FEBRUARY 06, 2016

By PVS Suryanarayana

AGM (F&A), Visakhapatnam Steel Plant, Rashtriya Ispat Nigam Limited

1. Leave Encashment u/s 43B of the IT Act, 1961

Present Status:

i. The Finance Act, 1983 introduced Section 43B in the Income Tax Act, 1961 with effect from April 1, 1984, for preventing companies from getting deduction for unpaid Statutory Liability without discharging the same.

ii. In the case of Bharat Earth Movers Vs. CIT - 2002-TIOL-123-SC-IT-LB, the Hon'ble Supreme Court considered the question of deduction for provision for leave encashment as per the scheme floated by the company and gave its verdict that the liability estimated with reasonable certainty can be claimed as deduction though it will be discharged at a future date.

iii. Subsequently, by Finance Act, 2001 inserted sub-clause (f) to section 43B barring deduction of any sum payable by the company as an employer in view of any leave at the credit of the employee. As per this amendment, any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed only in the year in which such sum is actually paid by him.

iv. Further, in the case of Exide Industries Ltd Vs. UOI - 2007-TIOL-429-HC-KOL-IT, the Hon'ble Calcutta High Court ruled that Leave Encashment is neither a Statutory Liability nor contingent nature. Accordingly, the amendment as brought by inserting sub-clause (f) to section 43B, only to nullify the Judgement made in the Bharat Earth Movers case. No amendment can be made for the sole object of nullifying the Apex court decision. There was no nexus between the amendment and the main objects behind section 43B and accordingly, the Hon'ble Calcutta High Court struck down section 43B (f) as arbitrary, unconscionable. Subsequently, Apex court stayed the decision of Hon'ble Calcutta High Court on the ground that the provision 43B(f) is in the Statue.

Recommendation:

In our view, in spite of Apex Court's order the Calcutta High court's observation that there was no nexus between the amendment and the main object behind section 43B is still valid on the following grounds:

(i) The legislative intent u/s 43B is to curb the practice of claiming tax benefits based on provisions created for statutory liability and employee welfare expenses and at the same time not meeting those liabilities one or other grounds.

(ii) This section was inserted with the main objective of preventing the loss to revenue and loss of social security benefits like PF, Gratuity etc., to which employees are eligible due to the above referred practice.

(iii) Whereas leave encashment is neither a statutory liability nor a social security liability because this facility is provided by the employer as per the terms of agreement with employee not by virtue of any statue unlike PF or Gratuity. Hence, the provisions of 43B are not applicable to this.

Considering the above, it is suggested, to remove sub-clause (f) to section 43B since leave encashment is neither a statutory liability nor a social security liability.

2. Specific provision to allow certain ascertained liabilities:

Present Status:

Provisions created towards the ascertained liabilities incurred by the assessee but are going to be discharged at future date like Employees benefits etc., are being disallowed by the assessing officer in the absence of necessary clarification in the Act.

Recommendation:

a. Under the mercantile system of accounting all companies are obliged to recognize certain expenditures as per the Accounting Standard 15-(Employee Benefits like retirement benefits, Employees Family Benefits Scheme, Long Service Awards, etc) which is also mandatory since the financial year 2006-07.

b. The objective of AS-15 is that an enterprise shall recognize the future liability on account of employees benefits based on the service provided and the expense of the enterprise on account of consumption of economic benefits arising from the services rendered by an employee.

c. Considering the fact that it is the liability towards ascertained employee cost for the present services, determined based on actuarial valuation i.e, on a realistic and scientific basis, the courts are deciding the same as an allowable expenditure.

d. As these employee benefits are different from statutory employee benefits like PF, Gratuity etc., the provisions of Section 43B of the Income Tax Act is not applicable in such cases. However, in the absence of any such clarity in the Act, these provisions are misunderstood by the assessing authorities and the provision of section 43B is being invoked mistakenly.

Considering the fact as stated above, suitable explanation may be brought out in the Act u/s 43B to exclude such type of provisions determined based on actuarial valuation i.e, on a realistic and scientific basis from the purview of that section i.e., 43B. There, may also be a provision to create fund in line with superannuation fund, gratuity fund etc. so that the companies may contribute to such funds. As on date there is no provision to crate fund or approval of such funds other than Approved PF, Gratuity Fund or superannuation Fund.

3. Refund of excess TDS made u/s 195 to the agent/representative assessee of non-resident.

Present Status

During the finalization of accounts under the Companies Act and under the Mercantile System of Accounting,liability has to be created for all the works done by the contractors on accrual basis but the actual bills received subsequently may be for different amount. In such situations in a big organization, it is difficult to create liability exactly matching with the actual amount and as a result there are chances that excess TDS is made and remitted to the Govt. account. Wherever, the taxes are to be borne by the payer, such excess TDS could not be claimed by the payer since such type of situation is not envisaged in the Circular no. 7/2011 issued by CBDT in this regard.

Recommendation:

Considering the above mentioned aspects, such type of situation may be incorporated in the said circular along with the other situations envisaged wherein the payer is entitled to claim refund of excess TDS made.

International Taxation:

4. Dispensing the provisions (Section 44DA, 44AA & 44AB), relating to the maintenance of books of account and audit as applicable in case the non-resident is deemed to be having permanent establishment in India.

Present Status:

a. We, a Government of India Undertaking under the administrative control of Ministry of Steel, Govt. of India, are operating an integrated steel plant at Visakhapatnam presently having the capacity of 3MTPA of steel. We have undertaken the expansion project to increase the existing capacity to 6.3MTPA. The expansion work is nearly completed.

b. We, during the course of our normal business and expansion process, enter into contracts with various international contractors for purchase of imported plant and equipment and other services. Since the services rendered by the overseas contractors are highly sophisticated and indispensable most of the terms and conditions of the contracts are being determined most favorable to overseas contractors/suppliers.

c. The law dealing with the taxation of such international transactions under the Indian Income Tax Act, 1961 is very cumbersome particularly when the overseas contractor is deemed to be having Permanent Establishment in India. Since the installation of giant plant like us would always take long time, by virtue of the provisions of relevant DTAA, most of our contracts will fall under the category of parties having permanent establishment in India.

d. In such cases, income accruing or deemed to be accrued in India under the contract to the parties shall be computed under the head ‘Profits & Gains of Business or Profession' as per the provisions of Section 44DA of the Act. Moreover, the assessee has to maintain the books of accounts as prescribed and get those books of account audited by Chartered Accountant as per provisions of Section 44AA and 44AB of the Act. Under the provisions of DTAA also such fees for technical assistance is supposed to be taxable under the head ‘Business Profit'.

e. By virtue of section 161,162 & 163 of the Income Tax Act, 1961, any person treated as agent of non-resident shall be responsible to comply with the provisions of the act with respect to the income deemed to have arisen in India to the non-resident as if the same has arisen to him. In other words, the Indian Counterpart has to get the income duly assessed and discharge all the tax liability of the non-resident.

f. When the non-resident voluntarily not maintaining the books of accounts under the provisions of the Income Tax Act say, 44DA, 44AA & 44AB relating to maintenance of books of account and audit, it is really not possible for the representative assessee to comply with the provisions of the Act since it is practically impossible to ascertain the profit of the non-resident contractors/suppliers, in the absence of proper records and information from the non-resident.

Recommendation:

In view of the above mentioned practical problems being faced by all representative assesses, we make our representation that, application of the provisions ie., Section 44DA,44AA & 44AB, relating to the maintenance of books of account and audit to representative assessee may be dispensed with. Perhaps, a reasonable flat rate of withholding tax may be prescribed in the Act which shall be applied on the gross payments. Such an amendment will help the residents taking services from the non- residents to determine the tax liability of the non-resident under the relevant contract at the time of tender finalization and decide accordingly.

5. Limiting the responsibility of representative assessee to the extent of submission of contract details at initial stage.

Present Status:

a. As per section 149(3) of the Act, the time limit for issuing a notice u/s 148 (notice for assessing the income of the non-resident in the hands of his agent as representative assessee), supposed to be issued to a person, treated as agent of non-resident u/s 163(2) is six years from the end of the relevant assessment year.

b. Under the circumstances where the duration of the contracts entered into with the non-residents is very short and the provisions of the Act are not duly taken care in the contract and where the contractors are not extending any co-operation to the agent to comply with the provisions of the Act, the person dealing with non-resident is unwarrantedly put to hardship and incur extra tax burden on account of interest, penalty etc., on the income derived by the non-residents in India.

Recommendation:

Necessary provisions may be made in the Act that every person, going to have business connection with non-resident, is supposed to provide at the initial stage of contract itself all the details of the contract like name and address of the contractor, contract value etc., to the Income Tax Authorities. Once such information is furnished by the agent, his responsibility as representative assessee should be dispensed with.

6. Insertion of Section 206AA and Deletion of section 160,161 & 163:

Present Status:

a. By virtue of section 206AA of the I.T. Act, 1961, tax at source shall be made at higher rate in case Permanent Account Number (PAN) is not available. Indirectly, this section intends to encourage the use of PAN in all situations and to have proper net work of assesses in order to ensure better compliance of the Act. It means that having PAN is compulsory in all cases including non-residents. In such cases, where the non-resident is compelled to obtain PAN in India, he shall be responsible for compliance of the provisions of the I.T. Act, 1961 including assessment and discharge of tax liabilities etc.,. In view of insertion of the section 206AA in to the Act, it is felt that the section 161,162 & 163 dealing with the representative assessee becomes redundant because the non-resident having PAN is intended to discharge the liabilities under the Act either in person or through authorized representative or subsidiaries etc.,.

Recommendation:

Keeping in view the intention of the section 206AA and the practical problems of the representative assesses in discharging the tax liability of the non-residents, it is proposed to delete the sections dealing with representative assesses say, 161,162 & 163 of the I.T. Act.

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