JANUARY 13, 2017

By Pallav Gupta, Head - Taxation, ITC Limited

17. HOTEL Industry:

(ii) Tax Incentives for eco-friendly Hotels: The need for building eco-friendly hotels cannot be over-emphasized for long term sustenance of the environment. Building of such hotels comes at a much higher cost and therefore some special incentives needs to be considered. Section 35AD does take care to some extent by allowing the deduction of the capital expenditure. However, an additional incentive is required in the form of a weighted deduction of the costs to offset the additional costs incurred.

(iii) Depreciation and Additional Depreciation : Hotels were eligible for the depreciation allowance of 20% on their building till 31 st March, 2002. The depreciation allowance for hotels buildings was, however, scaled down to 10% vide Notification No. 291/2002 dated 27.09.2002.

Hotel buildings constitute the 'plants' for the hotel industry as their usage is round the clock for 24 hours. The industry has to make very heavy investments in renovation, up-gradation and upkeep of the hotel buildings. Section 32 of the IT Act should therefore be amended to restore the depreciation rate to 20%. The additional depreciation applicable to Plant & Machinery u/s 32 1 (ii a) should also be allowed to hotels which have to make heavy investments in plant and machinery.

(iv) Hotel Charges for long stays are currently subject to TDS(rent) under section 194 I : Payments made to hotels are not the payment of rent, per se and hence Hotels should be excluded from the purview of Section 1941 for the purpose of Tax Deduction at Source. CBDT may issue appropriate circular in this regard.

18. Tax Incentives Under Section 72a In Respect Of Amalgamation Or Demerger (to Be Extended To All Businesses):

The tax benefits under section 72A in respect of amalgamation or demerger are currently limited to industrial undertakings or a ship, hotel, aircraft or banking. It is suggested that in the current liberalised and buoyant environment where various new sectors are growing at a rapid pace, this should now be extended to all businesses including financial services, entertainment/sports, information technology (IT) and IT enabled services.

Further, the provisions of section 72A should be simplified specially in respect of the conditions applicable for the amalgamating company like losses / depreciation being unabsorbed for at least three years and holding assets on the amalgamation date upto ¾ of the book value of fixed assets held two years prior to the said date.

19. Tax Exemption For Sale Of Carbon Credits/weighted Deduction For Certified Investments :

Carbon Credit is an incentive available to the industries reducing CO2 emission by investing in energy efficient technologies. As such, it is recommended that tax exemption be given for revenue generated from sale of carbon credits .

Further the cost of putting additional technology for clean development mechanism is relatively high. Therefore, there is a necessity for giving tax incentives by way of weighted deduction for all certified investments in such areas like Leed certified buildings/hotels. This would benefit the nation in terms of creating eco-friendly environment and earning foreign exchange.

20. Tax Deduction For The Employee Remuneration Cost Incurred Due To Grant Of Employee Stock Options (esop) To The Employees :

(a) As per the Guidance Note issued by Institute of Chartered Accounts of India ('ICAI'), the SEBI Guidelines and the IndAS the main objective to issue shares under an Employee Stock Option Plan (ESOP) is to remunerate the employee for his services. The SEBI guidelines and the IndAS requires a company to recognise the charge incurred for issue of ESOPs as an employee compensation in the Financial Statements/Books of Account of the Company over the vesting period.

For computing the related employee cost, the IndAS mandates companies to adopt the Fair Value valuation of the share options granted to the employee unless that fair value cannot be estimated reliably. Thus, under the IndAS regime, even if the companies have granted the options at the prevailing market prices on the date of grant, they have to do a fair valuation of the options granted to the employees using option pricing models (which essentially calculates the difference between the exercise/grant price and the expected price of the underlying shares on the date of vesting) and recognise the charge in the profit and loss account over the entire vesting period.

(b) Such share- based payments to employees is construed, both by the employees and the company, as a part of package of the remuneration. There is no difference in two situations viz. (i) when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services (ii) when the shares are directly issued to employees at a reduced rate.

(c) Further, it is pertinent to note that under the Income Tax Act too, under section 17(2)(vi) the difference between the fair market value of the ESOPs allotted and exercise price is treated as a perquisite ie. part of salary given to the employees, on which tax is payable by the employees. Hence, income tax itself cognizes the difference ie value of the share options granted to the employees as part of employee remuneration, taxable in the hands of the employees.

(d) Thus, it is evident that the legislature contemplates this to be an employee cost ie. a consideration for employment, which entails giving the employees the shares of the company at a particular exercise price and therefore, the same should be treated as an allowable business expenditure u/s 37 of the Income Tax Act.

(e) It is an ascertained liability and not a contingent liability, since the employer incurs obligation to compensate the employees over the vesting period, notwithstanding the fact that the exact amount of related cost is quantified only at the time of the exercising the options . The company becomes liable to issue shares at the time of the exercise of option and it is in lieu of the employees-compensation liability which it incurred over the vesting period to obtain their services. Therefore, the company incurs the liability only during the vesting period, which is neither incurred at the stage of the grant of options nor when such options are exercised.

Reference to the decisions of the Supreme Court in the case of Bharat Earth Movers vs CIT - 2002-TIOL-123-SC-IT-LB and Rotork Rotork Controls India (P) Ltd - 2009-TIOL-64-SC-IT also indicate that a definite business liability arises in an accounting year which qualifies for deduction even though the liability may have to be quantified and discharged at a future date. Thus, following the decision of the Supreme Court, the employee cost incurred during the vesting period on account of fair valuation of the share options granted to the employees during the year, cannot be treated as a contingent liability and hence should be allowed as a deduction u/s 37 of the Act, as and when it accrues over the vesting period, as per the Guidelines of SEBI and Accounting Standards and Principles.

(f) Further, the Supreme Court in the case of Woodward Governor India (P) Limited - 2009-TIOL-50-SC-IT has also held that the term 'expenditure' in certain circumstances can also encompass 'loss' even though no amount is actually paid out. Following the rationale of this Apex Court decision, the employee cost accruing on account of issue of ESOPs should be treated as a allowable expenditure u/s 37(1) of the Act, since by undertaking to make share-based payments, the company does not pay anything to its employees but incurs obligation of issuing shares at the determined exercise price on a future date(s) in lieu of their services.

(g) Reliance can be placed on the following decisions which have upheld the allowability of the employee cost incurred on issue of ESOPs to employees as a business deduction during the vesting period-

(a) Special Bench , ITAT Bangalore, in the case of Biocon Limited v DCIT - 2013-TIOL-625-ITAT-BANG-SB

(b) Madras High Court in the case of CIT vs PVP Ventures Limited - 2012-TIOL-550-HC-MAD-IT

(c) Chennai Tribunal in the case of S.S.I. Ltd vs DCIT - 2005-TIOL-30-ITAT-MAD

(d) Chandigarh Tribunal in the case of ACIT vs Spray Engineering Devices Limited - 2012-TIOL-438-ITAT-CHD

Legal issue involved:

a. The issue with respect to deductibility of employee cost incurred for grant of options to employee has been a matter of debate before the Courts/Tribunal. The Income Tax Authorities are not allowing such employee compensation expense as an allowable business expenditure u/s 37 of the Act, inspite of the various judicial precedents, as mentioned above, to the contrary.

b. Further, since the Income tax Law has not expressly specified , there is also a debate on the amount to be allowed as employee compensation expense, the method used for calculating the value of the stock options granted , the year in which the cost should be allowed etc.

c. Without prejudice to the above, it may kindly be noted that deduction for ESOP to employers is provided even by the developed nations:

United States of America

Sec. 83(h) of Internal Revenue Code (IRC) allows the companies deduction for ESOP Expenditure equal to the amount offered to tax by employee in the year it is offered to tax by the employees.

United Kingdom

Part 12, Chapter 2 of the Corporation Tax Act, 2009 allows companies deduction for ESOP expenditure as excess of market value of shares over the amount recovered by the employer in the period when the shares are acquired.

Recommendation

- To put an end to the litigations, it is recommended that the CBDT comes out with clear guidelines on the allowability, calculation and treatment of these employee compensation expenditure/cost incurred on account of issue of shares options to employees under ESOP for income tax purposes.

- Under the Ind AS the companies are required to account for the such employee cost for grant of ESOPs under fair value method which is a fair method used internationally to account for such cost. Hence, CBDT should also allow companies to claim deduction for the employee remuneration cost on the basis of fair value method, to ensure less complications and hassles in the calculations and to avoid unnecessary litigation and dispute on this subject

21. ALlowability Of Payment Of Premium Of Leasehold Land As A Revenue Expenditure:

a. Under the IndAS 16, the upfront premium paid on leasehold land held under operating lease are being treated as prepaid expenses and would need to be charged to the Profit and Loss statement under the head "rentals" on a proportionate basis over the life of the lease period.

Under the current Accounting Standards, these premium payments leasehold land, are charged to the statement of profit and loss account as amortisation of leasehold land on a proportionate basis over the life of the lease period

b. These upfront lumpsum premium lease payments for leasehold landare essential business expenditure and do not generate any capital asset and hence are purely revenue in nature.

c. These are just like payments made under any operating lease to utilise the leased property for the purposes of the business of the lessee and hence should be allowed just like any business expenditure for tax purposes. Further, under the IndAS, these upfront premium paid on leasehold land, held under operating lease are being classified as rentals. Therefore, these expenditures should be treated as tax-deductible expenses.

Recommendation

The CBDT should come out with instructions clarifying that these upfront premium payments for leasehold land, should be allowed for income tax deduction in the year of debit in the statement of Profit and Loss.

22. TDS :

(i) Reimbursement Of Expenses:

It has been legally established that TDS is not applicable in case of reimbursement of expenses since there is no income involved. However, very often disputes crop up, leading to unnecessary litigation and harassment. Therefore it is necessary to address this problem through a suitable clarification in the Income Tax Law or by way of a CBDT circular.

(ii) Tds Without Pan :

A new section 206AA was introduced in the Finance Act, 2009, under which a penal rate of TDS has been made applicable with effect from 1.4.2010 @20% or higher rate if prescribed, in cases where PAN is not available.

PAN for domestic parties: Section 206AA also necessitates the quoting of PAN in case of all declarations for domestic parties under section 197A. However, this is contradictory to the provisions of section 139A which stipulates that PAN is applicable only in certain cases like those with taxable income etc.

In fact, 197A only covers the issue of declarations in respect of dividend income and interest incomes under sections 194 and 194A in Form 15G and Form 15H. Parties with exempt incomes under the various provisions of the Income Tax Law like those with agricultural income etc. are not eligible to give declarations under section 197A for receiving payments in respect of other TDS provisions like section 194C, 194J etc.. It may be noted that in Smt. A Kowsalya Bai and Others vs. Union of India - 2012-TIOL-454-HC-KAR-IT, the Karnataka High Court has held that it should not be necessary for persons whose income is below taxable limits, to obtain PAN...."Imposing condition on such small depositors to invariably obtain a Permanent Account Number would cause hindrance.....".

It is therefore submitted that the following corrections be incorporated:

- Section 197A be extended for all TDS sections so that a person with say, agricultural income or income below taxable limit and in receipt of any payment under section 194C etc. can give a proper declaration.

- section 206AA be amended to exclude the quoting of PAN number in cases where the person has 'nil' income / exempt income / income below taxable limit.

(iii) Applicability Of Section 194c To Manufacturing/supplying Product By Using Material Purchased From Same Party Only If Such Material Purchase Is Substantial :

In the Finance (No.2) Act, 2009, TDS was made applicable under section 194C in respect of contracts for manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. However, in a large number of instances, it is observed that the material which is purchased from the customer represents a small fraction of the total cost and this provision has created huge operating problems since the transaction may be a principal to principal contract for purchase and sale of goods and the profit margin may be very small. Therefore, it is suggested that the provisions of section 194C be only made applicable in cases where the material purchased from the customer is substantial in nature, i.e., say it exceeds 40% of the total material cost (inclusive of raw materials and packing materials).

(iv) Enhancement Of Limits For Tds U/s 194c For Payment To Contractors :

Currently any payment for contract services rendered which exceeds Rs. 30000 at a time or Rs. 1,00,000 per annum requires the persons responsible for making such payments to deduct tax at source under section 194 C. These limits have been fixed some years ago. The deduction of tax at source on such small amounts involves deployment of relatively large amount of resources in terms of manpower, systems and other costs at the assessee's end without any significant benefits to the revenue. It is recommended that the threshold limit be increased to Rs. 50000 for single payment and Rs. 1,50,000 for aggregate annual limit.

(v) Applicability of TDS on Genuine Provisions On Estimate Basis Without Bills

Currently tax is deductible even in cases where payment is not made and the amount is merely credited in the books of the assessee as provision for expenses or as suspense account or by any other name. Very often, such provisions or credits are made by the assessees to follow accrual system of accounting so that true and fair state of affairs of the business is reflected in the books and to ensure that all revenues and expenses are appropriately matched. This does not necessarily mean liability has crystallized or the amount has become due. Very often exact numbers are not available and the provisions/credits are made based on best estimates available with the assessee. As per the current position, the assessee is required to deduct tax on such provisions even before the bill/invoice has been received. This often leads to excess deduction of tax, disputes with the vendor and extensive reconciliation. Further, this causes great amount of confusion between the assessee and the vendor if the provisioning by the assessee and invoicing by the vendor fall in two different financial years. It is therefore recommended that no TDS should be applicable on entries made by assessees which are merely provision for expenses for work completed / services rendered but for which bills have not been received. TDS may be imposed only on such credit entries to the party accounts which are supported by bills / invoices .

23. Domestic Transfer Pricing :

The Budget for 2014 had introduced provisions in respect of Transfer Pricing Audit and documentation for domestic transactions with associated enterprises/related parties. It has been observed that for transactions between domestic companies both of which are profitable, there is no tax implication since the tax rates are virtually the same. Therefore, it is recommended that such transactions between profitable domestic companies which are associated enterprises should be exempt from the requirements of the Transfer Pricing regulations to avoid unnecessary documentation, disputes and litigation.

24. Retirement Funds :

As per rule 87 of the Income Tax Rules, the employer is permitted to make a total contribution not exceeding 27% of the employee's salary in respect of Provident Fund and Superannuation. Further, as per schedule IV of Part A rule 6 of the Income Tax Act, the employer is permitted to contribute upto 12% of the employee's salary in respect of Recognised Provident Fund. In other words, the Income Tax Law permits contribution upto 15% for Superannuation and 12% for PF.

In the context of the current rates of interest and the high cost of annuities and considering that pensions are in any case taxable in the hands of the employees at the time of receipt, it is suggested that the limit of 15% for Superannuation should be done away with.

In fact, employers should be encouraged to increase the quantum of contributions to ensure a proper annuity / pension for the employees. The law should only stipulate that the annuities should be purchased from recognized and approved Life Insurance agencies. Moreover, the stipulations under section 36(1)(iv) and consequential limits fixed on initial contributions should be totally done away with. In fact, if there are gaps / deficits in the Retirement Funds in terms of the total fund position in relation to the actuarial value, the employer should be under a strict obligation under law to pay up the same for bridging the deficit and thereby avoiding a default.

25. Axability Issues For Gratuity, Leave Encashment And Other Terminal Benefits For Legal Heirs Of A Deceased Employee :

There is a lot of confusion in respect of TDS/taxability of various payments like gratuity, leave encashment and other terminal benefits to the legal heirs of a deceased employee. The existing circulars are very old and needs to be updated based on the current Income Tax Law. Detailed note is enclosed (Annexure 2) . This matter needs to be clarified urgently.

26. Confusion In Respect Of TDS On Payment For Telephone Bills (including Mobile Bills), Telephone Bills, Internet Charges, Electricity Charges Etc. Consequent To Amendments In Section 9(1)(vi) Explanations 2 And 6 :

Consequent to the amendment to the explanations to section 9(1)(vi) of the Income Tax Act in the Budget for 2012, it could be construed that TDS is applicable in respect of payments for telephone bills, mobile bills, internet charges, payment to cable operators, broadband charges, electricity charges and wheeling and transmission charges. However, it should be noted that the said amendment to the definition of "royalty" is ambiguously worded and is inconsistent with the industry understanding as well as in conflict with the established position internationally that the right to use of any service does not result in "royalty" per se without the right to use the concerned equipment or process. The characterization of such payments as royalty would be dependent on the terms of use and degree of control over the industrial, scientific or commercial equipment. Indian Courts have consistently maintained this position. Detailed note is enclosed (Annexure-3). Further, companies like BSNL have given internal instructions that no TDS is applicable for payment of telephone bills. In fact, if TDS deduction is made by the subscriber, then telephone lines are being disconnected. Therefore, it is absolutely necessary for the CBDT to give a detailed circular explaining the applicability of this new explanation 6 to section 9(1)(vi) and specifically confirm that no TDS is applicable for payment of telephone bills including mobile bills, payment of internet charges, payment to cable operators, service providers for viewing television channels, payment of broadband charges, electricity charges, wheeling/transmission charges etc. where the payment is only for the right to use the service without any payment for the right to use/control on the equipment / apparatus.

27. Appeals To Cit Appeals Under Section 246a To Include Interest Under Section 220(2):

In the last few years, the list of sections under section 246A has been revised in the context of appeals with CIT(Appeals). However, interest under section 220(2) has been missed out and this is currently creating unnecessary harassment for all assessees.

28. Long Term Capital Gains - Bonds Under Section 54EC :

The Income Tax Law has stipulated a limit of Rs.50 lacs per assessee in respect of the long term capital gains tax saving bond under section 54EC. Currently, huge amounts are required to be deployed in the infrastructure sector and this vehicle could be used for raising such infrastructure development funds. Moreover, the interest income on such bonds is fully taxable. Therefore, it is suggested that this limit should either be removed or substantially increased.

29. Carry Forward Of Excess Foreign Tax Credit :

The Income Tax Act allows for set off in respect of foreign taxes paid on overseas income. However, in case of loss/inadequate profits, no set off may be possible. In the current economic scenario of the global economy, business outlook has become extremely uncertain and results have become very volatile. Therefore, it is suggested that assesses be permitted to carry forward (say for five years) such unutilized credit (in USA such relief is granted vide section 904(c) of Federal Tax Act) for adjustment in future years.

30. Reassessment - Section 147/Section 148 :

Nowadays, reopening notices under section 147/section 148 have become a very common occurrence and such notices are being served in large nos. all over the country. It appears that there is no consideration in following the principles on the subject laid down by the Hon'ble Supreme Court and High Courts over the years. Simple audit observations, even on points of law, are frequently being used as grounds for re-opening leading to extreme harassment to all assessees. In fact, the position has become so bad that even for legislations which have become obsolete like Interest Tax (withdrawn in Finance Act, 2001) re-openings are being done for very old years since the relevant law permitted re-openings without any time limit.

Further, the said reopening provisions are being misused in various locations, especially for salaried assessees, where scrutiny assessment is not possible as per the CBDT guidelines and this has become a breeding ground for corruption and harassment.

Therefore, it is suggested that proper stipulations be laid down for any reopening and the period of reopening be also reduced to 3 years from the end of the assessment year.

Proviso to section 147 has been inserted to provide that the Assessing Officer may assess or reassess other than matters which are the subject matter of any appeal, reference or revision. However, in respect of matters which have already been examined at the time of original assessment, the current law as laid down by the various courts categorically stipulates that reassessment of the same cannot be done since it will result in change of opinion. Moreover, it does not make sense to keep on assessing/reassessing the same matter again and again. The annual income tax assessment/reassessment procedure should be normal and routine and should not provide for excessive powers to harass assesses. Therefore, it is suggested that the new proviso to section 147 should also state that all matters which have been examined in the original assessment should not be reassessed.

31. Penalty Under Section 271:

A new sub-section (1B) has been inserted retrospectively from 1 st April 1989 to provide that in case of any addition/disallowance in the assessment /reassessment order, the Assessing Officer can give a direction for initiation of penalty proceedings and this shall be deemed to constitute satisfaction for such initiation. It is apprehended that such general power will result in initiation of penalty proceedings in case of any addition/disallowance without justification. This will itself result in arbitrariness, harassment and risk of increased litigation. Moreover, the retrospective amendment will result in opening up a lot of past cases which have already been decided/closed. Therefore, it is suggested that this provision may be withdrawn. Even otherwise, it should not be made applicable retrospectively.

32. SIgning Of Notices Under Section 282A:

The new section 282A has been inserted to provide for issue of any income tax notice or other document without it being signed by the requisite authority. This can result in widespread misuse of powers and harassment. The memorandum has explained that this change is being provided for in the context of computerized generation of notices and other documents.

It is suggested that the computerized notice / document should have a separate control like provision for a digital signature because these are legal / statutory documents and this aspect should specifically be incorporated in section 282A. In respect of manual notices/documents the section should also record that signatures will be mandatory applicable.

33. Service Of Notices - Section 292BB :

Section 292BB has been enacted to provide that if an assessee has appeared in any proceeding or co-operated in any enquiry in respect of any assessment or reassessment it shall be deemed that notice has been duly served upon him and he cannot take any objection in respect of service of the notice. This provision could also be misused by Income Tax Officials with consequential risk of harassment specially in case of time barred notices. Therefore, it is suggested that this may kindly be withdrawn.

34. Deduction For Personal Tax Computation :

The Finance (No.2) Act, 2014 had increased the overall limit to Rs.1.5 lac in respect of deduction under section 80C. In the context of the current inflationary situation, it is suggested that this limit be increased to at least Rs.2.5 lac. This would act as a fillip to investments and also generate greater savings for the tax payer.

35. Limit For Medical Reimbursements:

Medical expenses reimbursed by the employer are exempted to the extent of Rs.15,000/- per annum. This limit has remained unchanged from the financial year 1998-99 onwards. Considering the sharp escalation in cost of medicines and medical treatment, it is suggested that this limit be increased to Rs.50,000/-.

36. Medical Reimbursements For Retired Employees:

Under section 17 of the Income Tax Act, medical reimbursements to employees are exempted from tax in respect of general medical expenditure (upto Rs.15,000 per annum) and expenditure incurred in approved hospitals. However, this tax benefit is not available to retired employees. It is suggested that the provisions of section 17 be amended to include retired employees for the tax benefit on medical reimbursements/hospitalization expenditure in approved hospitals.

37. Leave Travel Concession/Assistance- Tax Relief Every Year And Replacement Of Calendar Year By Financial Year :

As per the current provisions, Leave Travel Concession/Assistance is eligible for tax relief for 2 calendar years in a block of 4 calendar years. It is suggested that the concept of calendar year should be replaced with financial year (April - March) in line with the other provisions of the Income Tax Law. Moreover, the concerned tax relief should be granted annually and be extended to both domestic and foreign travel, to give a fillip to the Travel and Tourism Industry.

38. exemption For Payment Of Leave Encashment To Be Raised To Rs.10 Lakhs:

The exemption limit for payment of leave encashment is notified by the CBDT in accordance with the powers given under section 10(10AA). The current limit of Rs. 3 lakhs is very old (since 1998) and needs to be raised substantially with immediate effect. It is suggested that the limit should be raised to Rs.10 lakhs.

39. Other Tax Incentives For Individuals :

The Income Tax Law currently provides for various tax exemptions for individuals like transport allowance relief @ Rs.1600/- per month, children education allowance exemption upto Rs.100/- per month upto 2 children, children hostel allowance exemption @ Rs.300/- per month etc. These tax reliefs have not been revised over a long period of time and needs to be suitably enhanced. Otherwise, these benefits should be withdrawn and replaced by a standard deduction for the salaried class to ensure tax simplification.

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ANNEXURE 2

TAXABILITY OF GRATUITY, LEAVE ENCASHMENT AND OTHER TERMINATION BENEFITS TO THE LEGAL HEIR(S) OF A
DECEASED EMPLOYEE:

(a) Regarding Leave encashment -

There are CBDT circulars stating that leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary / not taxable. The gists of the 2 circulars are given below :

- Circular No. 35/1/65-IT(B), dated 5-11-1965 states if the legal representative of the deceased is to be taken to be the assessee, then the amount/proposed to be paid is certainly not due to him. It is an ex gratia payment on compassionate grounds in the nature of gift. Thus, the payment is not in the nature of salary.

- Circular No. 309 [F. No. 200/125/79-IT(A-I)], dated 3-7-1981 states this receipt in the hands of the family is not in the nature of one from an employer to an employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof the amount will not be liable to income-tax.

Based on the above 2 circulars it would seem that CBDT intends to exempt in the hands of the legal heir the leave encashment salary received by the legal heir of a deceased employee.

(b) Regarding Gratuity -

- There is a CBDT Circular No. 573 dated 21.08.90 which states that a lump-sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heirs of an employee, who dies while still in active service, is not taxable as income under the Income-tax Act, 1961. Infact this circular will cover all other lumpsum termination benefits being paid to the legal heir of a deceased employee, who dies while still in active service.

- Further, there are 2 caselaws Smt. L.K. Thangammal Vs. Third Income Tax Officer (2003-TIOL-179-ITAT-MAD) and First Income Tax Officer Vs. Smt. A.A.Talati ( 2003-TIOL-178-ITAT-MUM) which clearly established the law [before introduction of Section 56(1)(v)] that gratuity received by the legal heir of a deceased employee is not taxable, even after taking into account the provisions of section 10(10)(iii) of the Act.

(c) However, Section 56(1) and section 2(24) has been amended w.e.f AY 2005-06 to include gratuitous payments received by an Individual/HUF (any sum of money received not exceeding the prescribed amount without any consideration) with a view to widen the scope of Income. There are certain specific exclusion to such gratuitous receipts but such exclusions do not cover the leave encashment, gratuity or other termination benefits received by the legal heir of any deceased employee in connection with the services rendered by him.

Hence, due to the introduction of Section 56(1)(v)/(vi)/(vii) the leave encashment, gratuity and other termination benefits received by the legal heir is now getting taxable though there were CBDT circular issued [before the introduction of Section 56(1)(v)/(vi)/(vii) of the Act] which had exempted such payments. As the earlier CBDT circulars have not been withdrawn there is a confusion as to whether these payments to legal heir are taxable income in their hands or not.

Since death of an employee creates a lot of financial hardship to the legal heirs and it will be difficult for the legal heirs to calculate and pay taxes on the termination benefits received, hence it is suggested that CBDT should come out with a clear instruction that leave encashment, gratuity or other termination benefits received by the legal heir of a deceased employee is not taxable , even after the introduction of Section 56(1)(v)/(vi)/(vii) of the Act.

Implications Of The Explanations Inserted In The Definition Of Royalty By The Finance Act 2012

- As per explanation 2 to Section 9(1)(vi) of the Act, Royalty inter alia included within its ambit any lumpsum consideration for

(a) the use of any patent , invention, model, design, secret formula or process or trademark or similar property.........

- Explanation 6 to Section 9(1)(iv) has been introduced by Finance Act , 2012 which clarifies that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking , amplification, conversion for down-linking of any signal), cable, optic fibre or by any similar technology, whether or not such process is secret.

- Based on the above clarificatory explanation introduced by the Finance Act 2012, various transactions (as listed below)which are actually not in the nature of royalty payments and were earlier not within the ambit of TDS may now come under the purview of Section 194J, based on the wordings of Explanation 6 :

(a) Payment of Telephone (including mobile ) bills.

(b) Payment of Internet charges.

(c) Payment to cable operators, service providers like tata sky, distributors of tata sky, dish TV etc. for viewing the television channels.

(d) Payment of Broadband charges.

(h) Wheeling/ transmission charges paid to the state-electricity grid or private electricity transmission and distribution companies for transmission of electricity of the electricity generated by the windmills installed by private assessees to their factory/units for captive consumption.

(i) Electricity charges.

- However, there should not be any levy of TDS on the above transactions viz., telephone / mobile charges, internet charges , payment for viewing television channels, electricity charges based on the amendment of Finance Act 2012, since -

i. The subscribers/ customers are not getting any right/claim any property in the transmission lines by paying these amounts. The contract between the subscriber and the other party in none of these cases is for using any transmission lines (say for telephone charges, electricity charges, but it is a contract where the service provider (telecom co., electricity Co., etc.) are suppose to provide for a service by using their own infrastructure of cables, satellites, optic fibre line etc. Since no right is being given in respect of the transmission lines to the subscribers/clients , hence the payment made all the above transaction should not be treated as Royalty and no TDS should be deducted .

ii. The telecom co., electricity co., internet service providers are raising huge resistance against the deduction of Tax at source. BSNL, which is a PSU Company, has clearly circulated a letter wherein they have said that no TDS is applicable on telephone charges and in case tax is deducted by the subscribers/clients then telephone services will be discontinued. Copy of their letter is attached. Further, there is also a letter from CBDT to BSNL, letter no. 275/72/2002-IT(B) dated 16-2-2004, wherein the CBDT has stated that TDS under section 194J would not be applicable on payment made by subscribers to telecom companies.

iii. There are caselaws delivered prior to the Finance Act 2012 [Skycell Communications Ltd - 2003-TIOL-240-HC-MAD-IT - Madras High Court] wherein it has been clearly held that services in the nature of a standard facility , provided with the use of highly sophisticated equipment cannot be considered to be a technical service and hence does not attract TDS. Hence, no TDS u/s 194J is applicable on payment for telephone services, internet services etc. Thus, till date the Income Tax Dept had contested that these are payment for technical services and courts have clearly held that such payments are not technical services. Thus, now the department cannot do a volte face and assert that the above listed transactions are royalty payments (since these cannot be technical services in the light of the HC decision) on which TDS u/s 194J will be attracted.

iv. Regarding, wheeling/ transmission charges paid to the state-electricity grid or private electricity transmission and distribution companies for transmission of electricity of the electricity generated by the windmills installed by private assessees to their factory/units for captive consumption, there are specific caselaws by various Tribunals that no TDS u/s 194C or 194J on wheeling and transmission charges paid to State Electricity Transmission Co; Charges not for 'carrying out work' or FTS; Such payment is made pursuant to order of State Authorities constituted under Electricity Act and represents mere reimbursement of cost.

- Since the amendment to explanation 6 has created a lot of confusion as to the application of TDS u/s 194J on payments which are not in the nature of royalty itself, it is suggested that CBDT comes out with a circular explaining the applicability of this new explanation 6 and specifically exclude payments for telephone (including mobile) bills, payment of Internet charges, Payment to cable operators, service providers for viewing the television channels, Payment of Broadband charges, Electricity charges, Wheeling/ transmission charges paid to the state-electricity grid or private electricity transmission and distribution companies for transmission of electricity of the electricity generated by the windmills installed by private assessees to their factory/units for captive consumption.