Table of Contents
1. Introduction
2. Two methods of accounting generally followed
3. Section 145 of the ACT-method of accounting
4. When accounts of an assessee cab be rejected by the AO?
5. Method of accounting and computation of profit/Loss in the case of construction contracts
6. Tribunal’s decision in the case of Ashoka Hitech Builder (P) Ltd.v. DCIT (Central) –I, Indore (2018) 172 ITD (Ind-Trib)
7. Concluding comments
1. Introduction
Section 145 of the Income Tax Act, 1961 (Act, for short) provides that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” is to be computed in accordance with the method of accounting regularly employed by the assesse. This leads to the decision as to what are the various method of accounting, which an assesse can adopt?
2. Two methods of accounting generally followed
There are two methods of accounting, which are generally prevalent mercantile and cash system. In order to further clarify the same principle, section 43(2) defines the word ‘paid’ to mean ‘actually paid or incurred’ according to the method of accounting upon the basis of which the profits or gains are computed under the head “Profits and gains of business or profession.” When books of account are maintained on the basis of mercantile system, income is taxable and expenditure is deductible on ‘due’ basis, whereas, if books of account are kept on the basis of cash system, income is taxable on ‘receipt’ basis and expenditure s deductible on payment basis. Earlier up to 31.3.1997, the assesses were permitted to follow ‘hybrid’ system of accounting, i.e. combination of both cash and mercantile system, but this is prohibited since 1.4.1997 when section 145 was substituted by new section 145 by the Finance Act, 1995.
3. Section 145 of the ACT-method of accounting
This section, for ready reference, is reproduced below:
(1)Income chargeable under the head “Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provision of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly employed by the assesse.
(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assesses or in respect of any class of income.
(3) Where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assesse, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assesse or income has not been computed in accordance with the standards notified under sub-section (2) the assessing officer may make an assessment in the manner provided in section 144.
4. When accounts of an assessee cab be rejected by the AO?
The circumstances in this regard have been stated in sub-section (3) (supra) and these are:
*When the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee; or
*Where the method of accounting provided in sub-section (1) has not been regularly followed by the asessee; or
*Income has not been computed in accordance with the Standards notified under sub-section (2)
In such circumstances, the assessing officer has been empowered to make an assessment in the manner prescribed under section 144 of the Act to the best of his assessment. In other words, he has to first record findings on the aforesaid aspects before rejecting the assessee’s method of accounting – cash or mercantile.
5. Method of accounting and computation of profit/Loss in the case of construction contracts.
The institute of Chartered Accountants of India (ICAI) has prescribed vide AS-7 two methods of revenue recognition in the case of construction contracts. These are:
If an assessee engaged in construction business follows any of the above methods for computation of his profit regularly, the same cannot be rejected by the assessing officer for making assessment of his income under the income Tax Act.
Now, the government has specified ICDS-III, which deals with construction contracts and recognises only the percentage completion method.
6. Tribunal’s decision in the case of Ashoka Hitech Builder (P) Ltd.v. DCIT (Central) –I, Indore (2018) 172 ITD (Ind-Trib)
In the background of legal position, as stated earlier the Tribunal’s decision can be examined to indicate how assessing officers, occasionally make assessments disregarding the legal position, as stated earlier, leading to proliferation of litigation unnecessary, putting the assessee to uncalled for hardship, expense and waste of time and energies, to no-one’s benefit. The facts and other relevant aspects emerging from this decision are analysed in later discussion.
(i) Facts
The assessee, whose case was before the Tribunal, was engaged in the business of purchase/Sales/development of land, real, estate and infrastructure and construction and civil work. The issue linked to the grounds raised in this appeal related to agreement dt – 01.04.2009 entered into between the assessee and M/s.JSM Devcon (P) Ltd. The assessee is the owner of 2,039 hectare of land and the same was given for development to M/s. Devcon (P) Ltd. As per the terms and conditions of the development agreement, the developer will construct various high-rise buildings on the land and in consideration for allowing the development of land, the assessee company will be entitled to 32% of the total saleable constructed area, to be constructed by the developer. It was decided that entire revenue shall be shared in the ratio of 68:32 as decided in the development agreement. On examination of the audited accounts of the assessee, it was revealed that the assessee has not reflected any revenue from sale of units, however, it was getting advance against sale from the developer from 2010-11 onwards.
(ii)The assessee’s case and AO’s response
It was submitted by the assessee during the assessment proceedings that it is consistently following project completion method and has offered the revenue for tax in the year in which sales have been effected and the sale deeds, registered. However, the assessing officer was not convinced with the submission made by the assessee and he applied the method adopted by M/s.Devcon (P) Ltd, i.e. the percentage completion method on the assessee and calculated the income of the assessee applying the ratio of 68:32 as agreed in the agreement. The assessing officer took the basis of financial data of M/s.JSM Devcon (P) Ltd., which has accounted for the revenue on the basis of percentage completion method as per the guidelines prescribed by the ICAI.
(iii)Appeal before the CIT (A)
Aggrieved assessee filed appeal before the Commissioner (Appeals) against the method and Commissioner (Appeals) confirmed the action taken by assessing officer observing as follows:
“I have gone through the assessment order, the appellant’s contentions and the audited accounts of M/s.JSM Devcon (P) Ltd. In the assessment year under consideration, the appellant company has not reflected any revenue from the operations in the profit and loss account. During the course of assessment proceedings, the appellant company, in response to the query for not recognizing revenue in the books of account, had furnished the following reasons:
(i)The company has been recognizing revenue on the basis of sales deeds executed at the time of full payment coupled with possession of the apartment.
(ii)Advance have been received from various customers on the basis of schedule given in the allotment letter, which specifies that instalment shall be paid on completion of a particular level of activity. The amount so received is liable to refund and the possession shall be given at the time of execution of the sale deed.
(iii)In the transaction of advance received from customer, there is no transfer of property as envisaged in section 2(47) of the Income Tax Act, 1961 read with section 53A of the Transfer of Property Act, 1882.
(iv)Similar type of accounting method (mercantile) has been followed by the assessee from year-to-year.
(iv)Tribunal’s decision
The Tribunal posed the issue as to whether a person is mandatorily required to adopt percentage completion method or not and then, referring to section 145 of the Act and in the background of that and facts of the case, has decided that where project completion method had been consistently followed by assessee, land owner and it had been accepted by revenue authorities in case of assessee for previous year, assessing officer was not justified in applying percentage completion method on assessee for one year on selective basis merely because it had been followed by its developer.
7. Concluding comments
Such unfettered exercise of discretion by assessing officers, as has been done by the assessing officer in the case before the Tribunal, shows making assessment on the basis of whims and fancies of the assessing officers, who are quasi-judicial authorities without regard to legal provisions. If the assessing officer wants to alter the method of accounting consistently followed by an assessee, he can not do so arbitrarily on the ground that some other assessee follows a different method for computing profit from construction contracts. He has to give proper notice in regard to what he proposes to do, give adequate opportunity to the assessee to have his say and if he does not agree with the same, reject the assessee’s contentions by a speaking order. He cannot make assessment, deviating from the method of accounting followed by the assessee for two years 2012-13 & 2013-14 merely by observing that the assessee has entered into the agreement as a joint venture for development and the method of accounting followed by the assessee for two years 2012-13 & 2013-14 merely by observing that the development and the method of accounting applied by JSM DPL is binding on the assessee also. No such requirement is prescribed either under the Income Tax Act or by ICAI. He cannot function like an autocrat in the matter of making assessments unmindful of legal requirement and discard the method of accounting regularly followed by an assessee without giving any convincing justification merely on the ground that he must switch to the method to that of his co-developer merely because he feels that he should do so.
Such haphazard and arbitrary decisions by assessing officers need to be curbed by the CBDT by suitable instructions. Recently, the DG (Vig) with the concurrence of Chairman, CBDT, has issued instructions to CIT (Appeals) to regulate their way of functioning on the lines stated, which is, in a way, interference in the functioning of CsIT(A), which the CBDT is not authorized to do, there seems to be no reason why the malfunctioning of the ITOs indicated by the case before the Triunal (supra) cannot be regulated. Hence, immediate instructions to the assessing officers seem urgently called for.
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1. Meaning of Prior Period Expenses
Prior period expense are generally those expenses which are relating to the current year in the sense they are crystalised during the year, though relating to activities of an earlier year.
For accounting purposes these are generally known as prior period items and required to be shown separately.
2. Allowability of expenditure in year of crystallization
Normally where mercantile system of accounting is followed, expenses relating to relevant year are accounted for in that year. However prior period expenses had to be allowed in subsequent years because the expenses were crystallized only in that year.
A liability though pertaining to earlier year, is said to accrue when it actually crystallises, is ascertainable and legally enforceable. Refer to, Wolkem (P) Ltd. v. CIT (1996) 54 TTJ (JP-Trib) 414, Kumar Aerosoles (P) Ltd. v.CIT (1996) 55 TTJ (Del-Trib) 385 and Sarvaraja Textiles Ltd.v. CIT (1995) 54 ITD 612 (Hyd-Trib).
In Bearingpoint Property Services (P) Ltd.v.Dy.CIT 2014 TaxPub (DT) 4064 (Bang ‘B’ – Trib) : (2014) 35 ITR (Trib) 177 (Bang ‘B’-Trib), it was held that in the light of the admitted position that the expenditure in question was wholly and exclusively for the purpose of business and that the same was genuine, the fact that the expenditure relates to an earlier period could not be a ground to deny the deduction, especially when factually crystalisation of liability during the previous year had not been disputed. Therefore, the expenses claimed by the assessee were directed to be allowed, as such these expenses were allowed though related to prior period.
Where prior period expenses on account of repair and maintenance were related to earlier years but crystallized when bills were received during current year, same were to be treated as current year’s expenses and hence allowable – Vide Dy.CIT.v.Enercon India Ltd. 2016 TaxPub (DT) 2867 (Mum ‘E’-Trib) : (2016) 48 ITR (Trib) 362 (Mum ‘E’ – Trib).
When the department was taxing prior period income, deduction of expenses, which had crystalized during the relevant previous year, should have also been allowed to the assesses. In a going concern, certain bills are received late and pertained to the business transaction and are crystalized during the relevant accounting period. These types of expenses are revenue in nature and are allowable in the previous year in which they are crystalized - Vide Dy.CIT v.Khurana Engineering Ltd. ITA No. 571 (Ahd) of 2010 (Ahd ‘D’ – Trib).
3. Expenditure incurred as continuous flow
It was a continuous process to incur expenditure and to account for in the books of account. Therefore, even though they were treated technically as prior period expenses, it related to a continuous flow of expenditure. Therefore, there was no justification in disallowing the expenditure, otherwise normally eligible for deduction – Vide Union Bank of India v. Asstt. CIT (2011) 49 SOT 32 (Mum ‘B’ – Trib) Also see, Bank of India v. Dy.CIT (2012) 139 ITD 493 (Mum ‘B’- Trib).
Where prior period expenses were debited on basis of receipts of bills and were in the nature of routine expenses duly authorized by company’s authorized body, the same could not be disallowed on the basis of tax audit report – Vide DCM Limited v. DY.CIT 2015 TaxPub (DT) 4649 (Del ‘B’ – Trib).
4. Expenditure to be disallowed where assessee failed to prove as to crystallization in current year
In Asstt.CIT v.Adani Wilmar Ltd.2014 TaxPub(DT) 3727 (Ahd ‘B’ – Trib): (2014) 64 SOT 122 (Ahd ‘B’- Trib), it was held that while upholding the disallowance of the expenses, the Commissioner (Appeals) has noted that the assessee had not submitted any evidence to prove that the expenses crystallized during the year either before assessing officer or before the Commissioner (Appeals). The statement of expenses very clearly indicated that the expenses were related to assessment year 2000-01. Therefore there was no reason to interfere with the order of the Commissioner (Appeals) disallowing the prior expenses, after offsetting the income of earlier year. Also see, Gujarat State Fertilizers and Chemicals Ltd.v.ACIT (2013) 1 ITR (Trib) – OL 540 (Ahd).
Assessee had failed to establish that the related expenses were actually crystallised during the year under consideration. Since assessee was following the mercantile system of accounting it has to establish that these liabilities pertaining to the previous year were actually crystallised during the year under consideration. Since the assessee had failed to do so the order of Commissioner (Appeals) was sustained – Vide Dy.CIT v.Cosmo Films Ltd & Ors. (2012) 13ITR (Trib) 340 (Del ‘B’-Trib): (2012) 139 ITD 628 (Del ‘B’- Trib).
Since assessee had failed in proving crystallization of prior period expenditure which included professional fee during the relevant year, assessing officer was justified in disallowing deduction claimed by assessee – Vide Adani Gas Ltd.v. ACIT 2016 TaxPub (DT) 843 (Ahd-Trib).
5. Information as regards expenses with evidence where received after closure of accounts
In State Bank of Bikaner * Jaipur v.Asstt.CIT 2014 TaxPub (DT) 4331 (Jp-Trib) : (2014) 166 TTJ (JP-Trib) 244, the assessing officer observed that as per audit report, prior period expenses had been debited to Profit and Loss Account. It was held that the genuineness of the expenses had not been doubted by the lower authorities. Thus, these expenses of previous year were allowable in respective year to which they pertained but information as regards such expenses with evidence was received by the assessee from the various branches after closing of books of account. Hence, these expenses are allowable during the year under consideration.
6. ICDS vis-à-vis prior period expenses
The notified ICDS does not provide anything on allowability of prior period expenditure. Hence, it can be presumed that the treatment of prior period expenditure shall be decided as per judicial precedents and the provisions of the Act.
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1. Introduction
In CIT v. Canon India (P) Ltd. (ITA 137/2014, 138/2014, A.Y.2006-07, 2007-08 & 2008-09, decided on 03.08.2015), the assessee being a wholly owned subsidiary of Canon Singapore Pvt. Ltd. (hereafter ‘CSPL’) started its operations in India in 1996. During the course of its business, the assessee entered into various agreements/transactions with the Canon Group of Companies. These transactions pertained to purchase and resale of Canon products such as photocopiers, printers, scanners and cameras in India. The Assessee was also engaged in software development and as a part of its business, exports software and provides software related service to other Canon Group of Companies.
2. Canon India Appeals
One of the issue in the above appeals was relating to the adding by assessing officer unutilized subsidies, to the total income of the assessee received by the Assessee from its holding company – CSPL. The assessing officer observed that the subsidies received by the Assessee became its property notwithstanding that the same had not been spent for the purpose for which they were received. And, on the aforesaid basis, the assessing officer held that the subsidies received by the Assessee were required to be treated as its income for the relevant previous year.
3. Submission by assessee
The assessee had stated before the Tribunal that is had received sum of Rs.27,10,87,594 and Rs.50,16,13,022 from CSPL during the years relevant to assessment years 2007-08 and 2008-09 respectively. It was pleaded by the assessee that these subsidies were received for meeting specific advertisements and sales promotion expenditure that had been pre-approved by CSPL. During the period of the previous year ending 31.12.2007, the assessee had utilized a sum of Rs.19,48,29,160 for advertisements and sales promotion activities and this amount had been directly reduced from the relevant expenditure. The balance amount of Rs,7,62,58,434 remaining after incurring the expenditure was reflected as “Current Liabilities” by the Assessee in its books. Out of the said sum, a further amount of Rs.39,161,177 was utilized towards advertisements during the period from January to March 2007 and this amount had been directly debited to “Current Liabilities”. According to the Assessee, the remaining amount of Rs.37,097,257 continued to be reflected as “Current Liabilities” in its books as on 31.03.2007. In the subsequent year i.e. the Previous Year relevant to the assessment year 2008-09, the Assessee received an amount of Rs.50,16,13,022, which was directly credited to the account under the head “Current Liabilities”. All expenditure incurred against the aforesaid subsidy was directly debited to the said account. The unutilized part of the total subsidy as on 31.03.2008 amounted to Rs.10,54,11,660, which continued to be reflected as Current liabilities. The Assessee further pleaded that there were some inadvertent discrepancies in the amount of unutilised subsidy as recorded in the Assessment Order.
The procedure for receipt/reimbursement of subsidies against expenditure, as explained by the assessee, was recorded in the order of the Tribunal as under:
(a)Initially the assessee forwards a proposal to CSPL for reimbursement of expenditure to be incurred for specific purpose (eg display charges of neon sign fabrication charges of neon sign, advertisement in newspapers, etc.)
(b) Once the same is approved by CSPL, the assessee prepares debit notes from time to time for receiving the advance payment. This debit note contains the details of the particular relevant expenditure to be incurred.
© Thereafter, CSPL remits the advance in lump sum with a specific direction that such money is to be spent only for the specified purpose and any amount of subsidy remaining unspent/unutilised shall be held by the assessee in trust for and on behalf of CSPL and the same shall not utilized by the assessee for any other purpose.”
4. Decision by Delhi High Court in the appeal
The judges of the Delhi High Court observed that it is not disputed by the revenue that subsidies were received by the assessee from CSPL against specific obligation to incur expenditure on specific activities and it was not open for the assessee to divert the amount for any purpose other than for which it was remitted. It was also not disputed by the revenue that assessee was accountable to CSPL for the amount received. The Tribunal had examined the relevant facts and also concluded that the unspent amount is to be held in trust on behalf of CSPL and this was also confirmed by CSPL. The assessee rightly so – credited the subsidies received to its Profit & Loss Account but reflected the same as a current liability. In view of the Assessee’s obligation to utilize the same for the specific purposes, the revenue could be recognized only on the application of the subsidy for the specified purposes. In other words, the Assessee could credit the Profit & Loss Account with the quantum of subsidy only if the corresponding expenditure was also debited to the Profit and Loss Account maintained by the Assessee. The revenue’s contention that the unutilized subsidy is required to be recognized as income of the Assessee in the year of its receipt is contrary to the matching concept, which is the substratal principle for computing income during a relevant period. It is necessary that income be recognized along with the corresponding expenditure incurred for earning the income. Thus, where an assessee follows the Accrual/Mercantile system of Accounting – as in this case – income can be recognized only when the matching expenditure is also accounted for irrespective of the cash outflow/inflow during the year. It would thus, not be correct to recognize the subsidies received for incurring specific expenditure as income without accounting for the corresponding expenditure. In the circumstances, is was held that there was no infirmity with the Tribunal’s view on the issue in question.
Facilities – Whether Commission of purpose of TDS under section 194H
1. Meaning of Commission for purpose of TDS under section194H
Section 194H provides for deduction of tax at source from any income by the way of Commission or brokerage to a resident.
Explanation (i) to section 194H explains the meaning of the term ‘Commission or brokerage. Accordingly, “Commission or Brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.
2. Nature of payment made to bank on account of utilization of credit card facilities.
Where credit card company retained commission while making payment to merchant establishment then it cannot be said that the bank acted on behalf of the merchant establishment or that even the merchant establishment conducted the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchant establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/brokerage for acting on behalf of the merchant establishment. Accordingly, there is no requirement for making TDS on the commission retained by the credit card companies:- Vide Dy.CIT v. Vah Magna Retail (P) Ltd. 2012 TaxPub(DT) 2855 (Hyd-Trib).
In Germs Paradise v. Asstt.CIT ITA No.746/Jp/2011 ITA No.841/Jp/2011 (Jp ‘A’-Trib). it was observed that there is no relationship of a principal and commission agent between the bank and assessee shop keeper. It is not the case that bank has advised the assessee to sell their goods to its customers, then he will pay the commission. It is reversed in a situation as bank issued credit cards to the credit card holders on certain fees or whatever the case may be and the card holder purchases material from the market through his credit card without making any payment and that shop keeper presents the bill to the bank against whose credit card the goods were sold and on presentation of bill as stated above the bank makes the payment. Therefore, provisions of section194H are not attracted.
Where bank made payment to dealer for sales against credit cards and deducted handling charges before making payment to assessee, the transactions were principal basis and no element of agency was involved therein, the charges thus not being in the nature of commission, no liability to TDS under section 194H arose. – Vide ITO v. The Mobile Store Ltd 2016 TaxPub (DT) 4629 (Mum-Trib).
No tax is deductible on credit card charges collected by bank and paid by assessee as said commission paid to the credit card companies cannot be considered as falling within the purview of section 194H – Vide ITO v. Hotel Leela Venture Ltd. 2016 TaxPub(DT) 2796 (Mum-Trib).
3. Recent decision in Velankani Information System Ltd.’s case
In Velankani Information System Ltd v. Dy.CIT ITA Nos. 218,283 (Bang.) of 2017 the Bangalore Bench of the Tribunal followed its earlier decision in Tata Tele Services Ltd. V. DCIT (TDS) (2013) 29 taxmann.com 261 (Bang-Trib) : 2013 TaxPub (DT) 652 (Bang-Trib) wherein the Tribunal observed that payment to banks on account of utilization of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning of section194H of the Act. The same cannot also be said to be in the nature of professional services as services rendered by Banks is neither a service specified in the section nor notifies. The CBDT by notification under section 197A of the Act vide Notification No.56/2012, dt 31.12.2012 specified that credit/debit card commission for transaction between the merchant establishment and acquirer bank need not be subject to TDS. The notification is only recognition of the position as it always prevailed and as interpreted by several decisions rendered by the different benches of ITAT. The notification cannot be the basis on which it can be said that the amount retained by the bank was in the nature of commission within the meaning of section 194-H of the Act.
The CBDT Notification No.56/2012, dt. 31.12.2012 has been suppressed by Notification No.SO 2143€, No.47/2016. Dt.17.6.2016 with certain addition but having no relevance. This notification was passed under section 197A (1F) of the Act through which exemption from TDS was granted to certain categories of payments. One of such category is “(Vii) credit card or Debit card Commission for transaction between merchant establishment and acquirer bank” and the same was effective from 1.1.2013. The assumption of assessing officer that since such exemption was not available to the Appellant during the relevant assessment year thus deduction of tax has to be done, is not correct as this notification is clarificatory in nature and not making a fresh concession.
Therefore no addition can be made on account of non-deduction of tax at source under section 194H on the Commission retained by the credit card companies.
4. Concluding remark
From the above discussion it can be concluded that payments to banks on account of utilization of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning of section 194H of the Act.
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1. Introduction:
Under the GST regime, Goods and Services Tax (GST) is leviable on supply of goods or services or both. The scope of Supply is explained under section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act). As per clause (a) of sub-section (1) of section7 of the CGST Act, the “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
The two limbs of any supply under GST are “consideration” and in the course or furtherance of
business. Where the consideration is not extant in a transaction, such a transaction does not fall within the ambit of supply. But, in certain scenarios, as elucidated in Schedule I of the CGST Act, the key element of consideration is not required to be present for treating certain activities as supply.
One such activity which has been detailed in paragraph 3 of Schedule I to the Act, according to which supply of goods:-
(a) By a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) By an agent to his principal where the agent undertakes to receive such goods on behalf of
the principal, would be regarded as supply even if made without consideration.
It may be noted that all the activities between the principal and the agent and Vice versa do not fall within the scope of the said entry. Firstly, the supply of services between the principal and the agent and vice versa is outside the ambit of the said entry, and would therefore require
“consideration” to consider it as supply and thus, be liable to GST.
Secondly, the element identified in the definition of “agent”, i.e. “supply or receipt of goods on
behalf of the principal” has been retained in this entry.
2. Agent and Principal – Defined
Clause (5) of the CGST Act defies the term “agent” to mean person, including a factor, broker,
commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by
whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.
The term is also defined under section 182 of the Indian Contract Act, 1872, according to which the “agent” is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the “principal”. As delineated in the definition, an agent can be appointed for performing any act on behalf of the principal which may or may not have the potential for representation on behalf of the principal. So, the crucial element here is the representative character of the agent which enables him to carry out activities on behalf of the principal.
The following two key elements emerge from the above definition of agent:
(a) The term “agent” is defined in terms of the various activities being carried out by the person
concerned in the principal-agent relationship; and
(b) The supply or receipt of goods or services has to be undertaken by the agent on behalf of
the principal.
From this, it can be deduced that the crucial component for covering a person within the ambit
of the term “agent” under the CGST Act is corresponding to the representative character
identified in the definition of “agent” under the Indian Contract Act, 1872.
As per clause (88) of section 2 of the CGST Act, “principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.
3. Key ingredient to determine Principal-agent relationship
The crucial factor is how to determine whether the agent is wearing the representative hat and
is supplying or receiving goods on behalf of the principal. Since in the commercial world, there
are various factors that might influence this relationship, it would be more prudent that an
objective criteria is used to determine whether a particular principal-agent relationship falls
within the ambit of the said entry or not.
Thus, the key ingredient for determining relationship under GST would be whether the invoice
for the further supply of goods on behalf of the principal is being issued by the agent or not.
Where the invoice for further supply is being issued by the agent in his name then, any provision of goods from the principal to the agent would fall within the fold of the said entry. However, it may be noted that in cases where the invoice is issued by the agent to the customer in the name
of the principal, such agent shall not fall within the ambit of Schedule I of the CGST Act.
Similarly, where the goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then further provision of the said goods by the agent to the principal
would be covered by the said entry. In other words, the crucial point is whether or not the agent has the authority to pass or receive the title of goods on behalf of the principal.
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In order to develop Indian economy and attract talented entrepreneurs, the Government of India, under the leadership of PM Narendra Modi, has started the Startup India initiative to recognize,promote and support startups.
Table of Contents
1. Incorporate your business
2. Documents to be uploaded
3. Answer whether you would like to avail tax benefits
4. Self-certify that you satisfy the following conditions
5. Get a recognition number
6. Patents, trademarks and/or design registration
7. Funding
Incorporate your business
Incorporate your business as a Private Limited Company or a Partnership firm or a Limited Liability Partnership. You have to follow the normal procedures for registration of any business like obtaining the certificate of Incorporation/Partnership registration, PAN, and other required compliances.
Register with Startup India
The business must be registered as a startup. All you need to do is log on to the Startup India website and fill-up the form with details of your business and upload certain documents.
Documents to be uploaded (in PDF format only)
a) A letter of recommendation/support
A letter of recommendation must be submitted along with the registration form. Any of the following will be valid-
A recommendation (regarding innovative nature of business) from an Incubator established in a post-graduate college in India, in a format specified by the Department of Industrial Policy and Promotion (DIPP); OR
A letter of support by an incubator, which is funded (in relation to the project) by Government of India as part of any specified scheme to promote innovation; OR
A letter of recommendation (regarding innovative nature of business), from an Incubator, recognized by the Government of India in DIPP specified format; OR
A letter of funding of not less than 20% in equity, by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network, duly registered with SEBI that endorses innovative nature of the business; OR
A letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation ;OR
A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of the business being promoted.
b) You need to upload the certificate of incorporation of your company/LLP (Registration Certificate in case of partnership)
c) A brief description of the innovative nature of your products/services.
Answer whether you would like to avail tax benefits
Startups are exempted from income tax for 3 years. Inorder to avail these benefits, they must be certified by the Inter-Ministerial Board (IMB). Start-ups recognized by DIPP, Govt. of India can now directly avail IPR related benefits without requiring any additional certification from IMB.
Self-certify that you satisfy the following conditions
You must register your new company as a Private Limited Company, Partnership firm or a Limited Liability Partnership
Your business must be incorporated/registered in India, not before 5 years.
Turnover must be less than 25 crores per year.
Innovation is a must– the business must be working towards innovating something new or significantly improving the existing used technology.
Your business must not be as a result of splitting up or reconstruction of an existing business.
Get a recognition number
On applying you will immediately get a recognition number for your startup. The certificate of recognition will be issued after the examination of all your documents.
However, be careful while uploading the documents. If on subsequent verification, it is found to be obtained that the required document is not uploaded/wrong document uploaded or a forged document has been uploaded then you shall be liable to a fine of 50% of your paid-up capital of the startup with a minimum fine of Rs. 25,000.
Patents, trademarks and/or design registration
If you need a patent for your innovation or a trademark for your business, you can easily approach any from the list of facilitators issued by the government. You will need to bear only the statutory fees thus getting an 80% reduction in fees.
Funding
In order to provide funding support, the Government has set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year). The Fund is in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.
Read more about How To Register A Startup In India.
Looking forward to starting a business? Wondering which forms a business organization is suitable for your business? We at ADCA offer a full range of Company Registration Services in Bangalore to help get your business started.
The Government has notified the effective date of implementation of TCS provisions in GST returns w.e.f. 1.10.2018 (unless extended). This requires E-commerce operators like Amazon, Flipkart, etc. to collect TCS on the Transaction made by the suppliers through their portals w.e.f. the same date. If any under reporting is found, the same would be penalized by adding to the account of the supplier. The learned authors looks at the related provisions to bring attention to them so as to avoid penal actions.
As many transactions nowadays are happening through e-commerce mode, their day to day use in life is increasing. But with the implementation of GST, selling and purchase through GST is not as easy as it was earlier. There are many boundaries and restriction while transacting through E-Commerce. We will discuss here the provisions of TCS on E-commerce Operators.
E-commerce is the buying and selling of goods and services on the internet electronically and making payment electronically or via any other mode. Section 2(44) of CGST Act defines the term ‘e-commerce’ as the supply of goods or services or both, all the traders/dealers selling goods/services online would need to get registered under GST even if their turnover is less than 20 Lakh for claiming the tax deducted by E-commerce operators.
Table of Contents
1. For E-Commerce Operator
2. For E-Commerce suppliers
3. Liability to collect TCS
4. Rates of TCS
5. Notice to the E-Commerce Operators
6. Conclusion
Firstly it is important to understand the difference between E-commerce Operators and E-Commerce Suppliers:
1. E-Commerce Operator
An entity like Amazon, Paytm-Mall, and Flipkart etc. that owns operates or manages digital platform for e-commerce. Section 2(45) of the CGST Act, defines “E-commerce operator” as any person who owns, operates or manages digital or electronic facility or platform for e-commerce.
2. E-Commerce suppliers
An entity that supplies goods or services on a digital ecommerce platform, means any entity which is supplying goods or services through E-Commerce operator and will be termed as E-Commerce Suppliers.
3. Liability to collect TCS
As per provision of section 52 of the CGST Act, every e-commerce operator, not being an agent is required to collect tax known as TCS on the net taxable value in case a supplier supplies some goods or services through its portal and the payment for that supply is collected by the e-commerce operator.
Tax is to be collected on net taxable value of goods or services supplied by other suppliers through e-commerce operator.
Tax is to be collected on net taxable value of goods or services supplied by other suppliers through e-commerce operator.
Explanation to section 52(1) clarifies that “net value of taxable suppliers” shall mean the aggregate value of taxable suppliers of goods or services or both made during any month by all registered persons through the e-commerce operator as reduced by the aggregate value of taxable supplies returned to the suppliers during the said month. Further, specified services on which ecommerce operator itself is liable to pay GST under section 9(5) is not included in the net taxable value and thus, no tax is to be collected on such amount.
4. Rates of TCS
An e-commerce operator needs to collect tax @2% (1% CGST + 1% SGST) from the supplier on the net taxable value of intra state supply of goods or services supplied through its portal.
Any dealer/traders selling goods/services online would get the payment after deduction of 2% tax. They would need to deposit the tax deducted by the 10th day of the next month.
Mr. X is a trader who sells his ready-made clothes online on Flipkart. He received an order for Rs.10,000 inclusive of tax and commission. Flipkart charges a commission of Rs.200. Flipkart would, therefore, need to deduct 2% tax (TCS) on the amount, including the money paid as commission (Rs. 200) and GST (Rs.1800 when GST @ 18%) Flipkart would thus be deducting tax for Rs.200 (2% of Rs.10000)
5. Notice to the E-Commerce Operators
A Deputy Commissioner or a person above the rank of Deputy Commissioner can issue a notice to the E-Commerce Operator asking him to furnish details regarding the volume of Goods/Services supplied, rate and value, goods still lying in godown etc.
On receiving such notice the operator is required to furnish such details within 15 working days. In case the operator fails to furnish such information within 15 days, he would be liable for penal action and penalty upto Rs.25000.
Further other relevant points can be noted out which are as follows:
6. Conclusion
Subject to above there are many other rules which are required to be followed by E-Commerce Operators. The government has notified the effective date of implementation of TCS Provisions in GST Returns with effect from 1.10.2018 (unless otherwise extended). Thus E-Commerce Operators like Snapdeal, E-bay etc. have to collect TCS on the transactions made by the suppliers through such portals w.e.f. 1.10.2018.
Further E-Commerce operators are required to timely deposit the TCS and also required to furnish monthly and annual return of TCS. Further sale entered in GSTR-1 will be compared with the report of supplies by E-Commerce operators furnished in GSTR-8. If any under reporting is found, the same will be penalized by adding to the account of the supplier.
Thus TCS provisions need to be carefully looked at as any discrepancies found may lead to penalizing actions.
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Table of Contents
1. Prologue
2. Registration
3. Input tax Credit
4. Itemised Sales
5. Slump Sale
6. Liability of companies w.r.t. order of court or Tribunal
7. Sale of Securities
1. Prologue
Corporate Restructuring through amalgamation, arrangement, mergers, acquisition and takeover has become vital to corporate strategy to day. To attain accelerated growth, corporate in India now a days resort more towards restructuring strategies. The Goods and Services Tax (GST) has been envisaged as an efficient tax system and it affects the structuring of the various operations in India. Corporate transaction in pursuance of amalgamation, arrangement, mergers, acquisition and takeover are also affected by GST. Thus, the industries are required to analyse the provisions of the GST Law and its impact on their business.
2. Registration
Registration of any business entity under the GST Law implies obtaining a unique number from the concerned tax authorities for the purpose of collecting tax on behalf of the government and to avail Input tax credit for the taxes on his inward supplies. By virtue of section 22(3) of the CGST Act, where a business carried on by a taxable person registered is transferred, the transferee or the successor would be liable to be registered with effect from such transfer or succession and he will have to obtain a fresh registration with effect from the date of such transfer or succession.
Section 22(4) states that if the business is transferred as an order of a High Court, Tribunal or otherwise pursuant to –
Sanction of scheme
Arrangement for amalgamation
De-merger of two or more companies,
The transferee would be liable to obtain registration from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal.
3. Input tax Credit
Section 18 enshrines the provisions regarding availment of input tax credit by taxable person. Section 18(3) of the CGST Act as well as rule 41 of the CGST Rules stipulates that in case of change of constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of business, the registered person would be allowed to transfer the unutilized input tax credit to transferor. In this context, the registered person is required to furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business in Form GST ITC-02 electronically on the Common Portal along with a request to transfer the unutilized input tax credit lying in his electronic credit ledger to the transferee. The transferee would accept the details so furnished by the transferor on the Common Portal and, upon such acceptance, the unutilized credit would be credited to his electronic credit ledger.
In the case of demerger, the input tax credit would be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.
4. Itemised Sales
Where assets and liabilities of a business are transferred by way of assigning a value to each item then it is called as itemized sale. Such sale involves the disposal of key or selected business assets. Under the merger and amalgamation, value of each asset is calculated separately i.e. the whole business is transferred but item wise.
Transaction of itemized sale is supposed as supply under the ambit of GST and individual asset would covered under the definition of goods as per schedule II of the CGST Act. Thus, GST would levy on itemized sale.
5. Slump Sale
Slump sale will have the same treatment as normal supply. Under the GST regime tax is payable by the registered taxable person on the supply of goods and/or services. The term ‘Supply’ is wide in its import cover all forms of supply of goods or services or both that includes sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Further, supply covers the activities to be treated as supply of goods or supply of services as referred to in Schedule II. Accordingly, transfer of business assets is supposed as supply.
The transfer of business is amounted to transfer of a part of the assets and not the whole business. Moreover, para 4© of the schedule II specifies that in case business is transferred as a going concern then it would not constitute as supply. However, in pursuance of Notification No. 12/2017 Central tax (rate) dt 28.06.2017 services, which are provided by way of transfer of a going concern as a whole or an independent part thereof, are exempted from GST. Thus, no GST would applicable on slump sale transaction as transfer of business on a going concern basis.
6. Liability of companies w.r.t. order of court or Tribunal
According to section 87 of the CGST Act, when two or more companies are amalgamated or merged in pursuance of an order of court or of Tribunal or otherwise and the order is to take effect from a date earlier to the date of the order and any two or more of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt would be included in the turnover of supply or receipt of the respective companies and they would be liable to pay tax accordingly.
Such two or more companies would be treated as distinct companies up to the date of order and the registration certificates of companies would be cancelled with effect from the date of the order.
7. Sale of Securities
In most case, the usual mode is the acquiring of company by making an offer by the transferee company to the shareholders of the transferor company to purchase their securities, in the transferor company, at a price stated for the purpose. The definition of goods as well as services under the GST regime do not cover the securities, therefore GST would not be levied on the sale of securities.
8. Summing Up
Goods and Services Tax have impact on each and every industry and business in India. Transfer of business under mergers, amalgamation and acquisitions do not attract any tax liability under GST regime, they are unlikely to impacted by indirect taxation. For calculating the Capital gains, the holding period is calculated from the date of original purchase of shares. The companies who opt for merger and acquisition, the liability to register arises on the date of transfer for transferee of a business as going concern. Further, GST Law stipulates transfer or sale of business assets can take place either as a slump sale or itemized sale. In case of change of constitution of a registered person on account of sale, merger, demerger etc, the unutilized ITC would be allowed to be transferred to transferee. Thus, GST Law brought the immense clarity on the taxability of business transfer and related aspect thereof.
Read More
1. A Simple Guide To Resolve Your GST Registration Rejected Application
2. Filing Of NIL GSTR 3B Through SMS
3. Special Economic Zones - Related Issues Under GST
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