VAT Cir 13T of 2011 - Grant of Administrative relief to unregistered dealers.

TRADE CIRCULAR

 

No.VAT/MMB-1009/31/Adm-6

TradeCir.No.13T of 2011

 

Sub:	Grant of Administrative relief to unregistered dealers.
Ref:	1. Govt. of Mah., FD, Resolution No.VAT-1506/CR 1527 Taxation - 1, dated 5th February 2007. 2. Trade Circular No. 33T of 2007 dt. 18th April 2007. 3. Trade Circular No. 68T of 2007 dt. 26th November 2007 4. Trade Circular No. 37T of 2008 dt. 21st October 2008. 5. Trade Circular No. 36T of 2009 dt. 24th December 2009

 

Gentlemen/Sir/Madam,

 

The eligibility criteria, conditions and procedure for application of administrative relief on account of the delay in obtaining the certificate of registration have been laid down by the above referred Trade Circulars.

 

2. Para 2(a) of the Trade Circular 33T of 2007 dated 18m April 2007 lays down the limit of delay beyond which applications for administrative relief would not be considered. It was provided thus :

 

"2(a)    In supersession of all previous instructions in this behalf, now it has been decided that the delay in obtaining certificate of registration beyond 5 years shall be treated as an attempt to evade or to delay the payment of legitimate tax. The dealers who have remained un¬registered for a period exceeding 5 years shall not be entitled to get any Administrative Relief."

 

The instructions in the above para are now modified as follows:-

 

"2(a) In supersession of all previous instructions in this behalf,-now it has been decided that the delay in obtaining certificate of registration beyond 5 years shall normally be treated as an attempt to evade or to delay the payment of legitimate tax. While, attempt to evade tax in no case entitles a dealer for administrative relief; in cases of delay in obtaining the certificate of registration beyond 5 years, if the claimant dealer proves that the delay was not due to negligence or disregard of the provisions of law but due to bonafide belief that he was not required to obtain the registration, and in general, the dealers similarly situated as him have not obtained the certificate of registration, then such an exceptional case may be considered for grant of administrative relief inspite of the delay being beyond 5 years.

 

For this, the circumstances for delay should be carefully examined and where the dealer has proved to the authority that the delay was not as an attempt to evade payment of tax or to cause loss of revenue to the Government, the authority, with reasons to be recorded in writing, may extend the benefit of administrative relief in such cases of delay beyond 5 years. The composition amount in all such cases of delay beyond 5 years shall be as per Category ‘B' of the office order dated 18.4.2007."

 

3. This circular cannot be made use of for legal interpretation of provisions of law, as it is clarificatory in nature. If any member of the Trade has any doubt, he may refer the matter to this office for further clarification.

 

4.         You are requested to bring the contents of this circular to the notice of all concerned

 

 

Yours faithfully,

 

 

(SANJAY BHATIA)

Commissioner of Sales Tax

Maharashtra State, Mumbai.

Landmark Judgment on Notice u/s 163

Merely because a person is an agent or is to be treated as an agent, it would lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident. That would only mean that he would be treated as representative assessee. However, liability of such a representative assessee only if the eventualities stipulated in Section 161 of the Act are satisfied. Section 161 of the Act makes a representative assessee liable only “as regards the income in respect of which he is a representative assessee”.

 

GENERAL ELECTRIC COMPANY & ANR. vs DDIT (HC)

Dated: 12^th Aug 2011

 

Notice u/s 163 - Capital gains arising from the transfer of shares

 

1. Whether petitioner a non-resident company is chargeable to tax in India where he has transferred the share holding to another non-resident.

 

2. Whether the respondent No.4 can be treated as representative assessee of the first petitioner.

 

3. Whether the conditions stipulated in Section 163 read with Section 161 of the Act for the purposes of treating the respondent No.4 as representative of petitioner No.1 is satisfied or not.

 

Important Para -

 

The first petitioner is a company incorporated in the State of New York in the United States of America its principal place of activity is the United States and it has business interests all over the world. It has been assessed to tax in India over the last several years in respect of its income taxable in India, as a non-resident.

 

The second petitioner is a company incorporated in Mauritius that holds shares of group companies and investments and had a wholly owned subsidiary in India called GE Capital International Services (for brevity „GECIS‟), now known as Genpact India, which is registered under the Companies Act, 1956 and is respondent No.4 herein.

 

The entire share capital of GECIS was acquired by the second petitioner along with certain individuals as nominee shareholders in 1998 with the approval of the Foreign Investment Promotion Board. The second petitioner is a wholly owned subsidiary, through various intermediate holdings, of the first petitioner. The remote business processing and offshore support operation that provided specified business process outsourcing services (BPO) to the first petitioner and its affiliates were carried out from facilities located in India (through GECIS as explained aforesaid), as well as in China, Hungary, Mexico, the United Kingdom and the United States of America, through other, this BPO business grew, acquiring outside clients apart from the petitioner‟s group of companies and gathered value. With certain investors evidencing interest in acquiring 60% of the petitioner‟s BPO business and, with a view to divesting it worldwide ownership in companies through which such business was conducted, the petitioners‟ along with other affiliated companies embarked on a series of transactions in December, 2004.

 

The only capital asset in India which was transferred in the course of the restructuring and reorganization transactions was the gift of the shares of CECIS by the second petitioner – a Mauritius company and certain nominee shareholders to GECIS India Investments and GECIS India Holdings, respectively (each a Mauritius incorporated company). Therefore, no income had accrued or arisen or can be deemed to accrue or arise in India. The Income Tax Department, on the other hand, maintains that it is a taxable event in India.

 

Respondent No.1 who is the Deputy Director of the Income Tax (International Taxation) in New Delhi issued a show cause notice dated 11.04.2007 to the respondent No.4. In this notice, it was stated that from the records available with him, it appeared that General Atlantic Partners and Oak Hill Capital had purchased 60% shareholding in respondent No.4 from the first petitioner. The notice further recites that the said shareholding transferred which was valued at US Dollar $500 million and that no application was made under Section 197 of the Act by the payee “with regard to the transactions relating to the sale of the stake” in respondent No.4. It was further stated that the income arising to the first petitioner from the sale of its direct/indirect stake in respondent No.4 is liable to tax in India in view of the deeming provisions contained in Section 9(1)(i) of the Act. It was proposed in the notice to treat the respondent No.4 as an agent and consequently, the representative assessee of the first petitioner under the provisions of Section 136 read with Sections 160 and 161 of the Act and proposed to proceed to act in accordance with law. This show cause notice also referred to the earlier notice dated 02.11.2006 issued to the respondent No.4 stating that such information had not been furnished. Accordingly, the respondent No.4 was required to show cause as to why such action of treating the respondent No.4 as representative assessee be not taken and income accrued to the petitioner No.1 assessed in accordance with the law.

 

Respondent No.4 submitted its reply to the said show cause notice, inter alia, stating that it had no obligation to deduct the tax at source in respect of such transactions between the petitioners on the one hand and General Atlantic Partners and Oak Hill Capital on the other hand. According to it, merely because by the said transaction, shareholding of respondent No.4 was transferred by one party to other, both being non-resident, the respondent No.4 could not be treated as representative assessee. Since none of the conditions specified in Section 13 of the Act were fulfilled. It was also submitted that the petitioner No.1 is not and had never been a direct shareholder of respondent No.4 and therefore, question of any income accruing or arising to the petitioner, which is chargeable to tax in India would not arise.

 

On the basis of information collected during TDS proceedings and also information available in public domain, a prima facie belief was form that as per the provisions of Section 9(1)(i) of the Act, the income arising from these transactions, which otherwise was taxable in India but had not been offered to tax. The official respondents have maintained in the counter affidavit that conditions stipulated in Section 163 of the Act are satisfied and therefore, impugned show cause notice being perfectly valid, has rightly been issued.

 

“Section 163 of the Act has to be read in conjunction with Section 161, which provides that the specified person can be treated as assessee “…as regards the income in respect of which he is a representative-assessee…” Therefore, an agent can only be a representative-assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received.”

 

The respondent No.4 has business connection with the petitioner No.1 as explained by the official respondents on the basis of business relation between them reflected through the transactions entered into between the petitioner No.1 and respondent No.4 over a period of time. Therefore, conditions prescribed in Clause (b) of sub-section (1) of Section 163 can be treated to have been, prima facie, fulfilled. Thus, respondent No.4 can be treated as “an agent in relation to the petitioner No.1 – a non-resident”. As an agent respondent No.4 would be the representative assessee within the meaning of Section 161(1) of the Act. The question before us is as to whether in its capacity as representative assessee of the petitioner No.1, liability of the respondent No.4 arises within the meaning of Section 161 of the Act and it would be assessed in that representative capacity. To put it otherwise, whether the purported income earned by the petitioner No.1 through transfer of shares can be treated as the income in respect of which he is a representative assessee. It is because of the reason that Section 161 makes him liable only as regards that particular income.

 

 

High Court agree with the submission of the learned Senior counsel appearing for the assessee, that a harmonious reading of Sections 160, 161, 162 and 163 would show that:

 

(i) In order to become liable as a representative assessee, a person must be situated such as to fall within the definition of a representative assessee;

(ii) The income must be such as is taxable under Section 9;

(iii) The income must be such in respect of which such a person can be treated as a representative assessee;

(iv) The representative assessee has a statutory right to withhold sums towards a potential tax liability;

(v) Since the liability of a representative assessee is limited to the profit representative assessee, there can be multiple representative assessees in respect of a single non-resident entity – each being taxed on the profits or gain relateable to such representative assessee.

 

The scheme underlying the aforesaid provisions is explained with clarity and precision in the commentary on Section 163 of the Act in “The Law and Practice of Income Tax (Kanga and Palkhivala at page No.1280, English Edition), the relevant extract is reproduced:

 

“…Thus Section 163 really provides only the machinery for giving effect to Sections 160 and 161, and the mere appointment of an agent under Section 163 would be of no consequence unless there is income in respect of which the agent can be held to be a representative-assessee under Section 160 and can be assessed as such under Section 161 of the Act. In other words, any person appointed an agent under Section 163 is not necessarily assessable as a representative assessee in respect of the non-resident’s income; it is only in relation to the income covered by Section 160 that the status of representative assessee emerges and the liability to be assessed under Section 161 arises. For instance, though there may be a business connection between a resident and non-resident company, where there is no evidence to show that any profits accrued to the non-resident company through the business connection, no assessment can be made on the resident company as the agent of the non-resident company and the mere appointment of the resident company as such agent under this section would be of no avail.”

 

Even when we examine the case treating the allegations made by the Department as correct, we find no such live link of income earned by the first petitioner and the respondent No.4 in respect of the transaction which is sought to be taxed. As already held by us that Section 163 has to be read in conjunction with Section 161 which provides that the specified person can be treated as assessed “……..as regards the income in respect of which he is a representative – assessee……….” Therefore, an agent can only be a representative – assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received.

 

Merely because those shares relate to the respondent No.4 company, that would not make respondent No.4 as agent qua deemed capital gain purportedly earned by the petitioner.

Web link for Limited Liability Partnerships. Every thing you must know . details available on web.

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NATURE OF LIMITED LIABILITY PARTNERSHIP (LLP)

1. Concept of “limited liability partnership�

• LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership.
• The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
• Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
• Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

2. Structure of an LLP
LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession.

3. Advantages of LLP form

LLP form is a form of business model which:
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing  detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and efficient manner

4. Other countries where this form is available

The LLP structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore. On the advice of experts who have studied LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form i.e. as a separate legal entity, separate from its partners/members. 

5.  Difference between LLP & “traditional partnership firmâ€�

• Under “traditional partnership firmâ€�, every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner.
• Under LLP structure, liability of the partner is limited to his agreed contribution.  Further, no partner is liable on account of the independent or un-authorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.
  

6. Difference between LLP & a Company

• A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (i.e. Companies Act, 1956) whereas for an LLP it would be by a contractual agreement between partners.
• The management-ownership divide inherent in a company is not there in a limited liability partnership.
•  LLP will have more flexibility as compared to a company.
• LLP will have lesser compliance requirements as compared to a company.
  
  

APPLICABILITY OF THE LLP Act

7. Whether the LLP Act is applicable to any specific services like professional services regulated by Statutes?

No. Any two or more persons associating for carrying on a lawful business with a view to profit may set up an LLP.

In the light of various inputs received by this Ministry for applicability of the LLP form to small entities and venture capital funded enterprises, it is proposed that the framework should not be restricted to professional services alone as was earlier recommended by Naresh Chandra Committee. Accordingly, the LLP Act does not restrict the benefit of LLP structure to certain classes of professionals only.

8. Likely users/beneficiaries of the LLP Law?

India has witnessed considerable growth in services sector and the quality of our professionals is acknowledged internationally. It is necessary that entrepreneurship knowledge and risk capital combine to provide a further impetus to our impressive economic growth. Equally the services sector promises an economic opportunity similar to that provided by information technology over the past few years. It is likely that in the years to come Indian professionals would be providing accountancy, legal and various other professional/technical services to a large number of entities across the globe. Such services would require multidisciplinary combinations that would offer a menu of solutions to international clients.  In view of all this, the LLP framework could be used for many enterprises, such as:-

• Persons providing services of any kind
• Enterprises in new knowledge and technology based fields where the corporate form is not suited.
• For professionals such as Chartered Accountants (CAs), Cost and Works Accountants (CWAs), Company Secretaries (css) and Advocates, etc.
• Venture capital funds where risk capital combines with knowledge and expertise
• Professionals and enterprises engaged in any scientific, technical or artistic discipline, for any activity relating to research production, design and provision of services. 
• Small Sector Enterprises (including Micro, Small and Medium Enterprises)
• Producer Companies in Handloom, Handicrafts sector

9.  Whether an entity which has objectives like “charitable or other not for profit objectivesâ€� would be able to set up under LLP Act?

No. The essential requirement for setting LLP is ‘carrying on a lawful business with a view to profit’.

10. Whether provisions of Indian Partnership Act, 1932 would be applicable to LLPs?

No, these shall not be applicable to LLPs.

11. Why a new legislation for LLP? Why not amendments in Companies Act or Partnership Act are made?

The Companies Act is not suited to the liability and governance structure intended for LLPs. The overall intent of the legislation to regulate widely-held companies is different. Therefore, in accordance with the recommendations of the Irani Committee, it is felt appropriate to bring about a separate legislation for LLPs. The administration and enforcement of partnership firms under the Indian Partnership Act, 1932 is at the State level.  Besides, a partnership firm involves full joint and several liability of the partners. Because of this, many firms/enterprises engaged in biotech, information technology, Intellectual property and other knowledge based sectors find traditional partnerships unsuitable. The traditional partnerships are also considered unsuitable for multi-disciplinary combinations comprising a large number of partners, seeking a flexible working environment but with limited liability. LLP structure would promote growth and enable such firms/enterprises expand their trade/business or services across States in India as also abroad.

12. Committees, which have made recommendations for legislation on LLPs in India

The desirability of LLP form has been expressed in the context of small enterprises by :-

• Bhat Committee (1972);
• Naik Committee (1992);
• Expert Committee on Development of Small Sector Enterprises headed by Sh. Abid Hussain in 1997 and
• Study Group on Development of Small Sector Enterprises (SSEs) headed by Dr. S P Gupta (2001).

Following Committees set up by M/o Company Affairs have also recommended for legislation on LLPs:-

• Committee on Regulation of Private Companies and Partnerships headed by Sh. Naresh Chandra (2003)
• The Committee on New Company Law (Dr. J.J. Irani Committee) (2005)

13. Whether Ministry has adopted a “Consultative Approachâ€� while bringing out the LLP Act?

Yes. The Ministry of Corporate Affairs, on 2nd November, 2005, placed a Concept Paper on LLP Law on its website so that all interested stakeholders may express their opinions on the concepts involved and suggest formulations for the consideration of the Ministry on various aspects of LLP Law.  The Concept Paper was also circulated to various concerned Ministries/Departments and autonomous bodies like Comptroller and Auditor General of India (C&AG), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority (IRDA) etc. for their comments.         

Large number of comments and suggestions were received by the Ministry on the Concept Paper. These were examined in light of international practice/law on the subject. The Act has been prepared keeping in view the Indian requirements.

PARTNERS AND DESIGNATED PARTNERS

14. What are the restrictions in respect of minimum and maximum number of partners in an LLP?  

A minimum of two partners will be required for formation of an LLP. There will not be any limit to the maximum number of partners.

15. Whether a body corporate may be a partner of an LLP?

Yes.

16. What are the qualifications for becoming a partner?

Any individual or body corporate may be a partner in a LLP. However an individual shall not be capable of becoming a partner of a LLP, if—

(a)   he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b)   he is an undischarged insolvent; or

(c)   he has applied to be adjudicated as an insolvent and his application is pending.

17. What are the requirements in respect of “Designated Partners�?

Appointment of at least two “Designated Partners� shall be mandatory for all LLPs. “Designated Partners� shall also be accountable for regulatory and legal compliances, besides their liability as ‘partners, per-se�.

18. Who can be a “Designated Partner�?

Every LLP shall be required to have atleast two Designated Partners who shall be individuals and at least one of the Designated Partner shall be a resident of India. In case of a LLP in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as designated partners.

19. Should the number of designated partners resident in India not be more than partners from outside India?

LLPs, particularly those as may be engaged in the services or technology-based sectors, may provide services globally. This may require any number of its partners to locate them abroad.  In view of liability structure of partners, designated partners and LLP, clearly provided for in the Act, there does not appear to be any necessity and justification for restriction relating to designated partners to out-number partners located abroad. In fact it may pose unnecessary restriction.

20. Whether there would be any requirement of ‘identification number’ of Designated Partner? Whether Designated Partners would be subject to any other condition/requirement before they are appointed as such?

Every Designated Partner would be required to obtain a “Designated Partner’s Identification Number� (DPIN) on the lines similar to “Director’s Identification Number� (DIN) required in case of directors of companies. Enabling provisions have been made to prescribe under rules conditions, which would have to be fulfilled by an individual who is eligible to be appointed as a ‘designated-partner’.

LLP AGREEMENT

21. How the mutual rights and duties of partners inter-se and those of partners and LLPs would be governed?

The mutual rights and duties of partners inter se and those of the LLP and its partners shall be governed by the agreement between partners or between the LLP and the partners. This Agreement would be known as “LLP Agreement�.

22. Whether LLP Agreement would be mandatory for all LLPs?

As per provisions of the LLP Act, in the absence of agreement as to any matter, the mutual rights and liabilities shall be as provided for under Schedule I to the Act. Therefore, in case any LLP proposes to exclude provisions/requirements of Schedule I to the Act, it would have to enter into an LLP Agreement, specifically excluding applicability of any or all paragraphs of Schedule I.

REGISTRATION

23. What are the registration formalities relating to LLPs?

LLPs shall be registered with the Registrar of Companies (ROC) (appointed under the Companies Act, 1956) after following the provisions specified in the LLP Act. Every LLP shall have a registered office. An Incorporation Document subscribed by at least two partners shall have to be filed with the Registrar in a prescribed form. Contents of LLP Agreement, as may be prescribed, shall also be required to be filed with Registrar, online.

Contents of LLP Agreement or any changes made therein, if any, may be filed in Form 3 and details of partners/designated partners may be filed in Form 4 in accordance with LLP Rules, 2009.

24. Whether foreigners can incorporate LLP?

Yes, the LLP Act 2008 allows Foreign Nationals including Foreign Companies & LLPs to incorporate a LLP in India provided at least one designated partner is resident of India. However, the LLP/Partners would have to comply with all relevant Foreign Exchange Laws/ Rules/ Regulations/ Guidelines.

25. What are the broad provisions of the Act in respect of names of LLPs?

Every limited liability partnership shall have either the words “limited liability partnership� or the acronym “LLP� as the last words of its name. LLPs would not be given names, which, in the opinion of the Central Government, are undesirable. Registrar would be under obligation to follow such rules, which would be framed by the Central Government in connection with allotting names to LLPs. There are also provisions in respect of ‘rectification of name’ in case two LLPs have been registered with the same name, inadvertently.

26. for what period a name can be reserved by Registrar?

The name can be reserved by ROC on approval of Form 1, for a period of 3 months from the date of intimation by the Registrar. However, Foreign LLP/Companies have an option to reserve their existing names, under which they are operating outside India, for a period of 3 years in India, which can be further renewed on application to Registrar in Form 25.

27. Can LLP give any other address (besides its registered office) for the purpose of receiving communication from Registrar?

It has been provided in the Act that a document may be served on a LLP or a partner or designated partner by sending it by post or by any other mode (to be prescribed under Rules) at the registered office and any other address specifically declared by the LLP for the purpose in such form and manner as may be prescribed (in the rules). Thus, an LLP shall have option to declare one more address (other than the registered office) for getting statutory notices/letters etc. from Registrar.

CHANGE IN PARTNERS

28. How can a person become a partner of an LLP?

Persons, who subscribed to the “Incorporation Document� at the time of incorporation of LLP, shall be partners of LLP. Subsequent to incorporation, new partners can be admitted in the LLP as per conditions and requirements of LLP Agreement.

29. How can an existing partner cease to be a partner of an LLP?

A person may cease to be a partner in accordance with the agreement or in the absence of agreement, by giving 30 days notice to the other partners.

A person shall also cease to be a partner of a limited liability partnership- 

(a) on his death or dissolution of the limited liability partnership; or

(b) if he is declared to be of unsound mind by a competent court; or

(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.

Notice is required to be given to ROC when a person becomes or ceases to be partner or for any change in partners.

30. What will be the obligation of a partner in case he changes his name or address?

Every partner shall inform the LLP of any change in his name or address within a period of fifteen days of such change. The LLP, in turn, would be under obligation to file such details with the Registrar within thirty days of such change in Form 4.

PARTNER’S CONTRIBUTION AND TRANSACTIONS OF PARTNERS WITH LLP

31. What is the manner in which a partner of an LLP can bring his contribution? How will it be recorded/disclosed in the accounts?

Partner’s contribution may consist of both tangible and/or intangible property and any other benefit to the LLP. The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed in the rules.

32. Whether a partner would be able to give loan to or transact other commercial transactions with LLP? What will be his rights and obligations in this regard?

A partner may lend money to and transact other business with the LLP and shall have the same rights and obligations with respect to the loan or other transactions as a person who is not a partner.

33. Whether a partner would be able to transfer his ‘economic rights’?

A partner’s economic rights (i.e. rights of a partner to a share of the profits and losses of the LLP and to receive distribution at the time of winding up) in the LLP shall be transferable. However, such a transfer shall not by itself cause the partner’s disassociation or a dissolution and winding up of the LLP.

However, such transfer shall not entitle the transferee or assignee to participate in the management or conduct of the LLP’s activities. Therefore, the transferee would not be deemed to be a ‘partner’ of the LLP just because a partner has transferred him the ‘economic rights’. For becoming a partner of LLP, the manner specified in the LLP Agreement or the provisions of the Act would have to be followed.

 

LIABILITY OF PARTNERS

34. Nature & extent of liability of a partner of an LLP?

Every partner of an LLP would be, for the purpose of the business of the LLP, an agent of the LLP but not of the other partners. Liability of partners shall be limited except in case of unauthorized acts, fraud and negligence. But a partner shall not be personally liable for the wrongful acts or omission of any other partner. An obligation of the limited liability partnership whether arising in contract or otherwise, is solely the obligation of the limited liability partnership. The liabilities of LLP shall be met out of the property of the LLP.

35. what is the liability of a Partner upon reduction of minimum number of members in an LLP?

The Act provides for the minimum of two partners to carry on LLP. If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during that period.

36. Whether a ‘partner by holding out’ will be liable under the Act?

The Act provides that any person (not being a partner in any LLP), who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented to be a partner in a LLP (known as ‘partner by Holding out’) is liable to any person who has on the faith of any such representation given credit to the LLP, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

It has further been provided that where any credit is received by the LLP as a result of such representation, the LLP shall, without prejudice to the liability of the person so representing himself or represented to be a partner, be liable to the extent of credit received by it or any financial benefit derived thereon.

The provisions have also been made in the Act to provide that where after a partner's death the business is continued in the same LLP name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the LLP done after his death.

37. How penal action on errant partners who are not residents of India will be taken?

For statutory compliances provisions of at least one resident designated partner (DP) in every LLP is would ensure that at least one partner is available in India for at least six months for regulatory compliance requirements. The LLPs would have freedom to appoint more than one resident as DP. LLP as an entity would always remain liable for regulatory or other compliances. Civil liability on such a partner would be adjudicated by the courts under civil law which recognises ‘foreign awards’. Criminal liability would require adjudication/ enforcement by the courts including using the extradition process. Position would be similar to the cases of directors of companies who are foreign nationals. 

DISCLOSURE, AUDIT AND FILING REQUIREMENTS

38. Whether every LLP would be required to maintain and file accounts?

An LLP shall be under obligation to maintain annual accounts  reflecting true and fair view of its state of affairs. A “Statement of Accounts and Solvencyâ€� in prescribed form shall be filed by every LLP with the Registrar every year.

39. Whether audit of all LLPs would be mandatory?

The accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009.

Such rules, inter-alia, provides that any LLP, whose turnover does not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty five lakh rupees, is not required to get its accounts audited. However, if the partners of such limited liability partnership decide to get the accounts of such LLP audited, the accounts shall be audited only in accordance with such rule. 

40. Whether any provisions in respect of ‘mandatory insurance’ are being proposed in the Act?

No mandatory insurance has been proposed in the Act.  It would be difficult to assess insurance requirements of different types and sizes of LLPs. This would depend upon the nature of commercial risk attached with work or assignment handled by each. Applying common insurance requirements across a class of LLPs would result in increasing their costs of operation. Therefore, the underlying concern as to the credit worthiness of the LLP in the event of a contractual default is being addressed through statutory provisions for solvency declaration, disclosure of financial information and audit.

41. Whether any Annual Return would be required to be filed by an LLP?

Every LLP would be required to file annual return in Form 11 with ROC within 60 days of closer of financial year. The annual return will be available for public inspection on payment of prescribed fees to Registrar.

42. Whether the Registrar would have any power to call for information from LLPs?

Registrar would have power to obtain such information which he may consider necessary for the purposes of carrying out the provisions of the Act, from any designated partner, partner or employee of the LLP. He would also have power to summon any designated partner, partner or employee of any LLP before him for any such purpose, in case the information has not been furnished to him or in case the Registrar is not satisfied with the information furnished to him.

43. Which documents will be available for public inspection in the office of Registrar?

The following documents/information will be available for inspection by any person:-

• Incorporation document,
• Names of partners and changes, if any, made therein,
• Statement of Account and Solvency
• Annual Return

The fees for such inspection of an LLP is Rs 50/- and fees for certified copy or extract of any document u/s 36 shall Rs. 5/- per page.

44. How would compliance management (i.e. ensuring that LLPs file their documents with Registrars timely and otherwise comply with other procedural requirements under the Act) be ensured in the Act?

The provisions of the Act require LLPs to file the documents like Statement of Account and Solvency (SAS) and Annual Return (AR) and notices in respect of changes among partners etc. within the time specifically indicated in relevant provisions. The Act contains provisions for allowing LLPs to file such documents after their due dates on payment of additional fees. It has been provided that in case LLPs file relevant documents after their due dates with additional fees upto 300 days, no action for prosecution will be taken against them. In case there is delay of 300 days or more, the LLPs will be required to pay normal filing fees, additional fee and shall also be liable to be prosecuted. 

The Act also contains provisions for compounding of offences which are punishable with fine only.

 

INVESTIGATION OF AFFAIRS OF LLPS AND ROLE OF GOVERNMENT TO CHECK UNSCRUPULOUS LLPS ETC.

45. What are the measures, which can be taken against an LLP, which has engaged in fraudulent activities?

Central Govt may appoint inspectors to investigate the affairs of an LLP. The manner and procedure for conduct of investigation has been specified in the Act.

46. What will be the role of Government in regulation of LLPs? How will the Act able to prevent ‘fly-by-night’ promoters or LLPs vanishing after incorporation?

LLP structure is proposed to allow entrepreneurs and businessmen/servicemen to combine themselves with a view to run a business/service for profit in a more flexible manner than companies. The internal processes of LLPs shall be governed by the LLP Agreement. To protect interests of various stakeholders, following approach has been followed in the LLP Act:-

• imandatory incorporation of LLPs with registrar with suitable due diligence to be followed by promotes/professionals at the time of incorporation. Provisions for mandatory Designated Partners Identification Number (DPIN) to be obtained by every designated partner (similar to DIP for directors of companies) have been proposed in the Act.
  
• MCA-21 e-Governance process will be used for incorporation purposes which will help to track any unscrupulous promoter/partner of an LLP.
• Details of partners and any changes made therein shall be required to be filed with the registrar;
• Filing of annual documents like (SAS and Annual Return) with the Registrars will be mandatory. Such documents will also be open for public inspection;
• Audit of all LLPs (except small LLPs which may be exempted by way of notification by Central Govt) shall be mandatory;
• Provisions have been proposed in the Act to empower Registrar to conduct scrutiny of documents filed with him and for calling of any other relevant information from LLP or its partners/officials and also for summoning of LLPs’ partners/officials in certain cases.
• The Act also contains provisions for investigation of affairs of LLPs by competent inspectors to be appointed by Central Government, wherever circumstances so require.

 

TAXATION

47. What is the tax treatment being provided for LLPs?

Since the taxation related matters in India are provided under Tax Laws, the taxation of LLPs has not been provided in the LLP Act. The Finance Bill, 2009 has made provisions in this regard, pursuant to which the taxation scheme of LLPs has been proposed to be introduced in the Income Tax Act. The Finance Bill, 2009 has proposed following regarding taxation of LLPs:-

(a) LLPs to be taxed on the lines similar to general partnerships under Indian Partnership Act, 1932, i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners. (b) Consequent changes to be made in the Income-tax Act, 1961 like (i) the word ‘partner’ to include within its meaning a partner of a limited liability partnership, (ii) the word ‘firm’ to include within its meaning a limited liability partnership and (iii) the word ‘partnership’ to include within its meaning a limited liability partnership (c) The designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return. (d) In case of liquidation of an LLP, every partner will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part. (e) As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Income-tax Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. (f) If there is a violation of these conditions, the provisions of section 45 of Income-tax Act shall apply. (g) These amendments are proposed to be made effective from the 1st day of April 2010 i.e. assessment year 2010-11.   CONVERSION OF OTHER ENTITIES INTO LLPs AND VICE VERSA 48. Whether other business entities like firm or company would be able to convert themselves into LLP? Yes. The LLP Act contains enabling provisions pursuant to which a firm (set up under Indian Partnership Act, 1932) and private company or unlisted public company (incorporated under Companies Act) would be able to convert themselves into LLPs. Provisions of clause 58 and Schedule II to Schedule IV to the Act provide procedure in this regard.  49. Whether LLP would be able to convert itself into company under the Companies Act, 1956?           This would not be allowed under LLP Act. However, enabling provisions would be required to be made in the Companies Act for such conversion. Necessary action in this regard would be taken when Companies Act would be revised. 50. What is the treatment for stamp duty issues, both in terms of original incorporation and conversion from other business structures? Would there be any stamp duty exemption in case of conversion? Since Stamp Duty is the subject reserved for the States, the LLP Act does not contain any provision for treatment of stamp duty issues. The stamp duty payable will depend upon the relevant Stamp Act prescribed by the State Government/Union Territory. 51. What are the requirements and consequence provided in the Act in respect of licences, permits, approvals etc obtained by a firm, private company or an unlisted public company, prior to its conversion into LLP? It has been provided in the Act that on conversion of a firm/private company/unlisted public company into LLP, any approval, permit or licence issued to the firm/private company/unlisted company under any other Act shall, subject to the provisions of such other Act under which such approval, permit or licence was issued, be transferred in the name of converted entity viz LLP. MERGER AND WINDING-UP OF LLPS 52. Whether two LLPs would be allowed to merge? Provisions of section 60 to 62 of the Act provide for the manner in which compromises or arrangements including mergers and amalgamations involving LLPs shall be allowed. 53. What would be the provisions in respect of winding- up of LLPs? It is proposed to provide the provisions and procedures required to be complied with when the affairs of an LLP are to be wound-up and dissolved, by enabling the Central Government to make rules under the LLP Act, 2008. OFFENCES & PENALTIES AND JURISDICTION OF COURTS/TRIBUNAL 54. Broad provisions in respect of Offences and Penalties Offences and penalties arising out of the non-compliance with the provisions of the Act have been defined along with the substantive provisions themselves.  However, for defaults/ non-compliance on procedural matters such as time limits for filing requirements, penalties have been provided for application in a non-discretionary manner, through the levy of a default fee for every day for which the default continues. Such default fee would be payable at the rate of rupee one hundred per day after the expiry of the date of filing (as prescribed in relevant provision) upto a period of three hundred days. Charging of such default fees would, however, be without prejudice to any other action or liability under the Act, in case the filing is made beyond the expiry of three hundred days. The offences can be punished either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender. The Judicial Magistrate of the first class, or, as the case may be, the Metropolitan Magistrate shall have jurisdiction to try offences under the LLP Act. Though most of the offences in the Act provide for punishment by way of charging fine, imprisonment has been provided for in respect of violations relating to  (i) making by any person a false statement at the time of incorporation of LLP (ii) carrying on business of LLP with intent to defraud or for any fraudulent purposes and (iii) making, knowingly, false statements or omitting any material fact, in any return, documents etc under the Act. The offences which are punishable with fine only can be compounded by the Central Government, by collecting a sum not exceeding the amount of maximum fine prescribed for the offence. Further, for defaults/non-compliance on procedural matters such as time limits for filing requirements provisions have been made for charging default fees (on daily basis) in a non-discretionary manner. 55. Whether offences would be compounded under the LLP Act? Whether any protection to whistle-blowers is being proposed in the Act? The Act contains provisions empowering Central Government to compound any offence punishable with fine only by collecting a sum not exceeding the amount of maximum fine prescribed for the offence. Enabling provisions have also been made in the Act in respect of protection to “Whistle Blowersâ€�. MISCELLANEOUS PROVISIONS 56. What are the provisions being proposed in the Act for striking off defunct LLPs? Whether LLPs would be allowed a less stringent framework for closing of business? The Act empowers Registrars to strike off names of LLPs which are not carrying on any business or operation. They will be under obligation to give an opportunity of being heard to LLP concerned. Details for manner of striking off would be prescribed through rules.  Since LLPs would be governed by LLP Agreement it would be possible for LLPs to make suitable clauses in such Agreement prescribing time limits or duration of LLPs. In such cases, provisions for striking off names could be used. Besides, the Act empowers Central Government to make rules in respect of winding up and dissolution of LLPs. It is proposed to prescribe a simple procedure for voluntary winding up of LLPs under such rules. 57. Whether electronic filing of documents with ROC would be allowed? How far MCA-21 e-Governance initiative will be extended and be useful for LLPs structure under the Act? The LLP Act contains enabling provisions for use of electronic mode for filing of documents with Registrars. Details have been specified in the LLP Rules, 2009. Authentication of documents as per Information Technology Act, 2000 has also been recognized in the LLP Act. At present , Office of Registrar for registration etc of LLPs has been set up at Delhi (3rd Floor, Paryavaran Bhavan, CGO Complex, New Delhi-3). The filing and inspection of documents with the Registrar pursuant to LLP Act, 2008/ LLP Rules, 2009 can be made through website www.llp.gov.in   58. Whether provisions of the Companies Act, 1956 would be applicable to LLPs? Since LLP shall be in the form of a body corporate, it is proposed that to address various situations applicable to LLPs as such, the relevant provisions of the Companies Act, 1956 may be made applicable to LLPs at any time in the future by Notification by Central Government, with such changes or modifications as appropriate.   59. Whether, amendments will be required in the Regulatory Acts governing the various professional services so that these can be aligned with the objectives of the Act? Yes. Amendments to various such Acts would be necessary which can be considered by concerned Ministries/Departments. INTRODUCTION OF LLP BILL, 2006 IN THE PARLIAMENT AND EXAMINATION BY STANDING COMMITTEE AND SUBSEQUENT ACTION 60. When was the LLP Bill, 2006 was introduced? Whether the Bill was referred to Standing Committee? Has the Bill been revised? The Limited Liability Partnership (LLP) Bill, 2006 was introduced in the Rajya Sabha on 15th December, 2006. The Bill was referred to the Lok Sabha Standing Committee on Finance, for examination. The Standing Committee consulted various chambers of commerce, professional institutes and other experts and also heard the M/o Corporate Affairs. The said Committee presented/submitted its report to the Parliament on 27th November, 2007. Based on such report the Ministry of Corporate Affairs revised the LLP Bill and the revised LLP Bill, 2008 was introduced in the Rajya Sabha on 21st October, 2008. This was passed by the Rajya Sabha on 24th October, 2008. The Bill was passed by Lok Sabha on  12th December, 2008. The President has given assent to this Bill on 7th January, 2009. 61. Whether all recommendations made by Standing committee have been accepted by the Government? All the recommendations except one made by Hon’ble Standing Committee have been accepted by the Government. The recommendation which has not been accepted related to proposing a restriction on number of LLPs in which a designated partner may become designated partner. During examination of this recommendation, it was felt that since under the Companies Act, 1956 there is no restriction on a person to be come directors in any number of private companies. Since proposed structure for LLPs would be similar to private companies, it was felt that putting a restriction relating to maximum number of LLPs in which a person may become designated partner may not be necessary. 62. Whether the ongoing financial crisis across the globe requires any change in thoughts regarding the LLP Act, 2008? The ongoing financial crisis across the globe does not appear to have affected Indian economy. The Indian companies and other business entities, including those engaged in banking and financial business are not likely to have any major impact in view of financial crisis of US or Europe, thanks to the strict and conservative legal and regulatory systems working in India. Since a more professional and mature approach is needed in any country to handle such kinds of crisis,  the LLP Act, 2008, which would allow professionals from various fields to combine and work together in providing various services, would be even more useful.

Web Link for limited liability Partnership.
http://www.llp.gov.in/FAQ.htm

Whether when assessee transfers brand, trademark and other interests in a health periodical, held as intangible assets, profits arising out of such transactions are to be treated as capital gains or business income - capital gains, says HC

Whether when assessee transfers brand, trademark and other interests in a health periodical, held as intangible assets, profits arising out of such transactions are to be treated as capital gains or business income - capital gains, says HC

THE issue before the HC is -

Team Leader, Global Funds Services - GFS at JP Morgan Chase

Job Description Team Leader, Global Funds Services - GFS-110075486 Job Description JOB TITLE : Team Leader - Global Fund Services Oversee and manage the daily operations of one large functional unit or multiple operations sections. Recommends and implements specific procedures to insure immediate effectiveness and efficiency of services, systems, procedures and methods. Establishes operational policies, technological support and budget for assigned unit or section. Makes capital expenditure and production/service improvement recommendations. Provides guidance and development to supervisors and/or managers. Manages budget consisting of staff and operating expenses. May assist in long-term strategic planning for the unit. Description: As a team leader in Global Funds Services, you will : · Ensure Team Members are fully competent · Draft & ensure SOPs are current · Drive resolution of exceptions with ORM / management · Perform test checks on quality of operations · Lead and ensure completion of daily activities are timely. · Audit compliance and co-operation · Implement improvement initiatives · Accountable for top quality exception management · Encourage, participate & lead L&D sessions · Identify and facilitate development of training Champions/SME in team. · People morale & discipline · Foster communication and teamwork Qualifications Qualifications: Chartered Accountants with 2 to 3 years / BCOM with 4/5 years experience preferably in Financial Sector industry · Meticulous attention to detail · Ability to work in a deadline driven environment · Client focused · Uses initiative and readily questions · Strong analytical skills · Numerical thought process · Control orientated · Proficient use of PC software for document and worksheet preparation · Flexibility to work on holidays / extended working hours on high volume days, if required · The ideal candidate would have a 'can do' attitude · Good written & spoken English communication skills JPMorgan Chase offers an exceptional benefits program and a highly competitive compensation package Job Securities Operations Primary Location IN-MH-Mumbai Organization Treasury & Securities Services Schedule Full-time Job Type Standard Employee Status Regular  go to https://jpmchase.taleo.net/careersection/2/jobdetail.ftl?lang=en&job=1127083&src=JB-13027

MANAGEMENT LESSONS FROM ANNA HAZARE

Team Anna had a clear cut goal and a defined strategy.

Clearly , there are management lessons for all:

1) Set clear objectives that can galvanise and motivate an entire
work force. From the start, Anna'sgoal was to convince the government
to introduce his preferred version of a Lokpal bill in Parliament.
His method: a fast unto death. Only an extremely dramatic gesture fit
his ambitious goal and could capture the imagination of millions.

2) Follow a strategy. Anna's startegy was not to accept anything
less than a Lokpal bill drafted by civil society. In fact , when talks
between the government and civil society failed and the government
introduced its own version of a Lokpal Bill to the Parliament's
standing committe, Anna threatened another fast unto death. Nobody in
the government took him seriously , but Team Anna stuck to their
gameplan.

3) Choose a perfect time to launch. Target market, geography and
timing matters a lot in terms of generating a buzz. Anna Haxare could
have done his fast in his Maharashtra village Ralegoan Siddhi or some
other state , but he decided to sit at New Delhi’s famous Jantar
Mantar. He also planned his fast for after the IPL tournament was
over. His big deadline for the government was August 15, Independence
Day. The second venue: the much bigger and even more central Ramlila
ground.

4) Do not get intimidated by the money and muscle power of the
competitor. Anna Hazare's team had a clear startegy to deal with the
government's high headedness. Anna had to go to jail on Aug 16 to get
a place at the Ramlila ground to do his fast. He refused to budge or
compromise, and eventually the government and opposition accomodated
him.

5) Focus on delivery and the company's unique selling point to
reach out to the masses. Clearly, Anna's USP was a non violent
movement and invoking the great Mahatma Gandhi in his every speech.
That message played well with people including the government.

6) Always play to your strength in business and allow other team
members with different skill sets to execute the plan. Anna's strength
was to sustain the fast for a longer period. He did that successfully
in the past and he played to his strength. His other team members with
skills in operations, law and media management handled the external
envirnment.

7) Good negotiation skills are necessary when dealing with demanding
suppliers, dealers and other stakeholders. Team Anna kept the
'negotiation window' open right from the start till the last minute,
when talks hit a dead end. They held numerous meetings with
government, the Congress Party, opposition leaders and other civil
society members.

8) Always motivate and encourage employees to keep the overall goal
in mind. Anna Hazare used to address the people every day. Team Anna
played motivational and devotional songs at the Ramlila ground to
keep people engaged.

9) Always admit a mistake and move on. Anna Hazare was quick to
retract his statement regarding Gujarat chief minister Narendra Modi
(he praised the BJP chief minister for doing good work in the area of
rural development.) When he realised that the statement would damage
his own movement and give others a chance to undermine his credibility
with his target market, he quickly disassociated himself with that.

10) Effective communication. Messages about progress and the road
ahead have to be communicated clearly to all members of a team. Team
Anna made it a point to convey the details of theirmeetings with the
government on a daily basis to the media and the crowds at Ramlila.
Everybody knew what the government's stand was, what Team Anna aimed
for and what other government stakeholders believed.

Of course, Hazare's team still has a long fight ahead of them to get
their bill passed. This fight will require that they use every tool
in their management arsenal - including ones we haven't seen yet.

Held that expenses paid as ransom for release of kidnapped person allowable

*While kidnapping is an offense, paying ransom is not; Bar in Explanation 1
to s. 37(1) not attracted
*



The assessee, engaged in manufacture and sale of *bidis*, sent its
whole-time director to a forest area for purchase of tendu leaves. There, *the
director was kidnapped by dacoits and the assessee paid ransom of Rs. 5.50
lakhs to secure his release*. The AO disallowed the claim for deduction of
the said amount u/s 37(1) though the CIT (A) and Tribunal upheld the claim
on the ground of commercial expediency. Before the High Court, the
department relied on the *Explanation to s. 37(1) and argued that
expenditure incurred for any purpose which is an offence or which is
prohibited by law is not allowable as a deduction*. HELD dismissing the
appeal:


*(Click Here To Read More <http://bit.ly/expl_37_1>)*

Foreign IT firms can make clever use of tax laws,

Foreign IT firms use transfer-pricing provisions, double taxation
treaties to minimise taxes in India

These are differences that are increasingly drawing the inquisitive
and corrective eye of the income-tax department. In 2009-10, TCS, the
largest home-grown IT company, recorded a net profit per employee of
Rs 4.3 lakh. By comparison, Capgemini, a foreign IT firm with
operations in India, recorded a net profit per employee of Rs 1.5 lakh
-- about onethird of TCS.

The operations of Indian and foreign IT firms are now structured
similarly, they fight for the same business, there is parity in their
contract pricing and employee salaries, they follow the same tax
rules. So, then, why are foreign IT firms reporting profitability
numbers that are a fraction of their Indian peers?

It's a question the IT department is beginning to evidently ask
foreign IT firms with greater frequency -- and extract more tax
revenues from them.

It's not just profits per employee. The differences are equally wide
on every comparative financial metric: revenue per employee, operating
profit margin, net profit margin...This, say tax experts, is the
effect of 'transfer pricing' --or how a foreign parent with operations
in many countries, including tax havens, prices its transactions with
its Indian subsidiary, ostensibly to reduce its overall tax liability.

The basic premise of rules governing such related-party transactions
is that the price at which the Indian subsidiary (say, IBM India)
provides a service to its parent (say, IBM US) should be similar to
what it would have charged a client.

Claiming that foreign IT firms don't always invoke this principle of
pricing, the IT department is showing the transfer-pricing rules --
introduced in 2001 --to them. Cases of the department asking foreign
IT companies to recalculate revenues are increasing.

As is the quantum of adjustments on account of transfer pricing. The
overall adjustment figure for all foreign companies operating in
India, in both the IT sector and in non-ITsectors, hit a new high of
Rs 22,800 crore in 2010-11.

Individual numbers for the IT sector are unavailable, but Rohan
Phatarphekar, head of transfer pricing at KPMG, estimates that IT and
ITES (IT-enabled services) companies accounted for "onethird to half "
of these adjustments.

THE CASE FOR ADJUSTMENTS...

Most Indian subsidiaries of foreign IT companies operate as 'captives'
-- that is, they mostly service their parent companies, located in the
US and Europe. So, the parent or another subsidiary located in those
continents receives orders from clients. They sub-contract this work
to their Indian subsidiaries. At least 90% of the revenues of the
Indian subsidiaries of Accenture, Capgemini and IBM were with group
companies.

The Indian subsidiary of a foreign IT company takes limited risks. All
the risk related to the order, like pricing and delivery, is borne by
the overseas unit. So, the profit margin is lower for the Indian
arm.The operations of, say, TCS and IBM India are not strictly
comparable, as these companies abroad bring the customers and it's
their name that stands before the customers.

HITENDER MEHTA
Partner, Vaish Associates Advocates

The pricing is usually on a 'cost-plus' basis. This means the Indian
subsidiary is reimbursed for all costs incurred and a margin. In
effect, this model delinks the price paid by clients in the UK or US
and the amount paid to the Indian subsidiary for the work done by it.
As a result, while the top three foreign IT firms in India have 30% of
their global workforce in the country, they report only 5% of their
global revenues from India.

In its 2010 annual report, Capgemini, for instance, says: "...the
margin for Asia-Pacific is not representative of its activities, which
mostly consist of internal subcontracting carried out in India."
Capgemini, initially, agreed to participate in the story, but did not,
despite repeated reminders over email and phone. According to Nasscom,
the association for the industry in India, there were about 750
captives in the country in 2009, employing 400,000 professionals and
accounting for $10.6 billion in revenues.

These did work for their parents, either wholly or mostly. In
addition, according to Som Mittal, president of Nasscom, there are 100
units of foreign IT companies, which are not captives. Together, they
would be accounting for 30-35% of India's software export revenues and
40% of employees.

The growing presence of captives and Indian subsidiaries of foreign IT
firms has drawn the attention of tax authorities, who are looking at
transfer-pricing transactions closely than ever before. Says a senior
income tax official not wanting to be identified: "The issue is how
the company apportions its cost and profit. The department initiates
action when it sees unfair apportionment to reduce tax liability in
India."

According to Rohan Phatarphekar, a reason cited by tax authorities to
justify adjustments is higher profit margins of homegrown IT firms.
For example, in 2009-10, TCS recorded an operating margin of 45%,
whereas IBM India reported a margin of 30%.

Mittal says there is no reason why foreign IT and ITES firms should be
targeted. "Till March 2011, these companies were covered under Section
10A and 10B of the Income Tax Act (which exempt income from taxes),"
he says. "There is no motive for them to undervalue transactions."

...AND THE CASE AGAINST

Even otherwise, tax experts say, given the nature of the work done by
the respective parties, foreign It companies can justify lower
revenues. Hitender Mehta, partner with Vaish Associates Advocates, a
law firm specialising in tax matters, says the Indian subsidiary of a
foreign IT company takes limited risks. "All the risk related to the
order, like pricing and delivery, is borne by the overseas unit," he
says. " ."

According to Vaish, the operations of, say, TCS and IBM India are not
strictly comparable, as "these companies abroad bring the customers
and it's their name that stands before the customers." IBM India, the
whollyowned subsidiary of IBM World Trade Corporation of USA, declined
to respond to a questionnaire.

We comply with all international standards of transfer pricing. The
revenue and profits of Accenture India cannot be compared with those
of Indian IT companies, as their business models are different. We are
organised into 40 industry groups and these in turn are grouped into
five operating groups, where our profit and loss resides.

JIM MCAVOY
Spokesman, Accenture

This argument is corroborated by E Balaji, CEO of Mafoi, an HR firm.
"In the IT industry, client-facing jobs carry a premium compared to
other functions like coding," he says. "Also consultants earn at least
15-25% more than normal IT professionals."

By these arguments, foreign IT companies should get some leeway in
transfer pricing. But the question remains: how much? Mittal says
numbers of foreign information technology firms should not be
benchmarked to those of top homegrown technology services firms. "Tax
authorities can't take the best performers and ask for a higher mark
up," says Mittal.

"They should look at the industry average." In 2009, Nasscom estimated
an average operating margin of 15-16% for the industry. "We comply
with all international standards of transfer pricing," says Jim
McAvoy, spokesman of Accenture, which is registered in Ireland, a
low-tax regime.

Its Indian arm posted revenues of Rs 5,270 crore in 2009, about 92% of
which was related-party transactions. The company declined to give
details of transfer-pricing methods adopted by it, or the mark up in
contracts undertaken by Accenture India.

McAvoy says the revenue and profits of Accenture India cannot be
compared with those of Indian IT companies, as their business models
are different.

"We are organised into 40 industry groups and these in turn are
grouped into five operating groups, where our profit and loss
resides," he says.

"Also the global numbers are prepared under US GAAP (generally
accepted accounting principles), whereas the Indian numbers are not US
GAAP-compliant." The three companies declined to reveal the quantum of
adjustments under transfer pricing, if any, made by the tax
department. Their latest annual reports show that IBM India had tax
disputes of -- though not necessarily on account of transfer pricing
-- Rs 94 crore and Capgemini Rs 9.4 crore; Accenture India did not
disclose its figure. No further details were given.

The companies may also have paid some tax on these disputes.
Typically, the department raises a tax demand once its transfer
pricing officer determines undervaluation. "Companies can appeal, but
they have to pay 50% of the demand raised," says Mittal. "This
(appeal) process takes time," adds Gandhi of Deloitte. "In some
instances, the cases are pending for 7-10 years, adding to the
uncertainty." Phatarphekar of KPMG says if the tax authorities sought
a higher mark up, India would lose business. "Clients expect cost
savings to be passed on when work is outsourced to India," he says.

MANAGING TAX LIABILITY

Compared to homegrown firms, foreign IT firms with operations in India
have greater scope to avoid taxes (See box: Methods of Tax Avoidance).
And they are using it to good effect. Take Cognizant Technology
Solutions, which is registered in the US.

It uses a provision in US tax laws to reduce its tax liabilities. The
provision allows USbased firms not to pay tax on their non-US income
if they declare they will not repatriate the money to the US. "We have
indicated that since 2002," says Gordon Coburn, chief fi-nancial and
operating officer of Cognizant. "The reinvestment policy will drive
our future capital and acquisition expansion plans outside the US,
including in India." In 2010, Cognizant incurred capital expenses of
$180 million, globally. In calendar 2010, Cognizant's tax incidence --
tax paid as a percentage of profit before tax -- was 10 percentage
points lower than that of Infosys.

Another active method of tax avoidance is share buyback, which the
Indian subsidiaries of Accenture and Capgemini have used in recent
years to potent effect. It enables companies to take profits out of
India; if they route it through a tax haven, as both these companies
did, they pay zero tax on this transaction.

For example, Accenture holds nearly 100% in Accenture India through a
Mauritius-registered entity, Beaumont Development Centre Holdings. In
the last five years, Accenture India has twice bought back shares,
paying Rs 474 crore to Beaumont. When asked why Accenture opted for a
buyback when there was only one shareholder, and not dividend, McAvoy
says: "It was more (tax) efficient."

Long-term capital gains tax (holding period of above one year) in
India is zero. And since India has a double taxation avoidance
agreement with Mauritius, the company does not have to pay capital
gains tax in the island nation too.

Had Accenture routed the profits as dividend, it would have had to pay
dividend distribution tax of 16.9%, or Rs 80 crore. Even Capgemini
India had a share buyback scheme in March 2011, where it extinguished
7% of its capital for Rs 366 crore; interestingly only one
shareholder, Kanbay Asia (Mauritius), participated.

Foreign IT firms can make clever use of tax laws, and the tax
arbitrage between nations, to minimise their tax liability in India.
That said, the tax department seems to be checking at least one of
those strategies: transfer pricing.

ICAI) will launch a 100-hour certified course in ‘Forensic Accounting

ICAI to offer course in forensic accounting
Special Correspondent Share · print · T+ ICAI to offer it
using IT and Computer-Aided Audit Tools

In a month's time, the Institute of Chartered Accountants of India
(ICAI) will launch a 100-hour certified course in ‘Forensic Accounting
and Fraud Detection' using IT and Computer Aided Audit Tools, said its
president G. Ramaswamy on Tuesday.

Talking to reporters, he said that the importance of Forensic
Accounting and Fraud Detection was increasingly felt by insurance
companies, banks, police and government agencies considering the
growing incidence of cyber crimes/frauds and corporate failures.

“Chartered Accountants with their sound grounding in accounting,
auditing, business and legal requirements are the most appropriate
professionals to offer these services. The requisite training and
knowledge set is proposed to be offered as part of the certificate
course. There is a need for specialisation.”

Mr. Ramaswamy said that at its recent Council meeting at Manesar, it
was decided to extend a year's training to articled assistants in the
national regulators and government organisations such as C&AG,
Ministries of Corporate Affairs, Law, Commerce and Finance, Reserve
Bank of India, SEBI, CBDT, CBEC, Income Tax and Revenue department.

“At present, training is offered to them in manufacturing and services
sector. We are expanding the scope to enable articled assistants to
gain practical knowledge and exposure in the specific areas of
accounts, law, taxation and audit related functioning of the
government departments. Our Council has already approved the proposal.
We have written to the Ministries concerned seeking their approval.”

To enhance the soft skills of students, ICAI will launch a four-week
compulsory General Management and Communication Skill course for all
students from the current academic year.

It will be offered in two stages of 15 days' duration each, in the
first and third year. The first course has to be undergone by the
students during the first year of articled training and another 15
days' during the last year of practical training. Training will be
imparted through group discussion and case study methods, he said


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CA Ramachandran Mahadevan,M.Com.,F.C.A.,