Вы находитесь на странице: 1из 146

BUSINESS LAW & TAXES

Course Material

Business laws & Taxes

SEMESTER - IV

CI INSTITUTE OF LOGISTICS 1
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

CONTENT DEVELOPED BY

Mr. Krishnan R

All rights reserved. No part of this work may be reproduced in any form, without the
permission in writing from CII INSTITUTE OF LOGISTICS. No part of this material could
be shared by the intended readers with others.

Further information about the course offered by CII INSTITUTE OF LOGISTICS may be
obtained from the CII INSTITUTE OF LOGISTICS (Southern Regional Headquarters) at
Velacherry Main Road, Guindy, Chennai – 600 032.

For restricted circulation only.

CI INSTITUTE OF LOGISTICS 2
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

INDEX

Chapter 1: INDIAN CONTRACTS ACT / LAW OF CONTRACT .................................... 4

Chapter 2: NEGOTIABLE INSTRUMENTS ACT........................................................... 24

Chapter 3: COMPANY LAW ........................................................................................... 32

Chapter 4: INCOME TAX ACT 1961 .............................................................................. 57

Chapter 5: THE CENTRAL EXCISE ACT 1944 .............................................................. 77

Chapter 6: CENTRAL SALES TAX ACT 1956 ............................................................... 84

Chapter 7: THE CUSTOMS ACT 1962 ............................................................................ 92

Chapter 8: FOREIGN TRADE POLICY ........................................................................ 102

Chapter 9: THE CONSUMER PROTECTION ACT , 1986............................................ 124

Chapter 10: THE ENVIRONMENT PROTECTION ACT ............................................. 131

Chapter 11: VAT- VALUE ADDED TAX ..................................................................... 135

Chapter 12: FRINGE BENEFIT TAX - CONCEPT AND COMPLIANCE ................... 141

CI INSTITUTE OF LOGISTICS 3
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 1: INDIAN CONTRACTS ACT / LAW OF CONTRACT

After studying this unit you will understand

Meaning of law of contract


Objectives of law of contract
Requirements of valid contract
Salient provisions of law of contract

Contents

1. Object of Law of contract


2. Definition of Contract
3. Classification of Contracts
4. Essential elements of Contract
a. Offer and Acceptance
b. Consideration
c. Capacity to Contract
d. Free consent
e. Legality of Object
f. Contingent contracts
g. Performance of contract
5. Discharge of contract
6. Remedies for breach of contract
7. Summary
8. Key Words
9. Self Assessment questions
10. Reference Readings

Object of Law of contract

The Law of Contract is that branch of law which determines the circumstances in
which promises made by the parties to a contract shall be legally binding on them. Its
rules define the remedies that are available in a court of law against a person who fails
to perform his contract and the conditions under which the remedies are available. It is
the most important branch of business law. It affects all of us in one way or the other. It
is, however, important to people who are engaged in trade, commerce and industry as
bulk of their business transactions are based on contracts.

CI INSTITUTE OF LOGISTICS 4
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Definition of Contract

A contract is an agreement made between two or more parties which the law will
enforce. Sec 2 (h) defines contract as an agreement enforceable by law. The
immediate question will be what is an agreement? An agreement is defined as ‘every
promise and every set of promises, forming consideration for each other’ - Sec 2 (e).

A contract is “an agreement creating and defining obligations between the parties”. We
can observe that a contract essentially consists of two elements i) agreement and ii) its
enforceability by law.

An agreement is a wider term; it may be a social or legal agreement. An agreement to


become a contract, must give rise to a legal obligation or duty.

Eg., G agrees to sell his bike to N for Rs. 10,000 . The agreement gives rise to an
obligation on the part of G to deliver the vehicle to N and on part of N to pay Rs
10,000.

Classification of Contracts

Contracts can be classified according to their i) validity ii) formation and iii)
performance.

i) Classification according to Validity: A contract is based on an agreement. An


agreement becomes a contract when all the essential elements referred earlier are
present. In such cases they are valid contracts. If one or more of these elements are
missing, the contract is either void-able or illegal or unenforceable.

An agreement which is enforceable by law at the option of one or more of the parties
there to but not at the option of the other/others, is a voidable contract. This happens
when the essential element of ‘free consent’ is missing, that is, when the consent is not
there or consent of a party is caused by coercion or undue influence or fraud, a
contract is voidable at his option.

Eg., A promises to sell his car to B for Rs. 2,000. His consent is obtained by use of
force. The contract is voidable at the option of A. He may avoid the contract.

CI INSTITUTE OF LOGISTICS 5
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Similarly a contract which ceases to be enforceable by law becomes void when it


ceases to be enforceable. A contract when originally entered may be valid and binding
on the parties, it may subsequently become void.

Eg., import of goods from a country may be valid at the time of ordering but becomes
void when war breaks out between the countries.

An illegal agreement is one which is of criminal in nature or violates basic principles or


laws or that which is immoral. All illegal agreements are void. The consequence may
be that even collateral transactions may be tainted with illegality.

An un-force-able contract is one which cannot be enforced in a Court of Law because


of some technical defect such as absence of writing or where the remedy has been
barred by lapse of time. The contract may be continued but at the end, the aggrieved
party will not be entitled for the legal remedies.

ii) Classification according to formation: The modes of formation of contract may


be (a) made in writing or by word of mouth or (b) inferred from the conduct of the
parties or the circumstances of the case.

Contracts may be classified accordingly as:

a) Express contracts
b) Implied contract
c) Quasi Contract

If the terms of a contract are expressively agreed upon at the time of formation of the
contract, it is said to be an express contract

Implied contract is one which is inferred from the acts or conduct of the parties or
course of dealings between them. It is not the result of express promise. For an
example: getting into a bus; Taking a cup of tea in a restaurant.

A quasi contract is not a contract at all. It resembles a contract in which the legal
obligation is imposed on a party who is required to perform.

CI INSTITUTE OF LOGISTICS 6
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

E-Commerce contract is a contract which is entered into by parties via internet.

iii) Classification according to performance: This can be further sub classified as


(a) executed contract and (b) executory contract.

Executed contract means which is completed, that is in which both the parties have
performed their obligations.

Executory contract is one in which both the parties are yet to perform their obligations.

1.4 Essential elements of Contract

1.4.1Offer and Acceptance

Offer is made by one person to another, it may be made by express words, spoken or
written.
§ When offer is made to a definite person, it is called specific offer.
§ When an offer is made to the world at large, it is called a general offer.

The person making the offer is called offeror or proposer or promisor and the person to
whom it is made is called the offeree or promisee. When he accepts the offer, he is
called acceptor.

1.4.11 Requirements of valid offer

Following are the requirements for an offer to be valid

1] Offer must be such as in law is capable of being accepted and giving rise to legal
relationship.

A social offer does not create legal relationship because it is not so intended. An offer,
hence, must be such as would result in a valid contract when it is accepted

2] Terms of offer must be definite, unambiguous and certain.

If the terms of an offer are vague or indefinite, its acceptance cannot create any
contractual relationship.

Eg., A tells to B, “I will sell you a car”. A owns three different cars. The offer is not
definite.

CI INSTITUTE OF LOGISTICS 7
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

3] Offer must be communicated.

4] Offer must be made with a view to obtaining the assent.

5] Offer should not contain a term the non compliance of which may be assumed to
amount to acceptance (A tells B “I will sell my horse to you for Rs. 5,000 and if you
do not reply I will assume that you have accepted the offer”)

6] A statement of price is not an offer.

7] An offer may be distinguished from:

³ A declaration of intention and an announcement (eg., an announcement by a


beauty parlour of a beauty competition is a mere statement)
³ An invitation to make an offer or to do business (eg., catalogues or quotations
are not offers)

8] Tender as a response to an advertisement is an offer

1.4.12 Acceptance

The acceptance to the offer is the very essence of a contract.

Requirements of valid acceptance

³ It must be absolute and unqualified: ie., it must conform with the offer.

³ Eg., A informs B “I will sell my car for Rs. 50,000” B replies that “I will
purchase for Rs 45000” There is no valid acceptance.

³ It must be communicated to the offeror.

³ It must be in the mode prescribed or an acceptable reasonable mode.

³ Eg., A makes an offer to B and says : “If you accept the offer, reply by wire” B
sends reply by post – it is a valid acceptance.

³ It must be given within a reasonable time, if any time limit is specified, it


should be made within the time specified.

CI INSTITUTE OF LOGISTICS 8
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

³ It can not precede an offer Eg., In a company if shares are allotted to a


person who has not applied for – it becomes an acceptance before offer and
hence void

³ It must be given by parties to whom it was made.

³ It can not be implied from silence.

³ It must show an intention to fulfil on part of acceptor.

1.4.13 Communication of offer, acceptance and revocation

An offer, its acceptance or their revocation should be communicated. The


communication may be by words spoken or written or by conduct. The communication
is complete when it comes to the knowledge of the person to whom it was
communicated.

When can an offer or acceptance be revoked?

It can be before the communication reaches and not afterwards

When does an offer come to an end?

³ By communication of notice of revocation by offeror before acceptance.


³ By lapse of time (If not accepted within prescribed time).
³ By non fulfilment of a condition by the offeree, precedent to acceptance (A sells
goods to B with a condition that B has to pay money on a date, B fails to pay,
offer gets cancelled).
³ By death or insanity of the offeror provided the offeree comes to know about it
before acceptance.
³ If the offer is not accepted by prescribed or usual mode.
³ If law is changed making the offer unlawful.

1.4.2 Consideration

Consideration is one of the essential elements to support a contract. A contract made


without consideration is void, subject to certain exceptions.

CI INSTITUTE OF LOGISTICS 9
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

1.4.21 Definition: When at the desire of the promisor, the promisee or any other
person has done or abstained from doing or does or abstains from doing or promises
to do or abstain from doing, such act or promise is called consideration.

1.4.22 Requirements of a valid consideration:

It must move at the desire of the promisor (eg., A saves B’s goods without being
asked to do so. A can not demand payment for his services).

It may move from promisee or any other person (eg., An old lady O, by deed of gift
made over some property to her daughter D, with a direction that D shall pay A, sister
of O, certain money annually. D entered into an agreement with A to pay the agreed
amount, later refused claiming that no consideration moved from A. Here A was
entitled to the sum as consideration has moved from O in this case).

It may be past, present or future.

Past consideration: When consideration for the present promise was given in the past,
it is valid (eg., A renders some service to B at latter’s request. After a month B
promises to compensate A for the services rendered to him. It is past consideration
and valid).

Present or executed consideration: When consideration is given simultaneously with


promise, it is present consideration (eg., cash sale).

Future or executory consideration: When consideration passes from one to another


subsequently to the making of contract, it is future or executory contract (eg., credit
enjoyed by customers).

It need not be adequate: Consideration means ‘something in return’ and that


something in return need not be equal to value of ‘something given’.

It must be real and not illusory: Though it need not be adequate, it must be real (
Eg., A promises to put life into B’s life if B pays Rs 500).

CI INSTITUTE OF LOGISTICS 10
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

It must be something which the promisor is already not bound to do: A promise
to do a public duty by a public servant is not a consideration

It must not be illegal or immoral

Exceptions to the rule – Contract without consideration is void:

Love and affection: A written agreement based on natural love and affection between
near relatives is enforceable even without consideration (eg., A , out of love and affection
promises to give his son B Rs. 1,000 /- and puts it in writing and registers it. It is a valid
contract).

Compensation for voluntary services: A promise to compensate a person who has


already voluntarily done something for the promisor, is enforceable, even though without
consideration (eg., A finds B’s purse and gives it to him, B promises to give A Rs. 100/-,
this is a contract).

Promise to pay a time barred debt: A promise to pay a time barred debt is enforceable
provided it is made in writing and signed by the debtor (time barred debt- a debt remains
unpaid for more than 3 years which is legally irrecoverable). For example, D owes C Rs.
1,000 but the debt is barred by the limitation act-time barred debt. D signs a written
promise to pay C Rs. 500 on account of the debt. This is a contract.

Completed gifts: The rule ‘no contract if no consideration’ will not apply to completed
gifts, gifts actually made.

1.4.3Capacity to Contract

The parties who enter into a contract must have the capacity to do so. Capacity means
competence of the parties to enter into a valid contract. Section 11 of the Contract law
declares the following persons to be incompetent to contract:

³ Minors
³ Persons of unsound mind and
³ Persons disqualified by any law

CI INSTITUTE OF LOGISTICS 11
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Minors: A Minor is a person who has not completed eighteen years of age. Law protects
Minors against their inexperience as against those more experienced.

The position of a minor as regards his agreements may be summed up as under:

An agreement with or by a minor is void and inoperative.

He can be a promisee or a beneficiary: Incapacity of a minor to enter into a contract


means incapacity to bind him self by a contract. There is nothing which debars him
from becoming a beneficiary. (eg., A mortgage was executed in favor of a minor, if
upheld, he could get a decree for the enforcement of the mortgage).

His agreement can not be ratified by him on attaining the age of majority:
Consideration which passed under the earlier contract can not be implied into the
contract which the minor enters on attaining majority Thus; consideration given during
minority is no consideration. If it is necessary a fresh contract may be entered into by
Minor on becoming Major provided it is supported by fresh consideration.

If he has received any benefit under a void agreement, he can not be asked to
compensate or pay for it.

He can always plead minority: Even if he has, by misrepresenting his age, induced the
other party to contract with him, he can not be sued.

He can not enter into a contract of partnership but he may be admitted to the benefits
of an already existing partnership with the consent of other partners.

He can not be adjudged as insolvent, this is because he is incapable of contracting


debts.

His parents/guardians are not liable for the contract entered into by him.

He is liable for necessaries supplied: He is liable to pay out from the property for
necessaries supplied to him. He is not personally liable; it is only the property of the
minor which is liable.

CI INSTITUTE OF LOGISTICS 12
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Persons of unsound mind:

One of the essential conditions of competence of parties to a contract is that they


should be of sound mind. A person is said to be of sound mind for the purpose of
making a contract if, at the time when he makes it, he is capable of understanding it
and of forming a rational judgment as to its effect upon his interests.

Contracts of persons of unsound mind

Lunatics- a person who is mentally affected due to some mental strain Idiot- a person
who has completely lost his/her mental powers Drunken person- a person who suffers
from temporary incapacity to contract.

Persons disqualified by law:

Contracts with alien enemy is void


Contracts with insolvents are void

1.4.4 Free consent

Consent means- an act of assenting to an offer. Consent is said to be free when it is


not caused by-

³ Coercion
³ Undue influence
³ Fraud
³ Misrepresentation
³ Mistake

When consent to an agreement is caused by coercion, fraud or misrepresentation, the


contract is voidable at the option of the party.

Coercion: When a person is compelled to enter into a contract by the use of force by
the other party coercion is said to be employed. It need not necessarily proceed from a
party to the contract. It may proceed from a stranger also.

CI INSTITUTE OF LOGISTICS 13
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Eg., A threatens to shoot B if he (B) does not release him (A) from a debt which A
owes to B. B releases A under threat. The release has been brought about by
coercion.

Threat to commit suicide amounts to coercion

Undue influence: Sometimes a party is compelled to enter into an agreement against


his will as a result of unfair persuasion by the other party. This happens when a special
kind of relationship exists between the parties such that one party is in a position to
exercise undue influence over the other.

Eg., a spiritual guru induced his devotee to gift to him the whole his property in return
of a promise of salvation of the devotee, the consent was given under undue influence.

Misrepresentation: A representation, when wrongly made, either innocently or


intentionally, is a misrepresentation. It is a false statement which the person making it
honestly believes to be true.

Eg., A while selling his mare to B , tells him that the mare is thoroughly sound. A
actually believes it. Later on B finds that the mare to be unsound. The representation
of A is a misrepresentation.

Requirements of misrepresentation

³ It must be a representation of material fact


³ It must be made before conclusion of the contract
³ It must be made with an intention that it should be acted upon by the person to whom
it is addressed
³ It must have been acted upon
³ The person making it must have believed it to be true
³ It must be made without any intention to deceive
³ It must be made directly to the plaintiff

CI INSTITUTE OF LOGISTICS 14
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Fraud: Fraud exists when it is shown that –

A false representation has been made knowingly or without belief in its truth or
recklessly not caring whether it is true or false - there is a concealment of material fact

Essential elements of fraud:

Ø There must be a representation which is false


Ø Representation is made before conclusion of contract
Ø Representation is made without belief in its truth or recklessly not caring
whether it is true or false
Ø The other party must have been induced to act upon
Ø The other party must have relied upon the representation
Ø The other party must have subsequently suffered some loss

Mistake: Where both the parties are to an agreement are under a mistake to a matter
of fact essential to the agreement, there is a bilateral mistake. In such a case the
agreement is void. Following are two conditions to be fulfilled for the application

Mistake must be mutual


Mistake must relate to a matter of fact essential to the agreement

When in a contract only one of the parties is mistaken regarding the subject matter or
in expressing or understanding terms, the mistake is unilateral and not voidable.

1.4.5Legality of Object

A contract must have a lawful object. If the object of an agreement is the performance
of an unlawful act, the agreement is unenforceable.

Consideration or object is unlawful-

§ if it is forbidden by law (A promises B that he will get a job in Government if he


is paid Rs 10000)

CI INSTITUTE OF LOGISTICS 15
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

§ If it is of such a nature that if permitted, it would defeat the provisions of any


law
§ If it is fraudulent
§ If the court regards it as immoral
§ Where the court regards it as opposed to public policy

Unlawful and illegal agreements: An unlawful agreement is one which is not


enforceable in law. An illegal agreement, on the other hand, is not only void as
between immediate parties but has this further effect that the collateral transactions to
it also become tainted with illegality.

Eg.,L lends Rs. 5,000 to B to help him to purchase some prohibited goods from T, an
alien enemy. If B enters into agreement with T, the agreement will be illegal and the
agreement between B and L shall also become illegal, being collateral to the main
transaction which is illegal.

Agreements opposed to public policy:

The following are the agreements opposed to public policy

Ø Agreements of trading with enemy


Ø Agreement to commit a crime
Ø Agreements which interfere with administration of justice
Ø Agreements in restraint of legal proceedings
Ø Agreements in restraint of parental rights
Ø Agreements restraining personal rights
Ø Agreements in restraint of marriage
Ø Agreements interfering with marital rights (eg., a promise by a married person to
marry during the lifetime or after the death of spouse
Ø Agreements defrauding creditors or revenue authorities
Ø Agreements in restraint of trade

CI INSTITUTE OF LOGISTICS 16
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

1.4.6 Contingent contracts

A contract can be an absolute contract or a contingent contract.

Absolute contract is one in which the promoter binds himself to performance in any
event without any conditions.

Contingent contract is to do or not to do something if some event does or does not


happen.

Eg., A agrees to pay B Rs. 1,000 if B’s house is burnt. This is a contingent contract

Rules regarding contingent contract:

It depends on uncertain future event, can not be enforced till the event has happened
(eg., A contracts to pay B a sum of money when B marries C. C dies without marrying
B. The contract becomes void).

Contingent contracts to do or not to do anything, if a specialized uncertain event


happens within a fixed time, become void if the event does not happen within a fixed
time (eg, A promises to pay B a sum of money if a certain ship returns within a year.
The contract may be enforced if the ship returns within one year and become void if
the ship is burnt within the year).

Where a contingent contract is to be performed if a particular event does not happen,


its performance can be enforced when the happening of that event becomes
impossible (eg., A promises to pay B certain money if a ship does not return. The ship
is sunk. The contract can be enforced when the ship sunk).

Contingent agreements to do or not to do anything, if an impossible event happens,


are void. (A agrees to pay B Rs. 1,000 if two straight lines should enclose a space.
The agreement is void)

1.4.7 Performance of contract

Performance of a contract takes place when the parties to the contract fulfill their
obligation arising under the contract within the time and manner specified.

Sometimes it so happens that the promisor offers to perform his obligation under the
contract at the proper time and place but the promisee does not accept the
performance. This is known as attempted performance or tender. Where a promisor

CI INSTITUTE OF LOGISTICS 17
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

has made an offer of performance to the promise and the offer has not been accepted,
the promisor is not responsible for the non performance nor does he thereby lose his
rights under the contract. Thus a tender of performance is equivalent to actual
performance. It excuses the promisor from further performance and entitles him to sue
the promise for the breach of contract

Requisites of a valid tender:

Ø It must be unconditional. It becomes conditional when it is not in accordance


with terms of contract (eg. D, debtor offers to pay C, his creditor, the amount
due to him on the condition that C sells to him certain shares at cost. This is
not a valid transfer.

Ø It must be for whole quantity or whole obligation contracted and can not be on
instalment.

Ø It must be by a person who is willing to perform the promise.

Ø It must be made at the proper time and place. It must be made to the proper
person and in proper form.

Discharge of contract

A contract may be discharged

a) By performance- when both the parties perform their promises the contract is
discharged.

b) By agreement- As it is the agreement of the parties which binds them, so by their


further agreement or consent the contract may be terminated.

c) By impossibility- If an agreement contains an undertaking to perform an


impossibility, it is void (eg. A sold to B certain goods supposed to be on a voyage. The
goods has ceased to exist due to the perils of the sea, the contract is void).

CI INSTITUTE OF LOGISTICS 18
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

d) By lapse of time- A contract should be performed within a specified period, called


period of limitation. If it is not performed, and if no action is taken by the promisee
within the period of limitation, the contract is terminated

e) By operation of law- Contract can be terminated by

Ø death of party
Ø insolvency of party
Ø unauthorized alteration of the terms and conditions of a written agreement

f) By breach of contract- breach by one of the parties

1.6 Remedies for breach of contract

When a contract is broken, the injured party has one or more of the following remedies:

Ø Rescission of contract
Ø Suit for damages
Ø Suit upon quantum merit
Ø Suit for specific performance
Ø Suit for injunction

Rescission: When a contract is broken by one party, the other party may sue to treat
the contract as rescinded and refuse further performance. Eg., A promises B to supply
10 bags of cement on a certain day. B agrees to pay the price after the receipt of the
goods. A does not supply the goods. B is discharged from liability to pay the price

However in the following cases rescission is not permitted

Where one part of the contract is sought to be rescinded and such part is not
severable from the rest of the contract
Where the plaintiff has ratified the contract

CI INSTITUTE OF LOGISTICS 19
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Damages

Damages are monetary compensation allowed to the injured party by the Court.

The rules relating to damages are

Damages arising naturally


When a contract has been broken, the injured party can recover from the other party
such damages as naturally and directly arose in the usual course of things from the
breach. Eg., A contracts with B to buy at Rs 950 per quintal of rice, but no time being
fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to
him. The market price of rice on that day was Rs 930, B is entitled to receive Rs 20 per
quintal.

ii) Damages to contemplation of the parties

Damages other than those arising from the breach of a contract may be recovered if
such damages may reasonably be supported to have been in the contemplation of
both the parties as the probable result of breach of contract. Such damages can not be
claimed as a matter of right. These can be claimed only if the special circumstances
which would result in a special loss in case of breach of a contract, are brought to the
notice of other party.

Eg., A , a builder contracts to erect a house for B by 1st of Jan in order that B may give
possession of it at that time to C to whom B has contracted to let, A is informed of that. A
builds so badly that before 1st Jan it falls down. Consequently B loses the rent. A is liable
to compensate for the cost of rebuilding and the rent loss.

iii) Vindictive or exemplary damages

Vindictive damages have no place in law normally, but in case of breach of promise to
marry and dishonor of cheque by a bank wrongfully when he possesses sufficient
funds, Court may award vindictive or exemplary damages.

CI INSTITUTE OF LOGISTICS 20
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

iv) Nominal damages

Where the injured party has not in fact suffered any loss by reason of the breach of a
contract, the damages recoverable by him are nominal. ie very small

v) Damages for loss of reputation

Damages for loss of reputation in case of breach of a contract are generally not
recoverable. Exception to this rule is that in case of a banker who wrongfully refuses
to honor a customer’s cheque.

vi) Damages for inconvenience and discomfort

Damages can be recovered for physical inconvenience and discomfort. The general
rule is that measure of damages is not affected by the motive of the breach.

vii) Mitigation of damages

It is the duty of the injured party to take all reasonable steps to mitigate the loss
caused by the breach.

viii) Difficulty of assessment

Although damages which are incapable of assessment can not be recovered, it does
not prevent the aggrieved from recovering them. Court will do its best to do the
estimation

ix) Cost of decree

The aggrieved party is entitled, in addition to damages, to get the cost of getting the
decree for damages.

x) Damages agreed upon in advance in case of breach

If a sum is named in a contract as the amount to be paid in case of the breach, the
aggrieved party is entitled to get the same from the other who breaks it.

CI INSTITUTE OF LOGISTICS 21
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

1.7 Summary

A contract is an agreement made between two or more parties which the law will
enforce. The essentials of contracts are as follows:

³ There must be an agreement


³ The parties should have the intention and capacity to contract
³ There should be valid offer and acceptance
³ The agreement should be supported by consideration
³ The consent of the parties are free
³ The object of the agreement are lawful
³ The terms are capable of performance

Contracts are classified into different types based on nature and execution.

Essentials of valid contracts are offer, acceptance, consideration, free consent, legality
of objects.

A contingent contract is a contract to do something or not to do something.

There are many modes of discharge of contracts, performance, lapse of time,


agreement, impossibility, breach etc and there are remedies prescribed for breach of
contracts.

1.8 Key Words

Offer: An offer is an undertaking by the offeror to be contractually bound in the event


of a proper acceptance of the offer by the offeree

Consideration: It means ‘something in return’. When at the desire of the promisor, the
promisee or any other person has done or abstained from doing or does or abstains
from doing or promises to do or abstain from doing, such act or promise is called
consideration.

CI INSTITUTE OF LOGISTICS 22
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Ø Minor is a person who has not completed 18 years of age


Ø Coercion means compulsion
Ø Consent means act of assenting to an offer
Ø Contingent means depends on something
Ø Breach of contract means breaking of the obligation which a contract imposes

1.9 Self Assessment questions

1. What is the object and nature of law of contract?


2. Explain various types of contracts.
3. What is an offer? When is it complete? State the rules of a valid offer.
4. How can the offer be accepted? State the rules relating to the communication of
acceptance.
5. Define consideration. What are the essentials?
6. A contract without consideration is void! Comment!
7. What do you understand by ‘capacity of contract’? What are the effects of such
agreements?
8. Define fraud and point out its effect on agreements.
9. Discuss law relating to effect of mistake in contracts.
10. Under what circumstances is the object or consideration of a contract deemed
unlawful?
11. Explain meaning of contingent contract and rules relating to such contracts?
12. What are essentials of valid tender?
13. What are various ways that a contract may be discharged?
14. What are remedies available to an aggrieved party on the breach of a contract?

1.10 Reference Readings

1. Business law by N D Kapoor

**********

CI INSTITUTE OF LOGISTICS 23
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 2: NEGOTIABLE INSTRUMENTS ACT

After studying this unit you will understand

1. Meaning of Negotiable Instrument


2. Types of Instruments
3. Concepts relating to Negotiable Instruments

Contents

Introduction
Types
2.1 Promissory note
2.2 Bills of exchange
2.3 Cheque
2.4 Hundi
Summary
Key words
Self examination questions
Reference reading

Introduction

The word ‘negotiable’ means transferable from one person to another and the term
‘instrument’ means any written document by which a right is created in favour of some
person.

Negotiable Instrument is defined as a promissory note, bills of exchange or cheque


payable either to order or bearer. Thus the negotiable instrument is a document by
which rights vested in a person can be transferred to another person in accordance
with the provisions of the Negotiable Instruments Act 1881

Law relating to promissory notes, bills of exchange, cheques and other negotiable
instruments is codified in India under the Negotiable Instruments Act, 1881. It defines

CI INSTITUTE OF LOGISTICS 24
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

promissory note, bill of exchange, cheque, foreign instrument and negotiable


instrument. As per the provisions of this Act, in India, every person capable of
contracting, according to the law to which he is subject, may bind himself and be
bound by making, drawing, accepting, endorsing, delivering and negotiating of a
promissory note, bill of exchange or cheque and every person capable of binding
himself or of being bound, may so bind himself or be bound by a duly authorized agent
acting in his name. The act provides for the liability of an agent, legal representative,
drawer, drawee, maker and acceptor of a bill, endorser, holder in due course,
suretyship, etc.

As per the provisions laid down in the said act, a negotiable instrument means a
promissory note, bill of exchange or cheque payable either to order or to bearer and
when a promissory note, bill of exchange or cheque is transferred to any person so as
to constitute the person, the holder thereof the instrument is to be negotiated. Detailed
provisions have been made in the Act concerning presentment, payment, interest,
discharge from liability, notice of dishonour, noting and protest, reasonable time for
payment, acceptance and payment for honour and reference in case of need,
compensation, special rules of evidence, providing for certain presumptions and
estoppels, cross cheques, bills in sets, etc.

A very noteworthy amendment has been recently made with effect from 1st April 1989
in the form of Chapter XVII which provides for penalties in case of dishonour of certain
cheques for insufficiency of funds in the accounts. Under this Chapter dishonour of a
cheque in certain cases is an offence. After a cheque is dishonoured, written notice is
required to be given within 15 days of the receipt of information from the bank
regarding the return of cheque as unpaid and if the drawer of the cheque fails to make
the payment of the cheque within 15 days from the receipt of such notice, then only
the dishonour of the cheque amounts to an offence. If a cheque, which is dishonoured,
is issued by way of gift or loan, it does not become an offence. The cheque should
have been issued for the discharge of any debt or any other liability which can be
legally enforced AND the dishonour should be on account of insufficiency of funds.
The cheque should be presented to the bank within a period of six months from the
date on which it is drawn or within the period of its validity whichever is earlier. A
cheque otherwise valid does not become invalid merely by reason of its being either

CI INSTITUTE OF LOGISTICS 25
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

post dated or ante dated. The complaint with the Metropolitan Magistrate has to be
filed within one month from the date on which the cause of action arose. It shall be
presumed that the holder of the cheque has received it for the discharge of any debt or
liability and the onus would be on the issuer of the cheque to prove otherwise. The
punishment of the offence is imprisonment for a term which may extend to one year or
with fine which may extend to twice the amount of the cheque or with both.

Features of Negotiable Instrument:

Freely transferable- transferability may be by delivery or endorsement and delivery

Holder’s title free from defects- the term negotiability means that not only is the
instrument transferable by endorsement and or? delivery, but that its holder in due
course acquires a good title not withstanding any defect in a previous holders’ title. A
holder in due course is one who receives the instrument for value and without any
notice as to the defect in title of the transfer

The holder can sue in his own name

Negotiable instrument can be transferred any number of times.

Types: There are various types of negotiable instruments in use

2.1 Promissory note: It is an instrument in writing containing an unconditional


undertaking, signed by the maker to pay certain sum of money to another or to the
bearer of instrument.

eg., “I Promise to pay B or order Rs 5000”

“I acknowledge myself to the indebted to B in Rs 1000, to be paid on demand for value


received”

Following are NOT promissory notes:

“Mr B, I owe you Rs. 500”

CI INSTITUTE OF LOGISTICS 26
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

“I promise to pay B Rs. 500 after my marriage with C”

Essential characteristics of a Promissory Note:

Ø It should be in writing
Ø It must contain an undertaking or promise to pay - a mere acknowledgement of
debt is not sufficient
Ø It should be unconditional
Ø It should be signed by the maker
Ø The instrument must point out with certainty the maker and the payee of the
promissory note
Ø The sum payable must be certain
Ø It should be a promise to pay money only
Ø It may be payable in instalments
Ø It is payable on demand or after a definite period
Ø It must be duly stamped under Indian Stamp Act

2.2 Bills of Exchange

A bill of exchange (BE) is defined by Sec 5 as an instrument in writing, containing an


unconditional order, signed by the maker, directing a certain person to pay a certain
sum of money only to or to the order of, a certain person, or to the bearer of
instrument.

Characteristics of BE:

Ø It must be in writing
Ø It must contain an order to pay and not a promise or request. Words like “please
pay Rs. 1000 to A on demand do not constitute the instrument of BE”
Ø The order must be unconditional
Ø There must be 3 parties, drawer, drawee and payee
Ø The parties must be certain
Ø It must be signed by the drawer
Ø The sum payable must be certain
Ø The order must be to pay money alone

CI INSTITUTE OF LOGISTICS 27
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Distinction between BE and Promissory Note

Sl no Promissory note Bill of Exchange


1 There are only two parties There are 3 parties
2 A note contains an It contains an unconditional order to
unconditional promise by the the drawee to pay according to the
maker to pay the payee drawer’s directions
3 No prior acceptance is It should be accepted by the drawee
required
4 No notice of dishonour need Notice of dishonour must be given
be given

2.3 Cheque

A cheque is defined as a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than demand. Thus a cheque is a BE with two added features 1)
It is always drawn on a specified banker and 11) it is always payable on demand and not
otherwise

Distinguish cheque and BE

Cheque Bills of exchange


1 It must be drawn only on banker It can be drawn on any person
2 The amount is always payable on The amount is payable on demand or
demand after a specified time
3 The cheque is not entitled to days of A usance (time) is entitled to three
grace days of grace
4 A cheque can be crossed Crossing is not possible

Holder in due course

A holder of a NI is a person entitled in his own name to the possession thereof and to
receive or recover the amount due thereon from the parties thereto. Thus a person
who has obtained the possession of an instrument by theft or under a forged
endorsement is not a holder

A holder in due course, on the other hand , is a person who for consideration become
the possessor of a promissory note, BE or cheque, if payable to bearer, or the payee
or endorsee, if payable to order , before the amount mentioned in it becomes payable.

CI INSTITUTE OF LOGISTICS 28
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Thus a person receives a NI without consideration; he may be a holder but will not be
called as a holder in due course. Besides, the title of holder of a NI is always subject to
the title of its transferor whereas a holder in due course acquires a better title than that
of a transferor

Some Privileges of holder in due course:

Every prior party to a NI (maker, drawer, acceptor, intermediate endorsers) continue to


remain liable to the holder in due course until the Instrument is satisfied
A person who signed and delivered to another a stamped but otherwise incomplete
instrument, is stopped from asserting against the holder in due course that the
instrument is incomplete provided the stamp covers the value filled in not only the title
of holder in due course is not subject to the defect in previous holders’ title but once
the instrument passes through the hands of a holder in due course it is purged of all
defects

Hundis

Hundis have been in circulation in India from very early times even before the NI Act
1881.

The NI Act does not apply to Hundis, but where, by any words in the Instrument itself ,
the usages regarding such Instruments are excluded or where it is expressly indicated
that the legal relations of the parties thereto shall be governed by NI Act, THE Act
becomes applicable. In the absence of any of above indications, Hundis shall be
governed by local usages applying to such documents. They are some times drawn in
the form of promissory notes but more often they take the form of BE.

Certain important explanations under NI Act

When amount stated in words and figures differ, words will prevail over figures

A forged instrument confers no title

CI INSTITUTE OF LOGISTICS 29
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

A person who has obtained a NI by theft cannot enforce payment of it against any
party nor can he retain it against the party from whom he had stolen it

If consideration of a NI is unlawful, the instrument is void

Crossing of cheque serves a measure of safety against theft. By crossing a cheque, a


person, who is not entitled to receive its payment, is prevented from getting the
cheque en-cashed

Dishonor of cheque invites criminal penalties

A NI payable otherwise than to bearer can be negotiated only by endorsement and


delivery

A banker plays two roles, one as holder for value – ie., when to oblige a customer, a
bank pays the proceeds of a cheque drawn upon another banker , before collection,
he is treated as a holder for value. Another role as an agent – of a customer if he
credits the latter’s account with the amount of the cheque after it is actually realized

Summary

Negotiable Instrument is defined as a promissory note, Bills of Exchange or Cheque


payable either to order or bearer.

There are different types of NIs some of them are Promissory note, Bills of Exchange,
Cheques, etc. It is an Instrument in writing containing an unconditional undertaking,
signed by the maker to pay certain sum of money to another or to the bearer of the
Instrument.

Hundis have been in circulation in India from very early times before the NI Act 1881.

The NI Act does not apply to Hundis, but where, by any words in the instrument itself,
the usages regarding such Instruments are excluded or where it is expressly indicated
that the legal relations of the parties thereto shall be governed by NI Act.

CI INSTITUTE OF LOGISTICS 30
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Key words

Bill of exchange (BE) is defined by Sec 5 as an instrument in writing, containing an


unconditional order, signed by the maker, directing a certain person to pay a certain
sum of money only to or to the order of, a certain person, or to the bearer of
instrument.

Cheque is defined as a bill of exchange drawn on a specified banker and not


expressed to be payable otherwise than demand.

Holder in due course is a holder of a NI, a person entitled in his own name to the
possession thereof and to receive or recover the amount due thereon from the parties
thereto.

Self examination questions

1. What are essential requirements of a promissory note?


2. What are essential characteristics of NI?
3. Explain three NIs.
4. Distinguish BE and Cheque
5. Write short notes on Holder in due course

Reference reading

³ Business Law by N D Kapoor


³ Business laws by S S Gulshan & G K Kapoor

CI INSTITUTE OF LOGISTICS 31
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 3: COMPANY LAW

After studying this unit you will understand

Ø Meaning of a company
Ø Formation
Ø Kinds of companies
Ø Laws covering operations
Ø Share capital and shares

Contents

1 Introduction
2 Characteristics
3 Kinds of companies
4 Formation of a Company
5 Memorandum & Articles of Association
6 Prospectus
7 Membership in a Company
8 Share capital
9 Borrowing powers
10 Summary
11 Key words
12 Exercises
13 Reference readings

1. Introduction

The law relating to companies in India is contained in Companies Act 1956 as


amended now and then. The last amendment was done in 2002. This material covers
the basics of company law and excludes other parts.

A company means a group of persons associated together for the attainment of a


common end, social or economic. It is a voluntary association of person; it has capital
divisible into parts. It is an artificial person; it has no soul or body.

CI INSTITUTE OF LOGISTICS 32
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

2. Characteristics

Separate legal entity

A company, in law, is regarded as an entity separate from its members. In other words
it has an independent corporate existence. The company’s money is owned by it and
not by its members. Its members can enter into contracts with it.

Limited liability

A company may be a company limited by shares or limited by guarantee. If a company


is limited by shares, the liability of members is limited to the unpaid value of the
shares. (eg., if the face value of share is Rs 10 and a member has paid Rs 7, he can
be called upon to pay not more than Rs 3 during the life time of the company). If a
company is limited by guarantee, the liability of the members is limited to such amount
as the members may undertake to contribute to the assets of the company, in the
event of its being wound up.

Perpetual succession

A company never dies, nor does its life depend on the life of its members. It is not
affected by insolvency or mental disorder or retirement of members. It is created by
process of law and can be put to end only by a process of law. Perpetual succession,
therefore means, that a company’s existence persists irrespective of the change in the
composition of its membership.

Common seal

Since a company has no physical existence, it must act through its agents and all such
contracts entered into by its agents must be under the seal of the company.

CI INSTITUTE OF LOGISTICS 33
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Transferability of shares

The capital of a company is divided into parts, called shares. These shares are,
subject to some conditions, freely transferable, so that no shareholder is permanently
wedded to the company.

Separate property

As a company is a legal person distinct from its members, it is capable of owning,


enjoying and disposing of property in its own name. The members do not have
ownership. The company is the real person on which all its property is vested.

Capacity to sue

A company can sue and be sued in its corporate name.

Lifting or Piercing the Corporate Veil

A company is a legal person distinct from its members. This principle is referred as
“the veil of incorporation”. The effect of this principle is that there is a fictional veil
between the company and its members which means that a company has a corporate
personality which is distinct from its members.

However, this concept was later found to be misused for fraud or improper conduct.
Hence it became necessary to lift the veil and look inside at the persona behind the
company who are the real beneficiaries.

Following are the various situations where the veil would be lifted:

Protection and revenue

The corporate entity of a company will be ignored when it is used for tax evasion.

CI INSTITUTE OF LOGISTICS 34
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Prevention of fraud or improper conduct

If the machinery of incorporation has been found to be used for fraudulent purpose, the
legal personality of the company may also be disregarded.

Determination of character of a company whether it is an enemy

A company may assume an enemy character when persons in de facto control are
residents in enemy country.

Where the company is a sham

The veil will also be lifted if the company is found to be sham (hoax)

Company avoiding legal obligations

When the use of an incorporated company is being made to avoid legal obligations,
the legal personality may be disregarded.

Company acting as agent or trustee of share holders

Where the company is acting as an agent for its shareholders, the shareholders will be
liable for the acts of the company.

Avoidance of welfare legislation

It is like avoidance of taxation. and treatment is the same when veil is lifted

Protecting public policy

The veil will be lifted to prevent transactions contrary to public policy

CI INSTITUTE OF LOGISTICS 35
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Number of members below minimum

If a company carries on business for more than 6 months after the number of its
members reduced below 7 in case of a public limited company and 2 in case of private
limited company, every person who knows and a member during this time, is severally
liable for the debts of the company contracted during that time.

Failure to refund application money

The directors of a company are jointly and severally liable to repay the application
money with interest if the company fails to refund the application money who have not
been allotted shares within 130 days of the date of issue of prospectus.

Misescription of company’s name

Where an officer or an agent of a company does not act or enters into a contract
without properly mentioning the company’s name and the address of the registered
office, he shall be personally liable.

Fraudulent trading

Sometimes in the course of winding up of a company it may appear that some


business of the company has been carried on with intent to defraud creditors of the
company or any other person. In those cases such persons involving in those activities
are liable.

3. Kinds of companies

There are 5 broad classifications under which different kinds of companies can be
grouped:

Classification on the basis of incorporation

CI INSTITUTE OF LOGISTICS 36
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

i) Statutory Companies: These are created by special Acts; Eg., RBI, SBI, LIC etc.

ii) Registered Companies: These are companies formed and registered under
Companies Act 1956.

Classification on the basis of liability

i) Company with limited liability

Limited by shares: A company may be a company limited by shares or limited by


guarantee. If a company is limited by shares, the liability of members is limited to the
unpaid value of the shares (eg., if the face value of share is Rs 10 and a member has
paid Rs 7, he can be called upon to pay not more than Rs 3 during the life time of the
company).

Limited by guarantee: If a company is limited by guarantee, the liability of the members


is limited to such amount as the members may undertake to contribute to the assets of
the company, in the event of its being wound up.

ii) Companies with unlimited liability: A company without limited liability is known as
unlimited company. In case of such a company, every member is liable for the debts of
the company in proportion of his interest in the company.

Classification on the basis of number of members

i) A private limited company: It is a company which has a minimum paid up capital of


Rs. 1,00,000 or such higher paid up capital as may be prescribed and by its Articles:-

Restricts right to transfer its shares


Limits the number of its members to 50
Prohibits any invitation to public to subscribe for any shares, debentures of the
company

CI INSTITUTE OF LOGISTICS 37
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Prohibits invitation or acceptance of deposits from persons other than members

ii)A public limited company: It is a company which has a minimum paid up capital of Rs
5 lakh or such high paid up capital as may be prescribed and if a private limited
company, which is a subsidiary of a company which is not a private limited company.

Distinction between private limited and public limited companies

Sl no Characteristics Private limited Public Limited


1 Minimum capital Rs 100000 Rs 500000
2 Minimum number 2 7
3 Maximum number 50 No restriction
4 Number of Directors At least 2 At least 3
5 Restriction on appointment No requirements Directors must file
of Directors consent with Registrar
6 Restriction on invitation to Article prohibits Can invite, no
subscribe for shares prohibition
7 Transferability of shares/ Restriction on No restrictions, freely
debentures transfer transferable
8 Special privileges Enjoys some No privileges
privileges
9 Quorum 5 2
10 Managerial remuneration No restriction Can not exceed 11%
on net profits

Privileges of a Private limited company

Ø Number of members can be 2


Ø Can allot shares before minimum subscription
Ø Can allot shares without issue of prospectus
Ø No restrictions on issue of further shares
Ø Can issue any kind of shares
Ø Can commence business immediately on incorporation
Ø Need not keep index of members
Ø Need not hold statutory meeting
Ø No restriction on managerial remuneration
Ø Need not have more than 2 Directors
Ø Rules regarding directors are less stringent

CI INSTITUTE OF LOGISTICS 38
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

When a private company does becomes a public limited company, its rule regarding
private limited companies are violated by choice.

Classification on the basis of control

i) Holding company: A company is a holding company of another if it has control over


another.
ii) Subsidiary company: A company is a subsidiary company of another if control is
exercised by the latter on former.

Classification on the basis of control

i) Government Company: A company is a government company if not less than 51% of its
share capital is held by

central government
any state government
partly by both

ii) Non Government Company: It is controlled and operated by private capital

4. Formation of a Company

4.1 Incorporation

Before a company is formed certain preliminary steps are required.

Mode of incorporation: Any 7 or more persons (2 or more in case of private limited)


associated for any lawful purpose may form an incorporated company, with or without
limited liability.

CI INSTITUTE OF LOGISTICS 39
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Documents to be filed with the Registrar: Before a company is registered, it is to be


ascertained from the Registrar on the proposed name of the company for registering the
name. Then the following documents are to be filed:

³ Memorandum & Articles of Association


³ Agreement if any, with the proposed candidate for Managing Director
³ List of Directors
³ Declaration that all requirements under companies act have been complied
with

Once all requirements are complied with and Registrar is satisfied with the compliance, he
will issue a certificate of incorporation which is the conclusive evidence for compliance.

4.2 Promoter

A promoter is a person who does the necessary preliminary work incidental to the
formation of the company.

The fiduciary position of a promoter may be summed up as follows:

Not to make any profit at the expense of the company


To give benefits of negotiation to the company
To make a full disclosure of interest or profit
Not to make unfair use of position

Pre incorporation contracts

The promoters of a company usually enter into contracts to acquire some property which
is yet to be incorporated. Such contracts are called pre incorporation or preliminary
contracts.

Position of promoters as regard to pre incorporation contracts

CI INSTITUTE OF LOGISTICS 40
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Company not bound by pre incorporation contracts even where it takes the benefits
Company can not enforce preliminary contracts
Promoters personally liable

A company can not ratify a contract entered into by its promoters before incorporation

5. Memorandum & Articles of Association

5.1 Memorandum

The Memorandum of Association is the fundamental document and of great importance in


relation to the proposed company. It contains the fundamental condition upon which alone
the company is allowed to be incorporated. It is the charter of the company and defines
the reasons for existence. It defines area beyond which the actions of company can not
go. It also regulates the external affairs in relation to outsiders.

5.1.1 Purpose

The purpose is two fold:

Ø The prospective shareholders shall know the purpose for which their money is
going to be used
Ø The outsiders dealing with the company shall know with certainty as to what the
objects of the company are and as to whether the contractual relation into which
they contemplate to enter with the company is within the objects of the company

5.1.2 Printing and Signing

The Memorandum shall be printed, divided into paragraphs and numbered and signed. It
shall be as per the form prescribed.

CI INSTITUTE OF LOGISTICS 41
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

5.1.3 Contents

Ø Name of the company (limited / private limited)


Ø The state in which the registered office is to be situated
Ø Objects of the company classified as main objects & other objects
Ø Limited liability (shares/ guarantee)
Ø Share capital

5.1.4 Alteration

Alteration of change of name can be done by special resolution.

Change of registered office from one place to another within the state which is to be
approved by Regional Director.

If the change is from one state to another, a special resolution is required for approval.

The object clause is the most important clause in Memorandum. Change in the clause
may be done with special resolution with following purposes:

Ø To carry on business more economically


Ø To attain its main purpose by new or improved means
Ø To carry on business which can be conveniently combined with existing business
Ø To sell or dispose of the whole or part of undertaking
Ø To amalgamate with any other company

5.2 Articles

The Articles of association are the rules, regulations and bye laws for the internal
management of the affairs of the company. They are next in importance to Memorandum
of Association.

CI INSTITUTE OF LOGISTICS 42
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

5.2.1 Contents

Ø Share capital, rights of shareholders, variation of these rights


Ø Lien on shares
Ø Calls on shares
Ø Transfer of shares
Ø Transmission of shares
Ø Forfeiture of shares
Ø Conversion of shares into stock
Ø Share warrants
Ø Alteration of capital
Ø General meetings
Ø Voting rights of members
Ø Directors, their appointments, remuneration, qualification
Ø Manager/Secretary
Ø Accounts, audit and borrowing powers
Ø Winding up

5.2.2 Table A

There are three options for a Company for articles

Ø it can adopt table A


Ø it can have its own articles
Ø can have combination

5.2.3 Alteration

Companies have been given very wide powers for alteration of articles. It can alter by
passing a special resolution.

CI INSTITUTE OF LOGISTICS 43
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

However there are certain restrictions:

Ø It must not be inconsistent with the act


Ø Must not conflict with the memorandum
Ø Must not sanction anything illegal
Ø Must be for the benefit of company
Ø Alteration can be done only by special resolution
Ø It can be with retrospective effect
Ø Must not result in expulsion of member

Memorandum Articles
1 It is the charter of the company Regulations of the internal management
indicating nature of business,
also defines company’s
relationship with outside world
2 Defines the scope of activity of Rules for carrying out objects of the company
the company
3 Supreme document Subordinate to Memorandum
4 Every company must have their Table A can be adopted
own Memorandum
5 Strict restrictions on alteration Can be altered by special resolution
6 Any act of company ultra-wires Any act ultra-wires the articles but intra-wires
the Memorandum is wholly void the memorandum can be confirmed by
and can not be ratified even by shareholders
shareholders

5.3 Legal effect of Memorandum and Articles

a) Members to company: The memorandum and articles constitute a binding contract


between the members and the company. The effect of this is that each member is bound
to the company as if each member has actually signed the memorandum and articles

5.4 Exception to doctrine of indoor management

b) Company to members: A company is bound to the individual members in terms of


their ordinary rights as members (right to receive notice of general meeting).

c) Members to members: They act as contract between members and binding each
against other.

CI INSTITUTE OF LOGISTICS 44
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

d) Company to outsiders: Articles do not constitute any binding contract between


company and outsider

Doctrine of constructive notice and indoor management

Every outsider dealing with the company is deemed to have notice of contents of
Memorandum and articles. These documents are public documents, filed with Registrar of
companies.

The outsiders dealing with a company are entitled to assume that as far as the internal
proceedings of the company are concerned, everything has been regularly done. They are
presumed to have read these documents and to see that proposed dealing is not
inconsistent therewith and they are not bound to do more, they need not go into regularity
of internal proceedings as required by the memorandum and articles. They can presume
that all are done regularly. This is known as doctrine of indoor management

Thus, whereas doctrine of constructive notice protects the company against outsiders,
doctrine of indoor management seeks to protect outsiders against the company.

Exceptions to doctrine of indoor management:

If one already has the knowledge of irregularity


Acts with negligence
f acts on a forged document
Acts outside scope (officer of a company acts beyond authority)

6. Prospectus

To raise money to meet expenses or projects, company issues prospectus as invitation to


deposits or shares or debentures etc.

CI INSTITUTE OF LOGISTICS 45
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Prospectus is any document issued as prospectus includes notice, circular, advertisement


or other document inviting deposits from public or offers from public for subscription of or
purchase of shares or debentures.

Contents of prospectus:

Part I

Ø General information of company


Ø Capital structure of company
Ø Terms of present issue
Ø Particulars of issue (project cost etc)
Ø Company, management and project
Ø Details on companies under same management
Ø Outstanding litigations pending
Ø Management perception on risk factors

Part II

General information
Ø Consent of directors , auditors, solicitors
Ø Procedure and time schedule of allotment
Ø Change, if any, in directors and auditors
Ø Names of company secretary, legal advisor, lead managers etc

Financial information

Ø Report by auditors
Ø Principal terms of loans and assets
Ø Statutory information
Ø Minimum subscription
Ø Expenses on issues, fees payable to registrar, advisers, and managers
Ø Underwriting commission
Ø Previous issues

CI INSTITUTE OF LOGISTICS 46
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Ø Issue of shares otherwise than cash


Ø Rights of members regarding voting etc
Ø Revaluation of assets if any
Ø Material contracts and inspection

Statement in lieu of prospectus

Where a public company does not invite public to subscribe for the shares, but arranges to
get money from private resources, it need not issue a prospectus to the public, in such a
case the promoters are required to prepare a draft prospectus known as a statement in
lieu of prospectus which should contain the information required to be disclosed by the
Act.

Misstatements in prospectus and consequences

If there is a misstatement of material fact there may arise liability as follows:

Liability for misstatement


I
I
-----------------------------------------------------------------------------------
I I

Civil liability Criminal liability


I
I
I I
Against the company Against directors, promoters, experts
I I
------------------------------------- ------------------------------------------------------
I I I I I

Rescission
Of contract claim for damages damages compensation damages for
I non- compliance I
----------------------------------------------
I I
For fraudulent misrepresentation For innocent misrepresentation

CI INSTITUTE OF LOGISTICS 47
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Commencement of business: A company can commence business once the shares are
allotted up to an amount equal to minimum subscription. A declaration has to be filed with
Registrar to this effect. Registrar will issue a certificate of commencement of business.

7. Membership in a Company

The members or shareholders of a company are the persons who collectively constitute
the company as a corporate entity.

Member Vs Share holder

A registered shareholder is a member but a member need not be a shareholder because a


company need not have share capital.

A legal heir of deceased member is not a member unless he applies and gets the
registration.

Who can not be members?

³ A minor
³ Insolvent
³ Partnership firm (except sec 25 licensed firms)
³ Foreigner of alien enemy nation

Rights and liabilities of members

Rights:

Statutory rights (not exhaustive)

Ø To obtain copies of memorandum & articles


Ø Priority to get offer of shares in case of increase of capital
Ø To transfer shares
Ø To inspect register of members

CI INSTITUTE OF LOGISTICS 48
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Ø To receive copies of statutory, annual reports


Ø Receive notice of meetings
Ø To appoint proxy
Ø To demand poll
Ø To have minutes on request to participate in appointment of directors

Documentary rights

These are rights given by memorandum and articles

Legal rights

These are rights given by general law (eg., for misstatement in prospectus, damages can
be claimed).

Right on assets of company

No shareholder has any right on the assets of a company as they are owned by the
company, but in case of winding up, he will have a share in the distribution of surplus
assets.

Liabilities of members:

In case of company with unlimited liability, each member is liable in full of all debts of the
company.

In case of company limited by shares, each member is liable only to pay the unpaid
amount on the shares held by him.

Company limited by guarantee, each member is liable to contribute to the amount


guaranteed by him to be paid in the event of winding up.

CI INSTITUTE OF LOGISTICS 49
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Register and Index of Members:

Every company shall keep a register of its members with particulars like name, address,
occupation, shares held, amount unpaid or paid, date of membership etc. Company
having more than 50 members should have an index of members also.

Annual return:

Every company, having share capital, shall within 60 days from the date of annual general
meeting, file every year a return with Registrar of companies called annual return.

Format has been prescribed in the schedule, the contents are:


Ø Address of the registered office
Ø Details on shares and debentures
Ø Details of charges/ indebtedness
Ø Details of members with addresses
Ø Details of directors, managing director

8. Share capital

Share capital means the capital raised by the company by issue of shares

Ø Capital may denote - Authorised or nominal- value of shares up to which company


is empowered to issue
Ø Issued- amount of shares issued for subscription
Ø Subscribed- amount of capital subscribed
Ø Paid up-amount paid

There are two kinds of capital: Equity capital and Preference capital

CI INSTITUTE OF LOGISTICS 50
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Alteration of capital:

A company can alter its share capital, if permitted by articles, by

Ø Issuing new shares


Ø Consolidate into shares of larger amount
Ø Sub divide shares into shares of smaller amount
Ø Cancel shares

Reduction of capital:

Law relating to reduction of capital is rigid. It has to be done strictly according to


procedure.

Reduction can be in following ways:


Extinguish or reduce liability on any of shares not paid up (Rs 10 is valus of share, only Rs
6 paid up, remaining Rs 4 can be extinguished)
Pay off any paid up capital which is excess of requirements

Procedure

Special resolution to approve


Application to Tribunal (interest of share holders and creditors will be ensured)
Registration of approval with Registrar of Companies

Reduction can take place without approval of tribunal in following cases:

Forfeiture of shares –for non payment of calls


Surrender of shares- if partly paid up shares are surrendered instead of going through
forfeiture route
Buy back of shares by company
Redemption of preference shares

CI INSTITUTE OF LOGISTICS 51
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Types of preference shares:

Cumulative preference shares-dividends are accumulated till the capital is returned


Non cumulative preference shares- dividends are not accumulated
Participatory preference shares-not only eligible for fixed rate of dividend but also share in
surplus after the claims of equity share holders
Non participatory preference shares- only fixed rate of dividend
Convertible preference shares- convertible into equity
Non convertible preference shares
Redeemable preference shares- can be redeemed after a period

Buy back of shares: A company can purchase its own shares from

Out of its reserves


Out of premium account
Out of proceeds of earlier issue

Conditions

Should be authorized by its articles


To be approved by special resolution
If listed, as per guidelines of SEBI

9. Borrowing powers

Borrowings of a company may ultra-wires the company or intra-wires the company but
ultra-wires the directors, that is beyond the scope of their authority

Ultra-wires the company: If the borrowings ultra-wires the company, that is beyond its
scope or powers, it is void.

Intra-wires the company but ultra-wires the directors: This can be ratified and rendered
valid by the company

CI INSTITUTE OF LOGISTICS 52
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Debentures

It is the most common way of borrowing. It is like issue of shares for capital. It is a
document creates debt or acknowledges it

Characteristics:

Ø It is issued in the name of company and as a certificate


Ø Issued under company’s seal
Ø It usually specifies period
Ø It generally creates charge on assets
Ø The holder does not have right to vote

Kinds of debentures:

Ø Bearer debentures- this is payable to the bearer, kind of negotiable instruments


Ø Registered debentures-payable to registered holders, however are also
transferable
Ø Secured debentures- which create some charge on the property of the
company
Ø Unsecured debentures- which do not create charge
Ø Redeemable debentures- usually issued on the condition that they shall be
redeemed after a period
Ø Irredeemable debentures or perpetual debentures- when they are irredeemable
they are called perpetual
Ø Convertible debentures-given an option to holders to convert into capital
Ø Non convertible debentures

Charges:

The power of a company to borrow includes the power to create a charge upon its
assets. The charge that may be created on the assets of a company may be a fixed
charge or a floating charge.

CI INSTITUTE OF LOGISTICS 53
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

A fixed charge or specific charge is one which is created on some specific and definite
assets of the company (eg., charge on land & building). A floating charge is an
equitable charge which is crated on some class of property which is constantly
changing (on stock).

Charges are to be registered with Registrar of companies, if not charge becomes void.

10. Summary

We saw the definition of a company as voluntary association of persons. There are unique
characteristics of a company and by which it is always treated as separate legal entity.
Companies may be limited by capital or liabilities.

The fundamental documents for a company are Memorandum & Articles of association
which govern the powers and internal regulations of a company. While amendment of
clauses of Memorandum calls for stringent procedures, for Articles it is internal.

Prospectus is the document issued for raising capital by a company.

The share holders are the owners of a company. They can be registered members of a
company. There are stipulated rights and liabilities of members.

The share capital of a company can be up to the authorized amount. The capital can be
altered, increased or reduced following certain procedures.

Debentures are certificates issued to acknowledge the debts. It can be secured or


unsecured.

The borrowings of a company may have charge on assets which can be fixed or floating.

CI INSTITUTE OF LOGISTICS 54
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

11. Key words

1. Separate legal entity: A company, in law, is regarded as an entity separate from


its members. In other words it has an independent corporate existence.
2. Limited by shares: A company may be a company limited by shares or limited by
guarantee. If a company is limited by shares, the liability of members is limited to
the unpaid value of the shares.
3. Limited by guarantee: If a company is limited by guarantee, the liability of the
members is limited to such amount as the members may undertake to contribute to
the assets of the company , in the event of its being wound up.
4. Companies with unlimited liability: A company without limited liability is known
as unlimited company. In case of such a company, every member is liable for the
debts of the company in proportion of his interest in the company.
5. Memorandum: The Memorandum of Association is the fundamental document
and of great importance in relation to the proposed company. It contains the
fundamental condition upon which alone the company is allowed to be
incorporated. It is the charter of the company and defines the reasons for
existence. It defines area beyond which the actions of company can not go. It also
regulates the external affairs of the in relation to outsiders.
6. Articles: The Articles of association are the rules, regulations and bye laws for the
internal management of the affairs of the company. They are next in importance to
Memorandum of Association.
7. Prospectus: It is any document issued as prospectus includes notice, circular,
advertisement or other document inviting deposits from public or offers from public
for subscription of or purchase of shares or debentures.
8. Membership in a Company: The members or shareholders of a company are
the persons who collectively constitute the company as a corporate entity.
9. Annual return : Every company , having share capital , shall within 60 days
from the date of annual general meeting, file every year a return with
Registrar of companies called annual return.
10. Authorised or nominal capital: value of shares up to which company is
empowered to issue.

CI INSTITUTE OF LOGISTICS 55
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

11. Issued capital: amount of shares issued for subscription


12. Subscribed capital: amount of capital subscribed
13. Debentures: It is the most common way of borrowing. It is like issue of shares for
capital. It is a document creates debt or acknowledges it.
14. Fixed charge or specific charge: It is one which is created on some specific and
definite assets of the company (eg., charge on land & building).
15. Floating charge: is an equitable charge which is crated on some class of property
which is constantly changing (on stock).

12. Exercises

1. Define a company, what is corporate viel?


2. What is Memorandum of association, what are the contents?
3. What is an Articles of association, what are the contents?
4. Write a note on alteration of memorandum and articles
5. Define prospectus, when is a company not required to issue a prospectus?
6. Explain the liabilities for mis-statements in prospectus
7. Who are members of a company?
8. What are rights & liabilities of members?
9. Explain concept of capital
10. What are the different ways of alteration of capital?
11. What are types of preference shares?
12. Define debentures, what are various types?
13. Explain charges

13. Reference readings

³ company Law by N D Kapoor


³ Company Law by Ramiah

CI INSTITUTE OF LOGISTICS 56
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 4: INCOME TAX ACT 1961

After reading this act you will understand

³ Meaning of various terms used


³ Income on which tax is charged
³ Exempted income
³ Tax structure
³ Certain procedures
³ Penalties

Contents

1 Introduction
2 Basis of charge
3 Income do not form part of total income
4 Heads of income
4.1 Salaries
4.2 Income from house property
4.3 Profits and gains from business
4.4 Capital gains
4.5 Income from other sources
5 Set off / set on
6 Deductions
7 Double taxation
8 Brief note on transfer pricing
9. MAT
10.Tax on distribution of income
11.Special provisions for shipping companies
12. Advance tax
13 Income tax on fringe benefits
14 TDS
15 Appeals
16 Penalties
17 Summary
18 Key words
19 Practical questions
20 Reference readings

CI INSTITUTE OF LOGISTICS 57
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

1. Introduction

The act was introduced in the year 1961.It extends to whole of India. The Act contains 23
chapters and 298 sections (at the time of preparation of the material). The major
amendments are carried out by the budget proposals of every year. The last amendments
were carried out by the Finance 2005

2. Basis of charge

Income tax is chargeable on total income of a person resident in India for the previous
year

Resident- if is in India for a period of 182 days and more in the previous year or in
previous 4 years has been in India for 365 days or more

Previous year-financial year immediately preceding the assessment year

Assessment year means a period of 12 months commencing every 1st April

3. Income do not form part of total income

The following are some major income not to be included in total income to be considered
for taxation

Ø Agricultural income
Ø Any income by way of interest on securities for NRIs as notified by Central
Government
Ø In case of an individual, the travel concession received from employer (LTA)
subject to certain restrictions
Ø Income of an individual working in embassy or trade commission with restrictions
Ø Gratuity as per rules received subject to limitations
Ø Commuted pension upto one half of pension amount
Ø Leave credit amount received after retirement

CI INSTITUTE OF LOGISTICS 58
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Ø Compensation received under workmen compensation act


Ø Sums received from super annuation fund after retirement
Ø Payment from provident fund to the extent provided in rules
Ø Sums received under LIC policy subject to restrictions
Ø Scholarships granted to meet educational expenses
Ø Allowance received by MPs and MLAs
Ø Income of scientific research association
Ø Income of a public charitable trust
Ø Incomes of certain approved funds (PM Relief fund)
Ø Dividends received from Mutual and venture capital funds subject to conditions
stipulated
Ø Income of undertakings established in special trade zone for ten years which is
subject to conditions
Ø Income of certain 100 % EOUs with conditions

4. Heads of income

4.1 Salaries

It has to be kept in mind that there will not be any type of deductions allowed in respect
of expenditure incurred relating to income which do not form part of total income

Meaning : Salary includes any salary due from employer or previous employer whether
paid or not and arrears of salaries paid during the previous year. This also includes
bonus, commission by whatever name called

Ø Salary includes , as per definition,


Ø Wages
Ø Any annuity or pension
Ø Gratuity
Ø Fees, commission, perquisites, profits in lieu of salary
Ø Advance salary
Ø Leave wages
Ø Annual accumulation to PF fund

CI INSTITUTE OF LOGISTICS 59
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Perquisite means –

Ø Value of rent free accommodation


Ø Value of concession of rent
Ø Value of benefit or amenity granted at free of cost or at concessional cost
Ø Any sum paid by the employer in respect of any obligation which was payable by
the assessee
Ø Value of fringe benefits

However this shall not apply to the medical facilities provided by the employer

Deductions : Following is the list of major deductions allowed to be deducted from


salary income
If salary exceeds Rs 5 lacs a standard deduction of Rs 20000 , if salary does not exceed
Rs 5 lacs , it will be 40% or Rs 30000 whichever is less
Sum paid by employee for taxation as per rules
In case of Government employee, for entertainment expenses, if any allowance is
received, a sum equal to one fifth of salary or Rs 5000 whichever is less

Taxation slabs / rates with details of deductions are explained in IT rules which are
amended from time to time

4.2 Income from house property

The annual value of property consisting of any buildings or land appurtenant thereto of
which assessee is the owner, is chargeable to tax provided he does not occupy for the
purpose of carrying on business , the profits of which is chargeable under other heads

Annual Value – actual rent received or sum which the property is expected to earn as
reasonable rent

If it is vacant for some period , the value will get reduced proportionately

CI INSTITUTE OF LOGISTICS 60
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

If the property is residential and occupied by owner, the value shall be taken as nil

Deductions from property income

Sum equal to 30% of annual value


Interest on borrowed capital used for construction of property (not exceeding Rs 150000)
Taxes paid on the house

If rent is unrealized during a previous year but subsequently realized, it will be


chargeable to tax in the year of receipt

If property is owned jointly, the income and deductions are shared in the same
proportion of ownership

4.3 Profits and gains from business

Following income are chargeable to tax under head Profits & Gains from Business

Profits and gains of any business or profession


Profits on sale of license granted under Exim policy
Cash assistance received for exports under Exim policy
Value of any benefit or perquisite whether convertible into money or not, arising from
business
Interest, salary, bonus, commission or remuneration, by whatever name called, received
by partners of a firm
Sum received under key man insurance policy
Any sum received or receivable for not carrying out any activity relating to business or
not sharing know how etc
Any compensation received for termination of business
Income received by a trade or professional association for the services rendered by its
members

CI INSTITUTE OF LOGISTICS 61
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Following are some major deductions allowed :

Rent, rates and taxes, repairs , insurance of premises occupied and used for business
Repairs of building, machinery etc
Depreciation as computed by the Act (Various rates have been prescribed for different
types of assets and also to encourage investments in specific areas or industry)
Development rebate / reserve - Various rates have been prescribed for different types of
assets
Expenditure on scientific research
Expenditure on acquisition of patent rights
Expenditure on know how
Expenditure for obtaining telecommunication license
Amortisation of certain preliminary expenses
Amortisation of expenses in VRS
Amortisation of amalgamation expenses
Insurance premium for the assets of the business
Bonus or commission paid to employees as per rules
Interest on loans
Contribution to PF fund for employees
Contribution to approved gratuity fund
Salaries and wages
Bad debts provided as per rules
Any normal business expenditure

Amounts not allowed as deduction :

Interest or royalty fees payable outside India on which tax is not deducted at source or
deducted but not remitted in time
Any brokerage or commission to professionals or contractors on which tax is not
deducted at source or deducted but not remitted in time
Sum paid on account of fringe benefit tax
Sum of tax paid on account of profits and gains from business
Any expenses which the assessing officer feels as unreasonable or excessive

CI INSTITUTE OF LOGISTICS 62
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Cash payments in excess of Rs 20000


Expenses on interest on loans, contribution to PF etc, rates and taxes etc which are not
paid (allowed only hen they are paid)

Audit of accounts:

Every person carrying on business shall , if his total sales , turnover exceeds Rs 40
lacs or for a person carrying on profession , the gross receipts exceeds Rs 10 lacs has
to get his accounts audited and report be furnished before a specified date

Special provision for computing profits and gains of plying , hiring or leasing of
goods carriages

In case of an assessee who owns not more than 10 goods carriages at any point of
time during the previous year and who is engaged in the business of plying , hiring or
leasing of goods carriages , the business income for tax computation shall be

if heavy goods vehicle, Rs 3500 per vehicle per month


For other vehicles Rs 3150 per vehicle per month

No expenses are allowed as they are already factored

In case the assessee shows a higher amount , it will be accepted

Special provision for computing profits and gains in case of shipping & air craft
business in case of non residents

If an assessee is a non resident and engaged in the business of operation of ships , a


sum equal to 7 ½ % of the aggregate of following amounts shall be deemed to be the
profits and gains of such business

An amount payable to assessee on account of carriage of passengers , live stock or


mail or goods shipped at any port in India

CI INSTITUTE OF LOGISTICS 63
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

an amount received in India on account of the carriage of passengers, live stock ,


mails or goods shipped at any port outside India

4.4 Capital gains

Profits arising out of transfer of assets are chargeable to tax under the head ‘Capital
Gains’

Some important points

If an assessee gets an insurance claim for loss of assets due to flood or hurricane or
earth quake or riots etc then such profits are taxed as capital gains

If an assesse transfers an asset to a firm in which he gets admitted , it is treated as


transfer and capital gain is attracted

When the assets of a firm is distributed on liquidation , it is treated as transfer and capital
gain will be attracted in the hands of the firm.

If a company goes for liquidation , the distribution is not transferred as transfer in the
hands of company and there be no capital gains for the company. The shareholder who
gets the assets will be covered under capital gains

If a shareholder gets money for buying its own shares by the company , the difference
between the cost and realization is subject to capital gain tax

The following are not considered as transfers :

Distribution of assets by HUF


Transfer of assets by gift
Transfer of assets by holding to subsidiary and vice versa subject to certain conditions
Transfer under scheme of amalgamation subject to conditions
Transfer under scheme of demerger
Transfer of asset by a firm to a company as a result of succession of the firm by the
company subject to conditions

CI INSTITUTE OF LOGISTICS 64
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Mode of computation:

The income of capital gains can be computed by reducing from full value of
consideration the following :

Ø Expenditure incurred wholly and exclusively for the transfer


Ø Indexed cost of acquisition (worked out based on cost inflation index)
Ø Indexed cost of improvements

Capital gain not to be taxed If the assessee invests the net consideration from the
transfer of long term assets in specified assets (if part amount is invested , exemption is
proportionate) Net consideration means full revenues reduced by direct expenses

If the capital gains are invested in residential properties or in specified assets as notified,
then the capital gains are exempted from tax

4.5 Income from other sources

Income which shall not be excluded from total income and which has not been included in
any other head , shall be charged under the head ‘income from other sources’

Following are some of such income

Ø Dividends
Ø Interest on securities
Ø Lease or rental income if not charged under house property or profits and gains of
business

Reasonable commission or other expenses relating to such income are deductible as


expenses

CI INSTITUTE OF LOGISTICS 65
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

5. Set off

Set off of loss from one source against income of another source under same head of
income:

Such set off can be done except for loss under head capital gains

In case of loss of short term asset, the loss can be set off against gain of another short
term asset only. Similarly loss of a long term capital asset can be set off against gain of
long term capital asset

Set off of loss from one head against income of another

If the net result of any head other than capital gains is a loss, and there is no income
under the head capital gains, such loss can be set off against income of any other head

If the net result of any head other than capital gains is a loss, and there is income under
the head capital gains, such loss can be set off against income of any other head
including capital gains (both short and long term)

However the loss under the head capital gains can not be set off against income of other
heads

Loss under speculation business can be set of only against profits of another speculation
business

Carried forward for set off: In case of loss under head income from house property,
which can not be set off against income of other heads, can be carried forward to set off
in subsequent year , against income from house property of that year

Similarly the losses of head business income and capital gains can be carried forward
and set off against gains of business income and capital gains of following year

CI INSTITUTE OF LOGISTICS 66
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Losses of speculation business can be carried forward and set off against speculation
business profits of subsequent year and so on

The carried forward can be done for 8 years

The procedures for set off and carried forward are prescribed in the Act

6. Deductions

Section 80 of IT Act provides various deductions from the computed total income

Some of major deductions are:

Ø LIC Premium
Ø Deferred annuity plan
Ø Pf
Ø Unit linked insurance scheme
Ø Tuition fees for self an family
Ø principal repayment for housing loan
Ø stamp duty and registration fees for purchase of house

Subject to maximum of Rs 100000 and subject to rules prescribed

Ø Deposits into National savings scheme


Ø Medical insurance premia
Ø Expenses for medical maintenance of dependents
Ø Repayment & interest of educational loan taken for higher education
Ø Rents paid , not receiving HRA, any expenditure in excess of 10% of salary
Ø Donations
Ø Profits and gains of certain notified undertakings
Ø Interest on securities subject to Rs 12000 and certain conditions

CI INSTITUTE OF LOGISTICS 67
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

7. Double taxation

Central government may enter into agreement with any country

for granting relief in respect of Income tax chargeable by both countries to promote
mutual economic relations
for avoidance of double taxation of income under this Act and corresponding law in force

List of countries with whom India has already signed double taxation agreement is
provided by the rules

8. Brief note on transfer pricing

Any income or expense from / to an international transaction with an associated


enterprise shall be computed having regard to arm’s length price

This means that all international transactions , sale, purchase or expenses, with
associated enterprise (s) are subject to review and such transactions shall be computed
with arm’s length price

Arm’s length price can be by any reasonable method


comparable method
cost plus method
profit split method
net margin method
any other prescribed method by Board

The price by most appropriate method would be applied irrespective of the document
price and tax shall be computed accordingly

Documents and books are to be maintained as prescribed by the Act

CI INSTITUTE OF LOGISTICS 68
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

9. MAT

If a company shows book profit and the profits as per IT Act is a loss or is less than 7 ½
% of the book profits , then such book profits would deemed to be the income of the
assessee and tax payable would be at the rate of 7 ½ %

10. Tax on distribution of income

In addition to the normal income tax, additional tax shall be charged on the distribution of
income by companies at the rate of 12 ½ %

11. Special provisions for shipping companies

A shipping company has the option to work out the income as per prescribed methods of
computation and such income shall deemed to be the income under the head ‘profits
and gains from business’

Eligible companies-

Indian company
The place of effective management of the company is in India
It owns at least one qualifying ship
Main object of company is to carry on the business of operating ships

What is a qualifying ship?

It is sea going ship of fifteen net tonnage or more


It is a ship registered under Merchant shipping Act and in respect of which license has
been issued by Director General of shipping
A valid certificate is in force

CI INSTITUTE OF LOGISTICS 69
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Does not include

Fishing vessels
Pleasure crafts
Harbour ferries

A shipping company shall compute the tonnage income as per following table and such
computation has to treated as separate income

Qualifying ship having tonnage Amount of daily tonnage income


(1) (2)
Up to 1000 Rs 46 for each 100 tons
exceeding 1000 but not more than 10000
Rs 460 plus Rs 35 for each 100 tons
exceeding 1000 tons
exceeding 10000 but not more than Rs 3610 plus Rs 28 for each 100 tons
25000 exceeding 10000 tons
Exceeding 25000 Rs 7810 plus Rs 19 for each 100 tons
exceeding 25000 tons

The amount shall be multiplied by the number of days operated and such income shall
deemed to be the income as per the head ‘profits and gains of business’

12. Advance tax

Tax has to be paid in advance and for that purpose an assessee has to estimate his
income properly

The advance tax schedule is given as follows :

For companies

Due date of instalment Amount payable


On or before 15th of June Not < 15% of advance tax
On or before 15th of September Not < 40% of advance tax as reduced by
earlier instalment
On or before 15th of December Not <75% of advance tax as reduced by
earlier instalments
On or before 15th of arch Whole amount of such advance tax as
reduced by amounts paid earlier

CI INSTITUTE OF LOGISTICS 70
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

All assesses other than companies

Due date of instalment Amount payable


On or before 15th of September Not < 30% of advance tax
On or before 15th of December Not <60% of advance tax as reduced by
earlier instalments
On or before 15th of March Whole amount of such advance tax as
reduced by amounts paid earlier

13. Income tax on fringe benefits

In addition to the income tax , an additional income tax called FBT shall also be charged
on the facilities / benefits provided by employers to employees.

The following are such benefits-

Any privilege , service or amenity provided directly or indirectly


Free or concessional ticket given to employees for private journeys
Contribution to approved super annuation fund

Following are the benefits deemed to have been provided if the employer has incurred any
expenses towards-

Ø Entertainment
Ø Conference
Ø Sales promotion
Ø Employees welfare
Ø Conveyance, tour and travel
Ø Use of hotel
Ø Reapair and running of motor car
Ø Festival celebrations
Ø Use of health club and other clubs
Ø Gifts
Ø Scholarships

The values of these fringe benefits have also been stated in the act

Employer has to file a return on FBT by 31st of October every year

CI INSTITUTE OF LOGISTICS 71
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

14. TDS

Certain income are liable to be charged tax and such tax is charged at source, collected
and remitted. In case of income in respect of which there is no ruling for such recovery
and remittance at source, for such income the assessee shall pay the tax directly

Following are major such incomes which are subject to tax deduction at source
Ø Salaries
Ø Interest on securities
Ø Interest other than Interest on securities
Ø Winnings from lotteries, horse race
Ø Payments to contractors and sub contractors
Ø Insurance commission
Ø Commission and brokerage
Ø Professional and technical services
Ø Income from mutual funds
Ø Others as notified from time to time

Failure to deduct and remit attracts penalties. Assessee can take credit of such tax
amount deducted in his return based on certification by the person who had deducted.
More and more sources are being brought into this bracket to ensure avoidance of tax
and collection of tax in advance

15. Appeals

Aggrieved assessee , by the order of assessing officer , may appeal to higher authorities
in the following order

Deputy commissioner of appeals


Commissioner of appeals
Appellate Tribunal
High Court
Supreme Court

CI INSTITUTE OF LOGISTICS 72
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

16. Penalties

Following are some failures which attract penalties:

Ø Failure to furnish returns, comply with notices


Ø Concealment of income
Ø Failure to keep , maintain books as required by Act
Ø Failure to get accounts audited
Ø Failure to furnish audit report as per requirement
Ø Failure to deduct tax at source
Ø Failure to furnish annual information return
Ø Failure to comply with rules on fringe benefits
Ø Failure to allow inspection by authorities
Ø Failure to estimate and pay advance tax

17. Summary

Income tax is chargeable on total income of a person resident in India for the previous
year

Resident- if is in India for a period of 182 days and more in the previous year or in
previous 4 years has been in India for 365 days or more

Previous year-financial year immediately preceding the assessment year

The income are classified under some broad categories for taxation purposes , viz.,
salaries, Income from house property, profits nad gains from business, capital gains and
income from other sources

Set off of loss from one source against income of another source under same
head of income is permitted

Set off of loss from one head against income of another is allowed

If the net result of any head other than capital gains is a loss, and there is no income
under the head capital gains, such loss can be set off against income of any other head

CI INSTITUTE OF LOGISTICS 73
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

If the net result of any head other than capital gains is a loss, and there is income under
the head capital gains, such loss can be set off against income of any other head
including capital gains (both short and long term)

However the loss under the head capital gains can not be set off against income of other
heads

In case of loss under head income from house property , which can not be set off
against income of other heads , can be carried forward to set off in subsequent year ,
against income from house property of that year

Similarly the losses of head business income and capital gains can be carried forward
and set off against gains of business income and capital gains of following year

The carried forward can be done for 8 years

Central government may enter into agreement with any country

For granting relief in respect of Income tax chargeable by both countries to promote
mutual economic relations
For avoidance of double taxation of income under this Act and corresponding law in
force

Any income or expense from / to an international transaction with an associated


enterprise shall be computed having regard to arm’s length price

This means that all international transactions, sale, purchase or expenses, with
associated enterprise (s) are subject to review and such transactions shall be computed
with arm’s length price by prescribed methods

Assessees shall pay tax in advance as per the schedule prescribed by the Act

In addition to the income tax , an additional income tax called FBT shall also be charged
on the facilities / benefits provided by employers to employees.

CI INSTITUTE OF LOGISTICS 74
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

18. Key words

a) Resident- if is in India for a period of 182 days and more in the previous year or in
previous 4 years has been in India for 365 days or more

b) Previous year-financial year immediately preceding the assessment year

c) Assessment year: means a period of 12 months commencing every 1st April

d) Salary: Salary includes any salary due from employer or previous employer whether
paid or not and arrears of salaries paid during the previous year. This also includes bonus,
commission by whatever name called

e) Annual Value – actual rent received or sum which the property is expected to earn as
reasonable rent

f) Capital gains: Profits arising out of transfer of asset

g) Set off: Loss of one head – adjustment agaist gain of another head

h) Transfer pricing : Any income or expense from / to an international transaction with


an associated enterprise shall be computed having regard to arm’s length price

i) Advance tax: Taxation to be paid in advance based on estimates on the schedule


prescribed by the Act

j) Fringe benefit tax: In addition to the income tax , an additional income tax called FBT
shall also be charged on the facilities / benefits provided by employers to employees.

k) TDS: Tax deducted at source

CI INSTITUTE OF LOGISTICS 75
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

19. Practical questions

1. What are income that do not form part of total income?


2. Define salary and perquisite
3. What do you mean by income from house property and what are major deductions
allowed under that head?
4. What are income and deductions under the head profits and gains from business?
What are the disallowed deductions?
5. What do you mean by Capital gain? Hat are not considered as transfers?
6. List major deductions under section 80
7. What do you understand by Transfer Pricing and what are major provisions?
8. What do you understand by double taxation agreements?
9. Write a note on special provisions applicable to shipping companies
10. What is the schedule of payments of advance tax?
11. Write a note on TDS
12. What are salient rules regarding fringe benefit tax?
13. Write a note on provisions on appeals?

20. Reference readings

³ Bare Act
³ Income Tax by Taxman
³ Income Tax by Singhania

CI INSTITUTE OF LOGISTICS 76
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 5: THE CENTRAL EXCISE ACT 1944

After studying this module you will understand

Ø Meaning
Ø How are Levies & collections of duty are done
Ø Methods of Valuation of goods
Ø Powers and duties of officers
Ø Penalties

Contents

1. Introduction
2. Levy and collection of duty
3. Powers and duties of officers
4. Advance rulings
5. Settlement of cases
6. Adjudication , confiscations and penalties
7. Appeals
8. Summary
9. Self examination questions
10. Reference books

1 Introduction

The Central Excise Act was introduced in year 1944. On various occasions the Act has got
amended , the amendments are normally introduced by Finance Bills passed every year.

There are 40 sections in the Act in seven chapters. The act is framed in such a way that it
describes levy and collection, indicating amount of duty, powers of authorities, adjudication
of confiscations and penalties etc. Most of amendments are implemented through
schedules

Recently concept of CENVAT is introduced (Central Value Added ). This concept is


derived from internationally used concept of VAT , earlier known as MODVAT

2.Levy and collection of duty

2.1 A duty of excise , called as CENVAT, shall be levied and collected on all excisable
goods , which are produced or manufactured in India (excluding goods produced in special

CI INSTITUTE OF LOGISTICS 77
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

economic zones) at the rates specified in First and second schedule of Central Excise
Tariff Act

In case of goods produced or manufactured in special economic zones (SEZ) or by a


hundred percent export oriented units (100 % EOU) and brought to any other place in
India , the duty shall be the aggregate of duties of customs which are leviable as per
customs act as if they are manufactured outside India and imported into India

The application of levy shall not apply to manufacture of salt by or on behalf of


Government

2.2 Valuation of excisable goods:

If the transaction is genuine , not between related parties , the duty shall be chargeable on
value of goods which is the transaction value , when the goods are sold by the assessee ,
at the time of delivery or removal

In other cases , the value will be determined and not the transaction value automatically

(related means ‘relative’ or ‘inter connected undertakings’)

This does not apply for goods for which a tariff value has been fixed
Transaction value means – price actually paid or payable for the goods when sold and
includes in addition to the amount charged as price. However it excludes excise duty and
sales tax and other levies

Valuation of goods for retail sale price

Where the goods are excisable and are chargeable to duty with reference to value , then
such value shall be deemed to be the retail sale price declared on such goods

Where the excisable goods are removed from the place of manufacture without declaring
the retail price of the goods on the packages

CI INSTITUTE OF LOGISTICS 78
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Or retail price has been declared not as per the requirements of the provisions of the Act,
then such goods shall be liable to confiscation and retail price shall be ascertained as per
the prescribed manner

Registration : A person who is engaged in production / manufacture of any specified


goods included in first and second schedule of Act , shall register himself with proper
officer in prescribed manner

Any person violating the provisions will be pushishable , in case the offence relating to
duty amount exceeding Rs 1lac – imprisonment which may extend to 7 years , in other
cases imprisonment which may extend to 3 years with fine

If duty is short levied or excess refunded erroneously then authorities have powers to
issue show cause notice

If dues are not recovered , the Authorities have the right to enforce attachment on the
goods or can enforce others to deduct such amounts payable to the defaulter

Authorities also have powers to charge interest on delayed payments , the rates are
stipulated from time to time, not less than 10 % and not more than 36 % pa

If by suppression of facts or fraud duties are short paid , authorities shall determine the
exact duties and can also levy penalties for equal amount

Refund : Any person claiming refund can file an application to the Assistant Commissioner
of Central excise before expiry of one year from the incurrence date. If duties are paid
under protest , one year limitation does not apply

If refunds are elayed , interest shall be paid as per rules , not less than 5 % and not
exceeding 30 % pa

CI INSTITUTE OF LOGISTICS 79
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Indicating amount of duty in the price of goods etc

Every person has to prominently indicate the amount of duty which will form part of the
price , at the time of clearance of goods

Every person who has paid the duty of excise on any goods , be deemed to have passed
on the full incidence of such duty to the buyer of such goods

3. Powers and duties of officers

A central excise officer may exercise the powers and discharge the duties conferred or
imposed under this Act

With the prior approval of Commissioner, can arrest any person whom he has reason to
believe to be liable to be punished under this Act
Can summon persons to produce documents
With the prior approval of Commissioner, can order for special audit of the manufacturer
by a nominated person, if he is of the opinion that values are not correctly declared
Special audit can also be ordered if it is felt that credit of duty availed is not within normal
limits
All officers of police, customs, village administration, land revenue are required to assist
Central excise officers

Any excise officer makes search or seizure of places or documents without reasonable
reasonable ground or reason, is punishable with fine

Any excise officer who ceases or refuses to perform or withdraws himself from duties , is
punishable for imprisonment and or penalties

4. Advance rulings

Advance rulings means the determination by the authority, of law or facts specified in the
application regarding the liability to pay duty in relation to an activity proposed to be
undertaken by the applicant

CI INSTITUTE OF LOGISTICS 80
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

An applicant desirous of of obtaining an advance ruling may make an application in such


form and in such manner as may be prescribed setting the question on which the advance
ruling is sought

The question shall be in respect of

Ø Classification of goods
Ø Applicability of notifications issued
Ø Principles to be adopted for the purpose of determination of value of goods

5. Settlement of cases:

Central Government, by notification in official gazette, constitute a commission to be


called the customs and excise settlement commission for the settlement of cases.

An assessee may, file an application in the prescribed form and manner, containing full
details of duty or liability with workings and the short levy of on account of mis.
Classification etc to settle the case. On receipt, the commission will call for a report from
the Commissioner of central excise and opportunity will be given to all concerned

If for any reason the commission is of the opinion, pending the proceedings, for the
purpose of protecting the interests of revenue it is necessary to do so , it may
provisionally attach any property belongs to the applicant

The commission has also powers to reopen completed proceedings if it thinks it is


required to be done. It has got powers to inspect the any such person, can grant
immunity to person, can send back the case back to central excise officer if felt the
applicant has not cooperated with officer, the order of settlement shall be conclusive as
to matters stated therein

6. Adjudication, confiscations and penalties

If anything required to be confiscated under the act, it can be done with restriction on
values by assistant commissioner level and without restrictions by commissioner

However opportunity will be given to the party in the proceedings

Party has option to pay fine in lieu of confiscations

CI INSTITUTE OF LOGISTICS 81
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

7.Appeals

Any person aggrieved by the order of Central excise officer may appeal to to the
commissioner of central excise within 60 days of date of communication of such order

The commissioner shall give an opportunity to the applicant to be heard and after such
hearing he shall pass the order which shall be in writing

Commissioner shall pass the order within 6 months , where ever possible, from the date
of filing

A person who is aggrieved by the order of commissioner , may appeal to Appellate


tribunal in certain cases

The tribunal after hearing from parties concerned , may amend or confirm the order

If any party is aggrieved with such orders they can appeal to High Court and similarly
further to Supreme court

8. Summary

A duty of excise , called as CENVAT, shall be levied and collected on all excisable
goods , which are produced or manufactured in India (excluding goods produced in
special economic zones) at the rates specified in First and second schedule of Central
Excise Tariff Act

If the transaction is genuine , not between related parties , the duty shall be chargeable
on value of goods which is the transaction value , when the goods are sold by the
assessee , at the time of delivery or removal

In other cases , the value will be determined and not the transaction value automatically

Where the excisable goods are removed from the place of manufacture without
declaring the retail price of the goods on the packages

A person who is engaged in production / manufacture of any specified goods included in


first and second schedule of Act , shall register himself with proper officer in prescribed
manner

CI INSTITUTE OF LOGISTICS 82
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Any person violating the provisions will be pushishable , in case the offence relating to
duty amount exceeding Rs 1lac – imprisonment which may extend to 7 years , in other
cases imprisonment which may extend to 3 years with fine

Any person claiming refund can file an application to the Assistant Commissioner of
Central excise before expiry of one year from the incurrence date. If duties are paid
under protest , one year limitation does not apply

A central excise officer may exercise the powers and discharge the duties conferred or
imposed under this Act

Any person aggrieved by the order of Central excise officer may appeal to the
commissioner of central excise within 60 days of date of communication of such order.
Further appeals shall be in the order of Appellate tribunal, High court and Supreme court

9. Self examination questions

1. Explain applicability of the act


2. Explain how valuation is done and rules regarding the same
3. Explain penalties in case of irregularities
4. What are powers and duties of officers?
5. What do you mean by advance rulings?
6. Mention the procedures for settlement of cases?
7. Explain provisions relating to appeals?

10.Reference books

Ø Bare Act
Ø R K Jain

CI INSTITUTE OF LOGISTICS 83
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 6: CENTRAL SALES TAX ACT 1956

After reading this act you will understand

Ø Meaning and purpose


Ø Way of operating
Ø Inter state tax
Ø Way of settling disputes

Contents

1. Introduction
2. Incidence
3. Inter sales tax
4. Goods of special importance
5. Settlement of disputes
6. Summary
7. Key words
8. Practical questions
9. Reference readings

Introduction

This Act was enacted in the year 1956 and extends to whole of India
This Act contains six chapters and 23 sections. The Act is supplemented by schedules
and rules. Major amendments are effected by Finance bills normally

Meaning of some important terms –

a) Appropriate state- if a dealer operates from one state , that state; if he operates from
different states , all such states

b) Business- any trade , commerce or manufacture whether or not the firm is carried on
with profit motive

c) dealer- means a person who carries on business of buying , selling, supplying or


distributing goods directly or indirectly for cash or for deferred payment or for
commission , remuneration or other valuable consideration and includes-
- a local authority, company , cooperative society , club , firm, HUF
- broker , commission agent

CI INSTITUTE OF LOGISTICS 84
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

d) Goods- includes all materials, articles, commodities and all movable property but does
not include newspapers, shares and securities

e) Place of business- if a dealer carries on business directly or through agent, such


place of business
- warehouse, godown
- place where dealer keeps his accounts

f) Registered dealer- a dealer registered as per the provisions

g) Sale – any transfer of property in goods by one person to another for cash or for
deferred benefit or for any valuable consideration

h) sale price- amount payable to dealer as consideration for sale of any goods less any
sum allowed as cash discount according to practice prevailing in the trade

Incidence

2.1 when sale or purchase of goods deemed to take place in the course of inter
state trade

when the sale or purchase

- occasions the movement of goods from one state to another


- Is effected by transfer of documents of title to goods during their movement
from one state to another

explanation

– where movement of goods commences and terminates in the same state , it shall
not be a movement of goods from one to another state
- determination of movement from one to another state depends on contract and not
mere movement of goods

CI INSTITUTE OF LOGISTICS 85
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

2.2 when a sale or purchase of goods said to take place in the course of import or
export

A sale or purchase of goods shall be deemed to have taken place in the course of
exports out of country if sale or purchase of goods is effected by transfer of documents
of title to the goods after the goods have crossed the customs frontiers of India

A sale or purchase of goods shall be deemed to have taken place in the course of import
of goods into territory of India only if the sale or purchase is effected by transfer of
documents of title to the goods before the goods have crossed the customs frontier

The point to note here is that the documents to be complete on transfer of title

Inter sales tax

Liability to tax on inter state sales

Every dealer shall be liable to pay tax on all sales of goods effected by him in the course
of inter state trade . however he is not liable for taxation in case of export of goods. Any
subsequent sale is exempt from taxation subject to rules

Inter unit transfers

When a dealer transfers goods to his other units in other states , he is not liable to pay
tax , however , the burden of proof , lies with him

Registration of dealers

Every dealer liable to pay tax shall make an application for registration under this Act to
the prescribed authority. Once approved , the dealer will be issued a certificate in this
regard

Rates of taxes

The rates of sales tax will be as per the rate schedule notified and amended by the
Government from time to time

CI INSTITUTE OF LOGISTICS 86
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

A dealer who sells goods to Government or a registered dealer , shall pay tax which
shall be 2 % or the rate applicable to the state whichever is lower

A rate of 4% shall operate till this percentage of 2% takes effect

If the dealer sells to other than mentioned above , in case of declared goods , the rate
will be twice the rate applicable within the state and in case of goods other than declared
goods, the rate shall be 10% or the rate applicable in the state whichever is higher

Determination of turnover

In determining the turnover the following shall be deducted


Amount determined by the formula (rate of tax x aggregate of sale price) / (100+ rate of
tax)
Sale price of returned goods
Any other deductions notified by Government

Levy , collection and penalties

The tax payable shall be collected by the government from the dealer as per the
provisions of the act

On sales only a registered dealer can collect the tax from the buyer

Person who violates any provision of the act is punishable with penalties, for false
representations, non furnishing returns, failure to declare proper values , failure to remit
tax etc

Goods of special importance

It is not permissible for state legislature to impose a tax on goods declared to be of


special importance in inter state trade or commerce except in accordance with
restrictions and conditions stipulated in the act

CI INSTITUTE OF LOGISTICS 87
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Following are some of goods notified as of special importance :

Ø Cereals (paddy, rice , wheat, ragi , barley etc)


Ø Coal
Ø Cotton, cotton yarn but not cotton waste
Ø Crude oil
Ø Hides and skins
Ø Iron and steel
Ø Steel tubes
Ø Wheels , tyres
Ø Sugar

The restrictions imposed on state are in respect of declared goods

Ø A tax either on sale or on purchase alone can be levied


Ø Rate of tax shall not exceed 4 %
Ø Tax can be levied only at one definite stage (state can determine whether it can be
at first sale or purchase or any one of successive points)

Settlement of disputes

The central government shall constitute an authority to settle inter state disputes to be
known as “ central sales tax appellate authority”

Summary

Business- means any trade , commerce or manufacture whether or not the firm is carried
on with profit motive

dealer means a person who carries on business of buying , selling, supplying or


distributing goods directly or indirectly for cash or for deferred payment or for
commission , remuneration or other valuable consideration and includes-

CI INSTITUTE OF LOGISTICS 88
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

- a local authority, company , cooperative society , club , firm, HUF


- broker , commission agent

when the sale or purchase

- occasions the movement of goods from one state to another


- is effected by transfer of documents of title to goods during their movement from
one state to another

A sale or purchase of goods shall be deemed to have taken place in the course of
exports out of country if sale or purchase of goods is effected by transfer of documents
of title to the goods after the goods have crossed the customs frontiers of India

A sale or purchase of goods shall be deemed to have taken place in the course of import
of goods into territory of India only if the sale or purchase is effected by transfer of
documents of title to the goods before the goods have crossed the customs frontier

Every dealer shall be liable to pay tax on all sales of goods effected by him in the course
of inter state trade . however he is not liable for taxation in case of export of goods. Any
subsequent sale is exempt from taxation subject to rules

When a dealer transfers goods to his other units in other states , he is not liable to pay
tax , however , the burden of proof , lies with him

Every dealer liable to pay tax shall make an application for registration under this Act to
the prescribed authority. Once approved , the dealer will be issued a certificate in this
regard

The rates of sales tax will be as per the rate schedule notified and amended by the
Government from time to time

A dealer who sells goods to Government or a registered dealer , shall pay tax which
shall be 2 % or the rate applicable to the state whichever is lower

A rate of 4% shall operate till this percentage of 2% takes effect

CI INSTITUTE OF LOGISTICS 89
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

If the dealer sells to other than mentioned above , in case of declared goods , the rate
will be twice the rate applicable within the state and in case of goods other than declared
goods, the rate shall be 10% or the rate applicable in the state whichever is higher

In determining the turnover the following shall be deducted

Amount determined by the formula (rate of tax x aggregate of sale price) / (100+ rate of
tax)

Sale price of returned goods


Any other deductions notified by Government

Key words

Appropriate state- if a dealer operates from one state , that state; if he operates from
different states , all such states

Business- any trade , commerce or manufacture whether or not the firm is carried on
with profit motive

Dealer- means a person who carries on business of buying , selling, supplying or


distributing goods directly or indirectly for cash or for deferred payment or for
commission , remuneration or other valuable consideration and includes-
- a local authority, company , cooperative society , club , firm, HUF
- broker , commission agent

Goods- includes all materials, articles, commodities and all movable property but does
not include newspapers, shares and securities

Place of business- if a dealer carries on business directly or through agent, such


place of business
- warehouse, godown
- place where dealer keeps his accounts

Registered dealer- a dealer registered as per the provisions

CI INSTITUTE OF LOGISTICS 90
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Sale – any transfer of property in goods by one person to another for cash or for
deferred benefit or for any valuable consideration

Sale price- amount payable to dealer as consideration for sale of any goods less any
sum allowed as cash discount according to practice prevailing in the trade

Practical questions

1. Explain the terms sale of goods, sale price, registered dealer


2. What are rates of taxes and how the turnover is determined
3. Explain provision regarding goods of special importance
4. Explain provision regarding inter state sales

Reference readings

Ø Bare Act
Ø Sales Tax by Jain

CI INSTITUTE OF LOGISTICS 91
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 7: THE CUSTOMS ACT 1962

After studying this material you will be familiar with

Ø Meaning of various terms used in customs act


Ø What are prohibitions on import and export
Ø Detection of illegal exports
Ø How duties are levied
Ø What are exemptions
Ø Clearance of export and import of goods
Ø Drawback
Ø Confiscation of goods

Contents

1. Introduction
2. officers of customs
3. Prohibition on exports and imports
4. Levy and exemption of duties
5. Refunds
6. Advance rulings
7. Clearance of imported and exported goods
8. Warehousing
9. Drawback
10. Provisions regarding baggage, goods imported / exported by post
11. Searches, seizure
12. Appeals
13. Summary
14. Key words
15. Exercises
16. Reference readings

1. Introduction

The Customs Act was introduced in year 1962. It contains 17 chapters with 161
sections. The Act provides for levy of duties of customs. The Act extends to whole of
India. This act goes under amendments based on the needs and requirements of
industries

Dutiable goods means- goods which are chargeable to duty and on which duty has not
been paid

Duty – means duty of customs leviable under this act

CI INSTITUTE OF LOGISTICS 92
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Goods includes- vessels, air crafts, stores, baggage, any kind of moveable property

2. Officers of customs

Following are the class of officers of customs

Ø Chief commissioner of customs


Ø Commissioner of customs
Ø Commissioner of customs- appeals
Ø Joint commissioner of customs
Ø Deputy commissioner of customs
Ø Assistant commissioner of customs
Ø Such other class of officers as may be appointed

3. Prohibition on exports and imports

If the Central Government is satisfied that it is necessary to do so for any purpose listed
below, it may prohibit by notification, import and export of certain goods , either
absolutely or with some conditions

The purposes are –

Ø Maintenance of security in India


Ø Prevention of smuggling
Ø Prevention of shortage of goods
Ø Conservation of foreign exchange
Ø Prevention of injury to economy by uncontrolled import / export of gold
Ø Establishment of any industry
Ø Prevention of serious injury to domestic industry
Ø Protection of national treasures of artistic or historical value
Ø Protection of human or animal life or health
Ø Protection of trade marks
Ø Implementation of any treaty or agreement with any country

CI INSTITUTE OF LOGISTICS 93
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Ø Prevention of contravention of any law in force


Ø Conservation of exhaustible natural resources
Ø Any other purpose against the interest of public

4 Levy and exemption of duties

4.1 Dutiable goods

Duties shall be levied as specified in Customs Tariff on goods imported into or exported
out of India

4.2 Duty on pilfered goods

If the goods are pilfered before the officer makes an inspection and after it is unloaded,
no duties are payable

4.3 Valuation for assessment

For the purpose of duty , the value of goods shall be the price at which they are offered
for sale or normal prices as per practice as the case may be. The rate of exchange shall
be calculated with reference to one prevailing on the date of presentation of Bill of
Exchange

4.4 Date for determination of rate of duty

The date shall be the date of bill of entry

4.5 Assessment and provisional assessment

The goods imported or to be exported shall first be examined for their description and
classification. After examination assessment is done, the officer may ask for proper
records , contracts, brokers notes etc to substantiate the values

CI INSTITUTE OF LOGISTICS 94
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

When proper documents are not produced or the officer wants to refer the goods to lab
or proper documents produced but the officer feels to investigate further, a provisional
assessment can be made and then after the conditions are satisfied final assessment
shall be made

4.6 Duty for goods consist of articles of different rates of duty

Rates are applied individually to those articles as per the rates applicable or if there are
no clear documentation in case of item like spares etc, then the ate of the same rate of
article is applied

4.7 Re importation of goods

If goods are re imported after exports , such goods shall be liable to duty as if they are
imported into India

4.8 Power to exempt from duties

If the Central Government is satisfied that it is necessary in the public interest to do so ,


it may , by notification exempt certain goods , generally or with conditions , from duties

4.9 Refund and claim

Duty shall be refunded


if the goods are returned otherwise than by resale,
goods are re imported within one year from the date of exportation

Claim has to be furnished with Department within 6 months with all documentary
evidence to satisfy authorities

5. Advance rulings

This means determination of , by the authority, of a question of law or fact specified in


the application regarding the liability to pay duty in relation to an activity which is
proposed to be undertaken

CI INSTITUTE OF LOGISTICS 95
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

An applicant desirous of obtaining advance ruling , may make an application in such


form and in such manner as prescribed

The question on which advance ruling is sought shall be in respect of

Ø classification of goods
Ø applicability of notification
Ø principles adopted for determination of value of goods
Ø rates of duties applicable

6. Clearance of imported and exported goods

An importer may furnish a duly filled in bill of entry and present to the proper officer
The bill of entry shall contain all details about the goods to be cleared

Based on the examination and assessment of goods the duties are fixed and paid

If the officer is satisfied that the goods are not prohibited goods and duties are paid , he
may pass order permitting clearance of goods

If the goods imported are not cleared within the prescribed time, it may be auctioned by
customs

Pending clearance , the importer may store the goods in warehouse

Exporter of goods may furnish a bill of entry with proper officer

Once the proper officer is satisfied that goods are not prohibited goods and all formalities
of customs are duly completed he may allow export of such goods

7. Warehousing

Customs may permit private warehouses wherein dutiable goods imported may be
deposited

CI INSTITUTE OF LOGISTICS 96
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

An importer can utilize the services of warehousing and clear the goods in stages as per
his requirements . Duty shall be paid at the time of drawls . He has to execute a bond with
customs , with a guarantee for twice the amount of duty payable

He shall pay the rent for storage as per the prescribed rates

The maximum period for which the goods can be stored is for capital goods- 5 years, for
any goods for EOUs – 3 years for others – 1 year

The ware house shall be controlled by an authorized officer

The owner of warehoused goods may, with prior permission, transfer goods from one to
another warehouse

Goods may be taken for home consumption or for exports as the case may be

In case of improper clearance , there will be penalties and punishments

After total clearance of goods, the bond shall be cancelled

8. Drawback

The import duty paid on goods imported is refundable as duty drawback if the imported
goods are used in manufacture goods which is exported provided

the goods to be exported within 2 years


Customs should be satisfied that the imported goods are identifiable in goods exported

This is to make the exports competitive in world market

There are rules and procedures laid down to get the drawback in the Act

Government also prescribes brand rates for specified products which can be claimed
after goods are exported . These rates are revised from time to time

CI INSTITUTE OF LOGISTICS 97
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

9. Provisions regarding baggage, goods imported / exported by post

The owner of a baggage should make a proper declaration to the customs officer about
the contents of the baggage

If the officer is satisfied that the items are for bonafied use the owner , he can exempt
from duties

Otherwise the rate shall be as applicable on the date of import as per rules

If the duties are not paid or if they are prohibited items , officer can detain the goods

10. Searches, seizure

If officer has reasonable grounds to believe that the person bringing in goods may not
have complied with rules, then he has powers to search , seize the goods and confiscate
. he person also can be arrested

11. Appeals

Any person aggrieved by any order or decision passed by the officer, can make appeal
to higher authorities

Commissioner (appeals)
Appellate Tribunal
Committee of Chief commissioners of Customs (in some specified cases)
High Court
Supreme Court

Detailed procedures have been laid down on appeals

CI INSTITUTE OF LOGISTICS 98
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

12. Summary

The Act provides for levy of duties of customs , the Act extends to whole of India.

If the Central Government is satisfied that it is necessary to do so for prescribed


purposes, it may prohibit by notification, import and export of certain goods, either
absolutely or with some conditions

Duties shall be levied as specified in Customs Tariff on goods imported into or exported
out of India

If the goods are pilfered before the officer makes an inspection and after it is unloaded,
no duties are payable

For the purpose of duty, the value of goods shall be the price at which they are offered
for sale or normal prices as per practice as the case may be. The rate of exchange shall
be calculated with reference to one prevailing on the date of presentation of Bill of
Exchange

Rates are applied individually to those articles as per the rates applicable or if there are
no clear documentation in case of item like spares etc, then the ate of the same rate of
article is applied

If goods are re imported after exports, such goods shall be liable to duty as if they are
imported into India

If the Central Government is satisfied that it is necessary in the public interest to do so ,


it may , by notification exempt certain goods , generally or with conditions , from duties

Duty shall be refunded if the goods are returned otherwise than by resale, goods are re
imported within one year from the date of exportation

Customs may permit private warehouses wherein dutiable goods imported may be
deposited

CI INSTITUTE OF LOGISTICS 99
Website: www.ciilogistics.com
BUSINESS LAW & TAXES

An importer can utilize the services of warehousing and clear the goods in stages as per
his requirements. Duty shall be paid at the time of drawls . He has to execute a bond
with customs, with a guarantee for twice the amount of duty payable

The import duty paid on goods imported is refundable as duty drawback if the imported
goods are used in manufacture goods which is exported

The owner of a baggage should make a proper declaration to the customs officer about
the contents of the baggage. If the officer is satisfied that the items are for bonafied use
the owner, he can exempt from duties, otherwise the rate shall be as applicable on the
date of import as per rules

If officer has reasonable grounds to believe that the person bringing in goods may not
have complied with rules, then he has powers to search, seize the goods and confiscate.
He person also can be arrested

Any person aggrieved by any order or decision passed by the officer, can make appeal
to higher authorities : Commissioner (appeals), Appellate Tribunal, Committee of Chief
commissioners of Customs (in some specified cases), High Court, Supreme Court

13 Key words

1. Dutiable goods : goods which are chargeable to duty and on which duty has not
been paid

2. Duty: duty of customs leviable under this act

3. Goods includes- vessels, air crafts, stores, baggage, any kind of moveable property

CI INSTITUTE OF LOGISTICS 100


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

4. Advance rulings : Determination of , by the authority, of a question of law or fact


specified in the application regarding the liability to pay duty in relation to an
activity which is proposed to be undertaken

5. Duty Drawback : Refund of duty paid on imports , when goods are exported , if the
imported goods are used in manufacturing the exported goods

14 Exercises

1. Name few officers of customs


2. Under what grounds Central Government prohibits import / export of certain
goods?
3. Mention the provisions on Levy and exemption of duties
4. What do you understand by warehousing ?
5. Write a note on duty drawback
6. Write provisions on baggage clearances
7. What do you understand by advance ruling ?

15 Reference readings

³ Bare Act
³ R K Jain
³ Nabhi Publications

CI INSTITUTE OF LOGISTICS 101


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 8: FOREIGN TRADE POLICY

After reading this unit, you will be familiar with

Ø The policy framework


Ø Various authorities
Ø Various schemes for exporters
Ø General provisions for import & export
Ø Export oriented units, SEZ etc

Contents

1. Introduction
2. General Provisions regarding Imports & exports
3. Duty exemption schemes
4. Export promotion capital goods scheme
5. Deemed exports
6. EOUs, EHTPs, STPs, BTPs
7. SEZ
8. Free trade zones
9. List of appendices
10. Questions
11. Reference readings

Introduction

In exercise of the powers conferred under Section 5 of The Foreign Trade (Development
and Regulation Act), 1992 (No. 22 of 1992), the Central Government hereby notifies the
Foreign Trade Policy for the period 2004-2009 incorporating the Export and Import
Policy for the period 2002-2007, as modified. This Policy shall come into force with effect
from 1st September 2004 and shall remain in force upto 31st March, 2009 unless as
otherwise specified

General Provisions regarding Imports & exports

Exports and Imports free unless regulated Exports and Imports shall be free, except
in cases where they are regulated by the provisions of this Policy or any other law for the
time being in force.

CI INSTITUTE OF LOGISTICS 102


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Procedure The Director General of Foreign Trade may, in any case or class of cases,
specify the procedure to be followed by an exporter or importer or by any licensing or
any other competent authority for the purpose of implementing the provisions of the Act,
the Rules and the Orders made thereunder and this Policy. Such procedures shall be
included in the Handbook (Vol.1), Handbook (Vol.2), Schedule of DEPB Rate and in
ITC(HS) and published by means of a Public Notice. Such procedures may, in like
manner, be amended from time to time.

Restricted Goods Any goods, the export or import of which is restricted under ITC(HS)
may be exported or imported only in accordance with a licence/ certificate/ permission or
a public notice issued in this behalf.

Importer-Exporter Code Number No export or import shall be made by any person


without an Importer-Exporter Code (IEC) number unless specifically exempted. An
Importer-Exporter Code (IEC) number shall be granted on application by the competent
authority in accordance with the procedure specified in the Handbook (Vol.1).

Actual User Condition Capital goods, raw materials, intermediates, components,


consumables, spares, parts, accessories, instruments and other goods, which are
importable without any restriction, may be imported by any person.

However, if such imports require a licence/ certificate/permission, the actual user alone
may import such goods unless the actual user condition is specifically dispensed with by
the licensing authority.

Second Hand Goods All second hand goods, excepting second hand capital
goods, shall be restricted for imports and may be imported only in accordance with the
provisions of this Policy, ITC(HS), Handbook (Vol.1), Public Notice or a
licence/certificate/permission issued in this behalf.

Import of Gifts Import of gifts shall be permitted where such goods are otherwise freely
importable under this Policy. In other cases, a Customs Clearance Permit (CCP) shall be
required from the DGFT.

CI INSTITUTE OF LOGISTICS 103


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Passenger Baggage Bonafide household goods and personal effects may be


imported as part of passenger baggage as per the limits, terms and conditions thereof in
the Baggage Rules notified by the Ministry of Finance.

Import on Export basis New or second hand capital goods, equipments, components,
parts and accessories, containers meant for packing of goods for exports, jigs, fixtures,
dies and moulds may be imported for export without a licence/certificate/permission on
execution of Legal Undertaking/Bank Guarantee with the Customs Authorities provided
that the item is freely exportable without any conditionality/requirement of licence/
permission as may be required under ITC(HS) Schedule II.

Re-import of goods repaired abroad Capital goods, equipments, components, parts


and accessories, whether imported or indigenous, except those restricted under ITC
(HS) may be sent abroad for repairs, testing, quality improvement or upgradation or
standardization of technology and re-imported without a licence/certificate/permission.

Execution of BG/ LUT Wherever any duty free import is allowed or where otherwise
specifically stated, the importer shall execute a Legal Undertaking (LUT)/Bank
Guarantee (BG)/ Bond with the Customs Authority before clearance of goods through
the Customs, in the manner as may be prescribed. In case of indigenous sourcing, the
licence/ certificate/ permission holder shall furnish LUT / BG / Bond to the licensing
authority before sourcing the material from the indigenous supplier/nominated agency.

Exemption from Bank Guarantee All the exporters who have an export turnover of at
least Rupees 5 crore in the current or preceding licencing year and have a good track
record of three years of exports will be exempted from furnishing a BG for any of the
schemes under this Policy and may furnish a LUT in lieu of BG.

Free Exports All goods may be exported without any restriction except to the
extent such exports are regulated by ITC(HS) or any other provision of this Policy or any
other law for the time being in force.
The Director General of Foreign Trade may, however, specify through a public notice
such terms and conditions according to which any goods, not included in the ITC(HS),
may be exported without a licence/ certificate/ permission.

CI INSTITUTE OF LOGISTICS 104


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Export of Gifts Goods, including edible items, of value not exceeding Rs.5,00,000/- in
a licensing year, may be exported as a gift.
However, items mentioned as restricted for exports in ITC(HS) shall not be exported as
a gift, without a licence/certificate/permission.

Export of Replacement Goods Goods or parts thereof on being exported and found
defective/damaged or otherwise unfit for use may be replaced free of charge by the
exporter and such goods shall be allowed clearance by the customs authorities provided
that the replacement goods are not mentioned as restricted items for exports in ITC(HS).

Realisation of Export Proceeds If an exporter fails to realise the export proceeds


within the time specified by the Reserve Bank of India, he shall, without prejudice to any
liability or penalty under any law for the time being in force, be liable to action in
accordance with the provisions of the Act, the Rules and Orders made there under and
the provisions of this Policy.

Registration -cum-Membership Certificate Any person, applying for (i) a licence/


certificate/ permission to import/ export, [except items listed as restricted items in
ITC(HS)] or (ii) any other benefit or concession under this policy shall be required to
furnish Registration-cum-Membership Certificate (RCMC) granted by the competent
authority in accordance with the procedure specified in the Handbook (Vol.1) unless
specifically exempted under the Policy.

Duty exemption schemes

Duty Exemption and Remission Schemes Duty exemption schemes enable duty free
import of inputs required for export production. An Advance Licence is issued as a duty
exemption scheme. A Duty Remission Scheme enables post export replenishment/
remission of duty on inputs used in the export product.

Value Addition The value addition for the purposes of this chapter (Except for the
Gems and Jewellery) shall be:-
V.A A - B = ----------- x 100, where

CI INSTITUTE OF LOGISTICS 105


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

V.A. Value Addition


A FOB value of the export realised /FOR value of supply ceived.
B CIF value of the imported inputs covered by the licence, plus any other
imported materials used on which the benefit of duty drawback is being claimed.

ADVANCE LICENCE

An Advance Licence is issued to allow duty free import of inputs, which are physically
incorporated in the export product (making normal allowance for wastage). In addition,
fuel, oil, energy, catalysts etc. which are consumed/utilised in the course of their use to
obtain the export product, may also be allowed under the scheme.
Duty free import of mandatory spares upto 10% of the CIF value of the licence which are
required to be exported/ supplied with the resultant product may also be allowed under
Advance Licence.

Advance Licences are issued on the basis of the inputs and export items Advance
Licence can be issued either to a manufacturer exporter or merchant exporter tied to
supporting manufacturer(s):

i) for Physical exports (including exports to SEZ); and/ or


ii) for Intermediate supplies; and /or

Advance Licence is issued for duty free import of inputs, subject to actual user condition.
Such licences are exempted from payment of basic customs duty, additional customs
duty, education cess, anti dumping duty and safeguard duty, if any. However, the imports
for supplies covered under paragraph 8.2 (h) & (i) will not be exempted from the payment
of applicable anti-dumping and safeguard duty, if any.

Advance Licence and/or materials imported thereunder shall not be transferable even
after completion of export obligation. However, the licencee will have the option to dispose
off the product manufactured out of the duty free inputs once the export obligation is
completed.

CI INSTITUTE OF LOGISTICS 106


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Advance Licences shall be issued with a positive value addition.

The validity period of advance licence for import shall be as prescribed in the Handbook
(Vol.1).

The facility of Advance Licence shall also be available where some or all of the inputs are
supplied free of cost to the exporter.

Export Obligation The period for fulfilment of the export obligation under Advance
Licence shall be as prescribed in the Handbook (Vol.1).

Advance Licence for Annual Requirement

Advance Licence can also be issued on the basis of annual requirement for physical
exports, intermediate supplies and / or deemed exports.

One to Five Star Export House shall be entitled for the Advance licence for annual
requirement. All other categories of exporters having past export performance (in the
preceding two years) shall also be entitled for the Advance Licence for annual
requirement.

DUTY ENTITLEMENT PASSBOOK SCHEME

The objective of DEPB is to neutralise the incidence of Customs duty on the import
content of the export product. The neutralisation shall be provided by way of grant of duty
credit against the export product.

The DEPB scheme will continue to be operative until it is replaced by a new scheme which
will be drawn up in consultation with exporters .

Under the DEPB scheme, an exporter may apply for credit, as a specified percentage of
FOB value of exports, made in freely convertible currency.

The credit shall be available against such export products and at such rates as may be
specified by the Director General of Foreign Trade by way of public notice issued in this
behalf, for import of raw materials, intermediates, components, parts, packaging material
etc.

CI INSTITUTE OF LOGISTICS 107


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

The holder of DEPB shall have the option to pay additional customs duty, if any, in cash as
well.

Validity The validity period of DEPB for import shall be as prescribed in the Handbook
(Vol.1).

Transferability The DEPB and/or the items imported against it are freely
transferable. The transfer of DEPB shall however be for import at the port specified in the
DEPB, which shall be the port from where exports have been made. Imports from a port
other than the port of export shall be allowed under TRA facility as per the terms and
conditions of the notification issued by Department of Revenue.

Applicability of Drawback Normally, the exports made under the DEPB Scheme shall
not be entitled for drawback. However, the additional customs duty/excise duty paid in
cash or through debit under DEPB shall be adjusted as CENVAT Credit or Duty Drawback
as per rules framed by the Department of Revenue.

Export promotion capital goods scheme

EPCG Scheme The scheme allows import of capital goods for pre production,
production and post production (including CKD/SKD thereof as well as computer software
systems) at 5% Customs duty subject to an export obligation equivalent to 8 times of duty
saved on capital goods imported under EPCG scheme to be fulfilled over a period of 8
years reckoned from the date of issuance of licence.

In the case of agro units, import of capital goods at 5% Customs duty shall be allowed
subject to a fulfillment of an export obligation equivalent to 6 times the duty saved (on
capital goods imported under the Scheme) over a period of 12 years from the date of issue
of licence.

However for SSI units, import of capital goods at 5% Customs duty shall be allowed
subject to a fulfillment of an export obligation equivalent to 6 times the duty saved (on
capital goods imported under the Scheme) over a period of 8 years from the date of issue
of licence provided the landed CIF value of such imported Capital Goods under the

CI INSTITUTE OF LOGISTICS 108


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Scheme does not exceed Rs Twenty Five Lakhs and the total investment in plant and
machinery after such imports does not exceed the SSI limit.

However, in respect of EPCG licences with a duty saved of Rs.100 crore or more, the
same export obligation, as the case may be shall be required to be fulfilled over a period of
12 years.

The capital goods shall include spares (including refurbished/ reconditioned spares), tools,
jigs, fixtures, dies and moulds. EPCG licence may also be issued for import of components
of such capital goods required for assembly or manufacturer of capital goods by the
licence holder.

Second hand capital goods without any restriction on age may also be imported under the
EPCG scheme.

However, import of motor cars, sports utility vehicles/ all purpose vehicles shall be allowed
only to hotels, travel agents, tour operators or tour transport operators and companies
owning/operating golf resorts whose total foreign exchange earning in current and
preceding three licencing years is Rs 1.5 crores. However, the parts of motor cars, sports
utility vehicles/ all purpose vehicles such as chassis etc. cannot be imported under the
EPCG Scheme.

Import of Restricted items of imports mentioned under ITC(HS) shall only be allowed to be
imported under the Scheme after approval from the Import Licensing Committee.

EPCG for Retail Sector To create modern infrastructure in the retail sector, concessional
duty benefits under EPCG scheme shall be extended for import of capital goods required
by retailers having minimum area of 1000 sq meters. The retailer shall fulfill the export
obligation i.e. 8 times the duty saved in 8 years.

Conditions for import of Capital Goods Import of capital goods shall be subject to
Actual User condition till the export obligation is completed.

CI INSTITUTE OF LOGISTICS 109


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Fixation of Export Obligation In case of direct imports, the export obligation


relating to the EPCG licence shall be reckoned with reference to the duty saved value on
the CIF value of capital goods (including spares, jigs, fixtures, dies and moulds) actually
imported. In case of domestic sourcing, the export obligation relating to EPCG shall be
reckoned with reference to the notional Customs duties saved on the FOR of capital goods
(including spares, jigs, fixtures, dies and moulds).

Deemed Exports

Deemed Exports "Deemed Exports" refers to those transactions in which the goods
supplied do not leave the country and the payment for such supplies is received either in
Indian rupees or in free foreign exchange.

Categories of Supply The following categories of supply of goods by the main/ sub-
contractors shall be regarded as "Deemed Exports" under this Policy, provided the goods
are manufactured in India:

1. Supply of goods against Advance Licence / Advance Licence for annual


requirement/DFRC under the Duty Exemption /Remission Scheme;

2. Supply of goods to Export Oriented Units (EOUs) or Software Technology Parks


(STPs) or Electronic Hardware Technology Parks (EHTPs) or Bio Technology
Parks (BTP);

3. Supply of capital goods to holders of licences under the Export Promotion Capital
Goods (EPCG) scheme;

4. Supply of goods to projects financed by multilateral or bilateral agencies/funds as


notified by the Department of Economic Affairs, Ministry of Finance under
International Competitive Bidding in accordance with the procedures of those
agencies/ funds, where the legal agreements provide for tender evaluation without
including the customs duty;

5. Supply of capital goods, including in unassembled/ disassembled condition as well


as plants, machinery, accessories, tools, dies and such goods which are used for
installation purposes till the stage of commercial production and spares to the
extent of 10% of the FOR value to fertilizer plants;

CI INSTITUTE OF LOGISTICS 110


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

6. Supply of goods to any project or purpose in respect of which the Ministry of


Finance, by a notification, permits the import of such goods at zero customs duty;

7. Supply of goods to the power projects and refineries not covered in (f) above;

8. Supply of marine freight containers by 100% EOU (Domestic freight containers-


manufacturers) provided the said containers are exported out of India within 6
months or such further period as permitted by the customs;

9. Supply to projects funded by UN agencies; and

10. Supply of goods to nuclear power projects through competitive bidding as opposed
to International Competitive Bidding.

11. The benefits of deemed exports shall be available under paragraph (d), (e), (f) and

12. Only if the supply is made under the procedure of International Competitive Bidding
(ICB).

Benefits for Deemed Exports: Deemed exports shall be eligible for any/all of the
following benefits in respect of manufacture and supply of goods qualifying as deemed
exports subject to the terms and conditions as given in Handbook (Vol.1):-

1. Advance Licence for intermediate supply/ deemed export/DFRC/ DFRC for


intermediate supplies.

2. Deemed Export Drawback.

3. Exemption from terminal excise duty where supplies are made against
International Competitive Bidding . In other cases , refund of terminal excise duty
will be given.

Benefits to the Supplier

1. In respect of supplies made against Advance Licence in terms of paragraphs 8.2(a)


of the Policy, the supplier shall be entitled to Advance Licence for intermediate
supplies.

CI INSTITUTE OF LOGISTICS 111


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

2. If the supplies are made against Advance Release Order (ARO) or Back to Back
Letter of Credit issued against Advance Licence in terms of paragraphs 4.1.11 and
4.1.12 of the Policy, supplier shall be entitled to the benefits listed in paragraphs
8.3(b) and (c) of the Policy, whichever is applicable.

3. If the supplies are made against Advance Release Order (ARO) or Back to Back
Letter of Credit issued against DFRC, the supplier shall be entitled to the benefit
listed in paragraph 8.3(b) of the Policy.

In respect of supply of goods to EOU/ EHTP/ STP/BTP in terms of paragraphs 8.2 (b) of
the Policy, the supplier shall be entitled to the benefits listed in paragraph 8.3(a),(b)and (c)
of the Policy, whichever is applicable.

In respect of supplies made under paragraph 8.2(c) of the Policy , the supplier shall be
entitled to the benefits listed in paragraph 8.3(a), (b) and (c), of the Policy, whichever is
applicable.

(i) In respect of supplies made under paragraphs 8.2 (d), (f) and (g) of the Policy, the
supplier shall be entitled to the benefits listed in paragraphs 8.3(a), (b) and
(c),whichever is applicable.

(ii) In respect of supplies mentioned in paragraph 8.2(d), supplies to the projects funded
by such agencies alone, as may be notified by Department of Economic Affairs,
Ministry of Finance, shall be eligible for deemed export benefits. A list of such
agencies/ funds is given in Appendix-13 of Handbook (Vol.I).

(iii) The benefits of deemed exports under para 8.2(f) of the Policy shall be applicable in
respect of items, import of which is allowed by the Department of Revenue at zero
customs duty subject to fulfillment of conditions specified under Notification
No.21/2002-Customs dated 1.3.2002, as amended from time to time.

CI INSTITUTE OF LOGISTICS 112


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

EOUs, EHTPs, STPs, BTPs

Eligibility Units undertaking to export their entire production of goods and services
(except permissible sales in the DTA), may be set up under the Export Oriented Unit
(EOU) Scheme, Electronic Hardware Technology Park (EHTP) Scheme, Software
Technology Park (STP) Scheme or Bio-Technology Park (BTP) scheme for manufacture
of goods, including repair, re-making, reconditioning, re-engineering and rendering of
services. Trading units, however, are not covered under these schemes.

Export and Import of Goods

a) An EOU/EHTP/STP/BTP unit may export all kinds of goods and services except
items that are prohibited in the ITC (HS). Export of Special Chemicals, Organisms,
Materials, Equipment and Technologies (SCOMET) shall be subject to fulfillment of
the conditions indicated in the ITC (HS).

b) An EOU/EHTP/STP/BTP unit may import and/or procure from DTA or bonded


warehouses in DTA / international exhibition held in India without payment of duty
all types of goods, including capital goods, required for its activities, provided they
are not prohibited items of import in the ITC (HS). Any permission required for
import under any other law shall be applicable. The units shall also be permitted to
import goods including capital goods required for the approved activity, free of cost
or on loan/lease from clients. The import of capital goods will be on a self
certification basis.

c) State Trading regime shall not apply to EOU manufacturing units.

d) EOU/EHTP/STP/BTP units may import/procure from DTA without payment of duty


certain specified goods for creating a central facility which will be used by software
units. These software units can be EOU/ DTA units who will use the facility for
export of software.

e) An EOU engaged in agriculture, animal husbandry, aquaculture, floriculture,


horticulture, pisciculture, viticulture, poultry or sericulture may be permitted to

CI INSTITUTE OF LOGISTICS 113


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

remove specified goods in connection with its activities for use outside the bonded
area.

f) Gems and jewellery EOUs may source gold/silver/platinum through the nominated
agencies also. Units obtaining gold/silver/platinum from the nominated agencies
shall export gold/silver/platinum jewellery within 90 days from the date of release.
This shall not, however, apply to outright purchase of precious metal from the
nominated agencies.

g) EOU/EHTP/STP/BTP units, other than service units, may export to Russian


Federation in Indian Rupees against repayment of State Credit/Escrow Rupee
Account of the buyer subject to RBI clearance, if any.

h) Procurement and supply of spares and consumables required for the goods
manufactured by the units may be allowed to be exported along with goods upto
1.5% of FOB value of exports. This shall, however, not count towards NFE
calculation, for concessional rate DTA sales or for Income Tax exemption.

Second Hand Capital Goods Second hand capital goods, without any age limit, may also
be imported duty free.

Leasing of Capital Goods An EOU/EHTP/STP/BTP unit may, on the basis of a firm


contract between the parties, source the capital goods from a domestic/foreign leasing
company without payment of customs/excise duty. In such a case, the
EOU/EHTP/STP/BTP unit and the domestic/foreign leasing company shall jointly file the
documents to enable import/procurement of the capital goods without payment of duty.

Net Foreign Exchange Earnings

(NFE) EOU/EHTP/STP/BTP unit shall be a positive net foreign exchange earner. Net
Foreign Exchange Earnings (NFE) shall be calculated cumulatively in blocks of five years,
starting from the commencement of production.

Letter of Permission/ Letter of Intent and Legal Undertaking

a) On approval, a Letter of Permission (LOP) /Letter of Intent (LOI) shall be issued by


the Development Commissioner/designated officer to EOU/EHTP/STP/BTP unit.
The LOP/LOI shall have an initial validity of 3 years by which time the unit should
have commenced production. Its validity may be extended further up to 3 years by
the competent authority. However, proposals for extension beyond six years shall
be considered in exceptional circumstances, on a case-to-case basis by the BOA.

CI INSTITUTE OF LOGISTICS 114


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Once the unit commences production, LOP/LOI issued shall be valid for a period of
5 years for its activities. This period may be extended further by the Development
Commissioner for a period of 5 years at a time.

b) LOP/LOI issued to EOU/EHTP/STP/BTP units by the concerned authority would be


construed as a licence for all purposes.

c) The unit shall execute a legal undertaking with the Development Commissioner
concerned. Failure to ensure positive NFE or to abide by any of the terms and
conditions of the LOP/LOI/IL/LUT shall render the unit liable to penal action under
the provisions of the Foreign Trade (Development & Regulation) Act, 1992 and the
Rules and Orders made thereunder without prejudice to action under any other
law/rules and cancellation or revocation of LOP/LOI/IL.

Investment Criteria : Only projects having a minimum investment of Rs.1 crore in plant
and machinery shall be considered for establishment as EOUs under the scheme. This
shall, however, not apply to existing units and units in EHTP / STP/ BTP, Handicrafts /
Agriculture/ Floriculture / Aquaculture / Animal Husbandry/Information Technology,
Services, Brass hardware, Handmade

Special Economic Zone (SEZ)

Eligibility

a) Special Economic Zone (SEZ) is a specifically delineated duty free enclave and
shall be deemed to be foreign territory for the purposes of trade operations and
duties and tariffs.

b) Goods and services going into the SEZ area from DTA shall be treated as exports
and goods coming from the SEZ area into DTA shall be treated as if these are
being imported.

c) SEZ units may be set up for manufacture of goods and rendering of services.

CI INSTITUTE OF LOGISTICS 115


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Export and Import of Goods.

a) SEZ units may export goods and services including agro-products, partly
processed goods, sub-assemblies and components except prohibited items of
exports in ITC (HS). The units may also export by-products, rejects, waste scrap
arising out of the production process. Export of Special Chemicals, Organisms,
Materials, Equipment and Technologies (SCOMET) shall be subject to fulfillment of
the conditions indicated in the ITC (HS) Classification of Export and Import Items.

b) SEZ units, other than trading/service units, may also export to Russian Federation
in Indian Rupees against repayment of State Credit/Escrow Rupee Account of the
buyer, subject to RBI clearance, if any.

Ø SEZ unit may import/procure from the DTA without payment of duty all types of
goods and services, including capital goods, whether new or second hand,
required by it for its activities or in connection therewith, provided they are not
prohibited items of imports in the ITC(HS). However, any permission required
for import under any other law shall be applicable. Goods shall include raw
material for making capital goods for use within the unit. The units shall also be
permitted to import goods required for the approved activity, including capital
goods, free of cost or on loan from clients.

c) SEZ units may procure goods required by it without payment of duty, from bonded
warehouses in the DTA set up under the Policy and/or under Section 65 of the
Customs Act and from International Exhibitions held in India.

d) SEZ units, may import/procure from DTA, without payment of duty, all types of
goods for creating a central facility for use by units in SEZ. The Central facility for
software development can also be accessed by units in the DTA for export of
software.

e) Gem & Jewellery units may also source gold/ silver/ platinum through the
nominated agencies.

f) SEZ units may import/procure goods and services from DTA without payment of
duty for setting up, operation and maintenance of units in the Zone.

CI INSTITUTE OF LOGISTICS 116


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Free trade zones

Objective The objective is to create trade-related infrastructure to facilitate the import and
export of goods and services with freedom to carry out trade transactions in free currency.
The scheme envisages creation of world-class infrastructure for warehousing of various
products, state-of-the-art equipment, transportation and handling facilities, commercial
office-space, water, power, communications and connectivity, with one-stop clearance of
import and export formality, to support the integrated Zones as ‘international trading hubs’.
These Zones would be established in areas proximate to seaports, airports or dry ports so
as to offer easy access by rail and road.

Status The Free Trade & Warehousing Zones (FTWZ) shall be a special category of
Special Economic Zones with a focus on trading and warehousing.

Establishment of Zone

(i) Proposals for setting up of FTWZs may be made by public sector undertakings or public
limited companies or by joint ventures in technical collaboration with experienced
infrastructure developers. The proposals shall be considered by the Board of Approval in
the Department of Commerce. On approval, the developer will be issued a letter of
permission for the development, operation and maintenance of such FTWZ.

(ii) Foreign Direct Investment would be permitted up to 100% in the development and
establishment of the zones and their infrastructural facilities.

(iii)The proposal must entail a minimum outlay of Rs.100 crores for the creation and
development of the infrastructure facilities, with a minimum built up area of five lakh
sq.mts.

(iv)The developer shall be permitted to import duty free such building materials and
equipment as may be required for the development and infrastructure of the zone. Such
equipment and materials as are sourced from the DTA shall be considered as physical
exports for the DTA suppliers.

(v)Once it has developed the FTWZ, the developer shall also be permitted to
sale/lease/rent out warehouses/workshops/office-space and other facilities in the FTWZ to
traders/exporters.

CI INSTITUTE OF LOGISTICS 117


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Maintenance of Zone The developer shall itself or through suitable special purpose
arrangements, ensure a reliable mechanism for the proper maintenance of the common
facilities and security of the FTWZ.

Functioning

(i)The scheme envisages duty free import of all goods (except prohibited items, arms and
ammunitions, hazardous wastes and SCOMET items) for ware housing. As far as bond
towards customs duty on import is concerned, the units would be subject to similar
provisions as are applicable to units in SEZs.

(ii)Such goods shall be permitted to be re-sold/re-invoiced or re-exported. Re-export shall


be permitted without any restrictions. However export of SCOMET items shall not be
permitted except with the permission of Inter-Ministerial Committee.

(iii)These goods shall also be permitted to be sold in the DTA on payment of customs
duties as applicable on the date of such sale. Payment of duty will become due only when
goods are sold/delivered to DTA and no interest will be charged as in the case of bonded
warehouses.

(iv)Packing or re-packing without processing, and labeling as per customer or marketing


requirements could be undertaken within the FTWZ.

(v)The maximum period that goods shall be permitted to be warehoused within the FTWZ
will be two years, after which they shall necessarily have to be re-exported or sold in the
DTA. On expiry of the two year period, customs duties as applicable would automatically
become due unless the goods are re-exported within such grace period, not exceeding
three months, as may be permitted.

Entitlement of units

(i) Income Tax exemption as per 80 IA of the Income Tax Act.

(ii) Exemption from Service Tax.

(iii) Free foreign exchange currency transactions would be permitted.

(iv) Other benefits mutatis mutandi as applicable to units in SEZs.

CI INSTITUTE OF LOGISTICS 118


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

NFE criteria Units in FTWZs shall be net foreign exchange earners. Net foreign exchange
earning shall be calculated cumulatively for every block of five years from the
commencement of warehousing and/or trading operations as per formula. applicable for
SEZ units.

9. LIST OF APPENDICES

APPENDIX DESCRIPTION
NUMBER

1 LIST OF LICENSING AUTHORITIES AND THEIR JURISDICTION

1A JURISDICTION OF LICENSING AUTHORITY AND LIST OF NOMINATED


AGENCIES FOR THE PURPOSE OF GEM AND JEWELLERY EXPORT
PROMOTION SCHEMES

2 LIST OF EXPORT PROMOTION COUNCILS/COMMODITY BOARD

3 LIST OF BRANCHES OF CENTRAL BANK OF INDIA AUTHORISED TO


RECEIVE PAYMENTS FOR APPLICATION FEE

4A LIST OF AGENCIES AUTHORISED TO ISSUE GSP CERTIFICATION

4B LIST OF AGENCIES AUTHORISED TO ISSUE CERTIFICATES OF


ORIGIN
FOR SAPTA AND BANGKOK AGREEMENT

4C LIST OF AGENCIES AUTHORISED TO ISSUE CERTIFICATES OF


ORIGIN
- NON PREFERENTIAL

4D LIST OF AGENCIES AUTHORISED TO ISSUE GLOBAL SYSTEM OF


TRADE PREFERENCES ( GSTP) AND INDIA SRI LANKA FREE TRADE
AGREEMENT (ISLFTA) CERTIFICATION

5 LIST OF INSPECTION AND CERTIFICATION AGENCIES

6 LIST OF IS/ISO 9000 (SERIES) / ISO- 14000 (SERIES)/ WHO-GMP


/HACCP/SEI/CMM LEVEL II AND OTHER CERTIFICATION AGENCIES

7 LIST OF TOWNS OF EXPORT EXCELLENCE

8 AGRI EXPORT ZONES

9 LIST OF COUNTRIES, EXPORT TO WHICH CONFERS DOUBLE


WEIGHTAGE FOR THE GRANT OF STAR EXPORT HOUSE STATUS

10 LIST OF SERVICES

CI INSTITUTE OF LOGISTICS 119


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

11 VALUE ADDITION NORMS FOR EXPORTS FOR WHICH PAYMENTS ARE


NOT IN FREELY CONVERTIBLE CURRENCY

11A DATA SHEET FOR ADVANCE LICENCE APPLICATION ON SELF


DECLARATION UNDER PARA 4.4.2 & 4.7 OF HANDBOOK (Vol.I)

11B DATA SHEET FOR DEPB RATES

12A REPLENISHMENT FOR GEM & JEWELLERY

12B REPLENISHMENT SCALE FOR GEM REP LICENCE

13 AGENCIES/FUNDS/ NOTIFIED BY THE DEPARTMENT OF ECONOMIC


AFFAIRS, MINISTRY OF FINANCE FOR THE PURPOSE OF DEEMED
EXPORT BENEFITS.

14-I-A APPLICATION FOR SETTING UP EOU/SEZS OR UNITS IN SPECIAL


ECONOMIC ZONE

14-I-B CRITERIA TO BE ADOPTED FOR AUTOMATIC APPROVAL OF UNITS


UNDER EOU/SEZ SCHEME

14-I-C SECTOR SPECIFIC REQUIREMENTS FOR EOU/SEZ UNITS

14-I-D BOARD OF APPROVAL NOTIFICATION

14-I-E FORMAT FOR LETTER OF PERMISSION

14-I-F FORM OF LEGAL AGREEMENT FOR EOU/SEZ UNITS


14-I-G GUIDELINES FOR MONITORING THE PERFORMANCE OF
EOU/SEZ/STP/EHTP UNITS
14-I-H GUIDELINES FOR SALE OF GOODS IN THE DOMESTIC TARIFF AREA
(DTA) BY
EOU/SEZ/EHTP/STP/BTP UNITS

14-I-I PROCEDURE TO BE FOLLOWED FOR REIMBURSEMENT OF CENTRAL


SALES TAX (CST) ON SUPPLIES MADE TO EXPORT ORIENTED UNITS
(EOUS) AND UNITS IN ELECTRONIC HARDWARE TECHNOLOGY PARK
(EHTP) AND SOFTWARE TECHNOLOGY PARK (STP).

14-I-J ITEMS PERMITTED FOR IMPORT/DOMESTIC PROCUREMENT BY


EOU/SEZ UNITS ENGAGED IN AGRICULTURE/HORTICULTURE
WITHOUT PAYMENT OF DUTY FOR SUPPLY TO CONTRACT FARMERS
IN THE DTA.

14-I-K JURISDICTION OF SPECIAL ECONOMIC ZONES

14-I-L

CI INSTITUTE OF LOGISTICS 120


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

GUIDELINES FOR EXIT OF EOU/SEZ/EHTP/STP UNITS

14-I-M GUIDELINES FOR REVIVAL/EXIT OF SICK EOU/SEZ UNITS

14-I-N PROFORMA FOR EXTENSION OF LOP FOR EXPORT ORIENTED UNITS

14-II-O GUIDELINES FOR SEZ DEVELOPERS

14-II-P FORMAT FOR LETTER OF PERMISSION FOR SEZ DEVELOPER

14-II-Q FORMAT FOR LETTER OF PERMISSION FOR OPERATION AND


MAINTENANCE OF INFRASTRUCTURE
14-II-R UNIT APPROVAL COMMITTEE

15A APPLICATION FOR CERTIFICATION OF EXPORT PERFORMANCE OF


UNITS IN THE PHARMACEUTICAL AND BIOTECHNOLOGY SECTORS
BY THE REGIONAL OFFICES OF THE DGFT AS PER CUSTOMS
NOTIFICATION NO 21/2002 DATED 1.03.2002

15B APPLICATION FOR CERTIFICATION OF EXPORT PERFORMANCE OF


UNITS IN AGRO CHEMICALS SECTORS BY THE REGIONAL OFFICES
OF THE DGFT AS PER CUSTOMS NOTIFICATION NO 21/2002 DATED
1.03.2002

16 GUIDELINES FOR SETTLEMENT OF TRADE DISPUTES AND


COMPLAINTS

17 LIST OF NODAL OFFICERS NOMINATED TO ASSIST EXPORTERS

18A FORMAT OF BANK CERTIFICATE FOR ISSUE OF IEC

18B FORMAT OF IMPORTER - EXPORTER CODE NUMBER

18C STATEMENT OF PARTICULARS OF IEC NUMBERS

18D LIST OF REGIONAL LICENSING AUTHORITIES OF DGFT AND THE


CORRESPONDING OFFICE OF RESERVE BANK OF INDIA, EXCHANGE
CONTROL DEPARTMENT

19A FORM OF APPLICATION FOR REGISTRATION CUM MEMBERSHIP


(RCMC) WITH EXPORT PROMOTION COUNCILS

19B FORMAT OF REGISTRATION-CUM-MEMBERSHIP CERTIFICATE

19C PROFORMA FOR FURNISHING OF QUARTERLY EXPORT RETURNS

20A FORM OF APPLICATION OF IDENTITY CARD

20B FORMAT OF IDENTITY CARD

CI INSTITUTE OF LOGISTICS 121


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

21A FORMAT FOR DEPOSIT OF APPLICATION FEE

21B PROCEDURE FOR DEPOSIT/ REFUND OF IMPORT APPLICATION FEE


AND OTHER FEE
21C PROCEDURE OF ELECTRONIC FUND TRANSFER

22A BANK CERTIFICATE OF EXPORT AND REALISATION


22B BANK CERTIFICATE OF PAYMENTS FOR DOMESTIC SUPPLIES

22C CERTIFICATE OF PAYMENTS ISSUED BY THE PROJECT AUTHORITY

22D CERTIFICATE FOR OFFSETTING OF EXPORT PROCEEDS

22E BANK CERTIFICATE OF EXPORT REALISATION/ DEEMED EXPORTS


FOR STAR EXPORT HOUSE CERTIFICATE

23 REGISTER FOR MAINTENANCE OF CONSUMPTION AND STOCKS OF


IMPORTED RAW MATERIALS/ COMPONENTS ETC BY THE ACTUAL
USERS

24 FORM OF AFFIDAVIT FOR OBTAINING DUPLICATE COPY OF


LICENCES WHICH ARE LOST OR MISPLACED

25A BANK GUARANTEE FORMAT

25B LEGAL AGREEMENT/UNDERTAKING FORMAT

26 CERTIFICATE OF CHARTERED ACCOUNTANT


COST AND WORKS ACCOUNTANT/COMPANY SECRETARY
27 PROJECT AUTHORITY CERTIFICATE FORMAT

28 PROFORMA FOR SEEKING CLARIFICATIONS ON FOREIGN TRADE


POLICY

29 PROFORMA FOR SUBMISSION OF GRIEVANCE REPRESENTATION

30 ADVANCE RELEASE ORDER (ARO) FORMAT

31 FORMAT OF IMPORT CERTIFICATE UNDER INDO US MEMORANDUM

32A FORMAT OF CHARTERED ENGINEER CERTIFICATE FOR EPCG


SCHEME

32B FORMAT OF CHARTERED ENGINEER CERTIFICATE FOR FIXATION OF


SION

33 INFORMATION TO BE SUBMITTED FOR FIXATION OF STANDARD


INPUT OUTPUT NORMS

34 INFORMATION TO BE SUBMITTED IN CASES WHERE STANDARD

CI INSTITUTE OF LOGISTICS 122


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

INPUT OUTPUT NORMS ARE NOT FIXED AND APPLICATION IS


PREFERRED UNDER PARAGRAPH 4.42 AND 4.7 OF HANDBOOK
(VOL.1)

35 FORMATS FOR CLAIMING DUTY DRAWBACK ON ALL INDUSTRY


RATES/FIXATION OF DRAWBACK RATES/ REFUND OF TERMINAL
EXCISE DUTY

36 END USE CUM END USER CERTIFICATE IN CASE OF EXPORT OF


SCOMET ITEMS

37A LIST OF EXPORT ITEMS ALLOWED UNDER VISHESH KRISHI UPAJ


YOJANA

37B LIST OF IMPORT ITEMS NOT ALLOWED UNDER VISHESH KRISHI UPAJ
YOJANA

38A THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992


NO.22 OF 1992

38B FOREIGN TRADE (EXEMPTION FROM APPLICATION OF RULES IN


CERTAIN CASES) ORDER, 1993

38C FOREIGN TRADE (REGULATION) RULES, 1993

10 Practical questions :

1 Write notes on general provisions regarding exports and imports


2. Explain duty exemption schemes
3.Explain EPCG scheme
4. What do you understand by EOU, SEZ. Write provisions apply to those units
5. What do you mean by deemed exports? What are the provisions regarding
deemed exports?

11. Reference readings

³ Exim Policy
³ Foreign trade by M I Mahajan

CI INSTITUTE OF LOGISTICS 123


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 9: THE CONSUM ER PROTECTION ACT , 1986

After studying this material you will get familiarized with-

³ Purpose and background of the Act


³ Meaning of important terms
³ Role of Consume protection councils
³ Role of Consumer protection Redressal agencies

Contents

1. Introduction
2. Meanings and definitions
3. Consumer protection councils
4. Consumer Disputes Redressal Agencies
5. Miscellaneous
6. Summary
7. Key words
8. Self examination questions
9. Reference readings

1. Introduction

The Consumer protection Act is a central enactment applicable to whole of India except
the State of Jammu and Kashmir, passed by the India Parliament and implemented fro the
year 1986. Under the Act , Rules are made by almost all the states to implement the
provisions of the Act. Almost all the states framed rules and created enforcement
machinery. In a democracy , legislation is more often dictated by pressure groups who are
able to influence the party in power. It is really refreshing and heartening to find instance
when Government enacts laws which are really intended to safeguard the welfare of the
citizens

CI INSTITUTE OF LOGISTICS 124


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

There are 4 major chapters, Chapter I defines various expressions used in the Act
Chapter II and III deals with substantial rights and procedural matters. Chapters I,II nad IV
came into force on 15th April 1987 and Chapter III on 1st July 1987

2.Meanings and definitions

Complainant means
a consumer or
a voluntary consumer association registered under the Act or
the State or Central government which makes the complaint or
legal heir in case of death of a consumer
one or more consumers where there are numerous consumers having same interest

Complaint means any allegation in writing made by a complainant that–

Ø an unfair or restrictive trade practice has been adopted by a trader or service


provider

Ø the goods brought by him suffer from defects

Ø service availed by him suffer from deficiency

Ø a trader or the service provider has charged the goods or for the service mentioned
in the complaint , a price in excess of the price a) fixed by any law b) displayed on
the goods c) displayed on price list d) agreed by the parties

Ø goods which will be hazardous to life and safety when used , are offered for sale
contravention to any standards

Restrictive Trade practice :

Practice which tends to bring about manipulation of price or its conditions of delivery or
to affect flow of supplies in the market relating to goods or services in such a manner as
to impose on the consumers unjustified costs or restrictions

(eg., delay beyond the period agreed in supply of goods or services which lead to hike in
price)

CI INSTITUTE OF LOGISTICS 125


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Unfair trade practice :

A trade practice which for the purpose of promoting sale , use of supply of any goods or
service , adopts any unfair practice including the following

Ø falsely represent that goods of particular quality or standard


Ø falsely represent old goods as new goods
Ø falsely represent that goods have certain characteristics but they do not
Ø false representation on need of goods

3. Consumer protection councils

The Central Government shall by notification , establish a Council called as Central


Government Consumer Protection council

The objects of the council shall be to promote and protect the rights of the consumers

Similarly the State Government shall also establish a council to be known as Consumer
Protection State Council

The object of the council shall be to promote and protect within the State the rights of
consumers

4. Consumer Disputes Redressal Agencies

There shall be established , for the purpose of the Act, the following agencies

Ø A Consumer Dispute Redressal forum to be known as District Forum established


by State government in each district of a State
Ø A Consumer Disputes Redressal commission to be known as State Commission
established by State Government
Ø A National Consumer Disputes Redressal Commission established by Central
Government

CI INSTITUTE OF LOGISTICS 126


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Procedure of registering and processing complaints :

Ø A consumer or consumer association can file a complaint to District Forum with


proper form and fee
Ø It shall not be rejected unless parties are heard
Ø After receiving the complaint the forum may , within 21 days , refer to the opposite
party asking him to furnish his version within 30 days
Ø If required forum may also ask for sample of goods which are under complaint
Ø Forum shall give opportunity to both parties to be heard
Ø Take up proceedings
Ø During proceedings , if deemed fit , pass interim orders
Ø Pass final orders after due hearing
Ø Order may be

§ To remove defects
§ Replace goods
§ Pay compensation
§ To discontinue the unfair trade practice
§ To issue corrective advertisement
§ To withdraw defective goods

Appeal :

In case of grievance on order of the Forum , the aggrieved party can appeal to State
Commission and in case of grievance of order of State Commission appeal can be placed
with National Commission

Jurisdiction :

State commission shall take up the cases with complaint value of more than Rs 25 lacs
but not more than Rs 1 crore and appeals against order of Distric Forum

National commission can take up cases in which the value of complaint is more than Rs 1
crore and also the appeals against order of State Commission

CI INSTITUTE OF LOGISTICS 127


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

5. Miscellaneous

All notices shall be issued as prescribed by the act


Vacancies or defects in appointment of the officers will not invalidate the order
Rules and regulations of the Act are to be approved by Parliament
National Commission can issue regulations with the approval of Central Government

6. Summary

The Consumer protection Act is a central enactment applicable to whole of India except
the State of Jammu and Kashmir, passed by the India Parliament and implemented fro the
year 1986.

The Central Government shall by notification , establish a Council called as Central


Government Consumer Protection councilThe objects of the council shall be to promote
and protect the rights of the consumers

Similarly the State Government shall also establish a council to be known as Consumer
Protection State Council

Following agencies fuction as authorized agencies , a Consumer Dispute Redressal forum


to be known as District Forum established by State government in each district of a State,
Consumer Disputes Redressal commission to be known as State Commission established
by State Government, a National Consumer Disputes Redressal Commission established
by Central Government

In case of grievance on order of the Forum , the aggrieved party can appeal to State
Commission and in case of grievance of order of State Commission appeal can be placed
with National Commission

CI INSTITUTE OF LOGISTICS 128


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

7.Key words

Complainant means a consumer or a voluntary consumer association registered under


the Act or the State or Central government which makes the complaint or legal heir in
case of death of a consumerone or more consumers where there are numerous
consumers having same interest

Complaint means any allegation in writing made by a complainant that–


an unfair or restrictive trade practice has been adopted by a trader or service provider
the goods brought by him suffer from defects
service availed by him suffer from deficiency
a trader or the service provider has charged the goods or for the service mentioned in
the complaint , a price in excess of the price a) fixed by any law b) displayed on the
goods c) displayed on price list d) agreed by the parties
goods which will be hazardous to life and safety when used , are offered for sale
contravention to any standards

Restrictive Trade practice : Practice which tends to bring about manipulation of price
or its conditions of delivery or to affect flow of supplies in the market relating to goods or
services in such a manner as to impose on the consumers unjustified costs or
restrictions

Unfair trade practice : A trade practice which for the purpose of promoting sale , use of
supply of any goods or service , adopts any unfair practice including the following

³ falsely represent that goods of particular quality or standard


³ falsely represent old goods as new goods
³ falsely represent that goods have certain characteristics but they do not
³ false representation on need of goods

CI INSTITUTE OF LOGISTICS 129


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

8. Self examination questions

1. Define Complaint and complainant


2. What do you mean by Unfair trade practice and restrictive trade practice
3. Write a note on Consumer rederassal agencies
4. Write a note on jurisdiction of rederassal agencies and appealing authorities

9. Reference readings

³ Bare Act

CI INSTITUTE OF LOGISTICS 130


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 10: THE ENVIRONMENT PROTECTION ACT

After studying this unit you will understand

Ø The need and objective of these laws


Ø Various types of environment laws
Ø Various authorities in each law
Ø Requirements of persons under each law
Ø Offence by companies
Ø Meaning of certain important terms

Contents

1. Introduction
2. Environment Protection Act
3. Air (Prevention and Control of Pollution ) Act
4. Water (Prevention and Control of Pollution) Act
5. Self Examination questions

1. Introduction :

This act was passed as a measure to implement the decisions taken at the United
Nations Conference held in Stockholm in June 1972 to which India was a party

The objective of all laws on environment should be to create harmony between


development on the one hand and environment on the other hand since neither can be
sacrificed

This Act came into force in the year 1986

The following are various acts considered together as Environment laws

Air (Prevention and control of pollution ) Act 1981


Water (Prevention and Control of Pollution ) Act 1974
National Environment Tribunal Act
National Environment Appellate Authority Act

CI INSTITUTE OF LOGISTICS 131


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

India Forest Act


Forest Conservation Act
Wild Life Protection Act
Public Liability Insurance Act

Let us discuss some of the laws in following sections

Environment Protection Act

Although there are existing laws relating directly or indirectly with several environment
matters, it was felt that these laws were focusing on specific types of pollution or specific
categories hazardous substances. There also exist uncovered gaps and inadequate
linkages in handling matters relating to industrial and environment safety. Because of
multiplicity of regulatory agencies there is need for an authority which can assume lead
role for studying , planning and implementing long term requirements of environment
safety and to give directions to and coordinate a system of speedy and adequate
response to emergency situations threatening the environment

This Act seeks to achieve these objectives

The term Environment includes water, air and land and other inter relationship which
exists among and between water, air and land and human beings , other living creatures
, plants etc

Environmental pollutant means any solid , liquid or gaseous substance present in such
concentration which is injurious to environment

Environment pollution means the presence of any environmental pollutant

Hazardous substance means any substance , preparation of which . by reason of its


chemical properties, is liable to cause harm to human beings or living creatures or plats
etc

CI INSTITUTE OF LOGISTICS 132


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Powers of Central Government : The Central Government has powers to take all
necessary measures as it deems necessary for the purpose of protecting and improving
the quality of environment and preventing environmental pollution

The Central government can appoint officers of such designations as it deems fit and
has powers to give such directions as it deems fit

Central government has powers to enter the premises of any facility to inspect the
compliance of norms laid

Prevention , control of environmental pollution:

Persons carrying on industry , operation etc not to allow emission or discharge of


environmental pollutants in excess of standards
Persons handling hazardous substances to comply with procedural safeguards
Such persons to furnish information to authorities / agencies

3. Air (Prevention and control of pollution Act)

With the increased industrialization and the tendency of most of industries to expand in
areas which are already heavily industrialized , the problem of air pollution has begun to
be felt in the country. The presence in air , beyond certain limits , of various pollutants
discharged through emissions has a detrimental effect on the health of people as also
on animal life, vegetations and property. It is therefore felt there should be an integrated
approach for tackling these issues and hence formation of the Act

Air pollutant means- any solid , liquid or gaseous substance including noice present in
the atmosphere in such concentration as may be or tend to be injurious to human beings
or other living creatures or plants or environment

Central and State Pollution control boards have been formed to control , monitor and
direct various issues

CI INSTITUTE OF LOGISTICS 133


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

The Boards have elaborate powers as specified in the act . Industries may be directed to
ensure certain standards of emission and restricted on usage of certain plants. Persons
violating the rules are punishable

4. Water (Prevention and Control of Pollution) Act

The problem of pollution of rivers and streams has assumed considerable importance
and urgency in recent years as a result of the growth of industries and the increasing
tendency to urbanization. It is therefore essential to ensure that the domestic and
industrial effluents are not allowed to be discharged into the water courses without
adequate treatment as such discharges would render the water unsuitable as source of
drinking water as well as supporting fish life and or use of irrigation . A committee was
set up to analyse these issues in year 1962 and later the act was enacted in the year
1974

Central and State boars are formed to monitor, control and direct various issues under
this act

Any activity using stream or well for disposal of polluting matter is prohibited

Similarly discharge sewage into streams is also prohibited

Industries to get approval before commencing the operations , the approval is subject to
periodical reviews and renewals. Industries violating norms are punishable including
closure of industries

Self examination questions

1. What are various environmental laws


2. Write a note on Environment Protection act
3. Write a note on Water (Prevention and Control of Pollution) Act
4. Write a note on Air (Prevention and control of pollution Act)

CI INSTITUTE OF LOGISTICS 134


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 11: VAT- VALUE ADDED TAX

Introduction :

The biggest leap forward and the biggest change in the tax system in India , VAT
replaces the Sales tax from 1st April 2005. The Central Government has the power to
charge and collect excise duties on the production or manufacture of goods while the
State Governments have the powers to levy sales tax on consumption of goods. The
State also charges octroi, entertainment tax, electricity tax, motor vehicle tax etc. Thus
different state governments charge different rates of sales tax , but with the introduction
of VAT at State level , all these different rates of sales tax will become uniform over the
country

Vat is not new to our country as for Excise , this concept is being followed for a long time
in India

How is VAT different from Sales Tax ?

While in Sales tax , the ultimate consumer pays tax on some part (s) of the product more
than once , in VAT, the consumer pays tax on the value of the entire product only once.

Eg., a car manufacturer pays sales tax on all inputs used in manufacture of car , like
engine, steering, tanks etc. The consumer of a car pays tax on the price of car which
includes the above mentioned inputs on which tax has already been paid , meaning that
the consumer pays tax twice for the part used in the product

Eg., a manufacturer sells a product to a wholesaler at Rs 10000, he charges VAT at Rs


1250
For the wholesaler the cost is Rs 10000 and not Rs 11250
After adding profits of 20% say, he will sell to retailer at Rs 12000 + VAT Rs 1500 out of
which the wholesaler will pay only s 250 to the department (Rs 1500- Rs 1250 already

CI INSTITUTE OF LOGISTICS 135


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

paid to manufacturer) . So the VAT cost to the consumer is added only by Rs 250 or 2.5
% on the wholesaler level

Under sales tax system , manufacturers were required to pay total tax calculated on their
sales every month without deducting any claim on their purchases . each month they
used to lodge a separate refund claim for the sales tax paid on their purchases. These
claims were delayed for many months and hence VAT is a welcome change for
industrialists

Basic VAT Rates :

VAT covers around 550 goods , have only three rates , 1 %, 4 %, and 12.5 %

The standard VAT rate is 12.5 % generally payable on most consumer goods
A 4% VAT is payable on basic necessities (including medicines and drugs) all industrial
and agricultural raw materials , declared goods and capital goods consisting of about
270 items
On gold and silver ornaments and precious stones 1% VAT is payable
There is also 0% VAT on natural and unprocessed products of the unorganized sector
that are largely excluded from tax

The only products which will be outside VAT will be petroleum products which will be
continued to be taxed under Sales tax as these prices are not fully market determined

Small vendors with a turnover of less than Rs 5 lacs per annum are exempted from VAT

Salient Features :

VAT is a tax on the supply of goods eventually paid by the final consumer. VAT is a tax
paid at each point of exchange of goods where value is added – starting from primary
production, distribution and final consumption
It is charged on the difference between the sale price of goods (outputs) and cost of
purchases (inputs)
At each point of exchange , when value is added VAT is collected

CI INSTITUTE OF LOGISTICS 136


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

VAT is a multi point tax


The trader does not pay from his pocket, he collects and then pay
All transactions are taxed from the view point of seller
There is no difference whether one is selling to a dealer or consumer
VAT is not for CST sales as such, CST is planned to be phased out in 2 years

Who and why some people fear VAT?

Traders

Ø They have to learn new practices


Ø Maintain new set of books and documents
Ø More paper work
Ø Stock taking onj 1/4/2005 to be done
Ø No VAT refund on inter state purchases
Ø New registration required for VAT
Ø Averse to change to a new system

Industrialists

Ø Requires new accounting system


Ø CST and local tax charged by other state can not be claimed
Ø Stock transfers may create accounting problems
Ø Lack of clarity in the laws
Ø Buying from companies currently under a tax exemption scheme will attract VAT

Advantages of VAT

Ø Goods to become cheaper ultimately to the consumer


Ø Simple and transparent , lesser ‘Inspector Raj’
Ø Tax revenues for Government raises
Ø Ultimately the consumption will increase resulting in more demand for products
which results in higher economic growth
Ø Less paper work

CI INSTITUTE OF LOGISTICS 137


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Documents , Returns

Ø All tax payers will have a registration no called TIN – Tax payers Identification
number
Ø All transaction will have invoices/ bill/ memos
Ø For returns Credit notes will be issued
Ø Returns are to be filed every month on or before 7th of subsequent month

VAT calculation – a case

Take a case wherein a chain of transactions involving manufacturer , wholesaler,


retailer and consumer using standard VAT rate of 12.5%

Manufacturer Wholesaler Retailer Consumer


Price payable 11250 13500 16200
VAT 1250 1500
Recoverable
Net cost 10000 12000
Profit 2000 2400
Net selling 10000 12000 14400
price
VAT charged 1250 1500 1800
Sale price + 11250 13500 16200
VAT

VAT Accounting

Manufacturing Wholesaler Retailer Consumer


VAT Payable 1250 1500 1800
VAT 1250 1500
Recoverable
Net VAT paid 1250 250 300
VAT borne 1800

CI INSTITUTE OF LOGISTICS 138


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Some points to note here:

Total amount of VAT paid Rs 1800, represents 12.5 % of the value added in full chain of
transactions. Manufacturer created Rs 10000 in value , the wholesaler added Rs 2000
and retailer Rs 2400 , making Rs 14400 in total, and VAT on this at 12.5 % is Rs 1800

Consumer pays Rs 1800 as VAT , the parties involved earlier in the chain have paid
VAT but they have either recovered or to the extent they have not, passed on to down
the line to the ultimate consumer

Case study : Sales Tax vs VAT

There are two types of taxable sales in Delhi, 1.First point tax- paid by manufacturer
2.Second point tax-paid by consumer

Let us take a comparison of sales tax impact at both these instances and VAT

Sales Tax at first point Sales Tax last point VAT


Rs Rs Rs
Vendor 100 Vendor 100 Vendor 100
ST 0 ST 0 VAT @ 12.5% 12.5
Selling price 100 Selling price 100 Selling price 112.5

Manufacturer Manufacturer Manufacturer


Cost price 100 Cost price 100 Cost price 100
Profit 50 Profit 50 Profit 50
Selling price 150 Selling price 150 Cost price 150
ST '@ 12% 18 ST '@ 12% 0 VAT @ 12.5% 18.75
VAT paid 12.5
Net VAT 6.25
Total price 168 Total price 150 Selling price 156.25

Distributor Distributor Distributor


Cost 168 Cost 150 Cost 150
Profit 20 Profit 20 Profit 20
Tax 0 Tax 0 VAT @ 12.5 % 21.25
VAT paid 18.75
Net VAT 2.5
Selling price 188 Selling price 170 Selling price 172.5

Retailer Retailer Retailer


Cost 188 Cost 170 Cost 170
Profit 40 Profit 40 Profit 40

CI INSTITUTE OF LOGISTICS 139


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Tax 0 Sale Tax @ 12% 25 VAT @12.5% 26.25


VAT paid 21.25
Net VAT 5
Selling price 228 Selling price 235 Selling price 215

Consumer Consumer Consumer


Cost 228 Cost 235 Cost 215

Net tax paid to Net tax paid to Net tax paid to


Government 18 Government 25 Government 26.25
Consumer paid 228 Consumer paid 235 Consumer paid 215

Point to note here is that VAT results in lower price to consumer and more tax revenue for
the Government

CI INSTITUTE OF LOGISTICS 140


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

Chapter 12: FRINGE BENEFIT TAX - CONCEPT AND COMPLIANCE

Introduction

With the notification of the Finance Act, 2005, the Fringe Benefit Tax has become a law
and every person falling within the definition of employer shall now be required to comply
with the provisions relating to the Fringe Benefit Tax. The Hon’ble Finance Minister in
the Finance Bill 2005, has proposed to levy tax in the hands of the employer in respect
of the benefits being extended to the employees by such employer. After the
introduction of the bill many issues were raised by the trade, industry, chamber, After
extensive consultations and deliberations the initial proposal put forward in the Finance
Bill 2005 was modified. The salient features of the Fringe Benefit Tax after amendment
and notification of the Finance Act, 2005 are as under:

A. Applicability

The Fringe Benefit Tax is a tax to be paid by an employer in addition to the income
tax payable for every assessment year starting from the assessment year 2006-07.
The tax is to be paid in respect of the fringe benefits provided or deemed to have been
provided by an employer to his employees. The liability to pay Fringe Benefit Tax
shall be there even when there is no liability to pay income tax by an employer. Even
loss making entities and entities whose income is exempt shall also be required to pay
Fringe Benefit Tax.

B. Meaning of ‘Employer’

The liability to pay Fringe Benefit Tax is on the employer. For this purpose an employer
shall mean a company, a firm, an association of persons or a body of individuals, a local
authority and every artificial juridical person. Individuals and HUFs are not required to
pay Fringe Benefit Tax. A further exemption has been provided to the trusts or
institutions which are eligible for exemption under Section 10(23C) or which are
registered under Section 12AA of the Act.

CI INSTITUTE OF LOGISTICS 141


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

C . Meaning of ‘Fringe Benefits’

The liability to pay tax under this new provision is on the value of fringe benefits.
As such, the first important issue is, ‘What is the meaning of fringe benefits?’. As per the
provisions of the Act, fringe benefit means any consideration for employment provided
by way of any privilege, service, facility or amenity directly or indirectly provided by the
employer whether by way of reimbursement or otherwise to his employees including
former employees

A deeming provision has been introduced where in, a certain percentage of


expenditure incurred on some heads shall be deemed to be the fringe benefit extended
to the employees by the employer. By this deeming provision a part of the expenditure,
irrespective of the fact whether it has actually resulted in any benefit or amenity to the
employees or not, shall be deemed to be the fringe benefit extended to the employees.

D. Valuation of Fringe Benefits

The various heads of expenditure and the value of each expenditure which shall be
deemed to be the fringe benefits are as under

Clause of Percentage of the


Section Head of Expenditure expenditure deemed
115WB(2) to be fringe benefit
(A). Entertainment 20%
(B). Hospitality of every kind to any person 20%
(C). Conference (other than fee for participation) 20%
(D). Sales promotion, including publicity excluding 20%
advertisement
(E). Employees Welfare 20%
(F). Conveyance, tour and travel, including foreign travel 20%
(G). Use of Hotel, boarding and lodging 20%
(H). Repair, running(including Fuel), maintenance of 20%
motorcars and depreciation thereon
(I) Repair, Running(including fuel), maintenance of 20%
aircraft and depreciation thereon
(J). Use of Telephone including mobile phone(other than 20%
leased lines)
(K). Maintenance of accommodation in the nature of 20%
guest houses (Other than for training purposes)
(L). Festival celebration 50%

CI INSTITUTE OF LOGISTICS 142


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

(M). Use of health club and similar facilities 50%


(N). Use of any other club facilities 50%
(O). Gifts 50%
(P). Scholarship 50%
115WB(1)(b) Any Free or Concessional ticket for private journeys Actual
115WB(1)(c) Contribution to Superannuation fund Actual

Tax at a flat rate of 30 per cent is to be paid on the aggregate value of the fringe benefit
calculated by applying the above percentages. Further, surcharge at the rate of 10 per
cent and education cess at the rate of 2 per cent is to be added to the tax computed
above. The applicability of the surcharge and education cess is on all employer
irrespective of the total income of the employer. Thus, the effective fringe benefit tax rate
is 33.66 per cent.

D.Exemptions

1. Expenditure incurred on providing tea, coffee, food etc in office or factory is not to
be included in the fringe benefits.

2. Expenditure incurred on conference fee for participation by the employees in the


conference shall not be included in the fringe benefits. However, expenditure on
conveyance, tour, travel on hotel incurred in connection with any conference shall
be included in the value of the fringe benefits.

3. Expenditure incurred on advertisement is not to be included in the value of fringe


benefits. However, expenditure on sponsorship of any sports event or any other
event shall be excluded only when the event is organized by any government
agency or trade association or body.

4. Contribution made by the employer to the Provident Fund, ESI, approved Gratuity
fund etc shall not be liable for Fringe Benefit Tax.

Employer Specific Concessions :

In addition to the above general exemptions, there are certain employer specific
concessions have been provided.

CI INSTITUTE OF LOGISTICS 143


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

1. In the case of an employer who is engaged in the business of hotel, the value of
fringe benefits liable for tax in respect of provision of hospitality (clause B) shall
be 5 per cent (as against the general rate of 20 per cent) of the total amount of
expenditure incurred on hospitality.

2. In the case of the employer who is engaged in the business of construction, the
value of the fringe benefits in respect of the expenditure incurred on conveyance,
tour and travel including foreign travel (clause F) shall be 5 per cent instead
of 20 per cent.

3. In the case of employer engaged in the business of carriage of passengers or


goods by motor cars, the value of the fringe benefits in respect of the expenditure
incurred on repair, running and maintenance of motor car including
depreciation (clause H) shall be 5 per cent instead of 20 per cent.

4. In the case of an employer engaged in carriage of passenger or goods by aircraft,


the value of fringe benefit in respect of expenditure on repair, running,
maintenance including depreciation of aircraft shall be taken as nil instead of 20
per cent.

5. Further, in the case of an employer engaged in the business of manufacture or


production of pharmaceuticals, and computer software, the value of fringe
benefits liable for tax in respect of expenditure incurred on conveyance, tour and
travel including foreign travel (clause F) and use of hotel, boarding and lodging
facility (clause G), shall be 5 per cent (as against the general rate of 20 per cent)
of the expenditure incurred under these heads.

F. Need For Reclassification of Expenditure Heads

With the introduction of Fringe Benefit Tax from 1st April, 2005, there is a need to revise
the expenditure heads so that the expenditure not liable for fringe benefit do not get
merged with the expenditure liable for Fringe Benefit Tax. Some of the heads where this
regrouping will be required are as under.

CI INSTITUTE OF LOGISTICS 144


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

1. Hospitality provided to the employees by way of food and beverage in office or


factory or by way of paid vouchers need to be debited under a separate head other
than the employee welfare / staff welfare expenditure.
2. Expenditure on repair, running and maintenance of motor car and depreciation
thereon need to be classified separately from the expenditure incurred on repair,
running of vehicles other than motor cars such as scooter, bus, truck, etc.
3. Expenditure on conference fee for participation of employees need to be classified
separately in view of exemption in clause (C).
4. Expenditure which is taxable as perquisite in the hands of employees is not liable
for Fringe Benefit Tax. As such all such expenditure need to be debited under the
head ‘Salary’ or ‘Establishment Expense’, so that the same does not get clubbed
with the other expenditure which is liable for Fringe Benefit Tax.
5. Expenditure on maintenance of guest house being used for training purposes need
to classified separately from the expenditure incurred on maintenance of guest
house as such.

G. Fringe Benefit Tax is not a deductible expenditure

i) The fringe benefit tax paid by the employer shall not be an eligible expenditure while
computing profit or gain of business or profession, despite the fact, that the same has
been paid on account of the liability of the employees.

ii) Further, tax auditor shall be required to specify the amount of fringe benefit tax
debited in the profit and loss account under clause 16(f) of Form 3CD of the tax audit
report from assessment year 2006-07 onwards.

H.Compliance of Fringe Benefit Provisions

i. Payment of tax in advance The Fringe Benefit Tax is applicable from financial year
beginning on 1st April, 2005, i.e., assessment year 2006-07. For complying with the
fringe benefit provisions, every employer shall be required to compute the value of the
fringe benefits, every quarter. It is to be noted that there is a liability to pay Fringe
Benefit Tax by way of advance tax every quarter, not on the basis of yearly estimate,
but on the basis of the actual value of fringe benefits computed every quarter. The

CI INSTITUTE OF LOGISTICS 145


Website: www.ciilogistics.com
BUSINESS LAW & TAXES

immediate requirement will be to compute the same for the first quarter starting from 1st
April, 2005 to 30th June, 2005 of the current year and pay the tax thereon at the rate of
33.66 per cent (inclusive of surcharge and education cess) by 15th July, 2005. Similar
liability is to be computed and paid for the subsequent quarters by 15th October and 15th
January. However, for the quarter ending on 31st March, the fringe benefit tax is to be
paid even before the end of the quarter, i.e., by 15th March.

In case of failure to pay the tax for any quarter, or where the tax paid is less, then there
shall be a liability to pay interest at the rate of 1 per cent on the amount of the short-fall
for every month or part of the month till the short-fall continues.

ii. Filing of Return


Every employer who has provided the fringe benefits, as explained above, to his
employees is required to file return of fringe benefits irrespective of the fact whether
such employer is required to file the return of his own income under Section 139 of the
Act or not. The due date of filing the return shall be 31st October for a company and a
person whose accounts are required to be audited. In other cases, the due date shall be
31st July every year.

iii. Assessment
The procedure of the assessment including the best judgement assessment and
reassessment shall be the same as is applicable in the case of the regular assessment
of the income. Despite the return being a separate return, it appears that there will be no
separate scrutiny of FBT returns.

Fringe Benefit Tax is a new law. As is the case with any new law, many issues will
arise on its interpretation and application. One can only hope that the same gets
sorted out and clarified at the earliest.

---------X---------

CI INSTITUTE OF LOGISTICS 146


Website: www.ciilogistics.com