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    In the recent past there has been constant conflict between the employers and the Employees Provident Fund Organisation (EPFO)enforcement authorities on the issue of ‘basic wages’ on which contributions are required to be made. In this paper an attempt is made to collate the information on the subject based on the various judgements of the High Courts and Supreme Court to create a perspective on the subject for future guidance and to initiate corrective measures to avoid possible litigation with the EPFO.


    Para 29 of the Employees’ Provident Funds Scheme, 1952 deals with the contributions payable by the employer. In accordance with the said para, the employer shall contribute twelve per cent of the basic wages, dearness allowance (including the cash value of any food concession) and retaining allowance (if any)payable to each employee to whom the Scheme applies.


    The EPF&MP Act has defined ‘Basic Wages’ as all emoluments which are earned by an employee while on duty or on leave or on holiday with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include –


    • The cash value of any food concession;


    • Any dearness allowance ( that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living ), house rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;


    • Any presents made by the employer.


    Most of the new economy establishments are devising a salary structure with Basic Salary, HRA and other allowances without the component of Dearness Allowance and contributions towards provident fund are being paid on the basic salary only on the assumption that all other allowances fall under the exclusion category as per the above definition.


    There has been conflict between the employers and EPF Organisation and hence these matters reached various Hon’ble High Courts in the country and some of the matters are pending before the Apex Court for its final verdict. Review of some important judgements are mentioned hereunder to understand the views of the judiciary in the matter.


    The Hon’ble Madhya Pradesh High Court Division Bench in the matter of Montage Enterprises Pvt Ltd Vs EPFO, Indore [2011 LLR 867] held that the conveyance allowance and Special Allowance will fall within the definition of ‘Basic Wages’. The rationale taken by the Hon’ble bench is that the Conveyance Allowance and Special Allowance is paid to all non-executive category of employees and it is not a case that some of the employees are not getting the same. It is a settled law that if such wages are paid universally, necessarily and ordinarily to all across the board, the same will fall under the definition of basic wages.


    In the year 2005,the Hon’ble Calcutta High Court Division Bench in the matter of RPFC (II), WB Vs.

    Vivekanadnda Vidya Mandir [2005 LLR 339] held that contributions are payable on Special Allowance

    when it is revised from time to time and the company has not adopted the system of payment of

    Dearness Allowance. The detailed view of the court in the matter is as under:


    In order to exclude any allowance from the purview of Section 6 which provides for liability to pay contribution based on basic wages, such allowance should fall under Clause (i), (ii) and (iii) of Section 2 (b) which enumerate allowances which are not included in the definition of ‘basic wages’. In the instant case the special allowance paid by the employer was not a retaining allowance, neither cash payment for food concession, nor over time allowance, house rent, bonus, commission, nor a present by employer and it did not satisfy any of the ingredients of Clauses (i) to (iii). Considering that the said allowance was paid in terms of contract of employment and was upwardly revised every 2 years and there is no system of payment of dearness allowance, it was held to be dearness allowance though described differently (Special Allowance) and therefore has to be treated as a part of pay and hence order passed by PF Authority that special allowance was subject to liability of contributions under section 6 of the Act is upheld.


    In the year 2004, the Hon’ble High Court of Gujarat in the matter of Gujarat Cypromet Ltd Vs APFC [2004 III CLR 485] also held that the contribution to Provident Fund made on basic wages includes all emoluments earned by the employee and allowances like lunch allowance, medical allowance, conveyance allowance etc., except those which are specifically excluded by the legislature, such as house rent allowance which is clearly excluded from the definition of basic wages by virtue of Section 2(b).


    It could be seen from the above the judiciary has interpreted the term ‘basic wages’ to include all allowances which are not specifically excluded. This interpretation has major cost implications to industry.


    The establishments have been engaging employees through contractors and agencies to meet the non-core activities of the industry such as Security, House Keeping etc., In addition to this, during the last one decade, the establishments started engaging manpower through outsourcing agencies to meet the work requirements without having long term liability. The number of such employees have increased substantially in the recent past. Most of these employees are paid applicable minimum wages. The outsourcing agencies in general bifurcate the minimum wages as basic wages, house rent allowance and conveyance allowance etc.,


    The E P F authorities have come to the view that the employers are bifurcating the minimum wages with a view to avoid payment of provident fund contributions and this led to litigation across India. The Hon’ble High Court of Andhra Pradesh issued a stay order on the circular issued by the PF Department on this issue. The Division Bench of Punjab & Haryana held that the definition of wages under Minimum Wages Act is inapplicable to that of basic wages under EPF Act.


    The decisions of the Hon’ble High Courts, which are discussed above and similar other matters are pending before the Hon’ble Supreme Court of India for disposal. We have to await the decision of the Apex Court on these matters.



    The courts have also held that certain category of payments does not fall under the ambit of basic wages and does not attract provident fund contributions. They are:-


    The Supreme Court held that the Production Bonus / Incentive when paid in a sliding scale with due regard to the production made by each workman then no contribution is payable. Similarly if the production bonus is paid on an average to all workmen on the basis of extra production made by them, then also, no contribution need be paid. [Daily Pratap Vs RPFC 1999 I LLJ 1]


    The Madras, Delhi and Gujarat High Courts held in various matters that the ad-hoc allowance and ad-hoc payments made to employees does not form part of ‘basic wages’ and hence no contributions are payable.


    The Hon’ble High Court of Bombay held that payment made in lieu of notice for terminating the contract of employment of a permanent employee does not constitute ‘basic wages’ and hence no contributions are payable. The Gujarat High Court in the matter of Swastik Textile Engineers Vs V M Rathod [2008 II LLJ 533] held that the back wages awarded by Court cannot be regarded as ‘basic wages’ payable to the employee and it is in the form of damages or compensation and hence provident fund contributions are not required to be paid.


    The Supreme Court held that Leave Encashment should not be taken as part of ‘basic wages’ and hence no provident fund contributions are payable.


    The Hon’ble High Court of Madras in the matter of Wipro Ltd Vs PO Employees PFAT [[2007 LLR 624] held that the canteen subsidy is not equivalent to cash value of food concession and hence provident fund contributions are not payable on canteen subsidy.


    With effect from 1.9.2014, employees drawing basic wages, dearness allowance and retaining allowance of Rs. 15,000/- or below are liable to be covered under the provident fund scheme. Once covered employee will continue to get covered even though his wages exceed Rs. 15,000/- per month. The Supreme Court in the matter of Marathwada Gramin Bank Karamchari Sanghatana Vs Management of Bank [2011 LLR 1130] held that employers need not pay provident fund contributions higher than the prescribed limited under the Act and Scheme that is now Rs. 15,000/-.


    Most of the new generation organisations are following the concept of cost to the company of the employee and the compensation package is decided on annualised basis. As the organisations are deciding the cost to the company, it has all the freedom to bifurcate the mutually agreed compensation package. Say for example the annual CTC is Rs. 2.90 Lacs, the monthly wages can be defined as Basic: Rs. 15,000/-, HRA 40% of the Basic Salary ie Rs. 6000/- and the employer Provident Fund contribution as Rs. 1800/-. Thus the monthly cost to the company is Rs. 22,800/- and annual cost is Rs. 2, 73, 600/-. In view of the recent amendment to the Payment of Bonus Act, the employee with basic wages of Rs. 15,000/-will also be covered under the Act. Hence the employee will be entitled to at least 8.33% of the basic wages earned in the financial year which translates to one month basic wage of Rs. 15,000/-. Thus the annual cost to the company will be Rs. 2, 88, 600/-.


    When the CTC offered to an employee is higher than the Rs. 2.9 lacs per annum, other allowances such as conveyance allowance, medical reimbursement etc., may be introduced.



    In case of employees whose monthly wages are minimum wages, it would be advisable to bifurcate the minimum wage as basic wages and house rent allowance only. For example if the minimum wage is Rs. 10,010/- per month the same may be bifurcated as Rs. 7150/- as basic wage and 40 percent of basic wage as HRA ie Rs. 2860/-. The cost to the company per annum would be Rs. 1, 43, 272/- which includes statutory minimum bonus of 8.33%, 12% of PF and 4.75% of ESI contributions.


    If the monthly wages are above minimum wage and below Rs. 22,800/- per month, that is the annual cost to the company is between Rs.1.45 lacs and Rs. 2.9 lacs, the applicable minimum may be taken as basic and the balance wage be bifurcated as HRA, Conveyance Allowance, Washing Allowance and Medical Reimbursement etc.,


    In the above mentioned cost to the company, the liability that may arise on account of Payment of Gratuity Act is not included.


    Of late the highly reputed and law abiding employers are also finding it difficult to convince the provident fund enforcement authorities the method followed by them in finalising the compensation package of the employees during the 7A proceedings and the matters are going against them. This has led to large scale litigation in the Tribunal and also depositing a part of the amount determined in the 7 A proceedings by the Qasi Judicial Authority by the company. The cost of litigation has also become substantial besides monitoring the maters under litigation which may become major liability on the company at a later date.


    In view of the above analysis, it is suggested that organisations may consider to restructure the salaries of the employees, as suggested above, to ensure litigation free statutory compliance under Provident Fund Act, Payment of Bonus Act and the Minimum Wages Act.








    Contributed by CS DVK Phanindar









    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill











    Section 123


    Substitution  of  sub-section  (3)of  Section  123  to  allow

    Welcome  amendment,  as  it



    Declaration of Dividend


    declaration and payment of interim dividend, during the

    allows  a  new  criteria  for





    period from closure of financial year till date of Annual

    declaration of Interim Dividend,





    General Meeting for a financial year, and out of the profits of

    and  clarity  on  the  rate  of





    the said year; or from the surplus in the profit and loss

    dividend  in  the  absence  of





    account; or out of profits generated in the financial year till






    the quarter preceding the date of declaration of the interim












    In addition to the above, the substitution also prescribes the






    rate at which the interim dividend can be declared, in case of






    loss is incurred during the financial year.










    Section  129  -Financial


    Substitution of sub-section (3) of section 129, in connection

    Amendment/inclusion to





    with preparation of Consolidated Financial Statements in the

    remove ambiguity.





    same form and manner as that of its own in accordance with






    applicable accounting standards, for associate companies






    also in addition to subsidiary.










    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill












    Section – 130 –



    Amendment to sub-section (1) of Section  130, so as to

    Welcome amendment, as there






    provide that in addition to authorities already specified in the

    is  a  increased  scope  of



    on Court’s






    section, any other person concerned shall be given notice

    authorities, to whom notice as



    Orders (Section notified




    before passing an order for re-opening of accounts.

    to re-opening of accounts is to



    w i t h  e f f e c t  f r o m








    be given by the Tribunal; and








    Insertion of a new sub-section (3) to provide that no order







    also  giving  the  periods  for








    shall be made for re-opening of books of account relating to a

    which order can be given by








    period  earlier  than  eight  financial  years  immediately

    Tribunal,  for  re-opening  of








    preceding the current financial year, unless there is a specific









    direction under section 128(5) [i.e., maintenance of books of









    accounts] from the Central Government for longer period.










    Section 132- Constitution


    Amendment (reduction) of the minimum penalty that can be

    Welcome amendment.



    of  National




    levied by way of an order by NFRA on CA Firms, if professional








    or other misconduct is proved from Rs. 10 Lakhs to Rs.5 Lakhs.




    (NFRA). (Section yet to






    be notified)

















    Section 134



    Substitution of sub- section (1)of section 134, with a new

    Welcome amendment as the




    &  Board


    section, thereby removing the requirement that the CEO signing

    proposed amendments reduce








    the financials shall be a Director, and accordingly, a CEO shall

    the reporting requirements in








    now sign financial statements irrespective of whether he is a

    the Board Report.








    director or not.









    Amendments to sub-section (3) of section 134 seeks to modify









    the disclosure requirements with respect to (a) removal of the









    requirement of attaching the extract of annual return to the









    Board report, and just mentioning the web-address, if any,









    where the extract of annual return is placed is to be mentioned













    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill















    (b)amendment to clause (p) of the sub-section relating to







    statement  on  annual  performance  of  the  Board,  its







    committees and independent directors by the companies to







    which the provision is applicable(c)mentioning only the salient







    features of the Remuneration and nomination policy (Section







    178) and CSR policy( Section 135) in the Board Report, and







    providing the web-address where  the complete policy is














    Insertion of a new section 3A, which empowers the Central







    Government to prescribeabridged Board's report for small







    company and one person company.












    Section - 135 – Corporate


    Amendment to sub-section (1) of section 135,with regard to

    Amendment  to




    Social Responsibility.


    the period for which the criteria for applicability of CSR to a



    ambiguity  and

    ease  of





    Company (i.e., Turnover, Net worth & Net Profit) are to be seen










    from “any financialyear” to “immediately preceding financial



















    Insertion of a proviso to sub-section (1) regarding composition







    of CSRcommittee with two or more directors, by a company







    which is not required to appointindependent director under







    section 149.







    Amendment of Clause (a)  in sub-section (3) with regard to







    areas in which CSR activity can be undertaken "as specified in







    Schedule VII", the words and figures "in areas or subject,







    specified in Schedule VII", thereby providing more scope in







    the CSR activities.












    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill















    Amendment to the explanation given in sub-section (5) earlier







    with regard to “Average Net profit”, now changed to “Net







    profit”, and further to empower the CentralGovernment to







    prescribe sums which shall not be included for calculating 'net







    profit' of a Company for the purpose of section 135.










    Section  - 136 – Right of


    Amendment to sub-section (1) of section 136 by inserting a new

    Welcome amendment.




    to  copies  of


    proviso to provide that copies of audited financial statements




    a u d i t e d

    f i n a n c i a l


    and other documents can be sent at shorter notice if 95 % of






    members entitled to vote at the meeting agree for the same;







    and  accordingly  aligning  the  existing  provisos,  after  the














    Substituting the existing 4th proviso to Sub-section (1) with new







    proviso,   to rationalise the requirements with respect to







    financial statements of foreign subsidiaries of a listed company







    subject to conditions.







    Insertion of a proviso to Sub-section (2) thereby companies







    having subsidiaries to provide financials of the subsidiary for







    inspection by the member who asks for it.











    Section  –  137  –  Copy


    Insertion of a new proviso after the existing 4th proviso to sub-

    Welcome amendment.


    section (1)   so as to enable filing of unaudited financial









    tobe filed with


    statements by listed companies, of their foreign subsidiaries







    which is not required to get its accounts audited, under the laws







    of the country of incorporation.  The filing of unaudited







    financial statements are to be accompanied by a declaration by







    the listed company, to the above effect.











    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended



    Amendment Bill
















    S e c t i o n

    1 3 9


    Omission  of  the  first  proviso  to  sub-section  (1),  i.e.,

    Welcome amendment.



    Appointment of Auditors


    ratification of the appointment of auditors by the members at









    every AGM.













    S e c t i o n

    1 4 0



    Amendment to sub-section (3) of section 140 to reduce the



    penalty/penalty  criteria,  withrespect  to  failure  to  file










    auditor and giving of



    resignation form (ADT-3) by auditor to the Registrar concerned








    and also to the Comptroller and Auditor General (CAG) for the









    applicable companies, from  the existing  “Rs.50,000/-“ to









    “Rs.50,000/-or  the remuneration of auditors whichever is






















    Section – 141 - Eligibility,


    Insertion of an explanation to clause (d) of sub-section (3) of

    Amendment to remove


    section 141, to clarify the meaning of relative with reference to


    Qualifications and



    eligibility for appointment of auditors.




    disqualifications of

















    Substitution of the existing clause (i) of sub-section (3) along

















    with explanation, for harmonisation with section 144 in respect









    of providing of certain non-audit services to holding or









    subsidiary company of a company.













    Section 143 - Powers and


    Amendment to sub-section (1) of section 143 of the Act to

    Amendment to remove


    include   associate  companies  in  addition  to  subsidiary




    duties  of

    auditors  and




    companies with respect to right of auditors to have access to




    auditing standards.








    accounts and records for the purpose of consolidation.

















    Amendment to clause (i) of sub-section (3) to provide that









    auditors shall report on internal financial control systems









    relating to financial statements.









    Amendment to sub-section (14) to replace the term “cost









    accountant in practice” with “cost accountant”.




    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill











    Section 148 - Central


    Amendment to substitute the words 'cost accountant in

    Amendment to remove



    Government to specify


    practice' with the words 'cost accountant' in sub-section (3)




    audit of items of cost in




    & (5) of Section 148 and also to substitute the words 'Institute




    respect of certain


    of Cost and Works Accountants of India' with the words










    'Institute of Cost Accountants of India',in the explanation to











    Sub-section (3) of Section 148.










    Section 149 -


    Amendment to Sub-section (3) of Section 149, relating to the

    Welcome  Amendment  to





    requirement of resident director, the amendment proposed

    remove ambiguity and ease of





    requires that “every company shall have at least one director






    who stays in India for a total period of not less than 182 days






    during the financial year”instead of the existing requirement






    of “shall have at least one director who has stayed in India for






    a total period of not less than 182 days in the previous






    calendar year.”






    Further the amendment proposes that in case of a newly






    incorporated company the requirement under this sub-section






    shall apply proportionately at the end of the financial year in






    which it is incorporated.






    Amendment to clauses in sub-section (6) of Section 149, to






    specify limits with respect to pecuniary relationship of a






    director with respect to eligibility of a director to be appointed






    as an independent director. It also seeks to specify the scope of






    restriction on pecuniary relationship entered into by a relative.













    Section 66B provides for levy of service tax on services provided or agreed to be provided. On the other hand, we have Rule 5 of the Point of Taxation Rules, 2011(POT Rules) which can extend its arms to tax even those services which are provided prior to effective date of levy but the amount is received afterwards. Swacch Bharat Cess (SBC) and Krishi Kalyan Cess(KKC) are two levies that are newly introduced in recent past. A lot of confusion is prevailing in the trade whether Rule 5 can extend its arms to tax services already provided. Recently a notification is issued to exempt KKC for all services provided and invoices issued on or before 31st May, 2016.Is it required to really exempt these services by Notification? What is the rationale in extending this exemption only for KKC and not so when SBC is introduced? In this backdrop, an attempt is made to really under the nature of levy under section 66B and validity of Rule 5 in light the said section.


    Rule 5 of the POT Rules and its ramifications on literal interpretation:


    Rule 5 of the POT Rules is reproduced as under;


    “Where a service is taxed for the first time, then,-


    • no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;


    • no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time.


    Explanation 1.- This rule shall apply mutatis mutandis in case of new levy on services.


    Explanation 2.- New levy or tax shall be payable on all the cases other than specified above (inserted recently with effect from 01.03.2016)”


    In terms of the above rule read with newly inserted explanation 2, new levy is applicable except in the two circumstances stated therein i.e.


    1. invoice issued and payment received before the effective date of new levy and


    1. Payment is received before the effective date of new levy and invoice is issued within 15 days after the levy became effective.



    Let us consider the impact of this rule assuming a new levy is effective from 01st June, 2016 with the following examples;


    1. The service is completed by May 15th, 2016 and invoice is issued on June 01st 2016. Payment for the service is received on June 20th, 2016. In terms of Rule 5,new levy is applicable as payment and invoice are after the effective date of new levy.


    1. Advance received in the month of May 15th and invoice raised immediately on the same date. But service provision is started on 15th of June, 2016 and completed by 30th of June 2016. As first condition is satisfied, new levy is not applicable though the service is provided after the levy coming into force.


    • Service is provided in December 2015 and invoice is raised in the same month. Payment is received on 16th June 2016. The service is provided and invoice issued at the time when the levy of service tax is never contemplated. On plain reading of Rule 5, as payment is not yet received, it can be interpreted that new levy is applicable on all outstanding debtors as on 31st May, 2016 which gets realized on or after 01.06.2016.


    It is because of this reason, notification 35/2016-ST dated 23.06.2016 is issued to exempt from KKC all the services which are provided on or before 31.05.2016 and invoice is issued to that extent. But the whole issue raises the following questions;


    1. What would be the position for cases, where invoices are not yet issued but services are provided before 31.05.2016?


    1. Is it really required to exempt KKC by a notification on services provided upto 31.05.2016 i.e. services provided before the effective date of levy?


    1. How logical/prudent it is in not demanding anytax on services provided after the effective date of levy just because payment is received in advance before the effective date of levy?


    1. What would be the position in case of SBC which is introduced with effect from 15.11.2015?


    In order to find solutions to the above posers, it is pertinent to understand the moot question i.e. what is the taxable event under Finance Act, 1994 to attract service tax?


    Understanding Taxable Event under Finance Act, 1994:


    Every taxing statute contains a section which provides for event upon satisfaction of which the respective tax becomes payable by authority of law. This is popularly called charging section and the event is said to be taxable event. The taxable event for excise duty is manufacture of goods and for VAT, it is sale of goods.


    Thus in a case where taxable event is not satisfied or the charging section (Law) is not in force at the time when the taxable event occurred, then no tax is leviable as per the said taxing statute. In this regard, let us now examine the charging section under Finance Act, 1994. Under erstwhile positive based taxation, the charging section is section 65(105) of the Finance Act, 1994 and under the present negative list based taxation regime, it is section 66B. The same are reproduced as under;





    Section 66B effective from 01.07.2012


    Section 65(105) upto 30.06.2012








    There shall be levied a tax (hereinafter referred to as the


    "taxable  service"  means  any  service

    service tax) at the rate of fourteen per cent on the value of

    provided or to be provided….

    all services, other than those services specified in the





    negative list, provided or agreed to be provided in the












    taxable territory by one person to another and collected





    in such manner as may be prescribed













    On plain reading of the above two charging sections under Finance Act, 1994, both the sections are using more or less similar phrase ‘provided or agreed to be provided’ and ‘provided or to be provided’. Even upon strict interpretation of provisions, there is no difference between the two. Thus the judicial precedents on new levy of service tax under erstwhile regime can also be considered for determining the chargeable event under the current regime.


    Coming to interpretation of charging section, there are two phrases in the charging section. One is ‘provided’ and the other one is ‘to be provided’ or ‘agreed to be provided’. The first phrase ‘service is provided’ which means that provision of service is completed. The second phrase ‘to be provided’ is added in levy section after the words ‘provided’ during the Finance Budget, 2005. It has been then clarified that the objective of the amendment is to collect service tax on the advances received for the services to be provided in future.


    Though the charging section is amended to tax the advances received immediately without waiting for the services to be completed, it is just a conditional collection of tax amount and in case where service provider failed to provide the service, the same is required to be returned. Without the service being provided, question of collection of service tax do not arise. This legislative intent is clearly evident from provisions of Rule 6(3) of the Service Tax Rules, 2004 as reproduced below;


    “Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason, or where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract, the assessee may take the credit of such excess service tax paid by him, if the assessee.-


    • has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or


    • has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued”


    In view of the above rule, assesse is entitled to take credit of service tax amount paid on advances received if the service is not provided either wholly or partly. In case where it is not practicable for him to take credit of service tax and adjust against future liabilities, he can claim refund also. The principle that when no service is provided eventually, Government is not entitled to retain service tax paid on advance receipts has been upheld by Mumbai tribunal in the case of Datamatics Software P Ltd vs. CST, 2014-35-CESTAT-Mum.



    Thus upon plain reading of charging section and other provisions of Finance Act, 1994 and the rules made thereunder, it is very clear that the taxable event is the provision of service. Though service tax is collected by Government immediately upon receipt of advance, it is only a conditional collection. Only upon completion of service, the levy gets crystalised thereby Government gets the right to unconditionally retain such service tax. The question of taxable event and the issue relating to liability to pay service tax in case of new levy are considered in various judicial forums. Some of them are reproduced hereunder;


    1. In the case of Association of Leasing & Financial Service Companies vs. UOI, 2010(20)S.T.R417(SC) wherein it was held by Supreme Court that the taxable event for service tax is the rendition of service.


    1. In the case of CCE vs. Krishna Coaching Institute, 2009(014)STR0018(Tri-Del) wherein payments were received in advance for the services yet to be rendered. Service tax levy was in force at the time when service is rendered. it was held “The respondent has no vested right to collect in advance the fees for conducting the training programme to be conducted after 1-7-2003. The main obligation to pay tax arises out of Finance Act, 2003 and the service has been brought into tax nets by Notification No. 7/2003-S.T. dated 20-6-03 with effect from 1-7-03. This main obligation cannot be altered by subsidiary obligation like taking registration as an assessee, issuing invoices, filing returns etc. Even if the amount is collected in advance, it is not impracticable to raise an invoice indicating the service charges (noting that the amount already stands paid) and indicating service tax payable.”


    1. In the case of British Airways PLC vs. CST, 2013(29)STR177(Tri-Del) wherein the appellant contended that as levy was not in force at the time when tickets are sold, service tax payment do not arise though services are provided after the levy i.e. 01.05.2016. It was held that—“the levy of Service Tax has no connection with the receipt of payment and the service tax is required to be paid when the service is provided. Since all tickets though sold prior to 1-5-2006 journey was undertaken on and after 1-5-2006 and at the time of journey undertaken the levy of service tax on the amount of taxable service was in force and, therefore, the appellant is liable to pay the service tax on the air tickets sold by them prior to 1-5-2006 also.”


    In view of the above analysis, in the opinion of paper writer the taxable event under Section 66B or Section 65(105) is the rendition of service. At the time when service is provided, if the levy is in force, service tax gets attracted. It is not relevant whether or not money is received before or after the levy is in force. The said principle is in complete contrast to Rule 5 of POT Rules which provides that levy is applicable and tax is payable in all cases except in cases where amounts for the services are received prior to the effective date of levy. No importance is given to rendition of service.


    Is Rule 5 a case of excess utilisation of delegation power?


    Point of Taxation Rules, 2011 is introduced with effect from 01.04.2011 with two fold purpose i.e. to determine the time when service tax is required to be paid as provided under Rule 6(1) of the Service Tax Rules, 1994 and also to provide for the rate at which such service tax is to be paid as provided under sub-section 2 of section 67A of Finance Act, 1994.



    Thus the power extended to Central Government to frame the rules is to achieve the above stated objectives and not to make the levy applicable to services provided much before the charging section is introduced or to exempt services for which payment is made before levy but services are provided after the levy. Further no such express power is conferred in terms of section 94 of Finance Act, 1994 which provides the rule making power to Central Government. Thus in the opinion of paper writer Rule 5 of the POT Rules is clearly traversing the charging section and is excess utilisation of its delegated power under the guising prescribing the time when service tax is to be paid.




    Before parting, it is very clear from the fact of issuance of notification to exempt KKC that the rule is having a direct conflict with the charging section. Otherwise there is no reason to exempt them from KKC. Similar exemption is not provided with SBC is introduced. It seems that Government has identified the flaw but wanted to give just a temporary solution to the problem without thinking of amending or withdrawing the Rule 5. Further certain assesses who receives advances before the levy is introduced but services are provided subsequently would get unjust advantage as they need not have to pay service tax by virtue of Rule 5. Thus arbitrary and indifferent treatment prevails amongst the service providers and continues every time when a new levy is introduced. Let us hope that sooner or later the age-old canon(taxable event is rendition of service) is endured clearing the paradox on applicability of service tax in case of new levy.


    Legal History:


    Section 90 of the Income Tax Act, 1961(Act) empowers the Central Government to enter into agreement (Tax Treaties-aka DTAA) with Government of any country outside India or specified territory outside India for


    1. granting relief in respect of doubly taxed income or income tax chargeable under this Act and under the corresponding law in force in that country or specified territory, to promote mutual economic relations, trade and investment or


    1. for avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory or


    • for exchange of information for prevention of evasion or avoidance of income tax chargeable under this Act or under the corresponding law in force in that country or specified territory or


    1. for recovery of income tax under this Act and under the corresponding law in force in that country or specified territory as the case may be


    There are two modes of granting relief under DTAA. They are:


    • Exemption Method and
    • Tax Credit Method.


    Exemption Method:


    Under exemption method, a particular income is taxed in one of the two countries.


    Tax Credit Method:


    Under tax credit method, an income is taxable in both the countries in accordance with their respective tax laws read with the DTAA. However, the country of residence of the taxpayer allows him credit for the tax charged thereon in the country of source against the tax charged on such income in the country of residence.


    Agreement vs DTAA:


    In case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of the Act and can be enforced by the appellate authorities and the court.





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    Issue 1:


    Whether income be exempted from tax in India if tax was paid outside India at a higher rate?


    This issue was answered in case of ITO vs BESCO Engineering & Services (P) Ltd - ITAT KOLKATA.




    The Assessee is an Indian Company made equity investment in a Brazilian Company (Foreign Company). The Indian Company received dividend from the Foreign Company. Assessing Officer taxed the dividend on the contention that dividend received from foreign company is not exempt under section 10(34) of the Act.


    Assessee has contended that the foreign company has already paid tax @34% on its profits which is in excess of the rate prescribed in paragraph 2 of Article 10 of DTAA with Brazil (i.e.,15%). However, Assessing Officer has taxed the dividend without referring to provisions of DTAA.


    Assessee filed an appeal against the order of Assessing Officer before CIT(A). Order of the Assessing Officer was set aside by CIT (A). Revenue filed an appeal against the order of CIT(A).


    Ruling by ITAT:


    As per paragraph 3 of Article 23 of DTAA between India and Brazil where a company which is resident of a contracting state derives dividend in accordance with the provisions of paragraph 21 of Article 10 may be taxed in other contracting state, the first mentioned State shall exempt such dividends from tax.


    Withholding tax rates for dividends is 0% as per Brazilian Tax Law and also as per DTAA if dividend is paid to non-residents. Hence the appeal of the revenue dismissed.


    Issue 2:


    Is Tax credit available in respect of deemed tax foregone?


    This issue was answered in KrishakBharati Cooperative Ltd vs Asst. CIT - ITAT DELHI




    The Assessee held 25% shares in a foreign company registered in Oman. Assessee has received dividend income from the foreign company which was exempt from tax in Oman by virtue of Article 8(bis) of Omanian Tax Laws. The said dividend income was brought to tax in India as per the Act. The Assessing Officer allowed tax credit with respect to dividend income.




    Subsequently Principal CIT revised the order of the Assessing Officer and disallowed the tax credit so claimed by the assessee. The CIT was of the view that as the assessee did not pay any tax in Oman owning to exemption, no foreign tax credit was available to it.


    The aggrieved assessee filed an appeal against the order of the CIT passed u/s 263.


    Ruling by ITAT:


    Article 25(4) of DTAA between India and Oman lays down that tax payable shall deemed to include the tax which would have been payable but for tax incentive granted under the tax laws of the contracting state and which are designed to promote economic developments.


    The exemption for dividend income was granted in accordance with the article 8(bis) and such exemption was granted with the objective of promoting economic developments within Oman by attracting investments.


    The Order of CIT quashed and appeal of the assessee allowed.


    Note: Such credit was allowed by the Assessing Officer in the past also. When there is no change in facts and the relevant provisions of the law the principle of consistency of approach should be followed.


    Take away


    One just has to read DTAA with different countries separately. Each DTAA has similarities and dissimilarities. We have to go through each DTAA and analyze the issue before drawing conclusions.


    Today majority of the Indians are reaping the benefit of Industrial Liberalization and Globalization of the Indian economy. The then Prime Minister Mr. P V Narasimha Rao with the guidance and support of the then Finance Minister Mr. Manmohan Singh, has made paradigm shift in Industrial Licensing policy, Public Sector Policy, Foreign Investment & Foreign Technology agreement Regulations and Competition Laws (erstwhile MRTP Act) vide new Industrial Policy which was made effective from July 25, 1991.


    The author, in commemoration of Silver Jubilee Anniversary of Industrial Liberalization in 1991, has made an attempt to bring the fine details of FDI Inflows and its impact in India post announcement of New Industrial Policy, 1991 (NIP) and also the details of recent FDI regime liberalization.


    Government of India has introduced key reforms to the FDI policy, to help attract further investments. To achieve this goal, some measures such as the introduction of the composite cap that does away with the distinction between FDI and Foreign Portfolio Investment (FPI) and liberalizing FDI norms in 15 major sectors have been taken. Higher FDI limits would encourage more investment.


    FDI in India has started picking up, which stood at USD16.63 billion in FY2015-16, about 13 per cent higher than 14.69 billion in FY2014-15.


    Trends in India’s FDI Inflows, 1996 - 2016




















    Recent key changes of FDI Regulations


    I .      Press Note No. 5/2016, dated 24th June, 2016


    The Union government on 20th June, 2016 has announced radical changes in FDI Regulations and the said changes have been made effective by virtue of Press Note No. 5/2016, by which the following major changes have been made in FDI regulations to give impetus for employment and job creation and also for enhancing the FDI flows into India




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    1. Permission of 100% FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India.


    1. Foreign investment beyond 49% has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. The condition of access to ‘state-of-art’ technology in the country has been done away with.


    1. FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959.


    1. 100% FDI under automatic route is permitted for Broadcasting Carriage Services (Mobile TV, DTH, Teleports, Cable Networks and HITS)


    1. In case of Pharmaceutical Sector, 74% FDI in Brownfield Projects is made under automatic route. FDI beyond 74% for Brownfield Projects is under government route. The Greenfield Investment is permitted upto 100% under automatic route


    1. Civil Aviation Sector is also permitted upto 100% FDI in both Brownfield Projects and the Greenfield projects


    1. In case of Private Security Agencies, the FDI is permitted upto 49% under automatic route and under government approval beyond 49% and upto 74%. However Section 6 of the Private Security Agencies (Regulation) Act, 2005 need to be amended to accommodate the above FDI changes.


    1. In case of Animal Husbandry, the condition related to “Controlled Conditions” has been done away


    1. In case of Single Brand Retail Trading (SBRT), the condition related to 30% local sourcing of goods is relaxed for 3 years of establishment and may relax upto 5 years of establishment with the government approval. FDI into SBRT upto 49% is permitted under automatic route and under government route for FDI beyond 49%


    1. Press Note No. 12/2015, dated 24-11-2015


    1. The Government has permitted the 100% FDI into Manufacturing Companies (Subject to the sectoral caps and conditions stated for selective list of industries) under automatic route.


    1. FDI into LLP is almost made at par with Companies thereby paving the way to use LLP structure of business for most of the business activities.


    1. For swapping of shares (i.e., Exchange of Shares of the Indian Company between the Resident Investors and the Foreign Investors with Shares of Foreign Entity), no approval of Government is required, if the transaction otherwise falls under automatic route.


    1. Incorporated Foreign entities (viz., Companies, Partnership firms and Trusts) controlled by the NRIs is equated with the NRIs and can avail all the benefits of NRIs.


    1. The Limits for approval of FIPB has been enhanced from Rs. 2,000 Crores to Rs. 5,000 Crores, thereby the cases to be referred to Cabinet Committee on Economic Affairs (CCEA) will be reduced.


    1. Many plantation activities (coffee, rubber, cardamom, palm oil, olive oil) have been brought under automatic route, over and above the tea plantation activities.


    1. Defence production has been opened for FDI upto 49%, subject to the conditions stated therein.


    1. In case of Construction and Development Activities, the condition relating to minimum project size and minimum investment size has been done away and necessary changes have been brought in other related conditions.


    1. Many changes have been introduced in Single Brand Retail Trading



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    FDI Inflows - India's Trajectory



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    Post the above key changes, now very few sectors/industries have been left over for approval from the Government for FDI investments.


    The NIP followed with the above key recent changes are further bolstered with the key reforms of the Government viz., “Make in India” and “Ease of doing Business”


    Post the Britain Exit Referendum (Brexit) for exit from EU, India is poised to play key role in the World Economy and is becoming silver line in the dark clouds of economic turmoil across the global economies and many countries will select India as a favorable FDI destination.



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