ADCA - Blog

Converting a Partnership Firm into a Private Limited Company

23 Jul,2018

A partnership firm cannot think of growth on large scale without converting itself into Private Limited/Public Limited Company. Conversion of Partnership firms into a Company has its own advantages such as Limited Liability, Perpetual Succession, Transferability of shares, easy access to funds etc. Corporatisation is the need of the hour. Section 366 of Companies Act, 2013 provides the Companies capable of being to registered under the Act.

As per the provision of Section 366(1) the Companies Act, 2013, “Company" includes any Partnership Firm, Limited Liability Partnership, Cooperative Society, Society or any other business entity formed under any other law for the time being in force which applies for registration under this Part.

Key benefits of conversion

1. Automatic Transfer:

All the assets and liabilities of the firm immediately before the conversion become the assets and liabilities of the company.

2. No Capital Gain Tax:

No Capital Gains tax shall be charged on transfer of property from firm to Company (upon fulfilment of certain conditions mentioned under heading "Effect of Tax on conversion" below in this Article).

3. Continuation of Brand Value:

The goodwill of the Partnership firm and its brand value is kept intact and continues to enjoy the previous success story with a better legal recognition.

4. Carry Forward and Set off Losses and Unabsorbed Depreciation:

The accumulated loss and unabsorbed depreciation of Partnership firm is deemed to be loss/ depreciation of the successor company for the previous year in which conversion was effected. Thus such loss can be carried for further eight years in the hands of the successor company.

5. No Stamp Duty:

All movable and immovable properties of the firm automatically vest in the Company. No instrument of transfer is required to be executed and hence no stamp duty is required to be paid.

Mandatory Conditions for Conversion

All partners of the partnership firm shall become shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the conversion.

The partners receive consideration only by way of allotment of shares in company and the partners share holding in the company in aggregate is 50% or more of its total voting power and continue to be as such for 5 years from the date of conversion.

Effect of tax on conversion

Capital Gains : Section 45(1) of the Income tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54Gand 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.

Before a levy on the capital gain can be imposed, it must be ensured that, such a gain has arisen from the disposal of the asset by any one of the mode, referred to in the definition of the term ‘transfer’ in Section 2(47) of the Income Tax Act, 1961.

Section 2(47) of the Income Tax Act, 1961 (‘Act’ for short) defines the term ‘transfer’ in relation to capital asset, as including-

the sale, exchange or relinquishment of the asset ; or
the extinguishment of any rights therein ; or
the compulsory acquisition thereof under any law ; or
in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment
the maturity or redemption of a zero coupon bond; or
any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Section 45(4) provides for the chargeable of the tax on the transfer of a capital asset of a firm or other association of persons or body of individuals. The Section provides that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

Under Section 45(4) of the Act two conditions are required to be satisfied for the levy of tax on capital gains-

transfer by way of distribution of capital assets;
such transfer should be on dissolution of the firm or otherwise.

In case of conversion of a partnership firm into a company no capital gain shall arise if the following conditions are fulfilled:-

all assets and liabilities of the firm relating to the business immediately before the succession shall become the assets and liabilities of the company.
all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession.
the partners of the firm do not receive any consideration or benefit, directly or indirectly in any form or manner other than by way of allotment of shares in the company.

Requirements towards conversion under Companies Act, 2013

Registered Partnership firm with minimum 7 Partners
No minimum paid up capital requirement for incorporating private as well as public company.
If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered
Minimum 7 Shareholders
Minimum 2 Directors (for Private Limited Co.) and 3 Directors (for Public Limited Co.)
The directors and shareholders can be same person
DIN (Director Identification Number) for all the Directors
DSC (Digital Signature Certificate) for all the subscribers and Directors.

Procedures for conversion of Partnership Firm to Private Company

STEP 1: Hold a meeting of the partners to transact the following business

Assent of majority of its partners as are present for the purpose of registering the firm under the Companies Act, 2013. Since the liability of the members of the firm is unlimited, when a firm desires to register itself as a company as a limited company, the majority required to assent as aforesaid shall consist of not less than ¾ of the partners as are present in person or where proxies are allowed, by proxy, at a meeting summoned for the purpose.

To authorize one or more partners to take all steps necessary and to execute all papers, deeds, documents etc. pursuant to registration of the firm as a Company.

To execute a supplementary Partnership Deed to align it with the requirements as under:
- There must be at least 7 partners in the partnership firm;
- The firm may be registered with the Registrar of Firms;
- There must be a fixed capital divided into units ;
- There must be provision of converting a firm into company.
- There must be an agreement by the partners to convert the partnership to a company. This can be done by a contract in writing to this effect to which the partner’s resolution for conversion can be attached as annexure.

(If the above requirement is not fulfilled by the firm, then the Partnership deed should be altered)

STEP 2: Obtaining the Name Approval in INC 1 for Proposed Company

An application in Form needs to be filed with the Registrar of Companies (ROC) in Form INC-1 with following attachments stating the fact that the partnership firm proposed to be converted under the Companies Act.
Certified true copy of Partnership Deed.
Certified true copy of the latest balance sheet of the partnership.
Certified true copy of the latest income tax assessment order/return.
Consent of all the partners stating that they have agreed to register the partnership firm as a Company.
Certified True Copy of the resolution passed by the firm in this regard.
The application is required to be digitally signed by one of the promoters.

Step 3: Publishing the Advertisement in Two Newspaper (English Daily and Vernacular)

For the purpose of clause (b) of section 374 of the Act, every ‘company’ seeking registration under the provision of Section 366 shall publish an advertisement about registration under the said Part, seeking objections, if any within twenty one clear days from the date of publication of notice and the said advertisement shall be in Form No. URC. 2, which shall be published in a newspaper and in English and the in the principal vernacular language of the district in which Partnership is in existence and circulated in that district.

Step 4: Affidavit

File an affidavit, duly notarised, from all the members or partners to provide that in the event of registration under this Part, necessary documents or papers shall be submitted to the registering or other authority with which the company was earlier registered, for its dissolution as partnership firm, limited liability partnership, cooperative society, society or any other business entity, as the case may be.

Step 5: Filing of E form URC 1 with ROC with Following Attachments:- (For Companies limited by Shares)

A list showing the names, addresses, and occupations of all persons named therein as members with details of shares held by them respectively
a list showing the particulars of persons proposed as the first directors of the company, their names, including surnames or family names, the DIN , passport number(if any) with expiry date, residential addresses and their interests in other firms or bodies corporate along with their consent to act as directors of the company;
an affidavit from each of the persons proposed as the first directors, that he is not disqualified to be a director under sub section (1) of section 164 and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief;
a copy of the deed of partnership, bye laws or other instrument constituting or regulating the company and duly verified in the manner provided in sub-rule(4)
a statement specifying the following particulars:—
1. the nominal share capital of the company and the number of shares into which it is divided;
2. the number of shares taken and the amount paid on each share;
3. the name of the company, with the addition of the word "Limited" or "Private Limited" as the case may require, as the last word or words thereof;

f)statement of accounts, prepared not later than fifteen days preceding the date of seeking registration and certified by the Auditor together with the Audited Financial Statements of the previous year, wherever applicable shall be attached with Form No. URC. 1

If the assets of the existing company during the immediately preceding three years are revalued for the purpose of vesting of its assets with the company to be incorporated under this Act, the surplus arising out of such revaluation shall not be deemed to have been credited to the capital account or current account of partners.

written consent or No Objection Certificate from all the secured creditors of the applicant.
written consent from the majority of members whether present in person or by proxy at a general meeting agreeing for registration under this part.

Step 6: Certificate of Incorporation

If the Registrar is satisfied on the basis of documents and information filed by the applicants, decides that the applicant should be registered, he shall issue a certificate of incorporation in Form No. INC.11

NOTE – As per Section 366(2) and Rule 3 of The Companies (Authorised to Registered) Rules, 2016. There shall be seven or more members for the purposes of registration of a company under this sub-rule and Section.

Step 7: Other Obligation of Companies Seeking Registration

where a firm has obtained a certificate of registration under section 367, an intimation to this effect shall be given within fifteen days of such registration to the concerned Registrar of firms under which it was originally registered, along with papers for its dissolution as a firm.

Conclusion

Therefore, for enlarging or growth of a small scale business led by few partners into a large scale business, corporatization of firm is the needed.

Get comprehensive auditing serivces for your company by ADCA, one of most trusted audit firms in bangalore.

The Re Imbursement Of Actual Expenditure: Attracts Neither Section 194C Nor Sect ...

23 Jul,2018

The learned author takes up for discussion a very recent Tribunal decision in which the assesse had made reimbursement of expenditure to a certain party, which the assessing officer treated as payment to clearing and forwarding agent, therefore, attracting section 194C and consequently 40(a)(ia). The Tribunal, however, departed thus view

As per section 40 of the income Tax Act, 1961 (in short, ‘the Act’), certain amounts mentioned therein are not allowed as deduction, notwithstanding anything to the contrary in sections 30 to 38, in computing the income chargeable under the head “Profit and gains of business or profession”. Section 194C of the Act lays down provisions in respect of TDS on payment to contractors.

Recently, in ACIT, Kottayam v. St. Mary’s Rubbers Private Ltd., Kottayam 2017 TaxPub (DT) 2153 (Coch-Trib) [I.T.A. Nos. 224/coch/2016 date of decision 15-06-2017], the Revenue, aggrieved on the deletion of disallowance by CIT(A) of Rs.60,80,063 made by the assessing Officer(AO) under section 40(a)(ia) of the Act for non-deduction of tax at source on payment made by the assesse o C&F agents, filed appeal before ITAT, Cochin.

Facts in brief

The assesse, a manufacturer and seller of centrifuged latex, had filed its return of income for the impugned assessment year, declaring income of Rs.70,89,989. An assessment under section 43(3 was completed on 21-12-2011, computing total income of the assessee at Rs.77,87,14. Thereafter, the assessment was paid without deducting tax at source. During the course of assessment proceedings, it was noted by the AO that the course of assessment proceedings, it was noted by the AO that assessee had paid Rs.60,80,063 as clearing and forwarding charges to one

Mark Logistics. Claim of the assessee before the AO was that these were reimbursement of expenditure incurred by he said agent. As per the assessee, the said C&F agent was incurring expenditure on its behalf and therefore, According to him, the assessee should have deducted tax at source on the payment effected to Mark Logistics. Since assessee had not deducted such tax, AO applied section 40(a)(ia) of the Act and made a disallowance of Rs.60,80,063.

They also stated that they had deducted tax at source while effecting payments to various person with whom they had entrusted the work of assessee. CIT(A) sought a remand report from the AO>As per the CIT(A), in the remand report, the AO has admitted that amounts paid by assessee to Mark Logistics were re-imbursements. CIT(A) held that payment of Rs.60,80,063 made by the assessee to Mark Logistics were in the nature of reimbursement of expenditure and the payment received by them were not C&F charges. Relying on the judgment of the Hon’ble Gujarat High Court in the case of CIT v. Narmada Valley Fertilizer Co. ltd 2013 taxPub(DT) 2222 (guj-HC); (2014) 361 ITR 192 (Guj), the CIT(A) held that re-imbursement of expenditure, deduction of tax was not required. He deleted the disallowance made under section 40(a)(ia) of the Act.

Submission by Revenue

DR, assailing the order of the CIT(A), submitted before ITAT that assessee had paid Rs.60,80,063 for the service received by the assessee from Mark Logistics, which were contractual in nature. According to him, these were not reimbursement of expenditure and even if it was reimbursement, as per the DR, there would have been profit booking by Mark Logistics in built in the billings. In his opinion , AO has rightly considered the payment as liable for deduction of tax at source under section 194C of the Act. According to him , CIT(A), merely based on the submissions of the assessee, had allowed the claim of the assessee. Reliance was placed on the judgment of the Hon’ble jurisdictional High Court in the case of CBDT v. Cochin goods transport Association (1999) 236 ITR 993 (ker) and the judgement of the Hon’ble Apex Court in the case of Associated Cement Co. Ltd. v. CIT and Another (1993) 201 ITR 435 (SC)

Reply by Ar

In reply, AR submitted that the Delhi Bench of the Tribunal in the case of ITO v. Deepak Bhargawa 2017 Taxpub (DT) 21520(del’B-Trib) [ITA No.343/Del/2012, dated 13-11-2014] had clearly held that section 194C would not be applicable for reimbursement of expenditure. As per the AR, facts of this case were very similar to that case. Reliance was also placed on the decision of the Bangalore Bench of the Tribunal in case of DCIT v. Dhanyaa seeds (P) Ltd. 2014 Tax Pub (DT) 2664 (Bang ‘b’-Trib) : (2014) 64 SOT 15 (bang ;B’-trib) and that of the Hon’ble Gujurat High Court in the case of Principle CIT v. Consumer Marketing (India) (P) Ltd. 2017 Taxpub (DT) 2154 (Guj-HC)

Decision by ITAT, Cochin

The Tribunal considered the effector CBDT Circular No. 715, dated 08-0-1995 and observed that the said Circular was applicable only where consolidated bills ere raised inclusive of contractual payments and reimbursement of actual expenditure. Same view was taken by the Bangalore Bench of ITAT, Cochin in the case of Pr. CIT v. Consumer Marketing (India) (p) Ltd. (supra) held that when separate bills are there for reimbursemet of expenditure received by C&F agent, TDS was not required to be made on reimbursement. The assessee in addition to reimbursement of expenses, separately paid brokerage and commission of Rs. 2,52,410 which was subjected to disallowance in the original assessement. Hon’ble Members of the ITAT held that the CIT(A) was justified in deleting the disallowance made under section 40(a)(ia) of the Act.

Want to get deep knowledge on re-imbursement of actual expenditure? Get in touch with Mr. Anil D'souza, Expert CA in bangalore.

Mr.

23 Jul,2018

GST is a single tax levied on services and goods consumed in the Indian economy. Introduced by the Central Government, GST is an indirect tax treating India as one nation and market. Since its introduction in 2017, most businesses have found adhering to the GST compliance rules challenging.

As per the GST regulations, every business should pay taxes on time. Therefore, companies must compulsorily adopt the GST compliance protocols the government has created to adhere to. It is important to note that GST rules are updated regularly. However, businesses should focus on tax invoice compliance, registration compliance, and return filing compliance. With a reasonable GST compliance rate, any organisation can gain the trust of the tax authorities. And when the business gains the confidence of the government, it becomes easier to target a broad group of customers.

What is GST compliance rating?

The GST compliance rating is a score the government provides to a business. Its primary purpose is to motivate an organisation and others operating in the same industry domain to comply with the tax department. This compliance rating is calculated based on various parameters like timely filing of returns, furnishing proper details of input credits used, taxes paid, etc.

Note that the scores are updated by analysing whether the company has a GST compliance checklist. The details of a company that has received an excellent GST compliance rating will be published in the public domain so that everyone can access them. This also allows small and medium-scale organisations to select the most GST-compliant vendor for their operations.

The reasons for companies to maintain GST tax compliance

Here are some reasons why every company should maintain GST statutory compliance.

Legal obligation and penalties

The GST compliance is a legal duty for businesses in India. Compliance with GST rules and regulations is crucial, as failure to adhere to them may result in strict penalties, interest payments, and even prosecution in worst-case scenarios. Non-conformity with GST provisions, e.g., not getting registration, not filing returns, or not paying taxes on the due date, could lead to financial penalties and legal issues.

Financial implications

Businesses that do not comply with GST will experience severe financial difficulty. Penalties, interest charges, and blocking the Input Tax Credit (ITC) might negatively affect a company's profitability and cash flow. Achieving compliance helps businesses claim eligible tax credits and calculate their tax liabilities correctly, thus improving tax management.

Credibility and reputation

Those businesses that follow the GST compliance calendar are seen to be trusted by their suppliers, customers, and government bodies. One of the results of this reliability is that it helps build trust and creates new business opportunities for compliant businesses, putting them ahead of their competitors.

Operational efficiency

Timely submission of GST returns, issuance of compliant invoices, and proper documentation contribute to a seamless business operation. Non-conformity can disrupt agreed-upon arrangements, auditing, and legal disputes, which might interfere with daily operations and cause unnecessary delays.

Transparency and ethical practices

With the GST system in place, businesses are encouraged to be more transparent and accountable. A compliant business evidences it believes in ethical practices and earns stakeholders' trust, leading to a fair and thriving business environment. This can be a decisive factor in enhancing a company's reputation and attracting new customers and partners.

Through GST compliance, businesses in India can avoid financial losses, maintain credibility, ensure smooth running, and become supportive of transparent and ethical business.

What is the significance of audits for GST compliance?

GST compliance audit is critical for Indian companies as it guarantees that the Goods and Services Tax (GST) rules and legislations are followed. In the audit, the auditor thoroughly examines the company's books and records, transactions, and processes, ranging from GST-related records to the company's financials.

The auditor is an independent chartered accountant or cost accountant. If the companies are non-compliant with GST rules, there will be very serious penalties, interest charges, and legal actions, thus making the compliance audit a key factor.

As a result of the audit, companies may expose and correct all non-compliance issues, including inaccurate tax calculations, misplaced input tax credit claims, and poor record-keeping.

Such a preventative approach reduces the probability of companies being held responsible for GST and keeps them with a clean GST compliance record. Besides that, the audit gives businesses an opportunity to simplify their GST operations, improve efficiency, and reduce possible taxation mistakes.

On top of that, a GST compliance audit strengthens a brand's credibility as an open and ethical company. Such relationships may produce a bond of trust with primary stakeholders, including customers, suppliers, or government institutions. The companies that follow GST advisory and compliance are usually considered highly reliable and trustworthy, which may open new business opportunities and foster long-term relations.

An essential step of GST audit compliance is assisting Indian companies in mitigating risks, filing a correct tax declaration, maintaining a good reputation, improving their operational efficiency, and complying with GST regulations.

Things to know about the GST compliance requirements

Besides getting a GST compliance certificate, knowing the compliance requirements is essential. Listed are the crucial aspects of GST compliance requirements.

Registration

Companies with an annual income worth more than Rs. 20 lakhs (Rs. 10 lakhs for special-category states) need to get GST registered. This is through the provision of the required documents and application for GSTIN (Unique GST Identification Number).

Tax payments and filing of returns

Timely payment of CGST, SGST, and IGST for goods and services is required. Companies are also expected to regularly file GSTR-1 (Outward Supplies), GSTR-3B (Summary Returns), and annual GSTR-9 returns within stipulated time periods.

E-way Bills

Getting e-way bills is necessary to transport goods worth more than Rs. 50,000 within the same state or from state to state. An e-way bill is a document used to monitor the movement of goods and check tax evasion by unscrupulous persons.

Invoicing and record-keeping

Providing GST-compliant invoices that are all-inclusive, such as GSTIN, HSN/SAC codes, and GST rates is paramount. Businesses should likewise ensure that their inward and outward supplies records and ITC claims and payments are kept. They should also be able to generate e-way bills.

Audits and other compliances

Companies that achieve a specified turnover level are required to have their records audited by a chartered accountant or a cost accountant. They must also follow TDS rules and other GST regulations and processes.

Conclusion

You must have understood GST compliance and its importance for organisations by now. It is your first step towards establishing your business. If you want to know more about GST compliance, contact Anil D'Souza & Associates. Visit https://adca.in/ to get the best GST compliance services in India.

FAQs

What are the benefits of GST compliance?

The benefits of GST compliance in India include the prevention of penalties, preservation of credibility, simplification of processes, and maximisation of tax administration.

Why is tax compliance necessary?

Tax compliance is required to comply with legal requirements, prevent financial losses, and enhance the transparency of business dealings.

How many types of compliance are there?

There are several types of compliances: registration, tax payment, returns filing, invoicing, record keeping, and audits.

What is GST yearly compliance?

GST yearly compliance involves preparing and filing GSTR-9 returns, GST audits and reconciliation of accounts for the financial year.

Allowability Of Expenditure Incurred By Pharma Companies On Medical Conferences.

23 Jul,2018

Recently the Delhi high Court in Bostom Scientific India (p) Ltd.v.Asst.CIT 2017 Tax Pub (DT) 3985 (Del –HC) has give it’s verdict regarding allowability of expenditure incurred by pharma companies on sponsoring medical conference in and outside India. The learned author analyses the impugned issue in the light of this recent verdict.

Background

It is general practice of pharma companies to sponsor and conduct medical conferences in & outside India and for this purpose these companies also make arrangements for travel and accommodation of doctors attending the conferences. In a recent past, a serious controversy arose as regards allowability of expenditure incurred b pharma companies for organising such conferences. These expenditure incurred by pharma companies for organising such conference.these expenditure are claimed to be allowable as business expenditure for being incurred for business purpose, however, the department tends to disallow the same by invoking Explanation 1 to section 37 (1).

Explanation 1 to section 37(1) disallow illegal expenditure

The Finance (No. 2) Act, 1998 has inserted an Explanation to section 37(1), with retrospective effect from 1-4-1962, so as to clarify that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Nature of expenses incurred by pharma companies

The pharma companies incr expenditure to sponso and conduct doctors’ conferences , to distribute its product amongst doctors as free samples, to give gift articles to doctors , etc. These expenditure are classified as advertisement and sales promotion expenditure and claimed to be allowable on the ground of being incurred wholly and exclusively for the business purposes.

CBDT’s clarification as regards allowability of expenses incurred in providing freebies to medical practioner

The Medical council of India in excersise of its statutory powers amended the Indian medical Council (Professional Conduct, Etiquette and Ethics) Reguations, 2002 (the Regulations ) on 10-12-2009 imposing a prohibition on the medical practitioner & their professional associations from taking any gift travel facility , hospitality, cash of monetary grant from the pharmaceutical and allied health sector industries.

Section 37(1) of the Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expenses is laid out/expended wholly or exclusively for the purpose of business income if such 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 of any expense incurred in providing above mentioned or similar freebies 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 beingan expense prohibtited 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 freebies and claimed it as a deductable expense in it’s accounts against income.

It is also clarified that the sum equivalent to value of freebies enjoyed by the aforesaid medical practitioner or professional associatiosns is also taxable as business income or income from the other sources, as teh 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.

However,the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,2002 which has been amended on 10-12-2009 prohibits medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries.

Thus, the expenditure incurred on freebies are disallowed on the ground of being incurred in violation of the provision of Indian medical Council ( Professional Conduct, Etiquette and Ethics) Regulations, 2002.- circular No. 5/2012,dt.1-8-2012.

Judical controversy as regards allowability of expenditure incurred by pharma companies

In live Healthcare Ltd. v. DCIT (2016) 161 ITD 63 (Mum),the Mumbai Bench of the Tribunal held that the expenditure on foreign travel and accomdation of doctors and their spouses was incurred with the intent and the objective of profiteering form the distribution and entertainment that had a direct nexus with promoting the sales and profitability which made such expenditure violative of the provisions of the said regulations of 2002.It held that the expenditure was incurred to seek favours from the doctors by way of recommendation of the company’s product which was an illegal gratification ,was against public policy,was unethical and was prohibited by law. Accordingly,the expenditure in question was liable for disallowance.

However in PHL Parma (p) Ltd. v. ACIT (2017) 163 ITD 10(Mum),the decision was given in favour of the assessee by observing that the code of conduct has meant to be followed and adhered to by the medical practironers and doctors alone and did not apply in any manner to pharmaceutical companies. The Indian Medical Council did not have any jurisdiction nor had any authority upon the pharmaceutical companies and could not have prohibited such companies in conduct of their business. The CBDT in issuing Circular No. 5, dt. 1-8-2012 had enlarged the scope of the said Regulations by applying it to the pharmaceutical companies without any enabling provisions to do so. Further the circular in any case could not be reckoned retrospectively i.e., it could not be applied before the date of its issue, i.e., on 1-8-2012.

Thus the expenditure incurred by the assessee company was in the nature of sales and business promotion and was to be allowed; the gift articles bore the logo of the assessee and could not be held to the freebies,the free samples proved the efficacy of the products of the products of the company and again were not in violation of the said Regulations framed by the Medical Council of India.

Applicability of CBDT Circular No. 5/2012

In Syncom Foundations (I) Ltd. ( IT PPEAL Nos. 6429 & 6428 (Mum) of 2012, it was observed that CBDT circular would not be applicable in the assessment years 2010-11 and 2011-12 as it was introduced w.e.f. 1-8-2012. Similarly it was held in UCB India (P) Ltd.v. ITO (IT Appeal No. 6681 (Mum) of 2013, dt 13-5-2016), that the CBDT circular colud not have a retrospective effect.

Recent decision of delhi High Court in Boston Scientific India (P) Ptd.’s case

In Boston Scientific India (P) Ltd v. Asstt. CIT 2017 Tax Pub (DT) 3985 (Del-HC), the assessing officer on the specific heads of ‘advertisement and business promotion’ and travel related expenses ‘ made the following disallowances :

(i) Expenditure of Rs. 13,14,548 was stated to be constituting freebies provided to medical consultants and other doctors, disallowable in view of Explanation 1 to section 37(1) of the Act , read with CBDT Circular No. 5/2012, dt.1-8-2012.

(ii) Expenditure of Rs 19,06,000 incurred on conducting seminars conventions, meetings, etc., for the purpose of Appellant’s business.

This was disallowed on the ground that details were scanty, despite ample opportunity being given to the assessee .

(iii) Expenditure of Rs 8,00,000 incurred on sponsorship for organizing conference/seminor. This was disallowed on the ground that the payment was made after the event had place.

On appeal before ITAT , it was held that as the assessee had incurred expenses in the garb of marketing the cardiac machine, onus was upon the assessee to prove that the expenses incurred did not violate any law that may be applicable. The burden lies uopon the assessee which has not been discharged by evidences/materials. Merely by placing the bills of payments, the travel details, the hotel details , where the doctors were stationed , and the seminars / conferences that were actually attended by such doctors. Assessee had also not demonstrated that the doctors by participating in such conferences and accepting the hospitality extendedby it (the assessee ) have not contravened any MCI Regulations.

The High Court ,however, said that the ITAT placed an unfair burden on the assessee to prove that the above expenses was incurred bona fide for the business purpose of the assessee. The assessee had placed before the ITAT all the relevant details thereby discharging the initial onus. Thereafter,it was open to the Revenue to prove to the contrary . It was not possible for the assesee to show that doctors “actually delivered any lectures, attented any meetings for, providing training courses and seminars for assessee, etc.

As regards other disallowances, it was held that since the ITAT proceeded on and conjectures and failed to deal with the contentions of the assessee in that regard , it is only fair that the ITAT considers the entire appeal of the assessee on merits afresh.

Thus, the High Court rendered decision in favour of assessee and against the revenue and all the contentions of the assessee raised in the appeal before the ITAT would be considered afresh.

8. Conclusion

The decision of the Delhi High Court has provided some rays of hope in favour of Pharmaceutical Companies for doctors. If relief is provided, it wil be of great help in sharing and upgrading knowledge in the field of medical science and ultimately whole mankind would get benefitted therefrom.

Have questions? Get it cleared by ADCA, one of the top chartered accountant firms in bangalore.

Can Accommodation Services Be An Inter-state Supply.

23 Jul,2018

Accommodation services are under the purview of tax net since a long time It was a handsome source of revenue under service tax law and the legacy is continuing in refined manner,even under GST law.

1.Introduction

Accommadation service is the service to provide a place to live or stay, it has been introduced in the service tax net since positive list regime.The same is carried forward in the GST law also.Under GST law there is classification of services and accordingly accomdation services have been classified into the various categories according to the practice prevailing in the industry.

2. Classification

Accommodation services have been classified under HSN/SAC 9963 wherein the further classification ia as under.

Heading/Group	Service Tariff Code (HSN/SAC)	Description of Service
99631	996311	Room or unit accomdation services provided by Hotels, INN,Guest House , club, etc
	996312	Camp Site Services
	996313	Recreational an vocational camp services
99632	996321	Room or unit accomdation services for students in student residences
	996322	Room or unit accomdation services provided by Hotels, Capms, Paying Guests, etc.
	996329	Other room or unit accomdation services not specified else where

3.Nature of supply

Accommodation services are generally provided at the premises used for providing accomdation services. Since the GST is destination based consumption tax, therefore, the place of supply of accomdation services is the place where the property used forproviding such services is situated and the nature of supply is intra – State supply. However, before reaching at the conlusion we need to understand the relevantprovisions of the GST law.

The relevant provisions of law determaining the nature of services are coverd under the provisions of section 8 and setion 12 of the IGST Act,2017 read together.

According to setion 8(2) of the IGST Act,2017 supply of services where the location of the supplier and the place of supply of services are in the same State or the same Union territory shall be treated as intra-state supply.

According to setion 12(3)(b) of the IGST Act,2017, the place of supply of service by way of lodging accomdation by a hotel, inn, guest house ,home stay , club or campsite, by whatever name called and including a house boat or any other vessel shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.

Thus, on a combined reading of the above two provision,one can easily figure out the nature of supply of accomdation services is intra-State supply.

4.Whether accomdation services can be an inter-State supply

Although by referring to the provisions cited above, it can be inferred that the basic philosophy of implematon of destination based consumption tax goes in line of taxing accommodation services as intra-State supply. Howeve, the following provisions of IGST Act,2017 are worth noting-

(a)Provisio to section 8(2) : The said provision reads as –“the intra-State supply of services shall not include supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit”.

(b) Section 7(5) (b) : Supply of goods or services or both to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated to be a supply of goods or services or both in the course of inter –State trade or commerce.

The direct implication of the above provisions on accomdation services is that the said services if provided to any unit in SEZ shall not be considered as intra-State supply. In other words, it shall be considered as inter –State supply.

Hence, it can be fairly concluded that the accommodation services, when provided to any unit in SEZ or by unit in SEZ, evolve a concept divergent to the basic intent of the GST law of taxing the services on a consumption basis.Now the question that flashes in the minds is the need of such a provision. The purpose of the introduction of such provisions can be understood with the provisions of section 16 of the IGST Act, 2017

The implication of sections 7(5), 8(2) and 16 of the IGST Act, 2017

The implication of sections 16 and 8(2) can be understood i two parts. In one part the supplier of services is outside the SEZ and in another part the supplier of services is in the SEZ. The impact on both the transaction shall be different.

(i) Supply to SEZ – Zero- rated supply

Accordingly to section 16 of the IGST Act, 2017, “zero-rated supply “ means any of the following supplies of goods or services or both namely:- (a) export of goods or services or both; or (b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

The provision stated in section 16 clearly mandates that the accommodation services provided to SEZ developer or to a unit in SEZ shall be treated as zero-rated supply. To put it differently, the same shall be considered at par with the export of services. Thus, such services shall fall under zero-rated supply under GST law and shall be eligible for benefits attributed to zero-rated supplies including a refund of taxes paid on the relevant, services, subject to the other provisions of GST law.

(ii) Supply by SEZ-Inter-State-supply

On a close reading of section 8(2) and section 16 as mentioned above, it can be inferred that accommodation services provided by the unit in SEZ to any person outside SEZ shall be treated as inter-State supply. Meaning thereby that the said services provided by SEZ shall be considered as inter-State supply and IGST shall be considered as inter-State supply and IGST shall be chargeable on the same.

(iii) Supply within SEZ–Zero–rated supply

Since in case of supply within SEZ the recipient shall always be in SEZ, therefore, such supply shall always fall within the meaning of zero-rated supply. Hence, supplies within SEZ shall be eligible for benefits at par with the benefits available to zero-rated supply.

5. Conclusion

Accommodation services are generally taxed as intra-state supply, however, the law contains the relevant provisions for treating the same as inter-state supply also. Thus, before reaching any conclusion about the place of supply, it is essential to refer the law as a whole and relevancy of sections 7(5) and 8(2) cannot be undermined.

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