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April 2008 newsletter : latest developments

India

Set out below are details of the latest tax developments in India from BMR Advisors (www.bmradvisors.com). For further details please contact:

Bobby Parikh, Mumbai
Phone: +91 22 3021 7010
Email ID: bobby.parikh@bmradvisors.com

Mukesh Butani, New Delhi
Phone: +91 11 3081 5010
Email ID: mukesh.butani@bmradvisors.com

Abhishek Goenka, Bangalore
Phone: +91 80 4032 0100
Email ID: abhishek.goenka@bmradvisors.com

TAX EDGE : LATEST DEVELOPMENTS IN INDIA

Ruling on taxability of hardware maintenance services and software maintenance services

The applicant, Airport Authority of India (AAI) proposed to enter into a contract with Raytheon, a US based company, for supply of Air Traffic Systems. The contract involved supply of certain hardware and software. Subsequently, AAI entered into two separate contracts with Raytheon for maintenance and repair of hardware and software, respectively. Under the hardware repair contract, AAI was required to provide defective parts/components outside India to Raytheon at its workshop. The repaired parts were delivered by Raytheon to AAI outside India. The entire repair activity was undertaken outside India. The contract for software maintenance involved resolving anomalies and modifying the software earlier supplied by Raytheon.

The question in consideration was whether AAI was required to withhold taxes on payments to Raytheon under the two maintenance contracts.

As regards hardware maintenance activities, the AAR held that such activities do not qualify as Royalty / Fees for Technical Services (FTS) under Article 12 of the Agreement for Avoidance of Double Taxation (Treaty) between India and US. The hardware repair activities would qualify as business profits liable to tax in India if Raytheon constituted a PE and such activities were attributed to the PE. Also, even if Raytheon constituted a fixed base PE in India, due to its liaison office, the repair activities were entirely undertaken outside India and therefore, not taxable in India. Accordingly, it was held that AAI was not required to withhold taxes on payments made under the hardware maintenance contract.

The software maintenance services were held to be FTS under the India US Treaty and accordingly, AAI was required to withhold taxes.

The AAR also held that the liability to deduct taxes was independent of taxability of a payee to tax, though the two may be closely related. Therefore, even if the payee is being assessed to tax and is in appeal before the appellate authorities, the payer could still approach the AAR for determination of its liability to withhold taxes.

DIRECT TAX

Case Laws

Rulings by the AAR

Interest income derived by a non-resident Indian from a non-resident ordinary deposit account maintained in convertible foreign exchange is taxable at the rate of 20 percent

The applicant was an individual of Indian origin and a non-resident for Indian tax purposes. The taxpayer proposed to open a non-resident ordinary deposit (NRO account) account with banks in convertible foreign exchange in India. Interest income arising from such account was claimed as 'investment income' liable to tax at the rate of 20 percent under section 115E of the Income tax Act, 1961 (Act). However, the bank treated the income as 'income from other sources' liable to tax deduction at the rate of 30 percent.

The applicant, before the AAR, sought a Ruling on whether deposits made in the NRO account could be considered as a 'foreign exchange asset' and whether interest from such deposits could be treated as 'investment income' taxable at the rate of 20 percent under section 115E of the Act.

The AAR observed that a 'foreign exchange asset' under section 115C of the Act is defined to mean a 'specified asset' which has been acquired or purchased or subscribed to in convertible foreign exchange. Further, 'specified asset' includes deposits made in an Indian company, not being a private company as per the Companies Act, 1956. It was held that a banking company, though established by a special statute, is a company within the meaning of Companies Act, 1956. Thus, an NRO deposit in convertible foreign exchange would classify as a 'specified asset'. Accordingly, interest income derived from such deposits would be classified as 'investment income' and therefore, will be liable to tax at the rate of 20 percent under section 115E of the Act.
V Ravi Narayanan, In Re (215 CTR 234) (AAR)

Long-term capital gains derived by a non-resident on sale of listed equity shares of an Indian company are taxable at the rate of 10 percent, without indexation benefit

The applicant, a resident Indian company, had purchased equity shares
(original and bonus) of an Indian listed company from a non-resident company. The taxpayer sought an Advance Ruling on whether the non-resident will be eligible for the beneficial rate of tax of 10 percent on the capital gains arising from the sale of shares [section 112(1) of the Act].

The AAR, relying upon its own Ruling in the case of Timken France SAS, held that that the non-resident will be eligible for the beneficial rate of tax of 10 percent on capital gains arising on sale of shares. Further the benefit of indexation provisions will not be available to the non-resident. Also, since the shares were purchased by the non-resident in Indian currency, currency indexation would not be available.
Mcleod Russel India Ltd, In Re (299 ITR 79) (AAR)

Tribunal Decisions

Services inextricably linked with employment in India shall be taxable in India even if rendered outside India

The taxpayer was employed as correspondent by Japan Broadcasting Corporation (NHK) and was deputed to its Delhi office for investigating and reporting news in the South Asian region. The taxpayer was provided a rent-free accommodation in India. During the relevant previous year, the taxpayer spent some period outside India in connection with collection of news in the South Asian region. The taxpayer was 'Not Ordinarily Resident' in India during the relevant previous year. In the return of income, he excluded proportionate salary for his stay outside India contending that income for services rendered outside India would not be taxable in India.

The AO held that pursuant to his deputation, the taxpayer was required to carry on his employment from Delhi. Even though the services involved taxpayer to travel and spend time outside India during the period of his employment, such services were rendered in India as these had close nexus to employment in India.

On appeal, the Tribunal observed that the taxpayer was deputed to India as the bureau chief of the Delhi office and his role involved reporting news for the South Asian region. The main purpose of the visits outside India was to gather news and therefore, the taxpayer's stay outside India was inextricably linked to his duties as the chief of Delhi office. Thus, it was held that the entire salary and bonus of the taxpayer accrued in India and was liable to tax in India.
ACIT vs Hiromi Hirose (111 ITD 9) (Delhi)

Consideration paid for inspection and maintenance support services is not 'fees for technical services' under section 194J of the Act

The taxpayer made payments to a contractor for rendering inspection and maintenance support services, fabrication activities, thermal insulation / erection and activities in connection with conversion of one form of yarn into another. Taxes were withheld at the rate of 2 percent under section 194C of the Act. The AO held that the taxpayer rendered services which were technical in nature and therefore, taxes should have been withheld under section 194J. The CIT(A) reversed the order of the AO.

On appeal before the Tribunal, it was observed that though the activities undertaken by the taxpayer involved services of technically qualified personnel but this does not alone result in payments being categorized as FTS. It was held that rendering services by using technical knowledge or skill is different from rendering technical services. In order to categorize payments as FTS, the technical service should be 'made available' to a taxpayer pursuant to which such taxpayer may acquire certain rights which could be further utilized.

Based on above, it was held that the services rendered by the taxpayer did not result in technical knowledge (about maintenance of machinery / conversion process etc) being vested with the taxpayer. Thus, the amount paid was not considered as FTS under section 194J of the Act.
DCIT vs Parasrampuria Synthetics Ltd (20 SOT 248) (Delhi)

Consideration paid for acquisition of commercial rights is eligible for depreciation as 'intangible assets'

The taxpayer was engaged in the business of providing catering, house-keeping and allied services to a company. Such services were earlier rendered by another service provider. The taxpayer entered into an agreement with the service provider for taking over the catering contract for a consideration
(which was partly towards acquisition of commercial rights and balance as
non-compete fee). The taxpayer reflected the amount paid in its balance sheet as 'goodwill', on which tax depreciation at the rate of 25 per cent was claimed under section 32 of the Act.

The AO disallowed the claim for depreciation holding that tax depreciation is not available on 'goodwill'.

On appeal before the Tribunal, it was observed that the nomenclature given to entries in the books of accounts would not determine the taxability of payments. The agreement between the taxpayer and service provider clearly provided that the payments were made for acquiring commercial rights in relation to the catering contract. Therefore, irrespective of the nomenclature, such payments (other than those relating to non-compete fee) would not qualify as 'goodwill'.

The Tribunal observed that under section 32, depreciation under the head 'intangible asset' is available on payments, which are made for acquisition of 'any other business or commercial rights of similar nature'. The above expression would include all types of rights which could be used to carry on the business by a taxpayer. Accordingly, payments made by the taxpayer were considered to be in connection with acquisition of commercial rights which are eligible for depreciation under the Act.
Skyline Caterers (P) Ltd vs ITO (20 SOT 266) (Mumbai)

Income from letting out of building to be taxed as income from house property; income from letting out of equipment to be taxed as business profits

The taxpayer, being an Indian company, owned office building in Mumbai. The building was rented out to its group concern. In addition to the building, the taxpayer provided certain infrastructure facilities like electronic instruments and gadgets, air-conditioners, EPBX systems, telephone instruments, telefax etc to the tenant. In its return of income, the taxpayer classified the entire rental income as business profits. The AO assessed the income as 'income from house property'.

On appeal, the Tribunal observed that as per the lease agreement, the building and the infrastructure facilities were provided on lease by the taxpayer for a consolidated consideration.

In regard to lease of building, the Tribunal held that since the property was let out, the dominant intention of the taxpayer was to earn income by way of letting out the property. Also, nothing was brought on record to suggest that the taxpayer was exploiting the premises for its commercial business activity. Accordingly, it was held that the lease rentals received towards letting out the building should be treated as 'income from house property'. The consideration received towards providing infrastructure facilities / services were treated as business profits.

Since the lease agreement did not provide a bifurcation of rent between building and infrastructure facilities, 60 percent of the receipts were allocated towards building and treated as 'income from house property', while the balance receipts were allocated towards service charges and treated as business profits.
Universal Textile Water Proof Co (India) vs ACIT (20 SOT 275) (Mumbai)

A taxpayer is not obliged to determine the taxability of payments in the hands of the recipient; instead the order of the AO should be followed

The taxpayer, an Indian company was a subsidiary of a Dutch company. The taxpayer had entered into a contract for rendering services with its parent. Certain expenses under this contract were reimbursed by the taxpayer. The taxpayer filed an application with the Revenue authorities for issuance of 'nil' withholding tax certificate on the reimbursements proposed under the contract. The application was rejected and the taxpayer was directed to withhold taxes at the rate of 11 percent on the entire reimbursements.

The taxpayer withheld taxes on a portion of the reimbursements, treating the balance as not liable to tax. The AO disallowed the reimbursement cost
[under section 40(a)(i)] claimed by the taxpayer in his books of accounts in view of non deduction of appropriate taxes on these payments. The CIT (A) agreed with the findings of the AO.

On appeal before the Tribunal, it was observed that as per section 195, a taxpayer is duty bound to withhold taxes on payments made to non-residents at the prescribed rates. However, it is neither the duty nor desirable on part of the taxpayer to examine the taxability of payments in the hands of the recipient. Where the taxpayer believes that no tax is required to be deducted or that tax should be deducted at a lower rate, it is required to seek an order from the Revenue authorities determining such lower rate of tax deduction.

Based on above, it was held that the taxpayer was obliged to deduct and deposit taxes at the rate determined by the AO. Since appropriate taxes were not withheld on certain portion of the reimbursements, such proportionate amount was not allowed as a deduction in computing the taxable income of the taxpayer [section 40(a)(i) of the Act].
Van Oord ACZ India (P) Ltd vs ACIT (20 SOT 383) (Delhi)

Excise duty paid is deductible in the year of payment even though liability is not incurred

The taxpayer, engaged in the business of manufacture and sale of food and healthcare products, had deposited excess excise duty for the year ended
March 31, 2001. This excess duty payment was available as a credit (unutilized Modvat credit) against future excise duty liability of the company. The taxpayer, while computing its taxable income had claimed deduction of the excess excise duty paid under section 43B of the Act.

The AO disallowed the claim for deduction on the ground that under section 43B deduction is available for an expenditure which is incurred and paid. Considering the liability for excess excise duty paid had not been incurred, the taxpayer was not permitted to claim deduction for such expenditure. On appeal, the CIT(A) reversed the decision of the AO and allowed the deduction.

On appeal before the Tribunal, it was observed that as per section 43B of the Act, deduction of excise duty is allowed on payment basis. The section does not provide that the expenditure, incurred and paid for, to be allowed as a deduction. The basic purpose of enactment of section 43B was to replace the condition of allowability of a deduction from 'accrual basis' to 'actual payment'. It was also observed that under the excise laws, the taxpayer was statutorily required to deposit the duty before clearing the goods. Thus, payment of duty always precedes actual accrual of the duty liability, which would trigger at the time of clearance of goods. Accordingly, it was held that the taxpayer was not required to prove that the excise duty liability was incurred to be able to claim deduction on payment basis under section 43B of the Act.
Glaxo Smithkline Consumer Healthcare Ltd vs DCIT (299 ITR 1) (AT)
(Chandigarh SB)

High Court Decisions

Deduction of foreign exchange loss arising on the basis of accounting procedure prescribed under the Production Sharing Contract shall be available under section 42

The taxpayer, a non-resident company, was engaged in the production of crude oil alongwith joint venture partners under a Production Sharing Contract (PSC) entered into with the Government of India. The taxpayer had borrowed funds in US Dollars and was required to repay the loan in foreign currency. As per the provisions of the PSC, the taxpayer was required to convert expenditure incurred in US dollars into Indian Rupees on the basis of monthly average rate of foreign currency. The conversion into Indian currency of the borrowings resulted in loss, which was claimed as deduction under section 42 of the Act. The Assessing Officer (AO) held that the loss recognized by the taxpayer was a notional loss and therefore, should not be allowed as a tax deduction. The Commissioner of Income tax (Appeals) [CIT(A)], however, reversed the AO's order.

On appeal before the Income tax Appellate Tribunal (Tribunal), it was observed that as per the accounting procedure, prescribed under the PSC, sums borrowed in foreign currency were required to be converted into Indian currency at certain rates. In view of the depreciation of Indian currency, the taxpayer was required to repay more against the US dollars. It was thus held that foreign exchange loss recorded by the taxpayer was not notional, but instead a real loss and therefore, an admissible deduction under the Act. The High Court agreed with the views of the lower level appellate authorities and the claim was allowed to the taxpayer.
CIT vs Enron Oil & Gas India Ltd (168 Taxman 33) (Uttarakhand High Court)

Notifications and Circulars

Rule for determination of disallowance of expenditure in relation to exempt income

The Central Board of Direct Taxes (CBDT) has inserted a new rule (Rule 8D) to the Income tax Rules, 1962 which provides a mechanism for determining quantum of expenditure, liable to be disallowed, in relation to an exempt income.

As per Rule 8D, if AO is not satisfied with the correctness of the claim of expenditure made by a taxpayer, or with the claim that no expenditure has been incurred in relation to exempt income, then he may adopt the principles laid down in this new rule to compute the expenditure which would be disallowed.

As per this Rule, expenditure in relation to exempt income shall be the aggregate of the following:

o expenditure directly relating to income not forming part of total income
o in case of interest expense, which cannot be directly attributed to any income or receipt, proportionate interest computed as follows:

A*B/C; where

A = interest expense not directly attributed to exempt income
B = average value of investment from which exempt income is derived, on the first and last day of the financial year
C = average of total assets as appearing in the balance sheet of the taxpayer, on the first and last day of the financial year

Total assets have been defined as the total assets appearing in the balance sheet excluding any increase arising from revaluation of assets. The decrease in value of assets arising from revaluation will, however, be considered in computing the total assets.

o 0.5 per cent of the average of investments from which the exempt income is derived. Average would be computed on the basis of the value of investments as appearing in balance sheet on the first and last day of the financial year

Direct Tax Notification No 45 dated March 24, 2008

New forms for filing income tax return

The CBDT has notified the new forms for filing income tax returns for the financial year 2007-2008. Tax returns are mandatorily required to be filed using the newly notified forms. Further, tax returns are compulsorily required to be filed electronically by corporate taxpayers and taxpayers liable for audit under
section 44AB of the Act. All other taxpayers have an option to file the return in paper form.
PIB Press Release dated March 30, 2008

Non acceptance of withholding tax returns on failure to quote PAN

The income tax department, through an earlier notification had made stating of Permanent Account Number (PAN) of tax deductees compulsory in the quarterly tax returns filed by tax deductors. As per the notification, PAN of 95 percent of tax deductees in case of salary and 85 percent in other cases were compulsorily required to be quoted. In continuation of above, the tax department has specifically notified that in case of failure to quote PAN, withholding tax returns would not be accepted and taxpayer would be treated as default and exposed to penal consequences.
PIB Press Release dated April 1, 2008

Government signs India-Myanmar Treaty

The Government of India has signed a Treaty with the Government of Myanmar. The Treaty is expected to provide tax stability to residents of both countries and facilitate mutual economic cooperation as well as stimulate flow of investment, technology and services.

The highlights of the Treaty are as follows:

o Business profits would be taxable in the source state if the activities of an enterprise constitute a PE in such state. An installation PE would be constituted in case a project continues in the other state for 270 days or more.
o Dividends, interest and royalty would be taxed both in state of source and residence. However, the maximum rate of tax to be charged in the country of source would not exceed 5 percent in case of dividends and 10 percent in case of interest and royalties.
o Capital gains from sale of shares would be taxable in the country of source.
o Anti-abuse provisions have been specified to ensure that benefits of the Treaty are availed only by genuine residents.
PIB Press Release dated April 3, 2008

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INDIRECT TAX

Case Laws

Excise

Commissioner (Appeals)

Cenvat credit - Manufacture

The taxpayer manufactured dutiable sponge iron from iron ore, which resulted in generation of blast furnace gas (which is exempt from excise duty). The blast furnace gas was further used by the taxpayer for producing heat in the furnace and also (partly) sold to a third party. The Revenue demanded duty at 8 percent on sale price of blast furnace gas on the basis that the taxpayer manufactured dutiable and exempt goods. The taxpayer paid the duty and subsequently claimed refund of this amount on the ground that generation of blast furnace gas was inevitable and could not be avoided. The Revenue rejected the refund claim stating that since blast furnace gas was an exempted product, the taxpayer had failed to comply with Cenvat credit provisions and that the incidence of duty had been passed on to the customer.

The Commissioner (Appeals), relying on precedents, held that blast furnace gas was generated as a by product while manufacturing sponge iron, and therefore, did not tantamount to manufacture of dutiable and exempted products. Therefore, there was no requirement to pay duty at 8 percent. The Commissioner (Appeals) further held that raising supplementary invoices and mentioning duty amount attributable to blast furnace gas separately on the invoices would not imply that the duty was passed on to the buyer, since the buyer, in fact, did not pay the duty to the taxpayer.
In Re: Ispat Metallics (India) Limited) (222 ELT 574) (Mumbai)

Tribunal Decisions

Cenvat credit on advertisement

The taxpayer, a manufacturer of concentrates (that were used by bottlers / franchisees to produce aerated waters), availed Cenvat credit of expenses incurred by it on advertising aerated waters. The Revenue disputed such availment on the basis that advertisement expenses were in relation to aerated waters and therefore, did not qualify as input service for the taxpayer.

The Tribunal held that since the advertisement was in respect of aerated waters and not concentrates, such advertisement service could not be termed as 'input service'. The Tribunal held that to be an input service, advertisement should be undertaken for sale and promotion of final products of the taxpayer and not of others and disallowed the credit availed by the taxpayer.
Coca Cola India Private Limited vs CCE (223 ELT 69) (Mumbai)

Treatment of Cenvat credit balance on surrender of excise registration

The taxpayer surrendered its excise registration to opt for an exemption under Notification no 30/ 04 CE dated July 9, 2004, which was subject to the condition of non availment of Cenvat credit by the taxpayer. The issue was whether the Revenue could recover Cenvat credit lying in the taxpayer's account on the date of surrender of registration on the ground that such balance (carried over) would violate the condition of non availment of Cenvat credit.

The Tribunal held that on surrender of excise registration, the entire Cenvat credit in balance lapses, and there is no question of it being utilized. Further, the taxpayer did not claim refund of such balance; therefore, the Revenue could not recover the balance for violation of the prescribed condition in the aforementioned notification.
CCE vs Arihant Twisting Industries (223 ELT 258) (Mumbai)

Unjust enrichment not applicable to excess deposit made during investigation

The issue before the Tribunal was whether unjust enrichment provisions would be applicable to excess amount deposited during the investigation.

The Tribunal upheld the Commissioner (Appeals) order, where it was held that the doctrine of unjust enrichment has no application to amounts deposited during investigation proceedings. The Commissioner (Appeals) had further held that once the taxpayer deposited the duty during investigation, the accounting treatment accorded to such an amount by the taxpayer was immaterial, and merely debiting the amount to Profit & Loss account would not imply that the duty had been recovered from clients.
CCE vs Andor Powertron Limited (223 ELT 305) (Mumbai)

Unjust enrichment not applicable to repayment of excess duty collected by issue of credit notes

The taxpayer collected excise duty at 18 percent while being unaware of a reduction in rate of duty to 15 percent. The taxpayer returned such excess duty collected by issuing credit notes and applied for a refund of such excess payment. The issue was whether the principle of unjust enrichment would be applicable to such a refund claim.

The Tribunal, following an earlier decision of the Supreme Court, held that where the taxpayer collected an excess amount of duty, which was repaid to the dealers by issuing credit notes, the principle of unjust enrichment, would not be triggered.
CCE vs N V K Mohd Sultan Rowther and Sons (223 ELT 276) (Chennai)

Reversal of Cenvat credit on removal of used capital goods

The issue in this case was whether (the entire) Cenvat credit availed on capital goods was required to be reversed on removal of such capital goods (after they were put to use) from the taxpayer's factory.

In light of contradictory decisions of the Division Bench on this issue, the matter was referred to a larger bench of the Tribunal for settlement.
Modernova Plastyles Private Limited vs CCE (222 ELT 557) (Mumbai)

Value of co processor to be included in the assessable value of a computer system

The issue in this case was whether the value of a co-processor was required to be included in the assessable value of a computer system.

The Tribunal, relying on earlier precedents, held that the value of a numeric or math co-processor (the most common kind of co processor), which is synchronized with the main processor, had to be included in the assessable value of the computer system since it forms an integral part of the computer system as the computer system would not be able to function efficiently without the numeric or math functions.
CCE vs Ami Sanag Micromation Limited (85 RLT 30) (Bangalore)

Unjust enrichment not applicable to goods exported out of India

The taxpayer imported polyester yarn (under the advance license scheme), which was sent to a third party for conversion into fabrics and subsequently exported by the taxpayer. Due to dispute on valuation of goods manufactured, duty was provisionally paid on the declared value of goods. Subsequently, duty was paid on a higher value, even though the Assistant Commissioner accepted the declared value of goods, resulting in excess payment of duty. Accordingly, the taxpayer applied for refund of the excess duty paid, which was rejected by the Revenue on grounds of unjust enrichment.

The Tribunal held that irrespective of whether assessments were provisional, the taxpayer imported polyester yarn and got it manufactured into fabrics that were exported from India. Therefore, since there was no buyer of the final product in India, the incidence of the duty being passed on by the taxpayer would not arise and the doctrine of unjust enrichment would be inapplicable.
CCE vs Mitesh Brothers (84 RLT 732) (Mumbai)

Duty paid under protest, during pendency of proceedings, not hit by unjust enrichment

The Revenue, during an audit, had highlighted differences in weight recorded in the factory's weighment register and invoices raised between September 1996 and January 1997; consequently, the taxpayer paid the applicable duty on the difference under protest. While the taxpayer succeeded in contesting such duty liability, the refund was denied on the ground that provisions of unjust enrichment were triggered and the taxpayer could not prove that incidence of the duty was not passed on to the buyer.

The Tribunal held that the duty was paid under protest subsequent to clearance of goods and hence, the incidence of the duty could not be passed on to the buyers. Therefore, the provision of unjust enrichment was not applicable to this case.
CCE vs Sagar Cements (84 RLT 838) (Bangalore)

Customs

Supreme Court Decisions

Royalty / technical know how fees not includable in assessable value of imported goods

The issue in these cases was whether royalty / technical know how fees paid by the taxpayer to suppliers under Technical Assistance Agreements was includible in the assessable value of imported capital goods, raw material and components used for manufacturing final products in India.

It was held that royalty / technical know how fees were not includible in the value of imported goods as they related to a post importation activity and there was nothing on record to indicate that royalty was a pre condition to sale.
CC vs Ferodo India Private Limited (85 RLT 59)

Tribunal Decisions

Jurisdiction over units located in SEEPZ

The Commissioner of Customs (Preventive), Mumbai seized waste and sweepings containing silver and gold from a jewellery unit located in Santacruz Electronics Exports Processing Zone (SEEPZ) and issued an order levying penalty for violation of a notification requiring payment of customs duty on removal of scrap, waste or sweepings of gold for conversion into gold bars meant for re use.

The Tribunal held that as per Para 1.9 of the Manual on Procedures of Customs and Central Excise for Units in SEEPZ, the Assistant Commissioner, SEEPZ, the Joint or Additional Commissioner of Customs, Airport or the Commissioner of Customs, Airport (depending on the value of goods) have the jurisdiction to adjudicate on issues relating to units located at SEEPZ for contravention of provisions of the applicable Central Excise and Customs regulations. Further, the technical control of SEEPZ was with the Commissioner of Customs, CST Sahar, Mumbai; therefore, the Commissioner of Customs (Preventive), Mumbai did not have the power to adjudicate on matters relating to units located at SEEPZ.
Tara Jewels Export Limited vs CC (222 ELT 523) (Mumbai)

Service Tax

Commissioner (Appeals)

Cenvat credit

The taxpayer provided taxable and exempt services and did not maintain separate accounts for common input services used in providing taxable and exempt services. The issue in this case was whether non maintenance of separate records could be a ground for denying Cenvat credit on common services that form a part of the 17 enumerated services on which full credit is allowed under Rule 6(5) of the Cenvat Credit Rules, 2004.

The Commissioner (Appeals) held that since Rule 6(5) begins with the term 'notwithstanding'; hence Rule 6(3), which restricts utilization of Cenvat credit to 20 percent of the output service tax liability in case of common services used in provision of taxable and exempt services, would be inapplicable to services enumerated under Rule 6(5). It was further held that the word allowed used in Rule 6(5) covers both taking and utilization of credit.
In Re: Asia Pacific Hotels Limited (222 ELT 589) (Goa)

Tribunal Decisions

Cargo Handling Services

The taxpayer, a registered labour contractor, supplied labour to its client for handling goods within the factory for shipment etc. The Revenue sought to levy service tax on this activity under the category of 'cargo handling services'.

The Tribunal held that the labour, supplied by the taxpayer, was working and operating under the control of the client. Besides, the client was responsible for paying statutory minimum wages to the labour and undertaking statutory deductions and contributions (in the form of provident fund, ESI etc). Therefore, the activity of supplying labour to clients would not be covered within the category of 'cargo handling services'.
CCE vs Pawan Associates (9 STR 458) (Bangalore)

Software development

The issue was whether software testing, undertaken together with software development, can be separately subjected to service tax under
'technical inspection and certification services'.

While hearing the stay application, the Tribunal held that the activities of development and testing of software go hand-in-hand for releasing software. Development of software would be incomplete without the software being tested. Further, since the computer software industry is exempted from service tax, the taxpayers had a strong prima facie case for non-applicability of service tax.
Stag Software Private Limited vs CST (9 STR 476) (Bangalore)

Scientific and technical consultancy services

The taxpayer received consultancy and technical assistance in relation to goods manufactured in India from manufacturer of similar goods abroad. The issue was whether service tax could be levied on the taxpayer as a recipient of 'scientific and technical consultancy services'.

While allowing the stay application, the Tribunal held that for a given service to fall under the category of 'scientific and technical consultancy services', the technical assistance has to be rendered by a scientist or a technocrat or a science or technology institute or organization.
Mita Harig (India) Limited vs CCE (9 STR 508) (Delhi)

Leased Circuit Services

The issue was whether inter connectivity charges provided to cellular / mobile operators are taxable prior to June 1, 2007. Relying on the CBEC's
Circular No 91/2/2007 ST dated March 12, 2007, the Tribunal held that
inter-connection usage charges do not attract service tax for the period prior to June 1, 2007.
BSNL vs CST (9 STR 499) (Bangalore)

Valuation (Service tax)

The taxpayer provided 'steamer agency services' and 'custom house agency services', and did not include reimbursement of expenditure incurred on behalf of clients while computing the value of taxable services (during financial years 2000 01 through 2004 05).

The Tribunal held that expenses incurred on behalf of clients that were not directly relatable to provision of services by the taxpayer, could not be included in the value of taxable services.
GAC Shipping (India) Private Limited vs CCEC (9 STR 524) (Bangalore)

Goods transport agency services

The taxpayer paid service tax as a recipient of 'goods transport agency's services' and opted for abatement of 75 percent on the taxable value of services under Notification No 32/2004 - ST, which was subject to non-availment of Cenvat credit by the service provider on inputs / capital goods used for providing such services. The issue was whether the condition of non availment of Cenvat credit would also apply to the taxpayer, which paid service tax as a consignee of goods.

The Tribunal held that the condition of non availment of Cenvat credit necessarily relates to services actually rendered by a goods transport agency. Since the taxpayer did not render any transport services, and as a consignee of transport services, could not avail credit on inputs / capital goods used in providing such service, the taxpayers were entitled to the abatement.
CCE vs Sunhill Ceramics Private Limited (9 STR 530) (Ahmedabad)

Input services

The issue in this case was whether the taxpayer, a manufacturer of cement, could avail Cenvat credit of expenses incurred on management, maintenance and repair services used for its residential colony.

The Tribunal held that the taxpayer's factory was situated at a remote place where no facilities were available for stay of their engineers and workmen; therefore, it was necessary to construct a residential colony for the employees in order to maintain continuity in the process of manufacturing cement. Accordingly, Cenvat credit of such expenses was allowed.
Manigarh Cement vs CCEC (9 STR 554) (Mumbai)

Utilization of Cenvat credit to pay service tax on goods transport agency's services

The issue involved in this case was whether the taxpayer, being a manufacturer, could utilize Cenvat credit to pay service tax on 'goods transport agency's services' that were availed for outward transportation of finished goods.

The Tribunal held that though the taxpayer did not provide any service, since it paid service tax on services received, for which the taxpayer was treated as a service provider under explanation to Rule 2(p) of the Cenvat Credit Rules, 2004 utilization of Cenvat credit was permissible.
Pallipalayam Spinners Private Limited vs CCE (9 STR 544) (Chennai)

Computation of service tax liability

The issue in this case was whether service tax was payable on (a) amounts not received from clients and (b) where the value of services has been received, excluding the applicable tax (invoiced to clients).

On the first issue, the Tribunal held that service tax liability is computed on the basis of payments received in the preceding month, and tax amount cannot be calculated on the basis of value of services shown to have accrued in the Profit and Loss account. On the second issue, in situations where only the amount for value of services (and no service tax) is recovered by the service provider, the amount so received has to be considered as inclusive of service tax.
Turret Industrial Security Private Limited vs CCEC (9 STR 564) (Kolkata)

Erection, Commissioning and Installation service

The taxpayer entered into an indivisible works contract for supply, erection and commissioning of Automatic Teller Machines (ATMs) for banks during July 2003 to April 2006. The Revenue sought to levy service tax on a portion of the total consideration received by the taxpayer under the category of commissioning and installation services.

Relying on the decision in Daelim Industrial Company vs CCE, the Tribunal held that service tax could not be levied on indivisible works contracts prior to June 1, 2007 as the taxable event for levying service tax was not present before such date. The Tribunal further held that service tax could not be imposed on the ground that ATMs qualify as equipment (which were already taxable under commissioning and installation services) since ATM related services were made taxable only with effect from May 1, 2006, and introduction of a new entry for levying tax pre supposes that it was not covered by any pre existing category of taxable service.
Diebold Systems (Private) Limited vs CST (9 STR 546) (Chennai)

Precedent

The (limited) issue involved was the applicability of Supreme Court decisions
under Central Excise on non levy of penalty to service tax related matters.

The Tribunal held that such Supreme Court decisions do not automatically apply to service tax as the provisions of Central Excise legislation are different from service tax provisions.
Shrandeep Manpower Consultancy Private Limited vs CCE (9 STR 566) (Mumbai)

Manpower Recruitment Agency

The issue was whether the activity of loaning staff / employees of the taxpayers to a manufacturing company for carrying out its manufacturing activities would be classified under 'manpower recruitment or supply agency's services'.

While hearing the stay application, the Tribunal held that for the period prior to June 16, 2005, the aforesaid activity would not be taxable since the employees were working on the taxpayer's rolls, and such an arrangement would not constitute 'recruitment of manpower'; however, after such date, due to an expansion in the scope of the levy, such services would prima facie become taxable.
The Sanjivani (Taki) SSK Limited vs CCEC (12 STJ 406) (Mumbai)

Refund of Cenvat credit

The taxpayer filed a refund claim for unutilized Cenvat credit for the period April 2005 to December 2005 under Rule 5 of the Cenvat Credit Rules, 2004.
Prior to March 14, 2006, as per the provisions of the said Rule, a service provider exporting services was not (categorically) eligible to claim refund of unutilized Cenvat credit; however, with effect from March 14, 2006, this Rule was amended to specifically allow a refund of unutilized Cenvat credit to a service provider exporting services. The issue was whether the taxpayer's refund claim was admissible since it related to service exports prior to March 14, 2006.

The Tribunal held that prior to March 14, 2006, neither any condition, safeguard or limitation in respect of a service provider were present in law, nor was any procedure prescribed for claiming refund of unutilized Cenvat credit availed on input services used in export of output services. However, a refund claim filed after the amendment, which satisfies every requirement of Rule 5 and relevant notifications cannot be rejected on the ground that the claim relates to services exported prior to March 14, 2006 since there is no such condition prescribed in the notification or rules.
WNS Global Services (Private) Limited vs CCE (13 STT 37) (Mumbai)

Input service

The issue was whether service tax paid on services of telephone installed at residence, personal accident insurance, maintenance of garden and canteen building, repairing of street light would be covered within the ambit of
'input services'.

The Tribunal held that the aforesaid services do not fall under the purview of an 'input service' under the Cenvat Credit Rules, 2004; hence, credit was not permissible.
H E G Limited vs CCE (223 ELT 212) (Delhi)

Reverse charge

The issue involved was whether, for the period before January 1, 2005, the taxpayer was liable to pay service tax on management services received from a service provider outside India.

The taxpayer contended that prior to January 1, 2005, it was not liable to pay service tax on service received from foreign service providers as Notification 36/2004 ST dated December 31, 2004 imposing service tax on import of services, was effective only from January 1, 2005. The taxpayer further contended that even though the Central Government notified 'the person liable to pay service tax' by amending Rule 2(i)(d)(iv) of the Service tax Rules, 1994
(the Rules) with effect from August 16, 2002, there was no provision in the Finance Act, 1994 so as to deem services rendered by a non resident service provider as taxable in the hands of the service recipient.

The Revenue, on the other hand, relied on Rule 2(i)(d)(iv) of the Rules to contend that the service recipient would be liable to pay service tax on services received from foreign service providers with effect from August 16, 2002.

In light of conflicting views that have been expressed by various benches of the Tribunal on this issue, the Tribunal referred the matter to a larger bench for consideration.
Molex (India) Limited vs CCE (Appeals) (84 RLT 770) (Bangalore)

VAT

High Court Decisions

Entry Tax

The taxpayer challenged constitutionality of the levy of tax under the Andhra Pradesh Tax on Entry of Goods into Local Areas Act, 2001 (the Act).

While rejecting the Revenue's contention that entry tax was compensatory in nature, the High Court held that a compensatory tax, in the present context, would be understood as a compulsory contribution, levied broadly in proportion to special benefits derived to defray costs of regulation, or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. Provision of infrastructure facilities (such as good motorable roads and illumination of streets etc, which are not exclusively intended for promoting a particular class) cannot be rolled out and presented as the 'specific end objective' of the intended promotion of interest of tradesmen or businessmen. Therefore, the levy of entry tax was not compensatory in nature. Further, no sanction from the President was obtained under Article 304(b) of the Constitution, prior to enactment of the Act. Therefore, the levy of entry tax was held unconstitutional.
Sree Rayalaseema Alkalies and Allied Chemicals Limited vs State of Andhra Pradesh (13 VST 15) (Andhra Pradesh)

Works contract

The issue was whether the activity of the taxpayer engaged in the business of taking photographs, developing and delivering them to customers would amount to a works contract.

Relying on the decision in Associate Cement Companies Limited vs CC, the High Court held that the decision in Rainbow Colour Lab vs State of Madhya Pradesh was no longer good law; and accordingly, the High Court held that activity of taking photographs, developing and printing films was a
works contract.
Johny Joseph vs State of Kerala (13 VST 64) (Kerala)

Whether activation charges are chargeable to sales tax

The issue was whether activation charges received by a provider of cellular mobile telephone services would be subjected to tax on the basis that such a transaction qualifies as sale of goods.

Relying on the decision of Bharat Sanchar Nigam Limited vs Union of India, the High Court held that electromagnetic waves or radio frequencies do not constitute goods; and therefore, activation charges could not be subject to sales tax.
Escotel Mobile Communications vs State of Haryana (12 VST 443)
(Punjab & Haryana)

Purchase Tax

The taxpayer purchased oil from various dealers within the state (of Tamil Nadu), who enjoyed exemptions from sales tax, and stock transferred the oil to branches outside the state. The taxpayer challenged the constitutional validity of purchase tax on such transactions.

The High Court held that purchase tax comes into play when purchase of goods does not suffer tax. Although second sales of goods that have suffered tax enjoy an exemption, there may be contingencies where the first sale (liable to tax) is not assessed and the goods are no longer available for taxation within the state (when transferred outside the state). In such contingencies, if the selling dealer cannot be taxed, the purchasing dealer is taxed by levy of purchase tax. Therefore, the dealer was held liable to pay purchase tax.
Ruchi Soya Industries Limited vs Commercial Tax Officer (12 VST 546) (Madras)

Tribunal Decisions

Sale of fixed assets and discarded goods

The issue was whether sale of used machines and tools (fixed assets and discarded goods) by a computer manufacturer was liable to central sales tax.

The Tribunal held that in order to attribute an intention to carry on business, it is not sufficient to show that a taxpayer was carrying on business in some capacity and disposes off fixed assets and discarded goods. While relying on the High Court's decision in Morarji Brothers case, it was held that sale of fixed assets or discarded goods acquired in the course of business would not constitute 'sales in connection with or incidental or ancillary to the business of manufacture'; therefore, sale of used machines and tools would not be taxable.
Sahney Kirkwood Private Limited vs State of Maharashtra (37 MTJ 263) (Maharashtra)

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OTHER ALLIED LAWS

FEMA

Limit for overseas investment by registered Mutual Funds raised

The Reserve Bank of India (RBI), with a view to provide greater opportunity for investment overseas, has enhanced the aggregate ceiling for overseas investment by Mutual Funds registered with Securities and Exchange Board of India (SEBI) from the current limit of USD 5 billion to USD 7 billion. The existing facility to allow certain limited qualified Indian Mutual Funds to invest cumulatively up to USD 1 billion in overseas Exchange Traded Funds would continue. The above investments would be subject to terms and conditions and other operational guidelines issued by SEBI.
RBI A P (DIR Series) Circular No 34 dated April 3, 2008

Timing for receipt of e-payments

The RBI, in consultation with Central Board of Excise & Customs (CBEC) and Controller General of Accounts, had issued a Circular (dated March 5, 2008) to provide that e payments received upto 8.00 pm may be treated as received on that day and payments received subsequently, be treated as received on next working day. In continuation to above, it has been provided that the above cut-off time would apply to all government transactions as well.
RBI DGBA GAD No H 9561/41.07.003/2007-08 dated March 5, 2008 and
DGB GAD No 10577 / 42.01.038 /2007-08 dated April 3, 2008
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Overview of fiscal regime for Carbon Credits in China

A Contribution by Hendersen Consulting China, a member of Taxand

Clean Development Mechanism (CDM) is one of the flexibility mechanisms provided by Kyoto Protocol to combat global warming. CDM permits industrialized countries to take up Green House Gases (GHG) reduction projects in developing countries. On one hand, it enables industrialized countries to meet their GHG reduction commitments by acquiring GHG reduction targets. While for developing countries, which do not have any obligation to meet specified commitments, it creates a huge opportunity to earn revenues through generation and sale of reduction credits. The reduction credits generated / earned through CDM are known as Certified Emission Reductions (CERs). Among the developing countries, China dominates the carbon market on the supply side followed by India. In the coming years, India is expected to emerge as the leader and outway China.

CDM in China

With the promulgation of the Provisional Rules of CDM Projects Management in 2004 and the Regulation on CDM Projects, China has become one of the major countries exporting CERs. Till April 2008, China has successfully registered 193 CDM projects, which accounts for around 20 percent of the projects registered by host parties. The total annual emission reduction of these projects is estimated to be 100 million tons, which accounts for 50 percent of the total registered projects.

Common Structure

Project company: According to the Regulation on CDM Projects issued by the State Development and Reform Commission (SDRC Regulation), a company engaged in CDM project has to be a domestic company or a Sino-foreign joint venture (JV) with majority shares owned by the Chinese entity. The JV would receive CER credits.

Consulting company: It is common for foreign investors to set up wholly owned consulting companies. The consulting company would provide services to the JV and get compensated by the JV.

Tax Implications

As of now, there are no state regulations governing tax treatment of CDM projects. Certain provisional regulations are likely to be issued in 2008.

Based on SDRC Regulation, the State would collect 65 percent of the revenues generated for HFC and PFC projects. For N2O projects, the State would collect 30 percent. For projects in key areas and forestry projects, the State would collect 2 percent of the total revenues.

Further, the new Income Tax Code and the Rules and Regulations for Implementation (DRR) effective 2008, provide certain incentives to energy and environmental projects. Article 88 of the DRR provides that qualified environmental, energy saving and water reservation projects can enjoy a 3-year exemption and 3-year 50 percent reduction of income tax. The above mentioned projects include emission reduction projects. As stated above, further details in this regard could be issued during the course of the current year.

On indirect tax side, there are three different opinions:

o Since the state has been collecting substantial portion of revenue generated from CDM project, no additional indirect tax should be imposed.
o Business tax (which is applicable on services) should apply since the reduction of emission can be viewed as services. Today the business tax rate is 5 percent on services in China.
o VAT should apply since the process relating to CDR is more in the nature of manufacture. However, it may be argued that if VAT is applicable, it should be exempted since CER credits are "exported". Under Chinese system, VAT is zero rated or partially imposed depending on the type of export.

Since there are no specified state regulations governing the taxation in this sector, companies engaged in this sector need to proactively approach the
in-charge tax authority on the detailed tax treatments and incentives.

CDM in India

The Government of India is in the process of creating a framework for regulating carbon markets. Some of these initiatives include formulation of a new accounting policy prescribing the methodology for accounting revenues from carbon credits, establishment of Multi Commodity Exchange and National Commodity and Derivative Exchange for carbon trading, scheme to promote replacement of incandescent bulbs with CFLs etc.

On the taxation side, presently, there is no regime (including direct and indirect tax) for taxation of income generated from CERs under the Indian tax laws. As projects in India generate substantial revenues through CDM projects, there are a number of regulatory and tax issues that need to be resolved. There are alternate interpretations on the tax treatment of the income generated from CERs viz should such income be taxed as business income or as capital gains, are CERs liable to VAT, etc.

The gain in momentum of CDM projects and benefits from carbon reduction initiatives require that income generated from CERs is not subject to endless litigation and a fiscal regime for their taxability is formulated.

EVENTS

Conference & Interactive Workshop on "Successful EPC Contracting - Fiscal and Legal Challenges

BMR, in collaboration with InfralineEnergy Research Services, hosted the 3rd Annual Conference & Interactive Workshop on "Successful EPC Contracting - Fiscal and Legal Challenges" at The Imperial Hotel, New Delhi, from April 17-19, 2008. The workshop facilitated EPC contractors and Project Owners to update and gain a deeper and concise knowledge of the current and evolving tax and legal issues surrounding it. This workshop provided an update and enriched the knowledge base of Financial, Legal and Commercial teams of Contractors and Project Owners. The workshop also captured all important announcements and developments of India Budget 2008.

For more details, please click here.

International Tax Review to organise annual Asia Tax Forum 2008, in Singapore on June 5-6, 2008

International Tax Review, a Euromoney Legal Media Group publication, will host its third annual Asia Tax Forum on June 5-6, 2008, in Singapore. Leading Asian Taxand member Firms, BMR Advisors, India; KhattarWong, Singapore; and Kojima Law from Japan are supporting the annual event.

The annual Tax forum attracts participants comprising heads and regional heads of tax of leading companies in Singapore, Japan, North America and Europe. This event also brings together tax executives, officials and advisers from the Asian continent to discuss and debate the latest developments and issues in tax, including transfer pricing, financing structures and cross border tax structuring.

For more details, please click here

BMR Advisors expands partnership

Three tax professionals joined the partnership at BMR Advisors on April 1. Malini Mallikarjun specialises in a range of indirect taxes including service tax, value added tax, sales tax and customs regulations. Russell Gaitonde is a specialist in direct tax in the financial services industry. Amod Khare's practice focuses on direct corporate and international tax.

For more details, please click here
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Feedback

BMR in News

Expert Speak

Events

Special Contribution

Taxation of Clean Development Mechanism
(CDM) in china. . . . . . . . . . . . .

Contents
DIRECT TAX. . . . . . . . . . . . . . . . .

Case Laws. . . . . . . . . . . . . . . . . . .
Notifications & Circulars. . . . . . . . .

INDIRECT TAX. . . . . . . . . . . . . . .

Case Laws. . . . . . . . . . . . . . . . . . .
Notifications & Circulars. . . . . . . . .

OTHER ALLIED LAWS. . . . . . . . .

For more information on this topic, contact:
Bobby Parikh, Mumbai
Phone: +91 22 3021 7010
Email ID:
bobby.parikh@bmradvisors.com

Mukesh Butani, New Delhi
Phone: +91 11 3081 5010
Email ID:
mukesh.butani@bmradvisors.com

Abhishek Goenka, Bangalore
Phone: +91 80 4032 0100
Email ID:
abhishek.goenka@bmradvisors.com

Contributors to this edition:
Direct tax
Prerna Mehndiratta
G Chandra Shekhar
Dilip Agarwal

Indirect tax
Dharnendra Kumar Rana
Kaustuv Sen
Sumeet Kaur

Snippet
New Zealand has proposed to enter into a free trade agreement (FTA) with India to boost bilateral trade between the two countries. Signing of FTA would increase trade transactions between the two countries to more than 616 million NZ dollars. New Zealand's total exports to India rose to 366 million NZ dollars in 2007 while India's exports were 250 million NZ dollars.

Source: The Financial Express,
March 24, 2008

Snippet
The Information & Broadcasting Ministry has accorded approval for a proposal to increase foreign direct investment (FDI) limit to 24 percent from the current 20 percent in FM radio operations. The proposal is now forwarded to the Department of Industrial Policy & Promotion, the nodal ministry that governs foreign investment.

The Telecom Regulatory Authority of India, in the past, had recommended that composite foreign investment limit for FM radio operators broadcasting news should be raised to 26 percent and 49 percent for those operators who do not opt for news broadcasts.

Source: The Financial Express,
March 25, 2008

Snippet
The Petroleum Ministry has asked North Block to reverse its Budget proposal and extend tax holiday for the refining sector. The requisition has been made in view of the initiation of grassroot refinery projects by Public Sector Undertakings in Orissa, Madhya Pradesh and Punjab. The proposed change in the tax holiday provision would jeopardize the investment plan and render the project fruitless.

Source: The Economic Times,
March 27, 2008

Snippet
The Government and the RBI are unlikely to relax the restrictions on external commercial borrowings in near future. There is no decision yet on when a possible relaxation could be made. Currently, RBI is sitting on many applications for foreign borrowings, including those meant for utilization abroad and not to be brought into India. Decision on the relaxation is also likely to be delayed on account of rising inflation.

Source: The Economic Times,
March 27, 2008

Snippet
The Government may provide tax exemption to income generated by real estate mutual funds (MFs) that float schemes to invest mainly in the stocks of realty firms. This has been mooted to bring the exemptions in line with the benefits currently available to other MFs. The real estate MFs and other MFs that invest in shares of realty companies will be spared of paying tax on all income. The dividend income of unit holders will also be tax free.

While real estate MFs will stand to gain due to favourable tax treatment, Real Estate Investment Trusts (REITs) that directly buy and sell property including apartments and shopping malls could be denied such benefits.

Source: The Economic Times,
March 31, 2008

Snippet
The Institute of Chartered Accountants of India (ICAI) is likely to introduce a new set of norms to enable transparent accounting of the increasing number of carbon credits earned by Indian companies, which are presently classified as 'other income'. Once an Accounting Standard is defined, the companies would be required to reflect income separately. The Indian National CDM Authority has approved various projects engaged in generating certified emissions reductions (CER), which has facilitated investments of more than Rs 63,000 crore.

Source: Live mint, April 1, 2008

Snippet
The Government has proposed to allow FDI in small-scale industries (SSI) sector through the automatic route. This relaxation is in line with the Government's efforts to ease flow of funds into this sector and modernize this sector on account of its huge employment potential. At present, any small unit with over 24 percent FDI loses its SSI status. Once the proposed changes are brought about, the unit would retain its SSI status with a higher FDI, provided the investment fell within the sectoral cap.

Source: The Financial Express, April 3, 2008

Snippet
The Government is reconsidering the levy of commodities transaction tax (CTT), proposed in the recent Budget, in view of rising inflation. The Government is concerned that such levy could result in price hike on commodity exchange and has therefore, decided to review the levy.
Commodity exchanges have already raised objections against this tax and have been asking for withdrawal since levy of CTT would increase the transaction cost of exchanges.

Source: The Financial Express, April 7, 2008

Snippet
The Government may finally reduce the rate of Central Sales Tax (CST) from 3 percent to
2 percent in view of the Centre and State Governments agreeing to arrive at an agreement on the issue of compensation for the revenue losses that may arise to the States from such a move.

Although the reduction in CST ceiling rate to 2 percent was announced in the Budget 2008 09, the actual notification was subject to an agreement between Central and State Governments over compensation issues.

Source: Business Line, April 8, 2008

Snippet
The State Governments have decided not to raise the floor rate of Value Added Tax (VAT) from 4 percent to 5 percent in the current fiscal. Currently, floor rate is levied on medicines and medical equipment, fertilizer, IT products, tractor tyres, industrial inputs and capital goods.

The Centre and State Governments have agreed to carry out a constitutional amendment to facilitate levy of VAT on imports. Also, the State Governments have not agreed for removal of additional excise duty from textiles and imposition of VAT immediately. The same may only be affected from next fiscal after building consensus with the manufacturers.

Source: The Economic Times, April 9, 2008

Snippet
The Ministry of Finance has ruled out the introduction of Advance Pricing Agreement (APA) programme for deciding tax liability of the companies in advance in the near future. It has been indicated that the APA programme cannot be implemented in the absence of institutional mechanism that can ensure that such agreements are not questioned in the court of law or by the authorities like Comptroller and Auditor General of India (CAG) and the Central Vigilance Commission. APA is a binding contract between a taxpayer and the tax authority under which the two parties agree on the transfer pricing policy for specified transactions of a taxpayer over a specified given period of time.

Source: The Economic Times, April 9, 2008

Snippet
The Government is considering allowing taxpayers to withhold tax on rent after reducing the service tax liability from the total rental

Taxand's Take

Taxand's Take Author