TIOL-DDT 2151
18.07.2013
Thursday

IN DDT 2144, we raised this question. We are informed that a Commissioner (Appeals) has held that there IS a remedy.

The assessee, Prashant Deshmukh had two PAN numbers one as Prashant Deshmukh (individual) and the other as Prashant Deshmukh & Associates (as a proprietor). He also obtained two Service Tax registrations with the above two PANs. Later he surrendered the second PAN, but due to a mistake paid Service Tax under the first PAN based Service Tax Registration Number. And he was stuck with a demand of Rs. 48.5 lakhs of Service Tax with equal penalty and consequential interest.

The Commissioner (A) observed, "At the outset, it needs to be clarified that the individual (natural person) and his sole proprietorship firm do not have separate identities in the eyes of law. Thus, even if two PAN of Income Tax have been obtained in the names of the individual (Prashant Deshmukh) and the proprietorship firm (M/s. Prashant Deshmukh & associates), the onus of compliance with various laws, including service tax, remains only once and on the sole legal entity Shri Prashant Deshmukh. The Appellant had obtained two Service Tax Registration numbers, based on his two PANs, but in the same name (viz. M/s. Prashant Deshmukh & Associates) and by declaring the same address… Obviously, service tax cannot be recovered from the same legal entity twice on the same service supplied by it, even if the said entity has erroneously obtained two Service Tax Registration Numbers."

Though the Commissioner (A) has judiciously held that Service Tax is not payable twice by the same entity for the same service, he has upheld the penalty under Sections 76 and 77. He has also confirmed the demand of interest.

We understand that strangely this controversial order has been accepted by the Department and they are not going to CESTAT with this issue.

The order of the Commissioner(A)

I-T - ESOP discount (difference between market price and issue price) - Deductible expenditure - ITAT SB

THE question before the Special Bench of the ITAT headed by the President was, "Whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business?"

The assessee claimed deduction of Rs. 3,38,63,779 as `Employee compensation cost' u/s 37 of the Income-tax Act, 1961 representing discount under the ESOP 2000. In the assessment completed u/s 143(3), the Assessing Officer disallowed the said claim on the ground that there was no specific provision entitling the assessee to deduction u/s 37(1) in this regard.

Concept of ESOP: Section 2(15A) of the Indian Companies Act, 1956 defines "employee stock option" to mean the option given to the whole-time Directors, Officers or employees of a company, which gives such Directors, Officers or employees, the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price".

In an ESOP, the given company undertakes to issue shares to its employees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price.

In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer for the issue of shares against the options vested in them. The gap between the completion of vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares to them who can then freely sell such shares in the open market subject to the terms of the ESOP.

Thus it can be seen that it is during the vesting period that the options granted to the employees vest with them. This period commences with the grant of option and terminates when the options so granted vest in the employees after serving the company for the agreed period. By granting the options, the company gets a sort of assurance from its employee for rendering uninterrupted services during the vesting period and as a quid pro quo it undertakes to compensate the employees with a certain amount given in the shape of discounted premium on the issue of shares.

The Special Bench held that,

The discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in

computing the income under the head 'Profits and gains of business or profession'.

We bring you today this SB decision delivered on 16th July. Breaking News

ST non-filers and stop-filers - We are targeting them - FM

THE Finance Minister said in paragraph 183 of his Budget speech on 28th February 2013,

"While there are nearly 17,00,000 registered assessees under service tax, only about 7,00,000 file returns. Many have simply stopped filing returns. We cannot go after each of them. I have to motivate them to file returns and pay the tax dues. Hence, I propose to introduce a one-time scheme called 'Voluntary Compliance Encouragement Scheme'. A defaulter may avail of the scheme on condition that he files a truthful declaration of service tax dues since 1.10.2007 and makes the payment in one or two instalments before prescribed dates. In such a case, interest, penalty and other consequences will be waived. I hope to entice a large number of assessees to return to the tax fold. I also hope to collect a reasonable sum of money."

FM inaugurating the conference

Addressing the media after inaugurating a conference of the Chief Commissioners of Customs and Central Excise (and of course Service Tax), yesterday, the FM said,

The one-time voluntary compliance scheme for service tax gives an opportunity to assessees to come clean and pay arrears of service tax without interest and without penalty and then pay (taxes) regularly thereafter. Department will advertise it in a big way to encourage assessees to take advantage of the scheme.

Assessees are yet to get used to paying service tax, which is a new levy but the fastest growing tax. Starting with the 4 per cent of the total indirect taxes collected, the service tax now occupies one-third space of the total tax collected.

Assessees are used to the idea of paying excise duty but they don't realise that service tax is only the other side of excise duty. If you produce goods you pay excise duty, you produce a service you pay the service tax. But somehow there is mindset that why we should pay service tax? Why should the beauty parlour pay service tax? People must get to the idea that GDP is made up of goods and services.

It is not surprising that non-filers and stop-filers have mounted in service tax. The number exceeds 12 lakh or so. We are targeting them.

The Empowered Committee of State Finance Ministers on Goods and Service Tax (GST) will elect its Chairman when we meet on the 22nd. It is for them to elect a candidate from among themselves.

Is the FAQ on VCES, 2013, by any coincidence, out?

FM heading totally dissatisfied workforce

THE Finance Minister wants to target the non-filers and wants the Excise, Customs and Service Tax officers to collect the targeted revenue. He told them that revenue mobilisation is the most important task of the department and they should achieve the tax collection target.

But does he know that he heads a totally dissatisfied and frustrated work force. From Inspector to Chief Commissioner, officers in the department are frustrated and disappointed over the ever elusive cadre review, especially after it is cleared for the sister Board CBDT. Superintendents are retiring with just one promotion in their entire career and Chief Commissioners are waiting for the post of Principal Chief Commissioners and Commissioners are angry about the unfair transfer orders.

The victims of all this pent up anger and frustration are the poor assesses! Can the FM do something about this?

Appellant has collected ST from their customers but have failed to remit to exchequer - appellant is repeated offender - this is not case where any leniency is merited as it would send wrong signal to tax-paying community

SERVICE tax demand of Rs. 1,52,08,411/- was confirmed against the appellant in respect of security services rendered by them. Interest on the said service tax demand is also confirmed apart from imposition of penalties. An amount of Rs. 25,92,035/- paid by the appellant has also been appropriated towards the demand by the CCE, Pune III.

Before the CESTAT with a Stay application, the appellant submitted that they do not dispute the service tax liability or the fact that they have collected the service tax from their customers. Nevertheless, they seek leniency.

The Revenue submitted that the appellant is a repeated offender and does not deserve any leniency and that they should be put to strict terms.

The Bench observed -

"5. ..., we observe that the appellant has collected the service tax from their customers and have failed to remit the same to the exchequer. We also observe that the appellant is a repeated offender and this Tribunal itself in half-a-dozen cases have confirmed pre-deposit of huge amounts which the appellant have collected from their customers. Therefore, it is not a case where any leniency is merited or required to be shown, as the same will send a wrong signal to the tax-paying community. Therefore, we direct the appellant to remit the balance amount of service tax along with interest within a period of two weeks and report compliance…"

See 2013-TIOL-1086-CESTAT-MUM

Also see 2013-TIOL-840-CESTAT-MUM

FM speak on Rupee & GOLD

AT a conference yesterday, the Finance Minister ruled out a complete ban on gold imports and appealed to the people to moderate their purchases of the precious metal which is costing the nation USD 50 billion in foreign exchange. He also said that the government was targeting a "level" for the fluctuating rupee.

Almost two months ago in DDT 2110 we reported that the Finance Minister had appealed to the people to contain their passion for gold. Finding that the people ‘just do it', the appeal for "containment" has changed to "moderation".

Jurisprudentiol – Friday's cases

Central Excise

Appeal - Waiver of pre-deposit - When Stay granted by HC is vacated, Tribunal's order comes back to life - assessee directed to make pre-deposit: HC

WHEN the assessee challenged the order passed by the Tribunal originally directing deposit of the amount of Rs.5.00 lakhs, evidently, in the Writ Petition, it was subsequently vacated on the submissions made by the assessee that there was no need to make any payment, as the amount was not quantified. Thus, this Court held that there was no necessity to pass any interim order. Based on this order, the Tribunal stated that no pre-deposit was required. It is not clear under what circumstances the Tribunal by its order dated 23.1.2009 modified the order passed already on pre-deposit. Further, in the context of the fact that when the interim stay granted by this Court was vacated, the order of the Tribunal originally passed directing the assessee to make pre-deposit of Rs.5.00 lakhs stood thereon for compliance.

Income Tax

Whether development of Geographical Information software based on raw customer inputs and fact that it is not mere compilation of map simplicitor, satisfies test of manufacture as per Sec 80IB - YES: ITAT

THE issues before the Bench are - Whether the development of Geographical Information System Software based on raw customer inputs and the fact that it is not a mere compilation of map simplicitor, satisfies the test of manufacture as per Sec 80IB; Whether the fact that it is produced on a platform not owned by the assessee is relevant, when what is being transferred by the assessee is not the platform but the end product; Whether the mere fact that one of the input is owned by the client itself, does not mean that the property in the product never belonged to the assessee and Whether it was relevant for the AO to consider these foregoing issues, when there was a specific direction from a coordinate bench that all that is to be seen is the point of time when property in end product is transferred. And the verdict goes in favour of the assessee.

Service Tax

Appellant getting trade secret from an ex-employee of competitor firm - competitor firm filing suit in US Court - appellant pays for use of trade secret and reaches an out of court settlement as per which appellant has become a co-owner of intellectual property - since transfer is permanent transaction does not come under purview of Section 65 (55b) of FA, 1994 so as to be taxed under head of Intellectual Property Service - appeal allowed: CESTAT

THE appellant is a manufacturer of Ion exchange resins. In USA, one Shri Narendra Singh who was working with M/s Purolite International Ltd., a competitor of the applicant, left the job and provided trade secret for manufacturing of ion exchange to the applicant. M/s Purolite International Ltd. filed a suit in the USA court and the applicant was charged with using the trade secret of M/s Purolite International Ltd. Court proceedings were initiated against the applicant.

Not to escalate the matter further and be saddled with damages of astronomical proportions, the applicant entered into an agreement with M/s Purolite International Ltd., to settle the dispute out of court. As per the settlement, they paid consideration for the use of trade secret and became the co-owner of the Purolite's technology and information transferred by Shri Narender Singh to the applicant.

See our Columns Friday for the judgements

Until Friday with more DDT

Have a nice day.

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