In this blog post, Nitsimar Guliani, a student at Symbiosis Law School, Noida and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details how a deemed associate enterprise is taxed.

Definition: Section 92A(2) of the Income Tax Act, 1961 (IT Act)

An “associate enterprise”[1], in relation to other enterprises are those which can be owned and controlled by the same or common interest.[2] The expression “associated enterprises” as per Section 65B (13) of the Finance Act, 2001 (Finance Act) shall have the meaning assigned in Section 92A of the IT Act.[3]

Clauses (a) to (m) of Section 92A (2) defines “deemed associate enterprise” as under:

“…a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.”

Two enterprises shall be deemed to be associate enterprises if, at any time during the previous year one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise/each of such enterprises.[4] However, Section 92A (1) does not prescribe any minimum or maximum limit for participation in management, control or capital. This can be noted as an apparent irregularity within the provision.

Two enterprises shall be deemed to be associate enterprises if, at any time during the previous year, more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise.[5] The contemplation with regard to ‘appointment’ must be considered as “actual appointment” and not “a mere power to appoint.”

In the recent case of Kaybe Private Ltd.[6], it was held by the Mumbai Bench of the Income-Tax Appellate Tribunal that two enterprises would be treated as Associated Enterprises if the conditions of Section 92A (1) are satisfied irrespective of the deeming fiction set out under Section 92A (2) of the IT Act.

How Deemed Associate Enterprise Are Taxed:

In any fiscal laws, the idea of levy, collection and payment of tax to the Government are the principal perspectives. Duty of tax is straightforwardly connected with the taxable occasion. Once the occasion has ended up being taxable, then appears the subject of collection of tax.[7]

Note, deemed associate enterprise are taxed the same as associate enterprise.

Departmental clarification on Associated Enterprises[8] Vide Letter no. No.334/1/208-TRU  clarifies as follows :

2008. By virtue of Section 66, service tax at the rate of 12% is levied on the value of taxable services. Section 67, pertaining to valuation of such taxes, has however been omitted by the Finance Act, 2008. As per Rule 6 of the Service Tax Rules, 1994 – the service tax is only required to be paid only after receiving the payment.
2009. It has been conveyed that the provision requiring payment of service tax after receipt of payment are utilized for tax shirking particularly when the transaction is between associated enterprises. There have been occurrences where in service tax has not been paid on the ground of non-receipt of payment despite the fact that the transaction has been perceived as revenue/expenditure in the announcement of profit and loss account behind deciding corporate tax liability.
2010. Likewise an anti-avoidance measure, it may be suggested to elucidate that service tax will be leviable on taxable services, and duty to pay tax regardless of the measure will be not really received, yet the measure may be credited or debited in the books of service provider. In different words, service tax will be paid then afterward receipt of payment or crediting/debiting of the sum in the books of accounts, whichever is prior. However, this provision may be confined to transaction between associated enterprises. This provision would likewise apply to service tax payable under reverse charge method. (Section 66A) as taxable services received from associated enterprises. Notice amendment to Section 67 and rule 6(1) for this purpose.
2011. The term ‘associated enterprise’ has the same meaning as assigned to it in section 92A of the Income Tax Act, 1961. It is a relative concept i.e. an enterprise is an associated enterprise when it is viewed in relation to other enterprises. This concept is used in the Income Tax Act for applying transfer pricing provisions.
2012. Section 92A (2) of the Income Tax Act specifies various situations under which two enterprises shall be deemed to be associated enterprises. Enterprise means a person who is engaged in the provision of any services of any kind. For details, relevant provisions of Income Tax Act may be referred to.

As per Finance Act (as amended w.e.f. 10-05-2008)

[As per third proviso to Rule 7, in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be –

o   the date of debit in the books of account of the person receiving the service;

o   the date of making the payment, whichever is earlier.][9]

Take into account, also, the first proviso of Rule 7 of Point of Taxation Rules, 2011 that lays down that if the payment for service is not made within six months from the date of invoice, the Point of Taxation would be determined as if rule was not made.

Provisions related to service tax liability, would apply.

Cenvat Credit Rules, 2004[10]:

As per Rule 4(7) of CCR, credit of Cenvat Credit is allowed only after payment is made to service provider. However in case of Associate Enterprise, service tax is payable when entry has been made in books of account. So for availing of CCR, it has been clarified that as per deeming fiction in section 67(4)(c) of Finance Act 1994, book adjustment is deemed payment. Further rule 4(7) does not indicate form of payment. Thus debit in books of account can also be payment made.[11]

Conclusion

It is common knowledge that the Point of Taxation Rules have brought about significant changes in the monetary practices, and provided a more sophisticated version of dealing with Associated Enterprise Transactions. The step of insertion of service tax on book adjustments is a reformative step to combat tax avoidance. The only change the present calls for is the amendment in Cenvat Rules, 2014 in respect of service tax paid by associate enterprises on book adjustments.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

[1] See Section 65B (13) to F of the Finance Act for the meaning of “associated enterprise.”

[2] http://saprtax.blogspot.in/2013/03/associate-enterprise-ae-under-indian-tp.html, retrieved on 30 September 2016 at 9:26 pm.

[3] For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—

(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

[4] Section 92A (2)(a) and (b) of the IT Act.

[5] Section 92A 2 (e)

[6] Kaybee Pvt. Ltd. V. ITO (ITA No. 3749/Mum/2014)

[7] Balasubramanium, C.A.J., Point of Taxation Rules, retrieved at https://www.sircoficai.org/downloads/cpe-materials/POT_SIRC_JB.pdf on 30 September 30, 2016 at 10:15 pm.

[8] CBE&C TRU letter F. No.334/1/208-TRU dated 29-02-2008

[9] Balasubramanium, C.A.J., Point of Taxation Rules, retrieved at https://www.sircoficai.org/downloads/cpe-materials/POT_SIRC_JB.pdf on 30 September 30, 2016 at 10:15 pm.

[10] CBE&C circular 122/03/2010-ST dated 30-4-2010

[11]Kaushik, Alok, Point of Taxation while dealing with Associated Enterprises, (2015) retrieved at http://www.simpletaxindia.net/2015/02/point-of-taxation-rules-while-dealing.html#axzz4LkqM9Fuk

In this blog post, Nirankush Kenjige, a student at School of Law, Christ University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes tax planning by e-Commerce entities.

Tax planning means analysing the financial situation from the tax efficiency point of view so as to plan finances in the most optimised manner.[1] Various tax exemptions, deductions, and benefits minimizing tax liability is looked into by the taxpayer to reduce his tax liability. It allows the tax payer to make best of these exemptions in a financial year. Tax planning is technically a legal way of reducing tax liability. However, one must exercise much caution to ensure that the taxpayer is not indulging in tax avoidance or tax evasion.

In the Indian scenario, there are various options provided under the income Tax Act, 1961 (hereafter referred to as ‘The Act’), which provide wide range of exemptions and deductions that help in limiting the overall tax liability of the tax payer. One such set of exemptions is provided under Sections 80C to 80U of the Act. There are other exemptions too under the Act such as tax credits.

When tax planning is done within the legal framework, it is perfectly legal and is in fact, a smart thing to do.[2] Out of the available ways to escape from the liability of tax, tax planning is the only legal way to do so.

Corporate tax planning is a means of reducing tax liabilities on a registered company. Few of the common ways of doing this would include taking deductions on business transport, health insurance of employees, office expenses, retirement planning, child care, charitable contributions and such. Through the various tax deductions and exemptions provided under the Income Tax Act, a company can substantially reduce its tax burden in a legal way.[3]  As is said before, with good tax planning, the direct tax and indirect tax liability is reduced at the times of inflation. A good tax planning is a result of not being ignorant of the current applicable tax laws and the judgments of the court; and also having in mind the business objective of the company. [4]

Tax planning can be classified into:

1. a) Purposive tax planning: Tax planning with a particular objective in mind.
2. b) Permissive tax planning: tax planning which is allowed under the legal framework.
3. c) Long range and Short range tax planning: Planning done at the start and end of a fiscal year.[5]

While tax planning, an entity should have the following in mind- reduction in tax liability, maintaining economic stability, growth of the economy of the entity, litigation minimization, productive investment of the planned income.[6]

With the fast paced globalisation, and growth in technology, it is now possible for a consumer to transact businesses ‘automatically’ online. The sudden outburst of E-Commerce entities is making the world a easier place for online transactions. With negligible    costs required for setting up of the entities, and has mostly operational costs only. This, coupled with high returns, is resulting in the exponential growth of e-commerce entities.

“An e-commerce business transaction is a sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving and placing orders in automation”.[7] An e-commerce business transaction would however exclude orders made by telephone calls, or manually typed emails from the ambit of this definition. The primary characteristic of conducting business using the e-commerce platform would be that there would be a ‘Human to Computer’ relation rather than the traditional ‘Human to Human relation’.[8]

The international tax regime, which emerged in the 1920’s, recognizes two basis for tax jurisdiction. The first is the ‘source-based taxation’, or territorial jurisdiction. In this type of source-based taxation, a country has jurisdiction to tax the income arising in its territory. The second basis for tax jurisdiction is ‘resident’ or personal jurisdiction. In resident-based taxation, the country has jurisdiction to tax its residents irrespective of where the income arises. In this system, the determination of residency for tax purposes is critical and is usually based on the personal, social, and economic ties of the person to his country.

Taxation of an international e-commerce is typically dealt with in international taxation under bilateral tax treaties to prevent companies from paying tax to both countries. The United States has, for example, such agreements with as many as  50 other countries.[9]

One of the key concepts of these treaties are ‘permanent establishments’. Companies are taxed in a country only if they have their operations in that country sufficient to be called a permanent establishment there, which means the company should have a fixed place of business. Many treaties specify that a permanent establishment exists if:

1. a) The company has a fixed place of business with some degree of permanence.
2. b) Carries a business through employees of the company or agents of the company who have authority to conclude contracts on behalf of the company.[10]

However, the OECD (Organisation for Economic Co-Operation and Development), made certain changes and provided that a web site, by itself or facilitated through a web-hosting arrangement, is not a permanent establishment. Further, an internet service provider cannot be considered as an agent of the company. Further, OECD settled that no human interaction was necessary for the server to be a permanent establishment, but only that the server performs a core function of the business.

Thus, companies can strategically deploy web servers as substitutes for sales offices to avoid taxation.[11]

One of the key issues in such substitution of sales offices with web servers, independent of whether a permanent establishment has been established or not, is the amount of profits that is associated with such servers. Even when a permanent establishment does not in fact exist but is deemed to exist, transfer pricing rules must be applied. Since applying the transfer pricing rule to e-commerce is challenging, it is deemed that since the risk borne and value added by an order-taking server location is generally low, the amount of profits that can be attributed to the server will also be low.[12]

Since web sites can substitute foreign sales personnel of a company, companies would appear to have two basic choices to achieve income shifting and thus tax planning. First, companies resort to using domestic servers to undertake international sales in a country of high tax-rate jurisdictions without paying the high foreign taxes, forcing domestic taxes to continue to apply. This would suggest a preference for using export sales as opposed to having foreign subsidiaries located in relatively high tax rate jurisdictions.[13]

Secondly, a non-U.S. company can establish a subsidiary in a low-tax foreign country, and then operate a web site for global sales from that location to reduce taxes on foreign sales by avoiding tax in that high-tax rate domestic jurisdiction and in high-tax rate foreign jurisdictions. This would escape the company of high tax liability in both of the high-tax liability jurisdictions. Here, as contradictory to the earlier method, having foreign subsidiary is preferred as opposed to export sales while having domestic web servers. [14]

In both of the above cases, e-commerce can aid the company in avoiding high foreign taxes on the income generated by the sales in a high tax-rate foreign jurisdiction.

The U.S corporate tax rates are relatively much lower as compare to the other countries where U.S companies carry on their businesses. Thus, it is not surprising that U.S companies do business or carry on business globally using a domestic server. This would be more practical for these companies than creating a permanent establishment and deploying a server in another country with low-tax jurisdiction to reduce their tax liability. Thus, e-commerce gives a slight advantage to the U.S companies over the other companies to shift income for tax purposes by using the domestic servers to service foreign markets.[15]

In the Indian scenario, Value Added Tax (VAT) is applicable only to the sale of goods. The tax is levied on the value additions made before the sale to consumer. Therefore, a company dealing with ‘services’, like Uber, or OLX need not pay VAT since they are just facilitators of a service.

‘Service’ practically includes almost everything. India follows a comprehensive approach of taxing service wherein all services are taxed except the services provided for in the negative list, and the exemptions under ‘Mega exemption’ and other exemption notifications.

Sales tax is levied on the sale of goods.  The sales tax in India is levied by the authority of both the Central Government Legislation (Central Sales Tax) under the Central Sales Tax Act, 1956; And the State Government Legislation (Sales Tax) depending, upon whether the sale of goods is inter-state or intra-state.[16]

To reduce the payment of tax by the e-commerce entities, one must analyse the structure of the enterprise and the relationship with the customer. What is being provided to the customer- service or goods? Basically, it all comes down to analysing the business and modifying it to suit the needs  to reduce the tax liability of the enterprise.

Thus, as it can be seen, though there are no significant ways of tax planning and thus, reducing the tax liability of an entity, there are a few loopholes which are being exploited by the companies to reduce their tax liabilities. These are matters of concern that must be looked into by the policy makers and reduce the effect of commerce on multinational tax planning which in-turn is affecting tax revenues.

Nirankush Kenjige

DEABL July, 2016 Batch.

[1] https://www.bankbazaar.com/tax/tax-planning.html

[2] Ibid

[3] http://baihtarinvestments.blogspot.in/2016/08/baihtar-groups-baihtar-investments-what_9.html

[4] https://www.bankbazaar.com/tax/tax-planning.html

[5] http://incometaxmanagement.com/Pages/Tax-Management-Procedure/5-1-Meaning-of-Tax-Planning.html

[6] https://www.bankbazaar.com/tax/tax-planning.html

[7] Definition provided by Organisation for Economic Co-Operation and Development.

[8] https://www.linkedin.com/pulse/taxation-e-commerce-start-ups-bharath-rao

[9] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.5433&rep=rep1&type=pdf

[10] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.5433&rep=rep1&type=pdf

[11] Ibid

[12] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.5433&rep=rep1&type=pdf

[13] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.5433&rep=rep1&type=pdf

[14] Ibid

[15] http://poseidon01.ssrn.com/delivery.php

[16] https://blog.browntape.com/2014/11/27/taxation-rules-in-the-e-commerce-sector-in-india/

In this blog post, Mandvi Singh, a student at Campus Law Center and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discuses the implications of GST on the automobile industry.

INTRODUCTION:

The Goods and Services Tax Bill (GST) was passed recently, it received the assent of President Pranab Mukherjee on the 8th of September, 2016. The Bill with its passing follows with positive implications for the automobile industry. Being divided under the two heads of Centre and State, several taxes that are applicable at this time will be assimilated under these two heads.

The current industrial situation shows how highly the automobile industry is taxed at this point. Almost 77% of the whole is levied on the cost of the vehicle itself with the remaining posed around it. With cess levied by the Finance Minister of various percentages on different vehicles, the prices of cars have gone up. The categories of the same have been enlisted in the next to next topic. When the budget was being presented by the Minister in Lok Sabha, he spoke of the affliction on air pollution that these vehicles have and pointed out how perhaps the cess will reduce the power in hands of people to purchase such vehicles and opt for public transport instead.

The GST Bill:

The GST Bill was passed in form of the 122nd Amendment to the Constitution. It is the widest reform in the indirect tax structure of the country. The GST is working towards a more viable approach when it comes to tax, which is applicable in the manufacturing process. The tax under the new regime which the manufacturer has already levied in the manufacturing process in deducted when the final product created by the manufacturer is produced in the market. Hence the tax on products in overall reduced as the tax otherwise charged on the final product does not include the pre charged one. The same process is followed on the level of the wholesaler who sets off the tax when he purchases the good from the manufacturer and releases them in the market. The product passes from the wholesaler to the retailer, the retailer after adding value to the product again sets off the tax when releasing the goods finally in the market. In this chain of passing the goods from one to another, the tax sets off at every level, releasing a bit of pressure on all the people on the respective stages. Hence, when the final product is released, the overall value of the good when taxed has a marginal variation in favour of the consumer as compared to re-existing rate of taxes. The double-tax burden is being eliminated in this regime as taxed that may have been charged and again charged on the tax that was already paid has been done away with. 

This is the same sort of implication that is there on the automobile sector. The sector though has variations as per the type of vehicle depending on the size and emissions by the same.

TAXATION IN AUTOMOBILE INDUSTRY:

The Society of Indian Automobile Manufacturers (SIAM) has requested the Government to club all the taxes presently levied under one main excise duty. As per the society the automobile Industry is the highest taxed industry in the country.

In the beginning of the year the Finance Minister proposed cess on different vehicles of the following percentages:

1. 1% on small, CNG and LPG cars.
2. 2.5% on diesel cars of a certain capacity.
3. 4% on SUVs and High Powered Vehicles.

With this, the highest impact will be on diesel vehicles.  Petrol and vehicles in the 1st category with length not more than 4 meters and capacity not exceeding 1200cc attract the least cess.

There are vehicles exempted from this cess: electrically operated vehicles, three-wheeled vehicles, hydrogen vehicles based on fuel cell technology, vehicles used solely as taxis, the ones used by physically handicapped persons, hospital ambulances. These are vehicles of utility not owned by the public at large, most do not contribute to any pollution or traffic at all and ambulances which do not qualify as small clean vehicles as they are a health saving asset.

The current taxation technique is complex and and leads to obligations being created. The current excise duty for vehicles is divided into four slabs and the lowest tax rate in implicated on small cars i.e. the 1st category. When the regime comes into play several taxes will come under Central and State GSTs. In the former for the automible industry excise duty is included and in the latter category taxes like the registration tax, the sales tax and the road tax will all be combined in one shell. The vehicles prices are expected to fall and this wil increase the demand for vehicles. But this will happen mostly for small lesser polluting vehicles.

Currently when the manufactured goods are removed, excise duty is paid under the excise law and VAT is paid at the time of sale of vehicles. As per the GST law the time of supply of goods will be at the earliest point, unlike the current trend.

IMPLICATIONS OF GST ON THE INDUSTRY:

The efficiency in operations is expected to swell. The same impact is expected on compliance. Operation will also be more efficient, as the whole country instead of the scattered market will be treated as one market and be taxed the same way. Purchase will increase and so will overall economic activity. This may even give way to a stronger GDP. There are also a variety of valuation disputes that are being faced by the automobile industry right now. Sale below cost of market penetration, manufacturer retained State Industrial Promotion Subsidies. Excise includes the valuation of post-sale discounts which will be removed once the GST is implemented. The Bill also treats automobile industry job as service and will continue to maintain their excise procedures the way they continue to be.

The job work process is the backbone for automobile industry operations. The Model GST law treats ‘job work’ as a service and seeks to maintain existing excise procedures for the job work transactions, i.e. non-taxability of job work transaction and providing credits to the principal for supplies to job worker, 180 days condition for bringing back goods after job work, etc. However, some more clarity is needed in the conceptual framework for this.

The Ownership of tools for the manufacture of parts of these automobiles has been transferred to OEMs and the value is also taken from them whereas the tools are kept with the vendors. There will be a change in this as under the GST capital good definition includes only those goods which are used at the place the goods are supplied at. The other major benefit of GST is expected to be easing out of various bottlenecks and complexities involved in transportation of goods using road logistics from one state to another. Since CST will be subsumed in GST, companies will no longer be required to have depots/warehouses at multiple locations and also do away with C&F agents.

Moreover the overall compliance burden is expected to decrease and bring lot more efficiency in operations. From the Indirect tax prospective the whole country will be treated as ‘One Market’ and will add to operational efficiencies. One could expect the logjam at check post, etc. will get eliminated.

CONCLUSIVE ANALYSIS: With the introduction of GST, taxes move from the Origin State to the Consumption State due to which overall economic activity is expected to increase and we could expect a better GDP growth that should push demand for vehicle across categories. Impact of Tax cascading will also go away that will reduce overall cost of vehicle manufacturing as all taxes on input paid will be offset with the output liability of GST.

BIBLIOGRAPHY:

http://www.dnaindia.com/money/report-siam-says-indian-automotive-industry-highly-taxes-accounts-for-up-to-77-costs-2164076

http://indianexpress.com/article/business/budget/budget-2016-cars-set-to-become-costly-jaitley-proposes-4-cess-on-suvs/

http://indianexpress.com/article/explained/gst-bill-parliament-what-is-goods-services-tax-economy-explained-2950335/

http://auto.economictimes.indiatimes.com/news/policy/benefits-challenges-for-auto-sector-in-gst-bill/53541153

In this blog post, Kshitiz Agarwal, a student pursuing a BBA in Logistics Management University of Petroleum and Energy Studies and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the taxation of the income of a minor.

In India, a minor is a child who is less than eighteen years of age. The income of a minor is clubbed, gets added to the parent’s income is taxed along with and in the same way as parent’s income, with the income of his/her parent under the section 64(1A).

The following cases are to be considered before clubbing the income of the minor:

•         If the parents of the minor are unmarried or divorced

The income of the minor will get clubbed with the parent, who was taking care of the minor for the previous financial year.

•         If both the parents of the minor are earning and married

The income of the minor would get clubbed with the parent whose total income is greater before the addition of the income of the minor.

•         If one of the parents of the minor is not alive

The income of the minor will get clubbed with the income of the surviving parent, even if the income of the deceased parent was greater than that of the surviving parent for the previous financial year.

•         If both of the parents of the minor are not alive

The income of the minor wouldn’t get clubbed with the guardian, in case both of the parents are not alive and a separate income tax return is filed for the minor.

•         Continuance in clubbing of the income of the minor

The income of the minor is clubbed with either of the parent then it would be continued to be clubbed in the succeeding financial year as well.

•         Exceptions to clubbing the income of a minor:

The income of a minor is not clubbed with the income of his/her parent if the income is earned by the child by the way of any work or activity that uses his special talent or special knowledge. In this case, the income of the minor would not be clubbed with his/her parents. Such income might include the prize money earned by winning a singing competition, dance show, reality show, comedy show, talent hunt etc. This income of the minor would be taxed separately from his parents, a separate income tax return has to be filed and the rate of tax would be decided by the Indian progressive taxation system, in accordance to the amount of prize money earned by the minor by displaying or using his/her special talent. The income tax slab rates are different for different categories.  There are four categories of income tax slabs.

The income of a minor is not clubbed with his/her parent if the minor is suffering from any disability specified under Section 80U, under which a person is considered specially able only if he/she is suffering with not less than, that is, greater than and equal to, forty percent of either blindness, low vision, leprosy cured, loco motor disability, hearing impairment, mental retardation or mental illness.

When the income of a minor earned is taxed separately, two out of the four income tax slab rates for the year 2015-2016 and 2016-2017 will be applicable in accordance to the progressive taxation system of India.

Income tax slab for male individuals below the age of sixty years, as the income of the minor is taxed separated without getting clubbed with the parent due the above stated first exception and by the virtue of being a minor, he is below the age of 60 years of age and would neither fall in the category of the tax slab rate of senior citizens, the people who are above the age of sixty, nor fall in the category of the tax slab rate of super senior citizen, people who are more than 80 years of age.

The tax slab rates for male individuals below the age of 60 for the financial year 2015-2016 and 2016-2017 are as follows:

Income tax slab for female individuals below the age of sixty years, as the income of the minor is taxed separated without getting clubbed with the parent due the above stated first exception and by the virtue of being a minor, she is below the age of 60 years of age and would neither fall in the category of the tax slab rate of senior citizens, the people who are above the age of sixty, nor fall in the category of the tax slab rate of super senior citizen, people who are more than 80 years of age.

The tax slab rates for female individuals below the age of 60 for the financial year 2015-2016 and 2016-2017 are as follows:

Deductions allowed in clubbing the income of a minor:

•         When the income of a minor child is less than Rs 1500 per annum per child than the entire amount is allowed to be deducted.
•         When the income of a minor is more than Rs 1500 per annum per child than the parent is allowed to claim an exemption of Rs 1500 for each minor child whose income is clubbed,

How Can a Minor Earn Income:

Minors can earn an income from his bank accounts, fixed deposits and/or other investments made in the parents of the minor in his/her name. The income of a minor is clubbed, gets added to the parent’s income is taxed along with and in the same way as parent’s income, with the income of his/her parent under the section 64(1A). The exemption amount is 1500 rupees per annum for a minor, which might get adjusted over time in proportion to the inflation.

The income of a 16 years old kid, who works post schooling hours and has the income of less than and equal to 1500, within the exemption limit, wouldn’t owe any income tax to the government of India, given that he doesn’t have any other earned or unearned income. Hypothetically in case, if the employer withheld taxes in payment, he can obtain a refund by filing income tax return.

In this blog post, Kritika Surekha, a student at KIIT School of LAw and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the terms “Credits” and “Set-off” under VAT.  

What is VAT?

Value Added Tax is a multi-stage value addition on tax made by subsequent sellers on the inputs purchased. The principle of macroeconomics i.e. the sale invoice works in VAT.  Thus VAT constitutes a method of taxing final consumer spending in the economy. It does not only provides full set-off for input tax but also on previous purchases. It also abolishes the burden of several other taxes, such as turnover tax, surcharges on sales tax, etc. As a result the overall tax burden has been reduced and rationalised as a result prices of goods will fall. VAT has also made tax structure more simple and transparent. VAT is based on value addition to the goods and VAT liability of dealers is calculated by subtracting the input tax credit from tax collected on sales. Thus it set-off the tax paid earlier. Concept of rebate or input tax credit is used to give VAT effect.

What is The Cascading Effect of Tax in VAT?

VAT tax is related with selling of some goods or service. For making finished goods it goes through various stages of processing from raw material to semi-finished goods and finally finished goods. So if tax is levied each time in selling of this unfinished goods, the tax burden goes on increasing as it passes on from stage one to other. As stages of production or sales continues, again and again tax is been played by the subsequent purchaser on which they had already paid tax in the selling price. Hence paying of tax again and again on same good is called cascading effect.

Example- X sales good to Y at Rs 100. Vat @10%. Hence Y purchased goods at 110, cost price for Y is Rs 110, value addition made by him cost Rs 40. Finally Y decides to sell these goods to Z for Rs.150. Z pays Rs 165 (150+15). In fact the value addition is of Rs 40 thus tax would have been only Rs 4 instead of 15. Hence as stages of production continues each subsequent buyer had to pay tax again.

Thus introduction of VAT has removed the cascading effect as it was getting difficult to calculate exact tax content. Also it discouraged ancillarisation of goods which was discouraging small scale industries and a barrier in economic growth. Further concessions on basis of end use are not possible as same goods can be used as finished goods by someone and on the other hand it can be a raw material for some other industry.

How Cascading Effect Of Tax Is Avoided In VAT

VAT works on tax credit method system. In this method tax is collected or levied on the sale price but tax credit is paid on purchase. Thus in other words it can be said that tax is effectively levied on “Value Added”. For this reason many countries have adopted VAT and tax credit method for its implementation.

The below illustration will explain how VAT is credited and set of and explains the tax credit method.

X is a seller. Y purchases goods from X.  Y purchase goods from X at Rs. 220 (including 20 of duty amount). Y gets credit of that Rs 20 hence he will not consider that amount for its further sale or in its costing. He charges Rs 80 more as conversion charges thus sale price of goods becomes 280. In this amount he will charge 10% tax and will raise his invoice price by Rs 28 i.e. 208. As Y has already paid Rs 20 as tax while purchasing goods from X so he will get credit of that amount and thus effectively Y is liable to pay Rs 8 only. Thus in this method a buyer has to pay duty on only value added by him.

Credit and Set-off under VAT

VAT aim is to provide set-off for the tax paid earlier and avoid cascading effect i.e. double taxation of goods. This is been given effect through the concept called Input tax credit.

Input tax credit in relation to any period means setting the amount of input tax by a registered dealer against the amount of his output tax. Term input tax means tax which is already been paid. So this paid tax amount needs to be adjusted against tax payable by the new purchasing dealer on his sales. This credit availability is called input tax credit.

Input tax is the tax which is paid or payable on purchase of any good or course of business made from a registered dealer of a state.

Output tax means charged or chargeable tax under the Income Tax Act in a course of the business or on purchase of any good from a registered dealer of the state.

In other or simpler words input tax is paid by the dealer on his local purchases of business inputs like raw materials, capital goods as well as other goods which are used in his business directly or indirectly. Output tax is charged on his sales of the goods which ae subject to tax. The basic principle of VAT is to pay tax only on the value addition done by him.

The input tax credit is thus the tax paid on inputs purchased by both manufactures and traders for their business irrespective of whether utilized or sold. Input tax credit is paid in excess of 2% on stock transfers to other states are also eligible for tax credit. Thus it is a mechanism in which dealer set-off his output tax against input tax credit. Also in curtain cases like inputs used for manufacture of exempted goods partial input tax credit is available. Thus Input tax credit is generally given for the entire VAT paid within the State on purchase of taxable goods meant for resale/manufacture of taxable goods. But inter-state sale and stock transfer will not be eligible for credit as input credit from other state is not calculated.

Illustrations on calculation of VAT by input tax credit or set-off

1. X purchases input worth ₹ 15, 00,000 and records sales of ₹22, 00,000 in the month of January 2016. Input tax rate and output tax rate is 12.5 %. Input tax/ credit set-off shall be computed as follows [1]-

2. X purchases input worth ₹16, 00,000 and records sales of ₹21, 00,000 in the month of January 2016. Input tax rate and output tax rate are 4% and 12.5% respectively. Input tax credit/ set-off shall be calculated as follows[2]:

WHAT IS CARRYING OVER OF TAX CREDIT

If the tax credit exceeds the tax payable on sales in a tax period, it shall be carried over to the next tax period. At the end of financial year, the excess unadjusted input tax credit will be refunded. In some cases like in respect of local purchase, if collected VAT is less than input tax credit then the balancing amount will be carried forward to the next accounting year and will be adjusted on the same basis. However, unadjusted tax credit at the end of the financial year is generally refunded. Input Tax credit on capital goods is also available to manufactures and traders.

Illustration explaining carrying over of tax credit:

The following data pertains to X ltd., a manufacturing company, situated in State a where tax period. Input VAT credit on capital goods in State A is available in 36months. However, in State an input tax credit in respect of capital goods is not available in some cases. X Ltd. purchases input from State A as well as State B. Manufactured goods are sold by X Ltd. In State A as well as State C[3]:

Notes:

1. CST paid by X Ltd.  On procurement of input supplies from State B (i.e., Rs 3, 00,000) is not eligible for tax credit.
2. The surplus of Rs 76,000 as calculated above will be available for tax credit in February 2015.
3. Any surplus at the end of March 2015 will be refunded to X Ltd.

[1] Dr. Vinod k. Singhania & Dr. Monica Singhania, INCOME TAX (54 ed. 2016).

[2] Supra note 1

[3] Supra note 1

In this blog post, Konika Mitra, an Associate at Vikas Pahwa & Associates and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the procedure of tax appeals in India.  

INTRODUCTION:

Appeal is a proceeding resorted to rectify an erroneous decision of a court by submitting the question to a higher court, or court of appeal. It means ‘making a request’ and in legal parlance, it means ‘apply to a higher court for a reversal of the decision of a lower court.

Income tax liability is primarily determined at the level of Assessing Officer. Where the Income Tax department (the government) disagrees with the tax computed by the taxpayer, they can levy an additional tax. In such a situation, as per Income Tax Act, 1961 the liability is determined at the level of Assessing Officer. Where a taxpayer is aggrieved certain action of Assessing Officer, he can move an appeal.

The assignment herein deals exhaustively with procedure for such appeal as provided by Income Tax Act, 1961. 

APPEALS BEFORE COMMISSIONER:

WHEN CAN IT BE FILED:

As provided by S. 246 of the IT Act, an assessee who is aggrieved by an order, passed by Assessing Officer may prefer an appeal to the Commissioner of Income- Tax. Such Commissioner may admit an appeal, even beyond period of limitation, if satisfied that there was a sufficient cause for not presenting the appeal. Within time.

An appeal before ITAT can be filed by a taxpayer against;

• an intimation issued u/s 143(1)/ (1B), where adjustments have been made in income offered to tax in the return of income,
• an assessment order passed u/s 143(3) except in case of an order passed in pursuance of directions of the Dispute Resolution Panel,
• an assessment order passed u/s 144 or an order assessment, reassessment or re- computation passed after reopening the assessment u/s 147 except an order in pursuance of directions of the Dispute Resolution Panel,
• an order referred to inspection u/s150,
• order passed against the taxpayer in a case where the taxpayer denies the liability to be assessed under Income Tax Act,
• intimation issued u/s 200A(1) where adjustments are made in the filed statement,
• an order of assessment or reassessment passed u/s 153A or 158BC in case of search/seizure,
• an assessment or reassessment order passed u/s 92CD(3),
• a rectification order passed u/s 154 or 155,
• an order passed u/s 163 treating the taxpayer as agent of non-resident,
• an order passed u/s 170(2)/(3) assessing the successor of the business in respect of income earned by the predecessor,
• an order passed u/s 171 recording the finding about partition of a Hindu Undivided Family,
• an order passed by Joint Commissioner u/s 115VP(3) refusing approval to opt for tonnage-tax scheme to qualifying shipping companies,
• an order passed u/s 201(1)/206C(6A) deeming person responsible for deduction of tax at resource as assessee-in-default due to failure to deduct tax at source or to collect tax at source or to pay the same to the credit of the Government,
• an order determining refund passed u/s 237,
• an order imposing penalty u/s 221/  271/ 271A/ 271AAA/ 271F/ 271FB/ 272A/ 272AA/ 272B/ 272BB/ 275(1A)/ 158B FA(2)/ 271B/ 271BB/ 271C/ 271CA/ 271D/ 271E/ 271AAB,
• an order imposing a penalty under Chapter XXI.

An appeal to the Commissioner of Income-tax must be filed within 30 days from the date of service of notice of demand relating to assessment or penalty order.

PROCEDURE FOR APPEAL:

An appeal to Commissioner of Income-tax must be in Form No. 35 along with details of “Relief claimed in appeal”, “Statement of Facts” and “Grounds of appeal”, signed and verified by the individual taxpayer himself or by a person duly authorized by him holding valid power of attorney. Further, e-filing of Form has been made mandatory by Income-tax (3rd Amendment) Rules, 2016, for persons for whom e-filing of return of income is mandatory.

The prescribed fees for any such appeal is as under:

• Rs. 250, where the assessed income is Rs 1lakh or less
• Rs. 500, where assessed income is more than Rs. 1 lakh but less than Rs. 2 lakhs
• Rs.1,000, where assessed income is more than Rs. 2 lakhs

On receipt of Form no. 35, Commissioner of Income-tax fixes date and place for hearing the appeal by issuing notice to the taxpayer and the Assessing Officer, against whose order appeal is preferred. Before passing the order, the Commissioner of Income-tax may make such further inquiries as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result to him.

As a rule, a taxpayer is not entitled to produce any evidence, whether oral or documentary other than what was already produced before the Assessing Officer. However, in certain exceptional circumstances as provided below, additional evidence are accepted by the Commissioner of Income-tax (Appeals);

• Where the Assessing Officer has refused to admit evidence which ought to have been admitted; or
• Where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to be produced by the Assessing Officer; or [As amended by Finance Act, 2016]
• Where the appellant was prevented by sufficient cause from producing any evidence before the Assessing Officer which is relevant to any ground of appeal; or
• Where the Assessing Officer has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

ORDER OF COMMISSIONER OF INCOME- TAX:

After hearing the case/arguments, the Commissioner of Income-tax passes his order, and the same is recorded in writing. Where the order passed is that for disposal of the appeal and the Commissioner must supply reasons for the same. While disposing of an appeal, the Commissioner of Income-tax may consider and decide any matter arising out of the proceedings in which order appealed against was passed, even if such matter was not raised by the taxpayer before the Commissioner of Income-tax. The order should be issued within 15 days of last hearing.

APPEALS BEFORE INCOME TAX APPELLATE TRIBUNAL:

Income Tax Appellate Tribunal (ITAT) is the second appellate authority in order after The Commissioner of Income Tax.  This body is constituted by the Central Government, and functions under the Ministry of Law. It consists of 2 classes of member, i.e., Judicial and Accountant. An appeal to ITAT can be filed either by the taxpayer or by the Assessing Officer.

WHEN CAN IT BE FILED:

An appeal before ITAT can be filed by a taxpayer against;

• an order passed by the Commissioner of Income-tax (Exemption), u/s 10 (23C)(vi), which provides for filing of application by the educational institute or hospital for the purpose of grant or exemption;
• an order passed by the Principal Commissioner of Income-tax or Commissioner of Income-tax with respect to registration application made by a charitable or religious trust as provided u/s 12AA
• an order passed by the Principal Commissioner of Income-tax or Commissioner of Income-tax with respect to the approval of a charitable trust for donations made to it which would be eligible for deductions in the hands of the donor, as provided u/s 20G(5)(vi)
• an order passed by the assessing officer u/s 143(3) or 147 or 153A or 153C, either in pursuance of direction given by Dispute Resolution Panel or with approval of the Principal Commissioner of Income- Tax or Commissioner of Income- Tax as provided u/s 144BA(12);
• a ratification order passed by the Commissioner of Income- tax u/s 154;
• an order passed by a Principal Commissioner of Income- Tax or Commissioner of Income- Tax u/s 263, which relates to revision of the order of Assessing Officer which is considered as prejudicial to the interest of revenue;
• An order by the Assessing Officer u/s 115VZC(1), which provides for order of excluding the taxpayer from tonnage tax scheme;
• an order passed by the Commissioner of Income-tax u/s 250, 270A, 271, 271A or 272A;
• an order of penalty by a Principal Commissioner of Income- Tax or Commissioner of Income- Tax u/s 270A, 271 or 272A;
• an order or penalty by a Principal Chief Commissioner or Chief Commissioner or a Principal Director General a Director General or a Principal Director or Director under section 272A.

A Principal Commissioner of Income-Tax or Commissioner of Income-Tax, may direct the Assessing Officer to make an appeal to ITAT, if he objects the order passed by the Commissioner of Income-Tax (in appeals) under section 154 or section 250. Such an appeal is also called a Departmental Appeal, i.e., the Income-Tax department moving to ITAT against the order of the Commissioner of Income-Tax. However, Departmental Appeals are allowed only in cases where the tax effect involved in the appeal exceeds Rs. 10,00,000.

Notwithstanding the limit above mentioned, adverse judgements relating to following issues should be contested on merits, even when the tax effect is less than the mandatory limits specified above;

• Where the Constitutional validity of the provisions of an Act or Rule is under challenge, or
• Where Board’s order, Notification, Instruction or Circular has been held to be illegal or ultra-vires, or
• Where Revenue Audit’s objection in the case has been accepted by the Department.
• Writ matters
• Matters pertaining to other direct taxes, i.e., other than Income-Tax
• Where the tax effect is not quantifiable or not involved, such as case of registration of trust or institution under section 12A.
• Where the addition relates to undisclosed foreign assets/bank accounts.

Any appeal to ITAT must be filed in 60 days of the date on which order appealed against is communicated to the taxpayer or the Commissioner.

PROCEDURE FOR APPEAL:

An appeal to ITAT must be in Form No. 36- in triplicate. The prescribed fees for any such appeal is as under:

• Rs. 500, where the assessed income is Rs 1lakh or less
• Rs. 1,500, where assessed income is more than Rs. 1 lakh but less than Rs. 2 lakhs
• 1% of assessed income, subject to maximum of Rs.10, 000, where assessed income is more than Rs. 2 lakhs

Where the subject matter of appeal relates to any other matter, fee of Rs 500/- is to be paid. An application for stay of demand is to be accompanied by fee of Rs. 500

The appellant may submit a paper book in duplicate containing documents or statements or other papers referred to in the assessment or appellate order, which it may wish to rely upon, at least a day before the hearing of the appeal along-with proof of service of copy of the same on the other side at least a week before. Parties to the appeal are neither entitled to produce additional evidence of any kind, nor oral or documentary before the Tribunal.

The Appellate Tribunal then fixes the date for hearing the appeal and notifies the parties specifying date and place of hearing of the appeal. A copy of memorandum of appeal is sent to the respondent either before or along with such notice. The appeal is heard on the date fixed and on other dates to which it may be adjourned.

ORDER OF ITAT:

The Appellate Bench comprises of one judicial member and one accountant member. Appeals where total income computed by the Assessing Officer does not exceed Rs. 5lakh may be disposed of by single member Bench.

If members are equally divided in their opinion, the points of difference are stated by each member and the case is referred by the President of the ITAT for hearing such points by one or more of other members of the ITAT. Such point or points is decided according to opinion of majority of the members of ITAT who have heard the case, including those who first heard it.

APPEALS BEFORE HIGH COURT:

Where the High Court is satisfied that the case involves substantial question of law, an appeal shall lie against the order/ judgment of ITAT. Such appeal may be filed either by the taxpayer or the Chief Commissioner/Commissioner. An appeal against order of ITAT shall lie only within 120 days of receipt of such order and in the form of memorandum of appeal, precisely stating the substantial question of law. The High Court then goes on to formulate the question. An appeal filed before the High Court is heard by a bench of not less than two judges.

APPEALS BEFORE SUPREME COURT:

Appeal against an order of High Court in respect of Appellate Tribunal’s order lies with the Supreme Court. Appeal lies only against cases, which are certified to be fit one for appeal to the Supreme Court. Special leave can also be granted by the Supreme Court under Article 136 of the constitution of India against the order of the High Court.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

REFERENCES:

• Act, The and +CA Accountant. “The Appeal Procedure Under Income Tax Act”. Guide to Taxation and Legal Concern |Simplified Laws. N.p., 2015. Web. 30 Sept. 2016.
• “Appeal to Commissioner of Income-Tax (Appeals)”Income Tax Department, Govt. of India, 2016.
• Appeal to the Income Tax Appellate Tribunal” Income Tax Department, Govt. of India, 2016.
• “Income Tax Appeal Filing Procedure in Brief”. Taxguru.in. N.p., 2014. Web. 30 Sept. 2016.
• “Appeal Under Income Tax Act -I”. CAclubindia. N.p., 2016. Web. 30 Sept. 2016.

This article on legality of demonetization of currency notes in India is written by Ali Waris Rao.* He is currently pursuing a law degree from Jindal Global Law School from O.P. Jindal Global University. Prior to this, he obtained a Bachelor’s degree in Political Science from Hindu College, University of Delhi in 2014. His areas of interest include corporate law, constitutional law and public policy.

The current initiative of the BJP-led government to declare certain currency notes to be no longer a valid legal tender has been questioned of late. The very reason behind the introduction of the said scheme has been to eradicate corruption and counter terrorism. Although, the introduction of the said scheme is a great initiative, but the question that one needs to ask oneself is the manner in which the scheme has been executed by the government. Another aspect that needs to be dealt with is that, initially it was launched as a suitable measure to curb the issue of black money in India. Nevertheless, since then the justification has shifted from eradicating corruption to transforming our nation into a cashless economy. The disorderly implementation of demonetization has been witnessed at banks and ATMs which are perpetually out of money, the corporations enduring extreme losses, and the loss of wages and resources of the poorest (Gopalkrishnan, 2016). Also, the general population (several commoners) who are believed to have died standing in those serpentine queues (The Wire, 2016), the shock of having lost their cash, whose extreme cause lies in the ill-equipped and improper manner in which demonetization has been unleashed.

The greatest impacts of demonetization on the Indian economy are far from being obviously true. There are, in any case, issues that have been brought about the way in which demonetization has been notified by the Executive. A few petitions have been filed in the High Courts and in the Supreme Court also, challenging the Constitutional validity of demonetization or its facets. No final decision has been rendered till now, yet in the event that the approach of the Madras, Karnataka and Bombay High Courts is anything to go by, the Courts appears to be hesitant to interfere in the process. While the Supreme Court made a couple of observations about the troubles being confronted by individuals as an aftereffect of demonetization, it has not ventured in either.

This does not imply that there are no legitimate issues with the present demonetization framework. The petitioners questioning it have scrutinized the legality of the way in which it has been done, the specifics of certain moves and the violations of rights it potentially entails (Alok Kumar, EPW 2016). These require some genuine discussion and deliberation, not only with regards to demonetization, as well as for what it informs us concerning the condition about the state of the rule of law and the present government in our country. Through this article I will discuss the legitimacy of the move put forth by the present government.

Questioning the Legitimacy of demonetization

Under Section 26(2) of the RBI Act, the government has the power, in consultation with the Reserve Bank of India (RBI), to proclaim “any series” of notes of any denomination to no longer be a legal tender. It has been raised by a few petitioners that the said power cannot be exercised to proclaim all series of a note to never again be a legal tender. A bare perusal of Section 26(2) of the Act shows that the government has the power to demonetize through a notification. Nevertheless, the central issue is whether the government can pronounce that “all” banknotes of at least one or more denomination shall cease to be legal tender. This usually depends on how one interprets the term “series” and “any” pursuant to Section 26(2) of the Act. The contention that “any” does not signify “all” is not legally sound. The interpretational contention – that “any” can’t signify “all” – finds no support in the canons of statutory interpretation or in settled Supreme Court precedents. The Supreme Court in various cases has interpreted the term “any” to signify “every”, in view of the specific situation and the subject matter of the law. For instance, in L D A v M K Gupta (1994) and in S.K Mohammed Omer v Collector of Customs (1970), the Supreme Court has held that the expression “any” incorporates the term “all”. “Any series” pursuant to Section 26 of the Act ought to, in all conditions, incorporate “all series” of a given group or denomination and there is no other section in the RBI Act or in any other law for the time being in force which obliges it to be given a more limited interpretation.

Furthermore, in my view it can plausibly be argued that the very act of the government essentially assails the very legality of Section 26(2) of the Act, on the grounds of excessive delegation. It is a settled principle of law that matters pertaining to essential legislative functions cannot be delegated (S.P Sathe, Administrative Law). Only non-essential legislative functions can be delegated. Nevertheless, fixing the date from which the demonetization would come into force constitutes an “essential legislative function” and therefore, it could not be delegated to the Executive.

Additionally, shouldn’t something be said about the constitutional contention that demonetization essentially requires a law to be passed by the Legislature?

Under the present demonetization regime, there is no legitimate preclusion against accepting or offering Rs. 500 and Rs. 1,000 notes. It just implies that it is not illegal to decline to acknowledge such notes. The matter has, however, been confused by various “exclusion” clauses under various notifications issued by the government from time to time. Under the Indian Constitution, certain things must only be implemented by a law made by the Legislature. For instance, fixing the salaries of the judges, limitations on the right to life and property, etc. This does not infer that everything that the government does naturally require a law made by the Parliament, and positively not demonetization.

The next question that comes to my mind is the legitimacy of restrictions on cash withdrawals. On the off chance that the government has the ability to pronounce that banknotes might cease to be legal tender under Section 26(2) of the Act, then it ought to likewise have the ability to do other ancillary things to make demonetization work. Thus, imposing such restrictions, in my view will be valid. To contend otherwise would render the government’s power under Section 26(2) futile. Given the money crunch, these restrictions will guarantee that all depositors can get adequate money for their essential needs. All things considered, inquiries can be raised about how reasonable these limitations are. The more prolonged these limitations are the more solid will be the contention that they are irrational or capricious.

Right to Property – is it violated by demonetization

Under Article 300A of the Indian Constitution, the state may deny a person of property only in accordance with the authority of the law, i.e., by an Ordinance or an Act of Parliament. The Supreme Court is of the view that even a temporary deprival of property can constitute deprivation as per the meaning of this provision. The government’s inability to issue an Ordinance (since Parliament was not in session at that time) to extinguish its obligation to the general population in this way denying them of their property impermissibly disregards Article 300A of the Indian Constitution. Obviously, regardless of the possibility that the demonetization had been sanctioned by an Ordinance, the Court would still inquire and investigate if it met an essential public purpose and whether the individuals who were denied of their property were equitably reimbursed.

More so, the phenomenal hardship brought about by the demonetization ordinance has affected fundamental rights to trade, business and livelihoods of vast segments of the population and even the right to life of the individuals who have died because of standing in queues. While the government may “reasonably” limit such rights of the general population considering a legitimate concern for the overall population, the weight is on the Legislature to demonstrate that such restrictions are reasonable. The test of reasonableness is whether the measure was important to accomplish the stated policy goals of the government, and whether less unsafe, less destructive options were accessible. In Saghir Ahmad v. State of UP, the Supreme Court held that the reasonableness of a law must be evaluated in terms of its “instant effects” on the general population. Dissimilar to the 1978 demonetization practice that affected just 1% of money held, the current demonetization measure seeing that it impacts an expected 84-86% of total currency had serious punitive consequences for the vast sections of the society, day to day breadwinners, those without bank accounts, those subject to the informal cash economy for the significant source of their trade and employment. In my view, the notification is illegal for violating their fundamental rights under Articles 19 and 21 of the Constitution of India.

While the government may contend that such a classification is important and reasonable to accomplish their stated policy goals of eradicating unaccounted cash, seeing that the government neglected to assure that 100% of the population had bank accounts before the issuance of this notification, the classification might be challenged on the grounds of arbitrariness and hence, violative of Article 14 of the Constitution of India.

Another aspect that I would like to reflect upon is that presently the focus is now being shifted to a digital economy. Likewise, the thrust is more on encouraging electronic payments. This will further push hackers to become more proactive. There have already been many incidents of various bank account holders reporting loss of money from their digital cash wallet schemes by withdrawal without their knowledge of the same. How the government proposes to tackle this issue is a larger question that needs to be answered? In a country where the educated and the elite face unending troubles in withdrawing their money, then how can we expect a villager with little or no education to use e-banking services to enable transactions?

Rule of Law – does demonetization stand the test of rule of law

While the demonetization exercise carried out by the government is most likely legitimately stable, the way in which the government has reacted to events subsequently has been turbulent and misplaced. The notifications with changing rules and new preclusions cause confusion, as well as undermine the rule of law of the nation. This, in my view, is wholly impermissible. This measure is not only a transgression of the “rule of law”, but rather enslavement of individuals to the impulses of the rulers and smothering their lives without their assent (Dicey, Rule of Law). The daily demonetization declarations, ill-considered as they seem to be, likewise indicate a fundamental rundown in the rule of law.

We live in a nation administered by the rule of law, and not by a few individuals. The goals of the demonetization exercise might be praiseworthy, whether the said notifications will accomplish those stated policy goals is easily questionable. In any case, as it exists, the demonetization notification, in my view is unlawful and illegal.

References

Namita Wahi (2016), “Is The Current Demonetization Legal,”? Centre For Policy Research, 6^th December.

Prabhash Ranjan (2016), “To What Extent Is Demonetization Legal,?” The Wire, 30^th November.

L.D.A. v. M K Gupta (1994): SCC, SC 1.

S.K Mohammed Omer v. Collector of Customs (1970): SCC, SC, 2.

Saghir Ahmad v. State of UP 1955 SCR 707.

S.P Sathe, Administrative Law, Lexis Nexis.

Gopalakrishnan, Shankar (2016): “Demonetization Is A Permanent Transfer of Wealth From The Poor To The Rich,” The Scroll.

The Wire Staff (2016), “The Cost of Demonetization: Death Toll Rises To 82, Eight Million Workers Remain Unpaid,” The Wire, 2^nd December.

A.V Dicey, The Principles Of The Rule Of Law.

Alok Kumar, “Demonetization and The Rule Of Law,” Economic & Political Weekly, Vol 51 Issue No. 50.

* Final Year Law Student at Jindal Global Law School, Sonepat, NCT of Delhi, India.

In this blog post, Sayandeep Pahari, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how reliefs are calculated under DTAA.   

Introduction
     In this era of globalization, an international or cross-border transaction has become an indispensable component of our economy. Taxation policies are modified, subject to the tax regimes of other countries. The domestic tax policies of one country affect its transaction with other countries, which has led to the reviewing of taxation system periodically in order to suit the contemporary needs. There are two principles, which govern the fiscal jurisdiction of taxation between two sovereign states. One is called the source rule and the other residence rule. Source rule holds that income should be taxed in the place of origin irrespective of the residential status of an individual whereas; the residence rule assesses an individual based on their residence. Therefore, a business based on two countries; will fall under the conflict of these two separate rules and suffer taxes at both ends. If States decide to tax income on such unilateral basis, without any agreement with the other State, it will create an obstruction to trade and hinder globalization. In India, liability under Income Tax Act arises on the basis of the residential status of the assessee during the previous year.

Double taxation means taxing the same income twice, which happens when the same item of an individual’s income is treated as accruing, arising or received in more than one country.  DTAA or Double Taxation Avoidance Agreement is a treaty, which helps to overcome such perplexity by enacting rules of taxation between Source and Residential country. It is a universally accepted principle that no income should be taxed twice. Income Tax Act, 1961 serves to such principle by providing relief against double taxation under section 90 and section 91.

Types of Relief

There are two ways by which relief can be provided:

• Bilateral relief   – When the Governments of two countries enter into an agreement to provide relief against double taxation by jointly working out the system to grant it. In India, bilateral relief is provided under Section 90 and 90A of the Income-tax Act, 1961.

Agreements in this kind of relief can be of two types:

Exemption Method

When two countries agree that income arising from specified sources, which are taxable in both the countries, should either be taxed in only one of them or that each of the two countries should tax only a particular specified portion of the income so that there is no overlapping.

Tax Credit Method

In this kind of agreement, single taxability is not provided but some relief is provided. The assessee is given a deduction though he is liable to have his income taxed in both the countries.

Section 90 Of Income-Tax Act, 1961 states:

(1) The Central Government may enter into an agreement with the Government of any country outside India—

(a) for the granting of relief in respect of—
(I) income on which have been paid both income-tax under this Act and income-tax in that country; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or]
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.]
(3) Any term used but not defined in this Act or in the agreement referred to in subsection (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

Section 90A Of Income –Tax, 1961 Act states, Adoption by Central Government of agreement between specified associations for double taxation relief.

• Unilateral relief – The relief provided by home country irrespective of any agreement with the country concerned. This kind of relief exists because bilateral agreements might not be sufficient to meet all the cases. In India, Section 91 of the Income Tax Act, 1961 provides such relief. In other words, where Section 90 does not apply for relief under Section 91 will be available. Unilateral relief is only available in respect to doubly taxed income that is part of income which is included in assessee’s total income.
  
  Section 91 of Income Tax Act ,1961 states:

(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

(2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him—

(a) Of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or

(b) Of a sum calculated on that income at the Indian rate of tax;

Whichever is less.

(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

Calculation of Relief from Double Taxation

Method
 
The process which is generally adopted by the authorities in order to grant bilateral relief under Section 90 and 90A is:

Step 1 – Compute the total income of person liable to tax in India in accordance with the provision of the Income-tax Act.

Step 2– Allow relief as per the terms of the tax treaty entered into with the other contracting country or specified territory , as the case may be , where the income has suffered double taxation.


Under Section 91 of Income Tax Act, 1961 the steps for calculating relief are:

Step 1 – Calculate tax on total income inclusive of the foreign income on which relief is available. Claim any relief allowable under the provision of this act including rebates available under section 88E but before relief due under sections 90, 90A and 91.  

Step 2 – Add surcharge if applicable + education cess + SHEC after claiming the rebate.

Step 3– Calculate the average rate of tax by dividing the tax computed under Step 2 with the total income (inclusive of such foreign income).

Step 4-Calculate the average rate of tax of the foreign country by dividing income tax actually paid in the said country after deducting all relief due. This should be done before deduction of any relief due in the said country in respect of double taxation by the whole amount of the income as assessed in the said country.

Step 5– Claim the relief from the tax payable in India at the rate calculated at Step 3 or Step 4, whichever is less.

Conclusion

The double taxation system is propitious for enhancing the business environment in a country. A treaty of double taxation provides against non-discrimination of foreign taxpayers as well as benefits the taxpayer of a country to know about his liabilities with a greater certainty. One of the recent highlights includes the bilateral agreement between India and Mauritius. Previously, only Mauritius had the right to tax on capital gains by companies investing in India. Tax on capital gains was nearly zero in Mauritius which made the country a sweet spot for individuals investing in Indian companies. After the amendment to the treaty, India gets the right to tax on capital gains from transfer of shares of Indian resident companies.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

This article is written by Varsha Kewalramani, a lawyer working with a real estate law firm in Mumbai.

Note on Privilege Fees for a liquor License

The Grant and Renewal of Liquor Licenses are governed by the following Acts:

(a) Maharashtra Distillation of Spirit and Manufacture of Potable Liquor Rules, 1966

(b) Maharashtra Country Liquor Rules, 1973

(c)  Bombay Prohibition Act

(d) The Bombay Prohibition (privileges fees) Rules 1954

• General Provisions and Judgements with Reference to Payment of Privilege Fees

The  privilege fees is  required to be collected, at the time of an extension / renewal of  an agreement after  the expiry of previous one. The Provisions in different rules under the Bombay Prohibition Act refer to the sanction of different types of agreements.  Rule 5A of  The Bombay Prohibition (privileges fees) Rules 1954 states that the fee payable by any licensee for the privilege of having the lease or sub-lease of his licence in Form ‘CL-I’ under the Maharashtra Country Liquor Rules, 1973 and in Form ‘PLL’ or ‘I’ under the Maharashtra Distilation of Sprit and Manufacture of Potable Liquor Rules, 1966 under any agreement or arrangement to any person with the previous written permission of the Government or Commissioner as the case may be shall be the same as the fee chargeable for grant or renewal or continuance of such licence, whichever is higher. According to  Sub Rule 3 of Rule 24 of the  Maharashtra Country Liquor Rules, 1973, any licence granted under sub-rule (1A) shall be renewed by the Collector for a period not exceeding one year at a time on payment of fees on the scale mentioned hereunder, unless the Collector has reason to believe that there has been a breach of any of the terms and conditions of the licence, or that the retail licensee has not been working it properly and the fees of such license shall be Rs 40,000 in a city with a population of 20 lakhs. Under Rule 4 of the  Maharashtra Distillation of Spirit and Manufacture of Potable Liquor Rules, 1966, the licence may be renewed by the State Government for a period not exceeding five years on payment of renewal fee inclusive of consideration of fifty thousand rupees.

In the judgement, Gajraj Singh & ors. vs. State Transport Appellate Tribunal & ors., (1997) 1 SCC 650 Apex Court while considering the term renewal of lease or licence contained in document, observed that “grant of renewal is a fresh grant though it breathes life into the operation of the previous lease or licence granted as per existing appropriate provisions of the Act, rules or orders or acts intra vires or as per the law in operation as on the date of renewal” Judgment of Supreme Court of India in State of West Bengal Vs. Calcutta Mineral Supply Co. Pvt. Ltd. dated May 06, 2015 in this case the Court opined that opinion that the respondent Darjeeling Dooars Plantations (Tea) Ltd. is liable to pay salami which is one of the conditions of the Rules for the purpose of renewal of lease. The demand made by  the Collector is fully justified. The impugned order passed by the High Court, therefore, cannot be sustained in law. In the judgement, In the judgement, Shri Suresh Krishnaji Lakudkar Vs.  State of Maharashtra through its Secretary Department of State Excise and Prohibition, The Collector (State Excise) and The Superintendent of State Excise  para 21 states “The renewal is taken care of by next subrule i.e. Rule 24[3].It states that every license granted can be renewed by the Collector for a period of not exceeding one year at a time on payment of fees as per scale mentioned in that subrule.”

After perusing these judgements and provisions it is clear that Privilege Fees has to be paid at the time of Renewal or extension of an Agreement.

• Payment of Privilege Fees when the Nature of the Agreement has been changed

Firstly it is pertinent to  note  that ,  when there is a change in the Nature of the Agreement due to an Alteration approval of the State Excise Commissioner has to be taken according to the rules and the approval maybe sanctioned subject to the payment of privilege fees as prescribed by the Bombay Prohibition (privileges fees) Rules 1954.

In the judgement,  Deshbhakta Ratnappa Kumbhar Panchganga Sahkari S  akhar Karkhana Ltd. vs  Minister (State Excise) , license condition No. 13 states “Except with the written permission of the Commissioner, the licensee shall not sell, manufacture, transfer or sublet the right of manufacture conferred upon him by this licence not shall he, in connection with the exercise of the said right enter into any agreement which is in the nature of a sub-lease. If any question arises whether any agreement or arrangement is in the nature of sub-lease the decision of the Commissioner on such question shall be final and binding on the licensee.” A bare reading of the above condition, it is clear that except with the written confirmation of the Commissioner, the licensee shall not sell, manufacture, transfer or sublet the right of manufacture conferred upon him by this licence etc.

Therefore, the only authority if at all ought to grant such a license, is the Commissioner of State Excise and not the State Government, while exercising it’s  revisional power.

In the judgement The Collector of Bombay and others Vs Meena  Narayan Idnani  The  first question which requires determination is whether the death of one of the partners out of the two result into dissolution of the firm and whether the surviving partner can carry on the business as sole proprietor without seeking transfer of licence.

As mentioned hereinabove, Rule 21 demands that when the licence is sought by the more than one person who are carrying on business in the partnership, then the partnership is required to be declared to the Collector before the licence is granted and the names of the partners are entered jointly in the licence. It is obvious that the licence is secured by the respondent and her husband in the capacity as partners of the firm and not in their individual capacity. On the death of one of the partner out of the two, the partnership automatically stands dissolved and it is not open for the surviving partners to carry on the business in the character of a partners of a dissolved firm.

It is always open for surviving partner to carry on the business as a sole proprietor but the capacity as the sole proprietor is different and distinct from the capacity of partner in dissolved firm. In case the sole proprietor desires to hold licence by deletion, of the name of the deceased partner, then such request amounts to transfer of the licence. The Second point of consideration in this judgement the appellants are charging the fees under Rule 5, which is equivalent to the fee for grant of licence and which is Rs. 30,000/- per year and that fee is excessive and unreasonable and has no nexus to the services rendered.

The contention that the amount of Rs. 30,000/- charged towards fees is not accurate. The plain reading of the section makes it clear that the State Government has exclusive right or privilege of selling the liquor and the fees charged is to be considered inclusive of the rent or consideration for transfer or grant of such right or privilege. It is therefore obvious that the Government enters into a contract with the holder of the license for carrying out the trade or privilege which exclusively vests in the State Government and while conferring the right or the privilege, the amount charged is not for any services rendered and consequently the concept of requirements to render service for charging fees does not arise.

In the judgement , Somras Distillers Vs. State of Maharashtra and Ors.  there was a   transfer of existing licence to newly constituted firm under the same name while deleting two erstwhile partners and adding names of four new partners. The main point of Contention was whether the  petitioners were liable to pay fee applicable on date of making application with reference to the new rates having come in force. It was held, fee payable does not relate to the date of application but to the date on which permission was granted . Therefore the Petitioners were liable to pay the new rate prescribed. When on 16-3-1993 the Maharashtra Country Liquor Rules, 1973 stood amended by Maharashtra  Country Liquor (Amendment) Rules, 1993, obviously the petitioner firm was required to pay the fee for amendment in the licence at the rate prevalent on 17.4.1993 when the permission was granted to the petitioner-firm by the State Government permitting deletion of two erstwhile partners and addition of names of four new partners. The relevant date for payment of requisite fee for amendment in the licence is not the date on which the application is made by the party seeking amendment of names in the licences but the date on which the permission is granted and in the present case admittedly the permission was granted by the State Government to the petitioner-firm for deletion of names of two erstwhile partners and addition of names of four new partners on 17-4-1993 and on that date  the fee payable was in accordance with the Maharashtra Country Liquor (Amendment) Rules, 1993. There is no dispute that the deficient fee of Rs. 10,75,000/- has been claimed by the competent authority on the basis of the amended rules and that being admitted position, the communication dated 2.6.1993 asking the petitioner-firm to deposit an amount of Rs. 10,75,000/- towards the amendment fees in the licences cannot be faulted.

Hence it is concluded from the above judgements the nature of the partnership deed changes as there is a  change in the constitution of the firm. Therefore the privilege fees has to be paid in accordance with the provisions of the Bombay Prohibition (privileges fees) Rules 1954.