A regulator should rehabilitate, resolve litigation

CHAT ROOM

In the Reliance Industries Ltd vs Securities and Exchange Board of India (Sebi) case, (2004) 55 SCL 81 (SAT-Mum), the Securities Appellate Tribunal (SAT) has given a sound advice to Sebi regarding the exercise of its power to levy of penalties, which the market regulator has been exercising more as a measure of punitive policy than to ensure better functioning.

In this decision, the SAT said where the breach of regulations was not deliberate and non-disclosure was due to lack of understanding of law, penalty should not be levied under Section 15A of the Sebi Act.

According to the SAT, the role of a regulator should be to rehabilitate and bring to an end a litigation, which might not cast a stigma on the appellant, who otherwise, admittedly, had maintained a good record.

In this case, the breach was bona fide and the appellant was under the impression that since it had made a disclosure earlier, it was not necessary to make a fresh disclosure. That was an error of judgment and, at best, an error of understanding the law.

Ignorance of law is not an excuse, but an erroneous interpretation is a mitigating factor, especially if such interpretation is honest and bona fide to the knowledge of the appellant.

Thus, the breach could not be called deliberate and non-disclosure was due to lack of understanding of the law. Hence, the impugned order, imposing a penalty of Rs 475,000 was set aside.

No excise duty on software in computers: The Supreme Court has held that no central excise duty is payable on software loaded in computers, dismissing the central government's appeal and granting relief to computer manufacturers.

The excise department had argued that operational software implanted in hardware became a part of the later and therefore excise duty was chargeable on the total value of the computer. It said software implanted with a license to the right to use the information contained in them should not be compared with a disc, floppy or CD-Rom available in the market separately. The Supreme Court rejected this view.

The court said computer and operative software are different marketable commodities. They are available in the market separately. They are also classified separately for tariffs. The rate of excise duty for computers is 16 per cent whereas duty on the software is nil. The court's view is that accessories of a machine promote the convenience and its better use. But they are not the machine itself.

Though a computer could not be capable of effective functioning unless loaded with software, it would not bring them within the purview of the part of the computer so as to hold that if they were sold along with the computer, their value must form part of the assessable value for the purpose of excise duty, the court ruled.

It has been emphasised that the information contained in software, did not lose its value and was still marketable as a separate commodity. It does not lose its character as a tangible item being of the nature of CD-Rom.

SAT raps Sebi: The SAT has in an appeal filed by Alkan Projects (P) Ltd against Sebi set out the basic principle that unless a penalty is pegged to the offender's ability to pay it will be merely a paper order, which can never be implemented in a court.

The SAT said willful disobedience of summons and failure to furnish information by market entities, as required under the specified rules and regulations, is liable to be penalised but penalty should not be sky-high.

Sebi penalised Alkan Projects for not furnishing the necessary information as called for in summons. The SAT reduced the penalty from Rs 1 crore to Rs 15,000, asking the company to respond to the summons and co-operate with Sebi investigations. The three-member SAT Bench said the penalty imposed on any entity should be levied keeping in mind the default and financial position of the company.

Royalties for included services: The issue was when an income could be deemed to accrue or arise in India. The matter related to interpretation of the double taxation avoidance agreement (DTAA) between India and the US concerning royalties or fees for included services.

The Authority for Advance Rulings (AAR) held that payments received by a US company in the US from the US government for conducting a feasibility study of the air traffic management requirement of an Indian public sector undertaking were not taxable in India either under the provisions of the Income Tax Act or the DTAA between India and US.

It was so because the work was to be done in the US, the money was payable by an agency of the US government under a grant sanctioned by the latter and not by the Indian undertaking at all, and the US company had no office or establishment in India [In Re Airports Authority of India - AAR No 619 of 2003 (2004) 191 CTR (AAR)1].

Tribunal order: Prosecution proceedings under Sections 276 and 277 cannot continue if the finding of concealment leading to such proceedings is vacated by the tribunal. (The KTMS Mohammed and Anr. vs Union of India case, (1992) 108 CTR (SC); the GL Didwania vs Income Tax Office, (1997) 224 ITR 687 (SC).

In the Didwania case, the Supreme Court said: "In the instant case, the crux of the matter is attracted and whether the prosecution can be sustained in view of the order passed by the Tribunal. As noted above, the assessing authority held that the appellant assessee made a false statement in respect of income of Yong India & Transport Co and that finding has been set aside by the Tribunal. If that is the position, then we are unable to see as to how criminal proceedings can be sustained."