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    Key Topics Covered:

    • International Taxation
    • FEMA
    • Audit
    • Income Tax
    • Indirect Tax


    • Income Tax
    • Companies Act, 2013
    • Indirect Tax

    From the title of the article, it is clear that entire discussion is relating to understanding of ‘Governmental Authority’ prior and post to the judgment of Honourable High Court of Patna in the case of Shapoorji Paloonji and Company Pvt Limited. Before going into the discussion, let us try to understand the significance of the phrase ‘governmental authority’.


    We all know that negative list has been introduced from 01.07.2012 and post its introduction, majority of the exemptions are clubbed under single notification 25/2012-ST dated which is colloquially referred as ‘Mega Exemption Notification’. The subject notification grants exemption from service tax on various activities and has quite a long list. One such entry is Entry 12 which deals with exemption provided in respect of construction activities if the service receiver is ‘government, governmental authority or local authority’.


    Without much going into the details of what activities are exempted vide Entry 12 of Mega Exemption notification, we shall try to understand who is ‘governmental authority’. Because if the service receiver can be called as ‘governmental authority’ and if the activities provided by service provider fits into the ambit of Entry 12, then the service provider need not charge service tax on such activity. Hence, it becomes necessary to understand the phrase ‘governmental authority’ without any further delay.


    To understand the subject phrase, one place we need to see is whether the mega exemption notification defines such phrase or not. The phrase has been defined vide 2 (s) as


    “governmental authority” means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution’’.


    Consequently, the subject phrase has been amended by Notification No 02/2014-ST dated 30.01.2014 as under:


    (s)     “governmental authority” means an authority or a board or any other body;


    • set up by an Act of Parliament or a State Legislature; or (ii)established by Government,


    with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution


    Now let us get into facts to understand the impact of amendment and the judgment delivered by Honourable High Court of Patna. The facts of the case are Indian Institute of Technology (for brevity ‘IIT’) wants to get constructed an academic building at Bihar. IIT has appointed ‘National Building Construction Company’ (for brevity ‘NBCC’) as a consultant to get the building constructed. NBCC acts as a project managment consultant and oversees the construction of such building. In the process, NBCC has appointed Shapoorji Paloonji (for brevity ‘SP’) as a contractor to construct and deliver such building to IIT.

    SP being a service provider has examined whether such works were exempted from the provisions of service tax law in light of Mega Exemption Notification, in specific Entry 12. As stated earlier, to claim exemption under Entry 12, the prerequisite is the service receiver shall either be ‘government’, ‘local authority’ or a ‘governmental authority’. It is clear that IIT is neither government nor a local authority and if it fits to be a ‘governmental authority’, SP can avail the exemption benefit.


    On reading the definition of ‘governmental authority’, SP has interpreted that even though IIT is registered under Institutes of Technology Act, 1961 and constituted by an act of Parliament but since does not have 90% or more participation by way of equity/control and not a body constituted for carrying out activities mentioned vide 243W of constitution, IIT does not fit into the ambit of ‘governmental authority’ and accordingly started collection of tax and making payments to the credit of central government.


    Subsequently, Indian Audit and Account department raised objection stating that construction services provided by SP relating to educational institutions does not attract service tax and accordingly either SP or IIT is not required to pay service tax on subject works. SP has approached the Honourable High Court of Patna for ordering of refund of service tax paid on such construction services provided to IIT.


    The learned advocate representing the Commissioner of Customs, Central Excise and Service Tax has stated that the plea of SP is not right since the definition of ‘governmental authority’ states that IIT has to satisfy the condition of 90% or more equity/control and should be entrusted with the activities mentioned vide Article 243W of Constitution. Since IIT is not an entity not entrusted with activities mentioned vide Article 243W, it cannot be called as ‘governmental authority’ and accordingly SP has to pay service tax on the said transaction.


    That is to say, the department/authorities have interpreted the definition as under:


    • “governmental authority” means an authority or a board or any other body;


    • set up by an Act of Parliament or a State Legislature with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution; or


    • established by Government with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution


    However, the Honourable High Court of Patna has stated that the condition of 90% or more equity/control shall be applicable only to sub-clause (ii) of the definition and not to sub-clause (i) of the definition. That is to say, the High Court has interpreted the definition as under:


    • “governmental authority” means an authority or a board or any other body;


    • set up by an Act of Parliament or a State Legislature; or


    • established by Government, with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution

    Hence, in view of the Honourable High Court, it is clear that the condition of 90% or more equity/control has to be satisfied for a body/authority/any other body which is established by Government and does not apply to body/authority/any other body which is set up by an act of Parliament or a State Legislature.


    Accordingly, since IIT is a body constituted by an act of Parliament, it satisfies the definition of ‘governmental authority’ and consequently the services provided by SP shall fit into the exemption entry 12 and no service tax is required to be paid. The Court has ordered for a refund of service tax which is already paid by SP.


    Hence, from the above judgment it is clear that the condition is linked to the sub-clause (ii) and not sub-clause (i). Accordingly, all services which are falling under the Entry 12 and being provided to body/authority constituted by an act of Parliament/State Legislature does not attract service tax and if already paid can be applied for refund by placing reliance of the subject judgment.

    Legal Background:-


    Section 50C of the Income Tax Act, 1961 was inserted by Finance Act (“FA”) 2002 w.e.f 01-04-2003. It provides that where the consideration received or accrued as a result of transfer of capital asset by the assesee being land or building or both is less that value adopted or assessed or assessable1 by stamp valuation authority for the purpose of payment of stamp duty then the value adopted or assessed or assessable shall deemed to be full value consideration for the purpose of computing the capital gain.


    The very purpose of introducing the section is to counter suppression of sale consideration on sale of immovable properties, being land or building or both. The section provides for rebuttable presumption that the value adopted for the purpose of computing stamp duty by the competent authorities fairly indicates the market value of the property sold.


    The Provisions of section 50C are applicable in case of transfer of Capital Asset. Similar provisions are contained in section 43CA which was introduced by FA 2013 w.e.f 01-04-2014. The said section deals with the immovable property, being land or building or both, held as a stock in trade.


    Different dates and relief available:-


    Section 43CA(3) provides that where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer are not the same then the value assessable for the purpose of payment of stamp duty on the date of agreement may be taken for computing the income.


    This relief is available subject to the condition that the amount of consideration or part thereof has been received by a mode other than cash on or before the agreement for the transfer of asset. (Section 43CA (4)) .


    However, similar relief was not available to the assesee under section 50C.


    Amendment by FA 2016:-


    The Income Tax Simplification Committee has in its first report point out that the provisions of section 50C do not provide any relief where the seller has entered into an agreement to sell the property much before the actual date of transfer of immovable property.


    Considering the Tax Simplification Committee recommendations two provisos were added to the provisions of Section 50C.


    The amendment was made applicable w.e.f 01-04-2017. The amendment by FA 2016 to the section 50C provides that:-

    Where the date of agreement fixing the amount of consideration and the date of registration of capital asset are not same, the value adopted or assessed or assessable by the Stamp Valuation Authority on the date of agreement may be taken the purpose of computing the full value consideration for such transfer.


    Provided that the amount of consideration or part thereof, has been received by way of account payee cheque or account payee draft or by use of electronic system through bank account on or before the date of agreement for transfer.




    Whether the amendment brought by the FA 2016 has retrospective or prospective application?


    The above issue was answered by the tribunal2 which held that the amendment has been made to remove the incongruity, resulting in undue hardship to the assesee, such amendment has be treated as effective from the date on which the law containing such undue hardship was introduced.


    Reference was mad to the Judgement of Agra Bench of ITAT3 where in it was held that an amendment in law to cure shortcomings of provision and thus obviate the unintended hardships, in view of the well settled legal position to the effect that amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically. (Judgement summarized).


    The present amendment, being an amendment to remove an apparent incongruity which resulted in undue hardships to the taxpayers, should be treated as retrospective in effect. Quite clearly therefore, even when the statute does not specifically state so, such amendments, in the light of the detailed discussions above, can only be treated as retrospective and effective from the date related statutory provisions was introduced. Viewed thus, the proviso to Section 50 C should also be treated as curative in nature and with retrospective effect from 1st April 2003, i.e. the date effective from which Section 50C was introduced.


    Conclusion:- On the basis of above judgement and other relevant judgements4 on the issue of applicability of amendment retrospectively one can conclude that the amendment in law to cure shortcomings of provision and thus obviate the unintended hardships is to be applied retrospectively from the date on which the related provision was introduced.


    Definition of Fraud


    The term ‘fraud’ commonly includes activities such as theft, corruption, conspiracy, embezzlement, money laundering, bribery and extortion.


    Even in a rapidly changing business environment with emerging technologies and constant challenges, at the core of every organization is its employees — those carrying out operations, executives, administrative personnel, and even the board. Employees are faced with an increasing pressure to meet the bottom line at work and at home, and they can be exposed to a variety of ethical dilemmas. These dilemmas can tempt employees to commit fraud against their employer.


    The cost of occupational fraud can be minimized with fraud prevention. Depending on the size and complexity of an organization, internal audit can be called on to recommend improvements or evaluate an organization’s controls and commitment to fraud prevention. An organization’s internal controls are not always specifically designed to prevent fraud; however, often there are fraud prevention components inherent in internal controls related to the control environment, segregation of duties, and monitoring activities.


    Different types of fraud


    Fraud can mean many things and result from many varied relationships between offenders and victims.


    Examples of fraud include:

    Øcrimesby individuals against consumers, clients or other business people


    Øemployee fraud against employers, e.g. payroll fraud; falsifying expense claims; thefts of cash, assets or intellectual property


    Øcrimesby businesses against investors, consumers and employees Øcrimesagainst financial institutions,


    Øcrimesby individuals or businesses against government, Øcrimesby professional criminals against major organisation Øe-crime by people using computers and technology to commit crimes


    Control environment


    The control environment is one of the interrelated components of internal control, and it is vital in establishing an effective fraud-prevention culture within an organization. A visible commitment to fraud prevention can exhibit to employees the importance of antifraud measures to the organization. Control activities related to fraud prevention can be evident in the hiring, onboarding, and training of employees, as well as the organization’s policies and procedures.


    During the hiring pro- cess, companies may conduct background checks, validate references, or confirm certifications. Certain fields or industries may require background checks, which can serve as a first point of communication regarding an organization’s tolerance of fraudulent activity.


    The introduction to the organization’s mission and values typically occurs during the onboarding process. This can be an opportune time to distribute and explain the code of conduct, code of ethics, or a separate fraud policy. Taking time to discuss the firm’s policies and procedures thoroughly can be an effective measure in fraud prevention.


    For example, organizations subject to bid requirements should maintain sufficient documentation to support compliance with established protocols in place. Policies and procedures should be clearly defined, published, readily available, and required to be read and acknowledged annually by employees to correspond with terms of employment.


    Fraud-related training can reinforce the importance of anti-fraud, waste, and abuse measures to the organization. To be effective, training that promotes fraud prevention should be tailored to the role and duties of the individual employee. Mandatory, continuous training for employees who progress within an organization can be implemented based on individual job responsibilities and within a department’s specific function. This can equip employees with the skills to detect fraud, and also educate employees about what to do when fraud is suspected.


    Companies may opt to use hotlines for fraud reporting. Depending on available resources, an organization’s fraud reporting hotline may be third-party managed, in-house, or a combination of both. Information regarding the fraud report- ing hotline should be communicated during training, readily available, and publicly displayed in common areas so it is visible to all employees.


    To build the trust of employees in the fraud-reporting process, disseminated materials should con- tain information regarding how hotline tips are evaluated, and what level of anonymity and confidentiality can be assured for the tip-reporting employee.

    Segregation of Duties


    The organization should provide employees with the authority to carry out their duties, but no single employee should have the ability to create, execute, and monitor activities within a business function. For example, in payroll processing, there should be separation between the ability to approve payroll, write and sign checks, receive bank statements, and reconcile those bank statements. In this instance, an accountant or other financial personnel could approve payroll, write checks, and reconcile bank statements; whereas an executive director could sign checks, receive and open bank statements, and review bank reconciliations.


    The size of an organization can create complexities related to segregation of duties. Small organizations can experience challenges because of staff size limits. Careful consideration should be made so that no single employee has complete control over all aspects of a process or function. However, large organizations can experience distinct challenges because of the potential overlap of job duties among multiple departments, which can require a more concerted effort to deter- mine whether job responsibilities are adequately segregated.


    Regardless of the size of an organization, controls should be designed and implemented so they cannot be over ridden without appropriate authority. Insufficient safeguards and consideration for employee responsibilities can lead to collusion. Segregation of duties should occur at all levels of an organization and be relevant to each specific function.


    Comprehensive Monitoring


    Monitoring implemented controls not only provides oversight, but it also can gauge compliance with established policies and determine whether controls are operating as intended. For example, controls established to segregate employee duties will be ineffective if those employees disregard controls in place. Ineffective controls can create the opportunity for an employee to perpetrate fraud. Monitoring should occur at all levels of an organization and not be limited to day-to-day operations.


    Before establishing monitoring procedures, those responsible for monitoring activities should perform a fraud-risk assessment. Analytics are often used, but there are additional resources for an organization to consider.


    Employees are a valuable resource because they are close to the operations responsible for achieving components of the organization’s goals. Those performing the fraud-risk assessment should use the skills and knowledge of employees to strengthen monitoring activities. Employees can provide insight on how someone might circumvent current controls, which in turn can help an organization strengthen controls designed to prevent the occurrence of fraud. The involvement of employees in the fraud-risk assessment pro- cess provides them with increased fraud awareness. They can become more knowledgeable of fraud terms and schemes such as asset misappropriation and procurement fraud. Lastly, involvement of employees fosters continuous training and rein- forces the organization’s established policies and procedures.

    Publicizing monitoring activities within the organization can help deter employees from committing fraud because they realize the likelihood of detection is increased. Monitoring can serve as a preventive measure within the organization and can also minimize the duration of fraudulent activity.


    As businesses grow or are redefined, fraud often presents itself unpredictably. Organizations that ignore the occurrence of fraud or maintain the “it can’t happen here” mind-set may find themselves dealing with increasing fraud-related costs. Carefully designed and monitored preventive measures are crucial in the fight against fraud.


    A holistic approach to fraud management


    Fraud has often been compared to a balloon, since pressing on one place in the balloon just forces the air into another. Like the air, fraud moves from one inefficient process to another within an organization.


    When we stop transactions or decline claims without prosecuting the person responsible and without fixing the inefficient processes to begin with, we are training fraudsters to just keep trying. This cycle teaches people who are bent on criminal behavior how to attack your system. Many times you need to follow the suspect, rather than just disconnecting, in order to convict and eradicate. Indeed, business changes can often have a big impact on your fraud exposure, making it essential to be active and elastic in fraud prevention – not just fraud detection – and to use technologies that will grow as your needs grow.


    A fraud framework is a complete set of processes that access and integrate data, produce alerts, provide holistic reporting, control workflows and case management, and learn from past experience to become – and remain – effective.


    Fraud continues to be a major concern and that concern continues to grow. Currently, there are more white collar workers unemployed than ever before – and fraud is a white collar crime. The “fraud triangle” describes three factors present in fraud: motive, rationalization and opportunity. With a highly skilled unemployed population, these causal factors make for a trained, motivated and potentially desperate group of people. Add to that the Internet access available to so many people today and you have a toxic mix.

    In continuation of its thrust on liberalizing the economy, bringing more funds into India and creating employment, the Central Government has announced key amendments in the FDI policy by Press Release dated 12th November, 2015 followed by Press Note No. 12/2015, dated 24th November, 2015 (“Press Note”)[Please refer detailed coverage of Press Note No. 12/2015 published in our Wiki for December 2015 (Volume No. 17)]


    Post issue of the said Press Note, the necessary amendments have been carried in Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2000 (Notification No. 20/2000, dated 3rd May, 2000), (“FDI Regulations”) vide Notification No. FEMA 361/2016-RB, dated 15th February, 2016


    In continuation of the above, the RBI vide AP (DIR Series) Circular No. 6, dated 20th October, 2016 has advised all the Authorised Dealers to take note of the changes made in the Principal Regulations, inter alia, permitting the Foreign Direct Investment into Limited Liability Partnership Firms under Automatic Route subject to the conditions stated in the Regulations.


    In view of series of changes made the author has made an attempt to summarise the extant provisions of Foreign Direct Investment into the LLPs and also conversion of Companies into LLP as per revised Schedule 9 of FDI Regulations


    1. Eligible Investors:


    All Individuals and entities registered outside India are eligible to invest into LLP, except citizen/ entity of Pakistan and Bangladesh or a SEBI Registered FII/ FVCI/QFI or RFPI


    1. Eligibility of LLP for accepting FDI


    LLP is eligible for accepting FDI under automatic route only if the entity is operating in sector where the FDI is not prohibited and also the sector is eligible for 100% FDI under automatic route and without any FDI linked performance conditions and it is not in Agricultural, Plantation and print media activities.


    At present the following sectors are having restrictions:


    1. Agriculture & Animal Husbandry (except specified categories of Agriculture activities)
    2. Plantation (except specified categories of Plantation activities)
    • Mining of specified categories
    1. Petroleum and Natural Gas
    2. Defence
    3. Broadcasting
    • Print Media
    • Civil Aviation of various categories prescribed therein
    • Construction Development: Township, Housing, Built-up Infrastructure
    • Industrial Parks
    • Satellites – Establishment and operation
    • Private Security Agencies
    • Telecom Services
    • Trading (various forms)
    • Financial Services of various forms
    • Pharmaceuticals
    • Railway Infrastructure (other than prescribed forms of railway infrastructure)
    1. Eligible Investment


    LLP is eligible to receive the contribution by way of capital contribution only and cannot receive any loan in foreign currency (including loans from Non Resident partners)


    1. Downstream Investments by LLP


    As per extant FDI regulations, now LLPs are permitted to make down stream investments into either Indian Companies / LLPs subject to complying with all applicable FDI regulations.


    1. Pricing of capital contribution or profit share


    As per the extant FDI regulations, the pricing for subscription to the partnership deed/ acquisition or transfer of profit share, the pricing guidelines as per internationally recognized method of valuation need to be followed.


    In case of transfer of profit share from Resident to Non Resident, the minimum amount paid by the Non Resident shall not be less than fair value and in other cases it shall not be more than the fair value.


    1. Mode of Payment by an eligible investor


    As per the extant FDI regulations, the permitted mode of payment by the Non Resident Investor is only by way of cash contribution (Convertible Foreign Exchange or debit to NRE/NRO/FCNR(B) account etc.,) and other modes of contribution are not permitted (e.g., Consideration other than cash)


    1. Reporting


    The LLP receiving the FDI shall report RBI about the receipt of contribution/ acquisition of profit share by the Non Resident Investors by prescribed forms within 30 days of such receipt/ acquisition


    In case of disinvestment by the Non Resident Investor or transfer of profit share between Resident and Non-Resident shall be reported to RBI within 60 days of such transaction.


    In both cases the Authorised Dealer shall obtain KYC of the Non Resident Investor and shall report to the RBI accordingly

    1. Conversion of the existing Company having FDI into LLP


    The company (both Private Company and unlisted Public Company) which is engaged into sectors wherein the FDI is permitted upto 100% under automatic and not having FDI-linked performance conditions can itself get converted into LLP, subject to obtaining prior approval from FIPB and after complying with procedure laid down under Companies Act, 2013 and LLP Act, 2008


    In view of the recent amendments, now the companies are encouraged to get converted into LLP, since largely the requirement of obtaining FIPB/ Government approval for receiving future FDI is done away with and also the LLP offers more flexibility and tax benefits to the investors.


    1. Detailed steps and Procedure for conversion of Company into LLP


    We have made humble attempt to cover detailed procedure and aspects related to conversion of Company into LLP, tax impact for such conversion and other related mattersin our Wiki for November, 2014 (Volume No. 4)


    [Please refer Page No. 4 to 10] and request the readers to refer the respective volume of Wiki and get familiarize the process.




    With the above amendments now India has enabled another vehicle for carrying business as part of its initiatives of “Ease of doing business” and “Make in India” and it paves long way for thrust in Indian Economy


    We expect that many of the existing Indian Companies/ MNCs opt for converting the closely held companies into LLPs after weighing the pros and cons of doing it.


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