The earlier
notification by SEBI introducing the framework for SEBI (Investment Advisors)
(Amendment) Regulations, 2020 dated 3 July 2020 left many questions unanswered
of the RIA’s which drew many speculations and interpretations. Our article has
been divided into six sections mentioned below:
Segregation at client level for distribution and advisory
Agreement between IA and the client (Considerations & Contents)
Fee to be charged by IA to the client
Registration as a Non-individual Investment Advisor
Maintenance of records & Audit
Risk profiling and display of
details on website
IMPORTANT
DATES TO CONSIDER
These guidelines
shall come into force from 30 September 2020. Further, timelines specific to
the regulations specified have been stated in the table below:
Implementation of the respective regulations
Before 01 April 2021
Before 01 January 2021
Client
level segregation between distribution and IA clients
Maintenance
of all the records of communications with client
Considerations
& Contents of Agreements
Risk
profiling and suitability
Fee to be
charged to the client
Display
of details on the website
Registration
as non-individual if more than 150 clients as on 30 September 2020
Other
due dates to be considered under the regulations
Particulars
Date (Comply before)
Submission
of the report on the agreement implementation
30 June
2021
Qualifications
& certification requirements
3 years
for existing IA’s
Reporting
of adverse finding in audit report with action taken from the FY 2020-21
audit
30 days
from audit report or 31 October whichever is earlier
Reporting
by Individual IA having more than 150 clients as on 30 Sep 2020 file report
with SEBI in required format
15 October
2020
Particulars
Points to consider in the Guidelines
Segregation at client level for
distribution and advisory
Important points to
note:
Where existing clients are provided both, distribution & IA
services, option to be given for continuing with any one service to clientDiscretion given to the clients to keep holding such assets prior to
such applicability of selection between advisory/ distributionPAN to be considered for keeping control of clients for such
segregation. Family of the client to be considered as a single control recordIA to advice only direct plans, wherever available (Emphasis
supplied)Additional
Compliance:
Obtain an annual declaration from the client for having the
information on dependent family membersObtain annual certificate from auditor/ statutory auditor for client
level segregation
Action points:
IA’s offering both distribution and IA services should segregate the
clients by giving them option and obtain relevant declaration
Agreement
between IA and the client (Considerations & Contents)
Important points to note:
Terms & Conditions have been specified for the purpose of
inclusion in the IA agreement with the clientNo advice to be provided or fee to be charged until the agreement is signed
with the client and copy delivered to the client.
Now a question in
this scenario arises whether digital modes of signing would be considered as
valid when it has been specified that the agreement to be signed and
delivered to the client.Answer: In our
view, the intent of this is to have the client agreed to the terms as stated
by the IA in the agreement and delivering a copy of the same to the clients
knowledge. The modes of acceptance of a valid contract/ agreement should include
the way of digital signing like by way of ‘digital signature’ and having an
email of the same delivered to the registered email ID. We have also seen
lately many Fintech driven companies follow the process of e-signatures
followed by OTP verification where the agreements are integrated and signed
with the phone number or AADHAR number linked phone number, which means that
the client has given his consent, which is also considered as a valid
agreement in certain situations. However, one needs to verify the process
before implementing the same whether the process would be considered as valid
in the eyes of law depending upon the stakes involved.
All these agreements have to be done and executed with the existing
clients by 01 April 2021.
Additional
Compliances:
A report
confirming that all the agreements have been done by the format and per the
requirements of the regulations of IA needs to be submitted to SEBI by 30
June 2021.
Action
points:
The IA
should identify the differences between the existing agreements and the
proposed agreement under the IA regulations and can either opt to enter into
a fresh agreement or make an addendum to the existing agreement, based on his
requirements. However, he will have to confirm that all the clauses required
have been covered and those clauses which are against the interest of the IA
regulations have been omitted.
Fee to
be charged by IA to the client
Important points to
note:
Two methods have been prescribedAUA mode – 2.5% of AUA maximum can be
charged per annum across all services. Assets pertaining to pre-existing
regime of distribution shall be deducted from AUA.Fixed fee – maximum fee that can be charged
under this shall not exceed INR 1.25 lac p.a.The fee pattern agreed shall
remain for 12 months from the date of onboardingIA may charge in advance, however it shall not accept advance fee for
more than 2 quarters.The mode selected in the above can differ from client to client
Additional
Compliances: None
Action points:
The existing fee model will have
to be reworked and the IA will have to revisit on its terms with the client.
Since the family of a client will have to be considered as a single client,
the terms will have to be reconsidered and a thorough diligence of the
existing model and the revised model will have to be done to understand which
model is beneficial between the two client-wise.
Registration
as a Non-individual Investment Advisor
Important points to note:
Limitation prescribed to have not more than 150 clients as an
individual IAAn IA having more than 150 clients as on 30 September 2020, shall Apply for non-individual license
in Form AApplication to be made by 01 April
2020Not onboard further clientsCan continue servicing the existing
clients
Additional
Compliance:
Where the
IA has more than 150 clients as on 30 September 2020, he/she shall file the
details in required format to SEBI by 15 October 2020
Action
points:
Where the
individual IA is nearing the count of 150 clients or has already onboarded
more than 150 clients, should apply for the license in Form A to sustain
continuity.
Maintenance
of records & Audit
Important points to note:
All records of communications with the client shall be preserved by
the IA, i.e. from first communication until the advisory services existThe records shall be preserved for 5 years or until such time till the
dispute, if any, is resolvedAnnual audit shall be conducted for ensuring compliance with the
regulation within 6 months from end of financial year
Additional
Compliances:
Report on adverse
findings, if any, along with action taken, shall be submitted to the SEBI
office within 1 month from audit report and not later than 31 October from
the report of FY 2020-21
Action points:
The IAs are expected
to review all their previous audit reports and set in place their controls
and requirements per the regulations to avoid any adverse observations by the
auditors. It is advisable that the interim audit is conducted to identify the
issues and address them before the final audit.
Risk
profiling and display of details on website
Important points to note:
For the purpose of risk profiling and suitability analysis of
non-individual clients, IA should document the investment policy approved by
such client’s board/ managementIn absence of the same, it should be to the discretion of the IA for
such onboardingIA shall display the relevant details provided in regulation on its
website and all communications
Additional
Compliance: None
Action
points:
The IA shall communicate to all the non-individual clients for their
management approved investment policyThe IA shall identify the standard formats of communication and also
on its website, the required details and make relevant edits thereto to
comply with the regulations
Indian e-commerce and DigiTech
industry have been grown to a new height in the past decade. We have seen
exponential rise in the way people look at business and the modus operandi of
managing a business. From high investments in space and layouts, people have
diverted to high investments and expenditure in technology and logistics. This
is the reason why logistics demand has also equally risen along with
e-commerce. From what we understand that in todays date, anyone can do business
and reach out to the end consumer from anywhere in the world. With this type of
structure since the economic presence is possible for a particular organisation
without having a physical presence in India, it became very important for the
revenue departments to tweak their provisions to get these e-commerce and
DigiTech giants under their purview. With that spirit, we have seen amendment
and changes coming in the Income-tax Act, 1961 and also in Goods & Service
tax Law in India.
Digital Technology (DigiTech)
Income tax
Equalisation levy on online advertisements on digital
platforms
Business may be
conducted in digital domain without regard to national boundaries. This may
dissolve the link between an income-producing activity and a specific location.
To tackle taxation issues in transaction conducted in cyber space, equalisation
levy was imposed. Equalisation levy had come in force from 1 June 2016 under
section 165 if Finance Act 2016. Equalisation levy is required to be charged at
the rate of 6 percent of the amount of consideration for specified services
received or receivable by a non-resident from a person resident in India,
if such amount paid/ payable is more than 1 lac in a particular previous year.
Specified services for this purpose mean online advertisement, any
provision for digital advertising space or any other facility or service for
the purpose of online advertisement and includes any other service as may be
notified by the Central Government in this behalf.
Where a person
resident in India who is carrying on business or profession in India avails the
specified services as mentioned above, then such person shall deduct
equalisation levy from the amount paid or payable to the non-resident in
respect of such specified services at 6 percent on such amount paid/
payable.
Example
The most common
example to consider in this situation is of payments made to Google &
Facebook for online advertisement where such payments are made to Foreign arm
of Google or Foreign arm of Facebook. Since these are purely considered as
advertisement in digital space and would be considered as online advertisement,
an Indian person carrying out business or profession in India and availing
these services of non-resident entities (Google & Facebook) would result to
deduction of equalisation levy of 6 percent.
Grossing up
Now the most
important part in this entire scenario which most of the Indian businesses face
is that such platforms which facilitate online advertisement, take such amounts
in advance and the entire amount is debited by registering your cards/ wallets
online. These platforms do not allow lower payments and therefore deduction and
payment to these platforms becomes almost impossible. In that scenario it has
been categorically stated that where in case the payer has not deducted/ failed
to deduct such levy from the amount paid/ payable, yet the amount is liable to
be paid. In such situation, the amount will have to be grossed up along
with the levy and the liability of the levy will have to be discharged by the
service recipient.
Compliance,
interest and penal provisions
Payment: The equalisation levy collected is required
to be paid by 7th day of the month following the month in which the
equalisation levy has been collected.
Furnishing of
statement: WHAPL shall
furnish a statement electronically in Form No. 1 in respect of all specified
service entered into during the financial year on or before June 30 immediately
following the respective financial year.
Interest: Failure to make the payment would lead to
interest payment at simple interest method of 1 percent for every month (or
part of the month) upto the month of payment.
Penalty: where there has been a failure to deduct
equalisation levy (wholly or partly), penalty equal to equalisation levy is
required to be paid. Further, failure to furnish the statement in Form No. 1 as
specified above would make WHAPL liable for INR 100 per day of default.
Disallowance
of expense u/s 40(a)(ib)
Any
consideration paid or payable to a non-resident for a specified service
(mentioned above) on which equalisation levy is deductible under the provisions
of Chapter VIII of the Finance Act, 2016 and such levy has not been deducted or
after deduction has not been paid on or before the due date of filing the
return of income is disallowable u/s 40(a)(ib) of the Income-tax Act, 1961.
Further, if such equalisation levy has been deducted in any subsequent year or
has been deducted during the previous year but paid after the due date of
filing return of income (u/s 139(1) of the Income-tax Act, 1961), then such
expense shall be allowed as deduction in computing the income of the previous
year in which such levy has actually been paid.
Income tax
benefits
The Income-tax law has been amended to provide for exemption arising
from any income arising from any e-commerce supply or services made or provided
or facilitated, and chargeable to equalization levy as explained above.
Goods & Service tax
GST on RCM basis on import of service
As per Section 2(11) of IGST Act, import of
service means supply of service, where:
Supplier of service is located outside India
Recipient of Service is located in India
The place of supply of service is in India.
Applicability of GST on Import of Service
on Reverse Charge Mechanism (RCM) basis:
In terms of Notification no.10/2017-IT(R) dtd 28.06.2017, one of the notified category on which GST is applicable
under RCM is “any service supplied by any person who is located in a
non-taxable territory to any person other than non-taxable online recipient”.
IGST liability under RCM in case of Import of service has
to be paid in cash/bank. GST ITC to the extent of IGST paid can be availed
and utilized in the same month subject to ITC eligibility.
Therefore,
considering the above, the import of services from in the form of online advertisements
on digital platforms (like Google/ Facebook (Foreign entities)) would be liable
to GST on RCM basis at 18 percent.
E-commerce
Income-tax
Equalisation levy on E-commerce operators
The concept of equalisation levy was
introduced by Finance Act 2016 to tax certain services and recently through its
amendment in the Finance Act 2020, its scope has been enhanced to cover further
transactions. This levy is not through the Income-tax Act, 1961, but through
the Finance Act 2016. Through the amendment made through Finance Act, 2020,
equalisation levy of 2 percent has been imposed on the e-commerce
operators on the amount of consideration received or receivable for e-commerce
supply or services made or providedor facilitated by it
on or after 1st day of April 2020.
Having
understood the above, it becomes very important to understand the scope of
e-commerce supply or service and the scope of e-commerce operators, which is
covered by this amendment and therefore it is important to understand how the
Finance Act 2020 defines these terms, which has been stated as under:
“e-commerce supply or services” means—
(i)
online sale of goods owned by the e-commerce operator; or
(ii)
online provision of services provided by the e-commerce operator; or
(iii)
online sale of goods or provision of services or both, facilitated by
the e-commerce operator; or
(iv)
any combination of activities listed in clause (i), (ii) or clause (iii);]
Therefore, the scope above is
wide to cover the goods owned or facilitated by the
e-commerce operator. Therefore, if an e-commerce operator sells its owned goods
on the e-comm platform, still the same will fall within the purview of the
equalisation levy provisions introduced. However,
it is imperative to understand whether who all would be covered within the
ambit of e-commerce operator as per the amendments made by Finance Act,
2020.
“e-commerce operator” means a non-resident
who owns, operates or manages digital or electronic facility or platform for
online sale of goods or online provision of services or both
From the above, it is
clear that the Finance Act, 2020 intends to cover only
non-residents who own, operates or manages digital or electronic
facility/ platform.
Example: E-commerce
giants who are operating from their home countries or countries outside India,
like certain hotel accommodation reservation platforms, etc. will have to pay
this levy for the bookings made through their portal online.
The difference
between the provisions of equalisation levy in case of online digital
advertisement services and in case of levy on such e-commerce operators is that
in case of former, the deduction has to be done by the service recipient
whereas in case of later, the levy has to be charged by the e-comm operator and
recover from the customer and pay to the Government Treasury.
Exclusions
where the
e-commerce operator has a permanent establishment in India and such e-commerce
supply or services is effectively connected with such permanent establishment
where the
equalisation levy is leviable on online advertisement and related activities
sales, turnover
or gross receipts, of the e-commerce operator from the e-commerce supply or
services made or provided or facilitated is less than INR 20 million during the
financial year.
Compliances, interest & penalty
The equalization levy is to be paid by the non-resident e-commerce
operator quarterly within the following due dates:
Date of ending of the quarter
Due date
30 June
7 July
30
September
7
October
31
December
7
January
31 March
31 March
Interest:
Delayed
payment carries simple interest at the rate of 1 percent for every month
or part of a month
Penalty: Failure to pay equalisation
levy attracts penalty equal to the amount of equalisation levy
Income-tax benefits
The Income-tax
law has been amended to provide for exemption arising from any income arising
from any e-commerce supply or services made or provided or facilitated, and
chargeable to equalization levy as explained above.
Impact analysis
Previously,
the government had introduced the concept of “Significant Economic Benefits” in
the definition of “Business Connection” which specifically aimed towards
getting the non-resident entities operating in India through digital means
under the tax regime. However, the treaties benefitted the respective
non-residents as there was no such provision under the PE articles of the
treaties. Having said that, the Government of India has now introduced this
concept of taxing such e-commerce companies under equalization levy which will
have a significant impact on the non-resident supplying goods and services
digitally. This is so because the definition of ‘e-commerce operators’ and
‘e-commerce supply or services’ are very wide in scope. Therefore, taxpayers
may now need to evaluate various scenarios to understand the implication under
this. For instance, even where the parent company provides any IT services to its
subsidiary company, such provisions will have to be looked into from
applicability perspective.
More
importantly, it is also pertinent to note that supply of goods or service from
one non-resident to other also may attract these provisions (where the is some
nexus with India). It is important to note that the provisions of equalization
levy are not part of Income-tax and therefore benefit of treaty may not be
available in relation to such levy. Additional guidance on this subject is
awaited from the Government on these provisions.
TDS u/s 194-O for E-commerce operators
The Finance Act 2020 has inserted a new section 194-O in the Income-tax Act, 1961 where an e-commerce operator facilitating the sale of goods or provision of service of an e-commerce participant through a digital or electronic facility or platform of such e-commerce operator, then such e-commerce operator shall at the time of payment or credit of amount of sale or service or both to the e-commerce participant, whichever is earlier, deduct tax at 1 percent of the gross amount of such sales or service or both.
Therefore, in
order to understand the applicability of the provisions of this section, it is
ideal to first understand as to who would be considered as an e-commerce
operator and who would be considered as an e-commerce participant:
“e-commerce operator” means a
person who owns, operates or manages digital or electronic facility or platform
for electronic commerce;
“e-commerce participant” means a person
resident in India selling goods or providing services or both, including
digital products, through digital or electronic facility or platform for electronic
commerce;
“electronic commerce” means the
supply of goods or services or both, including digital products, over digital
or electronic network;
Therefore, any person resident in
India sells goods or providing services or both (including digital products)
through digital or electronic facility or platform, then such person would be
eligible to receive such receipts from sales occurred through such platform or
electronic facility after deduction of 1 percent as TDS by such operator who
owns, operates or manages such digital or electronic facility. This amount so
deducted will have to be deposited by such e-comm operator with the Credit of
Central Government and the e-comm participant will claim credit of the same in
its ITR.
Tax not deductible
Tax is not deductible under the
said section if the e-comm participant is an Individual or HUF and the gross
amount of such sale of goods/ services through the said e-comm operator during
the previous year does not exceed Rs. 5 Lac and such e-comm participant has
furnished his PAN or Aadhar to the e-comm operator.
Therefore, it is important to
note that:
An e-comm operator u/s 194-O can be a resident or a
non-resident
An e-comm participant u/s 194-O has to be a resident person
There can be a situation where e-comm operator will have to
comply with both Equalization Levy as well as provisions of deductions u/s
194-O
The provisions of this section are so vide that it may also
include operators selling financial products on the digital platform for eg.
Mutual fund distributors, insurance policy aggregators, etc.
Board may have to come out with a clarification where it lays
down the inclusions and exclusions of this provision to remove difficulties
Goods & Service tax
TCS for E-commerce operators
Electronic Commerce has
been defined in Sec. 2(44) of the CGST Act, 2017 to mean the supply of goods or
services or both, including digital products over digital or electronic
network.
Electronic Commerce Operator
has been defined in Sec. 2(45) of the CGST Act, 2017 to mean any person who
owns, operates or manages digital or electronic facility or platform for
electronic commerce.
As per Section 24(x) of the CGST
Act, 2017 the benefit of threshold exemption is not available to e-commerce
operators and they are liable to be registered irrespective of the value of
supply made by them.
Tax collections
The e-commerce operator is required
to collect an amount at the rate of one percent (0.5% CGST + 0.5% SGST) of the
net value of taxable supplies made through it, where the consideration with
respect to such supplies is to be collected by such operator. The amount so
collected is called as Tax Collection at Source (TCS). An e-commerce company is
required to collect tax only on the net value of taxable supplies. In other
words, the value of supplies which are returned are adjusted in the aggregate
value of taxable supplies.
Credit of TCS
The amount of TCS paid by the
operator to the government will be reflected in the GST returns of the actual
registered supplier (on whose account such collection has been made) on the
basis of the statement filed by the e-comm operator. The same can be used at
the time of discharge of tax liability in respect of the supplies made by the
actual supplier.
Disclaimer: The views expressed in this note are the personal
view of the writer and should not be considered as an opinion by any manner.
For deciding any implication, it is always advised that you approach a
consultant and obtain a professional advice.
MSME stands for Micro, Small and
Medium Enterprises. In a developing country like India, MSME industries are the
backbone of the economy.
The MSME sector contributes to 45% of
India’s Total Industrial Employment, 50% of India’s Total Exports and 95% of
all industrial units of the country and more than 6000 types of products are
manufactured in these industries. These industries are also known as
small-scale industries or SSI’s.
Statutory
Provision related to MSMEs
With a view to boost the development of small
enterprises in the country, the Government of India has enacted “Micro Small
and Medium Enterprises Development (MSMED) Act, 2006 and set up a separate
Ministry of Micro Small and Medium Enterprises, which came into force w.e.f.
02.10.2006.
Classification of
MSMEs
Earlier
scenario (till 13th May 2020): Classification of MSMEs have been done based on
investments in plant and machineries.
MSME are classified
into two categories:
Manufacturing
enterprise; and
Service
enterprise.
Classification
Micro
Small
Medium
Manufacturing Enterprises
25 lakhs
less than 50 lakhs
less than 1 cr.
Service Enterprises
less than 10 lakhs
less than 20 lakhs
less than 50 lakhs
Current
Scenario (from 14th May 2020): Classification of MSMEs have been done based on
investments in plant and machineries and Turnover and now there is no
distinction between manufacturing enterprise and service enterprises.
Classification
Micro
Small
Medium
Manufacturing &
Services enterprises
Investment less
than 1 cr.
and
Turnover less than 5 cr.
Investment less
than 10 cr.
and
Turnover less than 50 cr.
Investment less
than 20 cr.
and
Turnover less than 100 cr.
Registration
Process
The
entire registration process for MSME have been made very simple and
self-declaration basis. Applicant should visit www.udyogaadhaar.gov.in and
following information should be kept ready before filing of registration e-form:
–
Mobile
No. & valid E-Mail ID of applicant.
Aadhar
Number & PAN number.
Office
Address.
Bank
account details of applicant
Investment
in Plant & Machinery above information will be helpful in easy filling of
online e-form and after submission of form, Udhyog Aadhar Memorandum (UAM)
certificate will be generated.
Pros of being
MSMEs
50% Subsidy on Patent
Registration if MSMEs have created
something new (Product/models etc.)
MSMEs
will get collateral free loans for running their businesses.
MSMEs
will get exemption of interest on Overdraft if they have good credit history
and have good relations with their banks.
Central
government has reserved the purchase of more than 350 products exclusively from
this sector.
The
government helps MSME to upgrade their equipment through latest technology by
helping them get low-interest loans from banks.
MSMEs
will get protection against payments from buyer (i.e. buyer will pay within 45
days) irrespective of agreement between them.
Cons of being
MSMEs
MSME have more
difficulties to find funding as they do not have the financial power that large
companies have
It may be difficult to
reach many customers and earn their trust.
SMEs
will have enormous impediments to benefit from the economy of scale, which will
cause costs to be higher in certain types of business.
d. Despite being more flexible in dealing with
changes, the lack of financial capability can cause major problems for an SME
if it is forced to endure long periods of crisis.
MSME
have low bargaining power with suppliers and customers.
MSMEs
have limited Access to skilled personnel.
Relief provided to MSMEs due to
Covid-19 pandemic
Collateral-free
automatic loan which have 4 years tenor with moratorium of 12 months on
principal repayment.
Subordinate
Debt for Stressed MSMEs to be provided.
Equity
infusion for MSMEs with growth potential through fund of funds model.
Definition
of MSME to be revised to increase investment and turnover limit to expand the
coverage (already discuss in classification of MSME).
Conclusion
To conclude, the MSME sector of India is today at the
gateway of global growth on the strength of competitive and quality product
range. However, facilitation from the Government is required to minimize the
transaction costs of technology upgradation, market penetration, modernization
of infrastructure etc. The MSME sector has often been termed the ‘engine of
growth’ for developing economies. We begin with an overview of this sector in
India and look at some recent trends which highlight the development and
significance of this sector vis-à-vis the Indian economy. The factors like
export promotion, reservation policy, tooling& technology, manpower
training, technology and managerial skills gave enormous opportunities for
growth and better performance in the economy. It is concluded that MSMEs in the
Indian Economy have shown tremendous growth and excellent performance with the
contribution of policy framework and efficient steps which had been taken by
the government time to time for the growth and development of the MSMEs.
Physical verification of inventory is the
responsibility of management of the entity. Management is required to establish
procedures under which inventory is physically counted at least once a year to ensure
existence, condition, and support valuation of inventory.
The Companies (Auditor’s Report) Order, 2016 (CARO
2016) also requires auditors to comment on “Whether physical verification of
inventory has been conducted at reasonable intervals by the management and
whether any material discrepancies were noticed and if so, whether they have
been properly dealt with in the books of account”.
SA 500, “Audit Evidence” prescribes that the objective
of the auditor is to design and perform audit procedures in such a way as to
enable the auditor to obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the auditor’s opinion. When
inventory is material to the financial statements, SA 501, “Audit Evidence –
Specific Considerations for Selected Items” requires that the auditor shall
obtain sufficient appropriate audit evidence regarding the existence and condition
of inventory by:
(a) Attendance at physical inventory
counting, unless impracticable to:
Evaluate management’s instructions and procedures for
physical inventory counting.
Observe the management’s count procedures.
Inspect the inventory.
Perform test counts; and
(b) Performing audit procedures over the entity’s
final inventory records to determine whether they accurately reflect actual
inventory count results.
In some cases, attendance at physical inventory
counting may be impracticable. This may be due to factors such as the nature
and location of the inventory, e.g. where inventory is held in a location that
may pose threats to the safety of the auditor.
Auditor’s
consideration in various scenarios
The COVID-19 outbreak could create several potential
challenges for management of an entity to conduct physical inventory counting
and for the auditors to attend these counts. With scenarios like lockdown,
travel restrictions etc. as imposed by Government of India, physical inventory
counting would be challenging and in some cases it would be impracticable.
Possible challenges in this regard are discussed below.
Management
unable to conduct physical inventory counting as on the date of financial
statements: Due to Government imposed restrictions, inventory
is held in locations which are closed due to Government imposed lockdown. In
such a scenario, management should inform the auditors and those charged with
governance the reasons of not conducting the inventory counting.
Physical
inventory counting conducted by management at a date other than the date of
financial statements: If auditor decides to observe physical inventory
counting at the date other than the date of financial statement than he needs
to perform roll-back and roll-forward procedures, it is viable option where the
entity has continuous inventory counting system.
Auditor has to ensure that inventory counting being
performed reflects the appropriate assessment of the physical condition of
inventory. Auditor should have adequate controls and should exercise
professional skepticism while observing inventory count.
Alternative
audit procedures where it is impracticable for auditors to attend physical
inventory counting: If attendance at physical inventory counting is
impracticable, the auditor shall perform alternative audit procedures to obtain
sufficient appropriate audit evidence regarding the existence and condition of
inventory. If it is not possible to do so, the auditor shall modify the opinion
in the auditor’s report.
Following are the examples of alternate audit
procedures adopted by auditor for verification of Inventory:
Using the work of Internal Auditor (SA 610).
Engaging other Chartered Accountant(s) to attend physical verification.
Use of technology in inventory counting (Virtual attendance i.e. video
call)
Inventory held by a third party: Where the entity has inventory under the custody and control of a third
party, it may be possible, to place reliance on confirmation received from that
third party regarding the quantities and condition of the inventory held on
behalf of the entity.
In such circumstance’s auditor would need to exercise professional
skepticism and perform careful evaluation of such confirmation since auditors
themselves have not been able to attend the physical inventory counting. It
would be preferable that such confirmations are obtained by the direct confirmation
requests addressed to the auditor directly without the management being
involved in the process
Inventory in transit / cut-off
procedures: Due to the lockdown
situation, it might be possible that inventory purchased or sold might be locked
up in transit. Auditors should obtain suitable audit evidence regarding the
location and condition of the inventory including documentary records about
purchases/sales. Appropriate cut-off procedures need to be employed to ensure
appropriate quantities are considered in the inventory.
Conclusion
The primary responsibility of the auditor is to physically attend the inventory counting either at/ prior to/ post the balance sheet date. But when situation like Covid-19 arise than it is impracticable for auditor to observe physical inventory counting, in this situation auditor should performed alternative procedures for verification of physical inventory (already discussed in above paragraphs), subject to alternative audit procedure should provide sufficient and appropriate audit evidence to conclude that inventory is free from material misstatement.
However,
if it is not possible to perform alternative audit procedures or to obtain
sufficient appropriate audit evidence in relation to material inventory
balances, in this case auditor should modify the opinion in the auditor’s
report in accordance with SA 705(Revised).
This article is based on guidance note issued by Auditing and Assurance
Standard Board of ICAI.
FA 2020 has introduced lower rate of deduction @ 2% instead of 10%, under section 194J, if the service is in the nature of:
For the part of royalty, there should be no confusion to understand as it has been categorically included only for one segment. However, when one tries to interpret and differentiate the inclusions under professional service or technical service, they will refer to the definition under the act, which has been reproduced under:
professional service
isservices rendered by a person in the course of carrying on legal,
medical, engineering or architectural profession or the profession of
accountancy or technical consultancy or interior decoration or
advertising or such other profession as is notified by the Board for the
purposes of section 44AA or of this section
fees for technical services
means any consideration (including any lump sum consideration) for the
rendering of any managerial, technical or consultancy services (including the
provision of services of technical or other personnel) but does not include
consideration for any construction, assembly, mining or like project undertaken
by the recipient or consideration which would be income of the recipient
chargeable under the head “Salaries”.
So as per the definition of professional service, consultancy which is in the nature of technical consultancy gets covered there and tax should be deducted at 10% on the same, however, the definition of fees for technical service includes consultancy (including the provision of services of technical or other personnel). There has been no explanation provided to differentiate between what would fall under “technical consultancy” and what would be considered as consultancy under the definition of “fees for technical services” (FTS). Therefore, having said that, a person would have to be technically and academically prepare and decide if his service is in nature of FTS by concluding on the fact that the service would be only managerial, technical or consultancy in nature, and does not fall within the ambit of “technical consultancy” to claim the benefit of lower rate of TDS. Having understood from the various case laws (referred below), there is a very thin line to differentiate between these two and even if one does, he will have to convince the tax authorities (if called for) to substantiate that the service is not in the nature of professional service, because professional service is very widely defined.
Some reference case laws:
Delhi ITAT in Le Passage to India Tours &
Travel (P) Ltd. [2014] 369 ITR 109
E-bay International AG vs ADIT (2012) 25
taxmann.com 500 (Mum)
Endemol South Africa (Proprietary) Ltd. vs DCIT
[2018] 98 taxmann.com 227 (Mum ITAT)
Skycell Communication Ltd. vs DCIT [2001] 251
ITR 53
Understanding the Intent:
In order to get some clarity on this
amendment, it is important that we understand the intent behind having this
amendment. From the memorandum to Finance Bill 2020, we understand that this
amendment was brought in order to reduce the litigations where a particular
service falls within the definition of 194J (where 10% TDS rate was applicable)
or 194C (where 2% rate is applicable). To our understanding, the litigations
which have been referred to in memorandum would be around a particular work has
been argued to either fall under the definition of ‘work’ for section 194C of
the Act or under the definition of FTS under section 194J of the Act. This
would for instance include services like an AMC service provided by a technical
company which would undertake to maintain the entire server system or computer
systems of an organisation, whether the same would fall under the definition of
work or technical service, has been a point of argument in this instance.
Similarly there have been other examples, inference can be drawn from the same
to take guidance.
Conclusion
Therefore, while deciding the deductibility
of a rate, the above intent should be considered and decided about the rate of
deduction. However, considering that the interpretation has a very thin line as
explained above and there have already been so many litigations, this intent of
reducing the litigations might turn the other way. CBDT should therefore come
out clarifying the background and earmarking the list of services which would
fall under 10 percent deduction and 2 percent deduction for section 194J of the
Act.
