Taxation on Amalgamation of Companies and Fiscal Incentives

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					Union Pre-Budget
Memorandum 2010-11

Direct Tax Proposals




           Confederation of Indian Industry
 Union Pre-Budget
Memorandum 2010-11




  Direct Tax Proposals




   Confederation of Indian Industry
                                                        CONTENTS


1.     CORPORATE TAX
1.1 Dividend Distribution Tax ...................................................................................................        1
1.2 Dividend Received from Overseas Subsidiaries/Associates .............................................                                2
1.3 Taxation of Perquisite …………………………………………………………………………………….                                                                             2
1.4 Refund of FBT paid during financial year 2009 -10 ……………………………………………………                                                               4
1.5 Minimum Alternate Tax (MAT) …………………………………………………………………………...                                                                          4
1.6 MAT shortfall in the Advance tax installment payable in June 2009 ………………………………...                                                    5
1.7 Clarification regarding add back of ‘provision for diminution in the value of asset’, while
       computing book profits for MAT ………………………………………………………………………….                                                                      5
1.8 Goodwill as Depreciable Intangible Asset ………………………………………………………………                                                                    6
1.9 Amendment in Section 43B of the Income Tax Act …………………………………………………….                                                                 6
1.10 Depreciation Rate …………………………………………………………………………………………                                                                                6
1.11 Accelerated depreciation for Commercial vehicles ……………………………………………………                                                               7
1.12. Depreciation on assets costing less than Rs. 25000………………………………………………….                                                              7
1.13 Need for enhanced Depreciation on IT Products for competitiveness of Micro, Small and
     Medium Enterprises (MSMEs) ………………………………………………………………….                                                                               7
1.14 Scope for additional depreciation on pollution control and energy saving
     equipment………………………………………………………………………………………...                                                                                       9
1.15 Surcharge and Cess to be removed ……………………………………………………………………                                                                         9
1.16 Amendment to Section 42 of the Income Tax Act …………………………………………………….                                                                  9
1.17 Investment linked tax incentive for specified businesses (Section 35AD) …………………………                                                  10
1.18 No Retrospective Amendments…………………………………………………………………………                                                                             11


2. CORPORATE RESTRUCTURING
2.1 Amalgamation under section 72A ...................................................................................................   12


3. RESEARCH AND DEVELOPMENT
3.1 Extension of tax benefit for in-house and commissioned scientific research to all sectors ..............                             14
3.2 Weighted deduction under Section 35(2AB) to be extended to building ………….………………....                                                  15




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3.3 Tax Exemption for Indian R&D Companies ....................................................................... 15
3.4 Provide at least 150% Weighted Deduction for Contributions made by Corporates to R&D Fund
       for SMEs and Engineering Institutes ……………………………………………………………………                                                                15
3.5 Weighted deduction for Crop development and Agriculture extension………………………...                                                    16
3.6 Encouraging Use of Quality Agri-Inputs ………………………………………………………………... 16
3.7 Incentives Technology and R&D in Food Processing Industry .......................................... 16
3.8 Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation ................. 17
3.9 Allow the investments in Research and Development companies as “business
       expenditure”………………………………………………………………………………………. 17


4.     EXPORTS
4.1 Removal of sunset clause for STP units u/s10A and EOUs u/s 10B of the Act ................                                       18
4.2 SEZ Units – Section 10 AA ................................................................................................ 18


5.     TRANSFER PRICING
5.1 Determination of Arm’s Length Price in cases of international transactions …………………… 20
5.2 Safe Harbour provisions ....................................................................................................... 20
5.3    Alternate Dispute Resolution Mechanism ……………………………………………………………                                                                21
5.4    Providing minimum threshold for applicability of Transfer Pricing Regulations …………………….                                       21
5.5 Selection of Data for Transfer Pricing Assessments…………………………………………………..                                                          22


6.    FINANCIAL SERVICE SECTOR
6.1 Exemption to Banks and NBFCs from the Provisions of TDS ……………………………………….. 23
6.2    Derivative Trading and Speculative Transaction ……………………………………………………….                                                         23
6.3    Depreciation on Leased Assets ………………………………………………………………………….                                                                   24
6.4    Investments made in Portfolio Management Scheme ………………………………………………...                                                         24
6.5    Deduction for Provision for Doubtful Debts under Section 36(1)(viia) made in accordance with
       RBI Guidelines …………………………………………………………………………………………….                                                                           25
6.6    Benefits of Section 72A to Private Sector Banks ...........................................................................   25
6.7   Exclusion of Banks from the Purview of Sections 40A(2) ) & 92 to 92F …………………………...                                             25
6.8    Exclusion of charge created and duly registered in respect of credit extended or loans granted
       by Scheduled Banks from the provisions of section 281……........................................................               26
6.9 Exemption Under Section 10(15)(iv)(fa) for Interest on Overseas Borrowings …………………….                                             27
6.10 Provision for NPAs under section 36(1)(viia) ………………………………………………………….                                                            28




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6.11 Special Reserve under section 36(1)(viii) ………………………………………………………………                                  28
6.12 Special Provision for Income — Section 43D ………………………………………………………….. 29
6.13 Exemption to Assets Financing Companies from TDS Under Section 194A(3)(iii) ………………..                29
6.14 Tax pass through for Domestic Venture Capitalists …………………………………………………...                            29
6.15 Tax consolidation of accounts in a Holding Company structure ……………………………………...                      30
6.16 Dividend Tax Credit ……………………………………………………………………………………….. 31
6.17 Leveraging at FHC/BHC level …………………………………………………………………………… 31
6.18 Section 72AA should be made applicable to private banking companies ………………………….. 31


7.   INFRASTRUCTURE SECTOR
7.1 Definition of Infrastructure Facility u/s 80 -IA ..………………………………………………………… 32
7.2 Definition of “undertaking” for the purpose of tax holiday benefit under section 80 -IB(9) ………... 32
7.3 Development of Infrastructure Facility ………………………………………………………………….. 33
7.4 Tax Exemption to Infrastructure Capital Cos. / Fund ………………………………………………….. 33
7.5 Power Sector - Section 80-IA …………………………………………………………………….. 34
7.6 Transmission and Distribution of Power vis-à-vis Fiscal Incentives ……………………………..                     34
7.7 Infrastructure Status for Hotel Industry …………………………………………………………… 35
7.8 MAT on Infrastructure Companies and Hotel Industry ……………………………………………                                 35
7.9 Infrastructure status to Health Care Industry ……………………………………………………..                                 35
7.10 Extension of Sunset Clause for Civil Aviation Industry    …………………………………………. 36
7.11 Enhancing Knowledge and Awareness in Agriculture ....………………………………………... 36
7.12 Incentivising investments in respect of agricultural infrastructure ………………………………..                  37
7.13 Allow banks to write Credit Default Swaps ……………………………………………………….. 37
7.14 Amendments to Section 80-IA …………………………………………………………………………... 37
7.15 Exemption of income earned from processing, preservation & packaging of fruits or vegetables
     and integrated business of handling storage and transportation of food grains ……………………              38
7.16 Holiday under Section 80-IA of the Income Tax Act, 1961 to the telecom services sector at par
     with other infrastructure facilities provider ………………………………………………………..                               39
7.17 Income Tax Incentives to Independent Infrastructure Service Providers …………………………..                  40
7.18 Section 115(O) Tax on distributed profits of domestic companies with respect of Companies
     availing tax holiday u/s 80- IA …..…………………..…………………………………………………… 41
7.19 Infrastructure status to LNG import and re-gasification projects / gas transport and distribution
     projects, crude and petroleum products pipelines, City Gas Distribution (CGD) Projects ..………        41
7.20 Tax holiday for power exchange (IEX) u/s 80-IA………………………………………………….                                  42


8.   HOUSING SECTOR
8.1 Increase in the deduction on Interest and Principal Loan Repayment …………………………… 44
8.2 Deduction for Irrecoverable Rent ………………………………………………………………………..                                       44


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8.3 Tax incentives on Rental Income ………………………………………………………………………... 44
8.4   Infrastructure status to Integrated Townships & Group Housing Development ……………………. 45
8.5   Section 80-IB (10) …………………………………………………………………………………………                                                              46
8.6   Resources for mortgage financiers …………………………………………………………………….                                                      47
8.7   Priority sector norms ……………………………………………………………………………………..                                                           47


9. ENVIRONMENT
9.1 Energy Saving Technologies …………………………………………………………………………….                                                            48
9.2 Real estate ………………………………………………………………………………………………… 48
9.3 Incentivized tax savings ………………………………………………………………………………….. 49
9.4 Vehicular emissions ………………………………………………………………………………………. 49
9.5 Equipment manufacturers ………………………………………………………………………………..                                                             49
9.6 CDM project income ……………………………………………………………………………………… 49
9.7 Sustainability report mechanism ………………………………………………………………………… 49
9.8 Water………………………………………………………………………………………………………... 50


10. TAX DEDUCTED AT SOURCE (TDS)
10.1 Tax Deduction at Source / Annual Return ……………………………………………………………... 51
10.2 TDS on Data Communication …………………………………………………………………………... 51
10.3 Clarification on TDS with respect to IUC paid by one operator to another ………………………… 52
10.4 TDS on packaged Software …………………………………………………………………………….. 54
10.5 TDS and Section 195 ……………………………………………………………………………………. 54
10.6 Centralised TDS Compliance for Banks ……………………………………………………………….. 55
10.7 Intra-year Adjustment of TDS …………………………………………………………………………… 55
10.8 Provision of revision of TDS Returns …………………………………………………………………..                                                    56
10.9 Deduction of Tax at Source (other than salary) ………………………………………………….. 56
10.10 Increase in Tax Audit Limit ……………………………………………………………………………… 56
10.11 Higher TDS for non quoting of PAN …………………………………………………………………… 56

11.     OTHER TAX ISSUES
11.1 Capital Gains — Section 50C …………………………………………………………………………... 58
11.2 Foreign Companies- Section 115A ……………………………………………………………………..                                                        58
11.3 Taxation on Global Mergers and Acquisitions ………………………………………………………… 58
11.4 Assets under the Wealth Tax ………………………………………………………………………….. 60
11.5 Wealth Tax on Vacant Industrial Land ………………………………………………………………… 60
11.6 Re-Introduction of Sections 54EA / 54EB …………………………………………………………….                                                    61
11.7 Ambiguity in MAT Calculation ………………………………………………………………………….. 61
11.8 Incentives for Hydrogen / Fuel Cell and Hybrid Vehicles ............................................................. 62


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11.9 Amendment to Schedule IV of the Income-tax Act ……………………………………………… 62
11.10 Deemed Speculation Loss in case of Companies …………………………………………………… 63
11.11 Section 40(a)(ia) for Non-deduction of Tax at Source ……………………………………………….                         63
11.12 Wealth Tax on Motor Vehicles …………………………………………………………………………                                        64
11.13 Taxation of Hotel Industry ……………………………………………………………………………….                                       64
11.14 Section-2(15) Charitable Institutions…………………………………………………………………...                                65
11.15 Reinstate / clarify tax holiday for exploration and production of natural gas ………...…………….       66
11.16 Changes in section 234C of the Income Tax Act (interest for deferment of advance tax) ……...      66
11.17 Limited Liability Partnerships …………………………………………………………………………..                                    67
11.18 Amendment required under the Income Tax Act relating to Amalgamation of Subsidiaries into
      Parent Company………………………………………………………………………………………….                                                68
11.19 Deduction u/s 80G to liberalize the exemptions by deleting ceilings specified……………………            69
11.20 Exemption for CSR activities:……………………………………………………………………………                                       70
11.21 Amendment to section 80JJA …..………………………………………………………………………                                        70
11.22 Issuance of certificate for deduction of tax at source at low rate under section 197 of Income
      Tax Act ………………….………………………………………………………………………………...                                                70
11.23 Omission of clause (e) sub section 22 of section 2 of the Income Tax Act, 1961 .………………..         71
11.24 Taxation of gifts under section 56(2) as Income from other sources …..…………………………...              71
11.25 Taxability of exchange fluctuations to be aligned with Accounting Standards in force……………        72
11.26 Rule 8D – Method for arriving at expenditure incurred for earning exempt income ………………           72


12. INDIVIDUAL TAXATION
12.1 Levy in Personal Income Tax .……………………………………………………………………….…… 73
12.2 TDS on Salary - Section 192 ……………………………………………………………………………..                                       73
12.3 Retirement Funds …………………………………………………………………………………………                                               73
12.4 Raising Exemption Limit in respect of Medical Expenses………………………………………….….                         74
12.5 Raising Exemption Limit in respect of Conveyance Allowance………..…………………………..….                     74
12.6 Exemption u/s 10(10C) for VRS Payments……………………………….………………………….….                                  74
12.7 Section 80C ………………………………………………………………………………………………...                                               75
12.8 Standard Deduction ………………………………………………………………………………………..                                            75
12.9 Value of Rent Free Quarters provided by company (VRFQ) .………………………………………...                        75
12.10 Section 80L for bank interest etc………………………………..……………………………………….                                  76
12.11 Deduction for vehicle loans ..…………………………………………………………………………….                                     76
12.12 Voluntary Retirement scheme .………………………………………………………………………….                                       76
12.13 Review of ceiling of income tax exemption on payment of gratuity …………………………………                   77




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13. PROCEDURAL ISSUES
13.1 Differentiating between Business Income and Investment Income .….……………………………... 78
13.2 TDS statements ………………………………………………………….………………………………..                                          79
13.3 Delays in Implementation of Orders of Higher Authorities .…………………………………………...                 79
13.4 Delays in Appeals before the Commissioners / Appellate Tribunals ………………………………...              79
13.5 Interest on Refunds ..……………………………………………………………………………………...                                     80
13.6 Alignment of Tax Provisions with Accounting Provisions …………………………………………….                     81
13.7 Passing of penalty orders …..…………………………………...……………………………………….                                 81
13.8 Increase participates in commodities futures market ……..…………………………………………..                    81
13.9 (a) Providing consequences of Non-disposal of rectification Applications
           under section 154 of Income Tax Act …………………………………………………………….…82
      (b) Providing a time limit for and consequences of Non-disposal of Applications u/s 195(2)
          of Income Tax Act for determining proportion of profits of non-residents …………………...... 82
13.10 Stay of Demand …………………………………………………………………………………………..                                          83
13.11 Section 147 related to Income escaping assessment ………………………………………………..                       83
13.12 Difficulties in Withholding Tax Compliances on Foreign Remittances ……………………………...            84
13.13 Insertion of section 293C – Power to withdraw approvals …….……………………………………..                  85




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                                 DIRECT TAXES
The domestic tax system needs to be tuned in alignment with business requirements. The
taxation issues need to be addressed for the removal of barriers to the development process
to provide solutions attractive to business enterprises in India.

1.     CORPORATE TAX

1.1    Dividend Distribution Tax
As per the provisions of section 115-O, a domestic company is required to pay tax on the
dividends distributed @ 16.995% (including surcharge and education cess). The said
provisions had resulted in multiple taxation of profits distributed as dividends, particularly in a
case where the corporate group had a holding company and its step-down subsidiary. This
is in view of the fact that the DDT was paid at every stage of dividend distribution flowing
from the subsidiaries to its holding company within the group.

However, provisions of Section 115-O of the Income-tax Act have been amended in the
Finance Act, 2008, through insertion of subsection 1A, which reads as follows:

“1A: The amount referred to in subsection 1 shall be reduced by the amount of the
dividend, if any, received by the domestic company, during the Financial Year, if:

 a) Such dividend received from its subsidiary;
 b) The subsidiary has paid under such section on such dividend; and
 c) The domestic company is not a subsidiary of any other company”

While the amendment u/s 115-O mitigates the cascading effect of taxation of dividend, it
however, restricts elimination of double taxation only at one level. In other words, the
cascading effect of dividend distribution tax has been removed only in case of corporates,
adopting a single tier holding structure i.e. a parent and its subsidiary. By providing under
Clause (c) that in order to avail a set-off of the dividend received from its subsidiary of any
other company it would mean that the second level and the further step-down subsidiary
although in the same group and distributing dividend will continue to pay Dividend
Distribution Tax without any relief on account of cascading effect.

In the case of infrastructure business, the infrastructure projects are developed by parent
company generally through its holding company which in turn develops and operates /
maintains these projects through subsidiaries (Special Purpose Vehicle). There is no
rationale behind eliminating the cascading effect only partially by granting the benefit only in
case of horizontal structure of holding subsidiary and not extending it to the Vertical structure
wherein there will be more than one step down subsidiary.

Hence it would be ideal if the restrictive conditions of clause (c) under the newly inserted
subsection 1A are deleted so that the elimination of multiple taxation of dividend distribution
can be extended to further step-down subsidiaries within a group. This will also be on par
with the earlier provisions of Section 80M (dealing with deduction available when in case of
intercorporate dividends), which were there on the Statute at the time when dividends were
taxable in hands of the recipient.

Recommendations
Complete elimination of cascading effect of dividend distribution tax by deleting clause (c) of
subsection 1(A) of Section 115-O. Thus making section 115-O on par with the earlier
provisions of Section 80M.


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1.2      Dividend Received from Overseas Subsidiaries / Associates

To take advantage of globalisation of world trade / opening up of World economies and
liberalisation of Indian economic policies, many Indian companies have emerged as
multinationals and are making investment overseas by setting up manufacturing and other
facilities through joint ventures and subsidiaries abroad. At present there are no fiscal
incentives available in relation to the inflow / repatriation of funds into India in convertible
foreign exchange. The dividends received by an Indian company from a foreign company,
i.e. either its subsidiary or a joint venture, though received in foreign exchange, are fully
taxable in India.

Recommendation
To enable Indian companies to invest more and compete effectively in the World market by
setting-up overseas entities, dividends received from such entities in convertible foreign
exchange in India should be fully exempt from tax in line with the dividend received from any
domestic company.


1.3 Taxation of Perquisite
Finance Act, 2009 has amended Section 17(2) of the Income Tax Act, so as to include the
following benefits within the definition of the term “perquisite”.

o     Value of shares issued to the employees under Employee Stock Option Scheme
o     Amount of Contribution to an approved superannuation in respect of employee to the
      extent it exceeds Rs.1,00,000/-
o     The value of any other fringe benefits as may be prescribed

a) Value of shares issued to the employees under Employee Stock Option Scheme

Earlier the ESOP benefit was liable to FBT in the hands of employer. Consequent to
abolition of Fringe Benefit Tax, the value of benefit is now taxable as perquisite in the hands
of employee with effect from 1.4.2009.

Further the ESOPs issued free of cost or at concessional rates will be taxed on the date of
exercise on the difference between the “fair market value” and the amount actually paid by
the employee. The “fair market value” is to be determined based on stipulated methods,
which will be separately prescribed by the CBDT.

This has resulted into following drawbacks:

1. It seeks to tax a notional benefit at a time when the actual gain is not realised by the
   employee. In fact, it is possible that the actual sale of shares could result in a loss for the
   employee. Since the perquisite tax paid earlier cannot be set off against the capital loss,
   the employee suffers a double loss, namely tax outgo and loss on sale of shares.

2. The question whether the ESOPs are granted at a concessional rate is being determined
   with reference to the “fair market value” on the date of exercise of the options.
   Technically, this is an incorrect approach. If the ESOPs are issued at the prevailing
   market price on the date of grant, the issue should be treated as “non concessional”.
   This would be in line with the guidelines issued by SEBI. Any subsequent gain accruing
   to the employee due to favourable market movements by the date of vesting or exercise
   of option cannot be treated as a “perquisite” granted by the employer.

3. Since the actual sale of shares will attract capital gains tax, if applicable, it is
   unnecessary to subject the employee to perquisite tax.

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4. The dates of exercise by the employees would be numerous, as a result companies will
   have to do as many valuations, which would be an onerous task throughout the year

5. It would be even more difficult for unlisted companies and foreign companies

In fact, before FBT was imposed on ESOPs, specific provisions existed in the Income Tax
Act for giving concessions by way of exempting the same from perquisites and subjecting it
only to capital gains tax.

It may be noted that ESOPs have emerged over the years as a critical, motivational and
retention tool for companies in a highly competitive market for talent. It is a very effective
instrument for encouraging employees to perform and excel and is a win-win proposition for
the employers / shareholders on one hand and the employees on the other.
Further, as the tax on ESOP is payable in the year of allotment of shares, the Govt. needs to
take cognizance of the fact that the employee may not have the cash at that time and
therefore in such a situation it would be appropriate to tax only when they are sold. In this
regard the Govt. may consider conditions that the ESOP plan contains as prevailed prior to
the introduction of FBT. Alternatively, the fair market value should be the market price
prevailing on the date of grant of ESOPs.

Recommendation
The earlier income tax provisions before FBT was imposed on ESOPs, be brought back by
way of exempting the same from perquisite tax and subjecting the subsequent market
appreciation to capital gains tax or else, the “fair market value” i.e. value of perquisite, be
determined based on the market value on the date of grant of options, instead of the date on
which the option is exercised.


b) Amount of Contribution to an approved superannuation in respect of employee to
   the extent it exceeds Rs.1,00,000/-

Finance Act 2009 introduced a new provision as a consequence of abolition of Fringe
Benefit Tax on the employers, whereby the amount of any contribution to an approved
superannuation fund by the employer in respect of the assessee (employee) to the extent it
exceeds Rs. 1 lakh, is to be regarded as a perquisite and subject liable to tax. It needs to be
pointed out that an employer, in making such a contribution is merely securitising the amount
of pension which is, under the terms of employment, payable to an employee at the time of
retirement. Admittedly, the pension received by the employee post retirement is taxable and
taxing it also at the time of contribution amounts to double taxation. The amendment is also
against the principle of moving towards Exempt-Exempt-Tax method (EET).

The taxation of the amount of any contribution to an approved superannuation fund in
excess of Rs. 1 lakh is iniquitous for the following reasons:-

a. It amounts to recovery of tax on an amount which an employee does not receive in
   present. It therefore leads to a tax outflow on payments made to an annuity provider
   which an employee may or may not realise during his lifetime. Further, if he does receive
   the annuity, he would, in any case be taxed on such annuity income.

b. Employers make a contribution to an approved superannuation fund in cases where the
   terms of employment provide for payment of pension. The purpose of contributing to an
   approved superannuation fund is to merely securitise the capital fund required to ensure
   payment of pension to the employee. However, nothing prevents an employer from
   estimating the liability (based on actuarial valuation) and retaining the provision therefore
   in its books of accounts. In such a situation, since there is no contribution to an approved
   superannuation fund, there will be no perquisite under the amendment to section 17. The

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      decision to contribute to an approved superannuation fund or to retain the liability in the
      books of account is that of the employer and the employee usually does not have a say
      in the matter. While securitising the amount by making a contribution to the
      superannuation fund may be a prudent step from the employers point of view, it should
      not cast an additional burden on the employee, particularly, since he may not be
      adversely placed if the employer chose not to make such a contribution and still deliver
      on his promise of payment of pension to the employee post retirement. Therefore, to cast
      an additional tax burden on an employee in cases where the employer chooses to
      securitise its liability for pension payment by making a contribution to an approved
      superannuation fund is iniquitous.

Recommendation
The taxation, as perquisite, any contribution made to superannuation fund by the employer
in respect of the employee, to the extent it exceeds 1 lakh rupees, would leads to double
taxation, CII recommends that the amendment to be reconsidered and deleted, which will be
in the interest of natural justice.


1.4      Refund of FBT paid during financial year 2009-10

Under section 115WJ of the I.T. Act, FBT was payable in four installments. Accordingly,
assessees have deposited large amounts as estimated FBT payable by them on or before
15th June 2009. With the removal of FBT w.e.f. Asst. Year 2010-11, the amounts paid in
June 2009 towards FBT needs to be refunded. The CBDT must issue administrative
instructions to refund this amount along with applicable interest (in case of delays), at the
earliest without waiting for the assessees to file a return of fringe benefits.

Alternatively, for assesses who are also liable to pay advance tax, the amount paid in June
2009 may be considered as a payment made by them towards advance tax payable against
the first installment due. In other words, assessees must be allowed to adjust the amounts
paid as FBT in June 2009 against the advance tax payable by them in the current financial
year.

1.5      Minimum Alternate Tax (MAT)
The Finance Act 2009 had substantially increased the levy of MAT from 10% to 15%. This is
extremely harsh. By enhancement of the MAT from 10% to 15%, the assessee are required
to part with additional tax at a very crucial stage of the business cycle which may hamper
growth.

MAT was introduced in 1996 to be implemented from 1st April 1997 to counter the rapid
increase in the number of zero-tax companies arising out of tax exemptions, deductions and
high rates of depreciation. The aim was to widen the tax net and increase the tax revenue.
However, the tax incentives that were granted to revitalize industrial activity and promote
investment activity in infrastructure got diluted due to MAT. CII favours a complete abolition
of MAT.

While there are a few companies who have booked profits and declared dividends but yet do
not pay tax as their profit and loss statements prepared according to the Income Tax Act
does not book profits, there are many genuine companies that have not booked profits either
because of the long gestation period of projects executed by the company or because of the
very nature of business.
MAT is also applied on infrastructure companies, which are exempt from payment of tax for
a period of 10 years under section, 80 IA of Income Tax Act.
The imposition of MAT has affected the investment plans of companies due to reduction in
the availability of resources as a result of payment of MAT.

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… In addition, from the assessment year 2007-08, the Long term capital gains (LTCG),
which is exempt from tax under Section 10(38), is to be considered while computing the
MAT liability. This is illogical and unfair because an income that is exempt from tax under the
normal provisions should not be considered for MAT computation as well. Further the
intention of Sec 115JB of the Income Tax Act, was to exclude all income falling under Sec 10
of the Act, in the computation of Book profit for MAT purposes, as such the current inclusion
of LTCG, which falls under Sec 10(38) of the Act, defies this intention. Hence long-term
capital gains covered by Section 10(38) should be excluded from MAT computation.

Recommendation

MAT should be abolished, or at least the rate should be brought down to 5% and MAT
holiday should be given to new assessees during the first 5 to 7 years of its operations..
Hence long-term capital gains covered by Section 10(38) should be excluded from MAT
computation.

CII seeks elimination of inclusion of LTCG to book-profits for MAT purposes.


1.6    MAT shortfall in the Advance tax installment payable in June 2009

The increase in MAT had been announced after the due date for the first installment of
payment of Advance tax i.e. 15th June 2009. Obviously, assesses would have a shortfall in
respect of the amount of advance tax paid on or before 15th June 2009 due to the increase in
the levy of MAT. In the Finance Act 2009, there is no proposal to amend section 234C of the
Income-tax Act to provide relief from levy of interest there under due to shortfall arising in the
payment of advance tax on or before 15th June 2009.

Recommendation
A suitable amendment should be made to section 234C to provide that no interest shall be
levied in case of a shortfall in payment of advance tax on or before 15th June 2009 caused
due to increase in MAT from 10% to 15%.


1.7     Clarification regarding add back of ‘provision for diminution in the value of
asset’, while computing book profits for MAT

The Finance Act 2009 has provided that if any provision for diminution in the value of any
asset has been debited to the profit and loss account, it shall be added to the net profit as
shown in the profit and loss account for the purpose of computation of book profits for MAT
with retrospective effect (from AY 1998-99 and onwards).

CII recommends that the provision for diminution in the value of assets is very much a part of
determination of book profits and accordingly, disallowance of the entire amount of provision
for diminution in the value of assets for the purposes of computation of book profits is not
fair. Thus, the act should be modified to provide that at least, only the provisions of ad-hoc
nature for diminution in the values of assets should be added and if a provision is specific
and determinable with reference to the value of the assets should be allowed deduction in
the book profits computation. This may be analogous to the addition on account of provision
for liabilities other than ascertained liabilities in the computation of book profits. If this
amendment is not withdrawn completely, then it is recommended that the amendment
should be supplemented with a condition that no reopening / rectification / revision of the
previously concluded assessments upto AY 2008-09 should be done by the field officers.
Similar amendment was made at the time of insertion of section 14A by the Finance Act
2001.


CII Pre-budget Memorandum 2010-11                                                               5
1.8    Goodwill as Depreciable Intangible Asset

The definition of intangible assets as prescribed under section 32 of the Income Tax Act
includes know-how, patents, copyrights, trademarks, licenses, franchisee or any other
business or commercial rights of similar nature. ‘Goodwill’ in accounting parlance is
recognised as intangible assets arising out of difference between the business purchase
price and the net assets of the company in a merger/acquisition transaction. Unfortunately,
goodwill is not specifically recognised as an intangible asset under the Income Tax Act. CII
believes that extending the benefit of depreciation to the goodwill arising out of mergers and
acquisitions would augment the growth and development of the Indian industry through
encouragement of the strategic alliances.
Recommendation
CII recommends that ‘Goodwill’ should specifically be included within the definition of
intangible assets in order to be eligible for depreciation allowance.


1.9    Amendment in Section 43B of the Income Tax Act
Since the conversion of interest into loan amount takes the form of capital liability the same
cannot be allowed as a deduction under the Income Tax Act, 1961.
The amendment in Section 43B via the Finance Act 1988 provides for disallowing the
interest, which is already allowed/allowable as deduction upon conversion thereof into loan
or advance by treating such conversion as ’constructive’ payment of such interest. As part of
making the Indian industry globally competitive, the corporate sector has been allowed to
restructure high rate loans from financial institution to lower interest loans by which the
arrears of interest rate converted into loans and such loans became payable after 5-6 years.
The amendment would, however, defeat the purpose of restructuring of loans by companies
if the interest in the form of higher loan liability is not allowed deduction.
Moreover, Section 43B of the Income Tax Act has amended with retrospective effect from the
year 1989-90. Being retrospective in nature, this would result in unsettling of several already
completed assessments. This is against the recently adopted and followed policy of the
Government of India stating not to make any ‘retrospective amendments’, unless the same
are unavoidable. The retrospective amendment is likely to affect many sick companies &
financially weak organisation that have claimed for deduction for such interest in the year of
conversion thereof into loan and advance. If their closed assessments are modified, the
same would unsettle so many such completed assessments and could result in
unanticipated demands for those years in which such deductions were withdrawn. Hence,
CII suggests that if this amendment is not withdrawn completely; it should at least be made
prospective.

Recommendation
Withdraw the amendment in Section 43B and treat the interest converted into loans as
constructive payment in the year of conversion and allow the deduction in such a year. If,
however, this amendment is not withdrawn, it should at least be made prospective


1.10   Depreciation Rate
It is a well-known fact that technology is changing very fast and unless we are able to
replace our assets fast, we cannot match with other countries in terms of productivity. This
calls for allowing for higher rate of depreciation. Presently, the depreciation rate in case of
Plant and Machinery is low at 15%, which compares unfavourably with many countries of the
world. In Australia, the depreciation rate for assets depends on its effective life; in Canada,
depreciation on Plant and Machinery is allowed at the rate of 20%; however, for Plant and
Machinery used in manufacturing and processing, the rate is 30%. In UK, there is a system

CII Pre-budget Memorandum 2010-11                                                            6
of “free depreciation”. Spain, which also had free depreciation system earlier, provides free
depreciation now for certain specified assets.

Recommendation
To help industry to be more competitive and upgraded technology, depreciation rate be
raised from 15% to 25% on plant, machinery and equipment employed in the industry.



1.11   Accelerated depreciation for Commercial vehicles

The government vide two notifications has notified that Commercial Vehicles purchased and
put to use between January 1,2009 and September 30, 2009, would be eligible for an
accelerated depreciation of 50%. If the time limit for purchase and put to use of commercial
vehicles is increased by another one year till September 30, 2010, it would act as a catalyst
for stimulating the demand for commercial vehicles.
Recommendation
The time limit for purchase and use of Commercial vehicles, eligible for accelerated
depreciation, should be extended till Sept 30, 2010.


1.12   Depreciation on assets costing less than Rs. 25000
There are number of assets which are technically plant or furniture but are of limited life and
small cost. In the days of competition, assets are purchased on economic considerations
rather than as a measure of tax savings. Full depreciation should be allowed irrespective of
usage of the asset. Also, it is suggested that certain small items costing up to Rs. 25,000/-
be allowed to be written off in the year of purchase it self.

Recommendation
Full depreciation to be allowed on assets, which have limited life and small cost upto Rs.
25000/.

1.13   Need for enhanced Depreciation on IT Products for competitiveness of Micro,
       Small and Medium Enterprises (MSMEs)
MSME’s contribute significantly to the Indian economy. An estimated 40% of the industrial
output is accounted for by the SMEs. In order to sustain the current rate of economy, the
NMCC (National Manufacturing Competitiveness Council) has identified ICT (Information
and communication technology) implementation and ICT absorption in MSMEs as a key step
towards making the sector competitive. Currently India has an estimated pool of 17.85
Million SME’s. 3.1 million have at least one computer. This figure represents 17% of the
total Indian SME’s, which use modern technology in their business. MSME sector has been
playing a very vital role in the employment generation where millions of people are deployed.
With the rapid globalization of India, there are going to be more opportunities available to
Indian MSME sector wherein large Indian or global companies can outsource their products
& services requirement to this sector. However, these companies will require transparent &
global standards in the products and services where the MSMEs can gain a lot from
deployment of ICT in their enterprises.
With the strong appreciation of rupee, MSME sector engaged in the export is also badly hit.
MSME export sector can survive and compete through higher efficiency and productivity,
which can be enabled thru deployment of ICT.
  i.   Depreciation can be a key to reducing the absolute cost of purchase of IT
       products for in MSMEs
       The Government and Industry have a common objective of increasing penetration of
       ICT and Computers in the country, which currently stands very low as compared to

CII Pre-budget Memorandum 2010-11                                                            7
       the developed and even some of the developing countries. To improve ICT
       penetration, it is of utmost importance that the absolute cost of purchasing ICT and
       Computers is brought down.
       The capital cost of purchase can either be -
       1. directly made cheaper by bringing down the prices of hardware, or
       2. indirectly reducing the overall cost of purchase of ICT by providing incentives to
          corporate and individual to invest in ICT
       100% Depreciation is one such option in the latter category, wherein the Corporate
       immediately obtains the benefit, by way of reduction in his cost of purchase of a PC
       to less than Rs. 65 for every Rs. 100 invested.
 ii.   Why depreciation on IT equipment and software should be increased to 100%.
       In the "Old Economy" of manufacturing, it may have been possible to apply the
       traditional notion of depreciation as a literal "wearing out" of capital, over and above
       maintenance. But, to treat Information Technology and Internet in the same manner
       as traditional manufacturing equipments may not give the correct picture. ICT
       products and software, for example, never "wears out," they just become obsolete.
       Obsolescence, rather than depreciation, is more relevant for judging the decline in
       value of capital investment in high technology investments. Yet the tax laws are still
       based on the old notion of capital physically wearing out. The result is that
       investments in such items as computers and software are excessively taxed,
       because they cannot be depreciated quickly enough to compensate for their
       obsolescence.
iii.   Present regulation and its implications for corporate buyers
       Present regulation of limiting the depreciation rate to 60 % impacts the corporate
       buying /replacement decision, as it takes 7 years for the equipment to depreciate.
       This implies for a replacement cycle of 2 years, a capital loss of 16% on account of
       un-recovered depreciation. This impacts corporate replacement decision. Higher
       rate of depreciation will enable corporate to bring down there replacement cycle
       nearer to the 2 year time frame.
iv.    The Govt.’s concerns: Policy for 100% depreciation of computers can be
       misused by corporates
       The inhibition of the policy makers that the 100% depreciation will be misused by
       corporates through sale and lease back transaction is unfounded. The present
       Income Tax Laws have, enough protection to safe guard the Government’s revenue
       interests against the misuse of 100 percent depreciation. CBDT vide instruction No.
       1978 dated 31 December 1999 (F No. 225/190/98/ITA-II) has laid down that where
       assets are factually non-existent, having been created by hawala transaction, the
       question of allowance of depreciation does not arise. In case of sale and lease-back
       of assets without any alteration in the situation of assets and its working, the denial of
       depreciation claimed to be considered keeping in view of the principle laid down by
       the supreme court in the case of McDowell and Company Limited. There is a ruling
       dated August 14, 2003 of the Special Bench of the Income Tax Appellate Tribunal
       (‘ITAT’) Mumbai Bench, (unreported) in the case of ICICI Ltd v Deputy Commissioner
       of Income-tax and others on the misuse of sale and lease back transactions in which
       it was held that ICICI Ltd is not entitled to depreciation allowance on the assets
       leased by it. In view of the above, the concern that 100 % depreciation will be
       misused may be unfounded.
 v.    In order to ensure that ICT equipment meet the quality standards, such equipment
       can be bought from accredited companies certified & meeting ISO 9000, ISO 14000
       and members of leading industry association like CII, MAIT, Nasscom etc.& MSME
       should produce excise gate pass for ICT equipment purchased under this program to
       claim the tax rebate.
CII Pre-budget Memorandum 2010-11                                                              8
It is therefore recommended that a special depreciation policy/scheme be considered in
respect of ICT equipment and software consumption in MSMEs. This will significantly lower
the tax burden on high-tech investment, induce large scale corporate buying of computers,
which will raise labor productivity, increase economic growth and give a big boost to the
MSMEs and thus the whole economy.

Recommendation
To improve IT consumption in the SMEs it is recommended that the Government considers
according 100% depreciation, once in a block of three financial years, for an annual
investment in IT equipment and software up to a limit of Rupees Twenty Five Lakhs, to the
MSMEs (for the purpose of the scheme the standard definition of MSMEs as prescribed by
the Ministry of Micro, Small and Medium Enterprises, GOI, be considered).
The IT hardware/software equipment for which this appreciation is accorded should be
excise duty paid/cleared and the software is original (genuine)/duly licensed.

1.14 Scope for additional depreciation on pollution control and energy saving
equipment

The current scope of the rules providing for higher depreciation is restricted and archaic.
The scope should be enhanced to cover modern technologies deployed for control of soil,
water and air pollution. Moreover, the list provided in the rules is specific and restrictive, not
covering alternate technologies to reduce / control pollution.

Companies are investing on features that restrict noise pollution, thermal pollution, light
pollution (over illumination), vibration and other harshness parameters for safer environment
and employee safety. These should be covered in these rules with higher rate of
depreciation.

Further accelerated depreciation should be also given on the solar energy projects to
promote more industry to use solar energy.

1.15 Surcharge and Cess to be removed
The Surcharge on Income tax was initially levied at a nominal rate of 2.5% and the same
was increased to 10%. While the Finance Bill 2007, had exempted surcharge on income tax
on all firms and companies with a taxable income of Rs. 1 Crore or less, the increase in
Surcharge has still negated the impact of reduction in corporate taxes to 30%.
Education Cess was introduced with a specific purpose of collecting revenue for securing
funds for educational needs. This needs to be reviewed with the increase in collection of
Direct taxes and if required be a portion of Direct Taxes collection can be apportioned for
funding the educational projects of the Government instead of having a separate levy.
Recommendation
The Levy of Surcharge and Cess need to be abolished on individuals and company.

1.16   Amendment to Section 42 of the Income Tax Act

Section 42(1)(a) of the Income Tax Act, 1961, provides for deduction of “expenditure by way
of infructuous or abortive exploration expenses in respect of any area surrendered prior to
beginning of commercial production” in computing the profits and gains of any business
consisting of the prospecting for or extraction or production of mineral oils. The deduction for
infructuous or abortive exploration expenses is not allowed till the surrender of the area,
though the same are charged off in the books of accounts. The word “surrendered” in the
above clause precludes allowability of deduction for expenditure incurred in an area, which
cannot be surrendered for any practical constraints.


CII Pre-budget Memorandum 2010-11                                                               9
Complete prospecting of the entire petroleum Exploration License (PEL) area may take
number of years. Deduction in respect of well found and declared dry during a particular year
should justifiably be allowed without the requirement of surrender of the PEL to smoothen
appropriate phasing of expenditure by the assessee and revenue collections for the
Government and to bring uniformity in tax treatment.

With the increased liberalisation and globalisation of the Indian Economy in general, and the
petroleum sector in particular, and in line with the objective of acquisition of oil equity abroad
to maintain oil security of India, Indian companies are now acquiring fields in other countries
for exploration and production of mineral oils in line with the India Hydrocarbon Vision 2025,
to ensure energy security of the country. It may not be possible to surrender the areas in
such foreign countries owing to government regulations or due to strategic reasons.

As a result of the requirement of surrender of the area prior to the beginning of commercial
production, the assessee is not able to avail deduction from taxable income of expenses on
account of abortive exploration, in the year of incurrence of expenditure.

The existing requirement of surrendering the area for availing the deduction for infructuous
or abortive expenditure may sometime induce the exploration company to surrender the area
without fully exploring the same, which is not in the interest of the country.

It is therefore proposed that the word “surrendered” may be deleted from existing section
42(1)(a).

Recommendation
Provisions of section 42(1)(a)of the Act be amended to exclude the word ‘surrender ‘.or
provision is required to be inserted with respect to the expenditure incurred on the area not
surrendered but some activity has been carried out with regard to exploration of mineral oil.

1.17   Investment linked tax incentive for specified businesses (Section 35AD)
With a view to creating rural infrastructure and an environmental friendly alternate means of
transportation for bulk goods, the Finance Act 2009 inserted an investment linked tax
incentive scheme for specified businesses including setting up and operating cold chain
facilities for specified products, warehousing facilities for storing agricultural produce and the
business of laying and operating cross country natural gas or crude or petroleum oil pipeline
network.

Cold chain facility has been defined to include facility for storage and transportation of all
agricultural, forest, meat, poultry, marine, dairy, horticulture, floriculture and processed food
items which require preservation under scientifically controlled conditions including
refrigeration. The intent is to promote creation of investment in cold chains to ensure that
facility exists for preservation of food and other articles. For removal of doubts, the
Government should clarify that the benefit would be available for facilities for preservation of
“any other food products” which require scientifically controlled conditions including
refrigeration for the preservation of such products. This would ensure that all products would
be covered in the provision.
Further, to promote investment and employment, it is recommended that this investment
linked tax incentive scheme be extended to the entire manufacturing sector.




CII Pre-budget Memorandum 2010-11                                                              10
Recommendation
The Government should clarify whether the investment linked tax incentive scheme for
specified businesses would be available for facilities for preservation of “any other food
products” which require scientifically controlled conditions including refrigeration for the
preservation of such products
Further the investment linked tax incentive scheme should be extended to entire
Manufacturing sector.

1.18   No Retrospective Amendments
The Finance Act 2009 amended the following sections with retrospective effect.

(i) Section 115JA [w.e.f. A.Y.1998-99] and
      Section 115JB [w.e.f. 2001-02]
(ii) Section 80A[w.e.f. A.Y.2003-04]
(iii) Explanation to Section 80-IA [w.e.f. A.Y.2000-01]

Majority of these retrospective amendments were made to neutralize the decisions of the
appellate authorities namely ITAT or High Court, which were in favor of the assessee. As a
result of the aforesaid retrospective amendments the Assessing Officers will be required to
reopen the assessments in relation to claims made by the assessee. Such reassessment
will result into tax demand since the claim already allowed to the assessee will be withdrawn.
Needless to add that the demand will trigger the interest provision namely, interest u/s 234B
and 234C. Further the assessing officers will initiate penalty proceedings in all such cases.
Such a levy of interest to the assessee is a clear violation of principle of natural justice since
no assessee can ever envisage a retrospective amendment at a future date. On the same
principle no penalty should be levied in respect of such retrospective amendments.

Recommendation
To protect the principles of equity, justice and fair play and stability in the interpretation of
taxing statutes, it is recommended that Ministry of Finance to desist from amending the
provisions of taxation law with retrospective effect.

Alternatively, a specific provision needs to be introduced in the Income Tax Act to provide
that in the event of retrospective amendment pertaining to withdrawal of deduction, claim,
incentive, no interest/penalty should be charged to the assessee if the demand is on account
of such retrospective amendments.




CII Pre-budget Memorandum 2010-11                                                              11
2.     CORPORATE RESTRUCTURING

2.1    Amalgamation Under Section 72A
Under the existing provision, a company is entitled to set off and carry forward unabsorbed
depreciation and accumulated business loss if it is amalgamated with another company
provided it is an industrial undertaking. The term “industrial undertaking” is defined to
include:

       i) the undertaking is engaged in manufacturing or processing of goods; or
       ii) the manufacture of computer software; or
       iii) the business of generation and distribution of electricity or any form of power;
       iii) the business of providing telecommunication services, whether basic or cellular,
             including radio paging, domestic satellite services, network of trunking,
             broadband network and internet services; or
       iv) mining; or
       v) the construction of ship, aircraft or rail system.

CII is happy to note that Finance Minister has enlarged the scope of this section by
extending the same facilities to shipping, hotel, banking business, etc However, financial
companies like NBFCs, insurance companies and other services sector are currently
excluded from the purview of this provision. Thus, in case of amalgamation in these sectors,
accumulated depreciation and business losses are not allowed to carry forward and are thus
lost.


In order to augment the growth and development of the Indian industry through
encouragement of strategic alliances, the scope of section 72A needs to be extended to all
the aforesaid sectors.
In addition, the conditions attached with provisions to permit carry forward and set off
unabsorbed depreciation and accumulated business losses are far too stringent. For instants
an amalgamated company is allowed to carry forward and set-off of losses on the fulfillment
of the conditions that: -
        (i)     engaged in the business for at least three years during which the
                accumulated business loss was incurred or the unabsorbed depreciation was
                accumulated.
       (ii)    As on the date of amalgamation, it has continuously held at least three-
               fourths of the book value of fixed assets, which are held by it two years prior
               to the date of amalgamation;
       (iii)   Three-fourths of the book value assets of the amalgamating Co. be held for at
               least five years;
       (iv)    Continues same business as that of amalgamating Co. for at least five years;
       (v)     Production level of at least fifty per cent of the installed capacity of
               amalgamating Co. to be achieved.

CII has been asking for relaxation in the conditions to facilitate restructuring. Unless the
conditions are made congenial, the efforts made in this direction would go waste. Whatever
fiscal incentives announced to encourage restructuring would remain in paper and would
restrict the growth of corporates.

Further, as per section 72(3), the period to carry forward and set off of business losses,
should not more than 8 assessment years immediately succeeding the assessment year for
which the loss was first computed. However for the growth and development of Industry, it is


CII Pre-budget Memorandum 2010-11                                                          12
recommended that business losses should be allowed to be carried forward or set off for 12
years in place of 8 years.

Recommendation
The benefits of carry forward and set-off of business losses and unabsorbed depreciation of
the amalgamating company belonging to the industrial sector should also be extended to the
non-manufacturing sector that is engaged in services like Hospital & allied business, NBFCs
insurance companies and other service sectors.
In addition, to encourage successful business re-organisation and draw the benefits u/s
72/A, it is recommended that:-
(i) The continuity to hold assets of the amalgamating Co. should be confined to 50% of the
    book value in order to make the amalgamation viable so that recycling is possible and
    assets are procured in order to keep up with latest technology.
(ii) Continuance of business of amalgamating companies should be reduced from five years
     to two years to facilitate effective re-organisation.
(iii) Achieving installed capacity may not be possible for the service sector companies, which
      are given the benefit under this section, hence, this condition should not be made
      applicable to service sector companies.
Carry forward or set off of business losses to be allowed for a longer period (i.e. 12 years in
place of 8 years)




CII Pre-budget Memorandum 2010-11                                                           13
3.      RESEARCH AND DEVELOPMENT

3.1    Extension of tax benefit for in-house and commissioned Scientific Research to
all Sectors
Section 35(2AB) of the Income Tax Act allows a weighted deduction of 150 per cent of the
expenses incurred on in-house research and development facility as approved by the
prescribed authority to companies engaged in the business of biotechnology or
manufacturing or production of drugs, pharmaceuticals, electronic equipment, computers,
telecommunication equipment, chemicals, automobiles industry and production of agriculture
implements.


The Hon’ble Finance Minister in the Union Budget 2009-10 has extended this benefit to
company engaged in business of manufacture or production of an article or things except
those specified in Eleventh schedule to the Act. However the Eleventh Schedule to the
Income-tax Act has not be reviewed for a long time and includes several essential articles
like cosmetics and toilet preparations, soap, toothpastes etc. It is essential to promote
research on these articles as well as it could lead to innovations which will help in improving
the quality resulting in better hygiene and development of formulations which may help
reduce usage of certain essential and scarce commodities like oil. It could also lead to import
substitution resulting in savings of foreign exchange.


CII is of the opinion that this benefit should be extended all industries and sectors in order to
make India an attractive base for R&D. In addition, to encourage public private partnership in
R&D and effectively utilize the public sector science and technology capacity, it is suggested
that the 150% weighted deductions be also extended to all R&D commissioned by firms in
academic institutions, public sector R&D laboratories and land & building pertaining to R&D
on Hybrid, hydrogen, Electric Vehicle projects.

Further the Exploration of hydrocarbons is a high risk business. By its very nature the
outcome of such expenditure is quite uncertain. The success ratio of such efforts vary from
1/3 to 1/7 i.e. out of each three to seven wells drilled, only one is found to be bearing
hydrocarbons. However, to ensure energy security of the country it is very essential that all
efforts are made to explore all prospective areas available in the country. Thus, in order to
provide incentive to such efforts, weighted deduction of, say, at least 150% may also be
allowed for such expenses like in case of research and development expenditure allowed u/s
35

Similarly, Pharma Companies incur expenditure outside the approved R&D facility i.e. clinical
trials, legal/consulting fees for filing in USA for NCE(new chemical entity) and new drug
applications, bioequivalence studies conducted in oversea CROs and regulatory and patent
approvals, which are directly related to R& D but are not covered for weighted deduction.
The said anomaly should be abolished.


As per the sunset clause inserted in this section, such deduction will not be available on the
in-house research activities undertaken after 31 March 2012. The withdrawal of the benefit
would have an adverse impact on the ongoing research activities in the areas of drug
development, biotechnology, chemicals, computer, automobile and telecommunication
equipment — areas where India has shown tremendous opportunity for growth. Due to long
gestation period involved in these R & D activities, the period upto 31 March 2012 is
inadequate and should be extended for at least next 10 years.




CII Pre-budget Memorandum 2010-11                                                             14
Recommendation
The weighted deduction of 150 per cent of the expenses incurred on in-house scientific
research and development facilities, should be extended to all industries and sectors.
The weighted deduction under section 35(2AB) should be extended for at least 10 years
even after March 31, 2012. Thus will incentivize investment in R&D.
Further, the expenditure related to R&D, which are incurred outside the approved R&D
facility, should be allowed to be included in weighted deduction


3.2    Weighted deduction under Section 35(2AB) to be extended to Building

At present there is only 100% deduction for Buildings. Substantial investments are involved
in buildings and are required to house R&D facility. Weighted deduction of 150% can be
extended to buildings also. This will incentivize investment in Research & Development.
3.3    Tax Exemption for Indian R&D Companies
The deduction under section 80-IB (8A) of the Act is available to the companies engaged in
the business of scientific and industrial research and development for the ten assessment
years subject to fulfillment of certain other conditions.

The said provision is applicable to Indian companies approved by the Department of
Scientific and Industrial Research during the period 1 April 2000 to 31 March 2007. Looking
at the need of the industries engaged in research and development, the period of approval
may be suitably extended so as to provide benefits to large number of companies.
Recommendation
The period upto, which the R&D COMPANIES are required to get approved by the DSIR,
should be reasonably extended.

3.4   Provide at least 150% Weighted Deduction for Contributions made by
Corporates to R&D Fund for SMEs and Engineering Institutes
It is well known that R&D requirement of the SMES are quite different from those of the
large-scale industries. Shortage of funds comes in the way of SMEs undertaking the much
needed research requirement. This problem can be addressed by creating a central R&D
fund specifically for the SMEs. The government could create this fund by contributing the
initial requirement of the funds. The remaining funds can be generated through the
contribution from the private sectors. However, private sector would contribute to this fund
only if there is strong incentive for them to contribute. In order to promote this fund the
government needs to provide at least 150% weighted tax deduction on the contributions
made by the industries.
Further, there are thousands of engineering colleges and polytechnics in India but the
average quality of the product of such institutions is far from satisfactory. In this age of rapid
globalisation there is an urgent need to make the manufacturing industry in India competitive
and to achieve t his we need to urgently improve the quality of the engineering and
technology manpower graduating from the large number of institutions in our country. To
improve the quality, the Govt. should encourage the corporate sector to make contributions
or even adopt some of these institutions. At present, under the Income Tax Act, only 50% of
the contributions made are allowable as deduction, which discourages the Corporates in
making contributions. The Corporates would be encouraged to contribute if a weighted
average deduction of at least 150 per cent is allowed to them on contributions. This in turn
would result in better quality of output from these institutions and hence a multiplier effect on
the manufacturing growth.




CII Pre-budget Memorandum 2010-11                                                              15
Recommendation
Create a central R&D fund for the use of SMEs. Private sector to voluntarily contribute and
get at least 150% weighted tax deduction on contribution.
The Income Tax Act should be amended by insertion of a new section allowing weighted
average deduction of at least 150 per cent on contribution made to the engineering
institutes.


3.5    Weighted deduction for Crop development and Agriculture extension
The only way that farm yields can be improved and brought to international levels is by doing
grass-root extension work. Enhancing productivity lies at the root revitalizing Agriculture,
together with effective linkages to markets – both domestic and international. In this context,
effective agricultural extension services are crucial to enable effective absorption of
technology and best practices at farms. In order to ensure widespread reach of effective
extension services, the providers of such services and those engaged in crop development
activities need to be recognized on par with Research and Development.

Sec 35 (2AB) of Income Tax Act permits a weighted deduction of 150% of expenditure on
Scientific Research, in-house Research and development facility in specified industries. This
facility should also be extended to expenditure on Agri extension and crop
development being done by Indian companies. By this, all companies engaged in
extension of services/research will be encouraged to invest in the up gradation of cultivation
/ Agri practices for improved returns to the farmers.

Recommendation
The weighted deduction of 150 per cent of the expenses u/s 35 (2AB) should be extended to
agri extension and crop development done by Indian companies.

3.6    Encouraging Use of Quality Agri-Inputs
The Indian agriculture sector is plagued with the problem of poor availability and high cost of
quality agri-inputs. There is hence a need to promote balanced fertilizer use for High Yielding
Varieties, strengthening seed sector to increase productivity, improvement in SRR and
availability of quality seed.

Recommendation
Research on seed including hybrid, transgenic should also be provided 150% weighted
deduction

3.7 Incentivise Technology and R&D in Food Processing Industry
Success in Food Business is about the right “Tastes” at right “Time”. This will require
interventions for facilitating and incentivising consumer value creation through taste and
convenience innovation as well as making them affordable to the masses through significant
cost reduction across the value chain.
Cost effective and flexible technologies will be required in the entire value chain to facilitate
several functions such as shelf life enhancement innovations within categories etc.
Recommendation
Incentivise R&D for consumer focused value creation and innovations in “taste” and
“convenience”.
In addition to direct funding for research, the government can also provide incentives to
support research conducted by private firms.
Allow 3 years accelerated depreciation of 200% on R & D for new units in Food Processing
and Packaging.

CII Pre-budget Memorandum 2010-11                                                             16
Allow similar R & D Depreciation incentive for providing shelf life increase.

3.8    Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation
Due to insufficient investment and lack of awareness of both the quality standards and
access to modern technologies, a large percentage of SSI units continue with outdated
technology and plant & machinery. With increasing competition due to liberalization of the
economy, the survival and growth of the SSI units are critically dependent on their
modernization and technological upgradation.
It was in this background that the Credit Linked Capital Subsidy Scheme for Technology
Upgradation of Small Scale Industries (SSI) was launched.
The Office of DC (MSME) in the Ministry of MSME, was operating this scheme, that aimed at
facilitating technology upgradation by providing upfront capital subsidy to SSI units, including
tiny, khadi, village and coir industrial units, on institutional finance (credit) availed of by them
for modernization of their production equipment (plant and machinery) and techniques.
The Scheme (as revised) provided for 15 per cent capital subsidy to SSI units, including tiny
units, on institutional finance availed of by them for induction of well established and
improved technology in selected sub-sectors/products approved under the Scheme. The
eligible amount of subsidy calculated under the pre-revised scheme was based on the actual
loan amount not exceeding Rs.1 crore.
The “Credit Linked Capital Subsidy Scheme for Technology Upgradation of Small Scale
Industries (SSI)” which as quoted in the Package for Promotion of Micro & Small enterprises
states – quote “Significant improvements have also been made in the Credit Linked Capital
Subsidy Scheme for Technology Upgradation, leading to a spurt in the number of units
availing of its benefits “has been discontinued w.e.f. 31 March 2007.
Non – applicability of the extended scheme to the units which have successfully grown from
SSI sector and need to modernize for sustaining competitiveness in the globally competitive
scenario.

Recommendation
Renewal / continuance of the Credit Linked Capital Subsidy Scheme for Technology
Upgradation for Micro, Small & Medium Enterprises (MSMEs) is absolute necessity.
Extend Credit Linked Capital Subsidy Scheme for Technology Upgradation, across the
board for all possible Technical upgradations/modernisations.


3.9   Allow the investments in Research and Development companies as “business
expenditure”

Indian Companies are now acquiring research and development companies abroad that will
support their globalization and self-reliance strategy. Indian industries are now fully geared
to move up the value stream from manufacturing to designing. Acquisition of existing R&D
companies would save considerable time and effort in catching up with the developed world
in such technology acquisition and avoid reinventing the wheel. Such initiatives of industry
are not currently supported by any fiscal incentive. Equating investments in Research and
Development companies abroad to R & D capital expenditure in India, it is suggested to
allow deduction of such amounts from total income.

Recommendation
Equating investments in Research and Development companies abroad to R & D capital
expenditure in India, it is recommended to allow deduction of the investment in the R&D
companies from total income as business expenditure.



CII Pre-budget Memorandum 2010-11                                                                17
4.      EXPORTS
4.1 Removal of Sunset clause for STP units u/s 10A and EOUs u/s 10B of the Act
Section 10A provides exemption from tax for profits derived from software exports by STP
units. As per the current provisions there is a sunset clause, whereby, this exemption will
end on 31st March 2011 and accordingly the profits of STP units will be taxable w.e.f
financial year 2011-2012. However, from last financial year (2008-09) there has been global
uncertainity caused by the financial problems in US that has adverse impact on the IT/ITES
sectors. Considering the fact that IT/ITES sector is a significant contributor to the Forex
earning of the country, it is therefore prudent to extend the period of benefits u/s 10A for this
STP units for atleast five year beyond 2010. Such extension of benefit will improve the
foreign exchange earnings of the country.
Despite the sunset clause whereby the exemption u/s 10A will end on 31st March, 2011, the
book profits of such units are liable to MAT u/s 115JB. Considering the above this provision
effectively neutralizes the tax benefit intended for STP units.
Similar the Income Tax exemption, under section 10B for the EOUs is applicable only upto
the financial year ending 31.03.2011. Because of this sunset clause
a) any new EOU, which becomes operational during 2005-06 can claim income tax
    exemption only for five years as against the full tax benefit of 10 years enjoyed by the
    Existing EOUs
b) any EOUs which comes into operation may not be able to get any income tax exemption
    after 31.03.2011
However, SEZs have been granted Income tax exemption and benefits over a 15 year
period. It may be emphasized that EOUs are basically performing within the same parameter
as SEZ units and EOUs are also performing within the Customs bonded premises. They are
also required to achieve positive Net Foreign Exchange Earning. Hence complete tax
exemption u/s 10B of 100% should also be extended to EOUs for atleast 5 years beyond
2011.
Further, Section 10B allows deduction from Taxable Income earned by an EOU from its
export sales. However, the same benefit is not extended to Deemed Exports sales made by
an EOU.
Deemed exports has also been counted towards fulfillment of export obligation under various
schemes of Foreign Trade Policy (FTP) therefore should be included in export turnover for
computing deduction.

Recommendation
In view of the above, it is important that the tax benefit u/s 10A and 10B should be continued
for atleast 5 years beyond 2011. It is expected that by this time the SEZ infrastructure will
be developed and the industry will stabilize in spite of the present turbulence in the US and
Western Economy. This will have a favourable long term effect on Indian Economy.
MAT on 10A and 10B units be withdrawn.
Further, deemed Exports made by EOU and supplies made to an EOU should also be
allowed as deduction under section 10B.


4.2     SEZ Units – Section 10 AA
Under 10 AA (1)(i) & (ii) of IT Act, 100% of profits and gains of SEZ units derived from export
is exempted from income tax deduction for an initial period of 5 years and 50% of such
profits and gains for further 5 years and thereafter 50% of profits for the next five years
subject to the creation of resource
Large capital intensive projects require at least 2-3 years from their start of operations to
reach its full capacity. It is therefore essential that these units are provided the flexibility to be

CII Pre-budget Memorandum 2010-11                                                                 18
eligible for 100% tax deduction for a total period of any 5 consecutive years within the
overall block of first 10 years of their operation instead of insisting on the first 5 years. For
the other 5 years in that block, the SEZ units could claim 50% of the profits. In essence, this
would not change the overall provision of tax holiday for the SEZ units.
Further, the prescribed formula (Section 10AA) for calculation of Income-tax exemption for
the SEZ units needs review. The issue of dividing the 'export turnover of the unit' by the
turnover of the Business (which can have multiple units/ undertakings) was clarified in the
last budget however only prospectively. This has caused confusion for the SEZ units & SEZ
developers.
It is worthwhile here to note that a similar inadvertence had occurred in the provisions of
Section 10A and 10B of the Income-tax Act and the amendment were subsequently carried
out under the said provisions to remove the anomaly with retrospective effect.
Recommendation
Section 10 AA should be amended to allow flexibility to SEZ units to avail income tax
exemptions for any 5 consecutive years within the first 10 years of its operation.
It is recommended that the clarification given in the Finance Act 2009 on the issue of dividing
the 'export turnover of the unit' by the turnover of the Business w.r.t. sub-section (7) of
Section 10AA should be made effective retrospective from January 2006.
Deduction should be specifically allowed under section 10AA on transfer of existing 10A/10B
non-SEZ units to SEZ area.




CII Pre-budget Memorandum 2010-11                                                             19
5.     TRANSFER PRICING

5.1    Determination of arm's length price in cases of international transactions

The Finance Act 2009 amended the proviso to section 92C to provide that where more than
one price is determined by the most appropriate method, the arm’s length price shall be
taken to be the arithmetical mean of such price. However, if the arithmetical mean, so
determined, is within five per cent of the transfer price, then the transfer price shall be
treated as the arm's length price and no adjustment is required to be made. Thus the benefit
of +/-5% safe harbour range not available in case the transaction /tested price is outside the
5% range Image /Issues.

This amendment contradicts the views expressed by the Tribunals in the judgment of Sony
Development Consultants and Philips Software.

The proviso yields the benefit of 5% range with reference to the “actual transaction price” as
compared to the existing proviso which provides the 5% benefit with reference to the “arm’s
length price”. Considering that the transaction price is required to be tested under Transfer
Pricing provisions, the approach of taking the tested price itself as the reference point for 5%
range may be absurd and is against the international understanding on this issue.

Further, the amendment takes effect from 1st October, 2009 and is made applicable to all
cases in which proceedings are pending before Transfer Pricing Officer (TPO) on or after
such date. Thus the application of this amendment to all the pending proceedings as on 1
October 2009 would lead to harsh results and would cover even those international
transactions, which were entered into by the taxpayers during the financial year 2005-06.
Therefore, the amendment is applied prospectively to the international transactions entered
into by the taxpayers on or after 1 October 2009 or at least, to the transactions covered in
the transfer pricing documentation for the previous year ended 31 March 2009.


Recommendation
The benefit of a range around arm’s length price was granted on the basis of the fact that
transfer pricing is not a science and due to complexities in the economic and business
factors determining transfer prices, it may not be possible to arrive at one price. In other
words, it is accepted internationally that there may not be one arm’s length price but a host
of such prices. Thus, the Government may modify this anomaly and restore the earlier
provisions.
If not possible, then to atleast ensure the amendment applicable prospectively to the
international transactions entered into by the taxpayers on or after 1 October 2009 or at
least, to the transactions covered in the transfer pricing documentation for the previous year
ended 31 March 2009.


5.2    Safe Harbour provisions
As per the Union Budget 2009-10, the CBDT has the power now to prescribe safe harbour
rules for transfer pricing. The Safe harbour is defined to mean certain circumstances in
which the Revenue Authorities shall accept the transfer price as declared by the taxpayer.
Thus the safe harbour would result in significant reduction in Transfer Pricing litigation.
However, the CBDT, while framing the rules, should consider various issues i.e. What would
be the transactions which would be covered under safe harbour and what would be the safe
harbour; the non acceptance of safe harbour rules by one jurisdiction in another jurisdiction
may give rise to double taxation, etc.

Further, countries such as the United States, Brazil, New Zealand, Mexico, and Australia
have been effectively using safe harbour rules, which could also be referred to by the CBDT.
CII Pre-budget Memorandum 2010-11                                                            20
Recommendation
The Safe harbour rule should be framed in accordance with the one existing in other
countries and should be available for public comments and debate, before becoming
effective.


5.3    Alternate Dispute Resolution Mechanism

The Alternate Dispute Resolution Mechanism has been introduced with the two key
advantages i.e.:
      a. Early resolution / hearing at a level above the tax officer/ transfer pricing officer;
          and
      b. Since there would be no final assessment order from the tax officer till the case is
          disposed off by the DRP the tax demand would automatically be in abeyance.

DRM at present is eligible to Transfer Pricing cases or a foreign company. This may need to
be expanded to others also.

Further, some clarification sought on DRM are:-

       •   Whether or not for foreign entities orders/ proceedings relating to section 201/195
           should be covered
       •   Would the newly introduced provisions have an impact of the existing litigation
           pending before the CIT(A)?
       •   Would it still be possible for the taxpayer to follow the erstwhile CIT(A) route
           where for instance the taxpayer does not opt to approach the DRP?
       •   Time limit of DRP starts

Further, the provisions of section 263 of the Act should be amended to ensure that the order
passed by the AO pursuant to the directions of the DRP shall not be subject to revisionary
proceedings u/s 263 of the Act.

In case an assessee is not able to file any objection to the AO against the draft order within
the stipulated period of 30 days, there should be enabling provisions to provide for
condonation of delay on the part of assessee, wherever there is a reasonable cause and
circumstances exist warranting such condonation. This may be along similar lines as
provisions in case of condonation of delay in filing appeal before the CIT (Appeals) / ITAT.

5.4    Providing minimum threshold for applicability of Transfer Pricing Regulations
Transfer Pricing Regulations contained in sections 92A to 92F of the Act provide for the
maintenance of information & documents in respect of international transactions entered into
between associated enterprises, either or both of whom are non-residents, and for the
obtaining of an audit report in respect of such transactions. The transfer pricing regulations
kick-in the moment an international transaction is entered into by an Indian resident with a
non-resident associated enterprise irrespective of the value of such transaction. As a result,
the cost of compliance with transfer pricing regulations is, sometimes, more than the value of
the international transactions entered into. It is, therefore, suggested that a minimum
threshold transaction value may be specified beyond which only the transfer pricing
regulations in sections 92A to 92F would apply. The threshold may be pegged at the same
level as the monetary limit specified in section 44AB of the Act for getting a tax audit
conducted.




CII Pre-budget Memorandum 2010-11                                                           21
Recommendation
A minimum threshold transaction value may be specified for the applicability of Transfer
Pricing Regulations.


5.5      Selection of Data for Transfer Pricing Assessments
It has been the experience of the assesses that while selecting the data of various
companies the Assessing Officer are resorting to convenient database. The following are
the illustrative cases in this regard:

o     While selecting the companies for comparability of data for particular industry the loss
      making companies are ignored to arrive at the industrial margin.
o     While selecting the data details are selected only for a particular Financial Year
      disregarding the data which is available for a business cycle of 2-3 years. Such a
      arbitrary selection results into distorted picture of the margins earned by the industry.
      Due to arbitrary selection of data the assessee suffers by way of adjustment to the arm’s
      length price. Statutory guidance in this regard is therefore required.

Recommendation
Specific rules needs to be inserted compelling the Assessing Officers to consider the total
data available in the public domain, thereby denying them the arbitrary exclusions from the
publicly available data.




CII Pre-budget Memorandum 2010-11                                                           22
6.     FINANCIAL SERVICES SECTOR

6.1    Exemption to Banks and NBFCs from the Provisions of TDS
As per the provisions of section 196 of the IT Act, tax is not required to be deducted at
source on any payment to specified entities. A similar exemption from TDS should be
extended to banks as such deduction of tax at source on the income of banks causes
considerable inconvenience in view of huge volumes of TDS certificates collected from
thousands of borrowers /customers. It further leads to loss of tax benefit as on non-receipt of
TDS certificates from the borrowers / customers, income-tax department does not grant
credit for the tax deducted at source, which results in unnecessary tax liability. The Income-
tax department is also inconvenienced, as they are required to process the forms submitted
before granting TDS credit. In fact, in view of the grave inconvenience, exemption has been
granted to banks on interest income other than on securities under section 194A. A similar
blanket TDS exemption under section 196 to banks will facilitate a hassle-free administrative
mechanism. Also, since TDS is only a means of advance collection of tax and banks pay
advance tax, such blanket TDS exemption under section 196 will not lead to any revenue
loss to the Government.


Recommendation
Banks may be granted exemption from TDS under Section 196. Alternatively, TDS credit be
allowed even on non-receipt of TDS certificates from the borrowers / customers on the basis
of indemnity from the banks that no additional claim will be raised again for TDS credit on
receipt of such TDS certificates in future.


6.2    Derivative Trading and Speculative Transaction
The Reserve Bank of India, the regulatory head, has permitted banks to undertake derivative
trading either to develop derivative markets or to manage their balance sheet well. Banks
primarily undertake two kind of transactions viz. hedging transaction to minimize the risk on
borrowings and trading transaction as a market maker as per the guideline of the Reserve
Bank of India.
From the point of view of Income tax, derivative transactions are treated as speculative
transactions as actual delivery or transfer does not take place. The profits / losses of
speculative transaction are treated separately from that of any other business profits /
losses. Set off of speculative profits / losses is also not allowed against any other business
profits / losses. As the banks have entered the derivative market on the specific
recommendation of the Reserve Bank of India, the profits and losses on account of market
making transaction in the derivative products should be treated at par with other business
activities.
Further, the Finance Act 2005 has amended section 43(5) to include trading in ‘derivatives’
to be a non speculative transaction. The term ‘derivatives’ has been defined in the section
2(h) of Securities Contract Act 1956. The definition does not include commodity derivatives.
The transactions in commodity derivatives are executed on screen-based systems, which
leave an audit trail.

Recommendation
Derivative trading activities undertaken by banks and financial institutions to develop
derivative market should be treated at par with other business activities for the purpose of
the Income Tax Act.
It is suggested that the exemption should also be extended to commodity derivatives entered
into on recognized commodity exchanges.



CII Pre-budget Memorandum 2010-11                                                           23
6.3    Depreciation on Leased Assets
There is a tendency amongst the assessing authorities to disallow the assessee's claim of
depreciation in relation to assets given on lease on the ground that such transactions are
merely finance transaction and lessor is not the real owner of the assets leased.
Under the Income-tax Act, 1961, depreciation has to be allowed on fulfillment of two
conditions viz. ownership and use of assets. The lessor being the legal owner using the
assets in the business of leasing is entitled to tax depreciation. Besides the lessee who is
the beneficial owner cannot claim the tax depreciation as he is not the owner. In the process,
neither the lessor nor the lessee is allowed any depreciation with regard to the leased
assets. On the top of this, in few cases, even the lease rentals paid by the lessee to the
lessor are not allowed as deductible expenditure. It has been observed that such a view by
the assessing authorities of disregarding lease transactions in general, by holding them as
finance arrangement, without disputing the genuineness of such transactions, have been
followed in all the cases - lock stock and barrel.
The Explanation 4A to section 43(1) which was inserted with the specific object of curbing
the perceived evil practice in sale and lease back transactions and Circulars issued by the
CBDT clarifying the issues relating to claim of depreciation on leased assets are also
disregarded by the assessing and appellate authorities while disallowing the depreciation
claim.
The Central Board of Direct Taxes had set up an Expert Group to examine the issue of
allowance of depreciation on finance lease transactions to lessors. The Group had
suggested strengthening the existing provision of the law and adopt a remedy, which does
not destabilise the existing leasing and sub-serves the Government’s economic
infrastructure and globalisation policy. It was recommended that a proviso be inserted to
Section 32 to the effect that in cases of finance leases, the lessor will be deemed to be the
owner of the assets used in the finance leasing business. However, the suggestion has not
been incorporated, which would mean continuance of unjust assessments resulting in highly
inflated tax demands, prolonged litigation and locking up of funds.

Recommendation
To avoid litigation on the issue, the provisions of section 32 read with section 43(1) and 43(6)
of the Income tax Act, should clearly spell out the allowance of depreciation to the lessor at
the prescribed rates and subject to fulfillment of certain conditions, in respect of leased
assets - under operating lease / finance lease / sale & lease back cases.


6.4 Investments made in Portfolio Management Scheme
A Portfolio Manager provides personalised investment management/ administration services
to his investor client. Portfolio managers are required to obtain a certificate, from the
Securities and Exchanges Board of India (‘SEBI’) under the SEBI (Portfolio Managers)
Regulations, 1993 [‘SEBI Portfolio Managers Regulations’].
There are various clauses in SEBI Portfolio Managers Regulations, which clearly indicate
that the monies are entrusted by clients to the discretionary portfolio managers for
investment. A few examples of these clauses are as follows: (a) Portfolio manager cannot
borrow funds or securities on behalf of his clients – Regulation 15(4A), (b) The portfolio
manager has to enter into an agreement which should contain investment objectives, type of
investment, tenure of the investment, etc. – Regulation 16, (c) He cannot engage in
speculative and short selling transactions – Regulation 16(4), (d) All transactions in shares
by Portfolio Managers have to be settled by delivery - Regulation 16(4), (e) The portfolio
manager has to record all investment decisions, which are backed by extensive in-house
and external research on companies – Regulation 17(1), (f) Portfolio manager has to
maintain all records in compliance with PMS regulations, which are subject to regular
external audit and SEBI Inspection – Regulation 17/24.


CII Pre-budget Memorandum 2010-11                                                            24
All these regulations substantiate the fact that the investment with portfolio managers is an
investment activity and not a trading activity by any parameters. Thus, the regulations
recognize that the funds are invested with the intention of earning capital appreciation and
hence, the gains earned out of such investments should be assessed as Capital gains and
not as Business income.
Recommendation
In view of the above, it is suggested that the income of an investor who engages a
professional discretionary portfolio manager registered with SEBI should be considered as
capital gains and not business income.


6.5    Deduction for Provision for Doubtful Debts Under Section 36(1)(viia) made in
       Accordance with RBI Guidelines
Provisions made by banks and NBFCs in NPA account as per prudential norms prescribed
by RBI need to given full in computing Profits & Gains of Business in the year of making
provision.
Presently, the banks and NBFCs are allowed a deduction for provision in respect of NPA only
to a limited extent under section 36(1)(viia) of the I.T Act. In case of most of the banks and
NBFCs, the amount of NPA provision made in accordance with RBI norms far exceeds the
deduction presently available under section 36(1)(viia), which results in disallowance of a
substantial portion of provision made for NPA. It may also be noted that banks and NBFCs
are also encouraged to make higher provisions as per RBI directives and many of them are
doing higher provisioning than the mandatory requirements. Hence our submission is that
provisions made in NPA accounts should be allowed in full in computing profits and gains of
business in the year of making provisions. Here again both specific and unallocated
(surplus) provisions made by the banks and NBFCs could also be allowed in full for tax
purposes.

Recommendation
The provisioning made by banks and NBFCs in the books of accounts be allowed as a
deduction under section 36(1)(viia) of the IT Act.

6.6    Benefits of Section 72A to Private Sector Banks
The benefit to carry forward and setoff unabsorbed depreciation and accumulated losses
under section 72A have been extended to nationalised banks in case they go for
amalgamation. However, private banks would be deprived of such benefits in case they go
for amalgamation. This would create an imbalance amongst the banking industry.
Private banks are at par with nationalised banks, both being part of the organised banking
sector and are treated equally for all practical purposes including governance and regulation
by the Apex Regulatory Authority, the Reserve Bank of India. Consolidation through
amalgamation is an integral part of the banking business today to facilitate growth, achieve
operational efficiency and to meet competitive challenges. Fiscal incentive on consolidation
would further enable banks to gain long term stability by preventing sickness.

Recommendation
The benefit of section 72A to carry forward and setoff unabsorbed business losses and
accumulated depreciation should be extended to banks operating in the private sector too to
usher in a level playing field.

6.7    Exclusion of Banks from the Purview of Sections 40A(2) & 92 to 92F
As per the provisions of Section 40A(2), any expenditure incurred between related parties
treated as excessive or unreasonable by the Assessing Officer having regard to the fair
market value of the goods, services or facilities is not allowed as a deduction to the extent it
is excessive or unreasonable. The scope of related person under section 40A(2) for a
CII Pre-budget Memorandum 2010-11                                                            25
banking company includes a person in which it has a substantial interest in the business or
profession of that person i.e. ownership of shares not less than 20% of the voting power.
Similar condition regarding 26% holding of shares carrying voting power exists in respect of
transfer pricing provisions applicable to associated enterprises under sections 92 to 92F. In
fact, the definition of associated enterprises under section 92A is so wide that it also covers
loan advanced for not less than 51% of the book value of the total assets of the borrower
and guarantees granted for more than 10% of the total borrowings of the guarantor.
Banks provide financial assistance to various corporate and non-corporate clients by way of
investment in equity or preference shares, subscription to debentures, loans and
guarantees. Hence, there is a possibility that the financial assistance by way of equity
shareholding may exceed the specified shareholding limits for cases wherein banks do not
have any control nor do they exercise any significant influence. This leads to a peculiar
situation wherein subscription to equity shares even for financial assistance gets covered
within the scope of the aforesaid sections. At times, such assistance is granted at fluctuating
rates compared to market rates depending on the risk factors, creditability, type of industry
viz. infrastructure, agriculture, commercial, etc. As the pricing is based on various norms
outlined by banks that are in turn regulated by the apex body, Reserve Bank of India, it is
necessary that the banks are removed from the purview of such sections 40A(2), 92 to 92F.

Recommendation
Banks could be provided a limited exclusion from the purview of section 40A(2) and sections
92 to 92F in respect of transactions that have been carried out in the normal course of its
business.

6.8    Exclusion of charge created and duly registered in respect of credit extended
or loans granted by Scheduled Banks from the provisions of section 281
As per the provisions of section 281 of the IT Act, a charge or transfer effected by an
assessee in respect of specified assets during the pendency of any proceedings under the
income-tax act or after the completion but before the notice of the TRO is void to the extent
of the claims of the tax department. The charge is not void if it is created for adequate
consideration and without notice of the pendency of such proceeding or, as the case may
be, without notice of such tax or other sum payable by the assessee or with the previous
permission of the assessing officer.
“Assets” for the purpose of Section 281 of the Act has been defined to mean land, building,
machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of
the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.
Banks cannot seek exemption under the proviso (i) to Section 281(1) by claiming such
charge or transfer is for adequate consideration and they did not have any notice of the
pendency of the tax proceeding as Banks are usually in possession of the balance sheet (for
due diligence) of the Borrower, which usually indicates that there may be tax arrears.
The procurement of a certificate from the tax officials on creation of charge in favour of
banks by borrowers involves applications to the Assessing Officer for permission for creation
of charge causing inconvenience to banks and borrowers who are unable to borrow funds on
the basis of security of their asset pending issue of certificate from the tax authorities. In
some cases due to the exigencies of the project, borrowers are unable to furnish the
required certificate at the time of availing the loan against security. During this period, banks
usually take a commercial/credit call on disbursement of facility pending security creation.
With a view to reduce administrative hassles for the transferors / borrowers as well as for the
Income-tax Department, charge created and duly registered in respect of credit extended or
loans granted by scheduled banks should be excluded from the provisions of Section 281 of
the IT Act.




CII Pre-budget Memorandum 2010-11                                                             26
Recommendation
Charge created and duly registered in respect of credit extended or loans granted by
scheduled banks should be excluded from the provisions of Section 281 of the IT Act, 1961.
Alternatively, a reasonable time frame of say 10 days from the date of submission of
application to assessing officer be prescribed for issuance of certificate granting permission
under section 281.

6.9    Exemption under Section 10(15)(iv)(fa) for Interest on Overseas Borrowings
Banks and NBFCs provide a thrust to the industrial development of the country as a whole
as it assists with the development of the priority sector in India particularly the agriculture,
industrial, technical and infrastructure sectors. The investments require huge capital outlay
for which purpose banks raise funds through borrowings from foreign lenders to complement
the resources raised internally.
As per the earlier statute, Section 10(15)(iv)(e) of the I.T. Act provided for exemption from
tax on interest on moneys borrowed from banks and financial institutions by industrial
undertakings for specified purposes subject to the conditions prescribed therein. This
section has been deleted by the Finance Act 2001 on the ground that the lender would be
eligible for tax credit against his tax liability in the country of his residence on such interest
income. Section 10(15)(iv)(fa) of the I.T. Act extends the benefit of exemption to interest
earned on deposits placed by non resident with scheduled bank. Finance Act, 2003 also
eliminated the exemption available to housing finance companies while procuring funds
through external commercial borrowings under section 10(15)(iv)(g) which raised the cost of
borrowings for the housing finance companies.
It is proposed that the exemption be extended to interest on borrowings from foreign lenders
for the following reasons:
a)    The terms of borrowings with the foreign lenders across the globe, carry a standard
      clause in all documentation that all taxes in the borrower’s country shall be borne by
      the borrower as generally partial credit for taxes withheld in India is available to the
      lender due to lower rate of tax enjoyed in offshore countries.
      Typically, the funds are raised through External Commercial Borrowings (ECBs) and
      direct lending from various counter parties. ECBs are generally procured through an
      arranger wherein there are syndication of lenders who are providing loans to the
      borrower and the list of lenders and their tax residency details are not shared by the
      arranger with the borrower. Further, the loans by the lender are sold to the other
      counterparties without the borrower being aware about the same. In view of the
      borrower not being able to identify the lender, the bilateral treaty cannot be applied and
      in such scenarios, the Indian borrowers are required to gross up the taxes at the rate
      prescribed under the Indian Income tax Act, 1961. This effectively increases the cost
      of borrowing for the bank and ultimately affects the agriculture, infrastructure and other
      project costs for which funds were raised.
b)    Realising the importance of foreign currency deposit mobilization as an effective
      means of borrowings for the economic development of the economy through the
      banks, the Government reinstated the tax exemption on interest on Non-Resident
      External deposits and foreign currency deposits placed by non-residents and not
      ordinarily residents.
c)    The benefit of withholding tax exemption is mainly granted to attract inflow of foreign
      funds. Countries like Hong Kong and Singapore etc. have allowed the benefit of
      exemption from withholding taxes to enable the inflow of foreign funds for utilisation of
      agricultural, industrial, and technical and infrastructure development at low costs.




CII Pre-budget Memorandum 2010-11                                                              27
Recommendation
To provide level playing field to Indian borrowers, the exemption under section 10(15)(iv)(fa)
of the I.T. Act be extended not only to the deposit received but also to money borrowed from
non-residents by banks, NBFCs and housing finance companies.

6.10   Provision for NPAs under section 36(1)(viia)
The Finance Act, 2002, raised the limits of NPA provisioning under section 36(1)(viia)
available only to banks and FIs from 5 per cent to 7.5 per cent of the gross total income. This
is inadequate for cleaning the books. But even this inadequate tax shelter is not provided to
NBFCs — as if these entities were children of lesser gods. This is patently unfair, for it
discriminates one lending institution (NBFCs) from another (banks and FIs). Indeed, a recent
ruling by the ITAT Bench of Madras has confirmed that provisioning against the bad and
doubtful debts made by NBFCs as per RBI guidelines should be treated as normal business
expenditure.

Recommendation
The provision of section 36(1)(viia) should equally be applicable to those NBFCs, which
abide by the norms prescribed by the RBI.
6.11   Special Reserve under section 36(1)(viii)
The existing provisions of clause (viii) of sub-section (1) of section 36 of the Income-tax Act,
1961 provide for a deduction in respect of any special reserve created and maintained by a
financial corporation engaged in providing long-term finance for industrial or agricultural
development or development of infrastructure facility in India; or a public company formed
and registered in India with the main object of carrying on the business of providing long-tem
finance for construction or purchase of houses in India for residential purposes. The
deduction is allowed upto 40% of the profits derived from the business of providing long-term
finance.
The Finance Act 2007 has reduced the deduction from 40% of the eligible income from long
term financing to 20% subject to the continuing threshold limit of twice the amount of the paid-
up share capital and general reserves. In addition, the benefit of special reserve in respect of
profits arising out of business of providing long term finance for construction or purchase of
houses in India for residential purposes is restricted to a housing finance company.
With a view to encourage capital deployment in critical sectors of infrastructure, housing and
industrial areas, it is pivotal to continue the existing benefit @40%. The reduction of the
deduction will impact the long term financing for infrastructure, industrial and eligible projects
thereby hampering the development of the Indian economy in the long run.
Further, housing finance for residential purposes forms a part of the services offered by
many nationalized and private banks and financial institutions. In fact, the competitive rate of
interest on home loans, speedy loan processing and minimal paperwork facilitates
convenience to small retail borrowers who are largely dependent on banks for meeting their
housing needs. In this context reference may be made to the circular on housing finance
issued by the apex regulatory body, RBI, to banks which states that as banks, with their vast
branch network throughout the length and breadth of the country, occupy a very strategic
position in the financial system, they have an important role to play in providing credit to the
housing sector in consonance with the National Housing Policy. Therefore, the banks should
gear up to deliver the requisite ‘housing finance’. Hence, the denial of special reserve benefit
to banks in respect of housing loans would be unjust and lead to denial of level playing field
with housing finance companies even in respect of same type of business.

Recommendations
Deduction on special reserve @ 40% under section 36(1)(viii) of the Income Tax Act. Should
be reinstated.


CII Pre-budget Memorandum 2010-11                                                              28
Allow special reserve benefit in respect of profits arising out of business of providing long
term finance for construction or purchase of houses in India for residential purposes to all
specified entities including banks.


6.12   Special Provision for Income — Section 43D
Section 43D, inserted from the assessment year 1991-92, states that in case of a public
financial institution or a scheduled commercial bank or a state financial corporation, income
by way of interest on bad and doubtful debts would be chargeable to tax only in the year in
which it is credited to the profit and loss account or actually received by it. However, NBFCs
have been kept out of this provision. Consequently, NBFCs are liable to pay tax on such
income, irrespective of the fact whether it has been credited to the profit and loss account or
realised in cash. This is discrimination.
Recommendation
Section 43D should be enlarged to cover NBFCs as well


6.13   Exemption to Assets Financing Companies from TDS Under Section 194A(3)(iii)
According to section 194A of the Income Tax Act, tax has to be deducted at source by the
borrower on payment of interest to the lender as per the rates in force. However, banks, FIs,
co-operative banks and insurance companies are exempted from this requirement. In
contrast, NBFCs operating as domestic companies are not. Not only is this unfair, but it also
has resulted in a sizeable part of NBFCs’ funds being blocked due to the high rates of TDS
at 20.4 per cent. This has adversely affected their working capital position and created
serious cash flow problems. NBFCs operate on thin margins and with the imposition of TDS,
the entire margin goes for TDS.

Recommendation
To provide a level playing field with the banks and FIs, the provision of section 194A(3)(iii)
should be withdrawn. As a precautionary measure and to avoid misuse, CBDT can state that
only NBFCs registered with RBI would be allowed to get the exemption.

6.14   Tax pass through for Domestic Venture Capitalists
Post the Budget 2007, the government has restricted the scope of pass through to VCFs to
investments in few specified sectors. In computing the total income of a previous year of a
Venture Capital Company (VCC) or a Venture Capital Fund (VCF) that has been set up to
raise funds for investments in venture capital undertakings (VCUs), a tax pass through
status (no income tax or no dividend distribution tax) is allowed to only those VCFs when the
concerned VCF invests in a VCU that is engaged in any of the businesses identified u/s.
10(23FB) Explanation (c) of the ITA and the persons investing in such VCF/ VCC are taxed
in accordance with section 115U of the ITA. Thus, SEBI registered VCFs or VCCs are taxed
as per the provisions of section 10(23FB) read with the provisions of section 115U of the
ITA, Rule 12C of the Income Tax Rules, 1962 and Form No. 64.
While there is no clarity on taxation of income which is earned from investments made in
businesses falling outside those identified in the aforesaid section 10(23FB), it is highly
prejudicial to limit the tax pass through treatment to only select sectors and this absolutely
contrary to the principles on the lines of which VC industry operates in various jurisdictions.
It should be appreciated that a tax pass through status at the pooling level (i.e. the trust
income) is not a tax benefit as the investors in turn, are taxed on the income received from
the trust. In fact, if the trust is made taxable and the investors in turn, this would lead to the
anomaly of double taxation.


CII Pre-budget Memorandum 2010-11                                                              29
Considering the fact that a VCF registered with SEBI is required under Regulation 12 of the
SEBI (VCF) Regulations, 1996 to abide by certain investment conditions and restrictions. By
virtue of which restrictions, the VCF is required to invest at least 2/3rd of its investible corpus
in unlisted equity shares or equity linked instruments of venture capital undertakings. There
is also a negative list prescribed under the SEBI (VCF) Regulations. Accordingly separately
enumerating sectors as is presently being done in section 10(23FB) of the ITA is not
required. An entity requiring venture funding may be operating in sector that is unrecognized
within the defined sectors. Accordingly, the existing section 10(23FB) of the ITA could be re-
enacted to provide for automatic income tax exemption to VCFs registered with SEBI (like in
the case of mutual funds) which will eliminate the taxation at the pool level while maintaining
the same at investor level. Exempting the VCF from income tax does not necessarily cause
the loss of revenue as these are pass through entities and income distributed by VCF would
be taxed in the hand of investors. Further, such pass through income would not just include
dividends only, but also capital gains and interest income. In most of the cases, the bulk of
income pass through would be in the nature of capital gains which attract tax in contrast to
the income passed through as dividend. This would therefore increase the country's tax
base without any negative effect on the revenues.
Further, limited liability partnerships allow for alternative corporate business vehicle- benefits
of limited liability with flexibility of organizing the internal structure as a partnership based on
an agreement. LLPs should be considered for registration as a VCF and accorded pass
through benefits under the existing section 10(23FB) of the ITA.
Recommendation
Considering the fact that a VCF registered with SEBI is required to invest at least 2/3rd of its
investible corpus in unlisted equity shares and there is also a negative list prescribed under the
VCF Regulations, separately enumerating sectors as is presently being done in section 10(23FB)
Explanation (C) is not required. Accordingly the existing section 10(23FB) of the ITA should be
re-enacted to provide for automatic income tax exemption to VCFs registered with SEBI (like in
the case of mutual funds) which will eliminate the taxation at the pool level while maintaining the
same at investor level.

LLPs have now been recognised under the Indian legal framework and should be considered to
be eligible to register under the VCF Regulations and accordingly it should be extended the pass
through benefits under the existing section 10(23FB) of the Act


6.15   Tax consolidation of accounts in a Holding Company structure
In India, Holding Company accounts are required to be drawn up as per Indian GAAP.
Under the Indian GAAP, holding Company has to present standalone as well as
consolidated accounts (mandatory for listed entities as per listing agreements). However, for
Indian Income-tax purposes, such a consolidation of accounts is not presently permitted.
This brings forth the desire to tax a group by reference to its overall performance and not
merely along its legal structure, which leads to the demand for group taxation regimes
avoiding double taxation within the group. Worldwide there are a number of jurisdictions,
such as the US, UK and others offering a regime to tax a corporate group like a single unit.
Although the scope and approach may vary from one jurisdiction to another, tax grouping
concepts usually allow an offset of profits and losses within the group, with a few countries
extending the concept to cover even foreign subsidiaries.
If India is to transition itself in the global economy, and allow corporates compete in the
global space, there is a need for the Government to partner with them, provide the right
incentives, and evolve a regime that would ensure a stable tax environment for FHCs.
Consolidation of accounts for tax purposes and allowing set-off of losses intra-group is one
such step that should be considered by the Government. Such tax savings by allowing set-
off of losses will allow FHCs to expand in India and abroad by providing capital to fund the
CII Pre-budget Memorandum 2010-11                                                                30
new businesses. The Government needs to take risks with the FHCs where initial losses of
the gestation period of a new business are allowed for set-off. As the business becomes
profitable the FHCs are compensated for the risks undertaken and the Government in turn
will benefit from substantial higher tax revenues. Group taxation regime can be introduced
which is simple to administer, have low compliance costs and possibly include flexible rules
on intra-group transactions and group reorganizations. The regime can prescribe conditions,
such as minimum holding periods and condition for qualifying for group level consolidation,
consistency of financial years, entry and exit issues etc.


6.16   Dividend Tax Credit
Whilst the valuation of shares of the FHC will be based on the consolidated profits, dividend
can be paid only out of the standalone profits as against the shareholders expectation of
dividend based on consolidated profits. This is the unique situation where shareholders take
the risks of the entire businesses but the rewards available to them are limited, as FHC can’t
pay dividend out of the consolidated profits. Further, when a subsidiary company pays
dividend to its FHC, it will have to pay dividend tax of 16.995%. Resultantly, distribution of
the same profits by the FHC to the shareholders once again attracts dividend tax of
16.995%, thereby resulting in effective tax being paid of 33.99% on the same profits. This
results in double taxation and a dis-incentive for FHCs to reward its shareholders. Hence,
there is a need to plug double taxation and revenue leakage and also to provide incentives
to shareholders.


6.17   Leveraging at FHC/BHC level
Borrowing capacity of the Holding Companies is presently monitored by section 293 of the
Companies Act, 1956, where except for the consent of the shareholders, company cannot
borrow more than its’ share capital and free reserves. Due to this, it cannot leverage on its
consolidated balance sheet.
Leveraging in any business is common and important tool to a) fund expansion, b) undertake
new ventures, c) acquisition financing, and d) improve shareholders return. The present
restriction will limit the ability of Holding Companies to raise funds, restrict leveraged
business and in turn, will reduce shareholders’ profitability and tax revenue for the
Government. Hence, there is a need to recognize consolidated accounts for allowing
companies to raise funds based on such consolidated accounts with adequate safety
measures.
Recommendation
Stipulating minimum capital adequacy ratios at the BHC/FHC will help in addressing the
concern of over leveraging of its capital by BHC/FHC and at the same time provide sufficient
opportunities to FHC/BHC to raise funds for meeting their groups capital requirements.
6.18   Section 72AA should be made applicable to private banking companies
Sec. 72 AA of the Income Tax Act, relating to carry forward / set off of accumulated loss and
unabsorbed depreciation in cases of amalgamation / demerger of banking companies, is
applicable to amalgamation of a banking company with a banking institution under a scheme
sanctioned and brought into force by the Central Government under Sec. 45(7) of the
Banking Regulation Act, 1949. But the benefit of Sec. 72AA is not available to voluntary
banking mergers, which do not fall under Sec 45(7) of the Banking Regulation Act.
Recommendation
Considering the increase in M & A activity in the banking sector, provisions of Sec. 72AA
relating to carry forward/set off should be made applicable to voluntary / private banking
mergers, even when the scheme is not under Sec 45(7) of the Banking Regulation Act,
1949.


CII Pre-budget Memorandum 2010-11                                                          31
7.      INFRASTRUCTURE SECTOR
7.1      Definition of Infrastructure Facility u/s 80 -IA
Section 80-IA of Income Tax Act permits deduction in respect of profits or gains from
Industrial undertaking or enterprises engaged in infrastructure development. Such Industrial
undertaking includes businesses carried out in the nature of provision of infrastructure
facilities, telecommunication services, industrial parks and power generation and
transmission. However, the definition of infrastructure facilities is restricted to road, bridge or
rail; highway projects; water projects and ports and airports.

Rural infrastructure upgradation also encompasses digital and physical infrastructure
towards empowering farmers with knowledge and market connectivity. It is therefore
recommended that the definition of infrastructure for the purpose of the deduction u/s 80-IA
should definitely include rural based initiatives.

The definition of rural infrastructure facility must include:
a) Village kisosks housing IT infrastructure like computers, VASRs, Modems, smart cards,
   Projectors, Screens, etc.
b) Support infrastructure like solar-panels, UPS, batteries, etc at these locations
c) Water harvesting facilities like check dams, wells ponds and other rain harvesting
   structures.
d) Storage including farmer facilities center housing training centers, cafeteria, health clinic,
   pharmacy, bank counters and necessary parking area.
e) Green houses & Poly houses
f) Cold storages, freezing chambers & cold chain transportation system.

Further, keeping in view the catalytical role of investment made by commodity Exchanges
(spot and futures) and warehouses in rural development, rural investment and rural
employment, it is also recommended the definition of “infrastructure facility” under
Explanation to Clause 4 of Section 80-IA of the Income-tax Act be amended to include spot
and futures Exchanges, warehouses and quality test labs.

The amendment would allow such companies 100% deduction in profits or gains made for
10 consecutive years out of 15 years as in sec 80-IA.

Recommendation
The definition of infrastructure for the purpose of deduction u/s 80- IA should include rural
based initiatives.

The Investment in spot and futures Exchanges, warehouses and quality test labs should be
declared as Infrastructure investments.

Relaxation in quoting the PAN numbers in TDS returns related to the payment made to
farmers.

7.2    Definition of “undertaking” for the purpose of tax holiday benefit under section
80-IB(9)

The Union budget 2009-10 inserted the following Explanation to section 80-IB(9):-

      “For the purposes of claiming deduction under this sub-section, all blocks licensed under
      a single contract, which has been awarded under the New Exploration Licencing Policy
      announced by the Government of India vide Resolution No. O-19018/22/95-ONG.DO.VL,
      dated 10th February, 1999 or has been awarded in pursuance of any law for the time
      being in force or has been awarded by Central or a State Government in any other
      manner, shall be treated as a single "undertaking".';

CII Pre-budget Memorandum 2010-11                                                               32
The amendment has huge financial implications for the industry. This may discourage           the
companies from developing the small oil and gas discovered subsequent to                      the
commencement of production under PSC or not developed initially. The development of           the
oil and gas finds happens over a phased manner in a block and DGH also approves               the
budget based on the commercial viability of the production from wells/ cluster of wells.

Therefore, the benefit should be at least extended to field area for which commercial viability
and budget has been approved separately by Director general of Hydrocarbons (DGH)

7.3   Development of Infrastructure Facility
As per the provisions of Section 80-IA(4), the benefit of Tax Holiday is available to the
assessee, who is either a Developer or operates and maintains or develops, operates and
maintains any infrastructure facility subject to fulfillment of certain conditions.
In case of major infrastructure projects, the execution of such projects is done by Special
Purpose Vehicles (SPVs) floated by Cos. in accordance with the requirements of the Govt.
awarding such infrastructure projects. Such SPVs invariably gives the contract for
development of infrastructure facility to a third party on back to back basis – such third party
is sometimes also identified in the main contract – while retaining the operating and
maintenance part of such infrastructure project with itself. The existing provisions do not
extend the tax benefit, under such circumstances, to the third party in relation to the profits
earned on development of infrastructure facility. In other words, the SPV which undertakes
to develop, operate and maintain the infrastructure facility is ultimately entitled to Tax Holiday
only in relation to the profits from operating and maintaining such facility whereas the benefit
in respect of development of such facility is lost.
Recommendation
It is suggested that having regard to the intention of the Govt. of giving the Tax Incentive to
the assessee who only develops the infrastructure facility, the benefit of Tax Holiday under
section 80-IA should be extended to the third party who procures the contract for
development from the SPV.
Accordingly, the explanation inserted after sub-section 13 of section 80-IA, should be
modified to clarify that the said explanation will not apply to the cases where the contract is
executed by the third party, though in pursuance of the contract with the SPV.

7.4    Tax Exemption to Infrastructure Capital Cos. / Fund
Section 10(23G), which was there on the Statute till 2006-07, provided for exemption of
interest and Long Term Capital Gains in the hands of Infrastructure Capital Cos./Fund
derived from lending/investment made in approved eligible infrastructure projects,
development of SEZs, Housing Projects, etc. The Finance Act, 2006, has deleted the said
provision from the Statute. As per the explanatory memorandum, since the tax rates as well
as the interest rates on borrowing have come down thereby reducing the overall cost of
infrastructure projects, there is no need to continue with the said incentive.
Recommendation
Exemption to Infrastructure Capital Co. / Fund should be reinstated. Infrastructure
development has been identified by the Govt. as one of the thrust area and a lot of initiatives
have been taken in this area. The withdrawal of tax exemption in respect of interest and
long term capital gains will result into the higher cost of lending to the Infrastructure Capital
Company / Fund. This higher cost would ultimately increase the overall cost of the
Infrastructure Project making it unviable especially in the current high interest rate regime.
The ground on which the exemption was withdrawn does not hold good since the interest
rates have already started arising, thereby increasing the borrowing costs. Further, the Long
Term Capital Gains should also qualify for tax exemption. This is in view of the fact that the
major infrastructure projects are executed by the Special Purpose Vehicles (SPV) floated by
the Companies in accordance with the requirement of the Govt. awarding such infrastructure

CII Pre-budget Memorandum 2010-11                                                              33
contracts, and transfer of the shares of said SPVs would not qualify for tax exemption under
Section 10(38) since the SPVs would not be listed on the Stock Exchanges.
Infrastructure facility defined under Section 10(23G) should also include industrial
undertaking engaged in exploration of mineral oil, refining of mineral oil and pipeline projects
for domestic gas transportation also

7.5    Power Sector - Section 80-IA
The Hon’ble Finance Minister in his Budget Speech of 2004-05 has emphasized the need to
develop Infrastructure facility through a combination of public private partnership, domestic
and foreign participation and thereby has set a goal to provide “Electricity for all”. There is a
need to encourage public –private partnership, so that public funds are leveraged, and the
quality of service delivery is improved, thus yielding better value for money.
The Govt. of India has planned to double the existing power generation capacity by a
massive capacity addition programme of 1,00,000 MW in next ten years to meet the target of
“Power for all by 2012”.
In order to meet the target, Govt. has in the past promised to liberalize the “Mega Power
Project” Policy further by extending various tax benefits to such power project that fulfills the
conditions already prescribed for mega power projects. However, it is observed that though
the Govt. has rightly led thrust for improvement in Infrastructure development but the same
has not shown the desired growth due to lesser time provided for availing tax concessions or
the tax concessions are restricted to certain investments.

Recommendation
Fiscal benefits available under section 80-IA to power projects should be extended further till
2015 instead of March 31st 2010 at present. The extension of time limit to 2015 is required
in view of Govt. decision to go for four Ultra-Mega Power Project of 4000MW (approx.) in the
next year. These projects if awarded in the year 2007 will commence generation of power
after 2010.
Fiscal benefits available to an undertaking engaged in the Generation of power should be
continued on shifting of such Power Generation undertaking from one place to other place
7.6    Transmission and Distribution of Power vis-à-vis Fiscal Incentives
Section 80-IA of the Income Tax Act provides for 100 per cent deduction of the profits earned
by companies engaged in the generation and distribution of power for a period of ten
consecutive financial years. However, the deduction under section 80-IA would be available
to transmission and distribution companies provided they start transmission and distribution
by laying a network of new lines. Recently, the transmission and distribution activity has
been entrusted to private sector companies in order to streamline the distribution of power
and minimizing the transmission losses. The privatization of transmission and distribution of
power has substantially improved the power situation in many states. In order to encourage
further, the provision available under section 80IA and some other provisions should be
modified to allow the benefits to companies who are taking over the transmission and
distribution from the states.

In addition, the earlier section 115JA provided the profits derived by the industrial
undertaking engaged in the business of generation and distribution of power and amount of
profits of industrial undertaking engaged in the business of developing, maintaining and
operating any infrastructure facility qualifying for tax holiday u/s 80IA, was deductible from
MAT profits. The said deductibility was withdrawn under the provisions of section 115JB,
which was introduced w.e.f. assessment year 2001-02. Most of the infrastructure projects,
which are not required to pay tax for the first ten consecutive years as per section 80-IA are
required to pay MAT if their total income is less than ten per cent of their book profit. This
has created problem for most of the infrastructure companies and needs a thorough review


CII Pre-budget Memorandum 2010-11                                                             34
Recommendation
Currently, section 80-IA benefits is available to companies who are engaged in transmission
and distribution of power provided they have laid new network of lines after 1st day of April
1999. However, companies who have invested in modifying the existing network of state
governments after acquiring them are not entitled for such benefit. The benefits of section
80-IA should also be available to them as the old network of state governments needs
investments to upgrade them and distribute power efficiently.
Further, it is recommended for restoration of the earlier provision when the profits of the
undertaking engaged in the business of generation and distribution of power and
infrastructure business were also allowed to be reduced from the book profits for the
purpose of calculating MAT.


7.7    Infrastructure Status for Hotel Industry

Our country is experiencing a shortage of over 100,000 hotel rooms to meet the
accommodation needs of foreign and domestic tourists. The hotel industry is highly capital
intensive and construction of medium sized new hotel project may require a massive capital
investment ranging from Rs.300 – Rs.500 crores. The bulk of investment in a hotel is on
land and building, which has a long period of return on investment.

To help accelerate the pace of construction of more hotel rooms, the hotel industry should
therefore be declared an infrastructure industry under section 80-IA of the Income Tax Act
1961. This would enable the hotel industry to avail all benefits that are available to other
sectors of infrastructure such as airports, seaports, power projects etc.
Recommendation
The Hotel industry should be declared an infrastructure industry under section 80-IA of the
Income Tax Act 1961.
7.8    MAT on Infrastructure Companies and Hotel Industry
Infrastructure companies are exempted from payment of any tax for a period of 10 years
under section 80-IA of the Income Tax Act. However, the imposition of MAT under section
115-JB has substantially diluted the incentive provided under section 80-IA for this sector
and reduces the IRR to the investor. This has resulted in a peculiar situation as the fiscal
incentives bestowed by the Government on the selected sectors are being taken away in
another form.
The Hotel Industry has been recognized as Service Export Industry and is entitled to all the
export benefits under the Foreign Trade Policy announced every year by the Ministry of
Commerce. Since exporters are exempted from Section 115 (J), the Hotel Industry should
also be exempted from MAT.
Recommendation
In case MAT is not abolished overall, it should at least be removed for infrastructure
companies in order to promote infrastructure development and to motivate the private
investor to come in to this sector.
MAT should also be abolished from Hotel Industry.

7.9    Infrastructure status to Health Care Industry
Health facility development is a highly capital intensive having long gestation period and
limited profitability because of the egalitarian nature and associated with high risks of
technological obsolescence that impacts the capital and operating costs. While these
factors have been deterrents in high scale private investments yet corporate bodies have
tried to contribute to improve the health system through investments made in high-end
tertiary care centers that match the best of class hospitals in the world.
CII Pre-budget Memorandum 2010-11                                                         35
Thought, the Finance Act 2008 gave some relief to this industry. The clause 11C was
inserted u/s 80-IB whereby providing 5 year tax holiday for hospitals located in any place
outside the urban agglomerations especially in tier 2 and tier 3 towns provided the hospital is
constructed and start functioning during the period during the period 1 April 2008 to 31
March 2013. There is need to extend this benefit to all hospital located across India, so as to
attract investment in development of health care facilities across country and boost the
growth of infrastructure for health care industry.
In order to catalyze quality infrastructure development and attract Domestic/foreign
investments in the sector, government needs to constantly create and facilitate the
environment through incentivising investments in the sector.

Recommendation
Section 80-IB(11B) provides 100% deduction to any Indian company of the profits from
operating and maintaining hospital in rural areas only before March 31, 2008. If India has to
emerge as a low cost health care tourist destination, there is a greater need to set-up state
of the art health care facilities in the metros-Tier-I and Tier-II cities India. It is therefore
necessary to extend the tax holiday benefit to hospitals set up beyond the rural areas to
enable companies commit substantial investments required in the health care sector, it is
suggested that the period be extended to March 31, 2012 within which hospital can be set
up and this should no be restricted to rural areas only.




7.10   Extension of Sunset Clause for Civil Aviation Industry
The Civil Aviation Industry has witnessed tremendous growth in the past year. With number
of budget airlines launching their operations, the need to have aircrafts on lease has
increased. Currently, section 10(15A) of IT Act provides for exemption of income in the
hands of Government of a foreign State or a foreign enterprise from leasing of aircraft /
aircraft engine. There is sunset clause for this exemption with effect from March 31, 2007.
Usually tax is cost of Indian companies and therefore the cost of operations would increase
in the initial years.
Further, section 10(6BB) of the IT provides that where tax on income under the agreements
entered into after 31st March, 2007 and approved by the Central Government, is payable by
the Indian Company under the terms of the agreement, the tax so paid shall be exempt from
tax.

Recommendation
The sunset clause should be extended till March 31, 2012. Accordingly, sections 10(15A)
and 10(6BB) should be amended.

7.11    Enhancing Knowledge and Awareness in Agriculture
If agriculture has to grow at 4% or higher rate, there is a need to enhance the farmers’
knowledge and awareness of Agricultural Good Practices (AGP). This can happen by
encouraging much greater private sector participation, which in turn would require
incentivising Universities / Research Institutions to digitize content on AGP for widespread
dissemination.




CII Pre-budget Memorandum 2010-11                                                            36
Recommendation
All the expenditure on extension by the private sector such as new technology and inputs,
best crop raising practices adopted by the farmers, mobile vans exclusively devoted for
conducting awareness, training and knowledge, farmers expenses on soil testing, residue
analysis, diagnostics etc. to be provided 150% Income Tax exemption.
Further, there is need to incentivise and provide tax concession for private sector investment
in cold storage, refreeze vans, warehousing etc.

7.12   Incentivising investments in respect of Agricultural Infrastructure
There is an urgent need to invest heavily in building up of a viable and efficient infrastructure
in the agriculture sector in India. This would necessitate building up of proper computerized
infrastructural facilities and electronic highways for procurement, dissemination of best
agricultural practices, weather information, storage practices etc. as well as offering the best
possible price to the farmers. Also, this would result in cutting down
intermediaries/middlemen and thereby reduce the transaction costs. Proper tax incentives
need to be provided for ensuring that Indian Corporate Sector can also be involved in this
gigantic developmental effort.

Recommendation
Deduction of proportionate profits for the total value of turnover arising from such
computerized infrastructural facilities (similar to the provision of section 80IA read in
conjunction with section 80 HHC), or,
Deduction of 125% of the total expenditure incurred, both capital and revenue, for creating
such infrastructure (similar to the provisions of section 35).

7.13   Allow banks to write Credit Default Swaps
Many foreign investors are willing to take the rupee risk as well as the project risk in the
infrastructure space. For example, foreign investors are willing to take on the toll risk in road
projects. RBI has recently introduced credit default swaps (CDS). To make this effective,
banks should be allowed to write a CDS on a project to which it has taken an exposure and
sell it to foreign investors. This will allow an increase in the participation of risk capital and
the project risk can move offshore.
A portion of the ceiling on external commercial borrowing (ECB) should be allocated to such
risk capital. RBI does not allow financial intermediaries to raise foreign debt. However, in this
case, it would be no different from an ECB from a macro perspective. Compared to the
current situation when ECB funding is available only to a handful of large companies, this
reform would make much greater funding available for infrastructure projects. ECBs can
them be used to mitigate project risk and not just corporate credit risk.

Recommendations
Allow banks to write a Credit Default Swap recently introduced by RBI to increase
participation of risk capital in infrastructure projects.
Allocate a portion of the ceiling on ECBs to such risk capital.

7.14   Amendments to Section 80-IA

The Finance Act, 2009 has inserted the following explanation with retrospective effect from
A.Y.2000-01:

For the removal of doubts, it is hereby declared that nothing contained in this section
shall apply in relation to a business referred to in sub-section (4) which is in the
nature of a works contract awarded by any person (including the Central or State

CII Pre-budget Memorandum 2010-11                                                              37
Government) and executed by the undertaking or enterprise referred to in sub-
section (1).

As a result of the retrospective amendment the following issues have arisen:

i)     The amendment suggests that the entire section 80-IA shall not apply in relation to a
       business referred to in sub-section 4 of section 80-IA. A literal interpretation of the
       language suggests that the deduction u/s 80-IA will not be applicable to any
       business. This is primarily because of the fact that all the types of business, which
       are eligible for section 80-IA benefit, have been listed in Section 80-IA(4).

ii)    The existing provisions of section 80-IA(4)(i) provides that an enterprise carrying on
       business of developing any infrastructure facility will be eligible for deduction
       whereas the explanation specifies that if the development work is carried pursuant to
       a works contract awarded by Central or State Govt. the same will not be eligible for
       deduction u/s 80-IA. This contradiction within the same section is creating lot of
       ambiguity.

iii)   The retrospective amendment has disturbed all the development projects that have
       submitted their bids factoring the eligibility of the deduction when the bids were
       presented in earlier years. Such a unilateral amendment withdrawing the tax benefit
       is against the principle of natural justice and is adding to the business uncertainties.
       This will further discourage development of infrastructure projects.

Recommendation
i) The benefit of section 80-IA(4) needs to be continued to a developer of a infrastructure
   facility even if the same is pursuant to a works contract awarded by Central or State
   Govt.

ii) A specific amendment is required to grant a deduction to all the assesses who were
    otherwise eligible for deduction prior to retrospective amendment. In other words, the
    denial of deduction if any should be made applicable only in respect of contracts
    awarded from Financial Year 2009-10 and subsequent years.

7.15 Exemption of income earned from processing, preservation & packaging of
fruits or vegetables and integrated business of handling, storage and transportation
of food grains

Section 80 IB (11A) provides for a deduction of income earned by an undertaking deriving
profit from the business of processing, preservation and packaging of fruits and vegetables.
The objective of the section is to encourage fruit processing industry which will ensure year
round availability of fruits / fruit products and minimize volatile price movements in the
market and thus helping the farmers reduce the price risk and obtain higher realizations. The
exemption is currently available to only those who set up such processing infrastructure.

However, this deduction is only available to new units and not to existing unit. It is
recommended that to avoid unnecessary deployment of capital and mushrooming of new
units at the cost of old units and to ensure that substantial investment in existing units
increases for capacity building for more processing of perishable fruits and vegetables, this
exemption should be given to existing units also who substantially want to enhance their
capacity.
Further, It is a well known fact that many such units are currently lying unutilized due lack of
demand for processed fruit products. In other words, creation of demand and marketing
activities are as important as setting up of the infrastructure. Hence the scope of exemption /
deduction be extended to those who engage the services of these units on arms length basis


CII Pre-budget Memorandum 2010-11                                                            38
and leverage such processing infrastructure and their marketing skills to market fruits /
processed fruit products either domestically or exports.
The organized players who can become supply chain partners to other companies /
businesses can facilitate the building of infrastructure at appropriate locations and ensure its
efficient utilization. Hence the scope of exemption / deduction be extended to those
undertakings who outsource the infrastructure facility to third party service providers and
leverage such infrastructure to become supply chain partners to companies / businesses
engaged in food grains business by providing integrated handling, storage and
transportation services

Recommendation
The deduction u/s 80 IB (11A) to be extended to
o   existing units engaged in processing, preserving & packaging of fruits and vegetable
o   who engage the services of processing, preserving & packaging units on arms length
    basis and leverage such processing infrastructure and their marketing skills to market
    fruits / processed fruit products either domestically or exports
o   undertakings who outsource the infrastructure facility to third party service providers and
    leverage such infrastructure to become supply chain partners to companies / businesses
    engaged in food grains business by providing integrated handling, storage and
    transportation services.

7.16   Holiday under Section 80-IA of the Income Tax Act, 1961 to the telecom
       services sector at par with other infrastructure facilities provider

Sub section 2A of section 80-IA, however, provides that for the companies engaged in the
business of providing telecommunication services, the exemption for the first 5 years would
be 100% and for next 5 years it would be 30% of the profits of the gains of the enterprise.
The sub section 2A of section 80IA may be deleted and 100% tax exemption for 10 years
may be allowed to telecommunication service providers in line with infrastructure facilities
providers. The distinction between other infrastructure providers and telecommunication
service providers is arbitrary since telecommunication services are core infrastructure
facilities. This would foster the growth of infrastructure facilities relating to telecom leading to
higher growth in the sector. Also, telecommunication services, like other infrastructure
services, require major capital investments and operational outflows initially. Accordingly, its
gestation period is comparatively longer.

The period during which 80 IA can be claimed by the telecom operators should be extended
to 20 years in place of existing 15 years. Telecom operators have incurred heavy business
losses and significant tax depreciation on account of capitalization in its initial years due to
which 80IA benefits have not been triggered by many operators till now, which is almost 10
years since the licenses were granted. 100% exemption for successive 10 years out of the
20 years. As significant capital investment and proliferation in rural area is envisaged, tax
depreciation is anticipated to be high in the coming years as well.


Further in the case of Telecom Services, it is not easy to identify distinct undertakings.
Thus, increase in level of penetration of a Telecom Undertaking in an area already serviced
by a telecom undertaking is not recognized as distinct or a separate undertaking. As a
result, the Tax Holiday period commences from the year in which the undertaking
commences business and there is no separate period available in respect of the increased
profits arising on account of the deeper penetration by construction of additional
infrastructure such as BTS Towers, cables, etc.



CII Pre-budget Memorandum 2010-11                                                                39
In this Section, under existing provision, to avail this exemption services should commence
before 1.4.2005. Present clause (ii) of sub-section 4 of section 80IA states’ any undertaking,
which has started, or starts providing telecommunication services….. on or before the 31st
day of March, 2005’. It is therefore, suggested that for the new licenses issued, this period
should be extended upto 1.4.2010. This will be very useful for Licences issued for 3G and
also new operators to whom Licences were issued last year. The clause (ii) of sub-section 4
of section 80IA should therefore state that any undertaking, which has started or starts
providing telecommunication services… on or before the 31st day of March 2010.

Tax benefit U/S 80-IA to companies undergoing amalgamation or demerger after 31.3.2007
has been withdrawn. To make acquisitions tax efficient the benefit under section 80-IA to
companies undergoing amalgamation or demerger after 31.3.2007 be extended. This would
support the objective of affordable telecom service in the country. It is suggested that this
benefit be extended to companies undergoing amalgamation or demerger upto 31.3. 2010.

For providing better services and to achieve higher efficiency and effectiveness, the telecom
service providers need to restructure itself, through slump sale of the undertaking. If the
various benefits attached to the undertaking are continued in the hands of the transferee of
the undertaking in a slump sale, then it would be a great boost for the telecom sector. Thus
sector can achieve desired restructuring through simpler and faster means of slum sale,
which would avoid approaching the High Courts for their approvals.

Recommendation:
The period during which 80 IA benefit can be claimed by the telecom operators should be
extended to 20 years in place of existing 15 years. The period of commencement of service
to be extended upto 01.04.2010
As it is not easy to identify distinct undertakings in this sector, It is, therefore, suggested to
provide that any expansion of the undertaking by way of fresh investment exceeding a
certain threshold, say 10% of the existing capital expenditure made by an undertaking,
should separately qualify as an “undertaking” deemed to commence operations from the
year in which the expansion is carried out.
Further the Tax holiday benefits in case of mergers/ amalgamations after 31.03.2007 should
be continued and also during the slump sales.

7.17   Income Tax Incentives to Independent Infrastructure Service Providers
Tax incentives should be provided to Independent Infrastructure Service Providers so as to
ensure that the service provided by them is attractive. The Tax benefits with are available to
Access Service Providers should be extended to Independent Infrastructure Service
Providers.
The Income Tax Act under Sec. 80-I A (4) extends Income Tax benefits to the telecom
operators who are developing their own telecom infrastructure. This benefit should also be
extended to the Independent Infrastructure Service Providers as well. Moreover, this benefit
is available to developers of other infrastructure like roads, ports highways, and water supply
projects. The above incentives shall lower the cost of services offered by Independent
Infrastructure Service Providers and would thus help in achieving the Government’s goal of
providing affordable telephony.
Income Tax rules allow each operator to claim depreciation benefits on their capital
expenditure. Common network on shared basis would reduce overall depreciation benefits
claimed by the Service Providers.




CII Pre-budget Memorandum 2010-11                                                              40
Recommendation
To extend Income Tax benefits under Section 80-IA to Independent Infrastructure Service
Providers
Granting Infrastructure status to Independent Telecom Infrastructure Providers as a separate
entry u/s 80-IA(4)

7.18   Section 115(O) tax on distributed profits of domestic companies with respect
       of Companies availing Tax holiday u/s 80 IA

As per section 115(O) of the act, any amount declared, distributed or paid by a company
covered u/s 80IA by way of dividends (whether interim or otherwise) on or after the 1st day
of April, 2003, whether out of current or accumulated profits shall be charged to additional
income-tax (hereafter referred to as tax on distributed profits) at the rate 15%. Even if no
income-tax is payable by a domestic company on its total income computed in accordance
with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be
payable by such company.

The tax on distributed profits so paid by the company shall be treated as the final payment of
tax in respect of the amount declared, distributed or paid as dividends and no further credit
therefore shall be claimed by the company or by any other person in respect of the amount
of tax so paid.

No deduction under any other provision of this Act shall be allowed to the company or a
shareholder in respect of the amount, which has been charged to tax under sub-section (1)
or the tax thereon. This is not in line with the provision of Section 80-IA

Recommendation
Taxation of the distributed profits domestic companies availing tax holiday u/s 80 IA is not in
line with the Government commitments on promoting sectors covered by section 80IA.
Hence, such distributed profits should be exempted from tax.

7.19 Infrastructure status to LNG import and re-gasification projects / gas transport
and distribution projects, crude and petroleum products pipelines, City Gas
Distribution (CGD) projects

Infrastructure projects such as roads, ports, airports, inland waterway etc are eligible for
income tax holiday. In view of the strategic importance of oil and gas facilities such as LNG
terminals and pipelines, it is sought that such projects also be given infrastructure status and
be made eligible for 10 year income tax holiday.

The Government, in the Union Budget for 2007-08, had extended the infrastructure status to
cross-country natural gas pipelines and storage facilities integrated to the network and the
same was eligible for a 10 year income tax holiday on the basis of a profit-linked tax
incentive mechanism. In the Union Budget 2009, the Government replaced the profit-linked
incentive scheme with an ‘Investment-linked’ tax incentive scheme. The newly introduced
Investment-linked incentive mechanism is also applicable to cross-country crude oil as well
as petroleum product pipeline distribution network, including integral storage facilities.
Under this mechanism, no tax holiday is available and instead a 100 percent deduction of
capital expenditure (other than on land, goodwill and financial instruments) is allowable in
the year in which it is incurred. Pipelines are an important link in the chain of operations and
help inter-link the supply and consumption points. Disallowing tax holiday to this sector will
only defer new investments required in this sector.

Recommendation

CII Pre-budget Memorandum 2010-11                                                            41
The 10 year tax holiday benefit under Section 80-IA should be reinstated for and natural gas
pipelines including crude oil, petroleum products and integral storage facilities. Also, LNG
import and re-gasification projects should be extended similar status. In the context of
cross-country natural gas distribution network, the issue of availability of this benefit to City
Gas Distribution network remains unresolved. A similar incentive needs to be extended to
City Gas Distribution network as well. In addition, CGD infrastructure should also be allowed
to avail investment linked Tax incentives u/s 35AD.

Further, Infrastructure sector status and thereby Tax holiday u/s 80-IA should also be
provided to Solar Energy Sector.

7.20   Tax holiday for power exchange (IEX) u/s 80-IA

The need for power market development was envisaged in the Electricity Act, 2003 under
section 66 and power exchanges were set-up under provisions of Electricity Act, 2003 and
National Electricity Policy (Sec 5.7.1.f). They are fully regulated by CERC. One of the key
objective of such important institution in power market as mentioned in the draft power
market regulations recently published by CERC is to provide price signal for efficiently
allocating resources in power sector. The power exchanges have played pivotal role in
encouraging private sector investment into power generation projects. Relevant extracts
from the Electricity Act, National Electricity policy and Power Market Regulations are
attached at Annexure-IA.

The policy makers recognized the need for infusing capital in infrastructure like power
generation, transmission and distribution and therefore, allowed tax holiday for 10 years to
generation (including renewable generation), transmission and distribution projects which
starts operating by March, 2010. This sunset date has now been extended to 31st March,
2011 vide Finance Act, 2009. The relevant sunset clause for power projects under section
80-IA of IT Act is reproduced below for ready reference.

Extracts of Section 80-IA of IT Act.
       (2) The deduction specified in sub-section (1) may, at the option of the assessee, be
       claimed by him for any ten consecutive assessment years out of fifteen years
       beginning from the year in which the undertaking or the enterprise develops and
       begins to operate any infrastructure facility or starts providing telecommunication
       service or develops an industrial park or develops a special economic zone referred
       to in clause (iii) of sub-section (4) or generates power or commences
       transmission or distribution of power or undertakes substantial renovation and
       modernization of the existing transmission or distribution lines [or lays and begins to
       operate a cross-country natural gas distribution network.

Indian power sector is reeling under severe shortages on an average by 11% in peaking
power and in some States upto 15-25%. This calls for capacity addition at a faster pace. To
boost investments in power sector, Finance Act, 2004 allowed income tax holiday for power
projects besides other infrastructure projects like telecommunications, industrial parks, gas
network etc. At that time, the power market development through exchanges was not
envisaged.

The power exchanges operate their day-ahead markets by collecting price bids on hourly
basis and determining the Market Clearing Price (MCP) through carrying out auction of bids.
The transparent process of determining Clearing Prices has gained trust and confidence of
the market participants. These Clearing Prices set the reference price for trading on short-
term and seasonal basis. Due to trust and confidence of market, in last one year, the
participants have increased from 56 to 180 and the average volume has grown from
2500MWh/day to 24,000MWh/day, more than 9 times. Therefore, power exchanges have
served the intended purpose of giving price signals and optimally allocating scarce

CII Pre-budget Memorandum 2010-11                                                             42
resources. This has helped in infusion of capital in new plants and modernization of old
generating units.

Private developers started exchanges taking business risks. They have now created
infrastructure whose success was not guaranteed. Now, this infrastructure has significantly
benefited the sector as a whole. For such exemplary contribution to the sector, they should
be allowed tax holiday.

Though, exchanges are not as capital intensive as generation and transmission projects but
play a key role by providing a marketplace to utilize the final outcome in most optimal
manner. The major costs are technological. Robust and state-of-the-art technology was
imbibed and implemented to make this a successful venture. This was also required to boost
confidence of the participants in new institution. Smooth and fault-free operations of power
exchanges have helped create this market.

The distribution companies, generating companies are hugely benefiting from such
transparent markets. They also enjoy tax-holidays. Power exchanges run on thin margins.
The amount of investment is to the tune of Rs 20-50 Crs and profits are expected around Rs.
1-10 Crs in next 10 year’s time. The tax implications of power exchanges are small as
compared to companies involved in generation, transmission and distribution. It’s like small
pivot making large wheel (generation, transmission and distribution) move. Therefore, there
is definitely a case that exchanges should get tax holiday for creating vibrant markets.

Many industries have started utilizing its idle generating capacity and selling surplus power
on the exchange using the price signals from the market. Some of the industries, which
could survive during the recession period from selling their surplus power were cement,
steel, sugar, etc. Further many industries have planned for new capacity to be used for
merchant sale of power in the open market through power exchanges. Therefore, power
exchanges have played pivotal role in adding merchant capacities by achieving price
discovery in most neutral and transparent manner and sending price signals. Such
contributions have been recognized by policy makers, electricity regulators and all market
participants in the power sector.

Recommendations
The power exchanges should be considered as infrastructure project in the power sector and
should get the income tax benefits in the same manner as the infrastructure transmission
and generation projects receive.




CII Pre-budget Memorandum 2010-11                                                         43
8.     HOUSING SECTOR

8.1    Increase in the deduction on Interest and Principal Loan Repayment

In the period of financial instability where the Indian Economy is trying to recover at much
faster pace than the developed Countries worldwide who are still struggling, a special
window of say 1 to 2 years, if given to all people by encouraging them to purchase the house
for either their self occupation or for rental purposes would give the required boost to the
Real Estate & other related Industries thereby helping in pace of economic growth.

As per the present provisions under the Income-tax Act, an Individual acquiring house gets a
tax deduction of upto Rs.2.5 lacs i.e. Rs.1.5 lacs towards interest under section 24(b) and
upto Rs.1 lac towards principal loan repayments under section 88 (xv) in case of house an
owner occupies himself. For encouraging individuals to own their own house, the existing tax
deduction should increase.

Recommendation:
It is suggested that this limit of Rs.2.5 lacs be increased to atleast Rs.5 lacs i.e. Rs.3 lacs
towards interest and Rs. 2 lacs towards principal loan repayment, exclusively for repayment
of principal on home loan as the present limit of Rs.1 lakh is already overcrowded with
categories and the deduction allowed on principal of housing loan is largely a defunct
category. This will encourage the people to have a house of their own.

8.2     Deduction for Irrecoverable Rent
In computing the house property income, certain important deductions are not allowable.
Such deductions in no way can be said to have been included in statutory deductions of 30%
for repairs etc. Such deductions are as under: -

a) Ground rent being approx. 2 ½ % of the value of land. Land value in metros is very high
   and as such ground rent is very high.
b) Annual value under Income-tax Act is determined by excluding the rent, which the owner
   cannot realize. No provision u/s 24 has been made to allow deduction of irrecoverable
   rent, which the owner has included in the annual value as rent receivable but due to
   circumstances beyond his control the same could not be realized. Tax having been paid
   on such income in earlier years, the deduction u/s 24 should have been provided for
   irrecoverable rent. It may be mentioned that special provision has been made u/s 25AA
   and 25B to tax the unrealizable in earlier years. Therefore, in all fairness, deduction for
   irrecoverable rent accounted for in earlier years should be made u/s 24 of I.T. Act.

8.3 Tax incentives on Rental Income
In view of the housing shortage in the country and the objective ‘Shelter for All and in view of
the fact that not all can afford ownership housing, we need to give a big boost to ‘Rental
Housing’. The following incentives are suggested (for companies / partnership / HUF /
Individuals) for promoting rental housing:-

a) Income from renting of properties be taxed at a flat rate of 10%.
b) Depreciation allowance of 50% be allowed on investment made by employers in
   employee housing. Such depreciation should be 100% in case of employee housing with
   plinth area of <500 Sq. ft.
c) Provisions of rental housing on a large scale will require the services of Property
   Management Firms. In order to make property management a viable activity, income of
   firms which are wholly engaged in maintenance / repair and other specified management
   services for rental housing blocks may be brought within the ambit of Section 80-IB (10)
   and Section 10 (23G).

To encourage rental housing it is suggested that rental income should be exempt from tax
upto income of Rs. 2500 per month. It is also recommended that the TDS rate be kept at 55
CII Pre-budget Memorandum 2010-11                                                            44
for individual and 7.55% for companies as a high TDS leads to increased administrative
work in relation to refund claims. This proposal would encourage leasing of unoccupied
properties and thus making housing more affordable.

8.4 Infrastructure status to Integrated Townships & Group Housing Development

Section 80-IA of the Income-tax Act provides that where the gross total Income of an
assessee includes any profits and gains derived by an undertaking or an enterprise from any
of the business referred to in sub-section (4) then a deduction equal to 100% of the profits
and gains derived from such business shall be allowed for ten consecutive assessment
years.

Sub-section (4) covers the business of either (i) developing or (ii) maintaining and operating
or (iii) developing, maintaining and operating any infrastructure facility, which fulfills all the
conditions, laid down in the said section.

The Explanation in the said Sub-section defines “infrastructure facility” as under:
(a) a road including toll road, a bridge or a rail system;
(b) a highway project including housing or other activities being an integral part of the
    highway project;
(c) a water supply project, water treatment system, irrigation project, sanitation and
    sewerage system or solid waste management system;
(d) a port, airport, inland waterway or inland port.

Some companies are engaged in undertaking large scale urban development projects
including purchasing raw land and developing it for the purpose of construction of houses,
multi-storied buildings, creation of infrastructure and social facilities such as laying of roads,
systems for water supply, water treatment, sanitation and sewerage, solid waste treatment
and also to create educational, medical and recreational facilities as an integral part of
development of satellite townships, in accordance with the elaborate rules and regulations
and with the specific approval from the State Governments. Such projects tend to reduce the
pressure on existing cities by providing low priced alternatives and value for money to the
customers.
While according the approval, the State Governments specifically direct that these
infrastructure facilities shall ultimately be handed over and shall not remain with the
developer.
After purchasing agricultural land, these companies provide and create most of the
infrastructure facilities mentioned in the Explanation.
It is only by creating all these infrastructure facilities that the raw land gets converted into
developed land, fit for construction of houses and multistoried buildings for residential and
commercial purposes, thus augmenting the housing stock of the nation.
It is presumed that the activities of these companies are already covered by the definition of
‘infrastructure facility’ but the position has become debatable as such activities are not
covered by a specific clause.
Its is, therefore, suggest that ‘infrastructure facility’ to include an integrated township and
group housing development on area more then 10 acres involving provision of residential,
educational, medical, community, commercial or institutional buildings and creation of
required facilities including roads, water supply, water treatment, sanitation and sewerage
systems and solid waste treatment and management systems.




CII Pre-budget Memorandum 2010-11                                                              45
Recommendation
In the definition of “infrastructure facility” in section 80-IA (4), the following clause may also
be added:-
(e) An integrated township and group housing development on area more then 10 acres
    involving provision of residential, educational, medical, community, commercial or
    institutional buildings and creation of required facilities including roads, water supply,
    water treatment, sanitation and sewerage systems and solid waste treatment and
    management systems.

This will meet the long outstanding demand of housing to be treated as infrastructure.

8.5 Section 80-IB(10)
The section 80-IB(10), as amended vide Finance (No. 2) Act, 2009, is as under –
(10) The amount of deduction in the case of an undertaking developing and building housing
projects approved before the 31st day of March, 2008 by a local authority shall be hundred
percent of the profits derived in the previous year relevant to any assessment year from such
housing project if, -
(a) such undertaking has commenced or commences development and construction of the
      housing project on or after the 1st day of October, 1998 and completes such construction,
                1. in a case where a housing project has been approved by the local authority
                   before the Ist day of April, 2004 on or before the 31st day of March 2008
                2. in a case where housing project has been, or, is approved by the local
                   authority on or after the 1st day of April 2004 within four years from the end of
                   the financial year in which the housing project is approved by the local
                   authority.
Explanation – For the purposes for this clause –
  i)          in a case where the approval in respect of the housing project is obtained more
             than once, such housing project shall be deemed to have been approved on the
             date on which the building plan of such housing project is first approved by the
             local authority.
  ii)        the date of completion of construction of the housing project shall be taken to be
             the date on which the completion certificate in respect of such housing project is
             issued by the local authority.
(b) the project is on the size of a plot of land, which has a minimum area of one acre:
      Provided that nothing contained in this clause shall apply to a housing project carried out
      in accordance with a scheme framed by the Central Government or a State Government
      for reconstruction or redevelopment of existing buildings in areas declared to be slum
      areas under any law for the time being in force and such scheme is notified by the Board
      in this behalf;
(c) the residential unit has a maximum built-up area of one thousand square feet where such
      residential unit is situated within the cities of Delhi or Mumbai or within twenty-five
      kilometers from the municipal limits of these cities and one thousand and five hundred
      square feet at any other place;
(d) the built-up area of the shops and other commercial establishments included in the
      housing project does not exceed five per cent. of the aggregate built-up area of the
      housing project or two thousand square feet, whichever is less
e) not more than one residential unit in the housing project is allotted to any person not
      being an individual; and

(f)     in a case where a residential unit in the housing project is allotted to a person being an
      individual, no other residential unit in such housing project is allotted to any of the
      following persons, namely:—
             (i) the individual or the spouse or the minor children of such individual,
             (ii) the Hindu undivided family in which such individual is the karta,

CII Pre-budget Memorandum 2010-11                                                                46
           (iii) any person representing such individual, the spouse or the minor children of
           such individual or the Hindu undivided family in which such individual is the
           karta.”
Since a large number of projects sanctioned before 31st day of March 2008, which were to
be completed in four years from the end of financial year in which they were sanctioned,
have not been completed due to liquidity crunch and fall in demand consequent to economic
slowdown, it is necessary that four years period for construction be increased to six years to
take care of prevailing extra ordinary economic conditions.

Recommendation
The concessions under section 80-IB(10), allowed four years for construction, for projects
sanctioned before 31st day of March 2008, be increased to six year to cater for extra ordinary
conditions due to global recession.

8.6    Resources for mortgage financiers

It is suggested that in order to ensure a smoother flow of capital to HFCs for onward lending,

       Fixed Deposit program of HFCs be included under Section 80C.

       Interest on deposits with HFCs were eligible for deduction under Section 80L.
       Finance Bill 2005 abolished Section 80L and Section 88 and replaced it with Section
       80C, which allows a deduction of income for contributions made in specified
       investments within the overall ceiling of Rs 1 lakh. As a result of the deletion of
       Section 80L, interest earned on deposits with HFCs is now fully taxable.

       Currently Section 80C (xvi) (a) permits subscription to any deposit scheme of a public
       sector company (as the central government may specify in this behalf) which is
       engaged in providing long term finance for construction and purchase of house in
       India for residential purpose to be included for the deduction.

       If the HFC is not a ‘public sector company’ it is not an eligible investment under this
       section.

       Recommendation
       Suitable amendment of Section 80C (xvi) (a) be made by deleting the word “sector’
       so as to read as “any public company which is engaged in providing long term
       finance for construction and purchase of house in India for residential purposes”.

8.7    Priority sector norms

Currently the priority sector norms cap the loan value at Rs 20 lakhs. Given the rise in
property value, in order to increase affordability, it is proposed that the priority sector cap be
increased to Rs 30.00 lakhs.




CII Pre-budget Memorandum 2010-11                                                              47
9.       ENVIRONMENT

9.1      Energy Saving Technologies

Any money spent may entail savings not only by way of reduced costs of energy, water, etc.
but also by way tax incentives. The tax incentives may take the form of deductions,
exemptions or credits. The capital allowance or investment allowance may be given to the
companies’, on expenditure incurred to make environment friendly energy efficient devices,
use of recycled water, effective water disposal, green buildings etc. It may be noted that
energy efficiency is often not “economical” since involvement of many technologies requires
significant onetime cost or recurring capital cost. Merely providing accelerated depreciation
is not as significant benefit as a clear incentive for taxpayers who are deciding to adopt such
technologies.

Recommendation
Any person installs energy saving technologies or equipment as specified currently as
qualifying for accelerated depreciation, a tax credit may be provided equal to 150% of the
expenditure incurred on the cost and installation of the new technology. This will function of
similar lines as the scientific R&D credit under section 35 of the Income Tax Act.

9.2       Real estate

The real estate and home ownership base has the potential to generate sizeable gains for
the environment. At present, under the head “Income from house property”, an individual is
allowed deduction on account of repair and maintenance as well as interest on loans against
rental income from renting of the property. The deduction of interest on loan is also available
on self-occupied property.

Similar deduction should also be given to an individual for a certain percentage of
investment in the house on account of:

o     Purchase or installation of any energy conservation measure which includes installations
      or modifications primarily designed to reduce consumption of electricity or natural gas, or
      improve the management of energy demand
o     Energy efficiency improvements in the homes and for the purchase of high-efficiency
      heating, cooling and water-heating equipment. This may include insulation materials and
      systems designed to reduce a home's heat loss or gain and pigmented metal roofs
      designed to reduce heat gain, and asphalt roofs with appropriate cooling granules. The
      various energy efficient equipments may include natural gas water heaters, natural gas
      furnace or hot water boilers, biomass stoves.
o     Interior lighting, building envelope or heating, cooling ventilation that reduces the
      building’s total energy cost
o     Solar electric system, solar water heating equipments
o     Construction of green roofs. It is important to mention here that each 10,000 square-foot
      green roof can capture between 6,000 and 12,000 gallons of water in each storm event.
      In this case, the rainfall would not enter the sewer system. At the same time, the
      evaporation of this rainfall will produce enough heat removal to noticeably cool ten acres
      of the city. It reduces smog; provides better building energy efficiency by reducing
      cooling and heating loads, thereby saving fuel and electricity; captures storm-water
      runoff that otherwise may overflow sewers and overwhelm wastewater treatment plants;
      and improves air quality, by virtue of the increased plantings.

The above benefits should also be made available to tenants as if they are the owners of the
house property, in case they make such investment in the houses they are living in.

Tax breaks should also be made available to builders who invest in these technologies while
constructing Green buildings. This will provide an incentive for such buildings to come up
CII Pre-budget Memorandum 2010-11                                                             48
that will reduce the carbon and water footprints in the future. Leadership in Energy and
Environmental Design ‘LEED’ Certification ensures that a construction project meets the top-
most green building and operation measures. Such a construction is environmentally
responsible, productive and a well- preserved place to live. It is suggested to introduce tax
rebates or deduction if a building is being set up or constructed using energy efficient
facilities (under the LEED Certification category meeting certain predefined parameters). A
tax deduction may be provided to owners of new or existing buildings who install (1) interior
lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that
reduce the building’s total energy and power cost.

9.3    Incentivized tax savings

Tax deductions are always a stimulus for individuals to save or invest more. The success of
infrastructure bonds is the most perfect example of the same. In case a similar incentive is
given to an individual for investing in the companies engaged in generation of renewable
energy or such other businesses resulting in water efficiency, carbon emission reduction,
etc., the same would result in higher cash flow to those industries. The benefit should be
given by way of:-
o tax deduction or reduced rate of capital gain on transfer of shares in these companies
o tax free bonds such as ‘clean renewable energy bonds’ and ‘qualified energy
    conservation bonds’ which may be issued by these companies
o The investment in energy efficient systems and/or environment friendly equipments
    should be treated at par with investment in new residential house for the purpose of
    giving benefit under section 54 and 54F of the Act by way of including the cost of same
    in the cost of property to be acquired.
o Interest paid on loan for acquiring or installing eco-friendly equipments such as cost of
    solar equipments/ units should also be given tax deduction. It will enable individuals also
    to arrange finance to meet the high cost of using solar energy or similar systems, which
    will be coupled with the attraction for getting a deduction from their total income in
    respect of the interest on these loans thereby reducing their overall tax liability

9.4    Vehicular emissions

Vehicular emissions are the major source of roadside air pollution. Reducing emissions from
vehicles can improve roadside air quality. To encourage the use of environment-friendly
petrol private cars with low emissions and high fuel efficiency, a higher rate of depreciation
should be offered to buyers of environment-friendly petrol private cars. The benefit should
not be restricted individuals or corporate having income under the head “Profits and gains
from business or profession”. It should be also be available to salaried class employees who
are the main consumers of this sector. The benefit of depreciation on cars should also be
made available to individuals having no business income.

9.5    Equipment manufacturers
The benefit of tax holiday under section 80IA of the ITA which is presently available to
infrastructure facility and power sector, etc. may be extended to other undertakings also,
which are engaged in the manufacturing of advanced energy efficient products,
manufacturers of equipments used in solar, wind, and other environment friendly resources.

9.6    CDM project income
Lower tax rates for revenue generated from sales of carbon credits may be provided. At
present, developers of ‘Clean Development Mechanism’ CDM projects are subjected to
normal rate of tax.

9.7    Sustainability report mechanism
Sustainability Report based on GRI framework (Global Reporting Initiative) is getting more
and more acceptability across the globe and many of the countries have made it compulsory
CII Pre-budget Memorandum 2010-11                                                            49
for the corporate to include the same in their annual report. There are several factors driving
the increase in corporate transparency. Investors, the media, governments and non-
governmental organizations are pressing for more information. Companies are seeing the
benefits in terms of increased credibility and reduced risk by reporting on their social and
environmental activities.

The sustainability report involves measuring, accounting and disclosing an organization’s
economic, environmental and social performance to advance sustainable development.
Environmental sustainability report highlights the companies’ initiatives and effectiveness on
reduced energy use, minimizing resource depletion, reducing waste, redesigning and
recycling material, minimizing use of water and many other similar developments.
In India, this reporting is not mandatory and therefore a minimal voluntary disclosure is
observed in this front. The same should be made mandatory under the tax laws for the
companies enjoying tax holidays or tax incentives.

9.8    Water
Tax credits may be given to encourage water users to invest in (1) the construction of
impoundments to use available surface water, thereby reducing their dependence on ground
water; (2) the conversion from ground water use to surface water use; and (3) land leveling
to reduce agricultural irrigation water use. It may include:
o An income tax deduction of 50 percent of the project cost incurred in construction,
    installation, or restoration of impoundments.
o An income tax credit of ten percent of the project cost may be given for the conversion
    from ground water use to surface water use, outside a critical groundwater area and fifty
    percent, within a critical groundwater area.
o For agricultural land leveling projects that conserve irrigation water, an income tax
    deduction at ten percent of the project cost may be provided.




CII Pre-budget Memorandum 2010-11                                                           50
10      TAX DEDUCTED AT SOURCE (TDS)
10.1    Tax Deduction at Source / Annual Return
A major part of the revenue from direct tax comes from the TDS route. Sections 192 to 196D
of the Income Tax Act specify the various payments from which a taxpayer needs to deduct
tax at the prescribed rates in force. The provisions of TDS have always remains a matter of
challenge in front of Income-tax authorities. Thus TDS provisions face various amendments/
clarifications from time to time. In order to make it more user friendly., CII feels that there is a
scope for further improvement in the areas mentioned below:

Recommendation
There are a number of provisions for TDS, which need to be rationalised under one single
section. Therefore, there is need to consolidate the various sections, rationalizing TDS rates,
exemption limits, etc.
•    Currently there are certain exemption limits inbuilt in the various sections of TDS.
     Keeping in view the volume of transactions taking place in the business environment,
     these threshold limits should be suitably revised.
•    As per the provision of Section 195, every payment to non-resident is liable for deduction
     of tax at source. Even a single transaction entered into by non-resident in India comes
     under the ambit of Section 195. Monies of non-resident contractors are blocked in TDS
     due to excessively high estimate of profits. Excess amounts are refunded only on filing of
     tax return along with the claim of refund. This causes a hardship to the non-resident at
     least to those who have entered into Indian market only for single transaction and not
     running any continuous business. A corrective step is required to be taken in this regard
     either by introducing a threshold limit as present in the other section or bringing certain
     clarifications in this regard to avoid hardship to non-resident taxpayers.
•    TDS provision can be made more user friendly by introducing a single rate of deduction
     of tax at source from all the transactions falling in the ambit of TDS. It would eliminate the
     various litigations in respect of the applicable rate of TDS applicable to a particular
     nature of transaction.
•    A specific time limit should be introduced for the completion of verification of withholding
     tax returns as in the case of returns filed under section 139.
•    Recently, CBDT has clarified that service tax should be excluded for the purpose of tax
     deduction at source u/s 194I. Such exclusion of service tax for the purpose of TDS
     deduction should be extended to all the payments, which are liable to TDS. This will also
     enable the assessee to streamline their systems resulting into better tax compliance.


10.2    TDS on Data Communication
When a communication is established through satellite , the digital signals are converted into
analog signals and are transmitted to one of the geo-stationary satellites using the
bandwidth provided by Indian service providers like VSNL. The signals that are beamed to
the satellites are down linked to the earth stations in, say, the US and sent to the client’s
location using the bandwidth and down linking facility provided by international service
providers in the US.
The income tax department is of the view that the payments to international service
providers for down-linking signals from the satellites over the ocean to the US are subject to
deduction of tax under section 195 of the Income Tax Act — this being, in their judgment, a
technical service or a royalty. This view has also been affirmed by the court in various
rulings.
Provision of bandwidth is a utility facility, and can hardly be called a technical service. Utility
facilities are commoditised services, and not customised services. These are similar to the


CII Pre-budget Memorandum 2010-11                                                                51
services of telephones, electricity or water, and can under no circumstances be treated as
provision of technical services or payment of royalty.
According to Article 12(4) of the Double Taxation Avoidance Treaty (DTAA), fees for included
services means payments of any kind to any person in consideration for the rendering of any
technical or consultancy services if such services:
• are ancillary and subsidiary to the application or enjoyment of the right, property or
    information for which a payment is received; or
• make available technical knowledge, experience, skill, know-how or process; or
• consists of the development and transfer of a technical plan or technical design.
In no way can payments made to foreign companies for providing a basic utility services be
treated as technical service or royalty.

Recommendation
Payment made to foreign companies for providing basic utility service should be treated as
technical service or royalty.




10.3     Clarification on TDS with respect to IUC paid by one operator to another

a) Interconnect usage charges are not in the nature of fees for technical service but for
   allowing the call from one service provider to be carried over to the other service
   provider. As such, the existing telecom service providers have to provide interconnection
   of their networks, equipment to the networks and equipment of the new telecom service
   providers to provide the subscribers efficient and flawless service. These interconnection
   issues between the service providers are very crucial issues to deal with the Department
   of Telecommunications and Telecom Regulatory Authority of India (TRAI).

b) To resolve the issue and to fix the terms and conditions of interconnectivity between
   Service Providers, to ensure effective interconnection between different service
   providers and to regulate arrangements amongst service providers of sharing their
   revenue derived from providing telecommunication services, TRAI has made THE
   TELECOMMUNICATION            INTERCONNECTION         USAGE       CHARGES         (IUC)
   REGULATION, 2003 (1 of 2003). Through this Regulation, TRAI has provided for inter
   connection charges payable by one service provider to another service provider for the
   purpose of inter connection.

c) The following definitions of the Regulation are relevant for the matter:

       i) "Interconnection" means the commercial and technical arrangements under which
           service providers connect their equipment, networks and services to enable their
           customers to have access to the customers, services and networks of other service
           providers.

       ii) Interconnection Charge" means the charge for interconnection levied by an
            interconnection provider on an interconnection seeker.

       iii) “Interconnection Usage Charge (IUC)” means the charge payable by one service
             provider to one or more service providers for usage of the network elements for
             origination, transit and termination of the calls.

       iv) "Interconnection Provider" means the service provider to whose network an
            interconnection is sought for providing telecommunication services.


CII Pre-budget Memorandum 2010-11                                                         52
     v) "Interconnection Seeker" means the service provider who seeks interconnection to
         the network of the interconnection provider.

d) From the above definitions, it is obvious that through the process of interconnection, one
   service provider establishes a link between its own network, services and equipment with
   the network, services and equipment of other service provider. For facilitating these
   arrangements, TRAI has made the Regulation for IUC charges payable. Under the IUC
   regime, one service provider only uses the network elements (for carrying the calls to
   their destination) of other service provider. By providing the inter connection, the
   Interconnection provider does not render any services either to the Interconnection
   Seeker or to the subscriber of the services. In such Interconnection, the user telecom
   service provider utilizes the facilities, switches etc. for transferring the calls from one
   network to another network. The same cannot be considered as provision of technical
   services. Fees for technical services has been defined in Explanation (b) to section 194J
   read with Explanation 2 to section 9(1)(vii) of the Act as under:

     “Fees for technical services” means any consideration (including any lump sum
     consideration) for the rendering of any managerial, technical or consultancy services
     (including the provision of services of technical or other personnel) but does not include
     consideration for any construction, assembly, mining or like project undertaken by the
     recipient or consideration which would be income of the recipient chargeable under the
     head “Salaries”.

e) From the above definition, it can be observed that “technical services” involve rendering
   of services of managerial, technical or consultancy nature. Provisions of interconnect
   facilities and receiving and handing over of the calls do not involve rendering of any
   services. In Interconnect Agreements, the user utilizes the technical equipment for
   interconnect purposes.

f)   Just because technical equipment/gadgets are used in the process, it does not make the
     contract as that of rendering of technical services.

g) In the case of Skycell Communications Ltd. vs DCIT (2001) 119 Taxman 496, the
   Hon’ble Madras High Court has held that for the purpose of section 194J of the Act to
   become applicable, it is necessary that the payee receives ‘services’. If the payee uses
   only technical gadgets, which are made available to others also for fees, the same does
   not make the payment subject to tax deduction at source under section 194J of the Act.

h) In the case of Commissioner Of Income Tax VS Bharti Cellular Ltd, the hon’ble Delhi
   High Court has held the interconnect / port access facility is only a facility to use the
   gateway and the network of MTNL /other companies. MTNL or other companies do not
   provide any assistance to the assessees in managing, operating, setting up their
   infrastructure and networks. No doubt, such a facility is 'technical' in the sense that it
   involves sophisticated technology and may even be construed as a 'communication
   service' but to interpret the entire expression used in the pertinent Section the individual
   meaning of technical has to be seen, and the only meaning of the whole expression
   'technical services' is to be seen. Besides, the expression `technical service' is not to be
   construed in the abstract and general sense but in the narrower sense as circumscribed
   by the expressions 'managerial service' and 'consultancy service' as appearing in
   Explanation 2 to section 9 (1) (vii) of the I-T Act. In this light, the expression 'technical
   service' would have reference to only technical service rendered by a human. It would
   not include any service provided by machines or robots.

i)   Relying on the said decision, ‘interconnect facilities’ can be considered as ‘technical
     equipment provided by the Interconnection Providers to the Interconnection Seekers.
     However, it would not result into provisions of services by the receiver of the fees.


CII Pre-budget Memorandum 2010-11                                                            53
     Accordingly, the IUC cannot be made subject to deduction of tax at source under section
     194J of the Act.

j)   Telecom sector is already under 80IA and hence, this TDS deduction running into crores
     of rupees cause unnecessary hardships for the telecom sector.

Recommendation
The IUC cannot be made subject to deduction of tax at source under section 194J of the Act.
Also, in providing telecommunication services, bandwidth is one of the essential
components. This involves connecting points through which communications become
possible. Hence, this does not amount to providing technical services or royalty. This view
has also been affirmed by the courts in various rulings.


10.4    TDS on packaged Software
Recently, Supreme court has held that packaged software are to be covered by the definition
of goods as defined under Sales tax Act and is chargeable to Sales Tax. This software is
sold mostly by distributors who earn less than 5% margin on such sales. Deduction of TDS
u/s 194J/195 @ 10% or more causes undue hardship to such assessee.
Recommendation
Packaged Computer Software be exempted from the requirement of TDS/WHT u/s
194J/195.


10.5    TDS and Section 195
The definition of ‘royalty’ under tax treaties entered by India with countries like UK,
Singapore and US does not cover payment for use of ‘copyrighted article’. Tax authorities,
however, are interpreting the royalty definition in tax treaties to include software license
payments as well, even where such payments are for use of software for the payer’s own
operation, and not for further duplication and sale / license. It therefore insists on tax
deduction from such payments.
The OECD’s commentary on Article 12 of the Model Convention is quite pertinent in this
case. It clarifies that a distinction needs to be made between (i) payments for obtaining right
to duplicate software for sale / license and (ii) payments for use of software for the payers’
own position. The former case would amount to payment for use of a copyright and therefore
be subject to tax as royalty. The latter, being payment for use of a copyright article, would fall
outside the ambit of the royalty definition.
Most foreign software vendors require payment on a ‘net of tax’ basis. In other words, Indian
customers are required to gross up payments for any Indian taxes that may be levied.
Insistence on TDS on software payments, therefore, increases cost for Indian customers.
Software is not the only area where the income tax department is using the definition of
royalty to suit its own revenue purpose. Today, it is also using the definition of royalty as
payment for use of industrial, scientific or commercial equipment to cover use of leased lines
for international connectivity — and is insisting on TDS on this service as well.

Recommendation
CII feels that CBDT must issue necessary clarification to the effect that license payments
made for use of software for the payer’s own operations (as against duplication for onward
sale / license) are outside the ambit of the definition of royalty, and hence not liable to TDS.
Similarly, CBDT should issue clarification to the effect that leased line payments cannot be
construed as payments for use of equipment.


CII Pre-budget Memorandum 2010-11                                                              54
10.6   Centralised TDS Compliance for Banks
In view of the liberalization of the financial sector, banking sector has undergone a
fundamental change to establish itself as a platform for providing a full complement of
financial products and services to customers in and outside India. In order to facilitate the
delivery of such extensive services, it needs to expand through set-up of numerous
branches geographically across the country, build up human capital, and leverage on
technology. As per the present provisions of Income-tax Act, each branch of a bank is
treated as a separate assessee liable for deduction of tax at source on all payments / credits
made by it. Hence, each branch is required to obtain Tax Deduction Account Number (TAN),
deposit TDS into the Government Treasury, file TDS returns, issue TDS certificates and
assessments. With more and more emphasis on opening of various branches, it becomes
extremely cumbersome, cost ineffective due to huge paperwork and administratively difficult
to obtain multiple TANs, file multiple returns, attend to multiple assessments, issue of TDS
certificate by different branches across India, etc.

The Finance Minister in his Budget 2003 speech has placed lot of emphasis on elimination
of procedural complexities, reduction of paper work and simplification of tax administration.
With a view to reduce administrative hassles for the banks as well as for the Income-tax
Department, we suggest that an option be allowed to banks for centralised TDS compliance.
That is, the banks should be allowed, on behalf of all its branches, to deposit centralised
TDS, issue TDS certificate in Form 16A and file consolidated TDS returns, in the jurisdiction
of choice of the bank, which is preferably where its corporate office is situated. TDS is a
method of tax collection where taxes are deducted at the time of payment or credit,
whichever is earlier, and deposited into the Government Treasury within the stipulated
timeframe. Hence, the allowance of centralised deposit of TDS and consolidated filing of
TDS returns would involve the deposit of tax in one centralised place instead of multiple
jurisdictions. This would not lead to any revenue loss as the same amount of TDS, which
would otherwise have been deposited separately by each of the branches, would be
deposited in a centralised place by the bank. This procedure would save the administrative
cost of TDS administration for both the income-tax department and banks.

Recommendation
In order to facilitate elimination of procedural complexities, reduction of paper work and
simplification of tax administration, banks be allowed to opt for a centralised jurisdiction for
deposit of TDS, issue TDS certificate in Form 16A and filing of consolidated TDS returns, in
the centralised jurisdiction opted for by the bank.




10.7   Intra-year Adjustment of TDS
As per the present provisions of various section requiring assessee to withhold taxes on
various payments made , there is no mechanism for adjustment of excess deduction of tax
at source in earlier payments against the subsequent payments under the same section
during the financial year. This leads to genuine hardships to the tax deductors who are
unable to adjust the excess tax deducted and are required to apply for refund from the tax
authorities. Due to the long drawn refund procedure without any prescribed timeframe, the
assessees find it almost impossible to obtain refunds of excess tax deducted.


Recommendation
Intra-year adjustments of excess tax deducted be allowed under various sections on the
lines of other provisions like sub-section (4) of section 194A.



CII Pre-budget Memorandum 2010-11                                                            55
10.8   Provision of revision of TDS Returns


The present law should be suitably amended to include the provision of revising TDS return.
However, the software for revised return is prescribed, there is no such provision prescribed
in law to revise the TDS return already filed.

Recommendation
There is a need to amend the law suitably to introduce the provision of revising TDS return
with the prescribed timelines as existing for the returns filed under the normal provision of
Section 139(1).
10.9 Deduction of Tax at Source (other than salary)
Under the provision of TDS, tax is required to be deducted and deposited at the time of
credit of such sum to the account of the payee or even to the suspense account or at the
time of payment, whichever is earlier. As per the accounting practices, various entities are
required to report their financials on monthly basis. For this purpose they are required to
make certain provisions at the end of each of the month on estimation basis (without any
support of bill) with a subsequent reversal in the succeeding month. Even, the payee is not
identifiable at the time of making such monthly provision.
 Hence, it becomes difficult for these entities to deposit TDS in respect of the entries made
on an estimation basis, which may require reversal in future. In such a scenario, it also
becomes almost impossible to keep track of deduction of tax, its deposit and adjustment on
such provisions.
There is a need to harmonize the TDS provisions to exempt such provisional entries from
the ambit of TDS as it cause a unnecessary trouble to the assessee more so given the fact
that even the payee is not identifiable at that stage.

Recommendation
Monthly liability provisions should be allowed to be made without deduction of tax at source.
.

10.10 Increase in Tax Audit Limit

As per Section 44AB of the Act, every person carrying on business, if his total sales/turnover
in business exceeds Rs. 40 lakhs or carrying out profession, if his gross receipts in
profession exceed Rs.10 lakh in previous year shall get his accounts audited. Considering
the industry has grown by 15-20% over the last few years, the threshold limit specified in the
section for carrying out Tax audit should also increase. The low tax audit limit is creating lots
of hardship to Small and Medium size entrepreneurs. It is recommended that the Tax Audit
Limit should be suitably increased to give relief to the SMEs from both paper works, reduce
cost and also increase cost competitiveness of Indian Trade & Industry.
Recommendation
The threshold limit specified under section 44 AB for Tax Audit should be suitably revised.


10.11 Higher TDS for non quoting of PAN
A new section namely Section 206AA will become effective from 1.4.2010 [F.Y 2010-11].
The new section provides that in the event of non submission of Permanent Account No. by
the payee, tax will be deducted at the higher of the following rates, namely;
       (i)     Rate specified in the relevant provisions of the Act.
       (ii)    Rate or rates in force
       (iii)   @ 20% whichever is higher.



CII Pre-budget Memorandum 2010-11                                                             56
While the intention of the department to capture PAN of the deductee is laudable, the
provision does not recognize the practical difficulties of the deductor especially relating to
non-residents.
Obtaining a PAN (especially in case of one off transactions) is against international
practices. This provision would jeopardize the development of the international transactions
of Indian business entities. In majority of business transactions between the Indian concerns
and Foreign concerns, the non-resident generally operates from his resident country. .
It is a matter of common knowledge that in many cases one time payment to non-residents
on account of technical service fees are negotiated on a net of tax basis. In other words, a
non-resident in such cases receives the payment net of withholding tax. The tax in this case
is borne by the Indian deductors and the same is grossed up. The payees are not interested
in complying with the provisions of obtaining PAN since these are one-time transactions as
also the fact that the tax is borne by the Indian payer. It is worth noting that the newly
enacted provision will adversely hit the Indian payer who will be required to bear an
additional tax burden merely because of the fact that the non-resident payee has not
furnished PAN.
Further, the provisions of Section 115A(5) specifically exempts foreign companies from the
requirement of furnishing return if the income is derived from certain specified receipts. It is
quite obvious that such companies will not be interested in complying with the requirement of
obtaining PAN. In such cases also the Indian payer will be subject to additional cost burden
because of this new provision.
Further as per the section 206AA, the farmers are also required to have Permanent Account
Number, as companies involve farmers in contract farming activities. Many farmers are not
taxable/ claim agricultural income exemption and may not also have a PAN. Withholding
taxes at the rate of 20% on such payments could cause genuine hardship to farmers.
Specific relaxation should be given from the onerous requirements for the farming
community.

Recommendation
Provision to Section 206AA needs to be withdrawn since the same would result in to
additional tax burden on the Indian payers.
Alternative, this provision should be made applicable only in respect of payments to
residents (excluding the farmers).




CII Pre-budget Memorandum 2010-11                                                            57
11.    OTHER TAX ISSUES
11.1   Capital Gains — Section 50C
The Finance Act, 2002 substituted chapter XX-C with a new section 50C, which provides for
an artificial calculation of sale value by adopting stamp duty valuation as the sale price for
calculating capital gains / loss on transfer of immovable properties. The rationale behind this
was to curb the circulation of black money. Section 50C makes it mandatory for the
assessing officer to adopt the stamp duty valuation, and not the market price of the property
as mentioned in the sale deed. The rates fixed for the stamp duty valuations are often
arbitrary and do not consider the location, facilities, neighbourhood and are often subject to
litigation.
Indeed, problems arise in cases where the buyer disputes the valuation adopted by the
registration authorities for stamp duty purposes, and when the matter is pending in appeal.
Section 155(15) of the Income Tax Act permits for rectification of sale price within four years
from the end of the previous year in which the order revising the value was passed.
However, civil court proceedings are lengthy and generally involve a number of years of
litigation. This results in unnecessary blocking of funds and maintenance of records till
finalisation of matters. Further, in cases where capital gains tax has already been paid by the
assessee, claiming of refund is cost ineffective — as rate of interest on refund is much lower
than the interest cost borne by him on the funds borrowed for payment of capital gains tax.
Also, section 50C gives discretion to the assessing officer to refer the valuation of the
property to a valuation officer. Reference to a valuation officer is possible only if no appeal /
reference / revision are pending before any other court of law. Hence, the assessing officer
enjoys powers to deny reference to valuation officer.

Recommendation
The assessing officer should be required to refer the valuation of the property to the
valuation officer on request of the assessee.

11.2   Foreign Companies - Section 115A
Section 115A of the Income Tax Act states that foreign companies having income in the form
of dividend and interest are exempt from filing of income tax return in India provided tax has
been deducted at source. However, if a foreign company has some income in the form of
royalty, it is required to file an income tax return even though the nature of income may be
the same.
Recommendation
Foreign companies having income from royalty should also be excluded from filing returns in
India provided tax has been deducted at source — just as is the case with dividend and
interest income. These are all passive income, and should be treated equally.

11.3       Taxation on Global Mergers and Acquisitions

Today, globalization is an accepted norm with rampant increase in cross border mergers and
acquisitions, consolidation and restructuring activities. Such activities often have their impact
spread across borders of many tax jurisdictions.
Recently, tax authorities in the country have put forward an unprecedented view that India is
entitled to capital gains tax on share divestments taking place outside India, involving
transfer of shares in a non-Indian company and taking place between two foreign entities.
The authorities are contending that when the Acquirer Company purchases shares of
Company B from A, there is a transfer of assets, tangible and intangible, in India in favour of
the Acquirer Company. Such transfer of assets is taxable in India and the Acquirer Company
is liable to Indian withholding tax provisions.


CII Pre-budget Memorandum 2010-11                                                             58
This understanding of the tax authorities poses important questions that travel to the
foundation for a just and transparent tax administration.

Section 5(2) of the Income-tax Act, 1961 (‘the Act’ or ‘Indian tax law') provides that the total
income of a non-resident includes all income which is received or is deemed to be received
or accrues or arises or is deemed to accrue or arise in India.
Section 9(1)(i) of the Act specifies that in case of transfers of capital assets, income shall be
deemed to accrue or arise only where the capital asset transferred is situated in India (In the
above illustration, shares in Company B is the capital asset being transferred, which is not a
capital asset situated in India).

Further, in case payment made to non-residents is chargeable to tax in India, there could be
consequential withholding tax obligations under section 195 of the Act. This depends on a
number of factors including whether such withholding tax provisions can be applied to a
non-resident with no presence in India and whether it can be enforced through certain
retrospective changes in law made in 2008.
To summarize, the position adopted until date is that no taxes were payable in India on an
offshore transaction involving two non-residents in respect of transfers of shares of another
offshore company. Accordingly, neither a non-resident seller was subject to Indian tax law
nor a non-resident buyer was under an obligation to withhold taxes on payments made to a
non-resident seller. Such actions of the tax authorities creates uncertainty in minds of
investors
There is no provision in the prevailing Indian tax law to tax such offshore transactions and
accordingly enforce withholding tax obligations. The existing provisions are being applied out
of the context that they were intended.
In case offshore transactions as stated above are now taxed, such a change in the mindset
of the Indian tax authorities would create enormous uncertainty for such transactions.
It is also relevant to note that a holding company jurisdiction is a necessary and integral part
of corporate globalization, which India is increasingly becoming an integral part of.
Operating in a global environment requires alignment to global practices.
Equally with Indian companies now increasingly investing in various companies in foreign
jurisdictions, any aggressive tax postures that are inconsistent with global tax practices can
have a severe backlash that may hurt the interest of the Indian business community.
Further, the possible application of withholding tax obligations to a non-resident with no
presence in India as a mechanism to collect any possible taxes, together with retroactive
changes in law to enforce collection adds yet further uncertainty for companies and foreign
investors undertaking such transactions.
Without further clarity, investors looking to exit India face hindrances, while entrants will have
to worry about a possible new tax. Contentions taken by the tax authorities, if followed by
them, may cause anxiety among investors for all genuine international mergers and
acquisitions involving transfer of companies that themselves hold directly or indirectly
shareholding in an Indian subsidiary.
The above contention of the tax authorities also raises a key question on the cases where
such position of the tax authorities would apply. For instance, one may argue the
applicability in the following situations:
•   Transaction on world’s major stock exchanges, for e.g. New York Stock Exchange,
    between two non-resident individuals involving depository receipts in a listed company
    owning a business or assets in India.
•   Similarly, a takeover on the London Stock Exchange of a multinational company that
    has, as one part of its portfolio of international interests, a controlling interest in an Indian
    business.


CII Pre-budget Memorandum 2010-11                                                                59
•   Even if there is no complete takeover, a mere portfolio sale of shares in a company listed
    on the London Stock Exchange, which, as a part of global operations has a subsidiary in
    India.
Recommendations
    For past transactions - It is a well settled principle that law is to be interpreted as it
    exists, using the plain language employed and after considering legislature’s intention
    behind introducing the provision. As the current income tax law does not mandate taxing
    offshore transactions, the same should be clarified by way of circular issued by Central
    Board of Direct Taxes. Such provision in the circular should be detailed and
    unambiguous clarifying that neither offshore transactions are taxable nor subject to any
    withholding tax provisions in India.
    For future transactions - If the government wishes to tax these cross border activities, it
    may consider making a prospective amendment in the Indian tax law. For e.g. in
    Indonesia, after considerable deliberation, an amendment to tax transactions involving
    use of offshore vehicles/conduits for investments in Indonesian companies was
    introduced with prospective effect. Since changes have been proposed in the Direct
    Taxes Code Bill, 2009, there appears to be a clear intention to tax such transfers on a
    going forward basis. Such intent of prospective applicability needs to be spelt out under
    the current law. There are various aspects that need to be addressed in the proposed
    code including meaning of the term ‘indirect transfer’.
The above would ensure that the investors are aware of their tax obligations at the time of
exit and are able to factor this consideration while making their investment decision.
Introduction of any adverse provision with retrospective application may be viewed as being
unfair and unjustified.
If at all such tax is levied, the government would also need to consider introducing
mechanism for recovery of tax in view of the practical difficulties involved.

    Scope of taxation - Any amendment/ proposed action should also consider international
    experience on the subject. The legislative framework and judicial precedents in other
    countries may serve as an important reference.

11.4   Assets under the Wealth Tax
The definition of ASSETS in Section 2(ea)(i) of the Wealth Tax Act [Act] provides that the
following property will be excluded from the purview of Taxable Assets:
“a house meant exclusively for residential purposes and which is allotted by a company to an
employee or an office or a director who is in the whole time employment, having gross
annual salary of less than Five Lakh rupees”.
The above limit of Rs. 5 lakhs per annum was fixed many years ago. In the present times,
the salaries have gone up significantly as compared to the position that obtained when the
limit of Rs. 5 lakhs per annum was fixed.

Recommendation
The limit of Rs. 5 lakhs per annum given u/s 2(ea)(i) of the Wealth tax act be enhanced to
Rs. 25 lakhs per annum.
The term “Gross Annual Salary” should also be defined for this purpose as the said term
could carry more than one interpretation. It would be better to state “Annual Taxable Salary”.

11.5   Wealth Tax on Vacant Industrial Land
Industrial undertakings usually acquire land keeping in view of future expansion plans. As
such, initially the entire land is not used up resulting in existence of vacant land meant for
future expansion. Currently holding of vacant industrial land is not subject to wealth tax for
an initial period of two years after registration. Thereafter such vacant land is subject to
CII Pre-budget Memorandum 2010-11                                                           60
wealth tax. Taxing vacant land thereafter is a retrograde step, detrimental to the industrial
undertaking whose investments are always in phases spread over a period of 10-20 years.

Recommendation
The primary objective of exemption for a vacant land held by an assessee for industrial
purposes as presently available to an assessee under the Wealth Tax Act is that the
assessee may put the land to use over a period of time, in phases, according to the needs of
the business. The exemption need not be limited for two years and may be extended for use
of vacant Industrial, earmarked for future expansion, which may be in phases, without
limiting it for any period or atleast extending the exemption period to five years.



11.6   Re-Introduction of Sections 54EA / 54EB
Sections 54EA and 54EB were introduced in 1996 to offer a basket of investment options to
reduce taxable capital gains arising from transfer of long-term capital assets. These
provisions acted as an incentive for the notified companies to provide funds at low cost to
the infrastructure sector. This primarily covered activities like power generation / distribution,
telephone services, exploration / extraction of oil and natural gases in addition to basic
infrastructure projects of general public utility like road, bridge, airport, port, inland
waterways / ports, rail system, highway project, water supply project, irrigation, sanitation
and sewerage system. The new section 54EC introduced in lieu of sections 54EA / 54EB
restricts the scope only to agricultural and rural finance and highway infrastructure. The
abrupt withdrawal of the sections has restricted the growth of the other infrastructure projects
of national importance and public utility involving long gestation periods and huge resource
requirements. Moreover, the Finance Act 2007 has imposed an investment cap of Rs. 50
lakhs per taxpayer per financial year under section 54EC.

Recommendation
In order to enable speedy development of infrastructure projects, which usually involves
large capital outlay, CII suggests that section 54EA / 54EB should be reinstated. An
alternative to this arrangement could be notification of infrastructure facilities and persons
covered under 54EA / 54EB be also allowed to raise resources under section 54EC.
The cap of Rs. 50 lakhs must be deleted in the interest of making cheaper funds available to
such important infrastructure sector, which requires significant amount of funding over the
next several years.

11.7   Ambiguity in MAT Calculation
Under Explanation (iii) to Section 115JB, it has been provided that “the amount of loss
brought forward or unabsorbed depreciation whichever is less as per books of account.” Is to
be reduced from the Net profit as per the profit and loss account
However, the rules do not prescribe the methodology to arrive at cumulative brought forward
loss or unabsorbed depreciation as per books of accounts, which leads to confusion and
ambiguity with respect to computing the book profit for the year after adjusting carried
forward loss / unabsorbed depreciation.
Further, it has been provided in the explanation to the proviso that in case either the
unabsorbed depreciation or brought forward loss is NIL, then no deduction shall be allowed
to arrive at the book profit.
Further the MAT Provision does not also clearly spell out the treatment of deferred tax
assets and liabilities created as per Accounting Standard 22.




CII Pre-budget Memorandum 2010-11                                                              61
Recommendation
The brought forward loss and unabsorbed depreciation, both should be allowed as a
deduction from the profit as per P & L account.
It should be clarified that the explanation applies only to the cumulative brought forward loss
or unabsorbed depreciation, and not merely the loss or depreciation for the current or the
preceding year.
Circulars to be issued for the purpose of determination of brought forward loss or
unabsorbed depreciation. The adjustments for deferred tax with reference to MAT
calculations should also to be clarified.

11.8   Incentives for Hydrogen / Fuel Cell and Hybrid Vehicles
India is trying to develop such vehicles, which will have far reaching impact on India’s fuel
security and environment. However, costs of such vehicles are expected to be quite high
making them unattractive from customer point of view. Various countries offer direct
subsidies on such vehicles to make them relatively attractive to customers.
Income tax deduction on purchase of Hydrogen / Fuel Cell and Hybrid Vehicles should be
extended at Rs 100,000/- in case of cars, Rs 50,000/- in case of two & three wheelers and
Rs 200,000/- in case of commercial vehicles.
11.9   Amendment to Schedule IV of the Income Tax Act
The Finance Minister, vide clause 56 of the Finance Act 2006 amended the Rule 4 of part A
of Schedule IV of the Income-tax Act dealing with recognized Provident Funds. The
amendment seeks to lay down a condition that a recognized provident fund must obtain
exemption u/s 17 of the Employees Provident Fund and Miscellaneous Provisions Act on or
before 31st March 2007 to be able to retain the recognition under the Income-tax Act. In
other words, if the employer does not obtain exemption u/s 17 referred to above, then the
recognition granted under the Income-tax Act shall stand withdrawn.
The provisions of the Employees Provident Fund and Miscellaneous Provisions Act apply to
all employees earning a salary not exceeding Rs.6500/- per month. A recognized provident
fund whose members are in receipt of salary in excess of the said amount of Rs.6500/- per
month does not fall within the purview of the Employees Provident Fund and Miscellaneous
Provisions Act. Consequently, such a provident fund is not required to obtain any exemption
u/s 17 of said Act. In fact, the Provident Fund Commissioner may not entertain any request
for exemption from a Provident Fund whose members are excluded from the operation of the
Employees Provident Fund and Miscellaneous Provisions Act. The impact of the amendment
has resulted in all such provident funds losing its recognition under the Income-tax Act,
thereby resulting in hardship to its members. Further in case these excluded employees are
covered under the provisions of Employees Provident Fund Act, 1952, the Government of
India will have to make contributions for these higher income employees under the
Employees Pension Scheme 1995 (this coverage is mandatory under Employees Provident
Fund Act,1952 ) which is already running into huge deficit.
Further, the excluded Provident Funds are required to follow the investment pattern
prescribed by the Finance Ministry and the EPF Authorities and, therefore, investment very
clearly is directed in line with the Government policy and framework and as such bringing
such excluded funds within the purview of the EPF Authorities is unlikely to provide any
significant benefit either to the country or to the concerned employees. The excluded funds
are required to have their annual accounts including income and expense statements &
balance sheets duly audited, as a part of the approval granted under the Income Tax Act.
An additional requirement to bring these funds under the supervision and control of the EPF
Authorities would entail incremental costs, which EPF Authorities collect for supervision and
administration, without bringing any corresponding benefits to the employees and at the
same time stretching the resources of the EPF authorities from supervising and controlling
funds, which are under their direct control.


CII Pre-budget Memorandum 2010-11                                                           62
Recommendation
It is, therefore, recommended that the amendment to Rule 4 of part A of Schedule IV must
be dropped with retrospective effect.


11.10 Deemed Speculation Loss in case of Companies
As per the Explanation to Section 73, in case of most companies, share trading is deemed to
be speculative. Automation of the trading mechanism, screen based trading, controls on
reporting of capital market transactions by share brokers, dematerialization and other
measures initiated by SEBI over last few years have brought total transparency in share
trading, leaving little scope for manipulation of share trades by transfer of profits/losses from
one person to another.
Further, when derivatives, which are in the nature of speculative transactions, are not
considered as speculative transaction, there is least logic to continue deeming fiction of
treating the transactions in shares entered by a company as speculative transaction.

Recommendation
It is suggested that the aforesaid Explanation to section 73 of the Act ought to be deleted.


11.11 Section 40(a)(ia) for Non-deduction of Tax at Source
Section 40(a)(ia) provides for disallowance of the expenses incurred in the nature of interest,
commission, brokerage, fees for professional services as well as payment to contractors if
the tax has either not been deducted or if deducted not paid within the due date. This harsh
provision brought on the statute book by the finance act 2004 with effect from assessment
year 2005-06.
For a small default of not paying 1% of the TDS to the Government the intention of the
legislature to disallow the whole of the expenditure which in turn will lead to levy of tax@
33.99% plus interest and penalty is unheard of in the world.
The provision is confiscatory in as such as that at times when the amount of TDS involved is
only 1% of the expenses the additional tax liability comes to 33.99% of the sum which is
further increased by levy of interest under section 234B and 234C. In most of the cases the
total tax and interest liability comes to somewhere between 44% to 46% of the amount in
question. It will be appreciated that such a disproportionate burden on the assesses for not
collecting the tax from a third party (which is essentially a job of the Government) is
undoubtedly unreasonable. It is more so because in almost all such cases payments are
through banking channels and are fully amenable to verification and there are hardly any
reason to doubt that those receipts are not disclosed by the recipients.
The argument is also no consolation to the businessman whose business in subsequent
year is not good enough to absorb the deduction of expenses disallowed in earlier year
under section 40(a)(ia). True the deduction can be allowed but if the computation of income
results in loss in subsequent year, he does not benefit from such deduction.
To sum up this aspect it is clear that allowances of the deduction in subsequent year may
not in all cases given full relief in subsequent year and secondly, there will be no relief
whatsoever in respect of interest charged under section 234B and 243C in the year of its
disallowance. The ratio of the additional tax burden on the assesses to the alleged loss of
tax, or its delay is preposterous
Above provisions of income tax is hurting the exporters of goods from India the most as
while the cost of the commodity may be only US $ 50 per metric tones say in case of
minerals the internal freight and Ocean freight up to destination would nearly be US$S 100
to US $ 125 per MT. The department is adding all those expenditure by virtue of above
section. Through the expenditure has been incurred and paid by assesses by cheques and
CII Pre-budget Memorandum 2010-11                                                              63
accounts have been audited but these are disallowed because the exporter forgot to deduct
tax @1% or deposited the deducted tax late.
There are remedial provisions contained under chapter XVII of the Income Tax act for
recovering of TDS amount interest and penalty thereon and therefore having provisions U/s
40(a)(ia) is not only extremely harsh but tantamount to double taxation. Firstly he is
penalized by amount equivalent to TDS along with penal interest under section 201(A) and
under section 220(2) secondly, he is again penalized by the provisions of section 40a(ia)

Recommendation
Section 40(a)(ia) should be withdrawn /deleted and /or bring suitable amendment in the said
act, to help assessee in losing genuine deduction on this account.

11.12 Wealth Tax on Motor Vehicles
Wealth Tax was introduced on Aircraft, Yachts, Boats, Guesthouses and Motorcars owned
by companies in the year 1957. In line with the intention of the statute to tax luxury goods,
Motor vehicles have also been included in the list of luxury goods.
However, times have changed and motor vehicles are no more a luxury in the current
period. Infact, motor vehicles are a necessity and are used by businesses for even normal
everyday activity such as transportation of employees from and to the place of work or other
official duties.

Recommendation
Currently a deduction under Wealth Tax is allowable for motor vehicles only if they are let
out on hire or form part of stock-in-trade of the assessee. In view of the fact that motor
vehicles no longer can be considered as luxury goods, Government must extend the
exemption from Wealth Tax to ALL motor vehicles irrespective of the purpose for which it is
used.

11.13 Taxation of Hotel Industry
The Finance Act 2007 inserted section 80-ID whereby providing tax holiday for 5 years to
two star, three star and four star hotels and conventional Center (with a seating capacity of
not less than 3000) located in specified areas i.e. Delhi, Faridabad, Gurgaon, Gautam Budh
Nagar and Ghaziabad which started functioning any time between April 1, 2007 to March
31, 2010. This tax relief was given to speed up the infrastructure of hotel rooms needed for
the Commonwealth games in 2010.

Further the Finance Act 2008, extended this tax relief u/s 80-ID to 2/3/4 star hotels
established in specified districts declared as World Heritage Sites by UNESCO provided the
hotel is constructed and start functioning during the period during the period 1 April 2008 to
31 March 2013.

However, considering the high cost of land in and around Delhi, it may not be viable unless
one sets up five star hotels. Therefore the tax relief u/s 80-ID should be extended to Five
Star Hotels also with retrospective effect..

Under Rule 114B, PAN number is required for all payments exceeding Rs.25,000/- in hotels
and restaurants. Most parties’ pay by credit card and it becomes a huge problem to collect
PAN number in all instances. Therefore, it is suggested that the necessary PAN number
can be collected at the time of grant of credit cards and automatically the information can be
collated in a routine manner from credit card companies for expenditure above a stipulated
amount. The clause may be continued but its applicability can be restricted to hotels and
restaurants for only cash payments above Rs.25,000/-.



CII Pre-budget Memorandum 2010-11                                                          64
Recommendation
Relief under section 80ID should be extended to 5 Star hotels with retrospective effect.
Make PAN number mandatory for payments in hotels and restaurants for only cash
payments above Rs.25,000/-

11.14 Section-2(15) Charitable Institutions

The definition of “charitable purpose” as stated in the Finance Act 2008 may lead to litigation
and may affect genuine Charitable Institutions. The definition of “charitable purpose” in
Section 2(15) of the Income-tax Act 1961 includes the following proviso:-

“Provided that the advancement of any other object of general public utility shall not be a
charitable purpose, if it involves the carrying on of any activity in the nature of trade,
commerce or business, or any activity of rendering any service in relation to any trade,
commerce or business, for a cess or fee or any other consideration, irrespective of nature of
use or application, or retention, of the income from such activity.”

The net effect of the amendment may be that many of the genuine Charitable Institutions
who are rendering yeoman services in the country may be affected.

The word “business” connotes vide spectrum of activities. Various Courts in the country
including Apex Court has held that the meaning and effect of the word “business” is very
wide. Similarly, the words used in the above definition “any service in relation to any
business” has unlimited scope to rope in its ambit any activity carried on in organized
manner. These words namely, – “any service in relation to any business” may hit all
charitable activities being carried on by the Charitable Institutions
The existing provisions of section 11(4) and section 10(23C) of the Act permit the Charitable
Institutions to carry out businesses if same is incidental to the attainment of the main objects
and if separate books of account are maintained in respect of such business activities. The
amendment is in contradiction to the existing provisions
The various Charitable Institutions in the country even for providing relief to poor, education
and medical relief may also have mixed / multiple objects which are covered by the word
advancement of any object of general public utility. It is undisputed fact that Charitable
Institutions need funds to carry out charitable activities. Such Charitable Institutions to
garner funds for charitable activities carry out several activities like hiring out of space/
auditorium /building, selling of books, selling of medicines, publishing books etc. Without the
funds raising activities, the Charitable Institutions would not able to exist let alone carry out
charitable purposes.
The few charitable activities that may be affected by this amendment, for instance, are those
listed below:-
a) Charitable Institutions rendering services to Handicapped Persons
b) Charitable Institutions promoting craftsmen, artisans etc.
c) Charitable Institutions propagating Indian Music Art & Culture
d) Charitable Institutions running planetariums
e) Dharamshala/Guest Houses at Pilgrim Centers & Others
f) Charitable Hospitals
g) Charitable Schools \ Educational Institutions
h) Research Centers
i) Sports
j) Old Age Homes
k) Industry Associations




CII Pre-budget Memorandum 2010-11                                                             65
Recommendation
CII suggests that in view of enormous impact the definition may have on various charitable
activities carried by the Charitable Institutions in the country, the amendment in the definition
be dropped.
Taxation of Industry associations to be dropped

11.15 Reinstate / clarify tax holiday for exploration and production of natural gas

Section 80IB(9) of the Act (prior to Union Budget 2008 presented in the Parliament on
February 29, 2008), inter alia, provided for a seven year tax holiday for an undertaking
which begins commercial production or refining of mineral oil. However, the Memorandum
explaining the tax provisions in the Finance Bill, 2008 states that for the purpose of section
80IB(9) of the Act, the term ‘mineral oil’ does not include petroleum and natural gas. Clearly,
the observation in the Memorandum in relation to definition of ‘mineral oil’ for the purpose of
section 80IB(9) of the Act does not appear to harmonious with the for other sections (i.e.
Section 42, 44BB, 293A) of the Act dealing with E&P activities.
The seven (7) year tax holiday has been a feature for all NELP and CBM rounds. Domestic
and International companies have bid and won over 200 blocks in the last 10 years
assuming that the tax holiday was available irrespective of the find being oil or gas.

Globally, Petroleum always includes Natural Gas. This is consistent with the definition of
‘Mineral Oil’ in all the acts, viz., Oilfields (Regulation and Development) Act, 1948, Mines Act
1952, Mines and Minerals Act 1957, Oil Industry (Development) Act 1974.

The Petroleum Tax Guide, 1999 published by the Ministry of Petroleum and Natural Gas
clarifies that Production Sharing Contract (PSC) participants who begin commercial
production of petroleum in any part of India on or after April 1, 1997 shall be entitled to claim
deduction of 100 percent of their profits and gains derived from such business. The term
‘petroleum’ has been defined in the Tax Guide to mean crude oil and / or natural gas existing
in their natural condition but excluding helium occurring is association with petroleum or
shale.

The PSC for CBM operations defines CBM as ‘natural gas’, and, inter alia, mentions that
   ‘…the contractor shall be eligible for benefits under section 80-IB, as applicable from
   time to time’.

Further, the Union Budget 2009, without amplifying on the meaning of ‘mineral oil’, provided
income tax holiday in respect of natural gas production from blocks which are licensed under
the eighth round of NELP VIII and begin commercial production on or after April 1, 2009.
The issue of availability of tax holiday for natural gas production from pre-NELP and
previous rounds of NELP remains unresolved since the language of the earlier provision in
so far as use of the term ‘mineral oil’ remains unchanged.

Recommendation
In light of the foregoing, it is sought that the anomaly would need to be suitably addressed by
a clarification or subsequent amendment of the relevant provisions of the Act.

11.16 Changes in section 234C of the Income Tax Act (interest for deferment of
advance tax)
Section 234C of the Income Tax Act provides for levy of interest where there is shortfall in
any installment of advance tax actually paid vis-à-vis the installment of advance tax payable
as per the returned income.
The upstream Oil & Gas Sector is subject to daily swings in the international prices of crude
oil and the movements in the exchange rates of foreign currencies in addition to Government
CII Pre-budget Memorandum 2010-11                                                             66
directives on subsidy sharing with the downstream oil & gas sector. The daily swings in the
international prices of crude oil and the movements in the exchange rates for foreign
currencies make accurate estimation of annual revenues of upstream oil & gas companies
an almost impossible task. Moreover, Government directives on subsidy sharing with the
downstream oil & gas Sector are often issued during/after the end of the financial year after
some/all installments of advance tax have been paid. Thus, it is virtually impossible for
upstream oil & gas companies to estimate correct revenues for making advance tax
payments.

Situation mentioned above in addition to several other unpredictable factors leads to
difficulty in reasonable estimation of taxable profit and under estimation results in levy of
interest u/s. 234C for no fault of the upstream oil & gas companies. Hence, it is suggested
that oil & gas companies may be exempted from the rigours of section 234C or the rigours
may be relaxed by providing that no interest shall be leviable on shortfall of installment of
advance tax, if any, to the extent that such shortfall is attributable to either of the following
reasons:-

(a)      Fluctuations in the international prices of Crude Oil,
(b)      Movements in the Exchange Rates for foreign currencies,
(c)      Government directives on subsidy sharing.

Thus, no interest should be levied u/s 234C if the actual installment of advance tax paid falls
short, of prescribed percentages of tax liability as per returned income, owing to any one or
more of the aforesaid reasons.

Recommendation
Oil & gas companies may be exempted from the rigours of section 234C or the rigours may
be relaxed by providing that no interest shall be leviable on shortfall of advance tax provided
that 10%, 30%, 50% and 70% of the advance tax is deposited under respective installments.

11.17 Limited Liability Partnerships

There appear to be some contradictions and anomalies in the Finance Act 2009 and
Memorandum explaining the provisions in the Finance Act 2009 in relation to the taxation of
Limited Liability Partnership (LLP). These have been listed below:
1.    The Memorandum states that Limited Liability Partnership Act has come into effect in
      2009 and LLP Rules (except some rules dealing with conversion) and forms have been
      notified i.e. 1stof April, 2009. In fact the rules dealing with conversion were notified on
      22nd May, 2009 and came into force on 31st May, 2009.
2.    The definition of the terms ‘partner, ‘firm’ and ‘partnership’ have been substituted so as
      to define in the context of an entity registered under the LLP Act, 2008 in addition to the
      definitions in the context of a partnership formed under the Partnership act, 1932
3.    The Finance Act 2009 and the Memorandum explaining the provisions in the Finance
      Act 2009 is totally silent on the issue of tax implications on the conversion from a
      Company to LLP. As mentioned above, rules for such conversion under the Limited
      Liability Partnership Act 2009 were notified on 22nd May, 2009 and became effective
      from 31 May, 2009.
The most important point, which needs to be taken care off, is the insertion of provisions
relating to the tax liability, which can arise in the process of conversion of a Company into
LLP.
As the provisions dealing with conversion contained is Section 55, 56 & Second & Third
Schedules of LLP Act, 2009 have already been brought into force with effect from May 31,
2009, a large number of companies will get converted into LLPs during the current Financial


CII Pre-budget Memorandum 2010-11                                                             67
Year and tax liability, if any, will get attracted during the current financial year relating to
Assessment Year 2010-11.
The Second & Third Schedules of the LLP Act, 2009 contain provisions to the effect that all
movable and immovable properties of Companies will automatically become the assets &
liabilities of the LLPs by operation of law without further assurance, act or deed.
It has therefore become extremely essential that Income Tax Law must deal all the issues
arising from conversions, which are discussed below:-
(i)     Section 47 of Income Tax Act provides for exemption from capital gains in the case
        of mergers, demergers etc. It is essential that section 47 should contain a clause to
        the effect that conversion of companies into LLPs or conversion of general
        partnership firms into LLPs will not be treated as transfer for the purpose of section
        45 of the Income Tax Act, 1961.
(ii)    The Second most important provision which needs to be inserted is that the various
        benefits available for carry forward mentioned in section 72, 72A, 72AA, 72AB & 74
        of The Income Tax Act should be available to the converted entities subject to
        suitable safeguards.
(iii)   Section 115JAA of The Income Tax Act provides for tax credit in respect of tax paid
        under the Minimum Alternate Tax (MAT) Scheme. In all fairness, it is necessary that
        the converted LLP should be allowed to carry forward the benefit of unavailed tax
        credit of MAT, particularly now that the rate of MAT is being increased from 10% to
        15%. If it had been provided that the tax will be levied on the partners of LLP, it may
        have been difficult to give the benefit of carry forward of MAT. But now that it has
        been decided to levy tax on LLPs themselves and not on their partners. It is simple
        enough to allow the benefit of carry forward of tax credit of MAT to the LLPs.
Further, it is necessary to provide that the benefit of carry forward of losses and unabsorbed
Minimum Alternate Tax should continue be available to the LLPs converted as aforesaid,
subject to the overall limit in term of number of years.

11.18 Amendment required under the Income-tax Act relating to Amalgamation of
      Subsidiaries into Parent Company
By way of structural reorganization of business enterprises companies are often merged or
split up. Since 1991, Government started the process of reforms, which gave opportunity to
companies to dismantle their complicated structures created over the years, and move
towards simplified structures to conduct their businesses in an more open and transparent
manner.
Government supported companies to do so by enacting exempting provisions in the Income
tax Act to ensure that only real gains gets taxed which results from disposal of assets to
outsiders and not the notional gains arising from mere changes in ownership between
entities within the same group.
As per the earlier position, section 47 of the Income-tax Act provides for various exemptions
from capital gains on transactions not regarded as ‘Transfer’.

Supreme Court in its decision in case of CIT v. Rasiklal Maneklal(1989) 177 ITR 198/43
Taxman 259 decided in 1989 stated that since amalgamation does not involve transfer, it
does not attract any tax liability in the hands of shareholders of the amalgamating company.
This made reliance on clause (vii) completely unnecessary. After this decision, law stood
firmly established that on amalgamation, extinguishments of shares in the amalgamating
company did not result in any ‘transfer’ and hence, there was no question of any tax. Thus,
after this decision, the question of taxing the Parent Company on merging a subsidiary into
itself did not arise.
However this position was reversed after the decision in Grace Collis case. In 2001, a Full
Bench of the Supreme Court, in its decision in the case of CIT v. Mrs. Grace Collis (2001)
248 ITR 323, completely reversed the law established in Rasiklal Maneklal’s case. The
CII Pre-budget Memorandum 2010-11                                                            68
court did so taking into account the amendment made in section 2(47) of the Income-tax Act
which while defining the word ‘transfer’, included words ‘extinguishments of any right’ in its
ambit.
A parent company holds shares in the subsidiary and when the subsidiary gets merged into
it, the shares get extinguished and the assets of the subsidiary become the property of the
parent company.        In this situation, shares of the subsidiary get ‘transferred’, i.e.,
extinguished, not in consideration of allotment of shares in the amalgamated company, but
in consideration of the receipt of physical assets of the subsidiary by the parent company.
The parent company obviously cannot allot shares to itself. The parent company is,
therefore, treated as ‘exchanging’ its shares in the subsidiary with the assets of the
subsidiary.
Accordingly, in the case of such an amalgamation, the basic requirement of clause (vii) of
section 47 of the Income-tax Act does not get satisfied. The parent company will, therefore,
be liable to pay capital gain tax on the market value of the assets of the subsidiary as
reduced by the cost of shares in the subsidiary.
Even where a company, which is not a subsidiary, but in which amalgamated company olds
shares to the extent of say 40%, then capital gain tax will be attracted to the extent of 40%.
Thus, after the Supreme Court judgment in Grace Collis’ case, it has now become difficult for
a subsidiary company to merge into its parent company because in such situation its shares
gets extinguished as the parent company cannot issue shares to itself but instead takes over
the assets of subsidiary. Accordingly, condition laid down in clause 47(vii) does not get
satisfied. This also curtails simplifying structures by the corporate within the same group.
Government is considering simplifying mergers by amending the Companies Act to pave
way for contractual mergers specially in cases of mergers between parent and subsidiary as
well as mergers between two unrelated private companies where public interest is minimal.
This will only be possible only when necessary amendments is also carried out in the
Income-tax Act to remove the above anomaly.

Recommendation
it is recommended to add the following proviso to section 47(vii) of the Income-tax Act :

“Provided that in respect of shares held by the amalgamated company in the amalgamating
company, the transfer may be made in consideration of the receipt of assets from the
amalgamating company.”

11.19 Deduction u/s 80G to liberalize the exemptions by deleting ceilings specified.

There are many charitable institution all over India backed up by dedicated people servings
the cause of poor, downtrodden, handicapped- both physically and mentally, deserted
women, children orphans destitute and aged helpless people. Even though there are many
magnanimous donors who are willing to contribute to these humanitarian causes after
ensuring that their donations are properly utilized the overall ceiling of 10% of gross total
income u/s 80G impedes their way to contribute liberally and encourage more and more
institutions.

It is needless to mention that the Government alone cannot achieve the socialistic goal of
upliftment of downtrodden. Hence there is a need to encourage and nature these dedicated
service minded institutions. Since hundreds of institutions of this kind are in the field and the
willing donors with large heart being limited, it is but essential to remove the ceiling so that at
least the donors who want to serve the cause of humanity will not be tied up with such
artificial restrictions. This freedom may even induce then to be more generous in meeting the
requirement of these institutions.

In the context it is pertinent to note that the Income Tax Department has enough scope to
exercise control over these institutions while granting recognition issuing and renewal of IT
CII Pre-budget Memorandum 2010-11                                                               69
exemptions u/s 80G and lastly while assessing these institutions. The provisions of Section
11(5) relating to investment of their funds also work as a check to avoid misuse etc.

Recommendation
In view of the above, it is recommended that:
o The ceiling of 10% on gross total income removed.
o Donations of Chief Ministers Relief Fund be allowed 100% exemption as in the case of
    Prime Minister’s Relief Fund by deleting proviso a, b and c to Section 80G (2) (iii) of the
    Income Tax Act.

11.20 Exemption for CSR activities

As per 80G of the Income Tax Act, donations are exempted upto 50% only and upto 10% of
the profit.
It is recommended that exemption should be provided upto 100% if donation is for (1)
Education (2) Poverty Elevation (3) Health services to poor and needy people (4) Sanitary
infrastructure for Rural areas. This will go a long way in CSR activities in these very
important areas.
If a company has its own Foundation or Trust, it can do CSR activities in the Foundation
Trust. So 100% income tax exemption will help increase these activities.

11.21 Amendment to section 80JJA

The business of collecting and processing of bio-degradable waste is a new and developing
concept in India. The cost of capital investment in this sector is high as also getting finance
from banks is tough task. Further, the average break-even period in this sector is 5 to 6
years. It this therefore suggested to extend deduction under the section 80JJA to 10 years
from the existing 5 years

These amendments would benefit the nation in form of developing concept of processing
Bio-degradable, promoting clean energy and also benefit to the Small and medium scale
industries.

Recommendation
The deduction allowed u/s 80JJA to be extended to 10 years in place of existing 5 years.


11.22 Issuance of certificate for deduction of tax at source at lower rate under
section 197 of Income Tax Act.

As per the income tax Act, a certificate may be issued by the assessing officer for lower
deduction or non deduction of tax u/s 197 of income tax Act. The lower rate is determined
by virtue of rule 28AA of Income Tax Rules which provides for higher of the below two:

(i) average rate of tax as determined by the total tax payable on estimated income, as
     reduced by advance tax or tax already deducted at source: or
(ii) at the average of the average rates of tax paid by the assesses in the last three years.

A clarification is required in the application of rule as the assessing officers calculates the
average rate of tax paid on taxable income instead of calculating it on gross
receipts/turnover resulting in an average rate of tax @ 30% in almost all the cases, which is
apparently not the intention of the legislature.
Recommendation
For proper clarification on rule 28AA of income tax act keeping in view the practical aspects
of the ruling.

CII Pre-budget Memorandum 2010-11                                                           70
11.23 Omission of clause (e) sub section 22 of section 2 of the Income Tax Act, 1961
The provision of clause (e) of sub section 22 of section 2 were introduced way back in 1955
at the time, when dividend was taxable in the hands of the shareholders to curb tax evasion
on account of flow of funds from company to shareholders in the form of loans instead of
dividends.
Although provisions for taxation of dividend income has been radically amended as now the
company alone is liable to pay any tax on dividends under sections 115-O to 115-Q from
1997-98 @ 10-15% on the amount of dividend paid as such and the shareholders are
exempted from tax on the income by way of dividends but under section 2(22) (e) the
respective shareholders are liable to tax at normal rate of tax, which comes out to
approximately 34%
Therefore it is recommended to omit clause (e) from sub section 22 of the section 2 of the
Income tax Act,1961 w.e.f. 1988 which is causing unnecessary harassment to the assessee
and also to amend section 115-O accordingly so that there is no loss of revenue to the
department and the manipulation on the part of the assessee is also curbed. Alternatively, to
deem interest income on the advances given by the company to the share holder at
whatever rate the department feels fit and charge income tax for the same.

Recommendation
An appropriate remedial measures may be introduced by the CBDT with retrospective
amendment whereby if there are any loans or advances of long term nature which are not
being repaid to the company by the concerns in which shareholders have substantial
interested with a view to evade payment of dividend distribution tax, then that company
should be liable to pay the DDT on such deemed dividend or in alternative the company
should be deemed to have received interest at such rates as the authority may deem fit and
the company should be made to pay income tax on the same.

11.24 Taxation of gifts under section 56(2) as Income from other sources

If a property is gifted for free, donee will be taxed on the Fair Market Value (FMV) of the
property (in excess of Rs 50,000/-) u/s 56(2)(vii)(c). Subsequently, when donee sells the
property, he’ll be taxed as capital gains and the cost of acquisition will be taken as was in the
hands of the previous owner. There is no corresponding change made in the ‘cost of
acquisition’ formula, when donee has already been taxed at FMV upon gift received.

CII recommends that corresponding change should be made in the ‘cost of acquisition’
formula to provide that the FMV (at which donee has already been taxed u/s 56(2) upon
receipt of gift) would be adopted as the cost of acquisition for the donee. This amendment
may be along similar lines as has been done in case of section 49(2AA) for ESOPs to the
effect that their FMV would be considered as cost of acquisition.

Further in the case of immovable property, the amendment, leads to double taxation since
as per the provisions of section 50C, the transferor will have to pay tax on the shortfall in
consideration and under section 56(2)(vii), the transferee will have to pay tax on the same
amount.

In case of transfer of movable properties, the amendment would lead to a lot of practical
difficulties and consequent litigation since it would be very difficult to determine the ‘fair
market value’ for items like paintings, work of art, etc.

Recommendation
This section should be limited to taxation of ‘sum of money’ in specified cases. This is in line
with the original intention of introducing the erstwhile section 56(2)(v) in 2004. Alternatively,




CII Pre-budget Memorandum 2010-11                                                              71
o   In the case of transfer of immovable property, taxation in the hands of the transferee
    should be dropped as it leads to double taxation as the same amount is already taxed in
    the hands of the transferor under section 50C.

o   In case of movable property, some kind of safe harbour rules should be provided within
    which there should be no additional tax implications as also exclusion of transfer of
    specified assets of a minimum threshold value.

Further, amendment should also be made to the definition of the term ‘income’ under section
2(24) to include any sum

11.25 Taxability of exchange fluctuations to be aligned with Accounting Standards in
force

There is no specific provision in statute for treatment of exchange differences. To bring in a
specific provision in statute to allow Exchange losses / gains in line with Generally Accepted
Accounting Practices (Companies Accounting Standard rules, 2006) by which the section
43A becomes redundant. Allowing of substantial exchange losses would help the corporate
in reducing their tax burden and consequently the related cash outflow also. Clarity on
treatment will bring down the uncertainty in tax allowance and consequently litigation in this
regard.

11.26 Rule 8D– Method for arriving at expenditure incurred for earning exempt income

The introduction of Rule 8D has resulted in huge notional amounts getting disallowed. The
disallowed expenditure happens to be substantially higher than the actual expenditure
incurred to earn the exempt income. It is recommended that the rule 8D should be removed
or the disallowance needs to be restricted to 5% of exempt income.




CII Pre-budget Memorandum 2010-11                                                          72
12.    INDIVIDUAL TAXATION
12.1   Levy in Personal Income Tax

The Union budget for 2009-10 had increased the threshold tax exemption limit for all
assessees i.e. for women the threshold limit has increased to Rs. 1,90,000/-, for senior
citizen to Rs. 2,40,000/- and others to Rs. 1,60,000. Though this move was highly
appreciated by the individual tax payers, however, the increase in the basic exemption limits
are too low and need to be increased by at least Rs. 50,000 so as to boost the consumption
demand in the economy and counterbalance the economic slowdown. Due to the increasing
rate of inflation, people are unable to meet their basic necessities of life.

It is recommended that the exemption limit be further increased by Rs. 50000 and instead of
reducing the tax rate by 5%, slab limits should be revised keeping in view the proposed
Direct Tax Code Bill. Such a significant contribution would create buoyancy in the economy.

Recommendation
To encourage more consumption and saving in the economy the personal income tax
exemption limit should be further increased by Rs. 50000 and slab limits should be revised.


12.2            TDS on Salary - Section 192
With the Indian companies handling increasing volume of software, engineering and back
office operations for foreign clients, a significant volume of onsite work (i.e. work at overseas
client locations) is also being undertaken. This in turn triggers foreign income tax liabilities for
Indian personnel deputed for executing onsite jobs. The existing provision allows employees
to consider credit for foreign personal taxes in determining their final Indian tax liability.
Similarly inbound expatriate employees who become ordinary residents in India may also
claim credit of taxes paid in foreign countries.
However, a circular issued by CBDT under section 192 does not allow employers to consider
credit for foreign personal taxes in determining taxes to be withheld from the employee’s
salary in India. Inability to consider credit for foreign personnel taxes at the tax withholding
stage results in additional deduction of tax, which can only be claimed back by employees by
way of a refund through their personal tax returns.

Recommendation
Requirement to claim back excess withholding tax by way of refund claims leads to
significant cash flow constraints for employees, since refunds generally takes a long time
after the initial tax deductions and in many of the cases by that time the employees usually
left the country and closed their bank accounts in India. CII feels that a necessary
clarification needs to be issued to permit employers to consider credit for foreign taxes in
determining taxes to be withheld from the employees’ salary in India.

12.3   Retirement Funds

As per rule 87 of the Income Tax Rules, the employer is permitted to make a total
contribution not exceeding 27% of the employee’s salary in respect of Provident Fund and
Superannuation. Further, as per schedule IV of Part A Rule 6 of the Income Tax Act, the
employer is permitted to contribute upto 12% of the employee’s salary in respect of
Recognized Provident Fund. In other words, the Income Tax Law permits contribution upto
15% for Superannuation and 12% for PF.
In the context of the current rates of interest and the high cost of annuities, it is suggested
that the limit of 15% for Superannuation should be, increased especially since pensions are
taxable in the hands of the employees at the time of receipt.

Recommendation
CII Pre-budget Memorandum 2010-11                                                                73
It is suggested that the limit of 15 per cent for Superannuation Fund should be increased. In
fact, employers should be encouraged to increase the quantum of contributions to ensure a
proper annuity / pension for the employees. .

12.4   Raising Exemption Limit in respect of Medical Expenses
Existing limit for exemption in respect of ordinary medical expenses reimbursement on the
treatment of the employee or treatment of any member of his family is Rs.15, 000 per year.
This limit is very low with regard to the exorbitant cost of medicines and cost of medical
treatment.

Recommendation
In order to enable employees to avail quality healthcare services the limit prescribed under
section 17(2) of the Income tax Act for medical treatment should be raised to Rs.50, 000.
Also, today only an employee in the organised sector is benefited from the above deduction.
However, large mass of employee in the unorganised sector and other section of the society
are left out. To encourage better medical facilities for the growing population this deduction
should be allowed to all section of the society including senior citizens whether employed or
not.
The prescribed diseases and ailments, which are covered under the Income Tax Act, need
to be revised and the hospitals recognised by the Government need to be expanded.

12.5   Raising Exemption Limit in respect of Conveyance Allowance
The existing exemption limit in respect of an allowance granted to the employee to meet his
expenditure for the purpose of commuting between the place of his residence and the place
of his duty is Rs.800 p.m. This limit is too low with regard to the present day costs of
commutation and running and maintenance of the vehicles.

Recommendation
Keeping in mind the cost of commuting and running and maintenance of vehicles, CII
suggests that this limit should be increased to Rs.2000 per month.


12.6    Exemption u/s 10(10C) for VRS Payments
Payments are made to employees in accordance with VRS Scheme made in accordance
with Rule 2BA of the Income Tax Rules. The payments made under the VRS Scheme are
exempt upto Rs 5 lakhs under Section 10(10C) (hereinafter called Scheme A).
The exemption limit of Rs.5 lakhs under Section 10(10C) was fixed quite long back taking
into account the then existing salary limits and the sufficiency of such an exemption limit in
those days.
In view of the present day salary earnings and the need for adequate retirement
compensation in the retired employee’s hands to lead a normal retired life, the exemption
limit of Rs.5 lakhs, in the present days is low. With such a low exemption limit, the voluntary
retirement schemes become unattractive from the employees’ point of view and introduction
of such schemes prove purposeless.

Recommendation
In the interest of the employees as well as to make the schemes attractive and purposeful,
there is a need for hike in the exemption limit to at least Rs.10 lakhs under Section 10(10C).




CII Pre-budget Memorandum 2010-11                                                           74
12.7   Section 80C
For rationalisation of tax savings and move toward exempt- exempt-taxed system of taxation
benefits provided under section 88, section 80 L of the Act have been withdrawn, and new
section 80 C has been introduced via Finance Act 2005, which allows individuals and HUF
are allowed deduction from their income the investment in LIC, PF, PPF, subscription in
certain debentures/share, etc to the max limit of Rs.1 lac.
The Finance Act 2008 has though widened the cover of investment u/s 80C by including
Seniors Citizen saving Scheme2004 and Post office Time deposit but not changed the
investment limit. It is recommended that the threshold limit of deduction should be increased
to Rs. 2,00,000/- as against existing limit of Rs. 1,00,000/-

Recommendation
To encourage savings the limit allowed u/s 80C to Individuals and HUF should be increased
from Rs.1 lakh to 2 Lakhs.


12.8   Standard Deduction
Standard Deduction for salaried employees has been withdrawn from the assessment year
2006-07. The purpose of giving standard deduction was to allow for the reasonable
expenses incurred by an employee in earning his salary. A deduction of expenses incurred
for earning of income is also permissible under the heads “Profits and Gains of business and
profession” and “Income from other sources”. There is no logical reason for discontinuing
such a deduction in the case of “Income from salaries”. Hence standard deduction should be
restored.
Recommendation
To restore Standard deduction so as to cover the cost of expenses incurred in rendering the
services


12.9   Value of Rent Free Quarters provided by company (VRFQ)
In the Finance Act, 2007, changes were brought about in respect of the perquisite value for
rent-free accommodation and concession in the matter of rent. Explanations 1,2,3 and 4 were
inserted under section 17(2) for clarifying the said perquisite value. However, this clarification
has been only restricted to “concession in the matter of rent”. The specified rate for such
perquisite has been stipulated under Explanation 4, which states that the same shall be-
“(i)   Fifteen per cent of salary in cities having population exceeding twenty-five lakhs as per
       2001 census;
(ii)   ten per cent of salary in cities having population exceeding ten lakhs but not
       exceeding twenty five lakhs as per 2001 census; and
 (iii) Seven and one-half per cent of salary in any other place;”
The above change has created confusion in respect of the determination of the perquisite
value under section 17(2)(i) for “the value of rent free accommodation” provided by the
employer. This appears to be an unintended error since obviously this should be the same
as the “specified rate” under the above mentioned Explanation 4. However, this matter
needs to be clarified urgently by the CBDT to avoid confusion/disputes and unnecessary
harassment for the assesses/employers. The clarification should be made effective
retrospectively
Recommendation
It has been absolutely necessary for the CBDT to issue the circular that the perquisite
valuation was applicable both for rent free as well as concessional accommodation.




CII Pre-budget Memorandum 2010-11                                                             75
12.10 Section 80L for bank interest etc.
All individuals normally have money in bank accounts, which earn interest at a very
conservative rate. This interest income, alongwith some other stipulated items like post
office deposits, etc. were earlier given the benefit of tax deduction under section 80L to the
extent of Rs.12,000/-. This benefit was withdrawn in 2005 and has created unnecessary
hardship to individuals along with related complications like payment of advance tax.
Recommendation
Tax benefit under section 80L should be re-introduced, with minimum limit up to Rs. 25,000
which would lead to increase in saving by individual assesses.

12.11 Deduction for vehicle loans
Vehicles have become a necessity and remained no more a status symbol or luxury goods.
Rebate similar to house building activity could be considered for vehicle loans for individuals
especially for environment friendly vehicles as this would help in boosting demand for such
vehicles.

Recommendation
A deduction similar to Housing Loan under the personal income tax should be granted for
the environment friendly car & two wheeler loans.

12.12 Voluntary Retirement Scheme

An important change in the Income Tax Act in the Budget 2009-10 that has hurt the salaried
employees taking VRS. Under the voluntary retirement scheme, the retiring employee
receives lump-sum amount in respect of his balance period of service. Such amounts are in
the nature of advance salary. Clause (10C) of section 10 provides for an exemption of Rs. 5
lakhs in respect of such amount. This exemption is provided to mitigate the hardship on
account of bracket creeping as a result of the receipt of the amount in lump-sum upon
voluntary retirement. Further, the provision of section 89 provides necessary deduction
benefit to VRS.

The Union Budget 2009-10 amended both sections 10(10C) and 89, wherein the deduction
under section 89(1) and exemption under section 10(10C) cannot be availed for the amount
received / receivable at the time of availing VRS.

The budget inserted a proviso to section 89 to provide that no relief shall be granted in
respect of any amount received or receivable by an assessee on his voluntary retirement or
termination of his service, in accordance with any scheme or schemes of voluntary
retirement or in case of a public sector company referred to in sub-clause (i) of clause (10C)
of section 10, a scheme of voluntary separation, if an exemption in respect of such voluntary
retirement or termination of his service or voluntary separation has been claimed by the
assessee under clause (10C) of section 10 in respect of such, or any other, assessment
year.

Correspondingly, it is also inserted a third proviso to clause (10C) of section 10 to provide
that where any relief has been allowed to any assessee under section 89 for any
assessment year in respect of any amount received or receivable on his voluntary retirement
or termination of service or voluntary separation, no exemption under clause (10C) of section
10 shall be allowed to him in relation to such, or any other, assessment year.

Recommendation
The relief provided u/s 89 and the exemption u/s 10(10C) operate in different fields.
Consequently, a qualifying assessee should be entitled to both these benefits.


CII Pre-budget Memorandum 2010-11                                                           76
12.13 Review of ceiling of Income Tax exemption on payment of gratuity
Payment of gratuity is governed by The Payment of Gratuity Act, 1972, which makes it
obligatory for the employer to pay a minimum amount of gratuity to employee on fulfillment of
certain conditions. The Act also provides an upper limit on such obligation of the employers
and hence employer has an option to limit the payment of gratuity to the ceiling so provided.
Government has from time to time keeping the economic and other factors like inflation
revised this ceiling. Recently government has recommended an increase in the current
ceiling of Rs 3,50,000 to Rs 10,00,000. It is recommended that keeping the inflation and
other economic factors in mind the income tax exemption of Rs 3,50,000 on gratuity
payments should also be increased to Rs 10,00,000 under section 10(10) of the Income-tax
Act.
Recommendation:
The income tax exemption on gratuity payments should also be increased from Rs 3,50,000
to Rs 10,00,000.




CII Pre-budget Memorandum 2010-11                                                         77
13. PROCEDURAL ISSUES
13.1   Differentiating between Business Income and Investment Income
The CBDT had issued draft supplementary instructions for the Assessing Officers (AO) to
determine whether a person’s income should be taxed as business income or as income
from investment. It had given 15 points criteria to consider distinguishing a trader from an
investor. Given the extremely subjective criterion proposed for differentiating such income,
the new amendment has lead to significant and severe problems and unwarranted hardship
and harassment of assessees. Even the subsequent circular issued in June 2007 is
subjective and gives the broad guidance to the assessing office based on the judicial
decisions for differentiating between business income and investment income.
Presently, in case of investors if the gains made from the investment fall under the head of
“capital gains”, there is a concessional rate of tax applicable for transactions conducted
through the stock exchange. The short-term capital gains rate in such a situation is at 15%
and long-term capital gains at 0%.
The tax concessions were specifically given to encourage the mobilization of domestic
resources into the capital markets to aid the growth of the economy. However, with the
circular, there is considerable confusion and almost all investors would potentially run the
risk of being taxed as “traders” given the criteria indicated which may result in gains being
taxed from a probable 0% for long-term capital gains to over 30% when this is classified as
income from “business”.
A huge majority of investors buy securities with the object of ultimately selling the same for
profit at some stage and clearly this should not qualify them as “traders”. Introducing totally
subjective criteria like intention, scale, time of holding, etc has created unwarranted
confusion especially when the government is committed to making compliance easier and
tax laws simpler.
CII found that certain criteria’s suggested by the CBDT was vague and unworkable for a
number of reasons such as following:
(a) Norms are Subjective: The norms mentioned in the circular for differentiating between
    traders and investors are not scientific. The AO will be the deciding authority whether
    the income is trading or investment based on the facts of the case. For instance, despite
    the norms categorically stating that the AO will look at the ratio of sales to purchase and
    whether transactions are entered into regularly, it is finally left to the AO to determine
    what ratio will be suitable to classify an income as trading or investment. This is going to
    give excessive discretionary power with the tax authority and hence may lead to its
    misuse, harassment of the assessees and potential corruption.
(b) There is no time criterion: To avoid any ambiguity there is no specific clarification that
    investments held for even more than a particular period would not be taxed as income
    from trading activity.
(c) The scale criterion is not desirable: The “scale” of business activity is not an
    appropriate criterion at all to decide on whether income is from “trade” or “investment”.
    Large investors run the risk of being considered traders. Similarly, small-scale traders
    may get the advantage of being considered as investors.
(d) Increase in Litigation: The norms mentioned in circular would lead to sharp increase in
    litigation in view of high subjectivity involved with the assessment. The companies would
    also have tendency to spend more in seeking advise from tax experts to take advantage
    of the lack of objective criteria in tax rules to determine the nature of income.
(e) Small Investors would be discouraged: The individual investors are an important part
    of the stock markets. Once their income starts getting considered as business income
    and being taxed at high rates, they would begin to withdraw from the stock market. For
    such small investors, even a small change in returns on their investments influences
    their investment decisions greatly.


CII Pre-budget Memorandum 2010-11                                                            78
Recommendation
Certain objective criteria of differentiating between the income of a trader and investor
should be introduced. Some ways to do that could include:
An objective criterion like 90-day holding period for defining stock-in-trade versus
investments could be looked at. Similar provision already exist u/s 94(7) of the IT Act in
relation to purchase and sale of securities.
Any distinctions that are sought to be put in place should not be retrospective or scale
related.
Most importantly, there should be no room for any AO using discretionary powers, taking
advantage of any subjectivity in any of the criterion.

13.2 TDS statements
In the present scenario, the compliance with the provision of return filing of TDS is
considered to be the most tedious job. Every assessee is required to file 12 Quarterly
statements for TDS (4 statements for tax deducted on salary, 4 statements for tax deducted
on payments other than salary, 4 statements for tax deducted on payments made to foreign
company and non-residents and 4 statements for TCS) and 1 Annual statement. Moreover
the return forms to be filed are very detailed asking for the details of each of the
employees/vendors. This becomes very complicated in case of a big organization having
employees in thousands. Sometimes assessee ends up with the compliance of TDS
provision for the whole of the year.
Hence, filing of TDS statements should be made more user friendly .

13.3   Delays in Implementation of Orders of Higher Authorities
It has been observed that significant delay occurs in giving effect to the orders of the
Commissioner of Income Tax (Appeals), Income Tax Appellate Tribunals or High Courts
order by the assessing officer (AO), particularly in case of refund / relief. Substantial
amounts of money payable to assessees are withheld by the department, which places
taxpayers in great liquidity problems, particularly while paying advance tax installments.
Though section 244A provides for payment of interest at 6 per cent per annum for delay in
grant of refund, no time limit has been prescribed within which the refund is to be granted. At
times it has been observed that though the assessing officer grants the interest, no refund
order is given to the assessee. Or refund order is issued to the assessee after a long time,
for which no interest is allowed to the assessee.

Recommendation
Specific provision should be made in the tax laws so as to make the assessing officer
accountable for unnecessary delays in giving effect to the orders of the higher authorities.

13.4   Delays in Appeals before the Commissioners / Appellate Tribunals
In case an appeal has been preferred by the assessee or by the department before the
commissioner (Appeals) or before the Appellate Tribunal, there is a feeling that cases are not
taken up within the specified time limit for deciding the appeal. This is so because sections
250(6A) / 254(2A) state that CIT (A) / ITAT, wherever it is possible may hear and decide the
appeal within a period of one / four year(s) respectively from the end of the financial years in
which such appeal is filed. Most of the time, the ‘wherever it is possible’ proviso is implicitly
used not to settle cases within the stipulated time period, causing unnecessary hardship to
the assessees in terms of cost and time.
In the intervening period between the filing of the appeal and disposal of the matters by the
Appellate Authority, the assessee may be is mandatorily required to make part payment of
the tax demand for obtaining stay for that relevant assessment year. In addition to the
demand raised in the first year of disallowance, the assessing officer continues making

CII Pre-budget Memorandum 2010-11                                                             79
disallowance / additions for similar issues for all the subsequent years, which in turn requires
part payment of tax demand to obtain stay pending final disposal of appeal. Till the time the
assessee succeeds in appeal, the funds are locked up.
Though the legislature has introduced statutory provision emphasizing accountability of the
authorities for speedy disposal of appeals, CII feels that in the absence of any defined
prescribed timeframe for disposal of appeals, the proceedings tend to continue for long
periods of time. Such prolonged litigation results in locking up of funds and high litigation
costs for the assessee.

Recommendation
The existing provision for dealing with appeal cases has to be amended so that it is possible
to deliver justice within a stipulated time period. The mechanism to give an opportunity to the
assessee to present its case before a higher authority should not be diluted by time
overruns.

13.5   Interest on Refunds
Section 244A of the Act provides that where refund of any amount becomes due to an
assessee under this Act, he shall, subject to the provisions of this section, be entitled to
receive, in addition to the said amount, simple interest thereon calculated in the specified
manner. The manner specified for calculation of interest refers to interest only on refund out
of any tax collected at source or paid as advance tax or to payment of tax or penalty.

Though the main section provides for payment of interest on refund of any amount, the
“specified manner” for calculation refers to interest only on amounts of tax and penalty. The
Income Tax Department has taken the view that no interest can be allowed on refund of any
interest collected earlier from the assessee which is later found to be not chargeable or in
excess of the interest correctly chargeable. This leads to an assessee losing interest on the
amount of interest wrongly collected and being refunded. Even though courts have ruled
against the Income Tax Department in several cases, the assessees are still being denied
the interest on their money wrongly collected as interest by the Income Tax Department in
several cases. Therefore, it is felt that a clarificatory amendment may be made to section
244A to the effect that interest would be allowable not only on refunds of tax and penalty but
also of interest. This would lead to justice and avoidance of unwarranted litigation.

Further, Taxation Laws (Amendment) Ordinance, 2003 has reduced the rate of the interest
payable by the Government on tax refunds from the existing 8 per cent per annum to 6 per
cent under section 244A. On the other hand, interest payable by the taxpayer under section
234A / 234B and 234C to the Government has been also reduced from 15% p.a. to 12% p.a.
However this rate of 12 per cent, which is simply double the rate of interest on tax refunds. In
the current scenario where the real interest rate has significantly fallen, there is an
immediate need to bring it down.

Recommendation
(i) To amended section 244A allowing interest not only on refunds of tax and penalty but also
on interest collected earlier from the assessee, which is later found to be not chargeable or
in excess of the interest correctly chargeable.
(ii) The rate of interest should not be used as a mechanism by the Government to impose
additional penalty on the assesses. CII believes that the rate of interest payable by the
assesses should also be reduced to 6%, p.a. so that there is a uniform rate of interest both
for refund and tax due payable by the Government and assesses respectively.
Also, the interest receivable from the Government is further taxed as an income, while
interest payment by tax payers is not allowed as a deductible expense. This is clearly
asymmetric.


CII Pre-budget Memorandum 2010-11                                                            80
13.6   Alignment of Tax Provisions with Accounting Provisions
There are certain items which are dealt in by the tax and accounting provisions differently.
Recommendation
a)     AS per the accounting provisions, VRS expenditure is being amortized over a period
of 3 years. However, under the provision of Income tax, amortization is being done over a
period of 5 years. Now, to reduce this ambiguity and to bring both of these provisions under
the same platform. The changes can be brought in Income-tax Act to align with the
accounting provision.
b)      Accounting Standard – 28 prescribes that where the carrying amount (WDV) is
higher than the recoverable amount of an asset then the difference is to be recognized as
impairment and charged to P&L account. (Recoverable amount taken into account by
internal / external sources of information / cash flow expected to generate, etc.)
However under the Income-tax purposes, there is no such provisions similar to impairment
provision. Hence even if the asset has recoverable amount far lesser than its Tax WDV, still
depreciation can be claimed only over next few years based on depreciation rates. Since the
concept of block of assets is in existence, impairment provisions may be brought in based on
WDV that would have been allowable.
c)     As per the provision of Sec.36(1)(iii) of the Income Tax Act, in case of capital
borrowed for extension of existing business or profession any amount of interest paid for the
period from the date on which capital was borrowed for acquisition of the asset till the date
on which such asset was first put to use is not allowed as deduction.
However, the provisions relating to the treatment of interest on capital borrowed as per
Accounting Standard -16 differs from the provision of Income tax. AS 16 specifies that in
case of the assets which take substantial period of time to get ready for its intended use are
to be capitalized and others needs to be charged off to P&L account.

13.7   Passing of penalty orders
As per section 275(1A) any order of imposing or enhancing or reducing penalty will be
passed within six months from the end of the month in which the order of Commissioner (A)
or Appellate Tribunal or High Court or Supreme Court is passed.
The assessee will not be put to the burden of penalty before getting a chance to plead the
case before a different judicial forum.

Recommendation
The order of penalty should be passed only after the decision of highest authority, whenever
the assessee preferred an appeal before the higher authority.

13.8   Increase participates in commodities futures market
Banks may be permitted to participate in commodities futures market to ensure greater
participation in the commodity market for providing risk management services to the farmers,
processors, exporters etc, particularly in the rural areas.

Similarly, Foreign Institutional Investors (FII) and Mutual Funds (MF) may be permitted to
participate in commodities futures Exchanges so that large physical market users get strong
and large counterparty to take the risk from the physical market. Their participation will bring
greater liquidity and better services to farmers and other market participants.

Recommendation
Allow Banks, FII and mutual funds to participate in Commodity futures market


CII Pre-budget Memorandum 2010-11                                                              81
13.9 (a) Providing consequences of Non-disposal of rectification Applications under
Section 154 of Income Tax Act

Section 154(7) of the Income Tax Act specifies a time limit of four years for making
amendments to orders for rectification of mistakes apparent from records. This time limit is
reckoned from the end of the financial year in which the order sought to be amended was
passed. However, it is seen that, in a large number of cases, the assessing officers simply
do not dispose of an assessee’s application under section 154 for years together, which
results in loss to the assessee. Apparently to overcome this problem, a new sub-section (8)
was inserted in section 154 by the Union Budget, 2001, to provide that an application made
by the assessee under this section would be disposed off within a period of six months.
However, the consequences that would arise if the application so made is not disposed off
within six months have not been spelt out. Therefore, it is felt that it should also be provided
in the said sub-section (8) of section 154 that if the income-tax authority does not dispose off
the application made to it within six months, the application shall be deemed to have been
allowed.
Recommendation
Section 154(8) of the Act should provide that in case the Income-tax authority does not
dispose off the application for rectification of mistake in the records made to it within six
months, the application shall be deemed to have been allowed.


(b)    Providing a time limit for and consequences of Non-disposal of Applications
       under section 195(2) of Income Tax Act for determining proportion of profits of
       non-residents

Sub-section (2) of section 195 of the Income Tax Act provides that where a person
responsible for paying any sum chargeable under this Act to a non-resident considers that
the whole of such sum would not be income chargeable in the case of the recipient, he may
make an application to the Assessing Officer to determine the proportion of the sum so
chargeable and that when the Assessing Officer makes such determination, tax shall need to
be deducted only on such proportion. However, no time limit for disposal of the application,
or the consequences if the application is not disposed of within a reasonable time by the
Assessing Officer, has been specified.

As delay in payments to non-residents (while awaiting determination by the Assessing
Officer) not only makes the Indian payer liable to interest but could also make non-residents
charge a higher consideration for their future services which would be detrimental to the
national interest, it is felt that a reasonable time limit, say a maximum of 2 weeks should be
specified within which the Assessing Officer should pass the order making the determination.
Simultaneously, to ensure that the Assessing Officers adhere to the time limit, the
consequences that would arise if the application is not disposed off within the stipulated time
limit, also need to be spelt out. Therefore, it is felt that it should also be provided in the
section 195 that if the Assessing Officer does not dispose off the application made to him
within the stipulated time limit, the application shall be deemed to have been allowed as
prayed therein by the payer.

Recommendation
Section 195 of the Act should provide that in case if the Assessing Officer does not dispose
off the application filed before it for determining of Profit of Non resident chargeable to tax,
within the reasonable time period, the application shall be deemed to have been allowed as
prayed therein by the payer.




CII Pre-budget Memorandum 2010-11                                                            82
13.10 Stay of Demand

Subsequent to the completion of assessment the department officials start insisting for
payment of the demand determined in the Assessment Order. It is matter of common
knowledge that assessments are completed by considering all the disallowances in the
earlier years. The Assessing Officers disregard the favourable decision of the Appellate
authorities on the ground that the Income-tax department has preferred an appeal before the
higher authority. However, as regards the payment of tax demand, the department officials
expect the assessee to make payment of the entire demand irrespective of the outcome of
such issues in earlier years. Applications preferred for stay of demand are disposed of by
the Assessing Officers following the department’s internal instruction No.1914 / 1993 dated
2.12.93. As per this internal instruction of the department the plea for stay of the assessee
is considered only if a high court decision is available on the issue. No cognizance is taken
in respect of ITAT decision pronounced on the issue. It has been a matter of common
experience that on one hand the decision of ITAT is disregarded even for stay of demand,
adverse decision of ITAT is immediately applied by the department authorities in disallowing
the similar issue while completing the assessment. [Decision in case of M/s. Daga Capital is
a specific example].

Recommendation
For the purpose of stay of demand the Assessing Officer should be directed to take
cognizance of ITAT decision available as on the date of deciding the stay application. The
present practice of considering only the High Court decisions is against the principle of
natural justice. Further, all the guidelines in this regard should be clarified by way of a CBDT
Circular instead of internal departmental instructions.

13.11 Section 147 related to Income escaping assessment

The existing provisions of section 147 provides, inter alia, that if the Assessing Officer has
reason to believe that any income chargeable to tax has escaped assessment for any
assessment year, he may assess or reassess such income after recording reasons for re-
opening the assessment. Further, he may also assess or reassess such other income which
has escaped assessment and which comes to his notice subsequently in the course of
proceedings under this section.

Some Courts have held that the Assessing Officer has to restrict the reassessment
proceedings only to issues in respect of which the reasons have been recorded for
reopening the assessment. He is not empowered to touch upon any other issue for which no
reasons have been recorded.

Industry has been constantly demanding that if the assessee has made full and true
disclosure of all material facts necessary for the purpose of assessment of his income, the
Assessing Officer should not be allowed to reopen the assessment u/s 147 of the Act without
bringing on record any fresh facts, evidences or reasoning in support.

However, the Finance (No. 2) Act, 2009, with a view to further clarifying the legislative intent,
inserted an explanation in section 147 to provide that the assessing officer may assess or
reassess income in respect of any issue which comes to his notice subsequently in the
course of proceedings under this section, notwithstanding that the reason for such issue has
not been included in the reasons recorded under sub-section (2) of section 148. This
amendment will take effect retrospectively from 1st April, 1989 and will, accordingly, apply in
relation to assessment year 1989-1990 and subsequent years.

This amendment has made the existing provisions of Section 147 more complicated rather
than simplifying it. Further, it could also lead to arbitrary opening of IT returns filed years
ago, and undue harassment to tax payers.

CII Pre-budget Memorandum 2010-11                                                             83
Recommendation
In order to avoid unnecessary harassment of taxpayers in the hand of authorities, CII
suggests amendment to section 147 may altogether be dropped.

13.12 Difficulties in Withholding Tax Compliances on Foreign Remittances

As per the new procedure introduced with regard to foreign remittances to be made,
following steps are require to be followed

i.  Remitter is required to furnish to the income-tax authorities, the information in Form No.
    15CA, verified in the manner prescribed and
ii. Remitter is required to obtain a certificate from a Chartered Accountant in Form No.
    15CB. This certificate would be required to be submitted with the authorized dealer
    (bank) along with other documents at the time of making remittance to abroad.

These steps are to be followed in case of each of the foreign remittance to be made without
considering the nature of such remittance or the amount involved. This lead to the
procedural delays, complexities in compliance and unnecessary waste of resources.
Keeping in view the practical difficulties faced in complying with these provisions, certain
new amendments given below which may be considered to make it simpler.

1. The Form 15 CA (i.e. online undertaking to the Income-tax authorities) can be
   considered to be made a periodic return (Monthly/ Quarterly), rather than a daily
   requirement at individual transaction level.
2. A threshold limit may be introduced to give relief to the person making the small
   remittances.
3. A exemption clause can be introduced to give relief to those who are making remittance
   for the personal purposes.
4. Collation of Form 15 CA & 15 CB at each transaction level leads to waste of human
   resources and additional cost at all levels – Corporates, Professionals, Banks, Income
   Tax Department etc.
5. There are certain shortcomings in the current Form 15CA. These are being elaborated
   below:-
   i.      Form 15 CA requires undertaking with regard to withholding taxes in respect of
           Import remittances. This should be deleted, as import simplicitor can never be
           subjected to withholding taxes. There is a major discomfort among banking &
           corporate fraternity with regard to relevance of this requirement.
   ii.     Currently all the basic details viz. Company name and other particulars are to be
           mentioned every time. There should be registration of remitters for making the
           remittances. Thus when the remitters logs in, he has the basic info already filled
           in.
   iii.    The Form 15 CA should be available off-line. Remitter should be able to compile
           the data, check it and then upload it on the website. Currently the form has to be
           filled up online & uploaded immediately in the same session. This will only
           improve the quality and reliability of information supplied by the remitter.
   iv.     There should be a residuary clause /blank field to mention the purpose of
           remittance in the form. Currently there are over 60 clauses of purpose of
           remittance, but it does not include the very common remittances like “Capital
           Investments” and “Legal Fee”.

The aforesaid recommendations shall reduce the operational cost of making the remittances
and improve the quality of control with revenue authorities with more accurate and relevant
data.



CII Pre-budget Memorandum 2010-11                                                          84
13.13 Insertion of Section 293C – Power to withdraw approvals

Under many existing provisions of Income-tax Act, while an approval is required to be
granted by income-tax authority for availing of various incentives by assessee, there is no
specific provision containing power of withdrawal. In order to provide explicit provisions for
power to withdraw of approval, Finance Act 2009 has inserted a new section 293C to
provide that an approval granting authority shall also have the powers to withdraw the
approval at any time.

Recommendation
There is no enabling provision to permit the assessee to file appeal against the order
passed for withdrawal of the approval and accordingly, a suitable amendment is required.




CII Pre-budget Memorandum 2010-11                                                          85
                                  Confederation of Indian Industry

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the
growth of industry in India, partnering industry and government alike through advisory and consultative
processes.


CII is a non-government, not-for-profit, industry led and industry managed organisation, playing a
proactive role in India's development process. Founded over 114 years ago, it is India's premier
business association, with a direct membership of over 7800 organisations from the private as well as
public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 companies from
around 385 national and regional sectoral associations.


CII catalyses change by working closely with government on policy issues, enhancing efficiency,
competitiveness and expanding business opportunities for industry through a range of specialised
services and global linkages. It also provides a platform for sectoral consensus building and
networking. Major emphasis is laid on projecting a positive image of business, assisting industry to
identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the
country carry forward our initiatives in integrated and inclusive development, which include health,
education, livelihood, diversity management, skill development and water, to name a few.


Complementing this vision, CII's theme for 2009-10 is 'India@75: Economy, Infrastructure and
Governance.' Within the overarching agenda to facilitate India's transformation into an economically
vital, technologically innovative, socially and ethically vibrant global leader by year 2022, CII's focus this
year is on revival of the Economy, fast tracking Infrastructure and improved Governance.


With 64 offices in India, 9 overseas in Australia, Austria, China, France, Germany, Japan, Singapore,
UK, and USA, and institutional partnerships with 213 counterpart organisations in 88 countries, CII
serves as a reference point for Indian industry and the international business community.




                                   Confederation of Indian Industry
                                       The Mantosh Sondhi Centre
                     23, Institutional Area, Lodi Road, New Delhi – 110 003 (India)
                             Tel: 91 11 24629994-7 • Fax: 91 11 24626149
                                 email: ciico@cii.in • Website: www.cii.in

        Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244
                           CII Helpline Toll free No: 1800-103-1244

				
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