Internal Audit under Section 138 of Companies Act 2013

Internal Audit

As per section 138 of Indian Companies Act 2013 read with Rule 13 Of Companies (Accounts) Rules, 2014, certain class of companies are required to appoint Internal Auditors. An extract of Rule 13 of Companies (Accounts) Rules, 2014 is as follows-

Extract of Rule 13 of Companies (Accounts) Rules, 2014

“13. Companies required to appoint internal auditor.-

(1) The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:-

(a) every listed company; Always applicable

(b) every unlisted public company having-

(i)    paid up share capital of fifty crore rupees or more during the preceding financial year; or

(ii) turnover(income) of two hundred crore rupees or more during the preceding financial year; or

(iii)    outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or

(iv)    outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having-

(i) turnover of two hundred crore rupees or more during the preceding financial year; or

(ii)   outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year:

Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section.

Explanation.- For the purposes of this rule – The internal auditor may or may not be an employee of the company; The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit. However, the rule specifies that an internal auditor may or may not be an employee of the company. The Internal auditor may be a CA/CWA or any other professional. And also neither the rules nor the Act, has specified the duties and responsibilities. So even if the rules and act made the appointment of Internal Auditor mandatory, the same rules and Act provides option to companies to appoint any person as internal auditors. And also any one who has the knowledge can became an Internal Auditor, because the rules did not define the word “any other professional”

SHORTCUTS TO REMEMBER ABOVE LIMITS

I-LCD –Internal Auditors(I)- LCD(Gift)
Since this section provides indirect avenues & opportunities to internal auditors, Therefore it is termed as Internal auditor’s gift

Key Points:

1. For the purpose of checking the aforesaid limits , it may be noted that Preceding Financial year to be considered. For Eg.  For Checking the applicability of section 138 of Indian Companies Act 2013( Internal Auditor) for FY 2014-15 , FY 2013-14 to be taken into consideration.

2. For easy remember of the aforesaid limits , one should consider the above limit  decreasing in same    proportion  respectively i.e “L” is half of “I”, “C” is half of “L” and so on.

3. Listed companies has to comply with section 138 of companies act 2014 irrespective of above limit.

4. For Private unlisted companies, There are two limits to check out the applicability of aforesaid section     i.e Income & Loan

5. Internal auditor should either be a chartered accountant or a cost accountant, or such other professional as may be decided by the board to conduct Internal Audit of functions and activities of the company.

We are also reproducing extract of Section 138 of the Companies Act, 2013 for your ready reference-

138. Internal audit

(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

FAQs on Core Investment Companies

FOREWORD

The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective, is to:

a) ensure healthy growth of the financial companies;

b) ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that

c) the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system.

Over last some years, RBI has carved out some specialized NBFCs like Core Investment Companies (CICs), NBFC- Infrastructure Finance Companies (IFCs), Infrastructure Debt Fund- NBFCs, NBFC-MFIs and NBFC-Factors being the most recent one.

It has been felt necessary to explain the rationale underlying the regulatory changes and provide clarification on certain operational matters for the benefit of the NBFCs, members of public, rating agencies, Chartered Accountants etc. To meet this need, the clarifications in the form of questions and answers, is being brought out by the Reserve Bank of India (Department of Non-Banking Supervision) on Specialized NBFCs with the hope that it will provide better understanding of the regulatory framework.

The information given in the FAQ on Systemically Important Core Investment Companies (CICs-ND-SI) is of general nature for the benefit of the public and the clarifications given do not substitute the extant regulatory directions/instructions issued by the Bank to the specialized NBFCs.

Core Investment Companies (CICs)

1. What is a Systemically Important Core Investment Company (CIC-ND-SI)?

Ans. A CIC-ND-SI is a Non-Banking Financial Company

(i) with asset size of Rs 100 crore and above

(ii) carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet :-

(iii) it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;

(iv) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (iii) above;

(v) it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(vi) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

(vii) it accepts public funds

2. Will existing Core Investment Companies (CICs) which had previously been exempted from registration and whose asset size is less than Rs. 100 crore again be required to submit application for exemption?

Ans: Existing CICs which were exempted from registration in the past and have an asset size of less than Rs 100 crore are exempted from registration in terms of section 45NC of the RBI Act 1934, as stated in Notification No. DNBS.(PD) 220/CGM(US)-2011 dated January 5, 2011, and as such are not required to submit any application for exemption.

3. Would existing CICs which had previously been exempted from registration and whose asset size is less than Rs. 100 crore be required to submit Statutory Auditor’s Certificate with reference to position as on March 31 of each year to the effect that the company continues to comply with the earlier norms based on which it was treated as a ‘Core Investment Company’.

Ans: No, Existing CICs which have been exempted from registration in the past and have an asset size of less than Rs 100 crore are exempted from registration as stated in Notification No. DNBS.(PD) 220/CGM(US)-2011 dated January 5, 2011. As such they are not required to submit any auditor’s certificate that they comply with the requirements of the Notification.

4. A single group is having under its fold four to five prospective Core Investment Companies with an aggregate asset size of more than Rs. 100 crore. In such a situation, which company among the group companies is required to seek registration as CIC with the Bank.

Ans: All companies in the group that are CICs would be regarded as CICs-ND-SI (provided they have accessed public fund) and would be required to obtain a Certificate of Registration from the Bank.

5. A single group is having under its fold various prospective Core Investment Companies with an aggregate asset size of more than Rs. 100 crore. One of the entities has raised / holds public funds (one of the pre requisites for qualifying as a CIC-ND-SI). In such a situation, whether every CIC within the group or only the parent CIC or the specific entity that has raised/ holds public funds would be regarded as CIC-ND-SI, and thus would be required to seek registration as CIC-ND-SI with the Bank.

For Example: HCo is the parent group CIC holding 100 per cent equity capital of A, B and C, all of which are also CICs . In case C has accessed public funds, whether HCo as well as A, B and C must seek registration as CIC-ND-SI or will just C need registration?

Ans: In such a case only C will be registered, provided C is not being funded by any of the other CICs either directly or indirectly.

6. Whether the investment of a company in its subsidiary’s subsidiary (step down subsidiary) will be taken into account for determining not less than ninety percent of its net assets.

Ans: All direct investments in group companies, as appearing in the CICs balance sheet will be taken into account for this purpose. Investments made by subsidiaries in step down subsidiaries or other entities will not be taken into account for computing 90 percent of net assets.

7. Would Current Liabilities also form part of Outside Liabilities? What will be the treatment of DTL, Advance Tax Due and Provision for Income Tax? Will they be Outside Liabilities?

Ans: Anything that has to be repaid will be an outside liability.

8. In case an existing NBFC-ND-SI is converted into a CIC-ND-SI after fulfilling the stipulated criteria, will the existing CoR continue or will a fresh application need to be made?

Ans: As there would be a separate application form for CICs-ND-SI, they would have to apply afresh.

9. What items are included in the 10% of Net assets which CIC’s/CIC’s-ND-SI can hold outside the group?

Ans: These would include real estate or other fixed assets which are required for effective functioning of a company, but should not include other financial investments/loans in non group companies. It would however include investments in other group entities that are not companies eg: Trusts etc.

10. Is there an enabling provision for use of statutory accounts based on some date other than 31^st March, such as December 31^st?

Ans: While such accounts could be taken into account in view of the fact that developments after balance sheet date are also taken into account, all NBFCs including CICs-ND-SI would mandatorily have to finalise their accounts as on March 31 of the year, and submit annual auditors certificate based on this figure.

11. Whether investments in a group entity other than a Company, say partnership firms, LLPs, Trusts, Association of Persons, etc by CICs-ND-SI could be regarded as investments in Group Companies for the purpose of calculating 90% investment in Group Companies.

Ans: No, only investments in companies registered under Section 3 of the Companies Act 1956 would be regarded as investments in Group companies for the purpose of calculating 90% investment in Group companies. However, CICs/CICs ND SI can deploy balance 10% of their net assets in group entities other than a company.

12. Are CICs-ND-SI exempt from the NBFC (Non-Deposit holding) Prudential Norms Directions 2007?

Ans: No, they are only exempt from norms regarding submission of Statutory Auditor Certificate regarding continuance of business as NBFC, capital adequacy and concentration of credit / investments norms.

13. Would CICs-ND-SI require NOC in terms of Regulation 7 of FEMA (Transfer or Issue of Any Foreign Security) Amendment Regulations Act 2004 in case they want to invest abroad?

Ans: Yes, as they are regulated by RBI, they would require NOC from Department of Non-Banking Supervision (DNBS) for making investments in the financial sector. However, a registered CIC making investments in the non-financial sector need not obtain prior approval from the Department of Non-Banking Supervision (DNBS), RBI. It will only need to report such investments to the Department within 30 days of such investment.

14. Do CICs which are exempt from registration, and investing overseas need NOC from DNBS?

Ans: Exempted CICs desirous of making overseas investment in financial sector shall first need to hold a Certificate of Registration (CoR) from Reserve Bank of India (the Bank) and will have to comply with all the regulations applicable to registered CIC-ND-SI. However, they need not obtain NOC from the Bank if their investments overseas are in the non-financial sector.

15. Whether NBFCs already registered with the Bank as category “B” company whose asset size is below Rs. 100 crore, but fulfilling the CIC criteria, can seek voluntary deregistration (as such companies are not otherwise required to get registered with the Bank under the new norms)? If so, which source should be relied upon viz certificate from Statutory auditor or audited balance sheet for one year or more?

Ans: Yes, CICs presently registered with the Bank but fulfilling the criteria for exemption under Notification No 220 dated January 05, 2010 can seek voluntary deregistration. Both audited balance sheet and auditors certificate are required to be submitted for the purpose.

16. Whether CICs having asset size below Rs. 100 crore are regulated by the Reserve Bank?

Ans: CICs having asset size of below Rs 100 crore are exempted from registration and regulation from the Reserve Bank, except if they wish to make overseas investments in the financial sector.

17. As per the definition of CIC, only investment/loans/debt in group companies is eligible for computing 90% exposure? What treatment is to be given to company’s investment in group’s partnership concerns?

Ans: CICs can invest balance 10% of Net Assets in such concerns.

18. If a company is unlisted, would the terms of block deals apply? What is the minimum number/value of shares transferred for it to be defined as a block deal/block sale.

Ans: The term used in the CIC circulars is block sale and not block deal which has been defined by SEBI. In the context of the circular, a block sale would be a long term or strategic sale made for purposes of disinvestment or investment and not for short term trading. Unlike a block deal, there is no minimum number/value defined for the purpose.

19. Can CICs/CICs-ND-SI accept deposits?

Ans: No, CICs/ CICs-ND-SI cannot accept deposits. That is one of the eligibility criteria.

20. What does the term public funds include? Is it the same as public deposits?

Ans: Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of Commercial Papers, debentures etc. However, even though public funds include public deposits in the general course, it may be noted that CICs/CICs-ND-SI cannot accept public deposits.

21. In the definition of public funds, what do the term “indirect receipt of public funds” mean?

Ans: Indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.

22. Can CICs issue guarantees and will this be considered part of definition of public funds?

Ans: Yes, CICs may be required to issue guarantees or take on other contingent liabilities on behalf of their group entities. Guarantees per se do not fall under the definition of public funds. However, it is possible that CICs which do not accept public funds take recourse to public funds if and when the guarantee devolves. Hence, before doing so, CICs must ensure that they can meet the obligation there under, as and when they arise. In particular, CICs which are exempt from registration requirement must be in a position to do so without recourse to public funds in the event the liability devolves. If unregistered CICs with asset size above Rs. 100 crore access public funds without obtaining a Certificate of Registration (CoR) from RBI, they will be seen as violating Core Investment Companies (Reserve Bank) Directions, 2011 dated January 05, 2011.

23. What is a Group company?

Ans: For the purposes of determining whether a company is a CIC/CIC-ND-SI, ‘companies in the group’ have been exhaustively defined in para 3(1) b of Notification No. DNBS. (PD) 219/CGM(US)-2011 dated January 5, 2011 as “an arrangement involving two or more entities related to each other through any of the following relationships, viz.,Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies, a related party (defined in terms of AS 18) Common brand name, and investment in equity shares of 20% and above).”

24. Is the definition of group company the same for CICs/ CICS-ND-SI as that for NBFCs?

Ans: No the definition is not the same for CICs / CICs-ND-SI and NBFCs. The definition of group Company for the purpose of classifying a company as a CIC / CICs-ND-SI is much more exhaustive and gives a benefit to the CICs/CICs-ND-SI.

25. How can a company register as a CIC-ND-SI?

Ans: The application form for CICs-ND-SI available on the Bank’s website can be downloaded and filled in and submitted to the Regional Office of the DNBS in whose jurisdiction the Company is registered along with necessary supporting documents mentioned in the application form.

26. A CIC-ND-SI should have 90% investment within the group, and in terms of current exposure norms, NBFCs-ND-SI are permitted only 40% of both lending and investment within any group. Therefore, no NBFC as it stands, would be able to become a CIC without breaching the NOF, CRAR or Concentration Norms, since its entire business is in a subsidiary. However, an NBFC may voluntarily seek to become a CIC-ND-SI since it brings clarity to the holding structure in their organization. How would this issue be resolved? Could NBFCs-ND-SI be provided exemption from Capital adequacy/exposure norms during the transition period, just as unregistered CICs-ND-SI are given 6 months time.

Ans: The NBFC would have to apply to RBI with full details of the plan and exemptions could be considered on a selective basis on the merits of the case.

27. A company has investments in Group companies but does not meet the criteria of principal business as defined in terms of asset-income criteria to be as an NBFC. Can the company still be registered as a CIC or does it need to first register as an NBFC?

Ans: CICs need not meet the principal business criteria for NBFCs.

28. If a company is a CIC but does not exactly meet the criteria specified, does the company need to register as NBFC?

Ans: A holding company not meeting the criteria for a CIC laid down in para 2 of Notification No DNBS. (PD) 219/CGM(US)-2011 dated January 5, 2011 would require to register as an NBFC. However, if such company wishes to register as CIC-ND-SI/ be exempted as CIC, it would have to apply to RBI with an action plan achievable within the specific period to reorganize its business as CIC. If it is not able to do so, it would need to comply with NBFC requirements and prudential norms.

29. Whether a Holding Company which is not able to comply with the CIC criteria (all four conditions), would still need to comply with NBFC requirements and prudential norms even in the event that it is not satisfying the asset-income criteria. (For example: the holding company owns 60 per cent equity in another group company. Therefore, it does not qualify as a CIC. Further, the income from financial assets is also less than 50 per cent of total income. Whether such a company would require compliance with NBFC norms).

Ans: No, since the Company is not fulfilling the Principal Business Criteria (asset-income pattern) of an NBFC i.e. more than 50 % of its total assets should be financial assets and the income derived from these assets should be more than 50% of the gross income, it is not required to register as an NBFC under Section 45 IA of the RBI Act, 1934. However it should register itself as NBFC as soon as it fulfills the criteria of an NBFC and comply with the NBFC norms.

30. A group would like to set up a CIC-ND-SI in the group to rationalize the set up. However, no company can commence the business of NBFI without COR from RBI. Therefore the proposed company would have to apply for COR before transferring shares from different companies to the CIC-ND-SI. But at that time the company would not be eligible in terms of the requirements, as it would not have 90% of net assets as investment in group companies. What should the company do?

Ans: The company would have to apply for COR to RBI, giving a business plan within a prescribed time period of one year in which it would achieve CIC-ND-SI status. In case the company is unable to do so, the exemptions would not apply and the company would have to comply with NBFC capital adequacy and exposure norms.

31. Whether CICs that are exempt from registration either because they have an asset size of less than Rs 100 crore or are not accessing public funds are required to register as NBFCs?

Ans: CICs that (a) have an asset size of less than Rs.100 crore irrespective of whether they are accessing public funds or not and (b) have an asset size of Rs. 100 crore and above and are not accessing public funds have been exempt from registration with the Bank under Section 45IA of the RBI Act, 1934 in terms of notification No. DNBS.PD.221/CGM(US) 2011 dated January 5, 2011. Thus, they are not required to register with the Bank at all. As this is an exemption given under Section 45NC of the RBI Act, 1934, they are not required to approach the Bank at all.

32. Would a similar benefit apply to NBFCs i.e. would NBFCs with an asset size of less than Rs 100 crore and not accessing public funds be exempted from registration with the Bank?

Ans: No this exemption is specifically given to CICs only. NBFCs other than CICs are not covered by this or any other aspect of the CIC Directions and would have to register with the Bank and comply with all applicable Directions of the Bank as issued from time to time.

33. Should Net assets include operating assets?

Ans: Net assets have been defined in Notification No. DNBS.(PD) 219/CGM(US)-2011 dated January 05, 2011 (para3(1)e) specifically for the purpose of defining a CIC. As such they will only include the items specifically mentioned therein, irrespective of whether any of these qualify as operating assets or not.

34. Definition of Group Companies should include LLPs and Partnerships in the Group?

Ans: Neither LLPs nor Partnerships are companies and hence have been deliberately excluded from the definition of Group Company. Further, in view of the loose structure and regulatory framework for these entities it is felt that they should not be included in the definition. However, such investments by CICs have been allowed in the additional 10% of net assets.

35. While instruments that are compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue are excluded from Outside Liabilities, in terms of the Companies Act such instruments are excluded from the definition of ‘public deposit’ if they are convertible with a period of 20 years?

Ans: The period of 10 years was specified as a prudential measure not necessarily in alignment with a provision of the Companies Act. Moreover, the issue here is not public deposits but Outside Liabilities.

36. Unlike other NBFCs, CICs ND-SI can no longer make overseas investment or raise ECB under automatic route or obtain bank finance for acquisition of shares?

Ans: The Directions on CIC-ND-Sis have not restricted them from making overseas investment or raising ECBs on the lines of other NBFCs. Regarding the issue of bank finance, currently bank finance is not allowed for investments in equity which is however only 60% of net assets of a CIC. (and would therefore be a lesser percentage of total assets). CICs-ND-SI may have access to bank finance to the extent it is not used for investment in shares.

37. If one of the small CICs in a group does not access public funds why should it register based on the condition of aggregate asset size?

Ans: As already clarified in the FAQs, a CIC that does not access public funds is exempt from registration irrespective of having other CICs in the Group that access public funds. Illustratively, if A is a CIC and B and C are also CICs and Group Companies of A. Provided A does not access any form of public funds including any funds from any Group Company including B and C, it would not require to register as a CIC. If A, B and C do not access public funds in any form none of them would be required to register as a CIC.

38. Will adjusted net worth of all the CICs in the Group also be aggregated for compliance purposes ?

Ans: Adjusted net worth (ANW) is a concept akin to capital requirement wherein the ANW should not be less than 30% of the risk weighted assets (RWA). In cases where asset size is aggregated, all the CICs within the group will be registered as CIC-ND-SI ANW will be applicable individually.

39. There is an apparent anomaly in the definition of ‘public funds’ as the moment public deposits is included in the definition of ‘public funds’ and CICs will be deemed to have raised public deposits and will therefore become an NBFC subject to exposure norms?

Ans: Even though public funds include public deposits in the general course, it may be noted that CICs cannot accept public deposits. It may further be reiterated that no NBFC can accept public deposits without specific permission of the Bank even if it holds a CoR from the Bank. (Source- RBI)

Check List of Compliance of Cenvat Credit Rules, 2004 in Internal Audit

1.  Whether credit claimed on capital goods falls within the definition of Rule 2(a) of Cenvat Credit Rules, 2004 (CCR).

2.  Whether credit claimed on inputs falls within the definition of Rule 2(k) of CCR

3. Whether credit claimed on input services falls within the definition of Rule 2(l) of CCR.

4. Whether credit has been availed of Excise duty on any goods in respect of which the benefit of an exemption under Notification No.1/2011-CE dt.1.3.2011 has been availed, in contravention of proviso (a) to Rule 3(1)(i) of CCR.

5. Whether credit has been availed of Excise duty on any goods specified in serial numbers 67 and 128 in respect of which the benefit of an exemption under Notification No.12/2012-CE dt.17.3.2012 has been availed, in contravention of proviso (b) to Rule 3(1)(i) of CCR.

6. Whether credit has been availed for duty, tax and cess paid as per Rule 3(1) of CCR, 2004 and its Explanation.

7. Whether duty, tax or cess paid on any input or input services used in the manufacture of intermediate products by a job worker availing benefit of exemption specified in Notification of MOF(Dept.of Reveue) No.214/86-CE dt. 25.3.1986.

8.     Whether EOU has taken equivalent amount of central excise duty paid on capital goods, in terms of para 8 of Notification No.22/2003-CE dated 31.03.2003 as per the proviso to Rule 3(1) of CCR.

9.Whether CENVAT credit has been claimed on the duty paid on inputs lying in stock of finished products where the finished goods or service becomes taxable as per Rule 3(2) and 3(h) of CCR.

10. Whether CENVAT credit has been utilized for payment of duty or tax as per Rule 3(4) of CCR, to the extent of CENVAT credit available to the last day of the month or quarter of payment.

11. Whether CENVAT credit has been utilized for payment of excise duty in respect of which the benefit of exemption under notification No.1/2011-CE dt.1.3.2011 is availed, in contravention of the second proviso to Rule 3(4) of CCR.

12. Whether CENVAT credit or input or input services cleared after availing exemption under the notification No.32/1999-CE Dated 08-07-1999, Notification No. 33/1999-CE Dated 8/7/1999, Notification No.39/2001-Central Excise -Dated- 31st July, 2001, 56/2002-CE-Dated-14.11.2002, 57/2002-CE Dated-14.11.2002, 56/2003-CE Dated- 25.06.2003 and 71/2003-CE Dated- 09.09.2003 is utilized only for payment of duty on final products cleared after availing the exemption under these notification.

13. Whether additional duty u/s 3(5) of Customs Tariff Act has been utilized for payment of service tax on output service.

14.  Whether National Calamity Contingent duty payable for cellular telephones or push button type has been utilized for National Calamity Contingent Duty only.

15. Whether Cenvat credit has been used for payment of clean energy cess u/s 83 of Finance Act, 2010.

16. Whether additional duty of excise of final product has only been utilized out of additional duty of excise duty.

17.  Whether service tax paid under RCM has been paid out of Cenvat credit.

18. Whether Cenvat credit on inputs removed from factory or premises of output service, other than for providing output service or warranty, has been paid

19. Whether Cenvat credit on capital goods removed from factory or premises of output service, other than for providing output service or warranty, has been paid.

20. Whether capital goods has been removed after being used whether Cenvat is reversed after reducing percentage points as provided under rule 5A (a) of CCR

21. When the capital goods is cleared as waste or scrap whether duty is levied on transaction value.

22.When provision is created or write off is made for inputs or capital goods  before being put to use whether Cenvat credit is paid.

23.Whether when the input or capital goods is subsequently used whether Cenvat credit is availed as per the proviso to Rule 3 (5B) of CCR.

24.Whether input credit is taken immediately on receipt of the input.

25.Whether, after 1.9.2014, Cenvat credit is taken after 6 months of the date of issue of any documents.

26.Whether CENVAT credit on capital goods is availed only upto 50% and balance in the next year except to the extent stated in Rule 4(1) of CCR.

27.Whether CENVAT credit on capital goods is claimed fully :

a)   where capital goods are cleared in the same financial year

b)   on additional duty levied u/s 3(5) of Customs Tariff Act

c)   on capital goods cleared by eligible units(being > 400 lacs)

28.Whether depreciation u/s 32 is claimed on duty paid on capital assets on which CENVAT credit is claimed.

29.Whether capital goods or inputs sent to job-worker is returned within 180 days

30.Whether service tax paid under RCM has been taken after payment of the service tax.

31.Whethr CENVAT credit taken is reversed if not paid within 3 months.

32.Whether proportionate credit for CENVAT is reversed if the bill is reduced.

33.Whether refund of CENVAT is claimed as per Rule of CCR.

34.Whether refund of service tax under RCM is claimed as per Rule 5B of CCR.

35.Whether CENVAT credit is claimed in accordance with Rule 6(3) of CCR.

36.Whethr a banking company has reversed 5% of CENVAT credit.

37.Whether the input service distributor has distributed CENVAT credit in compliance of the provisions of Rule 7 of CCR.

TDS on sale of Immovable Property by Non-resident

Recently I was asked a question by someone that at what rate tds is to be deducted at the time of purchasing a property in India from a non-resident.

The answer to the question lies in the simple reading of the Income Tax Act’1961.

Let us examine the relevant Sections of the Income Tax Act’1961.

Sec 194IA:

(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.

(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Sec 194-IA deals with TDS on sale of immovable property. Under this section TDS is to be deducted @1% at the time of credit of such sum to the account of the transferor or at the time of payment of such sum whichever is earlier on sale of immovable property.

The transferor or the seller contemplated in this section should be a resident of India. Therefore, this section only deals with sale of property by residents and TDS @1% is to be deducted on such sale by resident seller provided the consideration for sale of property exceeds Rs. 50 lacs.

Now let us examine relevant extracts of section 195 of the Income Tax Act’1961.

Sec 195:

Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

[Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

(i) a residence or place of business or business connection in India; or

(ii) any other presence in any manner whatsoever in India.]

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the [Assessing] Officer to determine, [by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

[(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the [Assessing] Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).

(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the [Assessing] Officer before the expiry of such period, till such cancellation…..

Section 195 talks about sums payable to a non-resident which are chargeable to tax in India under the Income Tax Act’1961.

When a Non-resident sells an Immovable property in India, Capital gains income may accrue on such sale to the Non-resident which is chargeable to tax in India. Therefore, the consideration from sale of property in India by a non-resident is chargeable to tax in India and is covered by Section 195 and therefore tax has to be deducted at the time of payment of such consideration.

Now the question arises as to the rate of deduction of tax. Sub-section (1) of section 195 prescribes that tax is to be deducted at the rates in force.

Rates in force is the rate at which a particular type of income is taxable under the provisions of the Income Tax Act.

For the purpose of sale by a non-resident of an immovable property, we will have to see the rates prescribed for taxation of capital gains.

As per section 112, Long term capital gains on sale of a capital asset is to be taxed at the rate of 20%.

Short-term capital gain on sale of a capital asset (except on sale of equity shares and equity oriented mutual funds) is to be taxed at the slab rates prescribed under the Finance Act applicable to the year of sale.

Therefore, here we can draw the conclusion that the buyer/ transferee has to deduct tax on sale of immovable property by the non-resident at the slab rate prescribed in case property is sold within three years of its purchase and at the rate of 20% where property is sold after three years of its purchase i.e where LTCG accrues.

Section 90:

Now as per section 90 of the Income Tax Act’1961, the rates of taxation on taxable income of a non-resident will be as prescribed under the Income Tax Act’1961 or under the DTAA of India with the country of which the non-resident is a resident, whichever is more beneficial to the tax payer.

Therefore, if the rates prescribed for taxation of capital gains in the DTAA are less than the 20% rate or the slab rate, then tax will be deducted at that rate.

However, for availing the benefit of lower rate of deduction of tax under the DTAA, the non-resident transferor will have to furnish a Tax Residency Certificate to the payer indicating the tax residency of which he is a resident.

On what amount is the tax to be deducted?

After determining the rate of tax, now the question arises that on which amount is the tax to be deducted.

The tax is to be deducted on income only i.e on the amount of capital gains arising to the non-resident out of the total consideration.

But how will the payer determine the amount of capital gains arising to the non-resident transferee.

The answer lies in sub-sections (2) & (3) of section 195. Under, the provisions of these sub-sections the payer or transferor/payee may make an application to the jurisdictional Assessing officer to determine the sum of capital gains on which tax is to be deducted.

The application to the AO will be made in the prescribed form.

The amount determined by the AO will be the amount on which tax is to be deducted. However, if no such application is made by the payer or the payee to determine the sum chargeable to tax, the tax will be deducted on the entire consideration for sale of immovable property.

Hope you find the above information relevant and useful in your daily practice.