Business Advisor (Fortnightly inputs for professionals and executives) Volume I Part 1
October 25, 2012
o Governance and Board Diversity by Ramesh Venkataraman, CEO, CurAlea o Queries & Replies: Service tax and Income tax o The long wait for clarifications from the Service Tax Department â€“ Joseph Prabakar, Advocate, Chennai o Circular on freebies, Service Tax Order on due date o Case law updates by V. K. Subramani, Chartered Accountant, Erode Volume I Part 1 October 25, 2012
Dear readers: We are happy to announce the launch of ‘Business Advisor’ as a fortnightly online magazine to update finance, corporate governance, accounting, and tax professionals and executives on the recent developments in legislation and practice in these domains. Watch this space for the details about the experts and senior professionals who will be associating with ‘Business Advisor’ as editorial board members. For subscriptions, contact Shrinikethan, 34 Second Main Road, CIT Colony, Mylapore, Chennai 600 004. Feel free to send in your suggestions and feedback to firstname.lastname@example.org. Wishing you a productive reading! D. Murali, Editor 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 1 October 25, 2012
Governance and Board Diversity Ramesh Venkataraman Inadequate gender diversity on Indian boards has been a topic of heated discussion in recent times. A recent news item said representation of women in Indian Boards at 5% was amongst the lowest in the world. Half of the companies that form the Nifty Fifty have at least one woman director, so at the macro level all looks well as far as diversity in corporate India is concerned. However, a closer look at gender diversity in Indian Boards reveals an interesting picture. Let us look at presence of diversity before assessing its representation. Three out of In terms of four PSUs in the Nifty Fifty have women representation, directors, so the public sector is leading the women directors pack in bringing about greater gender diversity constitute 6% of at the top. This is not surprising given the focus the total director of the government on this aspect. New generation industries i.e. IT, private banks and strength of the pharma follow, where around half the Nifty Fifty companies on the Nifty Fifty have women companies overall. directors on the Board. In the case of the traditional private sector engineering-cummanufacturing companies and MNCs, only a third of the corporates on the Nifty Fifty have gender diversity on their boards. Interestingly, male domination of boards in traditional engineering companies is a global phenomenon that is changing only in recent times. In terms of representation, women directors constitute 6% of the total director strength of the Nifty Fifty companies overall. Again the PSUs lead the pack with a representation of 9%, followed by the new age businesses with 7%. The private sector manufacturing and MNC companies have a representation of 3%, not surprising given the fact that many of them do not have women directors. Interestingly, only 6 of the 50 companies have more than one woman representative on the board and Coal India with 4 women directors tops the list.
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The Nifty Fifty covers Indiaâ€™s corporate giants, some of which are well known for their good governance practices. This then begs the question if there are deep rooted issues limiting their ability to have more gender diversity on their boards? We look at some potential questions in the context of corporate governance. Is gender diversity essential for good governance? At a conceptual level, good governance requires good directors, and the objective of the corporate should be to have the best possible board irrespective of gender. However, one cannot help thinking that corporate governance would be poorer if board rooms were to remain a male preserve for reasons other than genuine non-availability of suitable women candidates for board positions.
In the last decade one has seen a concerted effort on the part of many corporates to ensure gender diversity amongst employees, for reasons of good governance and business sustainability.
In the last decade one has seen a concerted effort on the part of many corporates to ensure gender diversity amongst the employees, for reasons of good governance and business sustainability. It would be reasonable to assume that the factors influencing this trend would apply to the board of a company as well. Is there a paucity of women with the right qualifications?
A typical board member of a large corporate is a 50 plus person who has experience as a CEO or Director of another large company. It is quite likely that not many women are available who fit this requirement, given the fact that not many corporate CEOs in India are women. However, a good number of board positions are also held by professionals like Chartered Accountants, lawyers and management consultants. These are domains where women have made a mark in the last two decades. A large number of women have graduated through our IIMs have in the last 20 years. Add to this the number of women who have held high positions in our government and our central bank. Would this then mean that the availability of women who can match wits with men on corporate boards ought to be better today than say ten years back? This is a question that needs some introspection. Volume I Part 1 October 25, 2012
Can women handle board responsibility? The news item quoted at the start of this article had some interesting observations. It said women shied away from taking more important assignments and also find it difficult to balance roles such as that of a board member with the demands of their homes. These seem to raise questions about the ability of women to handle a board role effectively. We are one of the few countries in the world to have had a woman Prime Minister, and a bolder one has probably not led the country. Women bureaucrats have distinguished themselves in challenging assignments. It is quite hard to imagine that women would not have the mental toughness to handle a directorâ€™s role. And the role as an independent member of a board is not a full time job. A woman should not find it difficult to manage this with other responsibilities she may have. On the contrary, she may probably be able to devote more time to the board role than a man with a full time job. Is there a need for regulatory action? Regulatory action for increasing diversity on corporate boards can be a double-edged sword. Appointing persons to the board merely to fill a quota would be unfair to the shareholders of the company. All the more, it would be unfair to the person so appointed.
Appointing persons to the board merely to fill a quota would be unfair to the shareholders of the company. All the more, it would be unfair to the person so appointed.
Therefore regulatory action in the form of quotas has been avoided by many countries and rightfully so. However, what may be desirable is affirmative action to institute mechanisms that ensure a rigorous search is made for qualifying women candidates whenever there is a vacancy on the board, and the shareholders given a fair opportunity to promote diversity. This could be a part of the charter of the Nominations Committee. Also, a conglomerate with multiple listed companies has an opportunity to make a start by appointing women directors initially in smaller group companies. These steps could enable corporates to work towards a more sustainable and organic solution than what one would achieve through a mandate. (Ramesh Venkataraman is CEO, CurAlea Management Consultants, Consultant in Risk Management and Corporate Governance)
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Queries & Replies Service tax Payment for technical services Query: I am a paramedic attached to a hospital. I am eligible for 3% of the fee collected from the patients for the radiation treatment given in the hospital and supervised by me. I do not have any retirement benefits or provident fund contribution by the hospital as employer. Previously, I paid service tax since it was not an exempted service and I was registered in the category of ‘Business Auxiliary Service”. I understand that the mega exemption Notification No.25/2012 – ST, dated 20.06.2012 grants exemption with effect from 01.07.2012. Please clarify. Guide me on surrender of registration certificate with the service tax authorities. Reply: From the query its seems that the querist does not work under any employment contract. Since the relationship of employer-employee does not exist between the hospital and the querist, the payments have to be treated as payment for technical services. It is obvious that the employee is not eligible for superannuation benefits and PF contribution of the employer and hence the receipts do not have the character of salary. As there was no specific exemption previously, the querist had registered under the service tax in the category of ‘business auxiliary service’. However, the mega exemption notification referred in the query in item (2) covers ‘health care services by a clinical establishment, an authorized medical practitioner or para-medics’. The word clinical establishment defined in the ‘Clinical Establishments (Registration & Regulation) Act, 2010 defines clinical establishment means – (i) “a hospital, maternity home, nursing home, dispensary, clinic, sanatorium or an institution by whatever name called that offers services, facilities requiring diagnosis, treatment or care of illness, injury, deformity, abnormality or pregnancy in any recognized system of medicine established and administered or maintained by any person or body of persons whether incorporated or not; or (ii) a place established by an independent entity or part of an establishment referred to in sub-clause (i), in connection with the diagnosis Volume I Part 1 October 25, 2012
or treatment of diseases where pathological, bacteriological, genetic, radiological, chemical, biological investigations or other diagnostic or investigative services with the aid of laboratory or other medical equipment, are usually carried on, established and administered or maintained by any person or body of persons, whether incorporated or not, and shall include a clinical establishment owned, controlled or managed by â€“ (a)
the Government or a department of the Government;
a trust, whether public or private;
(c) a corporation (including a society) registered under a Central, Provincial or State Act, whether or not owned by the Government; (d)
a local authority; and
a single doctor,
but does not include the clinical establishments owned, controlled or managed by the Armed Forces constituted under Army Act, 1950, the Air Force Act, 1950 and the Navy Act, 1957â€?. In view of the above, radiological treatment includes radiology and nuclear radiation. The amount received from the hospital by the querist for the radiation treatment administered to the patients is exempt from service tax w.e.f. 01.07.2012. The querist is advised to intimate the fact of exemption given in the notification to the Superintendent of Central Excise with whom he is registered and after filing the return for the period upto 30th June, 2012 he can surrender the registration by communicating appropriately.
Income-tax Discontinued business Query: A partnership firm having unabsorbed depreciation of Rs.30 lakhs relating to the assessment year 2011-12 has discontinued the business during the financial year 2012-13. The partners of the firm decided to dispose off all the fixed assets (all depreciable) which would result in shortterm capital gain of Rs.35 lakhs. The partners propose to set off the brought forward unabsorbed depreciation against the said short-term capital gain. Is it possible? Is there any other tax efficient mode by which the disposal is possible? Reply: The partners have discontinued the business and they are eligible to revive the business or any other business (if the deed of partnership permits Volume I Part 1 October 25, 2012
the same) at a later date. Regardless of such discontinuation or dissolution of partnership or firm, the query is answered. The unabsorbed depreciation of the firm would become the current year depreciation by virtue of section 32(2) of the Act. To quote “where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years”. (emphasis supplied). Therefore, the unabsorbed depreciation becoming current depreciation is eligible for set off against any other head of income. The short-term capital gain of Rs.35 lakhs would be scaled down by set off of brought forward depreciation of the earlier year and only the resultant Rs.5 lakhs would be chargeable to tax in the hands of the firm on the assumption that the firm does not have any other income for the financial year 2012-13. With regard to a superior tax efficient strategy, it is possible that the partnership firm go in for slump sale envisaged in section 50B of the Act. The condition is “transfer of one or more undertaking for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales”. If the depreciable assets sold could fit in to the term “undertaking” and has been in operation for more than three years before the date of transfer, the capital gain would obtain the character of ‘long-term capital gain’ which is eligible for concessional rate of tax at 20% plus cess. Charitable trust Query: Sir, I want to start a charitable trust with the objects such as advising the business entities on various strategies for sustaining growth. The surplus of the activity however will be redeployed in the same activity and no amount would be withdrawn for personal use by the trustees. Can you please elucidate on the precautions to be taken and the conditions to be satisfied for availing tax concessions?
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Reply: A charitable trust can either be wholly religious or wholly charitable. It cannot be partly religious and partly charitable. You have stated that the object of the trust primarily is to advise the business entities for growth. The term ‘charitable purpose’ defined in section 2(15) is worth a reference. “Charitable purpose includes relief of the poor, education, medial relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility”. (Emphasis supplied). The proposed activity of the trust viz. helping business entities for sustaining growth would fall in the category of ‘advancement of general public utility’. The proviso to section 2(15) says ‘the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”. The further proviso says that the first proviso (mentioned above) will not apply if the aggregate value of receipts from the activities referred to therein is Rs.25 lakhs or less in the previous year. Therefore, in spite of your activity falling in the category of “any other object of general public utility” you are eligible for availing the status of a charitable trust so long as your aggregate receipt does not exceed Rs.25 lakhs. With regard to availing tax concession in respect of the surplus generated from the activity, you may note that you can form either a charitable trust by a declaration in writing and register the same or you may prefer to register as a society under the appropriate state Act dealing with establishment and management of societies. The following conditions may be kept in mind by the trust in order to be eligible for registration under section 12A which is the gateway for availing tax exemption at present: 1. The registration will be granted from the first day of financial year in which the application is filed or the date of creation of the trust whichever is later. Volume I Part 1 October 25, 2012
2. Certified true copy of the Trust Deed / Memorandum of Association / Bye-laws / Accounts for the last three years are to be filed. In the case of new trust, documents and accounts from the date of inception is to be filed in duplicate. 3. There must be a clear provision as to investment of funds of Trust / Society/ Institution to be in accordance with the provisions of Section 13(1)(d) read with section 11(5) of the Income-tax Act. 4. There must be a clause to the effect that the Trust/Society/Institution formed shall be irrevocable. 5. The Trust Deed / Memorandum of Association / Bye-laws must state that the accounts of the Trust / Society /Institution will be maintained regularly and the accounts will be audited by a qualified Auditor every year. 6. There should be a specific clause in the Trust Deed / Bye-laws that the income and funds of the Trust /society/Institution will be solely utilized towards the objects and no portion of it will be utilized for payment to Trustees/ Members by way of profit, interest, dividends etc,. 7. The Trust Deed / Memorandum of Association / Bye-laws must specify the mode of disbursement of assets in the event of dissolution or winding up of Trust/ Society/Institution. There should be a specific clause that â€œin the event of dissolution of the Trust/Society, the assets of the Society/Trust shall be transferred to another Charitable Trust /Society having similar objects of this Trust /Society. 8. There should be a specific clause that any amendment to Trust Deed/Memorandum of Association /Byelaws will be carried out only with the approval of the Commissioner of Income-tax / DIT (Exemptions) in whose jurisdiction the trust is located. 9. There should be a specific clause that the benefits of the Trust/Society/Institution are open to all, irrespective of caste, religion sex, etc. 10. There should be a specific clause that no activities of the Trust will be carried out outside India. 11. There should be a specific clause that the Trust /Society /Institution will not carry on any activity with the intention of earning profit.
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The long wait Joseph Prabakar
o Clarifications are not prompt from the Service Tax Department. o The officials do not commit themselves by issuing clarifications since advocates tend to use the same for arguing in favour of clients. o We have, therefore, approached the High Court under Article 226 of the Constitution, to direct the Commissioner to issue clarification. o Case of an assessee who had to wait for five years. (Joseph Prabakar is Advocate, Chennai) Volume I Part 1 October 25, 2012
Inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry Circular No. 5/2012 [F. NO. 225/142/2012-ITA.II], dated 1-8-2012 It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional Prohibition on the associations from taking any Gift, Travel medical practitioners facility, Hospitality, Cash or monetary and their professional grant from the pharmaceutical and allied health sector Industries. associations from
taking any gift, travel 3. Section 37(1) of Income Tax Act provides facility, hospitality, for deduction of any revenue expenditure (other than those failing under sections 30 cash or monetary to 36) from the business Income if such grantâ€Ś expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also Volume I Part 1 October 25, 2012
taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action.
Service Tax Order on due date Order No: 3/2012, dated 15-10-2012 F.No.137/99/2011-Service Tax In exercise of the powers conferred by sub-rule(4) of rule 7 of the Service Tax Rules, 1994, the Central Board of Excise & Customs hereby extends the date of submission of the return for the period 1st April 2012 to 30th June 2012, from 25th October, 2012 to 25th November,2012. The circumstances of a special nature which have given rise to this extension of time are as follows:
ACES will start releasing the return in Form ST3 in a quarterly format, shortly before the due date of 25th October, 2012.
a) ACES will start releasing the return in Form ST3 in a quarterly format, shortly before the due date of 25th October, 2012. b) This will result in all the assesses attempting to file their returns in a short time period, which may result in problems in the computer network and delay and
inconvenience to the assesses.
Watch these videos T. N. Pandey, Chairman (1989 - 1990), Central Board of Direct Taxes (CBDT)
Volume I Part 1 October 25, 2012
Case law updates V. K. Subramani No TDS on reimbursement of expenses The assessee made payment towards reimbursement of relocation expenses paid by the payee to its employees. The payment was made as per the terms of the agreement between the payer and payee. No profit or mark-up was made and only the actual expenditure incurred by the payee was reimbursed. It was held that the payment though made to non-resident since there was no income embedded in the said amount it is not liable for deduction of tax at source. It was held that the assessee (payer) cannot be treated as an assessee in default under section 201(1). (Global E-Business Operations (P) Ltd v. Dy.CIT (2012) 76 DTR (Bang)(Trib) 106) Rejection of books not a pre-condition for reference u/s 142A For the purpose of assessment or reassessment an estimate of value of investment is required and the AO may require the Valuation Officer to estimate the value and furnish a report under section 142A. There is no condition that the books of account produced by the assessee have to be rejected first before making such reference under section 142A. In the valuation reference mention of section 50C instead of section 142A is not fatal in view of section 292B. (Bharathi Cement Corpn. (P) Ltd v. CIT (2012) 76 DTR (AP) 155) Repair and renovation of lease accommodation not perquisite When the employer incurred expenses towards repairs or renovation of leasehold residential accommodation provided to the employee no amount could be added in respect of such expenditure as perquisite. The lease deed did not provide any obligation on the employee to carry out repair and renovation to the premises. Hence, there was no obligation on the employee which was discharged by the employer as much as to attract section 17(2)(iv) of the Act. If at all the AO wanted to enhanced the perquisite value he must go by rule 3(a)(iii) of the Income-tax Rules. (Scott R.Bayman v. CIT (2012) 76 DTR (Del) 113) Property inherited by partners as legal heirs not property of the firm Where the legal heirs succeeding the estate of the diseased and constitute a partnership with other family members (not being legal heirs), the assets of Volume I Part 1 October 25, 2012
the diseased related to the business will not become assets of the firm on automatic basis. The legal heirs would inherit the assets in the status of coowners and the property in spite of being used by the firm cannot be treated as property of the firm for charging capital gains upon its transfer. The legal heirs whom so ever divested his share by way of transfer could be subjected to tax consequence in personal capacity. (Dy.CIT v. South India Pulverising Mills (2012) 76 DTR (Chennai) (TM) (Trib) 57) Payment to trust by a company will not attract section 40A(2) Payment of rent by a company in the capacity of a lessee to a trust (lessor) will not attract section 40A(2)(b) since a trust is neither a company, nor firm, nor HUF nor an AOP. Even though the directors of company were the trustees of the trust, payment of such rent will not attract section 40A(2) because in the trust the beneficiaries enjoy the benefit of the trust and the function of the trustees is to merely administer the trust as per the recitals of the trust deed. (Shanker Trading (P) Ltd v. CIT (2012) 76 DTR (Del) 40) Non-compete fee capital expenditure eligible for depreciation The assessee paid Rs.594 lakhs by way of non-compete fee on acquisition of business on slump sale basis. The assessee claimed the payment as business expenditure which the AO disallowed in toto as capital in nature. The Commissioner (Appeals) allowed write off in five instalments. The tribunal held that non-compete fee is a capital expenditure but eligible for depreciation. It remanded the case to AO for allowing depreciation. The court held that acquisition of business as a going concern and payment of non-compete fee thereon is a capital expenditure, not deductible. However, the assessee had disclosed the same in the balance sheet as â€˜intangible assetâ€™. It upheld the remand order of the tribunal for reconsidering whether the same was eligible for depreciation at 25% under section 32(1)(ii) of the Act. (Pitney Bowes India (P) Ltd v. CIT (2012) 76 DTR (Del) 34) Acquisition of asset jointly with spouse and benefit of exemption When the assessee has long-term capital gain and redeployed the amounts in investments eligible for exemption under sections 54 and 54EC it cannot be denied merely for the reason that the name of the spouse of the assessee was included as joint owner. When the money for such acquisition has not flown from the spouse and was fully funded by the assessee the eligibility for exemption could not be curtailed by attributing inclusion of spouse name. (DIT (International Taxation) v. Mrs. Jennifer Bhide (2012) 75 DTR (Kar) 402) (V. K. Subramani is Chartered Accountant, Erode) Volume I Part 1 October 25, 2012
Business Advisor On finance, accounting, controls, risk management, taxation, and moreâ€Ś
Published by: Shrinikethan, Chennai http://bit.ly/ShriMap Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk October 25, 2012 Volume I Part 1 October 25, 2012
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