Latest Blogs from SBS and Company LLP

    1.1  Introduction:

     

    Profit potentiality, limited liability, tax benefits, free transferability would make investment in equity preferable, however there is other side to the coin in terms of high risk, market fluctuations which prudent investor should always consider.

     

    Normal tendency of investors while making investments is to look at the track record of the Board of Directors, CEO and management team along with company performance and risks adherent to such company and industry. In spite of those measures, history revealed so many scandals, Inspite of impressive track record of the Board of Directors and CEO,investors lost their money, Enron scandal would be prompt evident supported by ZZZZ Best Inc, Centennial Technologies Inc, Bre-X Minerals, Worldcom and many other scams.

     

    It is evident that, apart from the mentioned measures, an investor should also consider how risks are managed in the company, strength of its control environment and its effectivegovernance to make better decisions.

     

    What shall an investor consider can know easily, but how? is a million-dollar dividend question.

     

    Through this article I made an endeavour, how an Internal Audit system is relevant for investors while making investment decisions.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    2.1  Relevance of Effective Internal Audit

     

    Though internal audit doesn’t assure any commercial success, effective internal audit in an organisation assures good governance. It provides the management and stakeholders with an independent view on organisation’s risk and control environment.

     

    Many stock exchanges across the world recognised the importance of internal audit, they made mandatory for the listed companies to have internal audit in place. In India as per the clause 49 of listing agreement, every listed company should possess internal audit mechanism, same requirement is also there in Companies Act,2013. As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for every listed company in India.

     

    One of the surveys conducted by ACCA (the Association of Chartered Certified Accountants) found that more than 85% of respondents felt that the provisionof non-financial information (such as corporate governance practices and corporate social responsibility issues) would serve their (investment) decision making purposes and audit brought value for their decision making.

     

    As described by IIA, “Internal audit is a key pillar of good governance. It provides the board of directors, the audit committee, the chief executive officer, senior executives and stakeholders with an independent view on whether the organisation has an appropriate risk and control environment, whilst also acting as a catalyst for a strong risk and compliance culture within an organisation”.

     

    Presence of effective internal audit system will always provide better insight into the company’s governance and risk mitigation, on the other way we may not.

     

    2.2 Internal Audit Importance:

     

    2.2.1 Introduction of internal audit standards, risk assessment procedures by internal auditors improved reliability on internal audit for external auditors to the notable extent. There were instances where internal audit analysis reports made external auditors to qualify their Audit Report.

     

    “Well-controlled, well-managed organizations cost less to audit,”“Internal audit is a key part of a well-controlled, well-managed organization. Our coordination with internal audit is very helpful in making sure that the work we do is efficient.”

     

    -Greg Weaver, chairman and chief executive officer at Deloitte &Touche.

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Importance of Internal Audit for Investors

     

     

    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    2.2.2 Internal Audit can improve management and accountability, both financial and non–financial.Internal audit can be a pivotal activity to provide assurance to the board of directors, the audit committee, and the chief executive officer, and stakeholders that the organisation is governed effectively by

     

    ?Providingindependent, unbiased assessment of the operations of the organisation.

     

    ?Providingmanagement with information on the effectiveness of risk management, control and governance processes.

     

    ?Actingasa catalyst for improvement in risk management, control and governance processes.

     

    ?Informingmanagement what it needs to know, when it needs to know it.

     

    3.0  Conclusion:

     

    While making investment, apart from company growth, industry risk, management capabilities, Insight into the organisation’s risk mitigation, governance and ethical culture etch will always bring value advantage to investment decisions.

     

    Though internal audit doesnot assure any commercial success, effective internal audit in an organisation assures good governance, provides insight into the organisation’s both financial and nonfinancial aspects which a prudent investor should always consider.

    Tags:

     

     

     

     

     

     

     

    Contributed by CS D V K Phanindra

     

     

     

     

     

     

     

     

     

    Sl.

    Section(s) under the CA,

    Clause No. in the

     

    Proposed amendment relating to

     

     

    Remarks/Comments/Penalty

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    63

    Section - 196 –

    64

    Amendment to Section (4) of Section 196 of the Act, to

    Welcome amendment.  The scope

     

    Appointment of

     

    provide that approval of Central Government shall

    be

    of approval of Central Government

     

    Managing Director,

     

    required on matters specified in “Part I of Schedule V”.

     

    is proposed to be restricted to Part-I

     

     

     

     

     

     

     

     

    of the Schedule-V only.

    64

    Section - 197 –

    65

    Amendment to the 1st proviso to Sub-section (1) section 197 of the

    Welcome Amendment, and ease of

     

    Overall Maximum

     

    Act, to remove the requirement of obtaining approval of Central

    operations.

     

    Managerial

     

    Government, for payment of remuneration and amendment to 2nd

     

     

     

    proviso  to

    sub-section

    (1)  of  Section  197,  to

    include

    the

     

     

    Remuneration and

     

     

     

     

    requirement

    of special

    resolution for payment of

    managerial

     

     

    Managerial

     

     

     

     

    remuneration in respect of the payment of limits for the limits

     

     

    Remuneration in Case

     

     

     

     

    prescribed therein.

     

     

     

     

     

    of Absence or

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Inadequacy of Profits

     

    Further to include a new proviso after the 2nd proviso to sub-

    Welcome  Amendment  in  the

     

     

     

     

     

     

    section (1) of Section 197, relating to obtaining of priorapproval of

    interest of all the stakeholders.

     

     

     

    bank or public financial institution, in case of any term loan is

     

     

     

     

    subsisting or the company is defaulted in payment of dues to non-

     

     

     

     

    convertible debenture holder or secured creditor, before obtaining

     

     

     

     

    the approval of shareholders, for payment of remuneration to the

     

     

     

     

    Directors.

     

     

     

     

     

     

     

     

    Amendment to Sub-section (3) of Section 197, for deleting the

    Welcome Amendment, and ease of

     

     

     

    requirement as to obtaining of Central Government approval, in

    operations.

     

     

     

    case the Company is not able to comply with the provisions of

     

     

     

     

    Schedule-V, in case of payment of remuneration due to lack of

     

     

     

     

    profits or inadequate profits.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Sl.

    Section(s) under the CA,

    Clause No. in the

    Remarks/Comments/Penalty

    No.

    2013, amended

    Proposed amendment relating to

    Amendment Bill

     

     

    Substitution of a new sub-section (9) in place of the existing sub-

     

    section, there providing time frame, within which the director

    has top refund the unauthorised remuneration drawn by him

    from the Company.

     

    Amendment of sub-section (10) of Section 197, relating to the Welcome Amendment, and ease of authority for waiver of the refund of unauthorised remuneration operations.

    drawn by the Director.              The earlier authority of Central

    Government, is proposed to replaced with the Shareholders of

    the Company, who will have to pass a special resolution within

    two years from the date the sum becomes refundable; and to

     

    include a proviso to the sub-section that in cases where any term

     

    loan of any bank or public financial institution is subsisting or the

     

    company has defaulted in payment of dues to non-convertible

    debenture holders or any other secured creditor, their prior

    approval is required before the obtaining the approval of the

    members.

     

    Amendment of sub-section (11) of Section 197, the requirement Welcome Amendment, and ease of as to obtaining of Central Government approval, in case the operations.

    Company is not able to comply with the provisions of Schedule-V,

    for any increase of remuneration payable to the Directors.

     

    Insertion of two new sub-section (16) & (17) to Section 197, Welcome Amendment, to have firstly sub-section (16) to provide that the Auditors in their better transparency and better report, to report on the remuneration drawn by the directors and Corporate Governance.

    whether the same are within the limits or not.  Secondly, sub-

    Insertion to give clarity.

    section (17) relating to the fate of applications pending with the

     

    remuneration to the Director, other than in accordance with the

     

    provisions of the Schedule.

     

     

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    Sl.

    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to

    Remarks/Comments/Penalty

     

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

    65

    Section - 198 -

    66

    Amendment to Clause (a) of Sub-section (3) of Section 198 of

    Amendment to remove

     

     

    Calculation of Profits

     

    the Act to exclude Investment Companies [As per the

    ambiguity.

     

     

     

     

    Explanation given in Section 186] from the requirement of not

     

     

     

     

     

    giving credit for profits on sale of shares or debentures for

     

     

     

     

     

    calculation of profit.

    Amendment to remove

     

     

     

     

     

     

     

     

    Amendment to Clause (l) of sub-section (4) of Section 198 of

    ambiguity.

     

     

     

     

    the Act, to omit the words “which begins at or after the

     

     

     

     

     

    commencement of this Act”.

     

     

     

     

     

     

     

     

    66

    Section - 200 -

    67

    Amendment to Section 200 of the Act to omit the words

    Amendment in tune with the

     

     

    Central Government or

     

    "Central Government or", since the requirement of obtaining

    amendments made to Section

     

     

    Company to Fix Limit with

     

    the  approval  from  Central  Government  under  Section

    196 & 197

     

     

    Regard to Remuneration

     

    196(except  for  appointment  of  MD/WTD/Manager  in

     

     

     

     

     

     

     

     

     

     

    variation with the provisions of Part-I of Schedule-V)& 197, is

     

     

     

     

     

    omitted.  Accordingly, the Company alone can fix the limit

     

     

     

     

     

    with regard to the remuneration payable to the Directors.

     

     

     

     

     

     

     

     

    67

    Section - 201 –

    68

    Amendment to Section 201 of the Act as a consequential

    Amendment in tune with the

     

     

    Forms of, and Procedure

     

    change to amendment made section 196, thereby limiting the

    amendments made to Section

     

     

    in  Relation  to,  Certain

     

    purpose of making application in MR-2, for the purpose of

    196

     

     

    Applications

     

    appointment of MD/WTD/Manager in variation with the

     

     

     

     

     

    provisions of Part-I of Schedule-V.

     

     

     

     

     

     

     

     

    68

    Section - 216 –

    69

    Amendment to sub-section (1) Section 216 of the Act to insert

    Amendment for better

     

     

    Investigation of

     

    a clause (c) to provide for  Central Government to appoint

    transparency in the company

     

     

    Ownership of Company

     

    inspectors for determining true persons who have or had

    management.

     

     

     

     

    beneficiali nterest in shares of a company or who are or have

     

     

     

     

     

    been beneficial owners or significant beneficial owner of the

     

     

     

     

     

    company.

     

     

     

     

     

     

     

     

     

    21 | P a g e


     

    Sl.

    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to

    Remarks/Comments/Penalty

     

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    69

    Section – 223 –

    70

    Amendment to Sub-section (3) of Section 223 of the Act so as

    Welcome

    Amendment

    to

     

     

    Inspector’s Report

     

    to include, as to provide that the members, creditors or any

    remove ambiguity, as to there

     

     

     

     

    other person whose interest is likely to be affected, can apply

    was no provision in the principal

     

     

     

     

    for copy of inspectors report.

    act, as to who can apply for a

     

     

     

     

     

    copy of the Inspector’s Report.

     

     

     

     

     

     

     

    70

    Section – 236 –

    71

    Amendment to Sub-section (4), (5) & (6) of section 236 of the

    Amendment to provide clarity.

     

     

    Purchase of Minority

     

    Act to substitute the words 'transferor company' with the

     

     

     

     

     

     

     

    Shareholding (Section

     

    words 'company whose shares are being transferred' for

     

     

     

     

     

     

     

    not yet notified)

     

    providing clarity

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    71

    Section – 247 -

    72

    Amendment to Clause (d) of sub-section (2) of Section 247 of

    A m e n d m e n t

    t o

    p r o v i d e

     

     

    Valuation by Registered

     

    the Act to provide that a registered valuer shall not undertake

    ambiguity, as in the principal

     

     

    Valuers. (Section not yet

     

    valuation of any asset in which he has direct or indirect

    act, there was no limit or period

     

     

    notified)

     

    interest three years before appointment as valuer or three

    provided for the disqualification

     

     

     

     

    years after valuation of assets.

    for valuing the assets.

     

     

     

     

     

     

     

     

     

    72

    Section–366–

    73

    Amendment to Sub-Section (2) of Section 366of the Act

    Welcome Amendment for ease

     

     

    Companies Capable of

     

    reducing the general requirement of number of members for

    of operations.

    Lot

    of small

     

     

    Being Registered

     

    conversions of partnership firms, etc. into companies from

    partnership  firms

    with  2

     

     

     

     

    seven or more to two or more members.

    partners  can

    be

    directly

     

     

     

     

     

    converted in to private limited

     

     

     

     

    Insertion of a new clause (vi) to the proviso to Sub-section (2)

    c o m p a n y,

    w i t h o u t

    t h e

     

     

     

     

    of Section 366, to provide that  where the number of

    requirement re-constitution of

     

     

     

     

    members are less than seven members the conversion would

    the firm for admission of new

     

     

     

     

    be into a private company

    partners.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    22 | P a g e


     

    Sl.

    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to

     

    Remarks/Comments/Penalty

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

    73

    Section –379 -

    74

    Amendment to Section 379 of the Act, thereby re-numbering

    Amendment to provide clarity.

     

    Application of Act to

     

    the existing section as Sub-section (2) and inserting a sub-

     

     

    Foreign Companies.

     

    section (1 to provide that the provisions of Section 380 to 386

     

     

     

     

    and sections 392 and 393 of the Act, shall apply to all foreign

     

     

     

     

    companies, and  a proviso giving power to the

    Central

     

     

     

     

    Government,  to  except  certain  companies  from  the

     

     

     

     

    applicability of the provisions by way of an order, and copy of

     

     

     

     

    every such order shall, as soon as may be after it is made, be

     

     

     

     

    laid before both Houses of Parliament.

     

     

     

     

     

     

     

     

    Tags:

    The Finance Bill, 2016 proposed to insert a new section – section 270A on imposition of penalty to replace the existing section 271of the Income-tax Act, 1961 (“Act”) which has been matter of litigation throughout. This section shall come into effect from April 1, 2017 i.e., Assessment Year (“AY”) 2017-18.

     

    The reasons for bringing in a new section, as stated in the Memorandum explaining the Finance Billis - “Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act. In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1stday of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1stApril, 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income”.

     

    Purpose for bringing a new section:

     

    The existing provisions of Section 271of the Act is for levy of penalty in case of concealment of income or furnishing of inaccurate particulars of income which can range from 100 percent to 300 percent of the amount of tax sought to be evaded by an assessee. The levy of penalty under this section has always attracted huge litigation. The discretion regarding the quantum of penalty that can be imposed lies in the hands of Assessing Officer which also led to corruption. Major litigation under this section has been on the following issues:

     

    • The interpretation of the term – ‘tax sought to be evaded’;

     

    • The tax authorities considered any addition or disallowance made in the course of assessment would attract the levy of penalty under section 271(1)(c);

     

    • The rate of penalty has always been upto the discretion of the tax authority etc.

     

    To overcome all the shortcomings of this section and to reduce litigation to some extent, the Finance Bill, 2016 proposed the insertion of Sections 270A and 270AA in the Act which will replace the existing provisions of section 271.

     

    Section 270A:

     

    The section 270A of the Act imposes penalty for under reporting and misreporting of income. It states that:

     

    • The Assessing Officer / Commissioner (Appeals) / Principal Commissioner or the Commissioner may

     

    • During the course of any proceedings under the Act
    • Direct that any person
    • Who has under-reported his income
    • Shall be liable to pay penalty in addition to tax, if any, on the under reported income


     

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    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    In a nutshell, the concept of ‘concealment of income or furnishing of inaccurate particulars of income’ mentioned in section 271(1)(c) has been replaced by under reporting and misreporting of income which has been clearly defined in the section.

     

    What constitutes under-reporting of income?

     

    Sub-section (2) of section 270A lists the cases wherein a person is said to have under reported his income which are mentioned below:

    1. the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;

     

    1. the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;

     

    1. the income reassessed is greater than the income assessed or reassessed immediately before such re-assessment;

     

    1. the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

     

    1. the amount of deemed total income assessed as per the provisions of section 115JB or 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;

     

    1. the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

     

    The most important point to be noted here is that in case of the assessee who has reported a loss in his return of income, penalty will be charged on the amount of tax on the under reported income inspite of the assessee still having a loss after including the under reported income. Due to this provision, any income which is being under reported by the assessee will fall within the purview of penalty (excluding certain circumstances mentioned below) even if the assessee has an overall loss.

     

    What constitutes misreporting of income?

     

    Income is said to be misreported in the following cases:

     

    1. misrepresentation or suppression of facts;
    2. failure to record investments in the books of accounts;
    3. claim of expenditure nor substantiated by any evidence;
    4. recording of any false entry in the books of account;
    5. failure to record any receipt in books of account having a bearing on total income and
    6. failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction to which the provisions of Chapter X(Special provisions relating to avoidance of double taxation) applies

     

     

     

     

     

     

     

     

     

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    Rationalisation of penalty provisions

     

     

    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    Amount forming under reported income:

     

    In case a person’s case falls under any of the above 6 clauses, the amount of under reported income shall be:

     

    Rationalisation of

     

     

     

    Amount of under-reported income if assessed for first time

     

     

    *where,

     

     

    If Return of income has been furnished

     

     

     

     

     

     

    If Return of income has not been

     

    furnished

     

     

     

     

     

    Unreported income arising out of

     

    determination of deemed total income in accordance with MAT / AMT

     

     

     

    In any other case

     

     

    Amount of income assessed (-) Amount of income determined under 143(1)(a

     

     

    For Company, firm, local authority:

     

    Amount of income assessed

     

     

    For others:

     

    Amount of income assessed (-) maximum amount not chargeable to tax

     

     

    In accordance with formula*

     

    (A-B)+(C-D)

     

     

    Amount of income reassessed / recomputed (-) amount of income reassessed / recomputed in the preceding order

     

     

    penalty provisions


     

    A = Total income, including the under reported income, as per the normal provisions of the Act B = Total income, excluding the under reported income, as per the normal provisions of the Act C = Total income, including the under reported income, as per the provisions of section

     

    115JB / 115JC, i.e., MAT / AMT

    D = Total income, excluding the under reported income, as per the provisions of section 115JB / 115JC, i.e., MAT / AMT

     

    In case, the amount of under reported income on any issue has been considered under the normal provisions of the Act and as per provisions of section 115JB / 115JC, then for the purpose of computing the amount under D, such amount, considered under both, will not be excluded.

     

     

     

     

     

     

     

     

     

     

     

     

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    Amounts that would not form part of under reported income

     

    Section 270A lays lists down certain amounts that would not form a part of under reported income to not cause undue hardship to Assessees. These are listed below:

     

    • The amount of income for which the assessee offers an explanation which is satisfactory to the AO/CIT(A)/CIT/PCIT of it being bonafide and the Assessee has disclosed all material facts to substantiate the explanation

     

    • The amount of under reported income determined on the basis of an estimate wherein the accounts are correct and complete to the satisfaction of the AO/CIT(A)/CIT/PCIT but the method employed cannot compute the income satisfactorily

     

    • The amount of under reported income has been determined on the basis of an estimate, wherein the assessee on his own, has estimated a lower amount of addition or disallowance on the same issue andhas included such amount in the computation of income and has disclosed all material facts relating to such addition and disallowance

     

    • The amount of under reported income which is on account of any addition made in accordance with the arm’s length price as determined by the Transfer Pricing Officer and proper documentation has been maintained by the Assessee as prescribed under section 92D. Further, the assessee should also have declared the international transactions under Chapter – X and disclosed all material facts relating to the same

     

    • Amount of undisclosed income referred to in section 271AAB (penalty where search has been initiated)

     

    Amount of penalty

     

    The amount of penalty would be equal to 50% of the amount of tax payable on under reported income. In case the under reported income is on account of misreporting then the penalty would be equal to 200%of the amountof tax payable on under reported income. The AO/ CIT(A) / CIT / PCIT should issue an order in writing to impose penalty under this section.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Rationalisation of penalty provisions

     

     

    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki


     

    Amount of tax payable on under reported income

     

     

     

    No ROI filed + income

     

    assessed for first time

     

     

    Total income determined under

    Tax payable in respect

    clause 143(1)(a) / assessed /

    of under-reported income

    reassessed or recomputed in a

    shall be

    preceding order is a loss

     

     

     

     

     

    Amount of income assessed (+)

     

    maximum amount not

     

    chargeable to tax

     

     

     

    Amount of tax calculated on the under reported income as if it were total income

     

     

    Rationalisationofpenaltyprovisions

     

     

     

     

    In any other case                                                        X-Y*

     

     

     

    *X = Amount of tax calculated on the total income, including the under reported income

     

    Y = Amount of tax calculated on the total income, excluding the under reported income

     

    Penalty shall not be imposed if any disallowance or addition has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Immunity from imposition of penalty and prosecution – section 270AA

     

     

     

     

    Penalty imposed u/s

     

    270A and immunity

     

    is sought u/s 270AA

     

     

     

     

    2 conditions to be

     

    satisfied

     

     

     

     

     

    Tax + interest payable

    No appeal filed against

    by order u/s 143(3) /

    147 paid within time                                      such order

    prescribed u/s 156

    YES

     

     

     

     

    Application to be

     

    made within 30 days

     

    of such order to AO

     

     

     

     

    AO will pass order within 30 days

     

    from the end of the month in which

     

    the application is made wither

     

    accepting or rejecting the

     

    application after giving the assessee

     

    an opportunity of being heard

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Rationalisation of penalty provisions

     

     

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    Section 270AA has been inserted w.e.f April 1, 2017 from AY 2017-18 to provide immunity to assessees from imposition of penalty u/s 270A and initiation of proceedings u/s 276C (wilful attempt to evade tax, etc) or section 276CC (failure to furnish returns of income) if the following 2 conditions are satisfied:

     

    • The amount of tax and interest payable as per the order issued under section 143(3) or 147 of the Act, as the case may be, has been paid within the period specified within the time limit specified in the Notice of Demand, and

     

    • No appeal has been filed against such order issued under section 143(3) or 147 of the Act

     

    Process for obtaining immunity

     

    An assessee should make an application within one month from the end of the month in which the order u/s 143(3) and 147 has been received. The form and manner in which the application is to be made is yet to be notified by CBDT.

     

    In case the AO is satisfied that all conditions mentioned above have been fulfilled by the Assessee, he may grant an order accepting such application to grant immunity u/s 270AA. The order shall be passed after the expiry of the period available to file appeal against the above mentioned orders.

     

    The order has to be passed by the AO within one month from the end of the month in which the application has been made by the assessee. Before passing any order, the assessee is to be given an opportunity of being heard.

     

    In case the penalty under section 270A has been imposed on account of misreporting, no immunity is available for the assessee under this section.

     

    It is important to note that where the application has been accepted by the AO and an order has been issued for the same, no appeal can be filed with the CIT(A) nor an application for revision can be made under section 264 against the order received u/s 143(3) or 147 of the Act.

     

    With the insertion of section 270A and section 270AA in the Act, the complexities in the imposition of penalty have been reduced to certain extent along with the quantum of penalty thus being beneficiary for all assessee.

    Tags:

    Over the last two decades, rising internet and mobile phone penetration has changed the way we communicate and do business. E-commerce is relatively a novel concept. It is, at present, heavily leaning on the internet and mobile phone revolution to fundamentally alter the way businesses reach their customers.

     

    While in countries such as the US and China, e-commerce has taken significant strides to achieve sales of over 150 billion USD in revenue, the industry in India is, still at its infancy. However over the past few years, the sector has grown by almost 35% CAGR from 3.8 billion USD in 2009 to an estimated 12.6 billion USD in 20131

     

    Industry studies by IAMA2 Indicate that online travel dominates the e-commerce industry with an estimated 70% of the market share. However, e-retail in both its forms; online retail and market place, has become the fastest-growing segment, increasing its share from 10% in 2009 toan estimated 18% in 20133 . Calculations based on industry benchmarks estimate that the number of parcel check-outs in e-commerce portals exceeded 100 million in 2013. However, this share represents a miniscule proportion (less than 1%) of India’s total retail market, but is poised for continued growth in the coming years. If this robust growth continues over the next few years, the size of the e-retail industry is poised to be 10 to 20 billion USD by 2017-2020. This growth is expected to be led by increased consumer-led purchases in durables and electronics, apparels and accessories, besides traditional products such as books and audio-visuals.

     

    Now India is getting ready for introduction of Goods and Service Tax law (GST), it can further fuel the growth of e-commerce

     

    With the above background the author has made an attempt to bring the extant FEMA - Foreign Direct Investment Regulations for e-commerce industry

     

    Brief Background:

     

    Before 2006                       FDI was prohibited into Retail Business

     

    10thFebruary, 2006        FDI in cash-and-carry (wholesale) brought under automatic route.

     

    Earlier, it was allowed under approval route. 51% FDI was permitted under Government approval into SBRT

     

    April, 2010                          Cash and Carry Whole Sale Trade is permitted subject to 25% intra group entities

     

    sales restriction

     

     

    1Source: Internet and Mobile Association of India research report

     

    2Source: IAMAI report titled ‘e-Commerce Rhetoric, Reality and Opportunity’

     

    3Source: PwC analysis

     

     

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    www.sbsandco.com/wiki

     

    July, 2010

    DIPP has issued second Discussion Paper FDI into MBRT

    7th December, 2011

    Union Cabinet Proposes 51% FDI in Multi-Brand Retail Trade

    10th January, 2012

    FDI into Single Brand Retail increased to 100% under Government route subject

     

    to stipulated Conditions

     

    14th September, 2012 The Government opens FDI into Multi-Brand Retail Trade (MBRT) upto 51% subject to stipulated conditions

     

    20th September, 2012 The Government clarifies the position that company having FDI cannot enter into e-commerce in both SBRT and MBRT

     

    January, 2014                    DIPP Releases a discussion paper on “E-Commerce in India, highlighting pros and

     

    cons of allowing FDI in the Sector”

     

    29th March, 2016           DIPP has issued Press Note No. 3/2016, whereby the definition of E-Commerce has been divided into Inventory based Model and Market based model.

     

    24th June, 2016                DIPP has issued Press Note No. 5/2016 for relaxing local sourcing norms for SBRT

     

    Extant FDI Regulations for FDI into E-Commerce:

     

    1. Relevant Definitions:

     

    • E-commerce- E-commerce means buying and selling of goods and services including digital products over digital & electronic network.

     

    • E-commerce entity- E-commerce entity means a company incorporated under the Companies Act, 1956 or the Companies Act, 2013 or a foreign company covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2(v)(iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.

     

    • Inventory based model of e-commerce- Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

     

    • Marketplace based model of e-commerce- Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

     

     

     

     

     

     

     

     

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    FDI into eCommerce

     

     

    SBS Wiki                                                                                                                                                      www.sbsandco.com/wiki

     

    1. Guidelines for Foreign Direct Investment on e-commerce sector:

     

    • 100% FDI under automatic route is permitted in marketplace model of e-commerce. (ii)FDI is not permitted in inventory based model of e-commerce.

     

    1. Other Conditions:

     

    • Digital & electronic network will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.

     

    • Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis.

     

    (iii)E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services.

     

    (iv)E-commerce entity providing a marketplace will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business into inventory based model.

     

    • An e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies.

     

    (vi)In marketplace model goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.

     

    • In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.

     

    (viii)In marketplace model, any warrantee/guarantee of goods and services sold will be responsibility of the seller.

     

    (ix)E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

     

    • Guidelines on cash and carry wholesale trading as given in para 5.2.15.1.2 of the Consolidated FDI Policy dated 7th June, 2016 will apply on B2B e-commerce.

     

     

     

     

     

     

     

     

     

     

     

     

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    FDI into eCommerce

     

     

    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    1. Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security and other conditionalties, sale of services through e-commerce will be under automatic route.

     

    Currently, eTravel comprises close to 70% of the total eCommerce market. eTailing, which comprises of online retail and online marketplaces, has become the fastest-growing segment in the larger market having grown at a CAGR of around 56% over 2009-2014. The size of the eTail market is pegged at 6 billion USD in 2015. Books, apparel and accessories and electronics are the largest selling products through eTailing, constituting around 80% of product distribution. 4

     

    The increasing use of smartphones, tablets and internet broadband and 3G/4G has led to developing a strong consumer base likely to increase further. This, combined with a larger number of homegrown eTail companies with their innovative business models has led to a robust eTail market in India rearing to expand at high speed.

     

    The ecommerce business may further give impetus once the GST Mechanism is put in place and the echo system is tuned to the new law.

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