: SBS AND COMPANY LLP; Blog; 02 June 2016; Hits: 1538

An Overview Of India - DTTA - Protocol

Background:

Ever since the Entry into force of Indo-Mauritius treaty in 1983, there has been a lot of hue and cry on the Capital gains exemption and the treaty shopping being planned around it. The government has been proposing several initiatives including Circular No. 789, dated 13-4-2000 and Circular No. 1/2003, dated 10-2-2003 (specifying the mode of proof of residence of an entity in Mauritius -TRC). However, the government has finally come up with a Press Note referring to the Protocol amending the prevailing residence based tax regime under the India-Mauritius DTAA and gives India a source based right to tax capital gains which arise from alienation of shares of an Indian resident company acquired by a Mauritian tax resident.

Protocol:

The Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, has issued a press release dated 10 May 2016, on signing of the protocol amending the tax treaty between India and Mauritius. In the past there had been media reports, of talk between the two governments to revise the tax treaty. The protocol was signed by both countries on 10 May 2016 at Port Louis, Mauritius. The key features of the protocol are as under

Capital gains taxation:

With effect from Financial Year (FY) 2017-18 (tax year 1 April 2017 to 31 March 2018), India shall have taxation rights on capital gains arising from alienation of shares of an Indian resident company, acquired on or after 1 April 2017.For shares acquired prior to 1 April 2017, the exemption from tax in India as currently available would continue to apply.

Transition Period:

For a transition period of 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfilment of the Limitation of Benefits (LOB) article as introduced by the Protocol.Taxation in India at full domestic tax rate will take place from FY 2019-20 onwards.

Limitation of benefits:

A Mauritius resident (including a shell/ conduit company) will not be eligible for the benefit of 50% reduction in tax rate during the transitory period if it fails to fulfil the main purpose test and the bonafide business test.

A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than INR 2.7 million (Mauritian Rupees 1.5 million) in the immediately preceding 12 months

Interest taxation :

The Protocol revises the tax rate on interest arising in India to Mauritius resident banks to state that such streams of income shall be subject to withholding tax in India at the rate of 7.5% in respect of debt claims and loans made after March 31, 2017. At present such streams of income are exempt from tax in India under the India-Mauritius DTAA

Exchange of Information:

The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.

Impact of this protocol on the India-Singapore DTAA:

Article 6 of the protocol to the India-Singapore DTAA states that the benefits in respect of capital gains arising to Singapore residents from sale of shares of an Indian Company shall only remain in force so long as the analogous provisions under the India-Mauritius DTAA continue to provide the benefit.

Now that these provisions under the India-Mauritius DTAA have been ammended, a concern that arises is that while the Protocol in the Mauritius DTAA contains a grandfathering provision which protects investments made before April 01, 2017, it may not be possible to extend such protection to investments made under the India-Singapore DTAA.

Consequently, alienation of shares of an Indian Company (that were acquired before April 01, 2017) by a Singapore Resident after April 01, 2017, may not necessarily be able to obtain the benefits of the existing provision on capital gains as the beneficial provisions under the India-Mauritius DTAA would have terminated on such date.

Fees for Technical Services:

The Protocol has introduced a provision relating to taxation of fees for technical services, largely on similar lines as in various other treaties entered into by India. Fees for technical services arising in India and paid to a resident of Mauritius may be taxed in India, but the tax cannot exceed 10% of the gross amount of fees for technical services if the beneficial owner of the fees for technical services is a resident of Mauritius

Other Income:

As per the treaty, income not expressly dealt with by any other provision of the treaty is taxable in the country of residence of the recipient of income. The Protocol has amended the treaty to provide that such income may also be taxed in the country in which the income arises. In other words, any income arising in India to a Mauritius resident would be subject to tax in India, unless it is expressly dealt with by a specific provision of the treaty.

The Protocol has widened the scope of the term permanent establishment (PE) to include the activity of furnishing of services, including consultancy services. Such activities would constitute a permanent establishment if the activities continue for a project (or two or more related projects) for a period aggregating to more than 90 days within any 12-month period.

Exchange of Information:

The Protocol modifies the existing provisions in the treaty relating to Exchange of Information and assistance in tax collection.

Concluding Remarks:

Future Impact on Investments:

As mentioned above, while investments in shares of an Indian Company made before April 01, 2017 shall receive the benefit of the erstwhile provisions of the India-Mauritius DTAA, such benefits shall be curtailed for investments made during the Transition Period. Such investments shall be subject to tax in India at the rate of 50% of the tax rate prevailing in India provided the investments are realized before March 31, 2019. All investments made after April 01, 2017 which are also realized after March 31, 2019 shall be subject to full taxation as per the domestic tax rate in India.

However, investments that are made through hybrid instruments such as compulsory convertible debentures may still be eligible to claim residence-based taxation as the Press Release only refers to allocation of taxation rights in respect of shares and the Protocol restricts the shift to source based taxation only to such transactions.

Thus though this should be looked at as a positive initiative by the government there might be a lot of dent to the future investments to India.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Tags: news

: SBS AND COMPANY LLP; Blog; 01 June 2016; Hits: 3128

Methods of Audit Sampling

Introduction:

SA530 deals with Audit sampling. It came into effect from 1st April 2009. It deals with the Auditor’s use of statistical and non-statistical Sampling when designing and selecting the audit sample and evaluating results from the sample.

The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the Auditor with a reasonable basis on which to draw conclusions about the entire population.

The objective of the Auditor, when using audit sampling, is to provide a reasonable basis for the Auditor to draw conclusions about the population from which the sample is selected.

The Companies Amendment Bill,2016 [Bill 73 Of 2016]- A Review Part-1

The provisions of the Companies Act, 2013, came in to force with effect from 12.09.2013, and out of the 470 sections, 282 sections are in force, mostly effectivefrom 01.04.2014. The rest of the sections are still to be notified.

With in a period of 15 months of the commencement, on the pretext of ease of doing business in India, and to overcome some practical difficulties as to implementation of the provisions,some amendments were proposed to the Companies Act, 2013, and accordingly, the Companies Amendment Act, 2015, came in to force, and 29.05.2015 was the appointed date for coming in to force of the Sections 1 to 12, 15 to 23, and 14.12.2015, as the commencement date for Section 13 and 14 of the said Amendment Act.

Even after the above amendment, there were lot of provisions which required amendments/relaxations, and accordingly the Ministry had come with 4 notifications Dt:05.06.2015, giving exemptions/relaxation from the applicability of various provisions of the Act to Government Companies, Private Companies, Section 8 Companies and Nidhi Companies.

To sort out any further difficulties, the Ministry had constituted a Corporate Law Committee, to obtain opinion from the various sections in the industry and recommend amendments to the Act. The Committee submitted its report on 01.02.2016.

Based on the recommendation of the Corporate Laws Committee, the Ministry had come up with an Amendment Bill with nearly 86 amendments , and the said bill was introduced in the Loksabha on 16.03.2016. The bill was referred to the parliamentary standing committee on 12.04.2016. The committee is to submit its report with in a period of 3 months.


Sl.	Section(s) under the CA,	Clause No. in the		Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

	Amendment to Section 2		(6)-Associate Company- Inclusion of an explanation to the		Amendment/inclusion		to
	(6), (28), (30), (41), (46),		(6)-Associate Company- Inclusion of an explanation to the		Amendment/inclusion		to
1.	(6), (28), (30), (41), (46),	2	definitions of associate company, to include the basis of		remove ambiguity.
	(49), (51), (57), (71), (76),		definitions of associate company, to include the basis of		remove ambiguity.
	(49), (51), (57), (71), (76),		control for joint venture.
	(85), (87), (91)		control for joint venture.
	(85), (87), (91)
			(6)-Associate Company- Inclusion of an explanation to the		Amendment/inclusion		to
			definitions of associate company, to include the basis of		remove ambiguity.
			control for joint venture.
			(30)-Debentures- Inclusion of proviso to the debentures		Exemption proposed to		be
			definition, so as not to term certain instruments as		given to some companies
			debentures, i.e., instruments under CH-III-D of the RBI act,
			and other instruments as may be prescribed by the CG in
			consultation with RBI.
			(41)- Financial Year- inclusion of the word associate company		Amendment/inclusion		to
			in the proviso to the financial year definition to make an		remove ambiguity.
			application to the Tribunal to follow different financial year,
			than of the other associate company/holding/subsidiary
			company, for the sake of consolidation of a/cs
			(46)- Holding Company - inclusion of a proviso stating that for		Amendment/inclusion		to
			this clause, “Company” includes any Body Corporate.		remove ambiguity.

			(47) – The definition *interested director* omitted
			(51)-KMP- inclusion of clause expanding the scope of officers		Expanding the	scope	of
			under the definition of key managerial personnel, (Officers		applicability, for	ease	of
			under full time employment, not more than 1 level below the		operations and also to fix up
			directors, and designated as KMP by the Board.)		responsibilities.


Sl.	Section(s) under the CA,	Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

			(57)-Networth-inclusion to the definition of net worth, so as	Amendment/inclusion				to
			to include the debit and credit balances of P&L account.	remove ambiguity.
			(71) – Public Company - punctuation correction to the	Amendment/inclusion				to
			definition of Public Company.	remove ambiguity.
			(76)-related party – expanding the scope of related party	Expanding	the		scope	of
			under the head “body corporate”, an investing company or	applicability
			the venturer of the company.
			(85)-Small Company- The maximum prescribed limit of paid-	Expanding	the		scope	of
			up capital stands increased from Rs. 5 crores to Rs.10 Crores.	applicability. Cushion to Govt to
				prescribe the limit upto Rs. 10
			Change in the wordings as to the P&L account requirement.	crores.
			i.e., “last P&L account” to “P&L of immediately preceding FY”
			The turnover to be prescribed by the govt, is proposed to be	Amendment/inclusion				to
			increased from 20 crores to 100 crores.	remove ambiguity. Expanding
				the scope	of	applicability.
				Cushion to Govt to prescribe
				the turnover limit upto Rs. 100
				crores.
			(87)- subsidiary company- amendment to alter the holding of	Amendment	as		to basis	of
			more than 51 % in the “voting power” rather than “total share	s u b s i d i a r y,		f r o m a s		a
			capital”.	percentage of share capital to
				“voting power”


Sl.	Section(s) under the CA,	Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

			To omit the proviso to the definition. Proviso not notified till
			now.
			To omit explanation (d) regarding “Layer”.
			(91)-turnover- a new definition substituting the existing	Amendment/inclusion to
			definition.	remove ambiguity of the earlier
				turnover definition.

2.	Amendment to section 3.	3	A new Section 3(A) is proposed in connection with, if the	New provision to fix liability on
			minimum number of members are reduced in a Public	the members of for the debts by
			Company/Private Company to what is prescribed under the	non-complying companies.
			Act i.e., 7 & 2 respectively, and the company carries on the
			business for a period of more than 6 months, then for the
			debts for the said period, the said members shall be severally
			liable and they may be sued severally.

3.	Amendment to Section 4	4	Amendment of Section 4(1)(c) to allow companies an	Welcome amendment.
	(Memorandum)		unrestricted object clause, to engage in any lawful act or
			activity, rather than fixed objects.
			Amendment to Section 4(5) as to the validity of the name	The same is not welcome, as
			from 60 days to 20 days, from the date of allotment	the period is too short.
			Insertion of new sub-sections (6A) and (6B) regarding the	Will result in creation of
			model Memorandum of Association.	u n i f o r m i t y i n t h e
				documentation.


Sl.	Section(s) under the CA,	Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

4.	Amendment to Section 7-	5	Amendment to Section 7(1)(c) in connection with the	Will result in simplification of
	Incorporation of Company	5	requirement for incorporation of a company. To replace the	the incorporation process.
	Incorporation of Company		requirement for incorporation of a company. To replace the	the incorporation process.
			obtaining of affidavit from subscribers and directors and to
			replace the same with declarations from them with reference
			to incorporation of company.

5.	Section 12-	6	Amendment of Section 12 (1) as to requirement of having	W e l c o m e a m e n d m e n t
	Registered office	6	Registered office by a company within 30 days of	increasing the time lines for
	Registered office		Registered office by a company within 30 days of	increasing the time lines for
			incorporation from the present 15 days.	intimation to ROC.
			Amendment of Section 12 (4) as to increase of time frame
			within which the change in registered office to be intimated to
			ROC, increased from 15 days to 30 days.

6.	Section 21-Authentication	7	Amendment to include even an employee of the company to	W i l l r e s u l t i n e a s e	o f
	of documents	7	authenticate the documents for and on behalf of the Board, in	operations.
				operations.
			addition to KMP and other officer.

7.	Section – 26 – Matters to	8	Omission of sub-clauses (a) & (b) of Section 26(1), and	Probably simplification	of
	be disclosed in prospectus		inclusion of new clause in its place, in connection with the	information/Data.
			contents of the prospectus with respect to information and
			reports on financial information. Post the amendment, the
			information shall be in such manner, as specified by SEBI in
			consultation with Central Government.
			Further, amendment also provides that till the new
			requirements are specified by SEBI, the existing requirements
			as per SEBI act, shall apply.


Sl.	Section(s) under the CA,	Clause No. in the		Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

8.	Section 35- Civil Liability	9		New Clause- Insertion to include a sub-clause to hold experts	Burden on professionals to be
8.	Section 35- Civil Liability	9		liable for their statements made by them forming part of the	more cautious while giving
	for mis-statement in				more cautious while giving
	for mis-statement in		prospectus, and to provide immunity to Directors from		statements /certifications in
	prospectus.		prospectus, and to provide immunity to Directors from		statements /certifications in
			liability, as the directors had relied on the statements made		prospectus.
			by the experts, and do not result in misstatement by director
			himself.

9.	Section 42 – Private	10		Replacement with new section
	Section 42 – Private
	Placement
	Placement			Offer letter to be issued to selected persons, not exceeding 50
					Compliance will become very
			or such high number as may be prescribed, in a financial year,		complicated.
			whose names are to be recorded by the Board.
			Private placement offer does not carry renunciation right.
			Offer to more than the prescribed number will amount to
			public offer and compliance of section 23 is to be done.
			Amounts to be received through Cheque/DD or other normal
			Banking channels.
			Allotment to be done within 60 days from the receipt of
			money, and filing to be completed with in 15 days of allotment
			and only after that monies can be used.
			If return not filed with ROC with 15 days, then the Company,
			the promoters, Directors shall be liable for penalty of
			Rs.2,000/- for each day, during which the default continues
			but not exceeding Rs.25,00,000/-, for each default.


Sl.	Section(s) under the CA,	Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

			If, allotment not in compliance with the provisions, then the
			Company, the promoters, Directors shall be liable for penalty
			of equalling to amounts raised or Rs.2 Crores which ever is
			lower. Company to refund the amounts with in 30 days of the
			order imposing the penalty.
			Any offer not made in compliance with the provisions of the
			Section shall be deemed to be public offer and all the
			provisions of SCRA & SEBI Act, shall be applicable.

10.	Section - 47 – Voting	11	Amendment as to inclusion of section 188(1), in the	Amendment/inclusion to
	Rights		restriction of voting rights, in addition to the existing Section	remove ambiguity.
			43 and Section 50.

11.	Section - 53 – Issue of	12	Amendment of a grammatical error.
	Shares at Discount		Insertion of a new Sub-section 2(A) permitting issue of shares at a	Welcome amendment.
				Welcome amendment.
			discount to creditors pursuant to settlement/restructuring scheme
			under directions/regulations specified by RBI under RBI Act or the
			Banking regulation Act.

12.	Section – 54 – Issue of	13	Deletion of Section 54 (1) (c), the requirement being the	W e l c o m e a m e n d m e n t ,
	Sweat Equity Shares	13	company could issue sweat equity shares only after	relaxing	the period, thereby
	Sweat Equity Shares		company could issue sweat equity shares only after	relaxing	the period, thereby
			completion of 1 year from the date the company was eligible	allowing	the	companies to
			to commence business	issue sweat		equity shares,
				without	any	limitation of
				period.


Sl.	Section(s) under the CA,	Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

13.	Section – 62 – Further	14	Section 62(1) (c), is proposed to be amended to include the	Welcome amendment.
	issue of Share Capital		compliance of the Chapter III i.e., Section 42 and such other
			conditions as may be prescribed.
			Insertion as to the mode of dispatch ofRights issue offer letter.
			“Courier or any other mode having proof of delivery”, is
			proposed to be included.

14.	Section 73 - Deposits	15	Amendment to increase the amounts to be deposited in the	Welcome amendment in the
		15	Amendment to increase the amounts to be deposited in the	Welcome amendment in the
			deposit repayment reserve account, from 15 % to 20 % of the	interest of the depositors.
			deposits maturing during the following financial year.
			Amount to be deposited on or before 30 of April each year.
			Omission as to requirement of deposit insurance.
			Amendment of one of the condition to accept deposits, as to
			stricter certification from the company side that it has not
			committed any default in repayment of deposits and where
			defaults have taken place, the company has made good the
			default, and a period of 5 years has lapsed since the date of
			making good the default.

15	Section 74- Repayment of		Amendment as to the term of repayment of deposits	Relief to some companies, who
	Deposits accepted before	16	accepted under the old act, from 1 year to 3 years of the	had obtained deposits under
	commencement of the		commencement of the new act or on or before expiry of the	the old act.
	Act		period for which the deposits were accepted, whichever is
			period for which the deposits were accepted, whichever is
			earlier.


Sl.	Section(s) under the CA,				Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered				Clause No. in the
No.	2013, amended/Altered				Amendment bill
No.	/Inserted				Amendment bill
	/Inserted

16.	S e c t i o n	7 6 A		-	17	Amendment as to the increase of the minimum fine on the	Welcome amendment in the
	Punishment					company for non-compliance of the deposit rules either at	interest of the depositors.
	for contravention					the time of taking the deposit or its repayment, then the
	of section 73 or					minimum fine shall be Rs. 1 Crore or two times of the deposit
	section 76.					accepted, whichever is lower, and the maximum fee Rs.10
						Crores.

17.	Section 77	–	Duty	to	18	Insertion of a new proviso after the existing 3rd proviso to	Welcome amendment.
	Register Charges				18	Section 77 (1), providing non-applicability of the section for
	Register Charges
						some charges, as may be prescribed in consultation with RBI.

18.	S e c t i o n		7 8	–	19	Amendment of the section in line with Section 77, to include	No comment
	A p p l i c a t i o n f o r					the period of filing of 30 days.
	registration of Charge					the period of filing of 30 days.
	registration of Charge

19.	S e c t i o n	–	8 2	–	20	Amendment to provide time lines for filing of satisfaction of	W e l c o m e a m e n d m e n t ,
	Satisfaction of Charge				20	Charge by the Company or Charge holder with in a period of	because, now, we need to
	Satisfaction of Charge					Charge by the Company or Charge holder with in a period of	because, now, we need to
						300 days of satisfaction of the charge, and upon payment of	approach for condonation if
						additional fees, as may be prescribed.	delayed more than 30 days.

20.	Section 89 – Beneficial				21	Insertion of a new Sub-section (10), to section 89 which	Welcome amendment defining
	interest				21	defines the term “beneficial interest” for the purposes of	the term, thereby making it
						Section 89 and Section 90.	more clear.

21.	S e c t i o n		9 0	–		The existing Section 90 to be substituted with a new section	Welcome amendment in order to
	I n v e s t i g a t i o n			o f	22	and in a much more detailed way detailing who has to give	have a control as to who are the
	beneficial ownership of					notice of having beneficial ownership and who is not	real owners of the company, and
	shares in certain cases.					required, maintenance of register and other incidental	who are acting/representing them
						matters, and the heading of the Section to be renamed as	in disguise and the reason for the
						“Register of significant beneficial owners in a company”.	same.
						“Register of significant beneficial owners in a company”.


Sl.	Section(s) under the CA,	Clause No. in the		Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

22.	Section 92 – Annual	23		Omission of provisions relating to	Welcome amendment, since, it
	Return				will reduce	the time of
				(i) information as to indebtedness of the company.	p r e p a r i n g	d u p l i c a t e
			(ii) Names, address and other details of the FII.		documents.
			(ii) Names, address and other details of the FII.
			CG to prescribe Abridged form of Annual Return to OPC and
			small company.
			Annual Return need not be part of the Board Report, but the
			same shall be placed in the website of the company, if any, and
			a web-link to be provided in the Board’s Report.

23.	Section 93 – Filing of	24		The section is proposed to be omitted, and accordingly, the	Welcome change. Because the
	return with ROC in case			requirement of filing MGT-10, by a listed company, whenever,	company any how files return
	of change in promoters		there is increase or decrease of 2 % or more in the		to Stock Exchanges.
	stake		shareholding position of promoters and top ten shareholders
	stake		of the company in each case, will no longer be required.
			of the company in each case, will no longer be required.

24.	Section 94	25		Omission of the requirement that prior intimation/service of	Welcome amendment in the
			the Special resolution to keep the registers or copies of return		interest of company operations
			is to be given.		and ease of doing business.
			Insertion of a proviso that Government may prescribe that
			certain registers, index, return shall not be available for
			inspection or copies of the same can be obtained.


Sl.	Section(s) under the CA,			Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered			Clause No. in the
No.	2013, amended/Altered			Amendment bill
No.	/Inserted			Amendment bill
	/Inserted

25.	Section 96	– Annual		26	Insertion of proviso enabling unlisted companies to hold their	Welcome amendment.
	General Meeting				AGM any place in India, subject to consent in writing or
					through electronic mode from all the members in advance.

26.	Section 100 – Calling of			27	Pursuant to rule 18 of Companies (Management and	Welcome amendment in view
	Extra-Ordinary General				Administration Rules), 2014, EGM of a company can be held	of the practical difficulties
	Meetings				only India.	faced by the companies.
	Meetings					faced by the companies.
					The proposed amendment provides that EGM of a Company
					other than a WOS of a company incorporated out side India,
					shall be held in India i.e., EGM of WOS of a company
					incorporated out side India, can take place outside India.

27.	Section 101 – Notice of			28	Insertion of a proviso relating to hold of AGM & EGM at	Removal of ambiguity as in the
	meeting				shorter Notice after obtaining consent from 95 %	principal act, there was no
					shareholders, entitled to vote at the meeting in case of	mention as to AGM or EGM, but
					company having capital and in case of no share capital then	only as GM
					with the consent of the members holding not less than 95 % of
					the voting power.

28.	Section 110-		Postal	29	Insertion of a Proviso to Section 110 (1) to conduct the	Welcome amendment. It will
	Ballot				meeting in the form of a general meeting and not by postal	reduce the expenditure and
					ballot, and pass the resolutions through electronic voting.	waste of stationery.

29.	S e c t i o n	1 1 7 –		30	Amendment (reduction) of the minimum penalty for non	Welcome amendment.
	R e s o l u t i o n s		a n d		filing of resolutions with ROC:
	agreements to be filed				On the company: from Rs.5 Lakhs to Rs.1 Lakh
					On the company: from Rs.5 Lakhs to Rs.1 Lakh
					Every Officer: From Rs.1 Lakh to Rs.50,000/-.

Sl.	Section(s) under the CA,	Clause No. in the	Proposed amendment relating to	Remarks/Comments/penalty
Sl.	2013, amended/Altered	Clause No. in the
No.	2013, amended/Altered	Amendment bill
No.	/Inserted	Amendment bill
	/Inserted

			The requirement of filing of various resolutions that are	Reduction in filings.
			required to be done have been omitted, except for voluntary
			winding up petition and resolutions passed under Section
			179(3) (which any how is not applicable to private companies
			pursuant to the exemption notification Dt:05.06.2015)
			Insertion of a proviso that the clause shall not be apply to a
			resolution passed by Banking company for grant of loans or
			providing security, in its ordinary course of business.

Note:

1 Lakh = 100,000; 10 Lakhs = 1 Million; 1 Crore = 10 Millin; 10 Crore = 100 Million; 100 Crore = 1 Billion

Since there are many amendments proposed , due to paucity of space, we will bring up other amendements in the subsequent bulletins.

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Copmpounding Of Offences By RBI-Under Foreign Exchange Management Act,1999

Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”) which has replaced the erstwhile the Foreign Exchange Regulation Act, 1973 is a big leap in the management of Foreign Exchange Reserves of the Country. The erstwhile regime of approvals has been replaced with automatic approvals and principle of management by exception.

Since the law is of Economic Legislation and any violation/ non-compliance of the law effects the country as a whole, such non-compliances invites hefty penalties and the offender is liable for monetary Penalties. In order to give the opportunity to the offender to rectify the offence, FEMA has provisions to opt for Compounding of Offences.

In this article an attempt is made to dwell upon the concept of Compounding of Offences under FEMA.

Penalties under FEMA

As per Section 13 of FEMA, the following are the penalties for offences under FEMA

Where the amount involved in the offence is quantifiable, 3 times of the amount involved

Where the amount involved in the offence is not quantifiable, Upto Rs. 2,00,000/-

In case where the offence is continuing one, an additional penalty upto Rs. 5,000/- per day of continuing default/ offence.

In addition to the monetary penalty, the subject property of the offence, can also be confiscated by the Government

What is Compoundable Offence:

A criminal act in which a person agrees not to report the occurrence of a crime or not to prosecute a criminal offender in exchange for money or other consideration.

The purpose of Compounding of offences under FEMA is to minimize the transaction costs, while taking severe view of malafide, wilful and fraudulent transactions.

Compounding of Offences by RBI

As per Section 15 of the FEMA read with Foreign Exchange Management (Compounding Proceedings) Rules, 2000 read with Master Direction No. 4/2015-16, dated January 1, 2016 (updated from time to time), RBI can compound the following nature and types of offences

Matters covered under Section 6, 7, 8 & 9 of FEMA

Matters covered under FEM (Current Account Transactions) Rules, 2000 except the offences covered under Section 3(a) of FEMA

Compounding Authorities of RBI

The following is the authorisation matrix of RBI officers for compounding of Offences

Rank of the Officer		Sum Involved of the Offence (INR)

Assistance General Manager	< 1 Million

Deputy General Manager	>=	1 Million and < 4 Million

General Manager	>=	4 Million and < 10 Million

Chief General Manager	>= 10 Million

Provided that no contravention shall be compounded unless the amount involved in such offence is Quantifiable.

Delegation of powers to Regional Offices of RBI

RBI has delegated the powers of compounding to the officers of Regional Offices, if the nature of offence is covered under the below table:

FEMA Regulation	Brief Description of Contravention

Paragraph 9(1)(A) of Schedule I to FEMA 20/2000-	Delay in reporting inward remittance received for
RB dated May 3, 2000	issue of shares. (ARF)

Paragraph 9(1)(B) of Schedule I to FEMA 20/2000-	Delay in filing form FC-GPR after issue of shares.
RB dated May 3, 2000
Paragraph 8 of Schedule I to FEMA 20/2000-RB	Delay in issue of shares/refund of share
dated May 3, 2000	application money beyond 180 days, mode of
	receipt of funds, etc.

Paragraph 5 of Schedule I to FEMA 20/2000-RB	Violation of pricing guidelines for issue of shares.
dated May 3, 2000

Regulation 2(ii) read with Regulation 5(1) of FEMA	Issue of ineligible instruments such as non-
20/2000-RB dated May 3, 2000	convertible debentures, partly paid shares, shares
	with optionality clause, etc.

Paragraph 2 or 3 of Schedule I to FEMA 20/2000-	Issue of shares without approval of RBI or FIPB
RB dated May 3, 2000	respectively, wherever required.

Regulation 10A (b)(i) read with paragraph 10 of	Delay in submission of form FC-TRS on transfer of
Schedule I to FEMA 20/2000-RB dated May 3,	shares from Resident to Non- Resident.
2000
Regulation 10B (2) read with paragraph 10 of	Delay in submission of form FC-TRS on transfer of
Schedule I to FEMA 20/2000-RB dated May 3,	shares from Non-Resident to Resident.
2000
Regulation 4 of FEMA 20/2000-RB dated May 3,	Taking on record transfer of shares by investee
2000	company, in the absence of certified from FC-TRS.

The powers to compound the contraventions above have been delegated to all Regional Offices (except Kochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amount of contravention. Kochi and Panaji Regional offices can compound the contraventions for amount of contravention below Rupees Ten Million. The contraventions of Rupees Ten Million or more under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA will continue to be compounded at Cell for Effective Implementation of FEMA (CEFA), Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai, as hitherto.

The compounding proceeding may be initiated in any of the following manner:

Based on the Memo issued by the Authorised Dealer (Bank)

Based on the Memo issued by the RBI
suo motoby the applicant itself

The application need to be made in prescribed format along with prescribed fee of Rs. 5,000/- to the respective Compounding Authority.

The compounding application need to be disposed off by the Compounding Authority within 180 days of its receipt. If the applicant desires the RBI gives the opportunity of being heard.

No subsequent compounding application can be made for next three years from the date of disposal of previous application, related to same offence.

Authors Comments

The real benefit of compounding is that it gets rid of being chased/adjudicated by the regulatory authorities, gives peace of mind, reduction of monetary penalties etc.Also the offence stands cured from the date of its inception, as if no offence is taken place.

The amount paid under compounding proceedings is treated as Feesand is allowable business expenditure u/s 37 of Income Tax Act, 1961, whereas the amount paid under regular adjudication proceedings is treated as Penalty and is ineligible business expenditure.

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Consrtuction Services To GovernmentalAuthority-Patna High Court Widens The Scope Of Exemption

Certain infrastructural construction services provided by any person to Government, local authority and Governmental authorities are being exempted from service tax under entry 12 of Notification 25/2012-ST dated 20.06.2012. The said entry is reproduced as under;

“12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -

a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

canal, dam or other irrigation works;

pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act”

(Note: With effect from 01.04.2015, the entries (a), (c), (f) are omitted and by entry 12A exemption is restored with respect to these entries but only for contracts entered into prior to 01.04.2015)

The exemption under the above reproduced entry is applicable if the services are provided to Government or Local authority or Governmental authority. The term ‘Governmental authority’ for the purpose of this exemption is given under clause (s) of Part II (Definitions) of the Notification 25/2012-ST dated 20.06.2012. The same is reproduced as under;

“Governmental authority" means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution

In view of the above reproduced definition, the following conditions are required to be cumulatively satisfied in order to consider a particular authority as “governmental authority"—

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ØItshallbe a board, or an authority or any other body established by Government Øwith90% or more participation by way of equity or control by Government and Øsetupby an Act of the Parliament or a State Legislature

Øtocarryout any function entrusted to a municipality under article 243W of the Constitution.

Thus the above definition of ‘Governmental authority’ has restricted scope and does not include various bodies/authorities like government companies, boards, authorities that are established and owned by Government by means of a gazette notifications and are not separately setup by an Act of Parliament and State Legislature.

In view of this legal anomaly, the definition has been amended by Notification 2/2014-ST dated 30.01.2014 with a view to include within its ambit, the entities which are established by Government but are not necessarily setup by an Act of Parliament or State legislature. The amended definition is reproduced as under;

"governmental authority" means an authority or a board or any other body;

set up by an Act of Parliament or a State Legislature; or (ii) established by Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;

In the recent Finance Budget, 2016, it is proposed vide clause 156 to introduce a new section 101 in Finance Act, 1994 to refund service tax if any paid based on the previous restrictive definition of ‘Governmental authority’ for the canal or irrigation works undertaken prior to 30.01.2014; The TRU Circular F.No.334/8/2016-TRU dated 29/02/2016, which was issued to clarify the proposed budget changes, has made the following observation;

“K. Service Tax exemption to canal, dam or other irrigation works with retrospective effect:

Definition of Governmental authority was amended with effect from 30.01.2014 so as to exempt services provided by way of construction, erection, maintenance, or alteration etc. of canal, dam or other irrigation works provided to entities set up by Government but not necessarily by an Act of Parliament or a State Legislature. However, services provided prior to 30.01.2014 to such bodies remained taxable.The benefit of exemption is proposed to be extended to the said services provided during the period from the 1st July, 2012 to 29.01.2014.”

Thus the scope and intent of the above amendment in the definition of ‘Governmental authority’ is with a view to allow exemption benefit to those entities established by Government but not so by way of an Act of Parliament or State legislature.

Recently, the Patna High Court in the case of ShapoorjiPaloonji and Company Limited vs. CCE, 2016-TIOL-556-HC-Patna-ST had the occasion to interpret the scope and ambit of the above amended definition of ‘Governmental authority’.The facts of this case are that the petitioner company was appointed by IIT,

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Construction services to Governmental Authority

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Patna to construct their academic building. It was undisputed that IIT, Patna was setup by an Act of Parliament i.e. Indian Institute of Technologies Act, 1961. The petitioner company had initially collected service tax and paid. However, C&AG after conduct of their audit pointed that the petitioner company need not pay service tax for construction undertaken to the IIT. The petitioner applied for refund and the same was rejected.

The petitioner claimed refund on the interpretation that in order to come within the ambit of ‘Governmental authority’, it is sufficient that the same is set up by an Act of Parliament or State Legislature. The condition as to 90% or more participation by way of equity or control and to carry out any function entrusted to a municipality under 243W of the Constitution are not applicable for those entities that are set up by an Act of Parliament or State Legislature. The said conditions are applicable only for the second clause of the definition i.e. authority or body established by Central Government.

The Patna High Court heard the parties and came to the conclusion that no service tax is required to be paid by the petitioner for the reason that IIT falls within the ambit of ‘Governmental authority’. The relevant para is reproduced as under;

“The Governmental authority as defined in the notification dated 30th January, 2014, means an authority or board or any other body set up by an Act of Parliament or State Legislature. The provisions contained in sub-clause(i) and sub-clause(ii) of clause 2(s) are independent dis-conjunctive provisions and the expression “90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution” is related to sub-clause (ii) of clause 2(s) alone. The clause (i) is followed by “;” and the word “or”. Therefore each of the sub-clauses is independent provision.” (para 11)

In view of the above observation of Patna High Court, Governmental authority would include any authority or body set up by an act of Parliament or State Legislature. It also includes any authority or body established by Government with 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution.

Based on the interpretation of Patna High Court, any authority or body established under an act of Parliament or State legislature would come within the ambit of ‘Governmental authority’. This would be so even if Government is not holding 90% or more equity or controlling interest and such institutions are not entrusted with functions covered under Article 243W.These include institutions like LIC, IRDA, SEBI, ICAI etc. Thus any construction services of the nature specified under entry 12 to these entities would be entitled to exemption;

Before parting, as discussed above, by taking into cognizance the reasons/purpose behind the amendment to the definition of ‘Governmental authority’ coupled with clarification given by TRU on the scope of the amendment, the Revenue is not open to such wide interpretation of the term ‘Governmental authority’ as upheld by Patna High Court. Nevertheless the view of Patna High Court has opened the Pandora’s Box with respect to service tax applicability on the infrastructural construction works undertaken.

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