Business Advisor - November 10, 2012 - Preview, contents

Volume I Part 2 November 10, 2012 1 Business Advisor

Business

Advisor (Fortnightly inputs for professionals and executives)

Volume I Part 2 November 10, 2012


Contents

1) Corporate gifts: Bad governance - Dr S. Chandrasekaran

2) Negotiating with a banker - Dr B. Yerram Raju

3) Reforms and roadblocks - Bimbadhar Mishra

4) Markets endorse reforms - Dr Sanjiv Agarwal

5) March of the digerati - GBS Bindra

6) Education abroad: Forex implications - G. Karthikeyan

7) FDI in retail – Interview with Sriram Sridharan

8) FDI in retail – Business leaders’ views

9) Case laws update – V. K. Subramani

10) Queries, Information

(Cover photos location: ITC Grand Chola, Chennai)

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Corporate gifts: Bad governance

Dr S. Chandrasekaran

At the World Economic Forum (WEF) meet, several corporate

heads participated including the Union Law Minister, voiced

and appreciated the anti-corruption initiative, and have

pledged to stamp out bribery in their organisations and

across supply chains. India Inc. is focusing on setting ethical

standards and concrete action plans for business to fight

graft. It should be practised in all spheres by any means

without leaving it to preaching alone. Comptroller & Auditor General of

India who is in the limelight these days raised the question, why leave the

tackling of corruption to government alone. Leaving it to the government has

not succeeded, he said.

A typical, unethical bad practice is being followed by corporate sector by

offering gifts during the festival to people other than their employees and,

more particularly, to bankers and government servants. Distribution of gifts

by corporate entities during Deepavali can be construed as bribery.

Corporates are artificial persons and distinct from normal human beings

and do not have any friends and relatives to offer any gifts out of love and

affection without any expectation in return. Celebration of festival by

corporates should be through exchange of greetings and not by offering gift

irrespective of its value. Corporate governance speaks about transparency

and disclosure and throwing away such valuable gifts by corporates is not

related to business activities and does not qualify for tax deductions.

Corporates send valuable gifts to bank executives and employees and also to

government servants. Several leading cash-rich companies do have separate

treasury division; and bankers, mutual funds, in order to grab the lucrative

finance business too offer gifts in different forms to the executives and staff

of the treasury division of companies. Indian Banks Association should

come out openly and strongly banning the giving or accepting gifts in any

manner. A mechanism needs to be in place to check both accepting and

giving gifts. It is customary for listed companies to throw gifts, gift coupons

to small investors during annual general meetings, and the Ministry of

Corporate Affairs has come out with a draft circular banning distribution of

gifts at annual general meetings. Government should set an example by

directing their employees not to accept gifts during festivals in the same

lines as banning the giving of gifts to small investors.

(The author is Senior Partner, Chandrasekaran Associates, Delhi)


Negotiating with a banker: 7-point recipe

Dr B. Yerram Raju

Most CFOs and CEOs of mid-corporates find it tough to

negotiate a business deal with a bank. Some CFOs

have an uncanny knack of having their way through.

Look at Mr Ajay, a young CFO who joined Merkel and

Co, a pharma franchisee with a Rs 100 crore turnover

during the last three years. The chairman told Ajay on

the day of joining that the company is looking to expand its brand image

and improve its overseas sales by at least 150% in the next year and

doubling it the year thereafter. Banks are shying away at the moment. The

enterprise requires higher working capital and packing credit facilities. The

challenge, he could see, is formidable. He thought he had a recipe and it

worked. How did it work?

Banks usually are tight-fisted in times of

recession to grant enhanced limits. They also

have full information of the enterprise,

ecosystem in which it operates and the depth

of the export markets. They also have a track

record and credit record of the enterprise

seeking to expand its operations.

But Ajay was sure that the banks would not

like to lose a good client for another bank.

Since Merkel is a company of proven track

record he was hopeful of the deal for higher

limits on both working capital and export packing credit. He took an

appointment with the GM (mid-corporates) of the bank one fine morning. He

did his homework well. He gathered full data of the enterprise; environment

in which the entire industry has been working; the drug controls of both

India and the Asian economies in which the company is going to operate;

the disease patterns there; government health care and insurance

mechanisms; the IPR and above all the financials. He also worked on the

stress-testing of his projections. He presumed that in the first instance the

bank would know of the enterprise and ecosystem equally well. He started

off with all humility. During the discussions, when he noticed that the depth

of the officials on the areas requiring attention was not so high, he pitched

his fork high. He left some issues deliberately for the bank to come up with

subsequently. He did not press for a solution instantaneously. He left a

cooling time with the bank. He awaited a call from the bank three days after

Banks usually are

tight-fisted in times

of recession to grant

enhanced limits.

They have full

information about

the enterprise.


the first call. He went with his accounting team and with the required

project proposal in the bank’s usual format. He took care to ensure that no

additional collaterals would be offered. He kept under his armpit the

directors’ individual guarantee to offer when absolutely necessary. Finally,

when asked, he just mentioned that it was the company’s intention to go for

public issue at a propitious moment and raise equity to meet future needs

and therefore, it would be difficult to offer the same at the moment. The deal

got through.

The recipe is simple

1) Do your homework well: know your own enterprise, its SWOT.

a) Brainstorm possible implications of the proposal with the Board and

internal management.

b) Cushion the proposal with adequate collaterals and guarantees but

keep it undisclosed.

c) Go as a team for presentation with your confident technical and

financial team for discussion.

2) Do not thrust yourself at inconvenient times for the banker.

3) Be transparent during negotiations.

4) Be humble.

5) Never hide the data.

6) Go with a vision and a future plan.

7) Give reasonable time to the bank to think and come back with their offer.

(Dr B. Yerram Raju is Regional Director, PRMIA-Hyderabad www.prmia.org)

http://www.prmia.org/


Markets endorse reforms

Dr Sanjiv Agarwal

If hike in diesel prices and controlled supply of subsidised

cooking gas cylinders created a political furore all over, the

other reform measures such as allowing FDI in retail,

substantial reduction in taxes on overseas borrowings by

Indian Companies from 20% to 5% and final announcement

of Rajiv Gandhi Equity Scheme (RGES) as announced in

Budget brought much awaited frenzy on the stock markets.

It is also hoped that interest rates would also be reduced shortly resulting in

surge in demand for loans and housing loans. The setting up National

Investment Board will also help large projects and capital market. The boost

in equity market as well as demand for money would also help government

in suppressing the rising demand for gold. With

more foreign capital coming in, Indian rupee will

improve further against dollar.

These reform measures and a will (at least now

visible) to push some more reforms and the

toughness reflected in the Prime Minister's rare

recent address to the nation has enhanced the

market and the investor's confidence. The

markets have reacted positively, particularly in

insurance, financial sector, infrastructure and

capital goods sectors.

After almost half of the current financial year

has gone by and the budget announced scheme of Rajiv Gandhi Equity

Savings Scheme (RGES) has been notified now only. In RGES, tax incentives

will be given to first-time investors in equities. REGS shall on one hand

promote and rejuvenate the equity cult in the county and on the other,

likely to become a tool for government to offload PSU stocks on proposed

disinvestments. In fact, in some cases, it could be a win-win situation for

both the ends.

Conditions for Investment in RGES

• Only individuals can apply and the scheme is not for corporate investors

• Annual total Income in the year of investment should be less than Rs. 10

lakhs … (To read the complete article subscribe on http://bit.ly/ShriMagz)

In Rajiv Gandhi

Equity Savings

Scheme (RGES),

tax incentives will

be given to first-

time investors in

equities.



March of the digerati

G. B. S. Bindra

As governments across countries grapple to understand the

grand shifts taking place, the voice of a new generation

bolstered by technology is redefining democracy.

Fundamental to this shift is the power of the Internet and

mobile telephony.

Five hundred years back, it was the Gutenberg’s press which

turned Europe upside down. It was the power of the printing press which

was employed by our leaders during the struggle for Indian independence.

Then, about a hundred years ago, radio waves were harnessed to send

sound and images through the air. Through radio and then television, you

could get a message to everybody. Whether you do that with broadcasting

tower, wire-line or a printing press, it is an illustration of one-to- many

messaging communication. Now, something new is announcing itself. We

are in the midst of profound transformation. Some far-reaching technology

changes are happening and that’s fundamentally changing the nature of our

democracy.

The Internet as a medium has inherent support for conversations. While

radio and television allows one-to-many messaging, the Internet facilitates

many-to-many messaging. We have had the Internet and mobile telephony

in its public form for well over two decades now, but it has evolved all the

time, as media has become more social and more people access Internet

from mobile phones. This coupled with the fact that audiences can now also

be producers and not only consumers of information, dramatically

multiplies the influence of Internet. The same equipment, such as mobile

phone and computer, not only lets you consume information but also

simultaneously allows you to produce information.

Internet is increasingly becoming part of everyday life of the middle-class

and the democratic character of the Internet and social networking in

particular, has been firmly established. By design, Facebook, Twitter and

tools of similar kind are conducive to people coming together in a virtual

civil society. Using these free, open and easy to use tools on the Internet is

becoming a powerful way for the current plugged-in generation to demand

change. Surely a government for the people and by the people requires more

than Facebook and Twitter but the fact remains that social media is filling

an important vacuum as it becomes the fabric of civil society. During Arab

spring… (To read the complete article subscribe on http://bit.ly/ShriMagz)



Education abroad: Forex implications

G. Karthikeyan

Arya a graduate of IIT Delhi intended to pursue post graduate

studies at the prestigious MIT, USA. Arya cleared the entrance

and admission procedures with flying colours and was

absolutely delighted to be offered a seat at MIT. Her parents,

though equally delighted, were also concerned about the

prospective financial outlay which would be required to make

their daughter’s dream a reality. However, Arya’s parents were

conscious of the honor that a seat at MIT constitutes and did not want their

daughter to miss a golden opportunity. Thus, the admission process and

planning started in 2011 and the financial outlay was envisaged based on

the prevailing exchange rate of Rs 44 to Rs 45 per USD with a plus or minus

10% factor. Arya’s parents arranged requisite financing through an

application for an education loan from a scheduled commercial bank and

the bank agreed in principle to sanction the loan.

The loan amount, which was arrived at

based on prevailing exchange rates in

2011, fell short of the actual expenses of

admission in 2012, thanks to the 30%

depreciation in rupee value considering

the current exchange rate of Rs 56 per

dollar. Arya’s parents had no choice but

to request additional financing, thus

placing an extra burden of interest and

repayment on them and on Arya herself

should she choose to help repay the loan.

Arya is also contemplating approaching

her uncle in USA for a loan to tide over

the tight situation.

While the ever-increasing cost of education is worrying to all parents whose

children pursue higher education, the concern is doubled if the child needs

to go abroad for the same for the obvious reason that the price of an

American dollar has increased by 30% over the last one year. The support of

Indian banking industry in the last decade in terms of granting education

loans and the provisions of Income tax laws for deduction of Interest have

helped many foreign education aspirants. Indian Income tax laws allow

deduction of interest on education loans without any upper limit… (To read

the complete article subscribe on http://bit.ly/ShriMagz)

Indian Income tax laws

allow deduction of

interest on education

loans without any

upper limit. However

deduction of principal

repayment is not

allowed.



FDI in retail

Interview with Sriram Sridharan

Sriram Sridharan, Co-founder of Gormei Market (FB:

gormeisriram) took time off to answer a few questions on the

topic that has been stirring quite some debate, ‘FDI in

retail’.

First, which side are you on - the ‘yes’ or the ‘no’ group

- with regard to FDI in retail?

I support allowing foreign direct investment in the Indian retail sector with

some restrictions.

Would you like to elaborate on the reasons for your stand?

We have had an open economy for the past 20 years. Indian retail

participants have had enough time to better serve their customers by

investing more in infrastructure, by improving supply chain processes, and

by enhancing their shopping experience. They have had enough time to

work with our growers, support them in a

win-win manner, and create sustainable

eco-systems. They have had enough time

to reduce wastage and eliminate layers of

middlemen. They have had enough time to

create efficient systems and pass on the

resulting cost savings to consumers.

Looking at the current retail scenario, it is

clear that none of these have happened.

It is time we got some outside help. It is

time we have access to global capital,

processes and technology. It is time we

forged partnerships with global

participants to employ proven techniques in order to solve our fundamental

challenges.

What are your observations on India’s experiments with big-box

retailing thus far?

India’s big-box retail (or broadly, organised retail) has not delivered on its

promises. The purported ‘efficient value chain’ did not become a reality,

especially in food retail. The growers are not getting a better price; neither is

It is time we forged

partnerships with

global participants to

employ proven

techniques in order to

solve our fundamental

challenges.


the customer getting better quality produce in a consistent fashion.

Organised retail has a long way to go in our country. There needs to be

more focus on providing infrastructure and know-how to effectively store,

supply and market high-quality goods as reasonable costs.

Where can things go wrong when it comes to reaping the advantages of

retail FDI? And what can we do about them?

Couple of things can happen: The mom-and-pop shops might suffer in the

short term; however, I suspect they will adapt and start adding value

differently like home delivery, personalised service, being in the

neighbourhood etc, and hence find a way to stay relevant. A bigger threat,

especially in the food sector, is losing our food diversity in the name of

efficiency. What will happen to our traditional millets and our numerous

varieties of bananas? Will lab-engineered foods become our staple in the

name of food security? Will we start seeing standard-issue bananas, which

appear tasty, all over our markets? These are the questions that need

pondering and scrutiny.

Any other points of interest?

FDI will act as a necessary destructive force to shake up bad practices, and

create efficient systems in our retail landscape. We will need foreign direct

investment to create a new order, to spur further growth in the retail sector,

and subsequently boost our overall economy. But the policy needs to be

implemented with abundance of caution so as to protect our eco-systems,

support our growers, and still reap the benefits of global capital, processes

and technology.

D. Murali


FDI in retail: Business leaders’ views

Somnath Pal, CEO, Citrus Check Inns

Foreign direct investments in retail is an important

phenomenon in Indian economy. While India is still reckoned

as an agricultural economy, agriculture contributes only

17.2% of the country GDP. Services and Industry have

overtaken agriculture with 56.4% and 26.4% GDP

contribution respectively. FDI in retail not only promises job

opportunities in urban and semi-urban areas of India, but

holds promise to substantially improve agricultural supply chain like cold

chains, logistics etc. This will plausibly enhance the earning potential of

farmers; improve productivity, efficiency and open up wide scale

employment and entrepreneurship. It is said that untenable storage

facilities at terminal and retail markets cause more than 50% depletion of

perishable and semi-perishable products before they reach the refrigerator

of the consumer. Organised retail may bring down this wastage

substantially, creating profit at multiple levels of agriculture business. FDI

in retail will enhance standardisation and quality control which will add

value to healthy civic life. This is over and above the anticipation of creating

more than half a million jobs in urban & rural areas.

Sachiin Joshi, CMD, Viiking Ventures Pvt Ltd

I think FDI in retail is a good move. I back the government’s

decision to allow FDI in multi-brand retail. The retail market

will get much more organised and structured. Consumers will

get better pricing of goods at affordable pricing with high-

quality assurance. It will benefit all stakeholders in the entire

value and supply chain. The need of the hour is to urgently

integrate the supply chain and remove the disparity between

retail and farm prices. Moreover FDI in retail will not only benefit the entire

Indian retail sector, but will also help generate employment opportunities

and lead to higher income generation. This retail revolution will definitely

improve the Indian economy in a big way.

Mohan Mahajan, Founder Partner, Mahajan & Aibara

The government last week allowed up to 51% FDI in multi-

brand retail. This policy change will have several benefits. It

will generate employment for youth, contain supply side

inflation, and benefit the farmers as well as the consumers.


Farmers and consumers will benefit as the large chains will deal directly

with the farmers instead of mandis and middlemen. Competition and

efficiencies will drive down prices and help contain food inflation. These

companies are expected to invest in backend infrastructure, cold

distribution system and bring in modern management systems which will

help in reducing wastage of farm produce. Hypermarkets particularly

require huge amounts of capital and are unlikely to make any profits during

the first 10 years of their operations. In fact, most of the hypermarkets in

India are running at losses. Without the 1991 reforms and the opening up

of the economy, we would never have had the middle-class revolution and

achieved growth rates of 7 to 8% p.a. Even then some vested interests had

opposed the economic reforms. FDI in retail in China was allowed 20 years

ago even though it is a Communist country. Secondly, most of the big

Indian houses are already in multi-brand retail. It is therefore difficult

understand the logic in the argument that only foreign players will displace

kirana stores. On the contrary, entry of foreign retail companies will

increase competition and thus benefit the consumers by

way of lower prices.

Bijay Agarwal, Managing Director, Salarpuria Sattva

FDI in retail will improve supply chain and ensure fair price

to farmers.

Esther Lennaerts, CEO, Pressto Dry Cleaning & Laundry

Allowing foreign investment into retail is a good decision by the

government. It will bring efficient farming, logistics and

distribution to India and investment in infrastructure. More

efficient management will help lower inflation too. It will take a

few years to reach that stage but it is important to start now.

The consumer will benefit as well since the choice and the

quality of goods will increase/ improve and so will the service.

K. Vaitheeswaran, Founder & CEO,

Indiaplaza.com (@vaitheek)

FDI in retail will be bit of this and bit of that, bit more of this

and lot more of that. This being bad and that being good.

@CAnand31

A sign for growth wrt back-end infrastructure, technology, and experience

gap the industry is facing from unorganised players.


Case laws update

V. K. Subramani

Interest on loan borrowed before interest-free lending

would prompt disallowance of interest

CIT v. Harrison Malayalam Ltd (2012) 76 DTR (Ker) 335: When

moneys are borrowed before giving interest-free advances to

sister concern, the interest on moneys borrowed will have a

direct nexus and if such advances were not given to that

extent the interest expenditure would have been lesser. Hence, when a

borrowing is made, and interest-free advances are given to sister concern, to

the extent of the direct nexus between borrowing and interest-free advance,

the Revenue is justified in disallowing such portion of interest. Even loan to

subsidiary company cannot be treated as a loan out of commercial

expediency and on that score also the interest on borrowals preceding such

loan lending could be disallowed.

Receipt by pass-through entity is eligible for tax refund even though

such receipt was not forming part of its income

Arvind Murjani Brands (P) Ltd v. ITO (2012) 76 DTR (Mum) (Trib) 252: Where

the assessee received a payment meant for passing on the same to the

actual recipient, the amount of tax deducted at source on the payment so

made became eligible for tax credit even though the said amount did not

form part of its income or turnover. The assessee received rental payment

from a company net of TDS which was passed on to the real landlord

subsequently. The payer as a matter of precaution deducted tax at source

on the payment made. The assessee claimed credit for the tax deducted at

source though no income had accrued in its favour. The tribunal held that

the Revenue had to refund the amount which is not legitimately due to it in

spite of the receipt not forming part of income / receipt of the recipient.

Landing and parking charges paid to airport authority not liable for

TDS under section 194-I but under section 194C

CIT v. Singapore Airlines Ltd (2012) 76 DTR (Mad) 420: Landing and parking

charges paid to airport authority is more in the nature of contract payment

than towards rent. The amount paid towards various technical services

could not be called as rent for landing of aircraft and such payment was

held as liable for tax deduction at source under section 194C as contract

payment. The court upheld the view of the tribunal and dissented from the


decisions such as United Airlines v. CIT (2006) 287 ITR 281 (Del) and CIT v.

Japan Airlines Co Ltd (2010) 325 ITR 298 (Del).

Activity of deposit and lending amongst members, not banking

Dy.CIT v. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd

(2012) 76 DTR (Panaji)(Trib) 234: Where the assessee is engaged in accepting

deposits and lending to its members only and when no part of the deposit /

lending was from the public (non-members) it cannot be regarded as

engaged in banking business in view of section 5(ccv) of Banking Regulation

Act. Thus the proviso to section 80-P(4) will not apply. The claim of

deduction under section 80-P hence would be available to such entity.

Where the assessee has discharged his onus then the revenue has to

disprove the same for applying section 68

Vishnu Jaiswal v. CIT (Appeals) 2012 76 DTR (Lucknow) (TM) (Trib) 265:

Where the assessee had accepted unsecured loans and furnished bank

statements of loan creditors, the onus of proving the receipt of loans is

discharged. The onus would shift to the Revenue to prove the sufficiency of

the creditworthiness of the lenders. Where the Revenue had not examined

the loan creditors but merely rejected the evidences furnished by the

assessee, the addition under section 68

could not be sustained. The Revenue

cannot merely claim that the creditors

could not have saved any money to

advance the amounts without cross-

examining them and bringing any other

evidence on record.

Third proviso to rule 3 of Schedule III

will apply when more than one house is

kept for self-occupancy

Ramesh D. Hariani v. WTO (2012) 76 DTR

(Mum)(Trib) 297: Where the assessee has

kept more than one house for his own

residential purpose the assessee can value the house property as per third

proviso to rule 3, Schedule III of the Wealth-tax Act, 1957 and valuation

made as per second proviso by the Assessing Officer has to be ignored. The

house property if not commercial or non-residential but meant for exclusive

residential purpose it is adequate enough for applying third proviso to rule 3

was the dictum in CWT v. V.T.Ramalingam (1993) 201 ITR 839 (Mad).

(V. K. Subramani, Chartered Accountant, Erode)

Where the assessee

had accepted

unsecured loans and

furnished bank

statements of loan

creditors, the onus of

proving the receipt of

loans is discharged.


Queries & Replies

Service tax

Query: I am one of the trustees of a trust having multiple activities. Our

trust runs an educational institution and also a medical institution. In

addition we are running a coordinating arm for business entities by advising

them on their line specific activities.

In the light of mega exemption vide Notification No.25/2012-ST dated

20.06.2012 please elucidate on the scope of exemptions or taxability in the

context of service tax.

Reply: The query is brief seeking an overall idea as regards taxability or

exemption for various activities in the context of service tax.

The term ‘charitable activity’ is defined in the Income-tax Act, 1961 to cover

(i) relief of the poor; (ii) education; (iii) medical relief; (iv) other activities such

as preservation of environment and monuments etc; and (v) advancement of

any other object of general public utility.

In service tax ‘educational services’ specified in clause (l) of section 66D is

not a taxable service. However, it covers (i) pre-school education and

education up to higher secondary school or equivalent; (ii) education as a

part of a curriculum for obtaining qualification recognised by any law for the

time being in force; and (iii) education as a part of an approved vocational

education course.

Therefore, running of schools is exempt from service tax. However,

vocational training institutes do not provide education but provide only

training which improve the chances of success of candidates who already

have the required skill and hence are not eligible for exemption (vide

Circular No.107/01/2009-ST dated 28.01.2009).

As regards ‘medical services’ the mega exemption Notification referred above

exempts (i) health care services by a clinical establishment, an authorised

medical practitioner or paramedics; and (ii) services by a veterinary clinic in

relation to health care of animals or birds.

Hence, medical services rendered by the entity i.e. trust in this case is

exempt from service tax.

With regard to services rendered by charitable organisations other than

those covered by the above-said two types of services, item No.4 of

Notification No.25/2012-ST covers the same. It says ‘services by an entity


registered under section 12AA of the Income-tax Act, 1961 by way of

charitable activities’ is exempt from service tax.

The term ‘charitable activity’ is defined in clause (k) of para (2) dealing with

definitions which is inclusive of everything and somewhat overlapping with

the definition given in the Income-tax Act, 1961. It covers medical, medical

care service, advancement of religion or spirituality, preservation of forests

and wildlife.

It covers the expression ‘any other object of general public utility’ also and

prescribes the liability to service tax by making reference to the monetary

limit of Rs 25 lakh prescribed under the Income-tax law.

No service tax liability is attracted in respect of the activity of ‘any other

object of general public utility’ being pursued by the charitable organisation

up to Rs 18,75,000 for the financial year 2011-12 provided the total value of

such activities had not exceeded Rs 25 lakh during the financial year 2011-

12. In respect of any other financial year the threshold limit would be Rs 25

lakh if the total value of such activities had not exceeded Rs 25 lakh in the

preceding financial year. Thus enhanced threshold limit for service tax levy

would be applicable for charitable organisations with regard to pursuance of

objects of general public utility.

Controversy: Insertion of rule 112E to Income-tax Rules, 1962

We all know that social activists and general public seek transparency in

management of national resources and public money. The political parties

enjoy tax exemption if they comply with certain basic legal requirements.

Donation to political parties is deductible for the taxpayers in the recent

times. In spite of having such liberal provisions and compliance

requirements we come across unacceptable dealings and actions. Recently,

the Central Government inserted rule 112E to the Income-tax Rules, 1962

the impact of which is given below:

(i) The Assessing Officer is not to issue notice for assessment or

reassessment for six years immediately preceding the assessment year in

which the search is conducted in respect of the following cases:

(a) Where as a result of search under section 132(1) or requisition under

section 132A a person is found to be in possession of money, bullion,

jewellery, or other valuable articles or things, whether or not he is the actual

owner of such money, bullion, jewellery etc; and

(b) where a search is conducted or requisition is made in the territorial area

of an assembly or parliamentary constituency in respect of which a


notification has been issued under section 30 read with section 56 of the

Representation of the People Act, 1951 or where the assets are seized or

requisitioned are connected in any manner to the on going election in

assembly or parliamentary constituency.

Effect: In respect of constituencies where election is held and any money,

bullion etc is seized or requisitioned the tax consequence will be with

reference to such search and seizure limited to that event only. No

reopening of assessment of the preceding assessment years would be

resorted to by the Department. In effect, the unexplained money (including

jewellery etc.) would be taxed at flat 30% as per section 115BBE and the

past assessments of such person who was searched and engaged in election

work / campaign will not be disturbed.

Why is such protection given for those persons who are engaged or

connected to election campaign across the board in respect of all political

parties? Why is such concessional treatment given to such persons when

other taxpayers undergo the arduous process of search assessment as per

the true letter and spirit of law?

PIB Press Release dated 27.09.2012

Levy of Service Tax on Transportation of Goods by Rail from 1st October 2012

In compliance of the provisions contained in Finance Bill 2010 and

subsequent notifications issued by Ministry of Finance, the Service Tax in

case of transportation of goods by rail, which was exempted up to 30th

September 2012, would now be levied on total freight charges with effect

from 1st October 2012.

Since an abatement of 70% has been permitted on freight for the taxable

commodities by the Ministry of Finance, the Service Tax will be charged on

30% of the total chargeable freight inclusive of all charges (like busy season

charges, development charge etc.,) would be calculated as follows:

i) Service Tax of 12% will be charged on 30% of freight (equivalent to 3.6%

on the total freight charges)

ii) Education Cess of 2% on Service Tax will be added (equivalent to 0.072%

on total freight) and

iii) Higher Education Cess of 1% on Service Tax will also be added

(equivalent to 0.036% on total freight)

iv) Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total

freight charges.


Certain commodities have been exempted from payment of service tax as per

Ministry of Finance notification. The list of such commodities and further

details on the modalities of levy and collection of Service Tax on

transportation of goods by rail, may be ascertained from Indian Railways’

web site i.e. www.indianrailways.gov.in.

The amount of Service Tax collected by Railways would be deposited with

the Ministry of Finance as per prescribed procedure.

PIB Press Release dated 27.09.2012

Levy of Service Tax on Railway Passengers Travelling in AC Class/First Class

from 1st October 2012

In compliance of the provisions contained in Finance Bill 2012 and

subsequent notifications issued by Ministry of Finance, the Service Tax in

case of railway travel, which was exempted up to 30th September 2012, will

be levied on the fare of passenger services in the following classes from 1st

October 2012.

(i) AC First Class, (ii) Executive Class, (iii) AC-2 tier Class, (iv) AC-3 tier

class, (v) AC Chair Car class, (vi) AC Economy class and (vii) First Class.

Since an abatement of 70% has been permitted on passenger services by

Ministry of Finance, the Service Tax will be charged on 30% of total fare

including reservation charge, development charge, superfast surcharge

which would be calculated as follows:-

i) Service Tax of 12% will be charged on 30% of fare (equivalent to 3.6% on

the total fare)

ii) Education Cess of 2% on Service Tax will be added (equivalent to 0.072%

on total fare) and

iii) Higher Education Cess of 1% on Service Tax will also be added

(equivalent to 0.036% on total fare)

iv) Total Service Tax implication will be (i)+(ii)+(iii)=3.708% on the total fare.

On Concessional value tickets/PTO tickets etc. service charge will be levied

on 30% of the total fare actually being paid by the passengers.

The Service Tax will also apply to tickets issued in advance for journeys to

commence on or after date of implementation of Service tax. In the case of

tickets already issued excluding service tax, the service tax on total fare

including development charge, superfast surcharge, reservation fee, etc.


date of implementation of Service Tax will be recovered either by TTEs in the

train or by the Booking Offices before commencement of the journey by the

passengers. Commercial Inspectors and TIAs have been instructed to visit

all important stations and ensure that service tax is levied on tickets issued

as per the revised rates. Commercial Officers have also been asked to make

surprise checks at the stations and ensure that Service Charges are levied

from date of implementation of Service Tax.

The amount of Service Tax collected from passengers will be deposited with

the Ministry of Finance as per procedure. Finance Departments of Zonal

Railways have been instructed for proper accountal and remittance of

Service Tax amount to the Government.

In case of refund of passenger fare, if any, refund of Service Tax shall be

claimed by the passenger from the concerned Service Tax authority. No

refund shall be made by the Railways on this account. For the purpose of

claiming refund, Chief Commercial Manager (CCM) office of concerned Zonal

Railway shall issue a certificate to passenger detailing the amount of

refunds to be signed by an Officer authorised by CCM, which shall be

countersigned by the Dy. Chief Account Officer (DCAO) or officer authorised

by them for this purpose.

List of contributors to this issue

Bimbadhar Mishra, Senior Manager, Andhra Bank, Hyderabad

Dr B. Yerram Raju, Regional Director, PRMIA, Hyderabad

Dr Sanjiv Agarwal, Partner, Agarwal Sanjiv & Company, Jaipur

G. Karthikeyan, Chartered Accountant, Coimbatore

V. K. Subramani, Chartered Accountant, Erode

Dr S. Chandrasekaran, Senior Partner, Chandrasekaran Associates, Delhi

G. B. S. Bindra, Chief Innovation Officer, Logica Plc

Sriram Sridharan, Co-founder of Gormei Market

Esther Lennaerts, CEO, Pressto Dry Cleaning & Laundry Pvt Ltd

Sachiin Joshi, CMD, Viiking Ventures Pvt. Ltd

Somnath Pal, CEO, Citrus Check Inns

Mohan Mahajan, Founder Partner, Mahajan & Aibara

K. Vaitheeswaran, Founder & CEO, Indiaplaza.com

Bijay Agarwal, Managing Director, Salarpuria Sattva


Published by: Shrinikethan, Chennai http://bit.ly/ShriMap

Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk

November 10, 2012

Business Advisor

On finance,

accounting, controls,

risk management,

taxation, and more…

http://bit.ly/ShriMap

http://bit.ly/dMurali

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