement is sought in rendering of output taxable service. Such a rule defeats the very purpose of reimbursement and such amounts are subjected to double taxation: one, when original service provider provides such service; and, two, when reimbursement is sought, even on actuals without any mark-up or profit element. Other relevant pronouncements

The apex court held

Earlier in CCE & C, Rajkot v. Reliance that expenses Industries Ltd (2012) 37 STT 359 (Supreme Court), where Department was in appeal, incurred on account the apex court held that expenses incurred of reimbursable on account of reimbursable expenses do not expenses do not form form part of value of taxable services. Hence part of value of reimbursable charges incurred by assessee taxable services. for travelling allowances to consulting engineers are not required to be included in the fees for services so paid by them for the purpose of Service Tax. But the Supreme Court did not hold that Rule 5(1) is ultra vires the provisions of section 67 of the Finance Act, 1994 which provides for provisions on valuation of taxable services. However, contrary to a clear stand taken by Delhi High Court and Supreme Court, a Larger Bench of CESTAT in Shri Bhagavathy Traders v. CCE (2011) 33 STT 1 (Cestat, Bangalore), earlier held that the cost of inputs or input services which go into the manufacture or output services cannot be considered as reimbursements for service provider. The reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods. Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service Volume I Part 5 December 25, 2012

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provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. The claim for reimbursement towards rent for premises, telephone charges, stationery charges, etc., amounts to a claim by the service providers that they can render such services in vacuum. What are cost for inputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses. In such cases, effectively, double taxation takes place as in the first place, the original service provider charges tax and then when reimbursement is claimed, even without any margin or profit on actuals only, then also Service Tax is leviable. This interpretation is a major relief to the service providers but it may be short-lived as the Government is most likely to challenge the same. Epilogue Now that the Delhi High Court has announced its judgment, the ball lies in the court of the Government of India. Since this judgment is likely to have a major impact on Revenue and will also unsettle the settled position on interpretation of law on reimbursement of expenses, it will create a lot of confusion in the minds of assessees as well as service providers. The judgment is most likely to be appealed against and may also get stayed. If not or if it takes time, the Government has one more weapon in its armoury; i.e., to amend the law in the ensuing Budget and it may be pleased to do so retrospectively for which it is known for. (Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Chartered Accountants, Jaipur www.ascoca.org)

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Cooperative governance Dr B. Yerram Raju The Constitution 97th Amendment Act 2012, one of the very progressive legislations of the UPA Government, aims to correct mis-governance of cooperative societies in the country, among other important provisions, at a time when speaking of good governance is akin to smelling jasmine in fish and fowl market. The Act itself specified that the States shall amend their respective cooperative Acts before February 14, 2013, one year from the date of notification of the Act in line with the provisions of this Act. If the States do not amend their Acts as above, the 97th Amendment Act shall govern the State Cooperatives. Article 19(4) defined Cooperative Society as one that is promoted, managed and controlled by members. This would mean that the control of the Cooperative Societies to whatever extent it rested with the Registrar of the Cooperative Societies shall be unconstitutional. All such provisions in the existing Acts shall be removed from the modified Acts. It also specified in section 243ZO that such member to participate in elections should be actively availing the services of the Society and should be attending its meetings with certain regularity. This called for defining the Active Member in the new Act of the States. This Act under article 243ZK also specified that the States shall also set up a State Election Authority to conduct elections to the Cooperative Societies in the State and these should be conducted once every five years. If the State Government so chooses, it can entrust the responsibility to the State Election Commission, but with specific mention in the newly amended Cooperative Act. It has also mentioned that such elections should be conducted in a manner that the new Board should assume charge immediately after the first Board concludes its term. There are around six lakh cooperatives in the country with estimated 23 million members. It has become a habit with the States conducting such elections irrespective of the party in power to go in for enrolment of members just before elections as anybody paying a small share capital of ten rupees can become a member. To prevent such malpractice the Act, in section 243ZO, specifies the eligibility of members who can participate in voting.

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The Act clearly defines Board as the ‘Board of Directors or the Governing Body of the Society, or whatever name called, to which the direction and control of the management of the affairs of a society is entrusted.’ There is brazen violation of the Constitution by even the UPA-ruled State like Andhra Pradesh. The 97th Constitution Amendment Act 2012 dealing with Cooperative legal reforms and governance statutorily seeks a State Election Authority to conduct elections to cooperatives and the States are to carry out all the amendments required before February 14, 2013. The State that has been postponing elections to cooperatives for the last two years announced them hurriedly to have the last laugh on their subversive methods of winning the elections. The new Act would not allow non-active members to cast their vote. The ruling party is afraid of losing hold on the cooperative societies that hitherto formed the bedrock of State politics. States like Tamil Nadu and Karnataka issued ordinances repeating the Central Act that were returned promptly. The Board shall have maximum 21 members and provided for reservation of SC/ST and women not exceeding three provided the Society base itself The new Act does not have such constituency. General Body has been given supreme authority thus conferring would not allow autonomy in the Society. The rights of members non-active have also been defined along with the information members to the society should provide to the members and the cast their vote. regulator. The Board shall have three independent professional directors but would not have voting rights. These directors should submit to the General Body their statement of assets and liabilities and shall not be defaulters to the society in terms of their obligations. No Board can be superseded by the Government for more than six months with the exception of cooperative banks where the supersession can be for one year under the direction of the RBI. Governance of cooperatives through this Act provides for better participation in its management and control and has prospect of superior governance over the existing Companies, where the shareholders of the Company have to understand the company only from their half-yearly and annual reports. Cooperatives as body corporate managed and controlled by members could compete on their own terms effectively with other forms of business organisations. (Dr B. Yerram Raju is Regional Director, PRMIA-Hyderabad www.prmia.org) Volume I Part 5 December 25, 2012

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Corporate Social Responsibility (CSR): Business leader’s views Interem Rahul Pillai, Country Manager India Save the Children India (STCI), located in Sarai Kale Khan, New Delhi, was established eight years ago. It has grown from a handful of children to 525 children and women who benefit from STCI. This NGO provides preschool, computer literacy, academic assistance, vocational training, health/ nutritional education, anti-trafficking and community awareness. The American Women Association (AWA) has been sponsoring the Christmas party in total or in partnership with other organisations for the past six years. The party has grown to be the highlight of the year for the children and women of STCI. Over the years, gifts have been household goods, toys, sweaters, jackets, school-bags and ladies handbags. There have been many wonderful volunteers, assisting with gift-giving and playing Santa (even an Ambassador’s son). The Christmas party is held in a Hindu Temple for the benefit of a predominantly Muslim community, sharing a Christian Holiday. It is a unique and wonderful gathering that celebrates the true essence of the season, peace and goodwill to all. Transporting 525 gifts usually entailed a well-coordinated caravan of cars. This year, the NGO was blessed with a helping hand from Interem. The Interem team helped to load, transport and unload 36 boxes filled with gifts absolutely free of cost. (Interem is a part of the Freight Systems Group, a Dubai-based MNC with business interests in shipping, freight forwarding, supply chain, warehousing, BPO and relocation services, with presence in 18 countries and a turnover exceeding $350 million.)

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Year-end observations Building solutions Manish Garg, President, Everest Industries Ltd How has been 2012 for the industry/ sector/ domain – what has changed during the year and also what has not, both in tune and contrary to expectations? The year 2012 was a mixed lot for the Indian building solution; domestic business did well, and private sector demand remained robust. However, slowdown in infrastructure projects affected the market a little bit. We at Everest Industries Ltd are a building solutions company. Our order bookings went up by 25% as compared to previous year, and sales went up by about 10%, the progress has been heartening on account of repeat business from our major customers. We have done various projects during last one year, such as a 5-storey building for IIT in Mumbai, 60,000 sq ft.; a manufacturing facility for Parle Agro, in Banaras, 1,20,000 sq ft.; a factory for a German multinational in filter business Mann and Hummel Filters at Bawal, Haryana, 95,000 sq ft.; buildings for Ranbaxy, Wockhardt, Godrej, Cadbury, Jeumont, Kalpana Industries; actually we completed over 200 projects last year. Acute shortage of trained manpower for design and execution is a big challenge, everyone wants readymade engineers, no one is interested in creating them. Everest is doing a lot in this field by training raw talent under its unique GET/ DET programme wherein fresh engineers go through a rigorous classroom and practical training in the concerned domain, before being absorbed as engineers. Outlook for 2013 in the specific industry/ sector/ domain, with reasoning. Our target is to double our business in next one year, and we plan to achieve this through organic growth, better utilisation of our capacities, and increase in productivity. We also are working upon to increase our penetration in the market place to be deepest penetrated. We are starting a roofing factory in Orissa which will be the biggest in the Eastern zone.

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Aviation Ankur Bhatia, Executive Director, Bird Group – and Chairman of CII’s Core Committee on growth potential of civil aviation and airports The year 2012 saw Indian aviation industry going through some prominent challenges, which hindered its projected growth. The downfall of Kingfisher Airlines has left a negative impact on the Indian aviation industry. Additionally, the increasing oil prices, decline in passenger traffic, and liquidity constraints, have completely jeopardised the economics of some airlines and continued to strain and drain the limited financial resources of the airlines. To address the concerns surrounding the operating viability of Indian carriers, the Government has initiated a series of measures including FDI in aviation, direct import of ATF, lifting the freeze on international expansions of private airlines and financial assistance to the national carrier. Looking at these changes, 2013 looks bright, as growth is projected with the increase expected in the passenger demand and traffic. Further with the FDI coming, the Indian aviation sector is capable of growing 120-130 per cent as more international carriers will look to invest in domestic airlines. Therefore, there is an urgent need to have a strong regional infrastructure, as foreign airlines will look at a strong infrastructure base first, before investing.

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Gems and jewellery Abhijita Kulshrestha, Senior Gemmologist and Consultant, Gemstone Universe The gems and jewellery industry has definitely been affected by the economic downturn and the emergence of better business environment elsewhere (read China), where there is a decline of 13.19 per cent in exports as revealed by GJEPC. However, the industry is hopeful about the coming year. While the ‘plain vanilla’ yellow gold and diamonds continue their scintillating hypnotic grip on the Indian consumer psyche, the Indian markets are fast growing adventurous about experimenting with coloured gemstones. Precious gems are fast emerging as the new fashion statement as well as an attractive avenue of investment. When the stocks, bullion, dollar, commodities‌all continue to remain uninspiring, precious gemstones are fast emerging as the sound and solid investment option. The industry is now looking at greater interest from investors rather than just retail sales.

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Enterprise IT Sudarshan Boosupalli, GM-India & SAARC Operations, Ruckus Wireless How has been 2012 for the enterprise IT space – what has changed during the year, and also what has not, both in tune and contrary to expectations? In 2012, the adoption of tablets and smartphones continued to grow at a fast pace making way for the players of those segments, but IT managers are no longer able to stop the mobile devices being used in their corporate wireless networks. The demand for BYOD (bringyour-own-device) intensified across all enterprises; it became a top priority for enterprise to embrace both staff and visitors. For successful implementation of BYOD, the wireless infrastructure must be ready to handle the unique challenges of a mobile environment – secure, easy on-boarding, and offering IT managers the visibilities of these devices. Most important of all, their wireless networks must be able to handle 2x - 3x the device density. Outlook for 2013, in the enterprise IT space, with reasoning. As a part of the technologicallyprogressive users are constantly on the go, there is a strong need to manage the multiple mobile devices. In 2013, the focus would be on management solutions for mobile device. What remains unchanged is the need to have pervasive performance – a combination of intelligence features that help IT managers to automatically optimise their wireless networks to offer super reliable, consistent performance all the time. Ruckus’ BeamFlex has been the proven choice in many of today’s largest and most complicated wireless networks in many major universities, hotels, hospitals and retail outlets across India.

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Real estate Bijay Agarwal, Managing Director, Salarpuria Sattva Group How was the year 2012 for the real estate industry? The growth of the real estate sector in Bangalore has been good this year. There was an overall appreciation of 10-12% in the real estate market which was very realistic. Bangalore has today evolved into a mature real estate market. Residential property sales in Bangalore, compared to other cities in the South have been stable and consistent this year. It was genuine demand from owner occupiers which made the market very healthy. What are your expectations from the year 2013? The real estate market will continue to grow in 2013. We expect a rise in prices of up to 15%; however, it is in 2014 that we expect the market to be bullish. Salarpuria Sattva has up to 30 million sq ft space in different stages of development in Bangalore, Hyderabad, Vizag, Pune, Kolkata, Jaipur, Goa and Chennai. In Bangalore we have three new residential projects that will be launched in 2013. We are also focused on Hyderabad where we have just launched a 1.6 million sq ft mixed-use development with the work, live and play concept. Preenand Premachandran, CEO, Hebron Properties How was the year 2012 for the real estate industry? The year 2012 was a good year for North and East Bangalore with the growth being largely driven by the Bangalore International Airport and the IT sector respectively. These areas are also seeing a good growth in terms of commercial, retail, and social infrastructure. There was a good growth in real estate resulting from the investments in IT projects and the Aerospace SEZ, which the government plans to set up in the next few years. North and East Bangalore have been witnessing increased real estate activity over the past few years and with Volume I Part 5 December 25, 2012

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residential projects booming in these areas, retail interests will also perk up here. What are your expectations from the year 2013? Bangalore will continue to retain its sheen in the year 2012 in the real estate domain, thanks to the good potential that it offers for investors in terms of appreciation. Hebbal would see at least 20-30 per cent appreciation in property values. Another area to watch out for is Old Madras Road, where a lot of projects are now coming up. In 2013, we could see property prices appreciating by 20 per cent in this location. Similarly, Sarjapur Road and Whitefield too would see good appreciation and growth thanks to their proximity to the IT hub. Over the next three years, we can expect a 100 per cent growth in capital appreciation. The mid-scale apartment projects will continue to be the driver in 2013 too. Suraj H. Asrani, COO, Cornerstone Properties How was the year 2012 for the real estate industry? The passing year (2012) has seen Bangalore emerge as the most stable destination for realty across the country. Bangalore saw healthy absorption levels across commercial and residential markets with a healthy increase in capital values. In terms of geographical spread, the North, East and South East regions remained the most preferred destinations for IT, commercial and residential in Bangalore. Increased infrastructure, better connectivity and good office space absorption have seen values considerably appreciating. The city continued to be the preferred destination for IT/ITES companies, with a total absorption of around 9-9.5 million sq ft in 2012. Whitefield and the ORR have seen the maximum absorption of office space; residential demand in these areas along with Varthur and Sarjapur Road are robust and have seen successful launches and increased demand. What are your expectations from the year 2013? We expect Bangalore to retain its “preferred choice� title. This would be due to a host of positive factors like reduced interest rates, policy changes and improved infrastructure. The Cabinet approval of the PRR would be a game

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changer as access and connectivity to outlying/fringe areas would be rapid and easier. In terms of infrastructure development the projects slated to progress include the PRR, Elevated Expressway to BIAL, the High Speed Rail Link to BIAL and the Signal Free ORR Corridor. 2013 will be an exciting year for retail development. The announcement of FDI in this space would result in MNC retailers evincing closer interest in India. Bangalore has remained a preferred destination for retailers and with more brands entering the fray, we expect developers to launch larger malls with more interesting tenant mixes and as the infrastructure (Metro and PRR) expands footprints, concepts like strip malls and large format malls would find favour. The commercial real estate outlook for 2013 is optimistic, with Whitefield, Varthur, Sarjapur Road and the ORR being the preferred options for occupiers. The long-awaited go ahead to the PRR would be a defining factor in further accelerating growth in commercial realty. In terms of residential an interesting array of projects ranging from integrated townships, condominiums, villas/ villaments, affordable housing etc., have been announced with higher anticipated demand across geographies. Prices are on an upswing and the customer has access to a wider array of offerings. Another encouraging trend is the vibrant end user market. This trend would continue in 2013, and with RBI easing liquidity, we expect an exciting year ahead.

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Employee engagement and people management Asif Upadhye, CFO, Never Grow Up While the job market is blooming for the ‘right candidate,’ one of the key challenges that human resource managers have faced across industries is ‘engaging talent’ once on board. Another challenge that remains is ‘building effective and transparent’ dialogue between the core management team and everyone else. While there is no dearth of talent with the sheer number of employable ‘Gen Y’ candidates coming from colleges and B-Schools across the country, recruiting people who ‘fit the company culture’ needs to take precedence before their pedigree. Only then can we have the right task force. With a fresh batch of employees joining each year, a clear cut strategy on their career progression during their stint needs to be in place and this needs to be communicated regularly and effectively. Especially since this new and diverse breed of employees also comes with a different set of expectations as compared to the predecessors. Managing these expectations in an attempt to curb attrition seems to be one of the biggest challenges HR professionals face today. Attrition numbers in the first year or 1.5 years across companies or industries are an indicator of the amount of work that is needed in the space of active employee engagement. While companies remain open to caring for their employees and paying ‘attention’ to engagement scores, organisations need to truly start looking at employees as their greatest asset (not necessarily just a cost centre) and undertake initiatives and prove this belief on a consistent basis. This can be either by rewarding emotional intelligence or taking steps to build the right ‘top down’ culture across the company by ingraining company values while remembering that this is not a one-time task. Also see a lot of focus on the ‘softer’ aspects of building and managing teams gaining prominence in the next two years. Volume I Part 5 December 25, 2012

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Information Section 80CCG Section 80CCG was inserted by the Finance Act, 2012 to be effective from the assessment year 2013-14 onwards. The key points of the legal provision are given below: In the case of resident individuals investment in listed equity shares notified by the Central Government is eligible for deduction from gross total income. The quantum of deduction is 50% of the amount invested in such equity shares and the amount of deduction shall not exceed Rs 25,000. It is a one-time deduction for the investment made and where an assessee has claimed deduction for any assessment year, the assessee shall not be eligible for deduction under this section for any subsequent assessment year. The following conditions are to be satisfied:   

The gross total income of the assessee should not exceed Rs 10 lakh for the relevant assessment year. The assessee must be a new retail investor specified under the scheme notified by the Central Government. The investment must be in listed equity shares as specified under the scheme.  The lock-in period is three years from the date of acquisition; and  Such other condition as may be prescribed in the scheme notified by the Central Government. Where the assessee fails to comply with any condition specified above, the deduction originally allowed shall be deemed to the income of the assessee of the previous year and liable to tax for the assessment year relevant to the previous year in which the violation of condition or conditions takes place. Rajiv Gandhi Equity Savings Scheme, 2012 notified on 23.11.2012

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Case laws update: Capital gains V. K. Subramani Agricultural land beyond municipal limit In CIT v. Madhukumar .N (HUF) 78 DTR 391 (Karn) it was held that an agricultural land is not a capital asset unless it falls within the exception given in section 2(14)(iii) which covers two categories. An agricultural land within the jurisdiction of a municipality is a capital asset regardless of whether it is a notified municipality. However, where the agricultural land is situated beyond the municipal limits then, only when it is notified it is chargeable to capital gains upon transfer of the same. Where the agricultural land is situated beyond the municipal limit and such distance is not covered by the notification issued by the Central Government the transfer of agricultural land is not liable to tax. Capital gain for charitable trusts A wholly charitable entity eligible for the benefits of section 11 always faces the dilemma of deciding whether the capital gain is chargeable to tax or not. Where the capital asset say, cost Rs 2 lakh is sold for Rs 5 lakh there will be a resultant capital gain of Rs 3 lakh. This capital gain would be eligible for tax relief to the extent the sale consideration is deployed towards acquisition of yet another capital asset by the institution. For example, if the trust given above deploys Rs 4 lakh in acquiring a capital asset, the excess of the amount utilised over the cost of the transferred asset is eligible for tax relief. Thus the excess of Rs 2 lakh more than the cost of the originally transferred capital asset deployed in new asset acquisition is exempt from tax and the balance of Rs 1 lakh is only chargeable to tax. A charitable organisation even if keeps the sale consideration in the form of fixed deposit in a bank it is eligible for tax relief since the fixed deposit is to be treated as capital asset as per Circular No.883 dated 24.09.1995. A further liberal interpretation could be found in Asst. DIT v. Murugappa Chettiar Trust (303 ITR 360 (Mad)) where it was held that amount lying in current account satisfies the requirement of section 11(5)(iii) and hence the capital gain parked in current account is also eligible for tax relief. Splitting of consideration on sale of building A building when transferred is chargeable to tax as capital gain. When such building was owned for more than 36 months before the date of transfer it is Volume I Part 5 December 25, 2012

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taxable as long-term capital gain. A building could be a depreciable asset (example factory building) or a capital asset simpliciter say a residential building. However, the land beneath the building is not a depreciable asset as held by the apex court in CIT v. Alps Theatre 65 ITR 377 and hence when transferred it is either short-term or long-term capital asset. Section 50 meant for depreciable assets will not apply to capital gain arising from transfer of land. Reference could be made to CIT v. I. K. International (P) Ltd 72 DTR 70 (Del.). While transferring a building it is possible to split the consideration attributable to land and a portion attributable to a building to optimise the capital gains tax. Such splitting of consideration could be found in CIT v. Dr D. L. Ramachandra Rao 236 ITR 51. Section 50C for stock in trade When a capital asset being a land or building or both is transferred the sale consideration would be compared with the value adopted by stamp valuation authority for the purpose of computing capital gains. If the stamp valuation authority fixes the value which is higher than the value disclosed in the conveyance deed, the taxpayer can contest the valuation and a reference could be made to other authorities of the State government for fixing the value. Where such value is not contested before the valuation authority the taxpayer can contest the value for income-tax assessment before the Assessing Officer. On such occasion, the Assessing Officer will make a reference to the departmental Valuation Officer who may fix the value more than or less than the value fixed by the stamp valuation authority. If the value fixed by the Valuation Officer is more than the value fixed by the stamp valuation authority then the value fixed by the stamp valuation authority will be adopted. If the value fixed by the valuation officer is less than the value fixed by the stamp valuation authority, then such reduced value will be adopted for capital gain computation. Since the section uses the word ‘capital asset’ an immovable property being land or building or both, if does not fall within the expression “capital asset” then it is not governed by section 50C. Thus the value adopted by valuation authority will not have any binding value for the purpose of determining the income from the transaction which is prima facie income from business. Reference could be made to CIT v. Kan Constructions & Colonizers (P) Ltd 70 DTR 169 (All). Indexation for inherited assets Where a capital asset is inherited by the taxpayer the period of holding of the previous owner is also to be included for determining the character of capital asset, viz. long-term or short-term. However, the controversy with Volume I Part 5 December 25, 2012

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regard to indexation is because of clause (iii) of the Explanation to section 48 which uses the expression ‘for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 1981, whichever is later’. The Bombay High Court in CIT v. Manjula J. Shah 68 DTR 269 has held that the indexation benefit must be given from the date in which the previous owner obtained ownership of the asset. A further liberal interpretation could be found in CIT v. Ms Janhavi S. Desai 75 DTR 1 (Bom) where the assessee inherited the property from her mother who had inherited the property from her late husband (father of the assessee). The court held though a fraction of ownership was inherited from her mother the date of indexation must relate to the date on which the original owner acquired the property and from whom the property had travelled by means of a transaction or transactions not being regarded as transfer. Residential house outside India and section 54F When a long-term capital asset is transferred and the assessee opts to invest in a residential house to avail the benefit of exemption under section 54F, the issue arises as to whether the residential house must be in India or whether could be located outside India. In Vinay Mishra v. Asst. CIT 20 ITR (Trib) 129 (Bang) the assessee sold shares and had chargeable long-term capital gains. He acquired a residential house outside India and claimed the benefit of exemption under section 54F. The tribunal held that on prima facie drafting of the section there is no requirement that the residential house must be located within India. Following the precedent in Prema P. Shah & Sanjiv P. Shah v. ITO 282 ITR (Trib) 211 (Mum) the claim of the assessee was upheld. Shifting of industrial undertaking An industrial undertaking could be shifted from an urban area to any area and in the process when the capital assets are transferred, the capital gain arising therefrom is eligible for exemption if it is utilised in acquisition of plant and machinery for re-establishing the undertaking or acquisition or construction of building for the purposes of his business. In Dy. CIT v. Enpro Finance 77 DTR 297 (Mum)(Trib) the assessee while shifting the industrial undertaking acquired a building for a business and not for reestablishing the undertaking. The claim of the assessee was that acquisition or construction of building can be for any business purpose and not necessarily for re-establishing the industrial undertaking shifted from the urban area. Volume I Part 5 December 25, 2012

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A comparative study with section 54D dealing with capital gain arising from compulsory acquisition of land and building forming part of an industrial undertaking would show that the section mandates construction or acquisition of building for the purpose of re-establishing the said undertaking or setting up of another industrial undertaking. This kind of condition is not found in section 54G(1), hence acquisition of building for any other business of the assessee on shifting of industrial undertaking is also advantageous. Excess amount received by retiring partner When a partner retires from the partnership firm and receives a sum more than the amount standing to his credit in the books of account of the firm, it is always fraught with controversy. There is a very old court decision in the case of CIT v. Raghukumar .L 141 ITR 674 (AP) which was contested with regard to its validity consequent to omission of section 47(ii). The Andhra Pradesh High Court in Chalasani Venkateswara Rao v. ITO 349 ITR 423 (AP) has held that section 45(4) meant to tax only the partnership firms and could not be applied for taxing a retiring partner even if he receives a sum more than what was standing to his credit at the time of retirement. This decision taking into account the present position of law might prove to be a shot in the arm for the taxpayers. Depreciation whether rate specific or unit specific Section 50 dealing with capital gain in respect of depreciable asset comes in the chapter ‘capital gains’ but it is chargeable to tax only in respect of taxpayers having income from business/ profession or income under the head ‘other sources’. Where a taxpayer has multiple businesses and closes down one such business, the tax implication of the transfer of depreciable assets of the closed down business unit/ division was discussed in CIT v. Ansal Properties & Infrastructure Ltd 73 DTR 131 (Del). The court held the concept of block of asset is rate specific and not unit or division specific. Even if a division is closed down but before the end of the year the assets of the block or class are acquired, any surplus in the interregnum is not to be considered. The court was categorical to hold that the opening block value and all additions during the year have to be added and transfers/ sale have to be reduced therefrom to decide the short-term capital gain or loss. Cessation of block during the year at any point of time during the year cannot be considered for the purpose of applying section 50. (V. K. Subramani is a Chartered Accountant, Erode) Volume I Part 5 December 25, 2012

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List of contributors to this issue T. N. Pandey, Former Chairman, Central Board of Direct Taxes, Noida Dr S. Chandrasekaran, Chandrasekaran Associates, Delhi V. K. Subramani, Chartered Accountant, Erode Bimbadhar Mishra, Andhra Bank, Hyderabad Dr Sanjiv Agarwal, Agarwal Sanjiv & Company, Jaipur Dr B. Yerram Raju, Regional Director, PRMIA, Hyderabad Rahul Pillai, Country Manager India, Interem Manish Garg, President, Everest Industries Ltd Bijay Agarwal, Managing Director, Salarpuria Sattva Ankur Bhatia, Executive Director, Bird Group Abhijita Kulshrestha, Gemstone Universe Sudarshan Boosupalli, GM-India, Ruckus Wireless Inc. Preenand Premachandran, CEO, Hebron Properties Suraj H. Asrani, COO, Cornerstone Properties Asif Upadhye, CFO, Never Grow Up Volume I Part 5 December 25, 2012

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Business Advisor On finance, accounting, controls, risk management, taxation, and more‌

Published by: Shrinikethan, Chennai http://bit.ly/ShriMap Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk December 25, 2012 Volume I Part 5 December 25, 2012

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Business Advisor - December 25, 2012 - Preview copy  

Residence Certificate Rules-T. N. Pandey; Secretarial Standards-S. Chandrasekaran; Cartoon-Bimbadhar Mishra; Service tax-Sanjiv Agarwal; Coo...

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