News Of Use October 2006

NEWS OF USE Pardon subject to judicial review: SC NDTV Wednesday, October 11, 2006 The SC made the observation while setting aside the remission of sentence granted by former Andhra Pradesh Governor Sushil Kr Shinde to a Congress leader. The leader was convicted for 10 years in a murder case involving TDP workers but was pardoned after serving only five years in jail. The Supreme Court has said that improper pardon granted by the President or the Governor is subject to judicial review. It also ruled that the power of pardon shouldn't just benefit the convict who is pardoned. Undue consideration of caste, political loyalty, religion are prohibited from being grounds of clemency. Clemency is not only for the benefit of the convict. President/Governor has to keep in mind its effect on the family of victims and on the society as a whole. There has to be some requisite material to grant pardon and improper pardon is subject to judicial review. Wednesday's strong statement by the SC can be read as a message on granting clemency to Mohd Afzal, who has been sentenced to death in the Parliament attack case. President APJ Abdul Kalam is currently considering Afzal's clemency plea.

Expenses on bonus shares non taxable, says SC Rakesh Bhatnagar IST http://www.dnaindia.com/report.asp?NewsID=1055723

Issue of bonus shares does not result in inflow of fresh funds or increase in the capital employed

NEW DELHI: The Supreme Court on Thursday resolved a prolonged legal controversy over the nature of expenses incurred by a company in issuing bonus shares, ruling that it can’t be taxed.The court agreed with the earlier rulings of Bombay and Calcutta high courts on the same issue and held that the views of Gujarat and Andhra Pradesh high courts were erroneous. The judgment is a fall out of a dispute between General Insurance Corporation and Commissioner of Income Tax, Mumbai, over the on whether the expenditure incurred in issuing bonus shares is entitled to tax relief. GIC, which has four subsidiaries, filed a return on income of over Rs. 58.52 crore for 1991-92. The Income Tax department disallowed a few expenses incurred as revenue expenditure, one

of them being over Rs. 1.4crore incurred towards the stamp duty and registration fees, paid in connection with the increase in authorized share capital. GIC had, during the accounting year, incurred expenditure separately for the increase of its authorised share capital and the issue of bonus shares. According to the IT Department , the expenses incurred were towards a capital asset of a durable nature for the acquisition of a capital asset and, therefore could only be attributable towards the capital expenditure. The GIC challenged this. A Bench of Justices Ashok Bhan and Markandey Katju observed that issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalisation of reserves is merely a reallocation of company’s fund, they said, while giving an illustration indicating that bonus shares leaves the capital employed untouched before and after issuance of bonus shares. Issue of bonus shares doesn’t add to inflow of fresh funds or increase in the capital employed, the bench said. http://www.dnaindia.com/report.asp?NewsID=1055723

Good response to e-filing by companies Business Line Mamuni Das New Delhi , Sept. 28

The e-governance project of Ministry of Company Affairs that envisages electronic filing for company transactions, appears to have got off to a good start. Till Tuesday, while about 3.66 lakh e-filings of various forms have been made, 16,761 new companies have been registered using the online system. The numbers depict the cumulative filings done till September 26. The project was launched in a phased manner. It started with the pilot project in Coimbatore in February, followed by 10 more locations in April, and has been rolled out across the nation barring Jammu. "As on September 26, a total of 3,66,729 e-filings had been done and 16,761 new companies have been incorporated using e-forms," a senior Ministry official told Business Line. Total efilings include various kinds of forms.

IIMA TO take up STUDY Meanwhile, Indian Institute of Management (IIM), Ahmedabad, is learnt to have expressed its interest to conduct an impact assessment study of the MCA 21 project at a later stage. "In August, when the Minister for Company Affairs, Mr Prem Chand Gupta, visited IIM, Ahmedabad, the institute expressed its desire to take up an impact assessment study at an appropriate time to which the Minister has agreed," the official said. The Ministry is also studying various e-forms closely to do away with duplication of information.

"Since all company-related relevant data would be available online, we are trying to further cut down duplications in data sought by different forms," said the official. This exercise may result in reduction of data inputs sought by some e-forms. They may also lead to merger of some forms, resulting in reduction of total number of eforms.

No retrospective withdrawal of exemption notification: State must act validly for discernible reasons, not whimsically for any ulterior purpose; doctrine of promissory estoppel operates even in legislative field: Apex Court

By TIOL News Service NEW DELHI, OCT 03, 2006: MRF, the appellant is engaged in the manufacture of automotive

tyres, tubes, compound rubber, tread rubber, flaps, pre-cured tread rubber etc.

The Government of Kerala has from time to time declared and introduced several incentives to promote industrial growth and expansion in the State of Kerala by granting exemptions, concessions or reduction in sales tax, electricity duty and electricity tariff etc. to new industries as well as to existing industrial units undertaking substantial expansion, diversification or modernization. Accordingly, the Government of Kerala has been issuing notifications from time to time to give effect to its declared policy for industrial promotion. Acting on the incentives, concessions and benefits held out by the Government of Kerala, MRF approached the Government of Kerala with its proposal to make substantial expansion and diversification of its industrial unit at Vadavathoor. A Memorandum of Understanding was entered between MRF and the State of Kerala on 6.10.1993, which provided that the MRF had decided to make substantial investment of Rs.50 crores for expansion/diversification of its existing industrial unit at Kottayam for the manufacture of various products and that the immediate plan of MRF was to expand in the compound rubber manufacture and diversity into new products like tyres, pre-cured tread rubber, flaps etc. The Memorandum of Understanding expressly provided that MRF shall be entitled to tax exemptions available for existing industries undertaking expansion/diversification. On 3.11.1993 Government of Kerala issued a Notification SRO No. 1729/93 providing for tax exemption to industrial units going in for expansion/diversification/ modernization in the State of Kerala:Pursuant to the Memorandum of Understanding and the SRO No. 1729/93 MRF invested Rs. 80 crores and carried out substantial expansion of its existing industrial unit and set up new unit for manufacture of diversified products. In accordance with the provisions of SRO No. 1729/93 the eligibility certificate evidencing the MRF's entitlement to the exemption and benefits was to be issued by the Director of Industries and Commerce, Government of Kerala. MRF applied for the eligibility certificate and the Director of Industries and Commerce inspected the factory and verified the manufacturing process of goods for which expansion and diversification was undertaken by

MRF. After considering the application and all relevant facts and materials, and, on being satisfied that MRF was entitled to the exemption, concessions and benefits under SRO No. 1729/93 issued the eligibility certificate on 10.11.1997. Eligibility certificate in Form 4 set out the details of fixed capital investment of MRF of the aggregate amount of Rs. 74,12,77,528.51. MRF commenced its production on 31.12.1996. Director of Industries and Commerce forwarded the eligibility certificate and his report to the Board of Revenue for its consideration for issuance of certificate of exemption. The Board of Revenue vide exemption order No. C 4/40588/97/Tx MRF dated 30.6.1998 having found MRF eligible for sales tax exemption under SRO No. 1729/93 granted tax exemption of 7 years in the aggregate amount of Rs. 74,12,77,529.00 specifying the period of exemption to be from 30.12.1996 to 29.12.2003. On 15.1.1998 the Government of Kerala issued SRO No. 38/98 amending SRO No. 1729/93 by adding new sub-clause (h) to clause 11 (ix) which provided that certain processes shall not be deemed to be manufacture for the purpose of SRO No. 1729/93. Sub-clause (h) reads as under:- "(h) Conversion of rubber latex into centrifugal latex, raw rubber sheet, ammoniated latex, crepe rubber, crumb rubber, or any other item falling under entry 110 of the First Schedule to the Kerala General Sales Tax Act, 1963 or treating the raw rubber in any form with chemicals to form a compound of rubber by whatever name called." By notification SRO No. 1092/99 dated 31.12.1999 the State of Kerala modified SRO No. 1729/93 so as to withdraw tax exemption with effect from 1.1.2000 but with a proviso that:"2. Industrial Unit which had been sanctioned exemption/deferment as per notification SRO No. 1729/93 before 1st day of January, 2000 shall continue to enjoy the concession for the full period covered by the order of exemption/deferment" Assistant Commissioner (Assessment) issued a notice on 17.1.2000 proposing to levy purchase tax on the footing that exemption under SRO No. 1729/93 dated 3.11.1993 was not available with effect from 15.1.1998 by reason of amendment by SRO No. 38/98 dated 15.1.1998 and stated:"Thus you have filed incorrect returns and evaded payment of tax due. You are therefore directed to show cause why action should not be initiated to assess provisionally and u/s 45A for the offence of filing incorrect returns, within 7 days of receipt of this notice. You are also given an opportunity to be heard in person on that day, or at 11 a.m. on 27.1.2000." MRF sent its reply to the notice on 14.2.2000 pointing out that MRF has already completed expansion/diversification and had commenced commercial production on 30.12.1996 and was thereafter entitled to tax exemption for the full period of 7 years with effect from 31.12.1996 to 29.12.2003. The proceedings initiated by the Assistant Commissioner were dropped by Assistant Commissioner's letter/order stating that:- "I am to inform that further action in this matter is dropped as the expansion has been completed on 30.12.96." Assistant Commissioner of Sales Tax, Kottayam issued another set of notices dated 19.12.2001 proposing to impose penalty under Section 45A of the Act for availing of purchase tax exemption under SRO No. 1729/93 and for not paying the purchase tax. MRF sent its reply on 10.1.2002 raising its objection regarding the jurisdiction of the Assistant Commissioner of Sales Tax to issue such notice in view of the earlier order passed by the Assistant Commissioner dropping the proceedings initiated and in view of the eligibility certificate issued by the Director of Industries and Commerce and the exemption order passed by the

Board of Revenue (Taxes). The Assistant Commissioner vide order dated 17.1.2002 rejected the objections raised by the MRF. MRF thereafter filed Writ Petition No. 3343 of 2000 in the High Court of Kerala challenging the aforesaid notices issued as being contrary to the eligibility certificate and exemption order. It was prayed in the writ petition that a writ of mandamus be issued to the respondents, restraining them from taking any proceedings against MRF contrary to the eligibility certificate dated 10.11.1997 issued by the Director of Industries and Commerce and exemption order issued by the Secretary, Board of Revenue dated 30.6.1998. The Single Judge before whom the writ petition came up for hearing dismissed the same and remanded the matter back to the Sales Tax Authorities. Being aggrieved, the MRF filed the writ appeal which has been dismissed and they are in appeal in the Supreme Court. The Supreme Court observed that MRF's accrued right to exemption was not taken away or in any way affected by the amending notification SRO 38/98; which merely applied to those units which were established or expanded after 15.1.1998. If an industrial unit had been set up prior to 15.1.1998 and had also commenced commercial production prior to 15.1.1998 then the amending notification SRO 38/98 would have no retrospective application at all. The notification SRO 38/98 is prospective in operation which is evident by its mere reading as it specifically mentioned therein that: "notification shall be deemed to have come into force with effect from the 1st day of January, 1998." The Supreme Court observed that "The provisions of the Act or notification are always prospective in operation unless the express language renders it otherwise making it effective with retrospective effect." In S.L. Srinivasa Jute Twine Mills (P) Ltd. Vs. Union of India it was held that it is a settled principle of interpretation that: "retrospective operation is not taken to be intended unless that intention is manifested by express words or necessary implication; there is a subordinate rule to the effect that a statute or a section in it is not to be construed so as to have larger retrospective operation than its language renders necessary." It was further held that It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. The Supreme Court recollected some judicial observations on the issue. • In the words of Lord Blansburg, "provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment". • "Every statute, which takes away or impairs vested rights acquired under existing laws, or creates a new obligation or imposes a new duty, or attaches a new disability in respect of transactions already past, must be presumed to be intended not to have a retrospective effect." • As a logical corollary of the general rule, that retrospective operation is not taken to be intended unless that intention is manifested by express words or necessary implication, there is a subordinate rule to the effect that a statute or a section in it is not to be construed so as to have larger retrospective operation than its language renders necessary.

That being the legal position, the Supreme Court held that the judgments of the High Court are indefensible and are set aside. The appellants shall be entitled to the protection as had accrued to them prior to the amendment in 1997 for the period of 3 years starting from the date the establishment was set up irrespective of repeal of the provision for such infancy protection." The Court observed, "The view that SRO 38/98 did not affect MRF's pre- existing and accrued right to enjoy tax exemption from the full period of 7 years w.e.f. 30.12.1996 to 29.12.2003 was accepted and recognized by the assessing authority himself which can be seen from the order of the assessing authority dated 1.3.2000 whereby the proposal to deny tax exemption was "dropped as the expansion has been completed on 30.12.1996". This order was passed in respect of notice dated 17.1.2000 issued to the appellant whereby the proposal to continue tax was dropped."

Estoppel against Statute? The Supreme Court observed that the High Court had recorded a finding that the notifications being statutory "no plea of estoppel will lie against a statutory notification" But the Supreme Court did not agree. It referred to various judgements to show that the doctrine of promissory estoppel has been repeatedly applied by the Court to statutory notifications. In a recent judgment in the case of Mahabir Vegetable Oils (P) Ltd. Vs. State of Haryana, 2006-TIOL23-SC-CT , the Supreme Court in connection with the Haryana Sales Tax Act held "it is beyond any cavil that the doctrine of promissory estoppel operates even in the legislative field."

Legitimate expectation? The principle underlying legitimate expectation which is based on Article 14 and the rule of fairness has been re-stated by the Supreme Court in Bannari Amman Sugars Ltd. Vs. Commercial Tax Officer. It was observed in paras 8 & 9: • " A person may have a 'legitimate expectation' of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. The expectation may arise either from a representation or promise made by the authority, including an implied representation, or from consistent past practice. The doctrine of legitimate expectation has an important place in the developing law of judicial review. It is, however, not necessary to explore the doctrine in this case, it is enough merely to note that a legitimate expectation can provide a sufficient interest to enable one who cannot point to the existence of a substantive right to obtain the leave of the court to apply for judicial review. It is generally agreed that 'legitimate expectation' gives the applicant sufficient locus standi for judicial review and that the doctrine of legitimate expectation to be confined mostly to right of a fair hearing before a decision which results in negativing a promise or withdrawing an undertaking is taken. The doctrine does not give scope to claim relief straightway from the administrative authorities as no crystallized right as such is involved. The protection of such legitimate expectation does not require the fulfillment of the expectation where an overriding public interest requires otherwise. In other words, where a person's legitimate expectation is not fulfilled by taking a particular decision then the decision maker should justify the denial of such expectation by showing some overriding public interest.

• While the discretion to change the policy in exercise of the executive power, when not trammelled by any statute or rule is wide enough, what is imperative and implicit in terms of Article 14 is that a change in policy must be made fairly and should not give the impression that it was so done arbitrarily or by any ulterior criteria. The wide sweep of Article 14 and the requirement of every State action qualifying for its validity on this touchstone irrespective of the field of activity of the State is an accepted tenet. The Supreme Court observed,  The basic requirement of Article 14 is fairness in action by the State, and nonarbitrariness in essence and substance is the heart beat of fair play. Actions are amenable, in the panorama of judicial review only to the extent that the State must act validly for discernible reasons, not whimsically for any ulterior purpose. 

• The meaning and true import and concept of arbitrariness is more easily visualized than precisely defined. A question whether the impugned action is arbitrary or not is to be ultimately answered on the facts and circumstances of a given case. A basic and obvious test to apply in such cases is to see whether there is any discernible principle emerging from the impugned action and if so, does it really satisfy the test of reasonableness."

 In this case, the Supreme Court held that 

MRF made a huge investment in the State of Kerala under a promise held to it that it would be granted exemption from payment of sales tax for a period of seven years.



It was granted the eligibility certificate.



The exemption order had also been passed.

 It is not open to or permissible for the State Government to seek to deprive MRF of the benefit of tax exemption in respect of its substantial investment in expansion in respect of compound rubber when the State Government had enjoyed the benefit from the investment made by the MRF in the form of industrial development in the State, contribution to labour and employment and also a huge benefit to the State exchequer in the form of the State's share, i.e. 40% of the Central Excise duty paid on compound rubber of Rs. 177 crores within the State of Kerala.  The action on the part of the State Government is highly unfair, unreasonable, arbitrary and, therefore, the same is violative of Article 14 of the Constitution of India.  The action of the State cannot be permitted to operate if it is arbitrary or unreasonable.  Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14.  Equity that arises in favour of a party as a result of a representation made by the State is founded on the basic concept of "justice and fair play.  The attempt to take away the said benefit of exemption with effect from 15.1.1998 and thereby deprive MRF of the benefit of exemption for more than 5 years out of a total

period of 7 years, in our opinion, is highly arbitrary, unjust and unreasonable and deserves to be quashed.  In any event the State Government has no power to make a retrospective amendment to SRO 1729/93 affecting rights already accrued to MRF The Supreme Court further observed, We do not agree with the submission made by the learned counsel for the respondent/State that subsequent notification was classificatory in nature. That it only removed the doubt which had arisen with reference to "compound rubber" in the SRO 1729/93. Making of "compound rubber" had been accepted to be "manufacture" in the Memorandum of Undertaking entered between MRF and the Government on 6.10.1993 and the addendum dated 10.4.1996 to the Memorandum of Undertaking dated 6.10.1993. It is further recognized in the eligibility certificate issued by the Director of Industries and Commerce after investigation and due verification and the exemption certificate issued by the Board of Revenue. The Supreme Court allowed the appeal and issued Writ of mandamus restraining the respondents from taking any proceedings against MRF Ltd. contrary to or inconsistent with the eligibility certificate dated 10.1.1997 and the exemption order dated 10.6.1998. (See 2006-TIOL-124-SC-CT in 'Legal Corner')

Now e-filing of cases in the Supreme Court of India: NEW DELHI: From Monday, October 2, any advocate-on-record or petitioner-in-person can file a case in the Supreme Court here through the Internet, from anywhere in the world. This is the first time e-filing is being made available by any court in the country. The Court will be accessible through the website http://www.supremecourtofindia.nic.in According to the Registrar-General of the Court, a user-friendly programme with interactive features has been prepared by the National Informatics Centre. Step-by-step guidelines for efiling are available on the website. E-filing will obviate the need for a visit to the Supreme Court for filing and re-filing. The court fee and printing charges at Rs. 1.50 a page can be paid through any visa/master credit/debit card. No additional court fee or processing fee will have to be paid for e-filing. The Supreme Court Registry will give every advocate-on-record a password, which can be changed subsequently by accessing the website. As the advocate alone knows the password, it will not be possible for any other person to file any matter or document on his or her behalf. The petitioner-in-person will, however, have to submit proof of his or her identity such as ration card/PAN card/ identity card/driving license/voter ID card by scanning the document.

The text can be typed on the computer whereas documents including affidavits and "vakalatnamas" can be submitted by scanning them. Counter/rejoinder/fresh applications/caveat/additional documents can also be filed through the website. Further, it will be possible to make any modification before the matter is finally submitted to the Court. Any defects found by the Supreme Court Registry will be communicated to the person filing the case and he can remove them. Source: The Hindu

AAR Ruling on Residential Status of Employees deputed outside India In its recent decision in British Gas (I) (P) Ltd. vs. Commissioner o Income Tax 204 CTR 177, the Authority for Advance Rulings (“AAR”) has held that Indian citizens posted abroad on deputation are not ‘resident’ for the purposes of Income-tax, if they do not stay in India for a period aggregating to 182 days or more in the relevant year. Facts: An Indian citizen was employed by an Indian company in 2002. Later, he was deputed

on assignment to the U.K. for two years with effect from July 1, 2005. The assessee contended that since he would be spending less than 182 days in India in financial year 200506, he would not be a ‘resident’ by virtue of clause (a) of Explanation to section 6(1) of the Income Tax Act, 1961 (the “Act”).

Relevant Provisions: Section 6(1) of the Act provides that an individual will be ‘resident’ in

India in any previous year if he is in India for period(s) amounting to – a. 182 days or more in that year; or b. 60 days or more in that year and he has been in India for period(s) amounting to 365 days or more within the four years preceding that year. Clause (a) of the Explanation to section 6(1) of the Act provides an exception in the case of an Indian citizen who leaves India in any previous year “for the purpose of employment outside India” by extending the period of 60 days to 182-days. Decision: The AAR rejected the Revenue’s contention that since the Indian citizen was already

in employment, he cannot be said to leave India for employment so as to become entitled to the benefit of the extended period. The AAR observed that the Explanation postulates the requirement of leaving India “for the purposes of employment outside India” and not “for employment outside India” and an individual need not be an unemployed person who leaves India for employment outside India in order that the Explanation applies to him. Compulsory payment of service tax through Internet banking by certain specified assesses

With effect from 1 October 2006, the following category of assesses shall deposit the service tax liable to be paid by them electronically, through internet banking: Who has paid service tax of Rs. 50,00,000/- (Rupees Fifty Lakh) or above in the preceding financial year; or Who

has already paid service tax of Rs. 50,00,000/- (Rupees Fifty Lakh) in the current financial year. Source: Notification no. 27/2006 dated 21.09.2006]

Cos can claim service tax on mobiles as Cenvat TIMES NEWS NETWORK [ THURSDAY, SEPTEMBER 14, 2006 01:30:05 AM] DEEPSHIKHA SIKARWAR

NEW DELHI: THIS is a ring tone which the industry would enjoy. Companies can now claim the service tax they pay on cellphones as Central value-added tax (Cenvat) credit. The Mumbai Customs, Excise and Service Tax Appellate Tribunal has ruled that service tax paid on mobile phones is available as credit to eligible service providers of output service and manufacturers. The tribunal held that the term ‘cellular phone’ would include all kinds of phones which work on cellular technology. The revenue department has been insisting that the credit was applicable only on fixed line phone. Industry can claim credit against the Cenvat it pays and use the credit to offset against the tax it is liable to pay on its inputs. Giving its judgement on a case between Indian Rayon and the commissioner of customs and excise, Bhavnagar, the tribunal made it clear that the department could not rely on the old Central Board of Excise and Customs circular of ’03 to deny the credit of service tax. The tribunal said the old circular was relevant under old service tax credit rules, ’02, which required the telephones to be installed in the business premises of the service provider. And, since there was no such stipulation in the new Cenvat credit rules, ’04, the department could not press the old circular into service. Also, the tribunal pointed out that there was no provision anywhere in the rules disallowing the credit of service tax paid on mobile phones, which in any case was fast replacing fixed line phones in many establishments. It was held that the term ‘cellular phone’ would include all kinds of phones which would work on cellular technology. “Cenvat credit on mobile phones was never intended to be disallowed under the present Cenvat credit rules. It was under the service tax rules ’02 that credit was allowed only for fixed line connections. Therefore, clarification issued on the basis of services credit rules ’02, that credit of services on the mobile phones will not be allowed as credit has no applicability. Therefore, the judgement delivered by the Mumbai bench will give great relief to assesses for availment of Cenvat credit,” service tax expert J K Mittal said. The period involved in the case is from December ’04 to February ’05.

Apex court reserves judgment on Japanese company’s plea against AAR tax order ARUN S Posted online: Thursday, September 14, 2006 at 0000 hours IST

NEW DELHI, SEPT 13 : The Supreme Court recently entertained a petition challenging an order by the Authority for Advance Rulings (AAR) to tax a foreign company operating in the country. This was the first such petition that the apex court admitted.

The court, however, reserved its judgement on the petition by Japan’s Ishibkawajima-Harima Heavy Industries, challenging the ruling of AAR, which is the final arbiter on tax liability of foreign companies in India. In January 2001, Petronet LNG Ltd awarded the Japanese company, and five others, a $65.2 million contract to set up a liquefied natural gas (LNG) facility in Dahej, Gujarat. In October 2004, AAR ruled that the amount received/receivable by the Japanese company from Petronet LNG for offshore services and supply of equipment & material was also liable to be taxed in India as it is connected to the company’s permanent establishment in India. Before passing the order, AAR had examined the contract, the Income Tax Act as well as the India-Japan Double Taxation Avoidance treaty. The authority said certain operations of the offshore supply were inextricably linked with its permanent establishment in India. This includes the signing of contract in India, which imposes liability on the Japanese company to procure equipment and machinery in India. The income accrued to the company was from offshore supply through business connection in India and therefore could be taxed, the AAR ruled. On its part, the Japanese company contended that it was paying income tax on the income from onshore supply and onshore services. However, as regards to offshore supply of equipment and materials, the price of the equipment and the machinery was paid outside India and the property in the goods passed to Petronet on high seas. The company said, since the sale was completed outside India, the profit arising to the applicant on the offshore supply of equipment and machinery would not be taxable in India. In the apex court, Additional Solicitor General Mohan Parasaran, appearing for the government, defended the AAR ruling, arguing that in case of composite turnkey contracts, like the present one, there was no question of artificially splitting it into “offshore” and “onshore” elements. Parasaran said the location of the source of income from offshore elements within India gives sufficient nexus to tax the income from that source.

EXIM MATTERS: Defacement of names on bills allowed T N C Rajagopalan / New Delhi Sept 18, 2006 The Director General of Foreign Trade (DGFT) has allowed defacement of the name and address of the foreign buyers in the shipping bills and other documents when presented to the regional authorities for claiming benefits under various export promotion schemes. The decision will greatly help exporters make it difficult for their competitors to know the names and addresses of the foreign buyers through their connections in the licensing offices. The DGFT has issued Policy Circular no. 18/2006 dated September 4, 2006 conveying the above decision. The decision was taken in response to representations relating to leakage of confidential information viz name and address of the foreign buyer, etc. from the export documents such

as shipping bills when they are submitted to various departments as part of export/import documentation procedure. The regional licensing authorities can now accept shipping bills where the name and address of the foreign buyers are so defaced, for processing under various export promotion schemes, if the applications are otherwise in order. A few months earlier, the exporters had represented that while applying for Certificate of Origin (NP) to an agency listed in Appendix 4-C, they have to provide the entire details of the buyer abroad in column 2 of the certificate and only then the certificate is signed by the authorised agency. By disclosing the address of the buyer abroad and the details of product being exported, the confidential and sensitive business information becomes public, claimed the exporters. In response, the DGFT had allowed exporters to submit application to authorised agencies for issue of Certificate of Origin (NP), by leaving the Column No. 2 of the certificate blank and allowed this column to be filled up after the same was certified and signed by the authorised agency competent to issue such a certificate. The system of defacing the names and addresses of the foreign buyers in the copies of documents is not something new. Many merchant exporters who give the supporting manufacturers copies of documents such as shipping bills or bills of lading for submission to the excise authorities have been following the practice of such defacing. However, where the supporting manufacturers had to submit the original shipping bills to the licensing authorities as proof of discharge of export obligation against advance licence or for any other claims, the merchant exporters had to part with the originals without any alteration. Their prayers to find a way by which the particulars of the buyers can be kept confidential have now been answered. Having now taken a very sensible and practical decision to accept shipping bills where the names and addresses of the foreign buyers are defaced, the DGFT should take up the matter with the Central Board of Excise and Customs (CBEC) and ask for issue of similar instructions in regard to submission of documents as proof of exports. Similar instructions are also needed from the sales tax authorities wherever exports are made by merchant exporters. They issue Form ‘H’ but quite often, the sales tax officials ask for supporting documents such as export invoice and raise difficulties when invoices are presented where the names and addresses of the supporting manufacturers are defaced. Banks should also try to institute systems whereby the names and addresses of the foreign buyers do not leak to the competitors of the exporters. GOVERNMENT OF INDIA, MINISTRY OF COMMERCE & INDUSTRY DEPARTMENT OF COMMERCE, DIRECTORATE GENERAL OF FOREIGN TRADE

Policy Circular No. 18(RE-2006)/2004-2009

Date: 04.09.2006

Subject: Defacement of Shipping Bill in order to prevent leakage of confidential information. Representations have been received from exporters relating to leakage of confidential information viz name and address of the foreign buyer, etc. from the export documents such as shipping bills, when they are submitted to various Departments as part of Export/Import documentation procedure. The matter was deliberated and it has been decided to allow defacement of the name and address of the foreign buyers in the shipping bills and other documents when presented to the Regional Authorities for claiming benefits under various export promotion schemes. It is, therefore, clarified that such shipping bills where the name of the foreign buyers are defaced, may be accepted for processing by Regional Authorities under various export promotion schemes, if the applications are otherwise in order. This issues with the approval of the Director General of Foreign Trade. Sd/ (TAPAN MAZUMDER) Joint Director General of Foreign Trade (F.No: 01/94/180/00214/AM07/PC I)

GOVERNMENT OF INDIA MINISTRY OF COMMERCE & INDUSTRY DEPARTMENT OF COMMERCE DIRECTORATE GENERAL OF FOREIGN TRADE Policy Circular No.19 (RE-2006)/2004-2009 Date: 11-9-06 To: All Licensing Authorities Development Commissioners of SEZs EPZ Division of Deptt. of Commerce

DTA sale on third party exports by EOUs – Clarification thereon. In terms of para 6.10 of Foreign Trade Policy, an EOU Unit may export goods manufactured by it through another exporter or any other EOU unit subject to the conditions mentioned in para 6.19 of Handbook. In terms of sub-para 6.19(e) of Handbook, all export entitlements, including recognition as status holder would accrue to the exporter in whose name foreign exchange earnings are realized. However, such export shall be counted towards fulfillment of obligation under EOU scheme only. In terms of para 6.19(d), fulfillment of NFE by EOU unit in regard to such export shall be reckoned on the basis of the price at which the goods are supplied by EOUs to other exporter or other EOU unit. A clarification has been sought whether exports effected by EOUs through third party are eligible for DTA sale entitlements under para 6.8 of FTP.

2. The facility of DTA sale to EOUs is available against physical export of goods manufactured in EOU and earning positive net foreign exchange. Exports effected through third party and foreign exchange realized in the name of the third party for those goods which have been manufactured in the EOU and are directly transferred from the unit to the port of shipment are eligible exports and this export is also counted for the purpose of fulfillment of export obligation of EOU. The EOU is, therefore, eligible to get DTA sale benefits on exports effected through third party. The Shipping Bills must indicate the names of both the manufacturer and the third party. While indicating the name of the manufacturer in such cases, the status of the unit i.e. Export Orient Unit must be clearly indicated. The entitlement of DTA sale will, however, be calculated on the basis of the price at which the goods are supplied by EOUs to third party exporter. Para 6.19 (e) of Handbook is not intended to preclude DTA sale facility against third party exports. 3.

This issues with the approval of Competent Authority. (P.K.Santra) Dy. Director General of Foreign Trade For Director General of Foreign Trade (Issued from F.No.01/92/180/99/AM07/PC-II)

Instructions regarding Large Taxpayers Unit The Finance Minister in his Budget Speech 2005-06 announced the proposal to set up Large Taxpayer Units (hereinafter referred to as LTUs) in the country, which would act as a single window facilitation centre for all large entities paying excise duty, corporate tax/income tax and service tax. Notifications No. 18/2006-CE(NT) to 22/2006-CE(NT) and 28/2006-S.Tax all dated 30th September 2006 have been issued providing jurisdictional authority for LTU and for making changes in the Central Excise Rules, 2002, Cenvat Credit Rules, 2004, and Service Tax Rules, 1994. The first LTU has been set up at Bangalore, and it has since commenced operation from 3rd October, 2006. For carrying out legislative changes to give effect to various provisions and facilities with regard to a large tax payer, a new rule 12 BB has been inserted in the Central Excise Rules, 2002, a rule 12 A has been inserted in the Cenvat Credit Rules, 2004, and similarly, rule 10 has been inserted in the Service Tax Rules, 1994. In this way, it has been ensured that the amendments carried out are to the required minimum extent. 2. In this context, the important changes made in the rules and procedures with regard to LTUs are briefly given below: I. Receipt of Consent Form and its Acceptance: On receipt of the consent form from the large taxpayer, the Chief Commissioner, LTU will get the said consent form verified, and if the eligibility conditions prescribed under the rule and the notification have been satisfied, the taxpayer will be informed by way of issue of an acceptance letter. The process of acceptance would not normally take more than 7 days. The large taxpayer will be eligible to avail the facilities like removal of intermediate goods without payment of duty provided under the rules from the date of receipt of the acceptance

letter. Once a taxpayer acquires the status of LTU, the entire jurisdiction of central excise, service tax and income tax matters shall stand transferred to the said LTU in respect of all his manufacturing units, service providing premises, and other registered premises located throughout the country. Some of such activities are as given below: a) Filing of returns (Central Excise and Service Tax) – It is, however, clarified that as a transitional measure, the returns for the month of September, 2006 (to be filed in October, 2006) will be filed with the erstwhile jurisdictional officers and returns for the month of October, 2006 onwards shall be filed in the LTU. b) Filing of refund/rebate claims c) Audit, Adjudication and Appeals. d) Filing of intimation, permissions. e) Visit to units f) Acceptance of proof of export. The Chief Commissioner, LTU will intimate the jurisdictional Central Excise, Service Tax and Income Tax Commissioners regarding the transfer of the specified units from his jurisdiction to the LTU. II. Client Executive: The Chief Commissioner, LTU will assign a Client Executive for each large taxpayer from among the Additional/Joint/Deputy/Asstt. Commissioner posted in the LTU either from the Income Tax or Central Excise Department. The said Client Executive will be the single point interface with the large taxpayer for any assistance, clarification, and grievance redressal. III. Transfer of intermediate goods/inputs/capital goods: Rule 12BB of the Central Excise Rules, 2002 and Rule 12A of Cenvat Credit Rules, 2004, provide that a large taxpayer may remove intermediate goods or inputs or capital goods from one registered unit to another unit without payment of duty or reversal of credit, provided the recipient unit uses the said goods for further manufacture of the finished goods and pay excise duty thereon. The said goods can be removed by the sender premises under an invoice or a transfer challan, which should contain all details as in case of an invoice except the value. However, the facility of such removal without payment of duty or reversal of credit is not permitted when the recipient unit is availing the benefit under specified area based exemption notification or where the sender premises is an EOU or a unit located in EHTP or STP. The rules in this regard may be studied carefully. IV. Transfer of credit: Rule 12A(4) of the Cenvat Credit Rules, 2004 provides an option to a large taxpayer to transfer Cenvat credit (of central excise duty or service tax) accumulated in one manufacturing unit or service providing unit to any of its other manufacturing or service providing units. Such transfer can be made by way of issue of a transfer challan containing the details as provided in the said sub-rule. The said transfer challan can be sent by fax or electronically by way of e-mail attaching the scanned copy of the challan to other unit for taking credit which should be followed by the original copy of the challan. However, the utilization of such credit is subject to limitations prescribed under rule 3(7)(b) of the CENVAT

credit rules. Moreover, the credit cannot be transferred by units availing area based exemption notifications specified in the said rules. V. Self-adjustment of excess duty paid: Rule 12 BB of the Central Excise Rules, 2002 provides a facility that if a large taxpayer manufacturing excisable goods has paid at any time excess excise duty on account of arithmetical error, he would be permitted to adjust the said excess duty paid by him in the subsequent period. However, such adjustment is subject to the provisions of unjust enrichment and other applicable provisions of law. VI. Duty payment: As the e-payment facility has been provided for payment of central excise duty and service tax, large taxpayer may be requested to opt for e-payment as far as possible as it will reduce the compliance cost, and it will be beneficial for the department also for revenue reconciliation. However, in case of difficulties in e-payment, a large taxpayer is permitted to pay the duty (except in such cases of Service Tax where e-payment is mandatory) in the respective jurisdiction where the factories or service providing premises are situated or even in the jurisdiction of LTU, Bangalore. However, in order to ensure proper accounting of taxes paid by them, the large taxpayer should be directed to write the following details in their TR6 challan in addition to the details presently being filled up: “LTU, Bangalore” “LTU Location Code” (location code No. L-10000 is for LTU Bangalore). The present jurisdictional location code is also required to be entered on the TR-6 challan where payment is made in present jurisdiction. VII. Pending rebate/refund cases: All the refund/rebate claims filed with the jurisdictional Central Excise and Service tax Commissionerate till the date of receiving the acceptance letter issued by the Chief Commissioner, LTU shall be processed by the jurisdictional Commissionerate only, and these will not be transferred to the LTU. VIII. Export Procedures: In the Approach Paper issued by the Department, it has been clarified that facility of selfsealing of export consignment is available to all the large taxpayers. Therefore, all the taxpayers are expected to avail this facility. However, in exceptional cases, where the taxpayer intends to avail the facility of sealing by the Central Excise officers or the Customs officers, they should apply for the same to the LTU who in turn will request the jurisdictional Commissionerate to depute the staff for supervising the sealing of export cargo. However, the processing of accepting the proof of export shall be carried out only in the office of the LTU. The Chief Commissioner, LTU is requested to prescribe a modified procedure to ensure smooth processing of export documents that in case of any difficulty in following the present export procedure and the said procedure will be sent to the Board for post-facto approval. However, in no case, export consignment should be held up for want of any procedural formalities.

In case of sealing by the jurisdictional officers, it is clarified that the jurisdictional officers, whether of Customs or Central Excise, will continue to render the services of sealing as earlier. IX. Amendment in monthly returns (ER-1 return): The existing ER-1 form is being modified in order to capture certain details in respect of a large taxpayer. The details which are required to the given only by a large taxpayer shall be separately indicated. A suitable notification is being issued. The new format of ER-1 return would be applicable from the month of October, 2006 that is to be filed in November, 2006. X. Audit: Audit frequency norms have been fixed by the department for audit of units. However, a large taxpayer who is liable to be audited every year would not be ordinarily audited annually. The selection of a taxpayer for audit would be done based on ‘risk assessment’ taking into account various parameters. As far as possible, the audit of the head office and all the units will be conducted simultaneously. Dates for audit will be fixed in consultation with the large taxpayer. XI. Adjudication: All show cause notices pending adjudication, as on the date of issue of acceptance letter will be transferred to the LTU along with all connected case papers. Cases that are in the process of being adjudicated (i.e. where personal hearings have been conducted) will be decided by the jurisdictional adjudicating authority only. XII. Investigations: All pending investigation cases as on the date of issue of acceptance letter will be completed by the jurisdictional Commissioner. However, investigation of these cases must be completed on priority basis and SCNs should be issued by erstwhile jurisdictional authorities. However, the SCN should be made answerable to appropriate authorities of the LTU who would undertake adjudication of these cases. XIII. Arrears of revenue & cases pending with Appellate Authorities The complete details of the arrears of revenue will be forwarded to the LTU by the respective Commissionerates. The case files are not to be merely forwarded, but individual details of each case alongwith the full history should be prepared and sent. Similarly, all cases pending before the Commissioner (Appeals), CESTAT, High Court, and Supreme Court should be transferred to the LTU with a self-contained note in each file. All further action in respect of these cases will be taken by the LTU. However, the present jurisdictional Commissionerates will provide all logistical support to defend the cases in the respective appellate and judicial forums. XIV. Responsibilities of the jurisdictional Commissionerate

i) The present jurisdictional Commissionerate should prepare the assessee profile as per the Central Excise/Service Tax Audit Manual for each of the Central Excise and Service Tax assessee and forward the same to the LTU. ii) All pending show cause notices, (except for which personal hearing has already been held) should be transferred to the LTU. Before forwarding the SCN, a corrigendum making the notice answerable to appropriate officer of LTU shall be issued by the jurisdictional Commissionerate. iii) All files which are required to be transferred to the LTU should be numbered both in the note sheet side and correspondence side. iv) For each of the pending case of arrears of revenue, the cases pending with the Commissioner (Appeals), CESTAT, High Court, Supreme Court, a note giving full facts of the case should be prepared for each case and then only the files should be transferred. In case of any time- bound matter like review of orders or filing of appeal or hearing of the cases in the Court, etc., the present jurisdictional Commissioner should handle the matters for the month of October, 2006, and thereafter, the cases should be transferred. For other timebound matters, where the action is required to be taken in next one month, i.e., the month of November, 2006, the jurisdictional Commissionerate should send a d.o. letter explaining the relevant details of these cases. v) The cases under investigation should be handled by the present Commissionerate only and after issue of SCNs, the case records should be transferred to the LTU. In cases, where records of a particular case is voluminous, the Commissioner, LTU may be consulted in advance as to whether these records are required be kept in the custody of present Commissionerate or to be sent to the LTU 3. The Chief Commissioner, LTU, and Commissioners LTU are expected to play a pro-active role in the administration of the LTU. In fact, the success of LTU depends to a great extent upon their approach in solving the problems at the initial stage. There may be some procedural issues that are likely to crop up while dealing with various activities of a large taxpayer. It is possible that some of the present procedures prescribed under various instructions or circulars cannot be followed in the case of a large taxpayer. In such cases, the Chief Commissioner is empowered to prescribe a modified procedure, as long as it does not affect the interest of revenue. He is also authorized to issue fresh instructions in this regard, and thereafter, the instructions can be sent to the Board for seeking post-facto approval. 4. It is once again emphasized that the LTU is a trade facilitative measure seeking to address and deliver appropriate solutions to the unique compliance issues that may arise. The mission of CBEC is to achieve excellence in the formulation and implementation of Service Tax and Excise initiatives by creating a climate for voluntary compliance by providing guidance and building of mutual trust. The establishment of LTU is a step in this direction. It is envisaged that this approach will improve India’s business climate, and will reassure the trade that their taxation related concerns would be dealt with in a fair and transparent manner. In view of this, the officers would be expected to innovate and adopt a taxpayer friendly approach in their day-to-day work.

5. The rules prescribed through notifications should be gone through carefully. In case, any difficulties are faced in implementation of any provision, the same may be brought to the notice of the Board immediately. 6. Receipt of the Circular may be acknowledged. Sd/(Rahul Nangare) Under Secretary to the Govt. of India Issued by: Ministry of Finance Department of Revenue New Delhi

Deputation abroad for over 6 months makes you an NRI Corporate executives travelling abroad on business assignments are in for some good news -at least as per a recent Authority of Advance Ruling (AAR) judgment. As per the judgment, if the deputation abroad is for six months or more, such an executive would be a Non-Resident Indian (NRI) and consequently his Indian salary would be tax-free. But first, let us understand the background. Typically, for international assignments, the executive continues to get his Indian salary in the Indian bank account and is also given a daily allowance during the stay abroad. Now, as per the conventional application of the Tax Act, the Indian salary and also the savings from the daily reimbursement would have been fully taxable in the usual course. However, the Authority of Advance Ruling (AAR) has ruled that such executive goes abroad essentially on employment and hence if he has not spent 182 days or more in India in any financial year, he would get the status of NRI and hence the salary would be tax-free. However, to understand the concept clearly, first it is necessary for one to understand who exactly qualifies to be an NRI. The Income Tax Act does not define the term NRI directly. Instead the term 'resident' is defined and by corollary, a person who does not qualify to be a 'resident' gets the tax status of an NRI. So let's see what the definition of the term 'resident' is. A resident is one who during a financial year (FY) which is from April to March, satisfies any one of the following two conditions: He is in India for at least a) 182 days in the FY or b) 365 days out of the preceding four FYs and 60 days in the current FY.

However, the act goes on to add that if such person leaves India in any year for the purpose of employment, the 60 days in the clause 'b' above is to be replaced by 182 days. In other words, the number of days under consideration for determining status would be 182 and not 60. Putting it differently, no one can be born an NRI, rather an Indian resident becomes an NRI when he goes abroad. However, the purpose for which such person goes abroad is important. If the trip abroad is for purposes other than employment, clause 'b' above would apply. On the other hand, if the purpose is employment, clause 'a' is applicable. In the judgment under consideration, British Gas (I) Pvt Ltd., had assigned certain individuals to British Gas Group entities outside India. The employee in question had left around June 28, 2005. This meant that for FY 05-06, he had spent only 88 days in India. The company contended that since the employee had spent less than 182 days in India in FY 2005-06, he would be a non-resident and his income would be non-taxable. On the other hand, the contention of the department was that since the employee was already in employment of the Indian company and is leaving India essentially on deputation, he cannot be said to leave India for 'purposes of employment.' Consequently, the 60-day condition had to be applied and since he had spent 88 days already in India, he would not qualify to be an NRI. The AAR ruled in the company's favour. As per the AAR, a careful reading of the law would show that the requirement is not leaving India for 'employment abroad,' but it is leaving India for the 'purposes of employment outside India.' In other words, an individual need not be an unemployed person who leaves India for employment outside India. That he is employed in India is enough. What is important is that the person is traveling on account of his employment. Therefore, the fact that the person was already an employee at the time of leaving India is hardly material or relevant. However, it may also be mentioned that the AAR rulings are only applicable for the particular transaction of the particular assessee. Even for another similar transaction of the same assessee, the previous ruling doesn't apply. In the light of this, AAR rulings are at best of persuasive value and income tax authorities are not bound by the same while deciding on other cases. It may also be noted that as per the Tax Act, any income of an NRI, which is received or accrued in India, is taxable in India. Consequently, the commission income of an NRI who had canvassed business abroad for a company, which was holding an exhibition in India, was held to be taxable in India as it was deemed to accrue in India. In the light of such apparently conflicting interpretations, it will not be possible for any company to act unilaterally and not deduct tax at source on the salary incomes of its personnel deputed abroad. In the absence of any clear specification in this regard from the Central Board of Direct Tax (CBDT), the only course for such employees would be to file their tax return