Identity of firms

SME CHATROOM

What is meant by 'clubbing of clearances' and how does it affect small-scale industries?

Under the central excise notification no. 8/2003-CE dated 1.3.2003, first clearances in a year up to Rs 100 lakh are exempted from payment of central excise duty subject to certain conditions.

Sometimes, small entrepreneurs establish two or more units with a view to taking advantage of the notification even though together their first clearances are more than Rs 100 lakh or their aggregate clearances in the previous year are more than Rs. 300 lakh.

In such cases, the central excise authorities examine as to whether the two units are, in fact, independent units or not. If they find that the two units are not independent and that any façade of independent identity has been erected only to take undue advantage of the exemption notification, they club the clearances of both the units for the purpose of extending the benefit of the notification no. 8/2003-CE dated 1.3.2003.

Naturally, the excise officials tend to club the clearances of even independent units under one pretext or the other.

Such attempts have led to disputes and there are many court decisions that are helpful in deciding whether the two units are independent or not. Broadly, in the following situations, the clearances of the two units can be clubbed.

Financial flow back between the two entities

Actual control over the running of two units by the same person(s)

Mutuality of interest""common funding

Constitution and ownership patterns of the units reveal that the units are not independent

Second unit is a dummy unit i.e. its functioning reveals absence of any independence in regard to its operations

All the partners of a firm are also directors in another company

Common management, procurement of raw materials, stock accounting and planning, use of machinery, marketing arrangement

Common infrastructure, employees, expense accounts, control by same family members

Here are some situations when the criteria adopted are not enough grounds for clubbing:

Two units using a common office, sharing a common telephone or computer

Appointment of a common manager

One of the partners of a unit is a director in another company

Firms engaged in manufacture of different items

Separate infrastructure, machinery, funding sources, employees, management

There is, however, no ready reckoner to determine whether clubbing is justified or not. Each case has to be examined on merits and documentary evidence should clearly establish independence of the units or lack of it to justify clubbing or otherwise.

What are the services for which abatement applies and what are the conditions for availing abatements?

The services for which abatement applies and the extent of abatement is given below :

Besides other conditions, the notification no. 12/2004-ST dated 10.09.2004 prescribes the following conditions for availing the abatement.

No credit of duty paid on inputs or capital goods has been taken under the provisions of the Cenvat Credit Rules, 2004

No benefit under notification no. 12/2003-ST dated the 20th June, 2003 has been availed

Regarding general abatement to all taxable services from so much of the value of the goods and materials as are sold during the course of providing taxable service under notification no. 12/2003-ST dated 20.06.2003, I have dealt with the same in my previous column. 

S.No.	Taxable service	% of abatement	Notification no. & dated
1	Construction services	67%	15/2004-ST dated 10.09.2004
2	Convention Services along with Catering Service	40%	10/2004-ST dated 09.07.2004 as amended by 12/2004-ST dated 10.09.2004.
3	Goods Transport Agency Service	75%	32/2204-ST dated 03.12.2004
4	Mandap Keeper providing catering services also	40%	21/97-ST dated 26.06.1997 as amended by 12/2004-ST dated 10.09.2004
5	Mandap Keeper Services by hotels, providing Catering also	40%	12/2001-ST dated 20.12.2001 as amended by 3/2003-ST dated 1.3.2003, 8/2004-ST dated 09.07.2004 and 12/2004-ST dated 10.09.2004
6	Outdoor Caterers	50%	20/2004-ST dated 10.09.2004
7	Package Tour Operators, (incl. transport and accommodation)	60%	39/97-ST dated 22.08.1997 as amended by 12/2004-ST dated 10.09.2004
8	Pandal and Shamiana Contractors providing Catering Services	30%	22/2004-ST dated 10.09.2004
9	Rent-A-Cab Scheme Operators	60%	9/2004-ST dated 09.07.2004 as amended by 12/2004-ST dated 10.09.2004
10	Tour Operators (other than Package Tours)	60%	2/2004-ST dated 05.02.2004 as amended by 8/2004-ST dated 09.07.2004 and 12/2004-ST dated 10.09.2004
11	Services of booking accommodation only by Tour operator	90%	40/97-ST dated 22.08.1997 as amended by 12/2004-ST dated 10.09.2004

We exported in FY 2004-05 for US $ 1 Million and made provision for commission (at 4%) for Rs 17.60 lacs as per the exchange rate prevailing on 31.3.2005 (@say Rs.44/USD). Upon realisation of export proceeds in FY 2005-06 (@ say Rs. 45/USD), the agent raised a commission bill for Rs.18 lacs, which we paid after deducting TDS u/s 194H, which we deposited in the government account within due date. Can Income Tax dept. disallow the provision of commission in light of Section 40(a) (ia) for FY.2004-05 since TDS is actually deducted in FY 2005-06? Whether TDS is applicable on provisions as per chapter XVII under Income Tax Act ?

As per Section 194H of the Income Tax Act, 1961 tax shall be deducted at the time of credit of such income (i.e. commission or brokerage) to the account of the payee or at the time of payment of such income in cash or by the issue of cheque or draft or any other mode, "whichever is earlier".

Further, where any income is credited to any account whether called 'Suspense Account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee.

So, TDS must be deducted at the time of credit or payment, whichever is earlier. In your case, you have made a provision of Rs 17.6 lakh on March 31, 2005, and as credit of such income has been made, TDS should have been deducted and paid on this amount.

To elaborate:

Had you deducted TDS on the provision of Rs 17.6 lakh on March 31 2005, you should have paid the same to the government within the due date i.e. 31st May 2005. Had you paid this amount within the time limit, the expenditure (i.e. commission) must be allowed for the financial year 2004-05.

Had you deducted TDS on 31st March 2005 but paid the same after the due date i.e. 31st May 2005, then the expenditure shall be disallowed for the F.Y.2004-05 and shall be allowed only in F.Y.2005-06 when tax is paid.

Had you deducted and paid TDS in FY 2005-06, the expenditure shall be allowed in the FY 2005-06 when you actually paid the TDS to the government

Had you not deducted TDS at all or deducted TDS but did not pay to the government, the expenditure shall be disallowed.

In short, in your case, disallowance of provision in FY 2004-05 is in order. You can claim deduction in FY 2005-06.

This is the fifth column on SME-related queries. TNC Rajagopalan will answer questions from readers on SME-related issues pertaining on taxes, exim policies or registrations/reservations, etc. This will be a fortnightly column to be run on every alternate Wednesday on the Accent page. The readers may send questions at smequeries@business-standard.com