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    The Foreign Contribution (Regulation) Act, 2010 (for brevity ‘FC(R)A’) has been introduced with an objective to regulate the acceptance and utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit the acceptance and utilization of foreign contribution or foreign hospitality for activities detrimental to the national interest. FC(R)A is administered by Ministry of Home Affairs (for brevity ‘MHA’) under Government of India (for brevity ‘GoI’). The FC(R)A has replaced the earlier Foreign Contribution (Regulation) Act, 1976 and is effective from 1st May, 2011

    The recent amendments carried on to the FC(R)A clearly suggest that MHA is closely scrutinizing the receipts and utilization of foreign contributions particularly which are detrimental to national interest. Further, as per the information available on www.fcraonline.nic.in a total of 14,000 entities registration has been cancelled by MHA for violating the provisions of FC(R)A. Hence, in light of the tough regulations, it is very important for individuals, associations or companies who are in receipt of foreign contribution to be updated with the changes made to FC(R)A, more specifically areas pertaining to the registrations and filing of returns.

    The aim of this article is to dwell upon the registration (initial and renewal) and filing requirements under FC(R)A so the trade can be abreast of the procedures.

    Registration & Related Matters:

    Section 11 to Section 16 of FC(R)A read with Rules made thereunder deals with registration and related matters under the Act.

    Persons required to obtain registration under FC(R)A:

    Every person having a definite cultural, economic, educational, religious or social programme shall not accept foreign contribution unless such person is registered with central government. The term ‘person’ is defined vide Section 2(m) of the Act which includes individual, association, Hindu undivided family and a company registered under Section 8 of the Companies Act, 2013 (Corresponding Section 25 of Companies Act, 1956). It is to be noted that the definition of ‘person’ is laid in an inclusive manner, which make the definition of ‘person’ wider in scope. Hence, apart from what is stated above as ‘person’ all other general meaning of ‘person’ shall be falling under the ambit of the Act.

    Status of the registrations under Foreign Contribution (Regulation) Act, 1976:

    It is known that till the FC(R)A, 2010 was enforced, the FC(R), 1976 was operative. Associations which have obtained registration under 1976 Act, will also be treated as registered under the 2010 Act and such registration shall be valid till 5 years from the date on which Section 11 was made effective. Hence, all persons who has obtained registration under the old act shall apply for renewal on or before 31.10.2015 (6 months prior to the lapse of registration in case of One year projects).

    History of past operations for applying for registration:

    FC(R)A has not specified any time limit for applying for registration under Section 11. Even the rules has not provided for the same. As per Q2 of FAQs hosted on the https://fcraonline.nic.in website, it is required that any person having existence for atleast three years can apply for registration under Section 11 despite of the fact that the law nowhere states the same.

    Procedure for obtaining registration:

    • Person intending to obtain registration shall make an online application vide Form FC-3 by filling all the required information;
    • The applicant shall upload the singed or digitally signed application along with all the documents specified vide FC-3;
    • The applicant shall pay a fee of Rs 2,000/- for obtaining registration under the Act.
    • The applicant shall open an exclusive bank account for receipt and utilization of the foreign contribution.
    • Though not specifically mentioned, it is also advisable to send a hard copy of the application and other related documents to the central government apart from the online application.

    Grant of Certificate of Registration:

    Section 12 of the Act deals with provisions relating to grant of the registration. The central government if it deems that the application for registration is not in conformity with the rules made thereunder, may reject the application. In case the application for grant of registrations is rejected for any reason, the applicant shall wait for six months from the date of rejection and apply freshly for registrations vide Form FC-3 and by complying with the rules made thereunder.

     

    If the application is found to be good in all aspects, the central government after making such inquiry shall grant the certificate of registration within 90 days from the date of receipt of the application. If the central government fails to grant the registration within 90 days, it shall communicate the reasons to the applicant. Further, any person shall not be eligible for grant of certificate, if his certificate is suspended as on the date of making application. Also if there is any non-compliance of the provisions of FC(R)A, then such person is not eligible for grant of registration.

    Validity of Certificate of Registration:

    The certificate of registration is not a permanent one as it used to be under the 1976 Act. As per the 2010 Act, the certificate of registration is valid only for a period of 5 years from the date of its issue.

    Renewal of Certificate of Registration:

     

    The certificate of registration shall be renewed after the expiry of 5 years from the date of issue. Every person applying for such renewal has to make an application vide Form FC-3 , six months before the date of expiry of certificate of registration. Every applicant has to pay a fee of Rs 500/- for renewal of certificate of registration.

    If any person fails to renew his certificate of registration, the registration granted under Section 11 shall cease from the date of completion of 5 years and an application for fresh registration has to be made in terms of Section 11 read with Rule 9 of the FC(R)A Rules, 2011.

    However, if the person can prove sufficient grounds that failure to renew the registration within stipulated time, the central government can accept such application but not later than 4 months from the date of expiry of the original registration.

    The central government normally renews the certificate within 90 days from the date of receipt of application for renewal. If the central government does not renew within such time period, it shall communicate the reasons to the applicant. The central government is empowered to refuse the renewal application, if it thinks such person has violated the provisions of the act or rules. It is to be specifically understood that in case of not granting such registration within 90 days or there is no communication for rejection of the application, it cannot be deemed that the registrations is granted.

    Further, the registrations for which renewal is sought on the ground that 5 years has been exhausted from the date of certificate of registration, the renewal date has been extended to 15.03.2016 in terms of F. No II 21022/23(76)/2015- FCRA III dated 14. 12.2015.

    Suspension of Certificate of Registration:

    Section 13 deals with provisions relating to suspension of certificate of registration issued under Section 12 of the Act. The central government while considering cancellation of registration under Section 14, may after recording the reasons in writing, suspend the certificate of registration for a period not exceeding 180 days. The reasons for such suspension shall be issued by way of order in writing to the registration holder. However, a prior notice to registration holder regarding the suspension is not necessary.

    A person whose certificate has been suspended shall not be eligible to receive foreign contribution during the said period of suspension. In cases of hardship, the central government may allow the receipt of foreign contribution subject to such terms and conditions.

    Further, the person whose certificate has been suspended can only utilize only 25% of the unspent foreign contribution subject to prior permission from the central government on a plain paper. The remaining 75% of unspent money can only be spent post revocation of suspension order.

    Cancellation of Certificate of Registration:

    The central government may cancel the certificate of registration after making necessary inquiry and deems that any of the conditions mentioned under Section 14 are fit it to the case. However, the central government has to record its reasons in writing and grant an opportunity for hearing for the registration holder before the order for cancellation is made.

    Any person whose certificate of registration is cancelled under Section 14 of the Act, cannot apply for registration or for grant of prior permission for a period of 3 years from the date of cancellation of certificate.

    Intimation to Central Government vide Returns:

    Filing of Annual Returns:

     

    Every person registered under Section 12 of the Act, shall intimate central government or such authority prescribed by central government, the amount of foreign contribution received by it, the source from which foreign contribution is received and the manner and purposes for which such foreign contribution

    Documents and Forms to be filed with FC-4:

    Rule 17 of the FC(R)A Rules prescribe the details to be furnished along with FC-4, which are detailed as under:

    Ø    Income and Expenditure Statement, Receipt and Payment Account and Balance sheet for the

    stst

    period starting from 1 April to 31 March of succeeding year.

    Ø    FC-4 should also reflect the foreign contribution received in the exclusive bank account and shall

    also include the details in respect of funds transferred to another bank accounts for utilization.

    Ø    If the foreign contribution relates to only articles, the intimation shall be submitted in Form FC-1;

    Ø    If the foreign contribution relates to only foreign securities, the intimation shall be submitted in

    Form FC-1;

    Ø    FC-4 or FC-1, as the case may be, shall be duly certified by a chartered accountant;

    Ø      FC-4 shall be accompanied by the bank statement of the exclusive account maintained, duly certified by an officer of such bank;

    Ø    The accounting statements referred above shall be preserved for a period of 6 years.

    Ø    If the person has not received any foreign contribution in such financial year, even then a Nil report

    has to be submitted. Further, if the person has not received or utilized any foreign contribution

    during a financial year, it shall not be required to obtain a certificate from chartered accountant or

    income and expenditure statement or receipt and payment account or balance sheet with FC-4.

    Due Date for submission of FC-4:

    FC-4 has to be submitted within 9 months from the closure of the financial year. That is to say, for the

    st   st          st

    period 1 April, 2014 to 31 March, 2015, the Form FC-4 shall be filed by 31 December, 2015. Now FC-4 has to mandatorily filed electronically as per the procedure laid down.

    However, due to launch of the new website https://fcraonline.nic.in which facilitates filing of the Form st FC-4 online along with scanned copies of such details required,___________________ the due date has been extended from 31

    th       3          th

    December, 2015 to 15 March, 2016 . Hence, FC-4 for FY 14-15 can be filed till 15 March, 2016.

    Introduction:

    Services provided by employee to employer in the course of or in relation to his employment are excluded from the definition of ‘Service’ as given under Section 65B(44) of Finance Act, 1994. Hence no service tax is applicable on activities performed by employees to employers in course of employment. However the current article highlights the issues involved regarding applicability of service tax on any services extended by employer to employee in the course of or in relation to such employment. In corporate sector especially in IT Industry, it is the usual practice for the employer to extend a variety of services to employees. The following are widely provided such services.

    • Canteen facility: This service includes supply of food at the work place for a concessional rate to employee.
    • Access to sports/ gymnasium/cultural facilities: Many a times these services are provided at work place by employers without charging any amounts from employees as part of staff welfare. In such cases, no service is involved as there is no consideration. Sometimes these services are provided by charging nominal amounts from employee to recoup the maintenance costs of these facilities.
    • Free transport facility: This service includes to and fro transportation of employees between work place and home.
    • Concessional Loan/Finance Facilities: This service includes extending loans/finance at a concessional rate of interest.
    • Notice Period Pay: Sometimes, employees are obligated to give prior notice say two months in advance for leaving the employment. In case the employee violates this condition, employer recovers/forfeits two months’ salary and allows him to leave the employment. This is a kind of passive act involving employer agreeing to tolerate an act (breach of prior notice) for consideration (two months’ salary).

    With these insights on nature of services generally extended by employer to employee, let us proceed to examine the service tax implications on the said transactions.

    Whether Employer Services to Employee Covered Under Section 65B(44):

    The definition of ‘Service’ as provided under section 65B (44) is reproduced as under;

    "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include‑

    • a provision of service by an employee to the employer in the course of or in relation to his employment;

     

    (c) ---------------------------------------------------------------------------------

    Upon plain reading of clause (b), by adopting literal interpretation, it appears that ‘Service’definition excludes only a provision of service by an employee to the employer in the course of or in relation to his employment but not vice versa. This would mean that if any employer provides any services to employee for consideration, then the same constitutes service and is not excluded.

    Draft Circular of CBEC Propagating the Above Interpretation:

    The above stated interpretation is unofficially mooted by Revenue at the time of introduction of Negative list based taxation through a draft circular F.No. 354/127/2012-TRU dated July 27, 2012, which states that, activities carried out by employers to employees for consideration are taxable, unless specified in the Negative List or otherwise exempted. The taxability has been clarified by para 9 and para 10 which is reproduced as follows;

    “9. One of the ingredients for the taxation is that such activity should be provided for consideration. Where the employees pays for such services or where the amount is deducted from the salary, there does not seem to be any doubt. However, in certain situations,_______ such services may be provided against a portion of the salary foregone by the employee. Such activities will also be considered as having been made for a consideration and thus liable to tax…………………………………………………………………..

    1. However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net).”

    In view of the above clarification, it is very clear that the Revenue target is to tax any non-cash benefits/services extended by employer to employee factored as part of employee CTC (cost to company) at the time of appointing an employee. This would mean that even for extending a benefit/service, if no separate charge is made but the same is factored as part of CTC, then the same is said to have been provided for consideration (i.e. employee service) and the same is liable to service tax.

    For example, benefits like free holiday travel facility, car for personal use, rent free accommodation are factored in CTC but no costs are recovered from employees. These facilities even if provided without any charges from employees, the same would be considered as provided for consideration (i.e. employment) and would be subject to service tax.

    However any activity which is not part of non-cash benefits/services considered for CTC provided free of cost without charging anything from employee then the same will not be a service on the reason that there is no consideration involved. For example, employer allowing unrestricted access to gym facility at work place for all employees which is not even factored for the purpose of CTC. In such cases, it is treated as activity undertaken without consideration and the same shall not be liable to service tax.

    The above draft circular was released at the time of introduction of Negative list based taxation in the year 2012 for public comments; but for reasons unknown the same is not yet released officially. Despite this, there is no bar for Revenue authorities to resort to such interpretation.

     

    Recently, the DGCEI in its MO Circular has dealt with the issue regarding leviability of service tax on forfeiture of security deposits by employees. The recovery of an amount, in terms of forfeiture of security deposit or other payments, from employee for leaving the organization without giving stipulated notice or completing the bond period is a common phenomenon in business organizations. The DGCEI opined that the activity of forfeiture of a security deposit for short notice given by the employee is a taxable service as per the provisions of Section 66E (e) of the Finance Act, 1994, covered under the declared services of, "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to doan act". Thus, services by employer to employee like Notice period pay are chargeable to service tax from the standpoint of DGCEI.

    Recent Contrary view of Advance Ruling Authority (AAR):

    On the other contrary, the AAR in a recent case of JP Morgan Services India Private Limited, 2015-TIOL-12-ARA-ST has considered the applicability of service tax on employer services. In the said case, the applicant has given an option to employees to hire cars for their personal and official use. For this requirement, the applicant has taken vehicles on hire from a leasing company. The applicant has recovered from the employees the lease charges that are paid to leasing company. The applicability of service tax on the lease charges paid by employee to employer has been examined.

    The AAR has interpreted the definition of ‘Service’ under Section 65B(44) to mean that provision of service of by an employee to an employer in the course of or in relation to his employment cannot be considered as service as the same is excluded from the definition of ‘Service’. Once the activity of employment services to employer is excluded from ‘Service’ definition, the said definition cannot be applied for any non-monetary benefit extended by employer to employee in reciprocation to employee services.

    In order to add strength to this interpretation, one can put forward the argument that an activity excluded from ‘Service’ definition is different from a service covered under Negative list or mega exemption notification and is outside the ambit of service tax in entirety i.e. even any activity undertaken in reciprocation to the said excluded employment service is also out of the ambit of service tax levy. However, in the humble opinion of the paper writers, the said judgment is not in detail to address the issue holistically from all possible corners.

    Conclusion:

    Going by plain language of ‘Service’ definition under Section 65B (44) and drawing support from draft circular, employer services to employee could be considered as liable to service tax. The contrary interpretation adopted by AAR created doubts over the service tax applicability thus making the issue further gloomier.

    We all know that, every assessee as per section 208 of Income Tax Act, 1961 (“Act”), is required to pay income tax during a financial year in every case where the amount of such tax payable is ten thousand rupees or more. Such a tax is called as an advance tax. Failure to remit advance tax in accordance with the provisions laid down vide Section 208, ibid shall attract interest as per Section 234B and Section 234C.

    The objective of this article is to highlight few instances/issues which are to be considered while arriving the amount on which interest has to be calculated under sections 234B and 234C of the Act. Before going to deal with such issues, in the best interest of the readers, we have referred the statutory provisions of Section 234B and 234C hereunder.

    Section 234B - Interest for defaults in payment of advance tax:

    234B(1) Subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than 90% of the assessed tax, the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under section 143(1) and where a regular assessment is made, to the date of such regular assessment, on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax.

    234C- Interest for deferment of advance tax:

    Interest is payable u/s 234C if an assessee has not paid Advance Tax or underestimated installments of advance tax on the basis specified in 234C(1)(a), 234C(1)(b) which will be calculated on Tax on Returned Income.

    Food for Thought:

    1. Assessed Tax vs Tax on Returned Income:
    2. From the above provisions, it is clear that Section 234B speaks about Assessed Tax whereas 234C deals with tax on returned income.
    3. Hence 234B interest should be calculated based on Assessed Tax which is assessed as per section 143(1) or as per regular assessment (CIT v. Tulsyan NEC Ltd. [2011] (SC)). However, 234C interest to be calculated based on returned income.
    4. So, in-spite of change in tax as per returned income and assessed income, there will be no change in 234C interest but there can be change in 234B interest.

    Example: If the Return of Income filed by stating the Taxable Income of Rs. 250 crores which is Assessed by the AO by arriving Assessed Income as Rs. 275 crores then 234B interest to be calculated on assessed tax of Rs.275 crores where as 234C should be calculated on tax on returned income of Rs. 250 crores only.

    B. Returned Income: is it Original Return / Revised Return or something else:

    1. 234C refers to tax on returned income. However, 234C does not stressed on whether the income which has to be calculated should be based on the original return or revised return or any other document.

     

    1. However, once a revised return was filed (within due date) then it will substitutes the original return hence Income as per Revised Return can be considered as Returned Income, the returned income referred to in section 234C means the total income declared in the return of income furnished by the assessee validly for the relevant assessment year. Accordingly, Income declared in Revised computation which is filed after the due date cannot be treated as Returned Income for the purpose of section 234C.

     

    3. In South Eastern Coalfields Ltd Vs Jt. CIT (2003) 260 ITR (AT) 1 (Nag) it was held that "revised computation of income" filed before the assessing officer after the time-limit prescribed in section 139(5) cannot be treated as returned income of the assessee for the purpose of levy of interest under section 234C.

    C. Tax Deducted at Source vs Tax Deductible at Source:

    1. It is to be noted that in 234B interest, tax deducted at source is to be reduced from assessed tax, where as in 234C interest actual tax deductible at source is to be reduced from tax on returned income i.e., even though tax deducted at source is less than the tax deductible at source, assessee can reduce higher amount while calculating interest u/s 234C. (same treatment for TCS also)

     

    Example: M/s Cash Rich Ltd is having Fixed Deposits of Rs.750 crores during the F.Y.14-15 which will yield interest of Rs.71,81,87,600/- during the same financial year. Ideally Banker should have deduct TDS u/s 194A of Rs.7,18,18,760/- i.e., tax deductible at source is Rs.7,18,18,760/- however banker has deducted tds u/s 194A only Rs.5,25,00,000/- i.e., actual tax deducted is Rs.5,25,00,000/‑

     

    In this case even though actual tds deducted was Rs.5,25,00,000/-, while arriving interest u/s 234C we can consider Rs.7,18,18,760/- to reduce from tax on returned income, where as for interest u/s 234B Rs.5,25,00,000/- should only consider while reducing from assessed tax.

     

    1. However, we have come across situations where few books on direct taxes and ready reckoners, it was suggested that actual tax deducted should only be considered for both 234B and 234C.

     

    3. Whereas the Act is very clear that for calculation of interest under Section 234C, the tax deductible has to be considered. Hence, in our opinion the tax deductible has to be considered instead of actual tax deducted for the purpose of interest u/s 234C.

    D. Few Instances where 234B & 234C is not liable to be paid:

    1. As evident from the provisions of Section 234B, every assessee who is liable to pay advance tax has paid less than 90% of assessed tax is required to pay interest under Section 234B. However, there are certain instances where interest is not required to be paid even that 90% of assessed tax was not paid by assessee.

     

    1. The pre requisite for levy interest under Section 234B, 234C are “Assessee should liable to pay Advance Tax under Section 208 of Act”. Hence, it is clear that the provisions of 234B, 234C shall come into play only when the assessee fits into the ambit of Section 208 of Act. (Jt. CIT v. Rolta India Ltd. [2011] (SC))

     

    3. Hence, in a case where the assessee is not falling under the ambit of Section 208 i.e., not liable to pay Advance Tax, then in-spite of failing to pay 90% of assessed tax or there is a deferment in installments paid, assessee is not liable for interest u/s 234B, 234C.

    Few examples of such Privileged Assessee:

    1. a) An individual resident in India, who does not have any income chargeable under the head "Profits and gains of business or profession"; and is of the age of 60 years or more at any time during the previous year;
    2. b) Assessee whose tax payable as mentioned in section 208 of Act is less than Rs 10,000/-;
    3. c) Assessee covered under section 44AD (but not assessee u/s 44AE);
    4. d) I. Assessee whose total income comprises of Salary income from which tax at source is to be deducted (DIT v. Maersk Co. Ltd. [2011]) and
    5. Non Resident Assessee whose income is subject to tax deduction at source (DIT v. Jacabs Civil Incorporated/Mitsubishi Corporation [2010])

    •          for both these cases irrespective of fact that the TDS was deducted or not assessee not liable to pay interest u/s 234 B,234C.

    E. Amendments made in Finance Act,2015

    In sec.234B

    1. sub-section (2A) is inserted to provide that, where an application u/s. 245C (1) for any assessment year has been made, Assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month comprised in the period commencing on the 1st day of April of such assessment year and ending on the date of making such application, on the additional amount of income-tax referred to in that sub-section.

    Where as a result of an order of the Settlement Commission u/s. 245D (4) for any assessment year, the amount of total income disclosed in the application u/s.245C (1) is increased, the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month comprised in the period commencing on the 1st day of April of such assessment year and ending on the date of such order, on the amount by which the tax on the total income determined on the basis of such order exceeds the tax on the total income disclosed in the application filed u/s. 245C(1)

    2. Sub-section (3) is inserted to provide that the period for which the interest is to be computed will begin from the 1st day of April next following the financial year and end on the date of determination of total income u/s. 147 or sec. 153A.

    Conclusion: Apparently even though it seems to be similar factors for calculating the interest u/s 234B and 234C there are differences in factors that are to be taken for calculating referred interests such as Assessed Tax vs Tax on Returned Income, Tax Deducted vs Tax Deductible which will impact on outcome of interest amount.

    The role of trade agreements, either free trade or preferential trade has contributed a lot to the international trade. India has also entered various agreements with various countries in order to reduce the tariff based barriers between the contracting parties. The objective of this article is to throw light on the various agreements where India is party, so that the exporters and importers can take advantage of the same.

    These agreements boost the confidence of the Indian exporters and place them ahead in the competition while dealing with the signatory parties. For example, a person located in country ‘A’ has an option to import certain goods say, computers either from India or country ‘B’. If import is made from country ‘B’ the import duties shall be 20%. However, if the same goods are imported from India, the import duty for the person located in country ‘A’ is 0%, since India and country ‘A’ has entered an agreement.

    Further, these agreements also attract investments from other non-signatory countries. For example, consider two countries ‘P’ and ‘India’ having an agreement. Country ‘P’ has high infrastructure cost and large domestic market. The companies located in country ‘R’ may decide to invest in country ‘P’ to cater to its domestic market. However, if India offers better business environment and it is having an agreement with country ‘P’, ‘R’ may decide to invest in India to cater to the needs of ‘P’.

    Hence, the agreements entered by India with other foreign countries contribute a lot to the exports and also safeguards the domestic manufactures from paying high import duties. The agreements generally aim at reducing or granting complete exemption from import duty when goods are imported to India from other signatory countries.

    As far as the India is concerned, the agreements entered with other countries to participate in International Trade can be represented as under, for easy understanding:

    As represented above, the agreements entered by India with various countries can be grouped under two main buckets namely Unilateral and Bilateral or Multilateral, which we shall understand in the following paragraphs.

    Unilateral Tariff Preferences:

    Unilateral tariff preferences benefits or concessions flow from one country to another country and there shall be no reciprocity. There are two types of unilateral tariff preferences namely ‘Generalized System of Preference’ (for brevity ‘GSP’) and ‘Duty Free Tariff Preference Scheme’ for Least Developed Countries.

    Generalized System of Preference - GSP:

    The GSP is a commercial policy instrument aimed towards development. The objective of GSP is to offer the developing countries a more preferential tariff compared to the developed countries. For example, an importer in New Zealand buys material from India, by virtue of GSP with New Zealand Government, such material might attract lower customs duty in New Zealand when compared with same import from United States of America.

     

    As of now, Australia, Canada, EU, Iceland, Japan, New Zealand, Norway, Russian Federation, Belarus, Kazakhstan, Switzerland, Turkey and United States of America extend GSPs. The Indian exporters shall submit Certificate of Origin (for brevity ‘CoO’) issued by designated authorities to the importer, so that the importer can avail such reduced tariff or exemption as per the concerned GSP.

    Duty Free Tariff Preference (DFTP) for Least Developed Countries:

    One of the obligations from the sixth Ministerial Conference of WTO, also known as WTO Hong Kong Ministerial Conference (MC6) was to provide duty free tariff preferences for least developed countries. In order to stand up to this obligation, the Department of Commerce, India now provides duty free/preferential access to 98.2% of tariff lines. India has 31 least developed countries as beneficiaries to this scheme.

    Bilateral or Multilateral Agreements:

    Free Trade Agreements (for brevity ‘FTA’) and Preferential Trade Agreements (for brevity ‘PTA’) are either in form of ‘bilateral agreements’ where only India and counterpart alone entered into an agreement or in the form of ‘multilateral agreements’ where India and group of countries enter into an agreement. As on date, 619 notifications of RTA/FTAs had been received by WTO, where 413 RTA/FTAs are in force and there are 28 PTA’s.

    Free Trade Agreements - FTA:

    In terms of WTO, FTAs are defined as reciprocal trade agreements between two or more signatory countries. That is to say, in FTAs tariff on items covering substantial bilateral trade are eliminated between As on November, 2015 Source: https://www.wto.org/

    the signing countries, however the countries maintains an individual tariff structure when dealing with non-singing countries. Under FTAs the signing countries agrees on a list of goods called as negative list for which the FTA shall not be applicable. Except such goods mentioned in the negative list, all other goods can be freely traded between the signing countries. As on date India has entered 10 FTAs as per Para 2.103 of Handbook of Procedures. India is in the process of negotiating another 18 FTAs.

    List of FTAs signed by India are:

    1. India – Srilanka FTA;
    2. Agreement on South Asia Free Trade Agreement (SAFTA);
    3. Revised Agreement of Cooperation between Government of India and Nepal to control unauthorised trade;
    4. India – Bhutan Agreement on Trade Commerce or Transit;
    5. India – Thailand FTA – Early Harvest Scheme;
    6. India - Singapore Comprehensive Economic Cooperation Agreement (CECA)
    7. India - ASEAN CECA (Goods, Services and Investment)
    8. India - South Korea Comprehensive Economic Partnership Agreement (CEPA)
    9. India - Japan CEPA
    10. India - Malaysia CECA

    EHS/EH P:

    Early Harvest Scheme/Early Harvest Programme is a forerunner to FTA between two trading partners. This is to help the two trading countries to identify certain products for tariff liberalization pending the conclusion of FTA negotiation. EHS has been used as a mechanism to build greater confidence amongst trading partners to prepare them for even bigger economic engagement.

    CECA & CEPA:

    Comprehensive Economic Co-operation Agreement (for brevity ‘CECA’) and Comprehensive Economic Partnership Agreement (for brevity ‘CEPA’) describes agreements which consists of an integrated package on goods, services and investments along with other areas including IPR.

    EHS/EHP, CECA & CEPA are grouped under FTA. Preferential Trade Agreements - PTA:

    Under PTAs, two or more partners agree to reduce tariffs on agreed number of products, generally called positive list. Hence, PTAs do not cover substantial trade as like in FTAs. As of Feb 2016, India has entered 6 PTAs as per Para 2.103 of Handbook of Procedures.

    List of PTAs signed by India are:

    1. Asia Pacific Trade Agreement (APTA)
    2. Global System of Trade Preferences (GSTP)
    3. India - Afghanistan PTA
    4. India - MERCOSUR PTA
    5. India - Chile PTA
    6. SAARC Preferential Trading Arrangement (SAPTA)

     

    Global System of Trade Preference - GSTP:

    GSTP is entered between developing countries to exchange tariff concession to limited products. India provides tariff concessions to selective products imported from 54 countries subject to submission of CoO issued by the concerned authorities in exporting country. The goods originating from participating countries and CoO issued should comply with Customs Tariff (Determination of Origin of Goods under the Agreement on Global System of Trade Preferences among Developing Countries) Rules, 1989.

    Procedure for claiming concessions & exemptions under the above agreements – General:

    The basic customs duty charged under Section 12 of the Customs Act, 1961 is exempted or reduced by virtue of FTAs or PTAs. It is to be noted that other customs duties like countervailing duties are not covered under FTAs or PTAs. Further, a corresponding notification has to be issued under customs law to operationalize the promises made under FTAs or PTAs. The person intending to export or import as per the FTAs or PTAs has to satisfy the conditions mentioned in such notifications along with any rules made thereunder. The essential pre-requisite in order to avail the concessions or exemptions, is the Certificate of Origin (for brevity ‘CoO’).

    The general procedure in order to avail the concession and exemptions prescribed under the FTAs/PTAs is prescribed as under. Let us a take an example of Indian manufacturer who intends to import goods from Srilanka under the India – Sri Lanka Free Trade Agreement (for brevity ‘ISLFTA’).

    In order to import goods which are specified in the above agreement, the importer has to approach an exporter located in Sri Lanka, obtain CoO issued by the designated Sri Lankan authorities from such exporter, submit the CoO to the customs authorities and claim such exemption or reduced duty as place in the ISLFTA.

    In the same way, if an exporter located in India wants to export specified goods in the ISLFTA, the Indian exporter has to obtain CoO from the designated authorities and pass it on to the Sri Lankan buyer, wherein such person can claim the reduced import duty or exemption as per ISLFTA.

     

    Brief about ICDS:

    The Finance Act (No.2) 2014 provides in Section 145(2)that the Central Government may notify in the Official Gazette from time to time Income Computation and Disclosure Standards(ICDS) to be followed by any class of assessee or in respect of any class of income.

    In exercise of the powers conferred by Section 145(2) of the Income Tax Act, 1961 the Central Government has notified ICDS vide notification dated 31-3-2015. These notified ICDS are required to be followed by all assessee's following the mercantile system of accounting for the purpose of computation of income chargeable to income-tax under the head "Profits and Gains of Business or Profession" or "Income from Other Sources". ICDS is not applicable for assessee who are not required to maintain books of accounts as per the Income Tax Act, 1961.

    In case of any conflict between The Income Tax Act, 1961 & ICDS, the provisions of the Act will be prevail.

    Words and expressions used and not defined in ICDS but defined in the Act shall have the meaning respectively assigned to them in the Act.

    ICDS-III:

    ICDS-III shall be applied separately to each construction contract. However, where ever it is necessary, ICDS-III should be applied to the separately identifiable components of a Single Contract (Segmentation of Contract) or to a group of contracts (Combination of Contracts) to reflect the substance of a contract or group of contracts.

    When a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when separate proposals have been submitted for each asset and each asset is subject to separate negotiation. It provides that contractor and customer able to accept or reject that part of contract relating to each asset and cost and revenue of each asset can be identified, such contracts should be treated as separate construction contract.

    Where a contract provide for the construction of an additional asset at the option of the customer or is amended to include the construction of an additional asset, the construction of additional asset should be treated as a separate construction contract when the asset differs significantly in design, technology or function from the asset or assets covered by the original contractor the price of the asset is negotiated without having regard to the original contract price.

    A group of contracts should be treated as a single construction contract when the group contracts is negotiated as a single package and contracts are so closely interrelated that they are part of single project with an overall profit margin. These contracts are performed concurrently or in a continuous sequence.

     

    Contract for the purpose of this standard includes the following:

    1. Construction of an asset or combination of assets
    2. Contract for rendering services which are directly related to (i) above.
    • Contracts of demolition or destruction of assets in connection to (i) above.

    Note:- Taxpayer's who compute their taxable income on presumptive basis i.e 44AD etc are not required to maintain books of accounts for tax purposes if they claim their income in accordance with the provisions of section (i.e., 8% in case of 44AD). As a result ICDS may not be applicable as they are not following mercantile system of accounting.

    Contract revenue: It shall be recognized when there is a reasonable ground of certainty for collection of amount which includes the following:

     

    agreed price of the contract;

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    Retentions;

    Claims;

    Incentives;

    Variations such as escalation clause.

     

    Only when measured reliably.

    If any amount, in any year during the period of contract was written off due to uncertainty in collection, the same should be SHOWN AS AN EXPENSE, not by way of adjusting to contract revenue. (Finance Act,

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    2015- Section 36(1)(vii))

    Contract costs: Shall include the following:

    1. Costs which are directly related and attributed to contract;
    2. Other costs specifically charged under T&C of contracts;
    • Allocated BORROWED COSTS as per ICDS on BORROWED COSTS.

    These costs will be reduced by incidental income(Income which is supplementary to the costs), if any. But, income or revenue shall not comprise, if it is in the nature of:

    Interest;

    Dividend;

    Capital gains.

    Those costs* which are spent for securing a contract shall also be recognized if:

    1. They are separately identified;
    2. If it is more likely than not to secure a contract. (Probable).

    *If those costs are recognized as an expense in that particular year when they were incurred, then they are not included in contract costs when it is obtained.

    Contract costs related to future activity shall be recognized as an asset by showing as the amount due from customer.

    Contract costs exclude the following:

    1. Costs related to future activity;
    2. Payments to sub – contractors as an advance for work to be done.

    Recognition of contract costs & revenue: Shall be recognized by way of stage of completion of contract. Stage of completion of contract: Shall be determined by any of the following ways:

    1. Cost to cost method;
    2. Survey method;
    • Valuation through valuer - physical proportion of work done.

    Change in estimates: For cost to cost method – Cumulative cost is to be applied. If any change in estimates on a reasonable ground, that estimates are to be used for determining the percentage of completion of contract.

    Transitional pro visions: Contract costs & revenue which are commenced on or before 31st March, 2015 but not completed by the said date, shall be recognized as per this ICDS. The amount of contract revenue, contract costs or expected loss if any, recognised for the said contract for any previous year commencing on or before 01/04/2014 shall be taken into consideration for recognising revenue and cost of the said contract for the previous year commencing 01/04/2015.

    Disclosure requirements as per this standard:

    Type of contract;

    Contract revenue & costs recognized for the respective period; Method used for determining stage of completion of contract; The amount of advances received;

    The amount of retentions;

    Some Issues:‑

    Recognition of Retention Money:- AS-7 is silent on treatment of retention money. Various Judicial

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    pronouncements held that retention money accrues only at the time of completion of conditions attached as per the relevant contract. To nullify these judgements ICDS provides for recognition of retention money on Percentage of Completion Method basis. However, this is contrary to the concept of prudence and hence will not recorded in the books of accounts.

    If subsequently the amount is not recoverable, taxpayer can't claim this amount as bad debt since the amount is not recorded in the books. To claim non recovery of debt as bad debt it should have been written off in the books of accounts. Since debt was not recorded in the books the question of written off doesn't arise.

    To overcome this difficulty Finance Act, 2015 amended section 36(1)(vii) by inserting second proviso with effect from AY 2016-17. It provides that if debt or part thereof has been offered as income in compliance with ICDS and the debt or part becomes irrecoverable it would be allowed as a bad debt deeming that such debt or part thereof been written off as irrecoverable in accounts.

    Initial Period of Recognition of Revenue:- AS-7 provides that revenue shall not be recognized during the early stages of contract. What is meant by “early stage” is not clearly defined. To provide certainty ICDS provides that contract revenue and contract cost should not be recognised till the contract reaches 25% stage of completion.

    Recognition of Expected Losses:‑

    ICDS provides that expected losses from the contract are allowed to be recognised as per percentage of completion method. This is contrary to the concept of prudence. Also it would conflict with the provisions of section 28 which provides for allowances of losses in computing the business income. As per AS-7 expected losses to be recognised in full.

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