Leviability is essential feature to collect tax from any taxable person. In absence of leviablity, tax could not be collected. Under the new tax regime GST, the concept of leviablity is paradigm history in the levaiblity of indirect taxes.
Leviablity gives the power to the taxation regime to collect taxes from any person. In the absence of levy, tax could not be charged and collected. GST contains crucial provision in relating to levy of tax which are discussed hereunder.
2.Levy of tax under CGST & SGST
The power to levy tax is provided in section 8 of the revised model of GST law. Asper the relevant section Central & State GST is to be levied on interstate supply of goods and services as per the value determined of the said goods and services in terms of provision of this act. Although the rates of taxes is not notified in the law itself but the law provides for the caping of taxes rates and the said cap is fourteen percent.
3.Levy of tax under GST
The power to levy taxes is provided in section 5 of the revised model IGST law. As per the relevant section IGST is to be levied on all interstate supply of goods and services as per value determined of the said goods and services in terms of the provisions of the act. Although the rates of taxes is not notified in the law itself but the law provides for caping of tax rates and the said cap in twenty eight per cent.
IGST will be levied on goods imported into India inaccordance with the provisions of section 3 the Customs Tariff Act 1975 at the point when duties of customs are levied on the said goods.
Presently, payment of tax on reverse charges basis is applicable in case of provision of services. The concept will be carried forward as legacy for services and newly introduced for supply of goods. However, the goods and services tobe notified for reverse charge will be on the recommendation of the council, In the case of reverse charge the person receiving the supply has to pay taxes and the provisions of the act shall apply accordingly.
5.Electronic Commerce Operator.
In the digitization era an increasing online shopping of goods and services ,electronic commerce are also covered in the tax net and the same shall be liable to Pay taxes on notified goods and services on the recommendation of the council.
Further in the present global market, one can provide platform for supply of goods and services from any part of the world. Accordingly, if the electronic commerce operators situated in any parts of the world except India, then he hasto appoint some person on its behalf to comply with the provisions of the GST.
6. Composition of Levy
The small scale business man always enjoys some privileges. Composition levy is one of such benefits. Present laws contains different monetary limits from composition levy in addition to different monetary limits in different states. However GST being a uniform law will provide single composition scheme to be applicable through India. Accordingly business with taxable turnover not exceeding fifty lakhs can avail the option of paying composition fees. The composition fees are different for manufacturers and others. In case of manufacturing industry rate of composition is 2.5% and for others it is 1%.
7. Restriction under Composition Levy
Payment of option under composition scheme calls for limitation or restrictions, stated as under-
1. This option is not available to the person who is engaged in supply of services. Meaning thereby the provider of service cannot opt for composition scheme. Further the language suggest that in case of a person engaged in supply of services and goods both the also the option of composition scheme in not available.
2. The option to pay composition schemes is not available to the person who are not leviable to tax under this act.
3. The person making inter-state supply can also not avail of this option.
4. The electronic commerce operator who is required to collect tax at source also cannot avail of this option.
5. The manufacturer of notified goods are also not eligible to avail of the option of payment of taxes under composition fees.
6. In case turnover RS 50 lakhs the for the turnover exceeding RS 50 lakhs this option for paying tax under composition scheme will not be available.
7. The person availing the benefit of paying taxes under composition scheme are not eligible to avail of input tax credit.
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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
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 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-
In case of conversion of a partnership firm into a company no capital gain shall arise if the following conditions are fulfilled:-
Requirements towards conversion under Companies Act, 2013
Procedures for conversion of Partnership Firm to Private Company
STEP 1: Hold a meeting of the partners to transact the following business
(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
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)
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.
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.
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.
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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.
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Urban agricultural lands are treated as capital assets and gain arising on transfer thereof is charged to capital gain tax. If land is not an urban land the gain arising from transfer thereof is not chargeable to capital gain tax. But in such a situation question arises whether the gains can be treated as agricultural income. Recently the third member bench of ITAT has answered the question in the affirmative and held that the gain is agricultural income and thus exempt from tax.
Urban agricultural lands treated as capital asset
Section 2(14) defines the term capital asset. It provides an inclusive definition of capital asst. As per section 2(14) capital asset does not include agricultural lands in India within its ambit. But all agricultural lands in India are not out of the scope of capital assets. As a consequence the following agricultural lands are treated as capital assets and their transfer will give rise to capital gains :
Land situated in any area which is comprised within the jurisdiction of a municipality ( whether know as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before that first day of the previous year; or
In any area within such distance, not being more than eight kilometres, from the local limits of any municipality or a cantonment board referred to in items (a) above as the Central Government may, having regard to the extent of, and scope for urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.Gain arising from transfer of Agricultural Lands situated as above would give rise to capital gains.The above position held good till the assessement year 2013-14.The Finance Act, 2013 has amended section 2(14) effective from the assessment year 2014-15. Therefore, from assessment year 2014-15 the agricultural land situated:
In any area is comprised within the jurisdiction of a municipality (whether know as a municipality, municipal corporation, notified area committee, town area committee, or by any other name) or a cantonment board and which has of not less than ten thousand. [similar to item (a) of sub-clause (iii) of clause (14) of section 2 as it existing upto assessment year 2013-14 except for the difference that the words according to the last preceding census of which the relevant figures have been published before the first day of the previous year has been omitted and the term population has been explained in a separate explanation added to section 2 [iii].
In any area within the distance, measured aerially,---
Not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
Not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh will be treated as capital asset and gain arising from transfer of agricultural land situated as above would give rise to capital gain.
According to Explanation to section 2(14)(iii) “population” means the population according to the last preceding census of which the relevant figures have been publishes before the first day of the previous year.
Rural Agricultural land and Treatment of gain arising from Transfer thereof Position upto assessment year 2013-14
If any agricultural land is not a---
Land situated in any area which is comprised within the jurisdiction of a municipality (whether know as a municipality, municipal corporation, notified area committe, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relavent figures have been published before the first day of the previous year; or
In any area within such distance not being more than eight Kilometres, from the local limits of any municipality or a cantonment board referred to in items (a) above as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant consideration, specify in the behalf by notification in the Official Gazette.
Then such land will not be treated as a capital asset. If the agricultural land is not a capital asset, then its transfer of such land will be treated as agricultural income
This is borne out Explanation 1 to section 2(1A) which provides that any revenue derived from transfer will not result in capital gain. Further, the gain arising from transfer of such land will be treated as agricultural income.
Above view has been upheld in ITO v. Dr. Koshy George & Anr (2010) 31 (II) ITCL 150 (Coch-Trib) : 2009 TaxPub (DT) 1841 (Coch-Trib): (2009) 317 ITR 116 (Coch). In this case the assessing on sale of coffee estates, over and above the registration sale deed, wewe “On Money” is still taxable in the present case. It was held that the property sold by the assessee was agricultural property situated beyond 8 k.m. of any surplus of money arising to an notified either. In such circumstances, any surplus of money arising the registered sale deed is very much agricultural income even though that surplus consideration is tainted with the expression:On Money: the genesis of the :On Money” is definitely the sale of agricultural Land.
Position from asseseement year 2014-15
If any agricultural land is not a:
Land situated in any area which is comprised within the jurisdiction of a municipality (whether know as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of more than ten thousand but not exceeding one lakh; or
In any area within the distance, measures aerially,--
Not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
Not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not execeeding ten lakh; or
Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) nd which has a population of more than ten lakh.
Then such land will not be treated as a capital asset. If the agricultural land will not a capital assets, then its transfer will not result in capital gain. Further, the gain arising from transfer of such land will be treated as agricultural income.
Judicial precedents as to treatment of gain arising on transfer of land situated beyond specified distance.
In ITO v. Anthony John Pereira (2008) 24 (II) ITCL 582 (Mum ‘F-Trib);2008 TaxPub (DT) 2048 (Mum-Trib); (2008) 24 SOT 459 (Mum ;F’-Trib) the assessee had produced all evidence he could, by way of certificates from competent Authority Of ULC (Urban Land Celing), State PWD, ect.,, that the agricultural limits. It was held that the said agricultural land in question was not capital asst in terms of section 2 (14). Therefore, the land in question , was not a capital asset, and hence, profit earned on transfer of land to co-operative housing society was also not liable to capital gains tax.
In Ronjibhai P. Chaudhry v. Dy. CIT & Asstt. CIT v. Ramji P.
Chaudhry (2009) 29 (II) ITCL 531 (Ahd-Trib); 2009 TaxPub (DT) 696 in non specified urban area could not be treated as capital asset and gain arising on sale thereof could not be chargeable to capital gains tax.
It was held in the case of CIT v. Manilal Aomnath (1977) 106 ITR 917 (G uj) as follow:
“ Under the Income Tax Act of 1967, agricultural lend situated in India was excluded from the definition of ‘ capital asset’ and any gain from the sale thereof was not to be included in the total income of an assessee tinder the head :capital gains”. In order to determine whether a particular land is agricultural land or not one has to first find out if it is being put to any use. If it is used for agricultural purpose there is a presumption that it is agricultural land. If it is used for non Agricultural purposes the presumption is that it is non Agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be cases where agricultural purpose of the presumption is that it is non agricultural land. This presumption arising from actual use can be rebutted by the presence of other factors. There may be casese where land which is admittedly non agricultural is used temporily or agricultural purpose the determination of the question would therefore end on the depend on the facts of each case.
‘The assessee, Hindu, undivided family, had obtained some land on a partition in 1939. From that time, up to the time of its sale, agricultural operation were carried on in the land. There was no regular road to the and it was with the aid of a tractor that agricultural operation were carried on in the land. There was no regular road to the land and it was within municipal limits or took place. The facts that the land was within municipal limits or that it was included within a proposed town planning scheme was not by itself sufficient to rebut the presumption arising from actual use of the land. The land had been used for agricultural purpose for a long timr and nothing had happened till the date of the sale to change that character of thr land. The potential non-agricultural value of the land for which a purchaser may be prepared to pay a large price would not detract from its character as agricultural land at the date o fthe sale. The land in question was therefore agricultural land.
In Smt. T. Urmilav. ITO (2013) 50 (II) ITCL 370 (HYd ‘A’-Trib): 2013 TaxPub (DT) 845 (Hyd-Trib) the assessee had purchased 20.07 acres of land in Srinagar village in Maheswaram Mandal. During the relevant land in Srinagar village in Maheswaram Mandal. During the relavant previous year, the said land was sold to R. The receipt was not offered assessing officer noticed that the impugned land was situated in the village which was included in the Hyderabad Airport Development of Andhra Pradesh had issued a land acquisition notigication under the land Acquisition Act for the acquisition of the above said lans . it may be noted that the land and there was no dispute regarding come was declared in the return of income filed by the assesse for the past several years as agricultural income. It was also an admitted fact that the assessee had not applied for conversion of this agricultural land for non-agricultural purpose and the assessee had not put the land to any purpose other than agricultural purposes. It was also an admitted subjected to any developmental activities.
It was observed that it is important to mention that mere inclusion of impugned property in the HADA cannot change the character of the property. Mere inclusion of the property in the HADA by State Government notification does not change the character of the property if the property still continues to be agricultural land at the point of sale of said property. Nothing had been brought on record to show that in this village of Srinagar (Maheswaram Mundal) any infrasture development had taken place. In the present case during the relevant point of sale of the land in question the surimpugned of the land for non agricultural purpose would not change the character of the land into non-agricultural purpose would not change the character of the land into non agricultural land at the relevant point of sale of land by the assessee.
Facts of the case in Supriya Kanwar v. ITO (2015) 61 (II) ITCL 219 (Job- Trib) (TM): 2014 TaxPub (DT) 2468 (Job-Trib) (TM)- (2014) 163 TTJ (job-Trib)(TM)1
The assessee purchased certain agricultural land and sold in the previous year relevant to assessment year under consideration. The case of the assessee was that the income arose from the transaction of agricultural land and hence, it was exempt under section 10(1) read with swction 2[1A](a) of the Act. Even otherwise the income arising therefrom was not assessable to capital gains tax in the view of the provision of section 2(14)(iii)(a)/(b). On the other hand the case of the Revenue was that it was an adventure in the nature of trade and the income from the impugned land was business income. The assessing officer as well as the by the assessee on sale of the impugned land deserve to be treated as profit from adventures in the nature of trade and assessable as business income. When the case was heard land was purchase on 7-2-2006 and it was sold on 23-03-2007 (b) the land was situated beyond the prescribed municipal limits (beyond 8 kms. From the municipal limits) in a village of Alwar District, Rajasthan, and (c) it being agricultural land the sale proceeds thereon were not assessable to tax as business income wherein agricultural income on sale of standing crops was shown. He had also taken into consideration the plea of the assessee that at no point of time the assessee sought for conversion of land use by making an application with the respective authorities. Though the assessee was dealing in sale and purchase of plots in urban areas, so far as this land was concerned, the intention was not to convert into plots and in fact the agricultural land with standing crops was sold to single party, i.e. Vedic Village Developers (P) Ltd.
The case of the assessee was that no steps had taken to change the character of the land and hence it continued to remain as agriculture land till the date of sale to Vedic Village Developers (P) ltd. And the assessee did not make any effort to locate the buyer and because of the attractive price which was offered by Vedic Village Developers (P) Ltd. Assessee was persuaded to sell the land.
The assessee submitted that only such land which falls within the description of agricultural land under section 29(14) (iii), upon sale thereof, gives rise to income which cannont be considered as agricultural land which is situated beyond eight kilometres (specified distance for the A.Y 2014-15) from the local limits of any municipality, the sale proceeds thereof has to be considered as ;agricultural income’, in which event section 1091) comes into play, i.e., whether it is o capital account or revenue account, agricultural income cannot be included in the total income. It was also submitted that the assessee had also included the impugned sale proceeds for rate purpose.
Opinion of Judicial Member
The JM observed that the assessee purchased five pieces of agricultural land adjoining each other through different sale deed and the tural land was registered on different dates from 7-2-2006 to 5-4-2006. The assessee showed the purchase of agricultural land as ‘fixed asset’. In the preceding year the assessee earned Rs.70000 on sale of crop which was accepted by the Revenue. In this year Rs. 22,000 was declared on sale of outstanding crop and accepted by to assessing officer. In fact on sale of standing at the time of sale which was passes. If the intention of the assessee was to carry on an adventure in the nature of trade she would have applied ffor conversion of land use and drawn up the requisite plotting scheme, engaged professional architects for preparing site plan approval and would have commenced preliminarily development works whereas no such activity was undertaken by the assesse which shows that the intention of the assessee at the time of purchase of land was only to retain the land and it was not purchased for the purpose of resale as an adventure in the nature of trade. He also observed that undoubtedly the land was situated beyond 8 kms. From the municipal limit and hence the land has to be considered as agricultural land. So long as the land is capable of agricultural operations, the sale of agricultural land by itself would not make it business income. He also relied upon several precedents apart from analysing the facts of the case to come to the conclusion that the impugned land is Barani land admeasuring only seven Bighas with standing crop which it itself prove that it was not purchased with an intension to utilise the land for the purview of the definition of ‘capital assets’ and hence income therefrom cannot be assessed to tax by treating it as adventure in the nature of trade.
Opinion of Accountant Member
The AM was not agreeable with the view taken by the JM. Having regard to the peculiar factual matrix of the case, which was highlighted in his order, he order, he concluded that the assessee sold the land to make profit. He observed that the assessee was not having any agricultural background since she was deriving income b way of salary from Ashapurna land and also on fencing the land. The land was purchased along with standing crop and he said standing crop was sold in the earlier year. It was claimed that two crops were raised in this year and the first crop fact that both the lower authorised have given concurrent finding that the transaction of purchase and sale of agricultural land and purchase deriving a huge return of 558 percent, he also observed that the land was situated at a distance of more than 500kms. From the place where the assessee usually resided and therefore he drew a conclusion that these lands were not purchased for the purpose of cultivation. Since she was engaged in the business of real estate development the impugned purchase was with the full knowledge that the values are likely to appreciate rapidly as these fall within thw new town of National Capital Region (NCR) the global city, on national highway No.8 he also observed that the investment was made out of borrowed funds.
Adventure in trade vis-a-vis of sale
The issue as to whether a particular transaction amount to mere sale of investment or an adventure in the nature of trade was subjected matter of several judicial decisions and the Apex Court have time and again observed that no principal can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered. In the case of Venkataswami Naidu & Co. (supra) the Court observed that even an isolated transaction can safisy the description of adventure in the nature of trade may partake of the character of an adventure in the nature of trade but at the same time cautioned that the ‘ single plunge must be in the waters of trade.’ The Hon’ble Court observed that it is impossible to evolve any formula which can be applied in determining the character of isolated transaction; if a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit derives from an adventure in the nature of trade. These factore were taken into consideration to come to the conclusion that it was an adventure in the nature of trade. The Apex Court as well as various High Court have reiterated the basic principal and observed that it is impossible to evolve any formula which can be applied in determining the character of an isolated transaction and a holistic view has to be taken, by taking into consideration the circumstances of the case.
Agricultural land situated within specified distance vis-a-vis agricultural land situated beyond specified distance
If it is not considered as adventure in the nature of trade the next issue that arises for consideration is whether sale of agricultural land gives rise to ‘agricultural income’ or it is assessable to tax under the head ;capital gains’. Admittedly, the expression “agricultural income” is not comprehensively defined in the Income Tax Act, though it was explained under section 2(1A) , that any revenue derived from land, which is situated in the India, can be considered as agricultural income. Section 2(14) of the Act defines capital asset, which substituted by Finance Act, 1970 and thereafter in 1989 whereby only such agricultural land which is located within eight kilometres from the municipal limit should be treated as capital assets. In other words, agricultural land situated beyond eight kilometres from the nearest municipal limits not be treated as capital assets and sale proceeds thereof may be treated as revenue derived from land which is situated in India and is used for agricultural purpose. The Apex Court in the case of Singhal Rakesh Kumar v. Union of India & Ors. (2001)247 ITR 150 (SC) explained the meaning of the expression ‘agricultural income’ as well as the expression ;capital asset’. In the said case the issue was whether the profit arising out of sale of agricultural land gives rise to capital gains, within the meaning of income Tax Act, 1961. Awrit petition was filed by the assessee asking the High Court to declare as unconstitutional the Explanation to clause (1A) and sub clause (iii) of clause (12) of s. 2 of income Tax Act, 1961 to declare that capital gains arising from sale of agricultural land within the municipal area were not liable to capital gains tax under the Income Tax Act.1961. the Hon’ble High Court of Madhya Pradesh having dismissed the writ petition the matter came up before the Hon’ble Supreme Court. The Apex Court observed that the parliament is empowered to legislate to say what “agricultural income “ means. What Parliament says in this regard is that the meaning given under Income Tax Act should be taken as the correct meaning of the expression ‘agricultural income’ and in regard to such agricultural income the State may legislated in the aforementioned case the court observed that the Land being situated within the municipal limits income arising from transfer of agricultural land falls within the terms of items (a) and (b) of sub-clause (iii) of clause (14) of section 2 and falls outside the ambit of revenue derived from land, therefore, outside the ambit of ‘agricultural income’ and consequently liable to capital gains tax under section 45 of the Act. The assessee placed reliance upon the aforecited decision to submit that the impugned land sold by the assessee was situated beyond eight kilometres from the nearest municipal limt and hence, the income arising from transfer of agricultural land falls within the ambit of revenue derived from transfer of agricultural land falls as agricultural income in which event it has to be considered for rate purposes only.
The Hon’ble Bombay High Court in the the case of Gopal C. Sharma v. CIT (1994) 209 ITR 946 (Bom), on the other hand, observed that the expression agricultural land is not defines in the Income Tax Act and going by the Intention of the legislature, i.e. encouraging cultivation sale of agricultural land gives rise to capital gains. It may be noticed that the Court was not concerned with the case of agricultural land situated outside the municipal limit and had not specifically dealt with the provisions of section 2(1A) read with section 2(14) (iii)(a) and (b). On the contrary, the Apex Court in the case of Singhai Rakesh Kumar v. Union of India & Ors. (supra) observed that agricultural land situated within eight kilometres from the municipal limits
Land situated beyond specified distance cannot be treated as capital assets and gain arising on sale thereof gives rise to agriculture income
The Third Member held that the impugned land cannot be treated aas capital assets since it was situated beyond eight kilometres from the municipal limits and it was purchased as agricultural land and sold accordingly without making any change such as cconversion in the land records, plotting of land, ect. In facts the assessee stated that even at the time of purchase of the land cannot be inferred that the assessee intended to make enormous profit by selling the land within a short spam It was also submitted that National Capital Region masters plan was prepared in 2002 and notified in 2010 and it was to come into effect from 2031 whereas the land was purchased. There was nothing on record to suggest that the assessee has done any act to convert the land for non-agricultural use. It was not even the case of the Revenue that the assessee advertised for sale of the land the case of the assessee, on the other hand, was that the Vedic Village Developers (P) Ltd. Offered tempting pric and the assessee decided to take the benefit out of it though there was no intention to carry on trade
It is thus clear that it was a case of sale of agricultural land and the land being situated to tax under the Income Tax Act either as business income or capital gains. In the light of the latest decision of the Apex Court in the case of Snghai Rakesh Kumar v. Union of India & Ors (2001) 247 ITR 150 (SC) the only interpretation permissible is that the land situated outside the municipal limits stands excluded from the expression ‘capital Assets’ from the inception and the sale proceeds have to be treated as revenue received from agricultural land.
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The view stated in the title of the article (supra) has been expressed by the C- Bench of the C- Bench of the ITAT, Kolkata, in the case of Tarun kumar sarkar v. DY.Director Of Income -3 (1) , Kolkata 2017 Taxpub (DT) 3872 (Kol ‘C’ –Trib): (2017 ) 166 ITD 125 (Kol-Trib).The decision has been picked up for this write –up because the AO’s decision in the case is contry to the CBDT’s Circulars No.13/2017, dt.11-4-2017 and No.17/2017 dt.20-4-2017 issued ofter the assessment.
2.Facts of the case
The assessee,a Marine Engineer by profession , for the AY 2011-12 filed his return of income ,showing an income of Rs.2,09,021 in the status of a ‘non–resident ‘.He was engaged with M/s Mercator Lines Ltd ., Singapore, as a Marine Engineer .During the previous year ,relevant to the AY 2011-12, he was paid a sum of Rs.23,71,727 by the employer company on different dates for his services as a seafarer by credit to his two NRE accounts in india with HSHC Bank. The assessee did not show this amount as income in the return as income in the india filed in the status of a ‘Non-Resident’. The assessee’s case was that this income was received from outside india in foreign currency and,therefore, claimed as exempt.The assessee stated that he used to get his contract to do services with india/foreign shipping company through Indian agent and that contrats were executed in india duly signed by the agent in india and himself before joining the ship. But, he was to float on foreign water to render services during the courses of voyage and accordingly, when he will stay more than 182 days outside india or on foreign water,his residential status will be treated as ‘Non –resident’ as per provision of law and his salary income ,which are received out side india in foreign currency also will not be taxable under section 5 of the Act .The AO accepted the residential status of assessee as non-resident after verification of copy of passport and other details submitted . The assessee claimed that as per provisions of law ,salary income , which is received outside india in foreign issued show cause notice to the assessee as to why the remuneration received in india should not be brought to tax in terms of section 5(2)(a) of the Act. However, before examining the assessee’s defence to the AO’s notice ,it is relevant to examine the provisions of section 5(2)(a) of the Income Tax Act,1961 (Act).
3. Section 5(2)& (b) of the Act
Clauses (a) and (b) of section 5(2) of the Act read as under –
“(2) Subject to the provisions of this Act ,the total income of any previous year of a person , who is a non-resident, includes all income from whatever source derived , which-
(a) is received or is deemed to be received in india in such year by or on behalf of such person ;0
(b) accrues or arises or is deemed to accure or arise to him in india during such year”
Explanation 2 to section 5(2) provides that income,which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in india.
4.Analysis of section 5(2)(a)
From the foregoing extract of section 5(2)(a),it could be seen that section 5 of the Act provides for charge of income tax on accrual or receipt basis . Explanation 2 to section 5(2) provides that if an income has been subject of taxation on accrual basis , it cannot again be taxed on receipt basis. The section ,however , does nit give any indication as to in respect of what income ,the charge shall be on the receipt basis and on what income the charge shall be on accrual basis . Obviously , this would depend on the factual matrix.
5. Appraisal of the Tribunal’s decision
With the above background of legal provisions, the tribunal’s decision can be examined.
According to the AO, the provisions of section 5(2)(a) of the Act state that income from whatever source derived, which is received in india in such year by or on behalf of such person shall be included in the total income of any previous year of such person. He further observed that the said sextion does not mention anything about Indian currency. The section specifically states that any income received or deemed to be received in india taxable in india.He observed that the law states that the income received in india is taxable
In india in all cases (whether accrued in india or elsewhere), irrespective of residential status of the assessee. He also observed that it is significant to know the meaning of income received in india . if the place where the recipient gets the money (on first occasion) under his control ,is in india,it is said be income received in india. In the instant case ,all the income was remitted by the employer to the bank accounts of the assessee maintained in india .therefore, the AO added a sum of Rs .23,71,727 as income chargeable to tax in india. In support of his proposition , he placed of Capt . A.L.Fernandes v. ITO (2002) 81 ITD 203(Mum) (TM) whrerin it was held that teh salary received by the assessee in india was taxable under section 5(2)(a) of teh Act.
(ii)CIT (A)’s decision
The assessee claimed before the CIT (A) that teh AO’s decision is wrong,interalia, on the ground that he was under employment of a foreign company and serevices were rendered outside India. For The services rendered by the assessee outside India ,the entire payment of salary made by the foreign company in US$ and remittance was made to the NRE account of the assessee in india . The meaning of section 5(2) (a) or the Act. Should be interpreted only in the context of income received in india currency in india.There is a distinction between receiving money and transfer of money . The distinction between receiving money and transfer of money.the distinction is that where a foreign company makes payment to the non-resident for services rendered outside india , the foreign currency to the assessee who is a non- resident and the money in foreign received by the assessee not in india as because the point po payment by the company is in foreign land & the point of receipt by the assessee should be taken from the of payment. Mere remittance or transfer of the payments by the foreign co in the NRE account of the assessee in india that also in foreign exchange shall not be considered as income received in india & larger interpretation to the section would render it otiose.
The CIT (A) did not feel convinced with assessee (appellant before him) and confirmed AO’s order . Hence ,the assessee filed appeal before the income tax Appellate Tribunal (Tribunal ,for short,in later discussion).
(iii) Tribunal’s decision
The Tribunals has decided the appeal in favour of the case of the assessee , inter alia , on the following grounds.
(i) Thuogh the third Member’s decision in the case of capt .A.L.Fernandes v. ITO (2002) 81 (Mum) (TM), could be said to support the AO’s case , but More important are the CBDT’s Circulars (infra), which read as under and are binding on the AO’s:-
“Section 5 of the act –income- Accrual of –Clarification regarding liability to income tax in india for a non-resident seafarer receiving remuneration in NRE (non –resident external) account maintained with an Indian Bank
Circular NO. 13/2017 (F.No500/07/2017- FT & TR –V) dt 11-4-2017 (as corrected by Circular No 17/2017(F.No 500/07/2017-FT& TR- V) dt.26-4-2017)
Represent have been received in the board that income by way of salary received by non- resident seafarers for services rendered outside india on-board foreign ships,are being subjected to tax in india for the reason that the salary has been received by the seafarer.
2. The matter has been examined in the board. section 5(2)(a) of the Act provides that only such income of a non- resident shall be subjected to tax in india that is either received in india. It is hereby clarified that salary accrued to a non-resident seafarer for services rendered out side india on a foreign going ship (with indian flag or foreign flag) shall not be included in the NRE account maintained with an indian bank by the seafarer".
"section 5 of the act - income -accrual of - clarification regarding liability to income - tax in india for a non-resident seafarer receiving remuneraton in NRE (non-resident external) account with an indian bank - Corrigendum to circular NO.13/2017(F.NO.500/07/2017-FT&TR-V) dt.11-4-2017) Circular NO.17/2017(F.NO.500/07/2017-FT&TR-V) dt. 26-4-2017)
In the 4 of the paragraph No. 2 of the captioned circular, the words "Foreign Ship " may be "foreign going ship (with Indian flag or foreign flag)".
(iv) Final summing up by the tribunal
According to the Tribunal, a perusal of the Circulars reffered to above shows that salary accrued to a non-resident seafarer for services rendered outside india on a foreign going ship (withindian flag or foreign flag) shall not be included in the total income merely because the said salary hsa been crtedited in the NRE account maintained with an indian bank by a seafarer.Remittance of salary into NRE account maintained with an indian Bank by a seafarer could bea two types:
(i) employer directly creditng slary to the NRE account maintained with an Indian bank by the seafarer '
(ii) employer directly creding salary to the account maintained outside India by the seafarer transfering such money to NRE account maintained by him in india .the latter remittance would be outside the purview of provisions of section 5(2)(a) of the Act as what is remitted is not 'Salary income' but a mere transfer of assessee's fund from one bank account to another ,which does not give rise to 'income'.It ios not clear as to whether the expression 'merely because ' used in the Circular refers to the former type of remittance or the latter.To this extent, the circular is vague.
However, giving the benefit of doubt to the assessee ,the Tribunal has said that inthe case before it, the employer has directly credited the salary for services rendered outside India into the NRE bank account as it does not specify as to whether the circular covers either of the situations contemplated above. Hence, we deem it fit to give the benifit of doubt to the assessee by holding that the circular covers both teh situations referred to above. The result of such interpretation of teh circular would be that the provisions of section 5(2)(a) of the Act is rendered redundant. Be that as it may,it is well settled that the circulars issued by CBDT are binding on the revenue authorities . This position has been confirmed by the Apex Court in the case of Commissioner of Customs v.Indian Oil Corpn .Ltd .2004 Taxpub (DT) 1391 (SC) : (2004) 267 ITR 272 (SC) wherein their Lordships examined the earlier decisions of the Apex Court with regard to binding nature of the circulars and laid down that when a circular issued by the Bourd remains of the circulars issued by the Board remais in operation then the revenue is bound by it and cannot be allowed to plead that it is contrary to the terms of the statute.Accordingly,the grounds raised by the assessee are allowed.Hence the Tribunal allowed the assessee’s appeal.
Logically also,the Tribunals decision seems to be correct The salary accrued to the assessee for services rendered outside territorial waters when his status was that of non- resident, about which there is no dispute .The salary having accrued outside territorial waters, whether he rerceives it so on his behalf should make no difference.If at all, it could only be a technical non-compliance, for which the assessee need not be subjected abroad when it is squarely covered by teh CBDT’s circulars. Hence,it is respectfully said that the Tribunal has reached to a correct conclusion though through a circuitous route.
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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.
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).
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.
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.
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.
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.
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.
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.
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.
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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.
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.
Accommodation services have been classified under HSN/SAC 9963 wherein the further classification ia as under.
Service Tariff Code (HSN/SAC)
Description of Service
Room or unit accomdation services provided by Hotels, INN,Guest House , club, etc
Camp Site Services
Recreational an vocational camp services
Room or unit accomdation services for students in student residences
Room or unit accomdation services provided by Hotels, Capms, Paying Guests, etc.
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.
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.
The learned author attempts to make an overview of the anti-Profiteering measure introduced under the GST regime and the scope of powers of the National Anti- Profiteering Authority.
It is fundamental spirit of an indirect tax regime that reduction in rate of tax any supply of goods or services or the benefit by input tax credit should have been passed on to the recipient by way of commensurate reduction in prices. However, it has been the experience of many countries that when GST was introduced there has been a marked increase in inflation and the prices of the commodities. This happened in spite of the availability of the tax credit right from the production stage to the final consumption stage which should have actually reduced the final prices.
This was obviously happening because the supplier was not passing on the benefit to the consumer and thereby indulging in illegal profiteering.
With the introduction of GST regime in india, National Anti- Profiteering Authority has been constituted central Government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price o fthr goods or services or both supplied by him,this is to ensure that thecosumer is protected from arbitrary price increase in the name of GST.
The statutory provision relating to anti- Profiteering measure are enshrined under section 171of the CGT Act.Rules 123 to 133 of the CGST Rules,2017 deal with provision in respect of constitution of the National Anti- Profiteering Authority and scope of its powers.
As per sub–section (1) of section 171 of the CGST /SGST Act, any reduction in rate tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
As per sub- section (2) of section 171, the Central Government may, on recommendation of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being force, to examine whether input tax credits availed by any registreted person or the reduction in the tax rate have actually resulted in a commensure reduction in the price of the goods or services or both supplied by him.
It is clear from the above that when input tax credit is availed of by an registered person, the amount of tax is excluded from the purchase price or cost the goods and the input tax credit is used for discharge of output tax on outward supply. The Authority constituted under sub-section (2) of section 171 is required to examine that input tax credits availed by any registered person results in a commensurate reduction in the price of the goods or services or b both supplies by him.
The Authority is also required to ensure that any reduction in the tax rate must result in a commensurate reduction in the price of the goods or services or b both supplies by him.
3. Constitution of Authority
The National Anti- Profiteering Authority shall be a five-member committee consisting of a Chairman who holds or has held a post equivalent in rank to a Secretary to the Government of India ; and four technical Members who are or have been Commissioners of State tax or central tax or have held an equivalent post under existing laws.
The Additional shall cease to exist after the expiry of two years from the date on which the Chairman enters upon his office unless the Council recommends otherwise.
4.Power to determine the methodology and procedure
The Authority can determine the methodology and procedure for determination as to whether the reduction in the rate of tax on the suppy of goods or services or the benefit by way of commensurate reduction in prices.
5.Duties of Authority
As per rule 127 of the CGst Rules, the Authority would have the following duties:
(i) to determine whether any reduction in the rate of t axo any supply of goods o services or the benefits of input tax has been passed o to the recipient by way of commensurate reduction in prices;
(ii) to identify the registered person who has not passed on the benefit of reduction in the rate of tax on supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices;
(iii) to order;
(a) Reduction in prices
(b) Return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of eighteen per cent. Fromthe date of collection of the higher amount till the date of the return of such amount or recovery of the amount or recovery of the amount not returned, as the case maybe, in case the eligible person does not claim return of the amount or is not identifiable, and deposite the same in the Consumer Welffare Fund;
(c) Imposition of penalty; and
(d) Cancellation of registration.
(vi) to furnish a performance report to the Council by the 10th of the close each quarter.
6. Application to the Authority
According to sub-rule 128, the Standing Committee shall within a period of two months from the date of the receipt of a written application froman interested party or from a Commissioner or any other person, examine the accuracy and adequacy of the evidence provided in the application to determine whether there is prima-facie evidence to support the claim of goods or to the recipient by way of commensurate reduction in prices.
All applications from interested parties on issues of local nature shall first be examined by the State level Screening Committee constituted in each State by the State Government consisting of an officer of the State Government to be nominated by the Commissioner, and an officer of the Central Government to be nominated by the Chief Commissioner.
7. Initiation and conduct of proceeding
In terms of sub-rule (1) or rule 129, if the Standing Committee is satisfied that there is a prima-facie evidence to show that the supplier has not passed on the benefit of reduction in the rate of tax on thesupply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices , it shall refer the matter to the Director General of Safeguards for a detailed investigation.
In terms of sub-rule (3) of rule 129, if the Director General of Safeguards shall conduct
investigation and collect evidence necessary to determine undue profiteering and before initiation of the investigation,issue a notice to the interested parties (and to such other persons as deemed fit for a fair enquiry into the matter) containing, inter alia, information on the following, namely:-
(a) The description of the goods or services in respect of which the proceedings have been initiated;
(b) Summary of the statement of facts on which the allegations are based; and
(c) The time limit allowed to the interested parties and other persons who may have information related to the proceedings for furnishing their reply.
The evidence or information presented to the Director General of Safeguards by one interested party can be made available to the other interested parties participating in the proceedings in the proceedings. The evidence provided will be kept confidential and the provisions of section 11 of the Right to Infomration Act,2005, shall apply mutatis to the disclose of any information which is provided on a confidential basis.
The Director General of Safeguards can seek opinion of any other agency or statutory authorities in the discharge of his duties. The Director Genearal of Safeguards,or an officer authorised by him will have the power to summon any person necessary either to give evidence or to produce a document or any other thing. He will also have same powers as that of a civil court and every such inquiry will be a judicial proceeding.
The Director General of Safeguards will complete the investigation within a period of three months for reasons to be recorded in writing as allowed by the Standing committee and, upon completion of the investigation, furnish to the Authority, a report of its findings along with the relevant records.
8. Confidentiality of information
For the purpose of ensure confidentiality of information, it has been provided that notwithstanding anything contained in sub-rules (3) and (5) of rule 129 and sub-rule (2) of rule 133, the provisions of section 11 of the Right to Information Act, 2005, shall apply mutatis mutandis to the disclosure of any information which is provided on a confidential basis.
It is also provided under sub-section (2) of section 130 that the Director General of Safeguards may requie the parties providing information on confedential basis to furnish non-confidential summary thereof and if in the opinion of the party providing such information, the said information cannot be summarised, such party may submit to the Director General of Safeguards a statement of reasons as to why summarisation is not possible.
9. Cooperation with other agencies or statutory authorities
As per rule 131 of the CGST Rules, where the Directors General of Safeguards deems fit, he may seek opinion of any other agency or statutory.
Authorities in the discharge of his duties.
10. Power to summon persons to give evidence and produce documents
In terms of sub-rule 132,the Director General of Safeguards, or an officer authorised by him in this behalf,shall be deemed to be the proper officer to exercise the power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any inquiry in the same manner, as provided in the case of a Civil Procedure,1908.
Every such inquiry referred to in sub-rule (1) shall be deemed to be a judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code.
11. Order of the Authority
As per sub-rule (1) of the CGST Rules, the Authority shall (after granting an opportunity of hearing to the interested parties if so requested) within a period of three months from the date of the receipt of the report from the Director General of Safeguards determaine whether a register person has passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices.
If the Members of the Authority differ in opinion on any point, the point shall be decided according to the opinion of the majority.
Where the Authority determines that a registered person has not passed on the benefit of the reduction in the rate of tax credit to the recipient by way of commensurate reduction in prices, the benefit of input tax credit to the recipient by way of commensurate reduction in prices, the Authority may order-
(a) Reduction in prices;
(b) Return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interested at the rate of eighteen percent. from the date of collection of the higher amount till the date of the return of such amount or recovery of the of amount including interest not returned, as the case may be, in case the eligible person does not claim return of the amount or is not identifiable, and depositing the same in the Fund refered to in section 57;
(c) Imposition of penalty as specified under the Act ; and
(d) Cancellation of registered under the Act.
Any order passed by the Authority shall be immediately complied with by the registered person failing which action shall be initiated to recover the amount in accordance with the provisions of the Integrated Goods and service Tax Act or the Central Goods and Services Tax Act or the Union territory Goods and Services Tax Act of the respective States , as the case may be.
The Authority can direct any authority of central tax,State tax or Union territory tax to monitor the impletion of the order passed by it.
12. Decision to be taken by the majority
As per rule 134 CGST Rules, if the Members of the Authority differ in opinion on any point, shall be decided according to the opinion of the majority.
13. Compliance by the registered person
In terms of rule 135 of the CGST Rules, any order passed by the Authority shall be immediately complied with by the registered person failing which action shall be initiated to recover the amount in accordance with the provisions of the Integrated Goods and Services Tax Act or the State goods and Services Tax Act of the respective States, as the case may be.
14. Summing up
Anti-profiteering measures are globally Accepted policies which are implemented by various countries for controlling temporary inflationary prices of goods and services during the transition phase of implementation of GST. Anti-profiteering measure are adopted for providing benefit of GST to the consumers in terms of reduced prices and curbing more profit margins to the businessmen sought to be earned due to rise in prices of goods and services resulting inflation in country.
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