Legal Roundup October 2006

LEGAL ROUNDUP… Part of ICSI Mysore Chapter Newsletter October 2006

CENTRAL EXCISE No rigors of adjudication procedure if… The Board clarifies in respect of the amended Section 11A of the Central Excise Act, 1944 that if the duty demanded is paid in full or in part, along with interest and 25% of the duty amount as penalty within 30 days of the receipts of the show cause notice, such cases would be dispensed with the rigors of adjudication procedure. This scheme is optional and not compulsory. In case of part payment, the remaining amount will be subject to regular proceedings as per the law. Two new sections viz., Section 11DDA and Section 37E have been incorporated in the Central Excise Act, 1944. The Board will clarify on this in due course. CBE & C. Circular No. 831/8/2006-CX Dated 26-7-2006

Exemption from Annual Financial Information Statement The following class of assessees is exempt from submitting Annual Financial Information Statement. (i) assessee who paid duty of excise less than one hundred lakh rupees from account current during the financial year to which Annual Financial Information Statement relates; ii) Indian Ordnance Factories, Department of Defence Production, Ministry of Defence. Notification No.17/2006-C.E. (N.T.), dated 1.8.2006

Exemption to power driven pumps An amendment to Notification No.8/2003-C.E. - The SSI exemption to power driven pumps primarily designed for handling water, has now been extended from 10.8.2006 till the 31st day of December, 2006. Notification No.39/2006-C.E., dated 10.8.2006

Case Laws at glance…………. •

Universal Cables Ltd. Vs CCE, Bhopal 2006 (200) E.L.T. 73 (Tri.-Del) – CENVAT reversal not required when remission of duty is allowed on final product.

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Tata Tea Ltd. Vs CCE, Cochin 2006 (200) E.L.T. 81 (Tri.-Bang) – Refund of accumulated CENVAT credit admissible to E.O.U.

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Canon India Pvt Ltd Vs Commissioner of Customs, Mumbai 2006 (200) E.L.T. 83 (Tri.Del.) – Refund as a consequence to correction of clerical error admissible without filing claim. Technosales Corporation vs Commissioner of Customs, Bangalore - 2006 (200) E.L.T. 296 (Tri.- Bang.) – Filing of refund claim in itself a challenge to assessment order.

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K. Raheja Development Corporation Vs State of Karnataka 2006 (3) S.T.R. 337 (S.C.) – Construction of complex liable to turnover tax under Sales Tax Act.

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CCE, Mumbai – IV Vs CKP Mandal 2006 (3) S.T.R. 449 (Tri. – Mumbai) – Catering and decoration taxable under Mandap Keeper Service.

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In Re : Jason James Clemens 2006 (3) S.T.R. 452 (A.A.R.) – Advance Rulings not applicable to CBEC Circulars.

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Eurafrica S.A. Vs CCE, Indore – 2006 (3) S.T.R. 544 (Tri. – Del.) – Recruitment not covered under Consulting Engineer or Management Consultant Service.

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Amrit Paper Vs CCE, Ludhiana - 2006 (200) E.L.T. 365 (S.C.) – Notifications not to override rules

CENVAT Valuation Selling and distribution expenses not to be included in cost of production The Tribunal has held that selling and distribution expenses are not includible in the cost of production of goods used captively in another unit of the same company. Incowax Pvt. Ltd. Vs. CCE (2006 (76) RLT 70)

Charges recovered from buyers not to be included in value The Tribunal has held that the charges recovered from buyers for erection and commissioning at site are not includible in the value of manufactured goods under the Valuation Rules. Aluplex India Pvt. Ltd. Vs. CCE (2006 (136) ECR 665)

Cash refund of CENVAT The Tribunal has held that an assessee who has surrendered his excise registration certificate is entitled to a cash refund of the CENVAT credit lying in the books as on the date of surrender. CCE Vs. Nag Polypouches (P) Ltd (2006 (201) ELT 136) and CCE Vs. Deepti Chemicals (P) Ltd (2006 (201) ELT 423)

Credit on capital goods The Tribunal has held that credit on capital goods is not deniable where the manufacturer has foregone the benefit of depreciation claimed on such goods, by filing revised income tax returns. Anand Pipe Industries Vs. CCE (2006 (137) ECR 78)

Scrap at job workers premises The Tribunal has held that the principal manufacturer is not liable to pay duty on scrap generated at the job workers premises. CCE Vs. Rocket Engineering Corporation Ltd. (2006 (76) RLT 8),

Karnataka Value Added Tax Act Proceedings of the Authority for Clarification and Advance Rulings under Section 60 of the Karnataka Value Added Tax Act, 2003. The authority for advance ruling clarifying the doubt which arose in the above case held that, the software is intellectual property like a book or CD. Software licence provides the customers the right to use software. Everyone who uses the software is supplied to the customer in any media with the licence to use the same. It is actually sale of software with licence to use it. This software licence is covered under the Central Excise Tariff, heading 4907.0030, under heading documents of title conveying the right to use information technology software. This item is also not included in the list of IT products. Therefore, the same is exigible to tax at 12.5%. Order No. AR. CLR. CR. 239/05-06, dated 30.09.2005

INCOME TAX Contribution to PF before due date for filing return In the above case, the Honourable Gauhati High Court by dismissing the appeal filed by the Department held that, the contribution made to provident fund etc, after the close of accounting period but before due date for filing return will amount to deduction under Section 36(1)(va) and 43B(b). The Honourable High Court also relied on the decisions given in the cases of CIT vs. Assam Tribune (202) 253 ITR 93 CIT vs. Bharat Bamboo and Timber Suppliers (1996) 219 Commissioner of Income-Tax vs. George Williamson (Assam) Ltd. (Gauhati.- HC)

BANK TERM DEPOSIT SCHEME, 2006 In exercise of the powers conferred by clause (xxi) of sub-section (2) of section 80C of the Income-tax Act, 1961 (43 of 1961), the Central Government has notified the Bank Term Deposit Scheme of 2006. NOTIFICATION NO. 203/2006, DATED 28-7-2006

Whether loan or advance………. While deciding the below case, the Honourable Madras High Court held that, deposit and withdrawal of money from current account by the director of a company could not be considered as a loan or advance within the meaning of Section 269SS. Commissioner of Income Tax vs. Idhayam Publications Ltd. (HC- Mad.)

Increased profit due to closing stock………… In the above case, the Honourable Tribunal held that, the claim of the assessee for deduction under Section 80HHC on the enhanced profit due to the addition made on account of the closing stock should not be disallowed even though relevant goods in respect of which addition was made was not exported during the relevant year but was lying as closing stock. The reason behind this was the fact that, as a result of addition made on account of closing stock, the net profit eligible for deduction under Section 80HHC had increased to the extent of the said addition. Kuldeep Bishnoi vs. Assistant Commissioner of Income Tax, Circle 20(1) (ITAT-Delhi)

Purchase of property on installment basis: In the above case, the Honourable High Court held that, allotment of property to an assessee on installment basis did give rise to relationship of borrower and lender between assessee and Estate Officer. Therefore, interest paid by assessee on installments constituted interest on borrowed capital deductible from income from house property under Section 24 (1) (vi). Commissioner of Income Tax vs. Master Sukhwant Singh (Punj. & Har.-HC)

Transfer from one department to another department Employee, on his own volition, requests for transfer from one department to another department-Seniority computed from date of joining that department-Employee not entitled to get benefit of past service. Surendra Singh Gaur Appellant v/s State of M.P. and others Respondents ( 22-9-2006 )

Deduction uder section 80HHC In the above case, the Honourable Tribunal held that, the claim of the assessee for deduction under Section 80HHC on the enhanced profit due to the addition made on account of the closing stock should not be disallowed even though relevant goods in respect of which addition was made was not exported during the relevant year but was lying as closing stock. The reason behind this was the fact that, as a result of addition made on account of closing stock, the net profit eligible for deduction under Section 80HHC had increased to the extent of the said addition. Kuldeep Bishnoi vs. Assistant Commissioner of Income Tax, Circle 20(1) (ITAT-Delhi)

Liability to pay tax in case of Lease The Honourable Supreme Court in the above case held that, the absolute responsibility for payment of taxes and other charges in respect of the property taken on a financial lease lies with the lessee only and he should not recover the same from the lessor. Practically borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery or equipment, undertakes indemnity and agrees to bear the risk of loss or damage if any, gets the property insured, hence in all respect he will be liable to pay all the above expenses and he cannot recover the same from the lessor. The period of lease extends over and covers the entire life of the property for which it may remain useful divided entire into one term or divided into two terms with clause for renewal, in either of the case the lease is non-cancelable.The above decision will have impact on the claim of depreciation in case of financial lease in as much as the lessee may now claim the benefit of depreciation. Asea Brown Boveri Ltd. vs. Industrial Finance Corporation of India (SC)

Whether Interest on installment is a borrowed capital? In the above case, the Honourable High Court held that, allotment of property to an assessee on installment basis did give rise to relationship of borrower and lender between assessee and Estate Officer. Therefore, interest paid by assessee on installments constituted interest on borrowed capital deductible from income from house property under Section 24 (1) (vi). 155TAXMAN 153 Commissioner of Income Tax vs. Master Sukhwant Singh (Punj. & Har.-HC)

Expense incurred for issueing gearing-up funds In the above case the Honourable Tribunal while deciding the question, whether expenditure incurred for issue of share capital for gearing up funds for working capital would be considered as revenue expenditure, held that, the decision of the Honourable Supreme Court in the case

of Brooke Bond (India) Ltd. should be applied only after examining the object of the capital enhancement, the said decision could not be applied as in the above case enhancement of capital was made for gearing up of funds for working capital. 101 ITD 209 Lakshmi Auto Components Ltd. vs. Deputy Commissioner of Income-Tax, Special RangeX. (ITAT- Chennai)

Gift by employer The Honourable Tribunal in the above case held that, merely because the gift was from employer it could not be said that the same was in lieu of or in addition to salary or wages under Section 17(1)(iv), as the said gifts were made out of natural love and affection no evidence on record showed that it had connection with the employment, in view of this the addition made in respect of gifted amount in the hands of the assessee was deleted. 103 TTJ 54 Mrs. Meena Rajagopal vs. Assistant Commissioner of Income Tax (ITAT-Mumbai)

Issuing of Form 16A TDS Certificates In the above case the Honourable Tribunal deciding the question, whether Form 16A TDS Certificates should be issued even if such tax has not been remitted held that, Certificate in Form 16A has to be issued as per Section 203 r/w Rule 31, even though tax was not deposited. Assessee could not take shelter stating that he could not issue TDS Certificate as he had not filed necessary particulars and TDS amount was not deposited till date. Principle of double jeopardy was not applicable for penalties leviable under the IT Act. In this regard penalty under Section 272A(2)(g) was leviable. 103 TTJ 270 Income Tax Officer vs. Labh Construction & Industries Ltd. (ITAT – Ahmedabad)

Service Tax Notifications/Circulars/ Trade Notices The Central Government has inserted a proviso in Rule 6 (2) of the Service Tax Rules, 1994, to require the mandatory e-payment of service taxes with effect from 1st October, 2006, for those assessees who have paid service taxes of Rs. 50 lakhs or more in the preceding financial year or have already paid service taxes of Rs. 50 lakhs in the current financial year. (Notification No. 27/2006-STdated 21/9/06)

Case Laws Service tax by foreign service provider The High Court, has held that where a service recipient provides office facilities, office support staff and various other facilities to a foreign service provider, the foreign service provider would not be considered to be having an office in India and the liability to pay service tax would therefore be on the service recipient. CCE Vs. Kerala State Electricity Board (2006 (3) STR 625)

No service tax where sales tax is levied The Tribunal has held that service tax could not be levied on the activity of sale of goods on which sales tax has already been levied. The Tribunal has emphasized the principle of mutual exclusivity, as enumerated by the Supreme Court in the BSNL case. Idea Mobile Communications Ltd. Vs. CCE (2006 (6) STJ 209)

Customs Notifications/Circulars The Central Government has recently clarified that the value of imported materials supplied free of cost by the foreign buyer should be added to the free on board (FOB) value of exports for the purposes of calculation of value addition while determining the brand rate of duty drawback. (Circular No. 25/2006 dt. 19.09.06) The Central Government has notified a zero rate of basic customs duty for all goods identified under the Early Harvest Scheme of the Indo-Thai Free Trade Agreement w.e.f. 01.09.2006. (Notification No. 86/2006 dt. 30.08.06)

Delayed production of essential certificate The Supreme Court, in, has held that in a situation of provisional assessments, the delayed production of an essentiality certificate cannot be a reason for denying the importer the benefit of the exemption notification.

Foreign Trade Policy (FTP)

ONGC Ltd. Vs. CC (2006 (201) ELT 321)

Notifications/Policy Circulars The Directorate General of Foreign Trade has amended the Foreign Trade Policy to include supplies from 100% EOUs/ units in STPs/EHTPs/BTPs to the Domestic Tariff Area (DTA), against foreign exchange remittances received from overseas, in the Net Foreign Exchange earnings computation of these units. (Notification 31(RE-2006)/2004-2009 dt.8.9.06) DEPB if debited excess The Tribunal has held that excess duty debited through a DEPB scrip is refundable by way of credit in the scrip itself and not in cash. Milton Laminates Ltd. Vs. CC (2006 (76) RLT 52),

Antidumping Duty Notifications Antidumping duty has been imposed on the following products: Nylon Filament Yarn originating in or exported from People's Republic of China, Chinese Taipei, Malaysia, Indonesia, Thailand and People's Republic of Korea. Notification No. 85/2006 dt. 29.8.06) Cellophane Transparent Film of all grades and specifications originating in or exported from the Peoples Republic of China. (Notification No. 94/2006 dt. 7.9.06)

FEMA updates Purchase of immovable property by non-residents or persons of Indian origin Clarification on mode of payment for purchase of immovable property in India by Non-Resident Indians and Persons of Indian Origin The payment for acquisition of any immovable property acquired by NRIs and other Persons of Indian origin, can be made only out of (i) funds received

in India through normal banking channels by way of inward remittance from any place outside India or; (ii) funds held in any non-resident account maintained in accordance with provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank of India from time to time. Now it is clarified that such payments cannot be made either by traveller’s cheque ro by foreign currency notes or by other mode other than those specified above. A.P. (DIR SERIES) CIRCULAR No. 5 Dated 16.08.2006

Overseas Investment by Mutual funds By way of a circular dated July 26, 2006, RBI has liberalised overseas investments by mutual funds registered with the Securities and Exchange Board of India (‘SEBI’).The aggregate ceiling for overseas investment by mutual funds, registered with SEBI, has been increased from US$1 billion to US$2 billion. RBI has also decided to permit a limited number of qualified Indian mutual funds to invest cumulatively up to US$1 billion in overseas exchange traded funds as may be permitted by SEBI. Further, the earlier requirement of 10% reciprocal shareholding in listed Indian companies by such overseas companies in which mutual funds are allowed to invest has been dispensed with.

Company law Transfer of shares of Private Company which is subsidiary of Public company The Company Law Board (‘CLB’) rejected the argument that the shares of a private company which is a subsidiary of a public company in terms of Section 3(1)(iv)(c) of the Companies Act, would be freely transferable in terms of Section 111A of the Companies Act. The CLB held that the basic characteristics of a private company in terms of Section 3(1)(iii) of the Companies Act do not get alteredmerely because it is a subsidiary of a public company in view of the deeming fiction created by Section 3(1)(iv)(c) of the Companies Act.One of the basic characteristics of a private company in terms of Section 3(1)(iii) of the Companies Act is a restriction on transferability of its shares and the same would apply even if a private company is a subsidiary of a public company. Hillcrest Realty Sdn.Bhd. v. Hotel Queen Road Pvt. Ltd

Compliance requirements after allotment of the Director Identification Number 1. The director, to whom a Director Identification Number (DIN) is allotted, is required to inform the companies, on which one is a Director, about the DIN allotted to him/ her in Form DIN-2 within a period of one month of allotment of the DIN. 2. The companies, thereafter, are required to inform the DINs of the Directors on their Boards to the RoC in Form DIN-3 within a period of seven days after receipt of information to this effect from the Directors. This information is to be sent by the companies to the RoCs on-line in a paperless mode. 3. Any change in the personal particulars of a Director, including his address, after he has submitted the information initially in Form DIN-1. The required changes are to be intimated to the Government of India [Regional Director (Northern Region) at Noida] in Form DIN-4 in anual mode as in the case of Form DIN-1.

Miscellaneous Negligence of workmen and dismissal Respondent-workman was working as a driver for appellant Corporation. While on duty, the bus driven by the respondent met with an accident while trying to takeover another bus, causing injuries to several passengers and death of 4 passengers. The respondent-driver was dismissed from service after a domestic enquiry was conducted into the matter by the appellant Corporation. A dispute against the said order of dismissal was raised by the respondent-driver

under Section 10(4A) of the Industrial Disputes Act, 1947 before the labour court. The labour court set aside the order of dismissal and directed the respondent-driver to be reinstated back into services, on the ground that there was no evidence to show that the respondent-driver had not taken reasonable care in the process of driving. The said Award by the labour court was challenged by the appellant Corporation in a writ petition before the Single Judge of the High Court, who held that in absence of any evidence before the labour court, reinstatement was rightly awarded by the labour court and directed reinstatement of respondent-driver back into services of appellant Corporation. Aggrieved by the same, a writ appeal was preferred by the appellant Corporation before the Division Bench of the High Court. The Division Bench of the High Court dismissed the writ appeal and held that in the absence of evidence, the doctrine of res ipsa loquitur, which created a presumption that the respondent was negligent and is resorted to when the cause of the accident is primarily within the knowledge of the respondent, is not applicable to the present case. Hence, the present appeal. Held, labour court failed to apply correct standard of proof in relation to domestic enquiry, which is "preponderance of probability" and thus a case for judicial review was maintainable. Matter is remitted back to labour court. Appeal is allowed The Managing Director, Northeast K.R.T.C. Vs. Devidas Manikrao Sadananda

Extent of Insurance coverage The appellant-firm, dealing in textile goods, has its showroom in Coimbatore. It was expressly covered by an insurance policy with the respondent No. 1 insurance company, for damages that might be caused due to riots, strike, malicious and terrorist attacks on all the stock in trade of textile items and garments. Consequent to a series of bomb blasts, which rocked the city of Coimbatore, the appellant's showroom was looted and set on fire. Thereafter, the appellant firm filed a complaint with the police and lodged a claim for compensation to the tune of Rs 2.20 crore with the respondent-insurance company. The respondent insurance company appointed surveyors to estimate the loss caused to the appellant firm and submit a report. It also appointed investigators to enquire into the claim that the owners of the appellant-firm themselves looted some of the goods of the showroom during riots. The investigators, in the absence of substantial evidence, were unable to prove the above claim. The surveyors submitted a report working out the estimated loss to be around Rs 1 crore, excluding stocks in the two levels of the basement of the showroom. The appellant-firm then filed a claim petition before the National Consumer Disputes Redressal Commission. The appellants reiterated that the entire stock in the showroom, including the stock in the two levels of the basement was looted during the riots. As against the above, the insurance company's stance was that that soon after the mob set fire to the showroom on the ground floor, the police and fire fighting personnel arrived at the scene and in their presence no more looting could have taken place and so stock in the two levels of the basement of showroom was not looted and therefore excluded to calculate damages. The Commission dismissed the complaint filed by the appellant-firm holding that there was remote possibility of the riotous mob having entered the 1st and 2nd levels of basement as the only point of entry from the elevated ground floor was blocked by fire, heat and smoke and particularly in the absence of any lights in the basement area. Hence, present appeal filed under Section 23 of the Consumer Protection Act, 1986 challenging the decision of the Commission. Held, insurance company, despite report of investigator, failed to establish that claim of appellants was not justified and was not covered by policy of insurance. Appeal is allowed. Shobika Attire Vs. New India Assurance Co. Ltd. and Anr

RBI Guideline on Internet banking RBI has, by way of a circular dated August 22, 2006, amended the guidelines on internet banking to permit banks to offer internet based foreign exchange services, for permitted underlying transactions, in addition to the local currency products already allowed to be offered on internet based platforms. Such offering of foreign exchange services must be subject to the following terms and conditions: i. banks will remain responsible for secrecy, confidentiality and integrity of data; ii. the data relating to Indian operations will be kept segregated; iii. the data will be made available to RBI for inspection / audit as and when called for; iv. the services offered through internet, for banks’ customers on an internet based plat-

8 Letters Patent Appeal No. 814 of 2006 decided on June 17, 2006