Tuesday, September 2, 2014

Cenvat credit not available on Tower Parts & Pre-fabricated buildings

We are sharing with you an important judgment of the Hon’ble High Court of Bombay in the case of Bharti Airtel Ltd. Vs. The Commissioner of Central Excise, Pune III [2014-TIOL-1452-HC-MUM-ST] on following issue:


Whether Cenvat credit is available to provider of Cellular Mobile Service on Tower Parts & Prefabricated buildings?

Facts & Background:

Bharti Airtel Ltd. (“the Appellant”) is engaged in providing Cellular telephone services (“the Output Service”) and accordingly paying Service tax as applicable. The Appellant availed Cenvat credit of Excise Duty on the Base Trans-receiver Station (“BTS”) claiming to be a single integrated system consisting of tower, GSM or Microwave Antennas, Prefabricated building, isolation transformers, electrical equipments, generator sets, feeder cables etc., classified under Chapter 85.25 of the Central Excise Tariff Act, 1985 (“CETA”). Accordingly, the Appellant contended that Cenvat credit on said ‘Capital goods’ was rightly available to them under clause (i) of Rule 2(a)(A) of the Cenvat Credit Rules, 2004 (“the Credit Rules”).

Monday, September 1, 2014

Certifying Internal Controls on Financial Reporting Process under companies act

As per Sec 143 (3) (i) of The Companies Act, 2013, the Statutory Auditor has to certify whether the company has adequate internal financial controls sys tems inplace and al so comment on the operating effectiveness of such controls.

Hitherto, the auditor was commenting that his audit procedures were based on risk assessments  made including his assessment of internal control  relevant to Company's preparation and fair presentation of Financial Statements. But he does  not give any opinion on the same and this disclaimer is expressly stated so in the audit report. No longer is such a disclaimer possible!!

Even in CARO, the auditor was commenting on the internal control systems for purchase of inventory, fixed assets and sale of goods and services alone. 

It was restricted to specific areas and not generic  / related to financial reporting process as a whole. 

The Directors' Responsibility Statement also, u/s 134 (5) (e), requires the Directors to give their assurance on the adequacy of internal financial controls. But then, this stipulation is only for listed  companies whereas the auditor has to give his opinion on listed, unlisted public and also private companies! Audit Committee is also required to review thi s aspect but then, again, audit committee is not mandatory for every class of company.

What is meant by “Internal Financial Controls”? 

These are controls that give comfort on the following aspects:

  1. policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business
  2. adherence to company's policies
  3. the safeguarding of its assets
  4. accuracy and completeness of the accounting  records
  5. timely preparation of reliable financial information

The Internal Controls over Financial Reporting may  be classified as controls at the 

  • Entity Level;'
  • Transaction Level and also 
  • IT General Controls.

Entity level controls generally are “top”controls  which can impact all related operational controls under it. On a positive side, even if the transaction level control does not operate effectively, an entity level control can still'cap' the risk from affecting the financial reporting. In the same way,ineffective entity level controls can spell disaster for the operating controls that underly such entity level controls.

For documenting the transaction level controls, it  would be good to approach from identification of important accounts in the trial balance and then  identifying the processes that affect the recording of transaction in these accounts. Thereafter a risk  assessment with control mapping needs to be done. Once this effort is done, then the controls can be tes ted, say in internal audit, and effectiveness concluded upon.

IT Controls refer to security of data (confidentiality, integrity and availability) and help in efficient processing and reporting requirement.  IT Controls reduces manual level controls and thereby eliminates the vicissitudes of human error.

The auditor has to evaluate the design effectiveness as well as the operational effectiveness of controls. In design effectiveness  stage focus is on risk identification and also controls that exist to mitigate such risks.

Operational effectiveness stage focuses on the testing of the above controls to ensure they are operating effectively throughout the period under  audit.

The issue on hand: The above is very similar to  the SOX Framework etc that exists in the USA nowadays and applicable to US based companies  wherever they operate. These companies have a separate team for SOX Testing (either in-house or outsourced) apart from regular internal audit teams. Will this situation lend itself in Indian scenario?

Conclusion:The challenges are primarily to educate the management on the requirements of not only having proper internal control frameworks  but also a mechanism to properly demonstrate the documentation (2) regular update of processes (3) regular design effectiveness testing (4) making internal audit risk-based and focused on testing operating effectiveness of controls apart from traditional objectives.

The downside of not having visibility on the above  requirements may force the statutory auditors in not giving a clean chit. The Institute of Chartered  Accountants of India should also devise suitable guidance and approach for various practical scenarios and organise awareness programmes to the Members in Industry in particular.

CA. Mahesh Krishnan

Saturday, August 30, 2014

Capitalisation of borrowing costs in power projects :Clarification by MCA

Vide Circular no. 35/2014, Ministry of Corporate Affairs has clarified the following issues with respect to the capitalisation of borrowing costs in power projects:

1) Borrowing costs incurred during extended delay in commencement of commercial production after the plant is otherwise ready, can not be capitalised by virtue of AS-10 & AS-16 issued by ICAI.

2) Other capitalisations should be made unit-wise, instead of projectwise, therefore, in case one of the units of the project is ready for commercial production, capitalisation for such unit should be made, irrespective of the fact that construction of other units still continues.

3) AS-10 & AS-16 deals with all types of power projects. It doesn't differentiate treatment for cost plus projects or competitive bid projects.

For the sake of convenience, the said circular has been given as under for reference. 

  1. Accounting Standards AS-10 and AS-16 prescribe the principles of capitalization of various costs based on the underlying concept that only such expenditure should be capitalized as form a part of the cost of fixed assets which increase the worth of the assets. Cost incurred during the extended delay in commencement of commercial production after the plant is otherwise ready does not increase the worth of fixed assets. Such costs cannot, therefore, be capitalized.  
  2. Accounting Standard AS 16, inter alia provides guidance with regard to part capitalization where some units of a project are complete. In case one of the units of the project is ready for commercial production and is capable of being used while construction continues for the other units, costs should be capitalized in relation to that part once the part is ready for commercial production. 
  3. It is further clarified that AS 10 and AS 16 are applicable irrespective of whether the power projects are ‘Cost Plus projects’ or ‘Competitive Bid projects’.

All about PMJDY Pradhan Mantri Jan Dhan Yojana

Phase I (15th August ,2014-14th August,2015)-
  •  Universal access to banking facilities
  • Providing Basic Banking Accounts with overdraft facility of Rs.5000 after six months and RuPay Debit card with inbuilt accident insurance cover of Rs. 1 lakh and RuPay Kisan Card
  • Financial Literacy Programme
Phase II (15th August 2015-15th August,2018)-

  • Creation of Credit Guarantee Fund for coverage of defaults in overdraft A/Cs
  • Micro Insurance
  • Unorganized sector Pension schemes like Swavlamban

Thursday, August 28, 2014


Government of India, Ministry of Labour & Employment issued notifications enhancing statutory wage ceiling from existing Rs. 6,500/- to Rs. 15,000/-, fixing minimum pension of Rs, 1000/- per month and 20% additional relief on the amount of assurance benefit admissible under EDL1 Scheme, 1976 .

As we have earlier informed you that Central Board of trustees (CBT,EPF)  in his meeting dated 05.02.2014 has approved  to increase ceiling limit to Rs 15000/-  from earlier Rs 6500/-

Further EPF department has already sent letter to its regional offices to get ready for implementation of increased ceiling limit on 14.07.2014 and at that time we have informed you tentative date of implementation as 01.08.14 or 01.09.14

The copies of the said notifications are given as under.

Note :You may download these notifications from Link given at the end of this post.

RBI simplified KYC (Know Your Customer) for Bank Customers

The Reserve Bank of India today released a note along with a poster and a booklet comprising a few common questions relating to Know Your Customer (KYC) norms for opening bank accounts. The objective of this is to bring awareness among the general public about the KYC simplification measures taken by the Reserve Bank in the recent times with a view to helping the common man in opening bank accounts.

Measures taken for simplification:

1. Single document for proof of identity and proof of address
There is now no requirement of submitting two separate documents for proof of identity and proof of address. If the officially valid document submitted for opening a bank account has both, identity and address of the person, there is no need for submitting any other documentary proof.
Officially valid documents (OVDs) for KYC purpose include: Passport, driving licence, voters’ ID card, PAN card, Aadhaar letter issued by UIDAI and Job Card issued by NREGA signed by a State Government official.
To further ease the process, the information containing personal details like name, address, age, gender, etc., and photographs made available from UIDAI as a result of e-KYC process can also be treated as an ‘Officially Valid Document’.

2. No separate proof of address is required for current address
Since migrant workers, transferred employees, etc., often face difficulties while submitting a proof of current address for opening a bank account, such customers can submit only one proof of address (either current or permanent) while opening a bank account or while undergoing periodic updation. If the current address is different from the address mentioned on the proof of address submitted by the customer, a simple declaration by her/him about her/his current address would be sufficient.

3. No separate KYC documentation is required while transferring accounts from one branch to another of the same bank
Once KYC is done by one branch of the bank, it is valid for transfer of the account to any other branch of the same bank. The customer would be allowed to transfer her/his account from one branch to another branch without restrictions and on the basis of declaration of his/her local address for communication.

4. Small Accounts
Those persons who do not have any of the ‘officially valid documents’ can open ‘small accounts’ with banks. A ‘small account’ can be opened on the basis of a self-attested photograph and putting her/his signature or thumb print in the presence of an official of the bank. Such accounts have limitations regarding the aggregate credits (not more than Rupees one lakh in a year), aggregate withdrawals (not more than Rupees ten thousand in a month) and balance in the accounts (not more than Rupees fifty thousand at any point in time). These small accounts would be valid normally for a period of twelve months. Thereafter, such accounts would be allowed to continue for a further period of twelve more months, if the account holder provides a document showing that she/he has applied for any of the officially valid document, within twelve months of opening the small account.

5. Relaxation regarding officially valid documents (OVDs) for low risk customers
If a person does not have any of the ‘officially valid documents’ mentioned above, but if is categorised as ‘low risk’ by the banks, then she/he can open a bank account by submitting any one of the following documents:
(a) identity card with applicant's photograph issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions;
(b) letter issued by a gazetted officer, with a duly attested photograph of the person.

6. Periodic updation of KYC
Time intervals for periodic updation of KYC for existing low/medium and high risk customers have been increased from 5/2 years to 10/8/2 years, respectively.

7. Other relaxations
  1. KYC verification of all the members of Self Help Groups (SHGs) is not required while opening the savings bank account of the SHG and KYC verification of only the officials of the SHGs would suffice. No separate KYC verification is needed at the time of credit linking the SHG.
  2. Foreign students have been allowed a time of one month for furnishing the proof of local address.
  3. In case a customer categorised as low risk is unable to submit the KYC documents due to genuine reasons, she/he may submit the documents to the bank within a period of six months from the date of opening account.
Alpana Killawala
Principal Chief General Manager

Certificate by Indian Railways an eligible document for CENVAT credit:Circular

Service tax on transportation of goods was effectively levied w.e.f. 1st Oct’12(though levied from 1st July’12, but was deferred till 30th Sep’12).

However, abatement of 70% was allowed vide N/N 26/2012-ST, hence effective rate of tax imposed was 3.708%.

Ministry of Railways issued a circular- TCR/1078/2011/2 ,dated 27th Jun’12 to deal with the issues arising out of the aforesaid levy & in para 4(xi) of the same, it was stated that on written request from customers, a consolidated certificate for each customer shall be issued by the authorised officer of Indian Railways(CCM/Dy. CAO) on monthly basis giving following details date-wise & rake-wise:

  • o Service Tax;
  • o Education Cess;
  • o Higher Education Cess; and
  • o Total Service Tax

 It further stated that the said certificate can be used by the customers for taking CENVAT. However, no corresponding amendment was made by Ministry of Finance in rule 9 of CENVAT Credit rules, 2004, which deals with the list of eligible documents for availment of CENVAT.

 Now, vide N/N 26/2014-C.E.(N.T.), rule 9 of CENVAT Credit Rules, 2004 has been amended & clause (fa) has been inserted therein to include following certificate as an eligible document for the purpose of availing CENVAT:

“a Service Tax Certificate for Transportation of goods by Rail (herein after referred to as STTG Certificate) issued by the Indian Railways, along with the photocopies of the railway receipts mentioned in the STTG certificate”.

Henceforth, the eligibility stated vide circular issued by Ministry of Railways has finally been brought at par with CENVAT credit rules.

CA Sumit Grover  
Sumitgrover.ca@gmail.com  +91-9910946323

Notification No. 26/2014 – Central Excise (N.T.), dated 27-Aug-2014

Notification No. 26/2014 – Central Excise (N.T.)  New Delhi, the 27th August, 2014

G.S.R. (E). – In exercise of the powers conferred by section 37 of the Central Excise Act, 1944 (1 of 1944) and section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules further to amend the CENVAT Credit Rules, 2004, namely : –

1. (1) These rules may be called the CENVAT Credit (Eighth Amendment) Rules, 2014.

(2) They shall come into force from the date of their publication in the Official Gazette.

2. In the CENVAT Credit Rules, 2004, in rule 9, in sub-rule (1), after clause (f), the following clause shall be inserted, namely:-

“(fa) a Service Tax Certificate for Transportation of goods by Rail (herein after referred to as STTG Certificate) issued by the Indian Railways, along with the photocopies of the railway receipts mentioned in the STTG certificate; or” 

[F. No. 267/87/2013-CX.8]
(Pankaj Jain)
Under Secretary to the Government of India

Note.- The principal rules were published in the Gazette of India, Extraordinary, Part II,  Section 3, Sub-section (i), dated the 10th September, 2004, vide Notification No. 23/2004 –Central Excise (N.T.) dated the 10th September, 2004, vide number G.S.R. 600(E), dated the 10th September, 2004 and last amended vide Notification No. 25/2014 - Central Excise (N.T.) dated the 25th August, 2014 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 615 (E), dated the 25th August, 2014.

Wednesday, August 27, 2014

Important Service Tax amendments applicable from 1st October, 2014

We are sharing with you certain amendments made vide recent Notifications dated August 25, 2014 issued by the Central Board of Excise & Customs (“the CBEC”):

1.    Fixation of date of applicability of Clauses (A), (B), (C) of Section 114 of the Finance (No.2) Act, 2014

The CBEC vide its Notification No. 18/2014-ST dated August 25, 2014 (“the Notification”) has fixed the date of applicability of provisions of Section 114(A),(B),(C) of the Finance (No.2) Act, 2014 as October 1, 2014 (“Effective Date”) which are given as under:-

Service tax on advertisement on website,sign board applicable from 01.10.2014

CBEC has issued two notifications 18/2014 & 19/2014- ST dated 25.08.2014 regarding changes in Negative list. This changes has been proposed in recent budget but date of applicability is to be notified on later date . Now CBEC has notified the date as 01.10.2014 for changes in service tax on radio taxis and Service tax on advertisement in other than Print media.