The Institute of Chartered Accountants of India Newsletterbangaloreicai.org/images/icons/2016/Newsletter/BloreBr...FACTS TO PONDER : SURRENDERING AN AWARD When SIR M. Visveswaraya

(Set up by an Act of Parliament)

The Institute of Chartered Accountants of India

Bangalore Bangalore NewsletterNewsletterBranch of SIRCBranch of SIRC

English Monthly

Volume 04 | Issue 06 | January, 2016 | Pages : 36 ` 5/- per copyFor Private Circulation only

Heritage of Namma Bengaluru

“A man must arrange

his physical and cultural

circumstances so that

they do not hinder him in his

service of humanity,

on which all his energies

should be concentrated.”

“Problems of life,

even acute problems,

need not depress us.

Life is always a predicament

and the world constitutes

a challenge, but a challenge

that is an opportunity

for all of us.”

Bengaluru Fort

Branch Election 2016

Last Date of Receipt of Nominations23.01.2016

Date of Election 13.02.2016

(Details Inside)

Adv

t.

Advt.

Adv

t.

Advt.

Ever since a proviso was added to the definition of

Charitable purpose in the Income Tax Act [Section 2(15)] denying exemption for trusts h a v i n g a n o b j e c t o f advancement of any other

object (Apart from education, medical relief, relief of poor, etc as mentioned on the main section) which 'smacks' of a commercial character. When the proviso was introduced (through Finance Bill 2008), the Finance Minister stated - "The intention is to limit the benefit to entities which are engaged in activities such as relief of poor, education, medical relief and any other genuine charitable purpose, and to deny it to purely commercial and business entities which wear the mask of a charity". Allying the fears of members on the possible impact on genuine institutions, the Finance minister stated - "I once again assure the House that genuine charitable organizations will not be affected. The Central Board of Direct Taxes will, following the usual practice, issue an explanatory circular containing guidelines for determining whether an entity is carrying on any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business. Whether the purpose is a charitable purpose will depend on the totality of the facts of the case."

Today in actual practice the Department has at the first glimpse of an activity involving 'Surplus' invokes the proviso, denies or cancels exemption. A spate of litigation has followed and the Tribunals & High courts have decided in majority of the cases against the Department's interpretation of the Proviso. Here are a few examples to show that the Department has lost sight of the original purpose of the Proviso. It is yet to come to grips (reconcile with the limited play of the proviso).

Forensic Accounting and Fraud Prevention - FAFP

CA. Rajkumar S. Adukia

4

Charitable Trust's Tryst with Tax Department

Fraud is believed to be one of the most under reported

offences, with less than fifty percent of inc idents be ing reported to police or other a u t h o r i t i e s . G e n e r a l l y, a n

organisation loses 5% of its revenues each year to fraud which translates to a potential projected global fraud loss of nearly $3.7 trillion.

What is Fraud?

In criminal law, fraud is intentional deception made for personal gain or to damage another individual. Defrauding people or entities of money or valuables is a common purpose of fraud.

It is defined as 'abuse of position, or false representation, or prejudicing someone's rights for personal gain'.

Fraud is defined as 'a legal concept, which involves acts of deceit, trickery, concealment, or breach of confidence that are used to gain some unfair or dishonest advantage; an unlawful interaction between two entities, where one party intentionally deceives the other through the means of false representation in order to gain illicit, unjust advantage.' (XVI International Conference of Supreme Audit Institutions (INCOSAI) Uruguay, 1998)

Under the Indian Contract Act, 1872, Sec.17 defines fraud.

“Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract;

(1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

Congratulations to the Winners of Council Elections from BengaluruCentral Council Regional Council

CA. Madhukar N. Hiregange CA. Cotha S. Srinivas CA. Babu K. Thevar

Online International Placement Programme

Jnanasagara CA. S. Krishna Swamy

Special Article'sSpecial Article's

(Contd. on Page 11) (Contd. on Page 13)

Bangalore Branch of SIRCof the Institute of Chartered Accountants of India

5 January2016Follow us on www.facebook.com/bangaloreicai

Dear Esteemed Member,

Namasthe,

Happy New Year 2016 !

While I wish you a very happy, prosperous and a peaceful new

year, I take this opportunity to provide you a snapshot of the

activities conducted at your Branch:

Total Events 170

Total Number of Days taken to conduct

the Events

198 Days

Total CPE Hours for all the Programmes 678 Hours

Branch CPE Index* (In CPE Hours) 119692 Hours

Number of Persons Benefitted

(Total Foot Prints of Delegates)

23441 Delegates

* BRANCH CPE INDEX : A performance indicator; Concept coined by

Bangalore Branch, explained below -

A snap shot indicator of the success resulting from the active

participation of the Members(only Members) which indicate the

number of CPE hours availed by the Members of the Branch by

attending the Programmes conducted/hosted by the Branch for

enriching their knowledge.

The above figures are inclusive of the programmes conducted

by the DCO (like Certification Courses etc).

The year bygone was a wonderful year and the Branch was

brimming with Members, actively participating in all the events

conducted/hosted by the Branch.

It is my firm belief that the Speakers/Resource Persons are the

Heart and the Brain, organisers-the limbs and the distinguished

participants the life blood of the Branch. I thank all the speakers

and the participants for honoring us with this great success.

e- NEW FACILITY:

We are happy to inform you that the Bangalore Branch has

launched a unique facility in its Website for the benefit of the

Members.

You need not have to send someone to the Branch for buying

the Institutes’ publications; you may choose to click on the

“ICAI Publication online purchase” option made available in

our branch Website and buy as per your requirement; the items

booked will be delivered at your place through Courier.

The e-Buyer should necessarily be a Member of ICAI or a CA

Student. Please note that this facility (e-Booking/e-buy) is not

available for others.

Chairman’s Communique...Chairman’s Communique... Online orders can be placed any time between 10AM and 6PM.

Delivery shall be made within Bengaluru Urban District only.

Initially, we have opened this facility only for few popular

books; we will be including the other books and also extend

the timings shortly after the system fits in to its place without

any issues. We request you to cooperate till that time.

Packing, Handling & Delivery charges will not be levied.

SPECIAL ARTICLES:

Jnanasagar S Krishna Swamy in his article Charitable Trust's

tryst with tax department contemplates about the current

concept Ease of Doing Business. The concept will be successful

only when there is reasonable stability in the laws and

litigations are avoided, which requires the understanding of

the provisions of the law in the same perspective from both

the sides ie., biased interpretations should be discarded and

Consensus Ad Idem should prevail over. The Article provides us

few sample cases which reminds us about one of the aspects

of harmonious construction “Philosophy of the section and the

spirit behind the law to grant exemption should not be missed

while interpreting the exemption provisions”.I also thank CA. Rajkumar Adukia for providing us an useful

article on “Forensic Accounting and Fraud Prevention”.

COUNCIL ELECTIONS:

On behalf of the Bangalore Branch, I congratulate all the

winners of both the Council elections, especially the following

persons from Bengaluru:

1. CA. Madhukar Hiregange - Central Council

2. CA. Cotha S Srinivas - Regional Council and

3. CA. Babu K Thevar - Regional Council

BRANCH ELECTIONS FOR THE TERM 2016-19

The elections for the Managing Committee of the Bangalore

Branch will be conducted on 13.02.2016. Notice convening

the special general meeting and the relevant details are given

elsewhere in this Newsletter. I request the members to come

and vote in large numbers.

FACTS TO PONDER : SURRENDERING AN AWARD

When SIR M. Visveswaraya was conferrer knighthood (SIR

title) by the then British government, some people asked him

to surrender it by way of protest. He declined and said that

the recognition was for learning and that the individual must

be separated from the contribution to society. It is a message

that learning, selfless contribution to generation of wealth –

innovation will merit public recognition.

Dhanyavada

CA. Allama Prabhu M.S.

Chairman

6January2016 Online Registration is available. Visit our website: bangaloreicai.org Follow us on www.facebook.com/bangaloreicai

After the death of Chikka Raja Wodeyar in 1704, four

weak Kings succeeded. These Kings because of their

ineffective administration gave to usurp of their imperial

authority by the Dalavayi’s. In fact, Dalavayi’s were the

chartered functionaries duly appointed to manage the

State as representatives of the Royal Authority; but,

every successor mismanaged and emptied the Mysore

Treasury and the Mysore Army was in total disarray with

a low morale; the Mysore kings had become very weak

in all respects.

This was the situation when Hyder Ali made his grand

entry in the Scenario.

Hyder Ali was born(app. 1720) in Budikote, Kolar. His

father Fatteh Muhammad who was serving under

Nawab of Sira, died in a battle. Hyder Ali and his elder

brother Shabaz were small children when they took

shelter under their relative Ibrahim Khan. Ibrahim Khan

identified the natural leadership qualities of Hyder Ali

and further nurtured his martial instincts. He somehow

managed to take Hyder Ali to Katti Gopalaraja Urs who

was living in Bengaluru and the Bengaluru Fort was

under his command. He agreed to give shelter and work

to Hyder Ali. This was the turning point in the life of

Hyder Ali. During his free time he regularly visited Dodda

Garadi (Fitness House) in Aralae Pete and became much

stronger. Though illiterate, Hyder Ali was extraordinarily

intelligent and through his honest and smart work he

gained total confidence of his Master, who promoted

him to the Mysore Army.

When Mysore Army attacked Devanahalli, Hyder Ali was

in the Army. Hyder Ali exhibited exemplary bravery and

impressed the then Dalavayi Nanjarajiah who rewarded

him with enlarged commands. Hyder Ali by his sheer

courage and masculine endeavor’s excelled himself and

finally, in 1759, in recognition of his dedicated services,

Bengaluru and the surrounding provinces were conferred

to him as a personal jahgir by Krishna Raja Wodeyar II. By

1761, he became the most powerful figure with all the

political power concentrated in his hands. He eventually

carved out a Kingdom of his own; with Sriranga Patna

as his capital, he founded the Sultanate of Mysore and

declared himself as Sultan Hyder Ali Khan. He was a great

administrator, warrior, planner and a rare Statesman.

Hyder Ali realized the strategic importance of Bengaluru

for initiating action against the British, whose rising

power was watched by great concern. He immediately

reconstructed the mud fort of Bengaluru by entirely

casting in stores and significantly expanded it. He

brought French experts from Pondicherry and started a

Military training and recruitment center in Bengaluru.

The local people were trained about the latest techniques

in the manufacture of steel canons, swords etc. He is

also considered to be the Innovator of iron-cased Military

Misiles. All his policies favoured Bengaluru to develop in

to an Industrial and Commercial hub. Bengaluru became

a great haven for Hyder Ali’s achievements.

£ÀªÀÄä ¨ÉAUÀ¼ÀÆgÀÄ

Sultan Hyder Ali Khan - The innovator of iron-cased Military Misiles

11



He sought the help of British to fight against the

Maratha’s; British refused. He developed bitter enmity

against British, which ultimately percolated through his

lineage to Tippu. During the second Anglo-Mysore War,

in 1782, he suddenly died of severe illness. Tipu Sultan

succeeded Hyder ali.

In the considered words of Mr.M.Fazlul Hasan, in his book

“Bangalore Through the Centuries”, he has pronounced

as follows:

“As such, Haider Ali’s clash with the English

was inevitable. And, when the two powers were

engaged in a mortal conflict-the four Mysore Wars-

Bangalore, being situated in a strategically important

position, got the spotlight in an increasing measure,

with the result that it always remained a target of

British attack. Bangalore’s subsequent importance,

to a large extent, therefore, was due to its crucial

role in the wars with the British. As in the past, in the

years that followed, Bangalore had to pass through

tumultuous times. Indeed, history had earmarked

Bangalore for a stormy destiny.

Into this ever-shifting kaleidoscope also came Lord

Cornwallis, the English Governor General in India,

with a large and well equipped army-the biggest that

ever invested Bangalore. In March 1791 he captured

it after terrific bombardment and a prolonged fight.

The struggle was so sanguinary and obstinate that

all the principal centres of Bangalore were hotly

contested by the gallant defenders. After its fall,

for a period of nearly a year, Bangalore was the

occupation of the British forces. But when the treaty

of seringapatam was concluded, it was handed back

to Tippu Sultan. After the fall of Tippu Sultan in the

Fourth Mysore War, in 1799, Bangalore was restored

to the old Hindu royal dynasty and became part of

the newly carved out Mysore State.”

In just two paragraphs, Mr.M.Fazlul Hasan has vividly

explains the incidents that occurred in the City for nearly

three decades.

Stone Tablet on the Bengaluru Fort stating

‘ Through this breach the British assault was delivered

March 21, 1791’


CALENDAR OF EVENTS - JANUARY & FEBRUARY 2016Date/Day/

TimeTopic / Speaker CPE Credit

02.01.2016 Saturday

05.30pm to 08.30pm

Intensive Workshop on International TaxationArticle 10 - DividendsCA. B.P. Sachin Kumar

VENUE: Branch Premises No Delegate Fee

3 hrs

06.01.2016 Wednesday

6.00pm to 8.00pm

Study Circle MeetBasics of Income Computation Disclosure Standards (ICDS)CA. Sudheendra B.R. VENUE: Branch Premises

2 hrs


6.00pm to 8.00pm

Study Circle MeetBasics of FEMA CA. Vivek Mallya VENUE: Branch Premises

2 hrs

16.01.2016 Saturday

05.30pm to 08.30pm

Intensive Workshop on International TaxationArticle 11 - InterestCA. D.S. Vivek

VENUE: Branch Premises No Delegate Fee

3 hrs

19.01.2016 Tuesday

2.30pm to 5.30pm

An Update on Companies Act 2013 CA. S. Santhanakrishnan, Chairman, CL&CGC CA. K. Raghu, Immediate Past President, ICAIVENUE: Branch Premises

3 hrs

19.01.2016 Tuesday

6.00pm to 8.00pm

Invest Karnataka - Interative Session Ms. K. Rathna Prabha, Addl. Chief Secretary, Industry & Commerce, Govt. of KarnatakaSri. Gourav Gupta, Commissioner, Industry & Commerce, BangaloreSri. S. Rangappa, Spl. D.C. KIADB VENUE: Branch Premises

2 hrs


6.00pm to 8.00pm

Study Circle Meet Basics of Domestic Transfer Pricing CA. Prashanth.G.S VENUE: Branch Premises

2 hrs

22.01.2016 Friday

6.00pm to 8.00pm

PRACTICE ALERT - DISCUSSIONSE TDS Filing - Recent DevelopmentsCA. D. Tarun Kumar Jain VENUE: Branch Premises

2 hrs

26.01.2016 Tuesday

9.15am onwards

Republic Day CelebrationsChief Guest : CA. N.C.S. Raghavan VENUE: Branch Premises

–––


6.00pm to 8.00pm

Study Circle Meet Basics of IFRSCA. Vinti Varma VENUE: Branch Premises

2 hrs

29.01.2016 Friday

6.00pm to 8.00pm

PRACTICE ALERT - DISCUSSIONSTally - ERP9 Version 5.2: Demo of new features and Remote access Audit Mr. Divakar KR VENUE: Branch Premises

2 hrs


6.00pm to 8.00pm

Study Circle MeetInd AS- 103 - Business Combinations - Case StudiesCA. Rakesh Agarwal VENUE: Branch Premises

2 hrs



CALENDAR OF EVENTS - FEBRUARY & MARCH 2016Date/Day/

TimeTopic / Speaker CPE Credit

05.02.2016 Friday

6.00pm to 8.00pm

PRACTICE ALERT - DISCUSSIONSCompanies Act CS. M.S. Sivasankaran & CS. Ms. Mangala Rohit VENUE: Branch Premises

2 hrs

06.02.2016 Saturday

9.45am to 5.15pm

National Conference on FAFP Delegate Fees : Rs. 500/- VENUE: Sri Devaraj Urs Bhawan Auditorium, Opp. to Bangalore Branch Details at Page # 10

6 hrs

06.02.2016 Saturday

Intensive Workshop on International Taxation - Article-12 : Royalties VENUE: Branch Premises Time: 5.30pm to 8.30pm No Delegate Fee

3 hrs


6.00pm to 8.00pm

Study Circle MeetIncome Tax IssuesMr. M.V. Seshachala, Advocate VENUE: Branch Premises

2 hrs

13.02.2016 Saturday

Branch Election Details at Page # 31

–––


Study Circle MeetTDS - Latest Amendements and Critical Issues - CA. D R Venkatesh VENUE: Branch Premises Time: 6.00pm to 8.00pm

2 hrs

20.02.2016 Saturday

9.45am to 5.15pm

Workshop on Ind AS Co-ordinator : CA Gururaj AcharyaDelegate Fees : Rs 750/- VENUE: Branch Premises Details at Page # 10

6 hrs

20.02.2016 Saturday

Intensive Workshop on International Taxation Article 12: Fees for Technical Service VENUE: Branch Premises Time: 5.30pm to 8.30pm No Delegate Fee

3 hrs


Study Circle MeetGST - Model GST Law - CA. A Saiprasad VENUE: Branch Premises Time: 6.00pm to 8.00pm

2 hrs

01.03.2016 Tuesday

An awareness programme - Analysis of Union Budget 2016 - In association with FKCCI VENUE: Chowdaiah Memorial Hall, Malleshwaram, Bangalore Time: 3.30pm to 8.00pm

–––

11.03.2016 Friday

Clause by Clause Discussion on Union Budget - Direct Taxes VENUE: Ambedkar Bhawana Auditorium, Adjacent to B’lore Branch Delegate Fees: For Members - Rs. 2,000/-

6 hrs

12.03.2016 Saturday

Clause by Clause Discussion on Union Budget - Indirect Taxes VENUE: Ambedkar Bhawana Auditorium, Adjacent to B’lore Branch Delegate Fees: For Members - Rs. 2,000/-

6 hrs

26.03.2016 Saturday

Seminar on Bank Branch AuditDelegate Fees : For Members - Rs. 2,100/- (Details will be informed ) VENUE: Hotel Le-Meridien Sankey Road, Bangalore

6 hrs

EDITOR : CA. Allama Prabhu M.S.

SUB EDITOR : CA. Geetha A.B.

Disclaimer: The Bangalore Branch of ICAI is not in anyway responsible for the result of any action taken on the basis of the articles and advertisements published in the newsletter. The views and opinions expressed or implied in the Branch Newsletter are those of the authors/guest editors and do not necessarily reflect that of Bangalore Branch of ICAI.

Advertisement Tariff for the Branch Newsletter

COLOUR FULL PAGEOutside back ` 40,000/-Inside front ` 35,000/-Inside back ` 30,000/-

INSIDE BLACK & WHITEFull page ` 20,000/-Half page ` 10,000/-Quarter page ` 5,000/-

Advt. material should reach us before 22nd of

previous month.


National Conference on Forensic Accounting and Fraud Prevention

On Saturday, 6th February, 2016at Sri Devaraj Urs Bhawan Auditorium, Opp. to Bangalore Branch, Vasanth Nagar

Timings Topics Speakers09:00 AM Registrations10:00 AM to

11:30 AM

Introduction, welcome address etc. Chief Guest: An emminent Person*

Keynote Address by

CA. K. Raghu

CA. Rajkumar Adukia11:30 AM Tea Break11:45 AM to

01:15 PM

Current context: fraud, importance of

forensic accounting, recent cases

CA. Parag Deodhar, President,

Association of Certified Fraud Examiners

01:15 PM Lunch break02:15 PM to

03:30 PM

How to identify red flags,

how to investigate? Walkthroughs

CA. Manoj Khanna, Director,

Forensic Services, KPMG

03:30 PM Tea Break03:45 PM to

05:30 PM

Cyber forensic and forensic technology: use of technology in

an investigation (digital forensics and data analytics)

CA. Sundar Narayan, Associate Director,

SKP Business consulting LLP

05:30 PM Vote of thanks for the day

6 hrsCPE

DELEGATE FEES: FOR MEMBERS: ` 500/- FOR OTHERS : ` 3,435/- (Incl. Service Tax & Cess)

Workshop on Ind AS On Saturday, 20th February, 2016

Venue: S. Nararayanan Auditorium, ICAI Bhawan, Bangalore Branch

Timings Topics Speakers09.45am to 10.15am Inaugural Session10.00am to 11.30am IND AS - Presentation & Disclosure Standards CA K. Gururaj Acharya11.30am to11.45am Tea Break12.00pm to 1.30pm IND AS - Income & Expenditure Standards CA Vinayak Pai01.30pm to 02.30pm Lunch Break02.30pm to 04.00pm IND AS - Assets & Liabilities based Standards CA Mohan R. Lavi04.00pm to 04.15pm Tea Break04.15pm to 05.45pm IND AS - Group Reporting &

other Miscellaneous Standards

CA Adarsh Ranka

6 hrsCPE

CA. Allama Prabhu M.S.

Chairman

CA K. Gururaj Acharya

Co-Ordinator

CA. Geetha A.B.

Secretary

DELEGATE FEES: FOR MEMBERS: ` 750/- FOR OTHERS : ` 5,153/- (Incl. Service Tax & Cess)

Mode of Payment: Cash or Cheque/DD in favour of “Bangalore Branch of SIRC of ICAI”, payable at Bengaluru

For Registration, Please contact: Ms. Geetanjali D., Tel: 080 - 3056 3500 / 3513

Email : [email protected] | Website : www.bangaloreicai.org




(Contd. from Page 4)

(3) a promise made without any intention of performing

it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares

to be fraudulent.

Explanation.—Mere silence as to facts likely to affect the

willingness of a person to enter into a contract is not

fraud, unless the circumstances of the case are such that,

regard being had to them, it is the duty of the person

keeping silence to speak, or unless his silence, is, in itself,

equivalent to speech.”

Although there is no violence and no tangible visible scars,

fraud generally has devastating effect on economy and

society. On the economic front, fraud corrodes confidence

in the financial systems. It is, therefore, necessary that the

law deals with fraud as a crime and no quarter is given to

perpetrators of fraud.

Internal, external and collusive fraud

While an internal fraud is one where an employee of the

organization commits fraud an external fraud is where

third parties, such as businesses, individuals or organized

crime groups, steal money from a department or agency,

either by obtaining payments to which they are not

entitled or keeping monies that they should pay over to

the department. Collusive fraud is where fraud by a third

party is facilitated by an insider i.e. the employee who

receives a kickback for the assistance he renders.

Detection of fraud

Fraud detection is a topic applicable to many industries

including banking and financial sectors, insurance,

government agencies and law enforcement, and

more. Fraud attempts have seen a drastic increase in

recent years, making fraud detection more important

than ever. Despite efforts on the part of the affected

institutions, hundreds of millions of dollars are lost to

fraud every year. Since relatively few cases show fraud in

a large population, finding these can be tricky.

In banking, fraud can involve using stolen credit cards,

forging checks, misleading accounting practices, etc. In

insurance, 25% of claims contain some form of fraud,

resulting in approximately 10% of insurance pay-out.

Fraud can range from exaggerated losses to deliberately

causing an accident for the pay-out. With all the different

methods of fraud, finding it becomes harder still.

Data mining and statistics help to anticipate and quickly

detect fraud and take immediate action to minimize

costs. Through the use of sophisticated data mining tools,

millions of transactions can be searched to spot patterns

and detect fraudulent transactions.

An important early step in fraud detection is to identify

factors that can lead to fraud. What specific phenomena

typically occur before, during, or after a fraudulent

incident? What other characteristics are generally seen with

fraud? When these phenomena and characteristics are

pinpointed, predicting and detecting fraud becomes a

much more manageable task.

The following strategic fraud detection approach shows

how the use of information systems and technology

provide effective ways to detect fraud –

(1) Understanding the business,

(2) Identifying all possible frauds that could occur,

(3) Cataloguing possible symptoms for each type of

fraud,

(4) Using technology to gather data about symptoms,

(5) Analysing and refining results, and

(6) Investigating identified symptoms

Prevention of Fraud

It is impossible to eliminate any type of fraud altogether,

but the risk of being defrauded can be reduced by

increasing our fraud consciousness and taking practical

steps. Most organisations fare poorly in initial fraud

prevention because they don’t have appropriate anti-

fraud controls in place.


Preventing fraud in business is a tricky task because

the threat sometimes comes from people within the

organisation itself.

i. The first defence against fraud should be control

of entry, which should be applied both to people

employed in the organisation and to people with

whom business is done. The first fraud prevention

measure should be to carry out a risk audit on posts

in the organisation which might give people access

to fraudulent opportunities and/or to confidential

data that might be used for industrial espionage,

and take up references on all employees in those

posts, including more than just one previous job. The

background checking measures may assist in weeding

out some fraudsters, and psychological tests can

give guidance as to who is a devious and ‘unsound’

character.

ii. Apart from control of entry to prevent fraud, the next

defence should be the internal management systems

and compliance monitoring for internal frauds. This will

include the processes established by an organisation

for oversight and management of fraud risks.

iii. Apart from the initial controls of entry, the organisation

should ensure that there is an ongoing process for

regular identification of significant fraud risks to

which it is exposed.

iv. Every organisation

should implement measures

to eliminate or reduce

through processes, each

of the significant fraud

risks identified in its risk

assessment. Basic controls

include segregation

of duties relating to

authorization, custody of

assets and recording or

reporting of transactions. In

some cases it may be more

cost-effective to reengineer

business processes to

reduce fraud risks rather

than layer on additional controls over existing

processes. For example, some fraud risks relating to

receipt of funds can be eliminated or greatly reduced

by centralizing that function or outsourcing it to a

bank’s lockbox processing facility, where stronger

controls can be more affordable.

v. Major frauds usually involve senior members of

management who are able to override process-

level controls through their high level of authority.

Preventing major frauds therefore requires a strong

emphasis on creating a workplace environment that

promotes ethical behaviour, deters wrongdoing and

encourages all employees to communicate any known

or suspected wrongdoing to the appropriate person.

vi. The organisation should establish a process to detect,

investigate and resolve potentially significant fraud.

Such a process should typically include proactive fraud

detection tests that are specifically designed to detect

the potentially significant frauds identified in the

organization’s fraud risk assessment.

Strong fraud prevention processes help increase the

confidence investors, regulators, audit committee

members and the general public have on the integrity of

the organisation. Any organization that fails to protect

itself appropriately faces increased vulnerability to fraud.

(Contd. in page 15)

Strategic Fraud Detection Approach -



Charitable Trust’s Tryst with Tax Department


A. India Trade Promotion Organization V/S

DGIT(Exemption) (2015) 371 ITR 333 (Delhi). The

judgment extensively discusses the Philosophy behind

the legislation. The facts of the case are -

The Department cancelled the exemption applying the Proviso

and on a writ petition. the court held that the department's

interpretation of the proviso was highly flawed.

1. FACTS:

"The petitioner was engaged in socially and economically

desirable activities relating to the promotion of Indian

Trade and that the activities of the petitioner fell within

the ambit of the expression "advancement of any other

object of general public utility" as appearing in section

2(15) of the said Act. But because of the new proviso to

section 2(15) the petitioner's objects were not regarded as

charitable purposes. It was observed in the said order dated

February 23, 2012, that the petitioner, inter alia had huge

surpluses in banks, it had given its space for rent during

trade fairs & exhibitions, it had received income by way of

sale of tickets and income from food and beverage outlets

in Pragati Maidan, etc. The petitioner provides the service of

allocating space and other amenities like water, electricity

and security, etc to the traders to conduct their exhibitions".

2. Department's View:

The Department's contention on withdrawing the exemption

to the organisation originally granted u/s 10(23C)(iv) was -

"The main object of the petitioner being advancements

of objects of general public utility, the proviso to section

2(15), which has been introduced with effect from April

1, 2009, was applicable. The objects of the petitioner

being advancement of general public utility, the proviso

to section 2(15) to the said Act was clearly applicable

and as the petitioner was engaged in the activities of

trade, commerce and business for consideration, it loses

its status as a public charitable institution.

If a private operator charges rent from letting out its

land for trade exhibitions and collects money from

sale of tickets, advertisement, etc., its trading receipts

are subjected to tax. Similar treatment has to be given

to a public sector undertaking because the Income-tax

Act does not discriminate between the activities of a

private and a public entity so far as commercial taxable

activities are concerned. The claim of the applicant

that its charges are much lesser than the market rate

cannot benefit the applicant organisation keeping in

view of the facts that the applicant organisation was

earning huge surplus which clearly indicates conscious

and full scale commercial exploitation of the property at

Pragati Maidan which is in possession of the applicant

organisation. The huge surplus generated from year to

year does not indicate that surplus has been earned

casually or accidentally. There is a conscious planning

and policy decision to earn such huge revenue".

3. Issue:

"What is necessary in the first instance is to establish that

the income is received on behalf of a fund or institution

established for "charitable purposes". The first thing that

needs to be satisfied, therefore, is that the institution

must be established for "charitable purposes". Charitable

purpose is defined in section 2(15), as indicated above. It

is an inclusive definition and includes relief of the poor,

education, medical relief, advancement of any other

object of general public utility and "preservation of

environment (including watersheds, forests and wildlife)

and preservation of monuments or places or objects of

artistic or historic interest". In so far as the present case is

concerned, we are concerned only with the advancement

of any other object of general public utility, which has

been regarded as a residuary object".

4. Take a total view:

"We have already noted above, while discussing the facts

of the case that the income received by the petitioner

is from letting out of space, sale of publications, sale of

tickets and leasing out food and beverage outlets in Pragati

Maidan. The dominant and main object of the petitioner

is to organize trade fairs/exhibitions in order to promote

trade, commerce and business not only within India but

internationally. This is done through the organisation of


trade fairs, including the annual International trade fair

and other exhibitions. All these activities including the sale

of tickets and sale of publications are an inherent part of

the main object of the petitioner".

5. Profit not dominant:

"It is clear from the facts of the case that profit making is

not the driving force or objective of the petitioner. It is

registered under section 25 of the Companies Act, 1956,

which specifically applies to entities which intend to apply

their profits, if any, or other income in promoting their

objects and prohibits, the payment of any dividend to its

members. This makes it clear that any income generated

by the petitioner does not find its way into the pockets of

any individuals or entities. It is to be utilized fully for the

purposes of the objects of the petitioner".

6. Purpose of section:

"From this , it is evident that the introduction of the proviso

to section 2(15) by virtue of the Finance Act, 2008, was

directed to prevent the unholy practice of pure trade,

commerce and business entities from masking their

activities and portraying them in the garb of an activity

with the object of general public utility at their hearts and

charity institutions. The attempt was to remove the masks

from the entities, and to expose their true identities. The

object was not to hurt genuine charitable organizations.

And, this was also the assurance given by the Finance

Minister while introducing the Finance Bill, 2008".

7. Case Law:

The court after stating the rival arguments and drew its

conclusion from the following case laws on the subject -

i. GS1 India V/S DGIT(Exemption) (2014) 360 ITR 138 (Delhi)

ii. Institute of Chartered Accountants of India V/S

DGIT(Exemption) (2013) 358 ITR 91 (Delhi)

iii. Bureau of Indian Standards V/S DGIT(Exemption)

(2013) 358 ITR 78 (Delhi)

8. Judgment:

"In conclusion, we may say that the expression

"charitable purpose", as defined in section 2(15) cannot

be constructed literally and in absolute terms. It

has to take colour and be considered in the context of

section 10(23C)(iv) of the said Act. It is also clear that if

the literal interpretation is given to the proviso to section

2(15) of the said Act then the proviso would be at risk of

running fowl of the principle of equality enshrined

in article 14 of the Constitution of India. In order to save

the constitutional validity of the proviso, the same would

have to be read down and interpreted in the context of

section 10(23C)(iv)".

B. DIRECTOR OF INCOME TAX V/S WOMEN'S INDIA

TRUST [2015] 379 ITR 506 (BOM)

1. FACTS:

The assessee-trust formed to carry out the object

of education and development of natural talents of

people having special skills, more particularly women.

It trained them to earn while learning. It educated

them in the field of catering, stitching, toy making, etc.

While giving them training, it used material bought

from the open market. This was essential for carrying

out the assessee's object. In the process, some finished

product such as pickles, jam, etc were produced and

which the assessee sold through shops, exhibitions

and personal contacts. The motive of the assessee was

not the generation of profit but to provide training to

needy women in order to equip or train them in these

field and make them self-confident and self-reliant.

2. Department's View:

The sale of certain products amounted to commercial

activity and hence proviso was attracted and

exemption denied.

3. Court held that - "We are of the view that

considering the fact that the trust has been set up

and is functional for the past several decades and it

has not deviated or departed from any of its state

object and purpose, utilization of the income, if at all

generated, does not indicate carrying on of any trade,

commerce or business.

C. DIRECTOR OF INCOME TAX (EXEMPTIONS) V/S

SHRI VILE PARLE KELAVANI MANDAL [2015] 378

ITR 593 (BOM)

1. FACTS:

The assessee-trust set up thirty schools and colleges. The

Tribunal held that the management and development



programme and consultancy charges were part and parcel

of the institute of management studies set up by the

assessee.

Letting out of halls for marriages, sale and advertisement

rights has not been found to be a regular activity

undertaken and is a part of the business.

2. The court held that - "Letting out of halls for

marriages, sale and advertisement rights had not

been found to be a regular activity undertaken as

a part of business. The income was generated from

giving various halls and properties of the institution

on rentals only on Sundays and public holidays when

they were not required for educational activities, and

this could not be said to be a business which was

not incidental activity and the income derived from

it having been used for the educational institute and

not for any particular person, and separate books of

account having been maintained, this income could

not be brought to tax.

Forensic Accounting

Forensic accounting is a rapidly growing field of accounting

that describes the engagement that results from actual

or anticipated dispute or litigations. “Forensic” means

“suitable for use in a court of law”, and it is to that

standard Forensic Accountants generally work. Forensic

Accounting is an investigative style of accounting used

to determine whether an individual or an organization

has engaged in any illegal financial activities. Although,

forensic accounting has been in existence for several

decades, it has evolved over time to include several types

of financial information scrutiny.

Employee and management fraud, theft embezzlement, and

other financial crimes are increasing, therefore accounting and

auditing personnel must have training and skills to recognize

those crimes, especially in the area of fraud prevention,

deterrence, detection, investigation and remediation.

Forensic accounting is said to bring significant improvement

in the quality of fraud detection and prevention.

“Forensic accounting was coined by Peloubet in 1946. He

said, forensic accounting is the application of accounting

knowledge and investigative skills to identify and resolve

legal issues. It is the science of using accounting as a

tool to identify and develop proof of money flow. These

tools and/or techniques, skills and knowledge can be

invaluable for fraud and forensic accounting investigator.

Forensic accounting also called investigative accounting or

fraud audit is a merger of forensic science and accounting.

In fact, it is a combination of accounting, auditing and

investigative skills. In simple words, forensic accountants

are financial detectives who audit, investigate and ascertain

the accuracy of financial reporting documents, usually in

connection with anticipated or ongoing legal action.

Forensic accountants should possess specific skills

and training that enable them to play their role as

fraud investigators. More specifically, entry-level fraud

and forensic accounting professional should possess

knowledge, skills and abilities in the following areas –

· Criminology specifically oriented to the nature,

dynamics, and scope of fraud and financial crimes;

the legal, regulatory, and professional environment;

and ethical issues.

· Fraud prevention, deterrence, detection, investigation

and remediation in the following areas: asset

misappropriation, corruption, and false presentations,

financial statement fraud; and fraud and forensic

accounting in a digital environment, including

computer-based tools and techniques for detection and

investigation, electronics case management tools, and

other issues specific to computerized environments.

· Forensic and litigation advisory services, including

research and analysis, valuation of losses and

damages, dispute investigation, and conflict resolution

(i.e. arbitration and mediation).

Demand for forensic accounting and fraud detection

specialisation is increasing, considering the rising incidents

of cybercrimes and frauds detection.




DIGEST OF RECENT DECISIONS OF THE INCOME TAX APPELLATE TRIBUNALCA. K.S. Satish, Mysore

CHARITABLE INSTITUTION

In Haridwar Development Authority

v. CIT (2015) 155 ITD 318 (Del)

where the assessee was an authority

established under the Uttar Pradesh

Urban Planning & Development Act,

1973 for development of Haridwar,

Pauri, Tehri and part of Dehradun by

providing housing, roads & sewerage

system, development & maintenance of

parks and plantation of trees, the Delhi

‘C’ Bench while observing that the

activities carried out by the assessee-

Authority falls within the last limb of

section 2(15) namely, advancement

of any other object of general public

utility, ruled that the proviso to section

2(15) is not applicable since it is not

carying out any activity with a profit

motive and its predominant object is

welfare of the people at large.

SECTION 14A

The Kolkata ‘B’ Bench has in ITO v.

LGW Ltd. (2015) 174 TTJ (Kol) 553

held that share application money is

only in the nature of an offer made

by the assessee to buy shares, that till

the assessee becomes a shareholder,

the assessee does not have a right to

claim dividend that may be declared by

the company and that, therefore, share

application money cannot be included

while working out the average value of

the investments under rule 8D(2)(iii).

CONCEPT OF REAL INCOME

In Cachar Drug Distributors v. ITO

(2015) 155 ITD 745 (Gau) where the

assessee following mercantile system of

accounting did not account for interest

accrued on loan advanced to a certain

person since it was not receiving any

interest and wrote off the loan in

the subsequent year, the Gauhati

Bench observed that the principle of

accountancy cannot take place of

theory of real income and held that

addition could not be made towards

interest accrued merely because the

assessee was following mercantile

system of accounting.

INCOME FROM HOUSE PROPERTY

Where the assessee-company

purchased a building out of an interest-

free loan taken from another company,

let out the building to various tenants

and utilised the interest-bearing

deposits received from them to repay

the original loan, interest paid by the

assessee on the deposits was allowable

as a deduction under section 24(b)

ruled the Mumbai ‘E’ Bench in ITO v.

Structmast Realtor (Mumbai) (P) Ltd.

(2015) 174 TTJ (Mum) 544.

SECTION 43B

The Ahmedabad ‘D’ Bench has in

Marwar Hotel Ltd. v. ACIT (2015) 155

ITD 655 (Ahd) where the assessee-

company had borrowed loans from

financial institutions and paid interest

by issuing equity shares to them,

expressed the view that payment of

interest by way of issue of equity shares

to the financial institutions constitutes

actual payment under section 43B.

SECTION 40(a)(ia)

Where sub-contractors furnished Form

No. 15-I to the assessee-contractor

but the assessee did not submit Form

No. 15-J to the Commissioner, non-

furnishing of Form No. 15-J is merely

a technical default and disallowance

cannot be made under section 40(a)

(ia) of payments made by the assessee

to the sub-contractors opined the

Ahmedabad ‘B’ Bench in ITO v. Andhra

Roadways (2015) 155 ITD 352 (Ahd).

CAPITAL GAINS

In ITO v. LGW Ltd. (2015) 174 TTJ (Kol)

553 where the facts were that assessee

sold the property for Rs. 60,00,000,

the sale consideration adopted for

the purpose of registration and stamp

duty was Rs. 61,22,330 and the

Assessing Officer computed the long-

term capital gain by adopting the sale

consideration at Rs. 61,22,330 resulting

in an addition, the Kolkata ‘B’ Bench

held that though section 50C does

not speak of any variation in terms of

percentage between value adopted for

purpose of stamp duty and the actual

consideration received on transfer, since

the difference between the valuation of

the property for purpose of stamp duty

and the actual consideration received

by the assessee was less than 2%,

addition made by the Assessing Officer

(Contd. in page 21)



COMPANY LAW - UPDATES & AUDITORS RESPONSIBILITY REG. FRAUD REPORTING

CA K. Gururaj Acharya

I. Important Updates – December 2015

1. MCA Updates

1.1 Notification of S. 13 & 14 of the

Companies (Amendment) Act,

2015 WEF 14th December 2015

[MCA Notification S.O.3388 (E) dtd

14.12.2015]

a. S.13 (Amendment to S. 143(12)

of the Co’s Act 2013) – Auditor to

Report Frauds involving amounts

beyond threshold limit to the

Central Government (“CG”)

b. S.14 (Amendment to S. 177 of

the Co’s Act 2013) – Enabling

omnibus approval for Related

Party Transactions (RPT) (subject

to prescribed conditions) by Audit

Committee (“ACB”).

Note – The Companies (Amendment)

Act, 2015 contains a total of 23

Sections all of which, except S. 13

& S.14 were effective from 29th May

2015. With the above notification,

S.13 & S.14 are made operative

WEF 14th Dec 2015, thereby making

all provisions in the Companies

(Amendment) Act, 2015 operative.

1.2 Threshold limit of Rs. 1 Cr

specified for Reporting of

Frauds by Auditors to Central

Government

[Rule 13 of Companies (Audit and

Auditors) Amendment Rules, 2015

substituted WEF 14.12.2015]

With S. 13 of Companies

(Amendment) Act, 2015 [reg.

Reporting of Frauds involving

amounts beyond prescribed

limit to CG] becoming effective,

corresponding rules [Rule 13 of

Companies (Audit and Auditors)

Rules, 2015] have been amended

to provide, inter alia, the threshold

limit of Rs. 1 Crore or above,

disclosure in Board Report and

Reporting mechanism.

Note – MCA has introduced the

‘materiality concept’ for reporting

of fraud whereby cases of Frauds

where amount involved or expected

amount involved individually are less

than Rs. 1 Crore must be reported

ONLY to ACB or the Board and need

not be reported to the CG.

1.3 Omnibus approval for Related

Party Transactions (RPT) by Audit

Committee (ACB) on annual basis

[Rule 6A inserted vide Companies

(Meeting of board and its powers)

Second Amendment Rules, 2015

dated 14.12.2015]

a. With S.14 of Companies

(Amendment) Act, 2015 [reg.

Omnibus approval for RPT by

ACB on annual basis] becoming

effective, corresponding rules by

insertion of new Rule 6A to provide

for conditions s.t which Omnibus

approval for RPT by ACB on annual

basis can be obtained.

b. Rule 10 which provided for

exemptions for Loans / Guarantees

by Holding Co. to its wholly-owned

subsidiary Co. from the requirement

of S. 185 (Loans to Directors, etc)

has been omitted as this exemption

has been subsumed in S. 15 of Co’s Amendment Act.

c. Requirements of Special Resolutions

for RPT’s (wherever they occur

in Rule 15) replaced by Ordinary

Resolution to fall in line with the

already Amended S. 188 of the Act.

2. ICAI - Updates

2.1 Auditing and Assurance

Standards Board of ICAI has

issued the following Exposure

Drafts:

a. Revised SA 700 - Forming an

Opinion and Reporting on Financial

Statements

b. New SA 701 - Communicating Key

Audit Matters in the Independent

Auditor’s Report

c. Revised SA 705 - Modifications to

the Opinion in the Independent

Auditor’s Report

d. Revised SA 706- Emphasis of Matter

Paragraphs and Other Matter

Paragraphs in the Independent

Auditor’s Report


e. Revised SA 260 - Communication

with Those Charged with

Governance

f. Revised SA 570 - Going Concern

The comments on these

Exposure Drafts can be sent

latest by January 18, 2016.

2.2 With a view to assist Members

in Practice, ICAI Council has

approved the draft of Guidance

Note on Schedule III to the

Companies Act, 2013.

Note: In case of non compliance

of Schedule III, the Company and

every officer in default shall be

punishable with imprisonment for a

term extendable to one year or with

fine of Rs. 50,000/- to Rs. 5 Lacs or

with both.

2.3 MCA had constituted a Committee

to develop a new Companies

(Auditor’s Report) Order (CARO) to

be made applicable for FY 2015-16

onwards. At its recent meeting, the

Committee has requested ICAI to

prepare the draft of the proposed

new CARO on behalf of the

Committee. ICAI has already started

the process in this regard.

II. Auditors responsibility reg. Fraud Reporting u/s. 143(12)

1. Definition of FRAUD (Expln. to S.

447)

“Fraud” in relation to affairs of a

Company or any Body Corporate,

includes any act, omission, concealment

of any fact or abuse of position

committed by any person or any other

person with the connivance in any

manner, with intent to deceive, to gain

undue advantage from, or to injure

the interests of, the company or its

shareholders or its creditors or any other

person, whether or not there is any

wrongful gain or wrongful loss.

“Wrongful gain” means the gain by

unlawful means of property to which

the person gaining is not legally entitled.

“Wrongful loss” means the loss by

unlawful means of property to which

the person losing is legally entitled.

2. Provisions regarding Fraud

Reporting u/s. 143(12) r/w Rule 13

of Co’s (Audit and Auditors) Rules,

2014 & Amendment Rules, 2015.

2.1. With a view to improve Corporate

Governance norms and enhance

accountability on the part of the

Corporates and Auditors, a specific

duty has been cast on the Auditors

through Non-Obstante provisions

u/s. 143 (12) of the Companies

Act 2013 requiring him to Report

Frauds to the Central Government.

2.2. The Auditor is obligated to report

only such Frauds which are

being committed or have been

committed against the Company

by the Officers or Employees of

the Company.

Frauds committed by persons other

than Officers or Employees on the

Company, and frauds committed

by the Company need not be

reported u/s. 143(12).

It may be noted that the Auditors are

required to report the Nature and Amount

involved in any Fraud noticed or reported

during the year, whether committed on

or by the company, under para (xii) of

Clause 3 of CARO (Companies (Auditor's

Report) Order, 2015)

2.3. Threshold limit of Rs. 1 Crore

prescribed – i.e only those cases

where the Auditor has reason to

believe that an offence of fraud,

which involves or is expected to

involve individually an amount

of Rs. 1 Crore or above are to be

reported to the Central Government.

Cases of Frauds where the amount

involved or the expected amount

involved individually are less than

Rs. 1 Crore must be reported only

to the ACB or the Board.

2.4. Disclosure in Board’s Report:

Board’s Report u/s. 134(3) to

contain the following disclosures

of each of the fraud reported to

ACB / Board during the year – (As

per New Amendment Rules,2015)

i. Nature of Fraud with description;

ii. Approximate Amount involved;

iii. Parties involved, if remedial action

not taken;

iv. Remedial actions taken.

Note-The above disclosure is

required only for cases Not reported

to the CG [ S.134 (3) (ca) inserted

by the Companies (Amendment)

Act, 2015].

2.5. All the provisions of Rule 13

regarding Reporting of Frauds

to CG / ACB or Board applies to

the Cost Auditor appointed u/s.

148 and to the Secretarial Auditor

appointed u/s. 204.

It may be noted that Rule 13

i.e Fraud Reporting does not apply

to –

i. Internal Auditor (u/s. 138 of Co’s Act 2013);

ii. TAX Auditor (u/s. 44AB of Income

Tax Act 1961);

iii. VAT Auditor (under Value Added

Tax Act).

2.6. Manner of reporting to Audit

Committee / Board –(For



amount < Rs. 1Crore (As per New

Amendment Rules,2015)

i. Auditor to report to ACB (constituted

u/s. 177) or to Board within 2 days

of his knowledge of fraud.

ii. Report to specify the following –

a. Nature of Fraud with description;

b. Approximate amount involved;

c. Parties involved.

2.7. Manner of reporting to Central

Government – (For amount > Rs

1Crore)

i. Auditor to report to ACB / Board

within 2 days (As per New

Amendment Rules, 2015) of his

knowledge of fraud, seeking their

Reply or Observations within 45

days.

ii. Auditor to forward the following

to CG within 15 days of receipt

of ACB/Board’s Reply –

a. Report of the Auditor

b. Reply or observations of ACB / Board

c. Auditor’s Comments on Reply or

observations of ACB / Board

iii. In case ACB / Board fails to Reply

within 45 days, Auditor to forward

his report to CG along with a note

containing details of his report that

was earlier forwarded to Board / ACB

iv. Report to be sent to “The Secretary,

Ministry of Corporate Affairs”

in a sealed cover by Registered Post

with Acknowledgement Due (RPAD)

or by Speed Post followed by an

e-mail in confirmation of the same.

v. Report to be printed on Auditor’s Letter-head (containing postal

address, e-mail and telephone

/ mobile number) and must be

signed by Auditor with his seal and

ICAI Membership Number

vi. Report must be in form of a

statement as specified in Form

ADT-4

2.8. Penalty on Auditors for non-

compliance of S. 143(12) would be

Rs. 1 Lac to Rs. 25 Lacs.

3. ICAI Guidance Note on Fraud

Reporting

1.1. Auditor shall apply following

definition of fraud as in SA 240.

(Explanation to fraud as stated in

S. 447 may also be considered)

“An intentional act by one or more

individuals among management, those

charged with governance, employees,

or third parties, involving the use of

deception to obtain an unjust or illegal

advantage.”

3.2. Auditor may not be able to

detect frauds – unless reflected in

Financial Statements.

3.3. Auditor to Report only if he

is the First person to identify

while performing his duties as an

Auditor –

a. Auditor is not required to report

frauds detected by Management

or Frauds already reported u/s 143

(12) by others if he is satisfied

with the steps which are

appropriately addressed.

b. Auditors should refrain from

providing any information on fraud

against Company to other Covered

persons (Cost Auditor or Secretarial

Auditor) or any other person (other

than as provided in Rule 13) - Breach

may be considered as violation of

ICAI professional code of conduct.

3.4. In Consolidated Financial

Statements, Auditor must report

fraud of Parent Company only.

(Exception Provided)

3.5. Frauds pertaining to periods prior

to commencement of Co’s Act

2013 are to be Reported only if

identified during FY 2014-15 or

onwards and only to the extent

the same was not dealt with in the

Financial Statements, Audit Report

or Board report prepared under

the provisions of the Companies

Act 1956.

3.6. Auditor to Report Frauds only

when he has evidence and not

on the basis of mere suspicion or

Reason to believe that such a fraud

exists.

3.7. Cases of Corruption, Bribery, Money

laundering & Non-Compliance with

Laws – Auditor to use Professional

judgment & following Paras of

SA – 250 (Consideration of Laws &

regulation)

i. Para 28: Auditor to determine

whether to report to outside Party

ii. A – 19: Auditor’s legal responsibility

- Duty of confidentiality (legal

opinion)

iii. A – 20: Government Entities –

Report to Governing Authorities or

in Auditor’s Report

1.8. Auditor is not required to carry

out additional procedures

consequent to the responsibility cast

u/s 143 (12) as the objective of an

auditor (in course of performance of

duties as an auditor in accordance

with Standards on Auditing) is

not to detect fraud. Auditor

should however perform such

procedures that provide sufficient

appropriate audit evidence about

risks of material misstatement due

to frauds that have been assessed

by him.


DIGEST ON RECENT DECISIONS UNDER COMMERCIAL TAX LAWSCA Annapurna Kabra

M/S S.B. Audio and Video, opp. Mini

Vidhan Soudha, Gulbarga Vs Deputy

Commissioner of Commercial Taxes

(Audit-1), Gulbarga STA No. 701 of

2013 (HC)

· The Appellant is a registered dealer

engaged in the business of buying

& selling of electronic goods. The

Appellant files the return in Form VAT

100 before the Assessing Authority.

· The Assessing officer, on assessment

observed that the appellant has

claimed exemption in respect of

discounts granted subsequent to the

issuance of tax invoice and disallowed

the discount paid subsequent to the

issue of tax invoices and levied taxes

and penalty of Rs. 45,128/-.

· Aggrieved by the said order, the

appellant filed an appeal before the

First Appellate Authority.

· The appellant contended that the

discount allowed is as per the KVAT

Act. It was contended that their

sellers had given them discount of

Rs. 2,22,942/- and according to

their regular practice prevailing in

the business they had in turn given

discounts to the tune Rs. 5,33,445/-

under the provisions of law and

that there is no bar to allow more

discount to the customers. It is

further contented that they have

given discounts to the customers at

the end of the year and had issued

credit notes and recorded the same

in their books of accounts.

· The FAA held that discounts are

allowable, but such discounts are to

be in accordance with the regular

business practice of the assessee or

ought to be evidenced ny the terms

of any contract of agreement and

it must also be demonstrated by

the assessee that the purchaser had

originally charged sum less discount.

It is held that the methodology

adopted by the assessee is not in

consonance with law and reject the

appeal.

· Again a rectification application

was filed before the very same First

Appellate Authority.

· The appellant pleaded that the tax

has to be levied on the real and

actual value of sale and not on

notional value. The provision of

section 3(3) makes it mandatory to

declare the credit notes and that

the order in appeal has been passed

ignoring the provisions of section

30(1) r/w Rule 31 of the Rules.

· The FAA on exercising his powers of

rectification under section 69 of the

Act, set aside the order of discount

disallowed and ordered penalty of

Rs. 3,881/-.

· The FAA while passing the

rectification order has nowhere

referred to the factual material

placed before the authority. What

were the documents examined by

him? Whether the tax invoices as

mandated under Rule 27 and 29 of

the rules were booked into by him?

Whether debit and credit notes as

mandated under rule 31 of the

rules were looked into by him, It is

also not forthcoming as to whether

the rectification order is passed

after adverting to the contents

of the credit and debit notes and

tax invoices or after a comparative

assessment of the same.

· Due to above discrepancies in

the order passed by the FAA, the

Revisional Authority i.e the Additional

Commissioner of Commercial Taxes

suo moto reopened the case and

restored the order of Assessing

Authority by setting aside the order

of FAA.

· But yet again the Revisional Authority

has fallen into the same error as

committed by the First Appellate

Authority. He has not adverted to

any material particulars or factual

aspects of the case and approach

the case in a prefunctionary manner.

· Again the matter was carried before

the High Court.

· The petitioner relied on the case

of Civil Appeal Nos. 2516-17/2012

rendered by the Hon’ble Apex

Court in M/s IFB Industries. The

issue has been settled by the Apex

Court in the case of IFB Industries

Ltd. Though the Apex court was

dealing with the case arising out of

General sales tax Rule of Kerala but

the principles laid down by the Apex



Court is applicable in the facts of

the case.

· Further, Rule 31 empowers the dealer

to give further discounts in the form

of debit and credit notes. Rule 3

deals with the determination of total

and taxable turnover. Clause (c) of

Sub rule (2) refers to all amounts

allowed as discounts. Hence there is

no dispute that the taxable turnover

is the net amount after allowing

discounts permissible under the law.

· The records do not reveal what

are the details that were placed by

the assessee before the Authorities

and what are the details that the

authorities verified before concluding

the assessment. Hence, the High

Court gave direction to the assessee to

furnish all the details (i.e. tax invoices,

sales bill, monthly returns, credit

notes and debit notes)and thereafter

Assessing Authority to reconsider the

entire matter in the light of the said

provisions and pass fresh order in

accordance with law.

by adopting the sale consideration

at Rs. 61,22,330 was required to be

deleted.

REVISION

The Chandigarh Bench has in Vodafone

South Ltd. v. CIT (2015) 174 TTJ

(Chd) 246 taken the view that the

Commissioner need not give any

notice to the assessee before assuming

jurisdiction under section 263, that

the only requirement is to provide

an opportunity of hearing to the

assessee and that it is not necessary

for the Commissioner himself to sign

the communication of giving such an

opportunity to the assessee.

PENALTY

In Parinee Developers (P) Ltd. v. ACIT

(2015) 174 TTJ (Mum) 137 where the

assessee offered interest received on

fixed deposits in banks as business

income after netting the business

related finance expenses but the

Commissioner (Appeals) directed it to

be taxed as income from other sources,

the Mumbai ‘C’ Bench held that since

it was a case of change of head of

income, the issue was debatable in

nature and there was no default of

disclosure or furnishing of inaccurate

particulars relating to the issue, penalty

under section 271(1)(c) could not be

levied.

TAX DEDUCTION AT SOURCE

Where the assessee, a telcommunication

service provider, sold starter kits and

recharge coupon vouchers to distributors

against prior payment at a discounted

price, the relationship between the

assessee and the distributor is that

of principal to principal, the discount

does not constitute commission

and, therefore, section 194-H is not

applicable thereto opined the Jaipur

Bench in Tata Teleservices Ltd. v. ITO

(2015) 174 TTJ (Jp) 339.

DIGEST OF RECENT DECISIONS OF THE INCOME TAX APPELLATE TRIBUNAL(Contd. from Page 16)

Tally Training for Accounts Staffs of ICAI

OBITUARY

We deeply regret to inform

sad demise of

CA V. Padmanabhan,

Membership No. 003181

on 15th December 2015.

May his soul

rest in peace.


JOB WORK UNDER CENTRAL EXCISECA. N.R. Badrinath, B.Com, Grad CWA, FCA & CA. Madhur Harlalka, B.Com, FCA, LL.B

In order to ensure cost optimization,

manufacturing units tend to get a

part or whole of their processing done

from outside on job work basis. Job

Work means supplying the material to

a job worker who carries out certain

processes and returns the goods to the

principal manufacturer after carrying

out those processes.

In accordance with Notification 214/86

- CE dated 25.03.1986 and as per rule

2(n) of Cenvat Credit Rules, 2004, the

term jobworker means -“Processing

or working upon of raw material or

semi finished goods supplied to the

job worker, so as to complete a part

or whole of the process resulting in the

manufacture or finishing of an article

or any operation which is essential for

afore said process”

From the above definition inference

can be drawn that, raw materials

or semi finished goods should be

supplied by the principal manufacturer

to the job worker. When the person to

whom whole or part of the process is

outsourced, uses his own raw materials

in the process, it does not amount to

Job work.

Exceptions:

Use of incidental material is no bar in

job work:

Addition or application of minor

items by the job worker would

not detract it from being job work

[Prestige Engineering v. CCE Meerut

1994(73) ELT 497 (SC)].

In case, where negligible amount

of raw material is used by the job

worker which is incidental in nature

and for which no charges are made

by the job worker, the process

still remains as job work. [Madura

Coats v. Collector of C. Ex., West

Bengal1980 (6) ELT 582 (Cal HC)]

Use of own material by job worker is

not a bar

Normally the job worker can use

only minor items in addition to the

inputs provided by the principal

manufacturer. However, Notification

214/86 - CE does not prohibit a job

worker from utilizing other inputs

and recovering its charges from

the principal manufacturer. This

transaction would still amount to

job work.[Shakti Insulated Wires

Ltd. v. CCE Mumbai 1999 (114) ELT

424 (Tri.)]

Taxability:

Excise duty will be levied on goods

manufactured or produced in India in the

manner specified in section 3 of Central

Excise Act, 1994. If the process of job

work leads to manufacturing of a product,

the job worker is liable to pay excise duty

on the product manufactured. However,

the job worker can avail exemption the

following exemptions:

If a declaration under Notification

No. 214/86 CE dated 25.03.1986is

given by the principal manufacturer.

As per Notification No. 214/86 -

CE, job workers are exempt from

excise duty provided that the

principal manufacturer furnishes

a declarationto the Assistant

Commissioner having jurisdiction

over the factory of the job worker

that the goods returned to him

will be used in or in relation to

manufacturing of thefinal product.

An evidence has to be produced

that the goods have been so used

and the principal manufacturer

shall also take the responsibility of

discharging the excise duty on the

finished goods.

Where the raw material and semi

finished goods received by the

job worker are in accordance with

Rule 4(5)(a) of Cenvat Credit Rules,

2004.

Job workers are exempt from

payment of duty where raw material/

semi finished goods are received by

the principal manufacturer as per

Rule 4(5)(a) of Cenvat Credit Rules,

2004 i.e., goods sent by principal

manufacturer to the job worker are

brought back to the factory of the

principal manufacturer within 180

days.

Small Scale Industries (SSI)

Notification No. 83/1994 - CE

dated 11.04.1994, exempts the

job worker from payment of excise

duty if the principal manufacturer is

a small scale industrial unit subject

to the declaration to be given by

the principal manufacturer.

Scrap arising at the job worker’s premises during the manufacturing

process



Would be liable to central excise

duty in the hands of the job worker,

unless the same is sent / returned

to the principal.

Valuation

When job work leads to manufacture of

a product and excise duty is payable by

the job worker, value of goods will be

determined as per the provisions of Rule

10A of Central Excise Valuation Rules,

2000.

Rule 10A:

The value of the goods manufactured

in the process of job work will be as

per the table given, provided that the

buyer of goods is not related to the

principal manufacturer and price is the

sole consideration for sale.

Availability of Cenvat Credit:

A. For Job worker:

Job worker can avail Cenvat credit

on materials supplied to him, if

the inputs are supplied to him free

of cost. [Hindustan Development

Corporation Ltd. v. CCE, Calcutta

[2001 (137) ELT 472 (Tri. –Kolkata)]

B. For Manufacturer:

· As per Rule 4(5)(a) of CCR,2004,

the principal manufacturer can avail

cenvat credit oninputs if the goods

sentto job worker are received back

by the principal manufacturer within

180 days.

· In cases where the goods are

not received by the principal

manufacturer within 180 days, he

should pay an amount equivalent

to cenvat credit availed on such

inputsby debiting the cenvat credit

or otherwise. However, he can re-

claim the cenvat credit after the

receipt of the goods from the job

worker. The manufacturer should

maintain necessary documents to

prove that the goods sent for job

work is received within 180 days.

· As per Rule 4(5)(b) of CCR, 2004

cenvat credit is allowed in respect of

jigs, fixtures, moulds and dies sent

by a manufacturer to a job worker.

The restriction of receiving back the

goods within 180 days will not apply

in this case.

Job Work under Service Tax

As per Section 66D (f) of the Finance

Act, 1994, (i.e., Negative List of

Services), Service Tax is not applicable on

- “services by way of carrying out any

process amounting to manufacture or

production of goods excluding alcoholic

liquor for human consumption.”

However, if job work does not amount

to manufacture of goods, intermediate

production process in respect of the

following has been exempted vide

Mega Notification No. 25/2012 - ST

dated 20.06.2012 -

(a) agriculture, printing or textile

processing,

(b) cut and polished diamonds and

gemstones or plain and studded

jewellery of gold and other precious

metals,

(c) any goods on which appropriate

duty is payable by the principal

manufacturer, or

(d) processes of electroplating, zinc

plating, anodizing, heat treatment,

powder coating, painting including

spray painting or auto black, during

the course of manufacture of parts

of cycles or sewing machines upto

an aggregate value of taxable

service of the specified processes of

one hundred and fifty lakh rupees

in a financial year subject to the

condition that such aggregate value

had not exceeded one hundred

and fifty lakh rupees during the

preceding financial year;

Sl. No

Type of Transaction Assessable Value

1. Where the goods are sold by the principal

manufacturer at the time of removal of

goods from the factory of the job worker.

The Transaction Value of the goods

sold by the principal manufacturer.

2. Where the goods are not sold by the

principal at the time of removal of goods

from the factory of job worker, but are

transferred to some other place from

where the said goods are to be sold, then

if the goods are -

Sold at or about same time (i.e., time

of removal from job workers factory)

Not sold at or about the same time.

Normal Transaction Value of the

said goods

Normal Transaction Value of

the said goods sold at or about

the time nearest to the time of

removal of goods from the factory

of the job worker

3. In any other case The provision of Cenvat Excise

Valuation Rules, 2000 will be

applicablemutatis mutandis.

Cost of transportation from the premises where the goods are sold to the place of

delivery is to be excluded in calculating the assessable value of excisable goods.


SERVICE TAX DECISIONSPARTS DIGESTED – STR VOLUME 40, PARTS 5 & 6

CA. A. Saiprasad

Departmental Clarifications

Speedy disbursal of pending refund

claims of exporters under Rule 5 of

CCR, 04

This scheme is applicable to exporter

of services who have filed refund

claims under Rule 5 of CCR, 04 on

or before 31.3.05, which has not

been disposed of as on the date of

issue of circular (10.11.15). Additional

documents in the form of certificate

from statutory auditor in case of

companies and from a Chartered

Accountant in case of assessees who

are other than companies has to be

submitted in the format given in the

circular. An undertaking has to be

provided by assessee in the format given

in the circular. On receipt of aforesaid

documents, the jurisdictional AC/ DC

will give a dated acknowledgement and

then make a provisional payment of

80% of the amount claimed as refund,

within 5 working days of the receipt of

the document.

CBEC Circular No. 187/6/2015 ST

dt.10.11.15

Swachh Bharat Cess – Accounting

Code for Payment

SBC Minor Head – 0044-00-506

Tax Collection – 00441493

Other Receipts (Interest) – 00441494

Penalties – 00441496

Deduct Refunds - 00441495

CBEC Circular No. 188/7/2015-S.T.

dt.16.11.15

Swachh Bharat Cess – Frequently Asked

Questions (FAQ) and Clarifications –

Refer http://www.cbec.gov.in

Notifications

SBC – Effective Date

The Central Government appoints 15th

day of November 2015 as the date

with effect from which provisions of

Chapter VI of Finance Act, 2015 (SBC)

shall come into force.

Notification No.21/015-S.T. dt.6.11.15

SBC – Effective Rate

The effective rate of SBC shall be 0.5%

of value of taxable service (and not

0.5% of service tax).

SBC shall not be levied on services

which are exempt from service tax or

otherwise not leviable to service tax.

The notification shall come into force

from 15.11.15.


SBC – To be calculated on Abated

Value

SBC shall be levied only on that

percentage of value of taxable service

specified in column (3) in Notification

No.26/12 ST (i.e. abated value).

Value of taxable service for SBC shall be

value as determined in accordance with

Service Tax (Determination of Value)

Rules, 2006.


Reverse charge system (Notification

No.30/12-ST) shall be applicable to SBC.

Notification No.24/2015-S.T.

dt.12.11.15

SBC applicable to Composition

Rates

Sub Rule (7D) has been inserted to Rule

6 of Service Tax Rules, 94 whereby SBC

is made applicable to composition rates

of service tax available as an option to

1. Service of booking of tickets for

travel by air provided by an air travel

agent (Rule 6(7)),

2. Insurer carrying on life insurance

business (Rule 6(7A)),

3. Servicein relation to purchase or

sale of foreign currency, including

money changing (Rule 6(7B)),

4. Distributor or selling agent, liable

to pay service tax for the taxable

service of promotion, marketing,

organizing or assisting in organizing

lottery (Rule 6(7B)).

Notification No.25/2015-S.T.

dt.12.11.15

Case Laws

Reverse Charge applicable to

Lottery Distributors?

The Sikkim High Court held that:

1. Buying and Selling lottery tickets is

not rendering service to State and

therefore their activity does not

fall within the meaning of ‘Service’ u/s 65B(44).Hence said activity is

outside the purview of Expln 2 to

S.65B(44)

2. Explanation 2 to S.65B(44) expands

the scope of the main provision of

S.65B(44), hence ultra vires Finance

Act, 94 and therefore struck down.



3. Circular No. 334/ 5/ 2015 - TRU

dt.19.5.15 (stating that activity

carried out by a lottery distributor

or selling agent in relation to

promotion, marketing, organizing,

selling of lottery or facilitating in

organizing lottery of any kind, in

any other manner) stands quashed.

Future Gaming & Hotel Services Pvt Ltd

V. UOI, 2015 (40) STR 833 (Sikkim)

Whether credit of service tax not

payable can be taken as credit

(input service)?

Assessee had paid service tax under GTA

service for period prior to 1.1.05, when

service tax payable only post 1.1.05.

The High Court held that credit of the

tax not due for payment by assessee

is otherwise entitled for claiming credit

and availing of credit of undue tax is

not illegal.

CCE V. Tamil Nadu Petro products Ltd.,

2015 (40) STR 878 (Mad)

Whether service tax can be

recovered prior to issuing SCN?

The High Court held that service tax can

be recovered only after adjudication (i.e.

passing order in original by adjudicating

authority after considering reply to SCN

and granting hearing).High Court held

that directly issuing Garnishee Order

prior to issue of SCN is not warranted

and brings disrepute to assessee.

Gopala Builders V. Directorate General

of Central Excise Intelligence, 2015 (40)

STR 888 (Guj)

Note: Also see Kunj Power Project Pvt

Ltd V. UOI, 2015 (40) STR 1061 (All)

Whether Transfer of Goodwill in a

slump sale is liable to service tax?

The assessee (transferor) granted a

non-exclusive license to use the name

and style ‘Kanan Devan’ as a part of

transferee’s corporate name for a

period of 30 years. The Tribunal held

that transfer of goodwill viz. ‘Kanan

Devan’ along with ongoing business is

liable to service tax under ‘Intellectual

Property Service’.

Tata Global Beverages Ltd V. CST, 2015

(40) STR 909 (T)

Note: 1. Bombay High Court in Tata

Sons Ltd Case (TS-33-HC-2015 (Bom)-

VAT) held that agreement granting

subscribing companies the right to

obtain a non-exclusive and non-

assignable license to use the ‘Tata

Marks’ was liable to ‘Sales Tax’ since

the transaction envisaged transfer

of right to use goods (goods would

include patents/ trademark). Also see

Commissioner of Sales Tax V. Dukes and

Sons Pvt Ltd., 1999 (1) MH.L.J (26) and

Kreem Foods Private Limited V. State of

Kerala, (2009) 24 VST 333

2. Prior to 1.7.12, as per erstwhile S.65

(55a), intellectual property right meant

any right to intangible property. As

per erstwhile S.65 (55b), intellectual

property service means permitting

the use or enjoyment of intellectual

property right. Post 1.7.12, as per

S.66E(c) (declared service), temporary

transfer or permitting the use or

enjoyment of intellectual property right

is a declared service.

Whether “permitting the use or

enjoyment” of trade mark/ patents/

intellectual property is liable to sales tax

or service tax is yet to attain finality.

Whether activity undertaken under

a loan license agreement is liable to

service tax?

The assessee entered into loan license

agreement for manufacturing bulk

medicines and other finished, unfinished

and intermediate products. Department

initiated proceedings under renting of

immovable property service. Tribunal

held that activity of manufacturing has

been specifically excluded from taxable

service BAS (prior to 1.7.12) and hence

not liable to service tax.

Teena Labs Ltd V. CCE, 2015 (40) STR

928 (T)

Note: Also see Jubliant Industries V.

CCE, 2013 (31) STR 181 and S.66D(f)

(post 1.7.12)

Whether leasing of tower space on

microwave towers liable to BAS?

Tribunal held that leasing of tower

space on microwave towers to

cellular operators is covered under

Telecommunication Service and exigible

to tax w.e.f. 1.6.07. Hence said activity

not liable to service tax under BAS prior

to 1.6.07.

Rail Tel Corporation of India Ltd V. CCE,

2015 (40) STR 1131 (T)

Whether rent received by Co-

owners can be clubbed for

computing threshold limit?

Rent received by all co-owners letting

out jointly owned property in individual

capacity. Tribunal held that co-owners

not to be considered as liable for service

tax jointly or severally. That department

must identify service provider and

service receiver for imposing service tax.

Held that in the instant case, service

providers are individuals and that

assessee and their brothers should not

to be treated as association of persons.

Benefit of threshold limit extended to

assessee was correct. Departmental

appeal rejected.

CCE V. Deoram Vishrambhai Patel.,

2015 (40) STR 1146 (T)

Note: Also see Khusiram V. CST,

2013 (32) STR 730 (T), Sanjay K

Motwani V. CST, 2013 (32) STR 445 (T),

K.D. Chaudhary V. CST, 2013 (32) STR

441 (T)


List of Holidays for the year 2016

1 MAKARA SANKRANTI JANUARY, 15 FRIDAY

2 REPUBLIC DAY JANUARY, 26 TUESDAY

3 MAHASHIVARATHRI MARCH, 07 MONDAY

4 GOOD FRIDAY MARCH, 25 FRIDAY

5 CHANDRAMANA UGADI APRIL, 08 FRIDAY

6 AMBEDKAR JAYANTHI APRIL, 14 THURSDAY

7 MAHAVEER JAYANTHI APRIL, 19 TUESDAY

8 RAMZAN JULY, 06 WEDNESDAY

9 INDEPENDENCE DAY AUGUST, 15 MONDAY

10 GANESHA CHATHURTHI SEPTEMBER, 05 MONDAY

11 BAKRID SEPTEMBER, 12 MONDAY

12 MAHALAYA AMAVASYA SEPTEMBER, 30 FRIDAY

13 AYUDADHA POOJA OCTOBER, 10 MONDAY

14 VIJAYA DASHAMI OCTOBER, 11 TUESDAY

15 NARAKA CHATURDASI OCTOBER, 29 SATURDAY

16 DEEPAVALI / BALIPADYAMI OCTOBER, 31 MONDAY

17 KANNADA RAJYOTSAVA NOVEMBER, 01 TUESDAY

Advts.



INTERNATIONAL TAXATION

CA Sachin Kumar B.P.

Bacon, Lettuce and Tomato - BLT

I would like to begin by wishing all

the readers a very Happy New Year

and a productive 2016.The year 2015

has been a good year for the industry

from the direct taxes perspective with

the government actively working to

simplify the provisions of the Act and

clarifying matters of litigation such

as applicability of MAT on Foreign

Institutional Investors. One of the

significant events to have occurred

at the end of the year 2015 in the

tax landscape was the clarity which

emerged from a wave of high court

rulings on the BLT tool used for

transfer pricing purposes by the

Indian revenue authorities. The ‘BLT’ we will be discussing in this article

is not the popular itemsfound on

breakfast menus, rather we will be

discussing the Bright Line Test tool,

and therefore as a reader,you need

not worry whether this article will

increase your appetite.

The Bright Line Test (BLT) in the

recent times has been used by

the revenue authorities as a tool

for making additions to income

of Indian companies engaged

in distribution business, under

the brand name of their foreign

associated enterprises. The addition is

done by making adjustments to the

advertising,marketing and promotion

(AMP) spend of these companies. In

this article we will be discussing the

two landmark judgementsof the Delhi

High Court which werepronouncedin

March 2015 and December 2015

respectively on the matter of using

BLT for making adjustment on the

AMP spend of assessees under the

transfer pricing provisions.:

· Sony Ericsson Mobile

Communications India P. Ltd.

V. CIT 374 ITR 118 and

· Maruti Suzuki India Ltd. v. CIT

595 TS 2015

As per Garner’s Dictionary of Legal

Usage, Bright Line rulemeans“a

judicial rule of decision that is simple

and straightforward and that avoids or

ignores the ambiguities or difficulties

of the problem at hand”. The usage

of thephrase dates back from the mid

– 20th century,the phrase was used by

Supreme Court of the United States

in “Girard Trust Co vs I.R.C., 122 F.2d

108, 110(3rd Cir.1941)” case saying

“A bright line between that which

brings conviction to one person and

its influence on the body politic

cannot be drawn”.

The concept of BLT under transfer

pricing for making adjustments on

marketing intangibles was first used

in a celebrated US Court of Appeals

decision in the case of DHL in 2002.

An important principle emanating

from the DHL ruling is thatthe AMP

expenditure should first be examined

to determine routine and non-routine

expenditure and accordingly, if at all,

compensation may be sought possibly

for the non-routine expenditure.

In the Indian context, the revenue

authorities have used the BLT, to

make transfer pricing adjustments

to AMP expenses incurred by the

Indian Associated Enterprise (AE)

distributors of foreign brands. The

case of the revenue being, the Indian

AE distributors are rendering brand

building services to the owner of

the foreign brand by incurring the

AMP expenses in India. Therefore,

as per the revenue authorities this

AMP expenditure is in the nature

of international transaction, and

the Indian company has to be

separately compensated for the AMP

expenditure; in the absence of the

same, the Indian AE will be liable for

a Transfer Pricing adjustment by way

of an addition to the income.

The Indian revenue authorities

used the BLT tool to determine

the quantum of the international

transaction liable for adjustment,the

Bright Line Test being a comparison as

to the percentage of AMP spend over

sales incurred by Indian AE distributor

to the percentage of AMP spend


over sales incurred by independent

Indian companies engaged in the

similar lines of business. If theIndian

AE distributor,say Motorola India, has

incurred AMP expenditure of 5%

over sales and other independent

comparable companies on average

have incurred AMP expenditure of

2% over sales, the excess 3% will

be considered as an international

transaction liable for adjustment

along with a mark – up. As a result

many Indian AE distributors suffered

substantial additions to their income

by way of transfer pricing adjustment

on the excess AMP (i.e. 3% in the

example presented above) spend over

the Bright Line.

Before we go ahead, I would like to

invite attentionto the Special Bench

decision of the ITAT in2013 in the

case of LG Electronics Pvt Ltd. Vs

ACIT, 22 ITR (Trib) 1.This ruling on

the AMP adjustment was followed

in many other tribunal decisions.

In the LG case (supra) the tribunal

ruled that the incurring of the AMP

expenses lead to the promotion of

LG brand in India, which is legally

owned by the foreign AE and hence

it is aninternational transaction. The

said transaction can be characterised

asan international transaction within

the ambit of Sec. 92 B (1) of the Act,

since:

(i) there is a transaction of creating

and improving marketing

intangibles by the assessee for

and on behalf of its AE;

(ii) AE is a non – resident; and

(iii) such transaction is in the nature

of provision of service

Also the special bench of the ITAT

accepted BLT to determine the cost/

value of the international transaction,

in view of the fact that the assessee

failed to discharge the onus by

not segregating the AMP expense

incurred on its own behalf vis-à-vis

that incurred on behalf of the AE.

Though the Sony Ericsson and

the Maruti Suzuki decisionsdeal

with transfer pricing adjustment

on AMP expenses incurred by the

assessee, they differ with regard to

a key point. In the Sony Ericsson

decision the appellants at the first

instance admitted the existence of

an international transaction with

reference to the AMP expenditure,

whereas in the Maruti Suzuki

decision the appellant challenged

the very existence of an international

transaction with reference to the

AMP expenditure.

Sony Ericsson Mobile

Communications India P. Ltd. v.

CIT 374 ITR 118

In the batch of appeals heard in the

Sony Ericsson case the assesseeshad

used either the Transaction Net

Margin Method (TNMM) or the Resale

Price Method (RPM) to establish

Arm’s Length Price (ALP).

The revenue authorities had

segregated the AMP expenditure

above the Bright Line as an

international transaction and

computed addition being the excess

AMP expenditure & a mark – up

on the same without giving the

benefit of a set – off, except where a

consideration was specifically received

by the Indian AE distributorfor

meeting AMP expenditure specifically

from the foreign brand owner. The

tribunal had decided the matter in

favour of the revenue following the

LG Electronics ITAT decision. To give

an example, suppose the assessee

has a net margin of Rs.150 on

revenue of Rs.1000 and has used

the TNMM where the Net Margin is

after including AMP expenses of say

Rs.100. The assessing officer had

made an adjustment of Rs.100 plus

the computed mark – up say 10%,

therefore making a total addition of

Rs.110.

The assessees contested this order

on various grounds before the High

court, such as economic ownership

of the brand lies with the Indian

distributor itself and therefore the

AMP expenses are for the benefit of

the Indian entity itself and not the

foreign brand owners. The assessee

also contested that TNMM subsumes

the AMP expenses; therefore, if as per

TNMM the assessee’s margins are at

ALP then there is no need for separate

benchmarking of the AMP expenses.

Also in case of RPMthe Arm’s Length

gross margin compensates for the

AMP expenses incurred.

The High Court after much

deliberation observed that only AMP

expenses are insufficient to build

a brand &brand is a function of

continued efforts to deliver quality

and build trust.In the final order

pronounced the followingpoints are

the highlights:

· Once the AO/TPO accepted and

adopted TNMM, but chooses to

treat a particular expenditure like



AMP as a separate international

transaction without bifurcation/

segregation, it would lead to

unusual and incongruous results

as AMP expenses was the cost

or expense and was not diverse.

It was factored in the net profit

of the inter-linked transaction.

The TNMM proceeded on the

assumption that functions, assets

and risks being broadly similar and

once suitable adjustments have

been made, all things get taken

into account and stand reconciled

when computing the net profit

margin. Once the comparables

pass the functional analysis test

and adjustments have been

made, then the profit margin

as declared when matches with

the comparables would result in

affirmation of the transfer price

as the ALP. Then to make a

comparison of a horizontal item

without segregation would be

impermissible.

· The BLT was judicial legislation.

By validating the BLT the Special

Bench in LG Electronics Case

went beyond Chapter X of

the Act. Even international tax

jurisprudence and commentaries

do not recognise BLT for

bifurcation of routine and non-

routine expenses.

· Segregation of aggregated

transactions requires detailed

scrutiny without which there

shall be no segregation of a

bundled transaction. Set off

of transactions segregated as

a single transaction is just and

equitable and not prohibited

by Section 92(3). Set-off is also

recognized by international tax

experts and commentaries.

· The RPM loses its accuracy and

reliability where the reseller adds

substantially to the value of the

product or the goods are further

processed or incorporated into

a more sophisticated product

or when the product/service is

transformed. RPM may require

fewer adjustments on account

of product differences in

comparison to the CUP

Method because minor product

differences are less likely to have

material effect on the profit

margins as they do on the price.

· However, it would be wrong to

assert and accept that gross profit

margins would not inevitably

include AMP expenses. The gross

profit margins could remunerate

an AE performing marketing and

selling function. This has to be

tested and examined without

any assumption against the

assessed. A finding on the said

aspect would require detailed

verification and ascertainment.”

Maruti Suzuki India Ltd. v. CIT 595

TS 2015

In this case law the matter which

was debated is similar to the Sony

Ericsson case law discussed above

i.e.adjustment on AMP expenses

above the Bright Line. However, a key

difference between the Sony Ericsson

case law and the Maruti Suzuki case

law which has been pointed out

earlier in the article being, in the

former whereas the client accepted

existence of an international

transaction with reference to the AMP

expenditure and only challenged the

transfer pricing adjustment, in the

current case the assessee challenged

the very existence of an international

transaction with reference to the

AMP expenditure.

The assesseeMaruti Suzuki India Ltd.

(MSIL) contended that BLT has been

used first to infer the existence of

an international transaction and

thereafter quantify the amount of

the transfer pricing adjustment. After

the judgement in Sony Ericsson,

BLT cannot be used for either of

the purposes. Moreover revenue

has to show the existence of an

agreement or an arrangement or an

understanding between the assessee

(MSIL) and its AE foreign brand owner

(Suzuki Motor Corporation) prior to

incurring of the AMP expenditure in

excess of the bona fide requirements

of its business in India and thereby

may add to the value of the brand

of the Foreign AE (Suzuki Motor

Corporation). A mere incurring of

the AMP expenditure could not

be considered as an international

transaction.

After much deliberation on various

issues put forth by the department

representative and the counsel for

the assessee the High court has made

the following key observation:

· “As regards the submission

regarding the BLT having been

rejected in the decision in Sony

Ericsson is concerned, the

Court notes that the decision in


Sony Ericsson expressly

negatived the use of the BLT

both as forming the base

and determining if there is an

international transaction and

secondly for the purpose of

determining the ALP. Once BLT

is negatived, there is no basis on

which it can be said in the present

case that there is an international

transaction as a result of the

AMP expenses incurred by MSIL.

Although the Revenue seems to

contend that the BLT was used

only to arrive at the quantum

of the TP adjustment, the order

of the TPO in the present case

proceeds on the basis that an

international transaction can

be inferred only because the

AMP expenses incurred were

significantly higher than what

was being spent by comparable

entities and it was also used for

quantifying the amount of the

TP adjustment. Consequently,

the Court does not agree with

the submission of the learned

Special counsel for the Revenue

that de hors the BLT, which

has been rejected in the

SonyEricsson judgment, the

existence of an international

transaction on account of the

incurring of the AMP expenses

can be established”.

Conclusion

The two case laws discussed in this

article above will certainly be land

mark judicial precedents on AMP

expenses and marketing intangibles

from the perspective of taxation in

the Indian jurisdiction. Taxation of

marketing intangibles has always

been a difficult area to grapple with

for both the assessee and the revenue

authorities. The challenge has also

been recognised in the OECD Transfer

Pricing Guidelines. I have tried to

present the gist of the matter of the

case laws in the most concise manner

for the benefit of the reader, as

these are voluminous case laws and

we are all tied for time. But I would

definitely recommend these case laws

as a weekend read for those who

are passionate about direct taxes as

they have been eloquently drafted. I

would like to conclude by wishing all

the readers, Happy Reading for the

year ahead.

‘‘YAK TOON’’ by CA. Vinayak Pai V



Bangalore Branch of SIRC of The Institute of Chartered Accountants of India

ICAI BHAWAN, No. 16/O, Millers Tank Bed Area, Vasanth Nagar, Bengaluru 560 052 Telephone +91 – 80 – 3056 3551 / 500 / 508 | email: [email protected] | www.bangaloreicai.org

NOTICE CALLING FOR SPECIAL GENERAL MEETING OF THE BRANCHNo. 001/2016 Date : 05-01-2016

To:

All members of Bangalore Branch of Southern India Regional Council

Dear Member,

Sub: Notice for Special General Meeting of the members of its Branch

This is to inform you that the Special General Meeting of the members of the Bangalore Branch of the Southern

India Regional Council will be held from 08:00 AM to 06:30 PM on 13-02-2016 (i.e., on Saturday) in the premises of

the Branch – Bangalore Branch of SIRC of ICAI, ICAI Bhawan, No.16/0, Millers Tank Bed Area, Vasanthnagar,

Bangalore 560 052 - for electing 8 members of its Managing Committee for the term 2016 to 2019. The number of

members to be elected shall be (six in the case of Branch having upto 500 members and) eight in the case of Branch

having more than 500 members. The cut-off date to be reckoned shall be six months prior to the date of polling. The

important dates relating to the above elections are given below.

Those members, who are desirous of standing for said election may submit their nomination form duly filled

in and signed by the Candidate and by the Proposer and Seconder (both of whom shall be entitled to vote in the

said branch election) together with a (non-refundable) nomination fee of Rs. 25/- by way of Demand Draft/Pay Order/

Cheque drawn in favour of the “Bangalore Branch of SIRC of ICAI” and payable at Bangalore.

The nomination form duly filled in should be submitted in a sealed cover addressed to CA. Cotha S Srinivas,

Returning Officer/Polling Officer, at the above address of the Branch against an acknowledgment. The blank nomination

form can be had from the said Returning Officer or from the undersigned or from the branch premises effective

from 13-01-2016 (Wednesday) till 6 PM of 23-01-2016 (Saturday) i.e. last date of receipt of nominations. The said

nomination form is also available on the website of the Branch: www.bangaloreicai.org.

IMPORTANT DATES

1. Last Date of receipt of nominations 23-01-2016 before 06:00 PM

2. Date of scrutiny of nominations 25-01-2016

3. Display of list of valid nominations on the Notice

Board of the Branch

25-01-2016

4. Last date for withdrawal of nominations 27-01-2016 before 04:00 PM

5. Display of final list of nominations

(after withdrawals, if any)

27-01-2016 at 06:00 PM

6. Date of Election (if the nominations exceed more

than the number of vacancies)

13-02-2016, Saturday,

8.00AM to 6.30 PM

7. Declaration of Result On or Before 15-02-2016

The election, if necessary, shall be held under the Single Transferable System of Voting.

Yours faithfully

Secretary of Bangalore Branch of SIRC of ICAI


FORM OF NOMINATIONFORM OF NOMINATION OF A CANDIDATE FOR ELECTION TO THE

MANAGING COMMITTEE OF BANGALORE BRANCH OF SOUTHERN INDIA REGIONAL COUNCIL

FOR THE TERM 2016 TO 2019

We, the undersigned Members of the Institute of Chartered Accountants of India, belonging to the Bangalore

Branch of Southern India Regional Council, not being in arrears on this day in respect of Annual Membership Fee for

the current year and also being qualified to vote in the election of members to the Managing Committee of the said

Branch for term 2016-19, do hereby nominate ________________________________, who is a Member of the Institute

belonging to the said Branch and is also eligible to vote in the said election, as a candidate for the election to the

members of the Managing Committee to be held on 13-02-2016.

(1) Signature of Proposer _______________________________________________________________________

Name in full _______________________________________________________________________

Membership Number_______________________________________________________________________

Professional Address _______________________________________________________________________

_______________________________________________________________________

Dated this __________________ day of ______________________2016.

(2) Signature of Seconder _______________________________________________________________________

Name in full _______________________________________________________________________

Membership Number _______________________________________________________________________


_______________________________________________________________________

Dated this __________________ day of ______________________2016.

I,_________________________________________, being a Member of the Institute belonging to the Bangalore Branch

not being in arrears on this day in respect of Annual Membership Fee for the current year and also being qualified to

vote in the election of members to the Managing Committee of the said Branch for the term 2016 to 2019, agree to

stand for the election to the said Managing Committee of the Branch to held on 13-02-2016.

I agree to abide by the provisions of the Directions of the Central Council regarding Functions of the Branches of the

Regional Councils and the Chartered Accountants Regulations, 1988.

I send herewith the fee for election of Rs. 25.00 (Rupees Twenty Five only) by Demand Draft/Pay Order/Cheque

No._______________ dated the ____________ on ___________________________ Bank drawn in favour of the Branch.

Signature of Candidate _______________________________________________________________________

Name in full _______________________________________________________________________

Membership Number _______________________________________________________________________


_______________________________________________________________________

Dated this __________________ day of ______________________2016.

33

CA. K. Gururaj Acharya Workshop Co-ordinator

Shri V.K Girijavallabhan, IAAS,Hon’ble Principal Director of

Commercial Audit, CAG, Bengaluru

Felicitation to Shri V.K Girijavallabhan

One Day Workshop on Internal Financial Controls

Chairman's address Felicitation to CA. K. Gururaj Acharya

CA Abdul Majeed J Shaikh

CA V. Balaji CA A Rafeq CA Sunil Bhumralkar Cross section of delegates

Welcoming the Chief GuestCA Upender Gupta

InaugurationCA Upender GuptaHon’ble Commissioner-GST, CBEC

Two Day Workshop on Taxation of Real Estate Transactions

Release of Background Material

Chairman's address CA. Ashok RaghavanCo-ordinator

CA. Vivek Mallya CA. Keyur Shah

CA. T.R. Rajesh Kumar CA. Annapurna D Kabra

Mr. Arvind Raghavan, Advocate

CA. H. Padamchand Khincha

CA. K. Gururaj Acharya CA. S. Venkataramani CA. S. Ramasubramanian, Moderator

CA. N.R. Badrinath

Inauguration

Felicitation to Chief Guest CA Upender Gupta Felicitation to Co-ordinator CA. Ashok Raghavan

34

Felicitation to Sri. M. Jayakumar, Hon'ble ROC - Kranataka InteractionSri. M. Jayakumar, Hon'ble ROC - Kranataka

CA. K. Gururaj Acharya

Awareness Creating Workshop on INC-29

CA. Sivaram Sri. Govada. V. Subbarao

Dr. P.S.R. Prasad CA. S. Dayanidhi CA. Nanda Gopala Katteri

Sri. P.T.S. Murthy

Certificate Course on Concurrent Audit of Banks

Cross section of the participants

Chairman Thanking Mr. Biradar, Food Inspector, BBMP

Free Medical Checkup Camp for the Poor

CA. Rajkumar S. Adukia, Chairman, Committee on Information Technology, ICAI

Launching of Online Book Purchase Portalby CA S Ramanujam

CA. K.K. Chythanya CA. Vishnu Bagri CA. Vishnu Moorthi H. CA. K. Gururaj Acharya & CA. Ashok Kumar CA. S. Parthasarathy Mr. L. Bharath

Intensive Workshop on International Taxation

CA. Annapurna D Kabra CS. R. Parthasarathy CA. Rakesh Agarwal CA Vinayak Pai CA Ganapatlal Kawad at Tumkur

CA Ganapatlal Kawad at Bengaluru

Launching of Online Book Purchase Portal

Practice Alert Discussions

Speakers at Study Circle Meetings

Recognizing & acknowledging the efforts of Staff Members Send off to Ms. Rema Sujit

Students Debate

Students Industrial Visit

Interactive Session - Exploring Professional Opportunities

on Information Technology

Visit to Toyota Kirloskar, Bidadi

Adv

t.

Advt.

Advt.

36 Bangalore Branch of SIRC News Letter English Monthly Printed & Published & Edited by Editor CA. Allama Prabhu M.S., Chairman, on behalf of Bangalore Branch of SIRC of ICAI., No.16/O, 'ICAI Bhawan', Millers Tank Bed Area, Vasantnagar, Bangalore-560052, Karnataka

Tel : 080 - 3056 3500, Fax : 080 - 3056 3542, www.bangaloreicai.org e-mail : [email protected] Printed at: Jwalamukhi Mudranalaya Pvt. Ltd., 44/1, K.R. Road, Basavanagudi, Bangalore-560 004, Ph : 080-26617243, e-mail : [email protected]

Published at: No.16/O, 'ICAI Bhawan', Millers Tank Bed Area, Vasantnagar, Bangalore-560052, Karnataka, EDITOR: CA. Allama Prabhu M.S.

Total No. of Pages printed : 36Date of Posting 7th & 8th of the month, at Bangalore PSO, Mysore Road, Bangalore-560026

Licensed to Post without prepayment License No. WPP-326, "Registered" News Letter

for India vide No.KA/BG GPO-2523/2015-17 & RNI No. KARENG/2012/45348

Adv

t.

Documents

The Institute of Chartered Accountants of India Newsletterbangaloreicai.org/images/icons/2016/Newsletter/BloreBr...FACTS TO PONDER : SURRENDERING AN AWARD When SIR M. Visveswaraya