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Grindwell Norton Ltd. Versus Addl. CIT 1 (1) , Mumbai and Vice-Versa

Pre-payment of deferred sales tax - taxability of surplus arising to the assessee on repayment on deferred sales tax liability - AO held this surplus to be taxable as a revenue receipt liable to be taxed u/s 41(1) whereas Ld. CIT(A) has treated the same as ‘benefit’ liable to be taxed u/s 28(iv) - Held that:- By making payment of net present value of a future liability it cannot be said if any financial benefit, in real terms, has accrued to the assessee. It is noted that none of the authorities .....

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tangible or intangible nature. It is also noted that the AO made direct inquiries with OAL in response to which proper reply was given by the OAL confirming the transactions. The OAL submitted letter dated 21.02.2009 to the AO wherein it was inter alia confirmed that the said company transferred its abrasive division situated at Bhiwadi (Rajasthan) to the assessee company for a total consideration of ₹ 26.17 crores. It is also brought to our notice that subsequent to the take- over, the a .....

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uired by the assessee. Thus the assessee is eligible for the claim of depreciation u/s 32(1)(ii) on the amount of intangible assets acquired by it as per Business Transfer Agreement, and thus action of lower authorities was not factually or legally justified while making disallowance of the depreciation on the intangible assets. The AO is directed to grant the benefit of depreciation in terms of section 32(1)(ii) upon the intangible assets acquired by the assessee. Thus, these grounds are allowe .....

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cial Member And Shri Ashwani Taneja, Accountant Member For the Appellant : Shri P.J. Pardiwalla & Shri Jitendra Jain (AR) For the Respondent : Shri A. Ramachandran (DR) ORDER Per Ashwani Taneja (Accountant Member) These appeals pertain to the same assessee for different assessment years involving identical issues, therefore these were heard together and being disposed of by this common order. 2. We shall first take up appeal filed by the assessee in ITA No. 528/Mum/2012 against the order of .....

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g on prepayment of deferred sales tax was a revenue receipt liable to tax u/s.28(iv) of the Income-tax Act. 2. The learned Commissioner of Income-tax (Appeals) erred in holding that the appellant obtained a "benefit" in respect of the said pre-payment. 3. The learned Commissioner of Income-tax (Appeals) erred in applying section 28(iv) to tax the said amount. 4. Having regard to the facts and circumstances of the case, the Appellant submits that the addition of ₹ 1,63,03,435/- be .....

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der section 32. 7. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is allowable only on those intangible assets which are protected rights. 8. The learned Commissioner of Income-tax (Appeals) erred in holding that depreciation is available under section 32 only in respect of a "registered trade mark' or "patented know how". 9. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be direct .....

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Having regard to the relevant facts and circumstances of the case and the past record of the appellant, it is submitted that the disallowance under section 14A read with Rule 8D is grossly excessive and requires to be reduced substantially. 3. During the course of hearing, arguments were made by Shri P.J. Pardiwalla & Shri Jitendra Jain, (AR) on behalf of the Assessee and by Shri A. Ramachandran, Departmental Representative (Ld. DR) on behalf of the Revenue. 4. Ground Nos. 1 to 4: These gro .....

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r it is in the nature of benefit liable to be taxed u/s 28(iv), but merely a capital receipt not in the nature of income to be taxed. 4.1. The brief facts and background of the case are that during the year under concern, the assessee was engaged in the business of manufacturing of abrasives & refractory products and also dealt in ceramics and plastics. During the course of assessment proceedings, it was noted by the AO that during the year the assessee company had made some gain on repaymen .....

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deferred sales tax was capital receipt not liable to tax. It was submitted that deferred sales tax was treated as unsecured loan in its books by the assessee and loan was not a trading liability. Thus, making full payment of loan at lesser account did not give rise to revenue receipts and therefore, it could not have been brought to tax u/s 41(1). No benefits had accrued to the assessee and therefore, it could not be brought to tax u/s 28(iv) of the Act also. But, the AO was not satisfied with t .....

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le to be taxed u/s 41(1). Ld. CIT(A) in the appeal order relying upon the order of the Tribunal in assessee s own case of earlier year held that this amount was not liable to be taxed u/s 41(1) and thus, allowed the relief to the assessee on this ground. But, he raised another issue of taxability of this amount as a benefit having been accrued to the assessee, which is liable to be taxed u/s 28(iv) of the Act. The assessee made detailed submissions on this issue also, but Ld. CIT(A) was not sati .....

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nd 2006-07 and submitted that this issue has become now settled as Hon ble High Court has confirmed the order of the Tribunal wherein it was held that this amount was not taxable u/s 41(1) of the Act. It was submitted that in the impugned year revenue has not contested before the Tribunal, the decision of Ld. CIT(A) on this issue and thus it has attained finality. With regard to the alternative issue raised by the Ld. CIT(A) i.e. taxability of this amount u/s 28(iv) of the Act by treating the sa .....

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ance upon the Borad s circular w.r.t. section 28 issued in 1964. It was further submitted by him that it has been held by the High Court also that this amount was not even a benefit of the nature as envisaged u/s 28(iv) and thus, the order of the Hon ble High Court squarely covers this issue. 4.4. Per contra, Ld. DR relied upon the orders of the lower authorities and submitted that amount not paid is a benefit . Reliance was placed by the Ld. DR on the judgment of Amritsar Bench of the Tribunal .....

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i.e. A.Y. 2005-06 and 2006-07 wherein this issue has been decided in favour of the assessee by the Tribunal as well as by Hon ble Bombay High Court. It has been contended by the Ld. DR before us that in earlier year, the taxability has been examined u/s 41(1) only and not with respect to the provisions of section 28(iv), under which the impugned amount will be taxable as benefit accrued to the assessee. Before we deal with the arguments of Ld. DR, we find it appropriate to discuss about precise .....

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harashtra. The Sales tax Incentive Scheme was availed by the Company in respect of its plant at Butibori Industrial area at Nagpur (Butibori Plant). Copy of the agreement between the Company and the Govt. of Maharashtra is enclosed herewith. In accordance with the Sales tax Incentive Scheme, the sales tax collected in respect of Butibori Plant was credited separately to Sales tax account. Set off if any available on the purchases was debited to this account with corresponding credit to purchases .....

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However, in respect of such deferral schemes the CBDT has vide Circular No. 496 dated 28.9.1987 and Circular No. 674 dated 29.12.1993 notified that although the sales tax collected in accordance with a deferral scheme is not paid into the Government Treasury, the same is deemed to have been paid and no disallowance under section 43B is called for. On 12th December, 2002, the Govt. of Maharashtra announced a scheme of "Premature repayment of the amount of deferred tax by the eligible units .....

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on 12th December, 2002 and has during the year under consideration made a prematured payment of its deferred sales tax liability as under: Rs. Sales tax liability 2,26,45,595 Less: Premature pre-payment 63,42,160 Surplus on the above 1,63,031435 The company has treated the surplus accruing on premature repayment of deferred sales tax as a capital receipt not liable to income tax. 4.6. As discussed earlier also, the AO held this amount of surplus as remission of liability and brought to tax the s .....

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t is equivalent to a benefit as has been envisaged u/s 28(iv) and therefore, it would be liable to tax u/s 28(iv). But, Ld. Counsel of the assessee vehemently assailed the reasoning given by Ld. CIT(A), inter alia, on the ground that Hon ble Bombay High Court in assessee s own case in earlier years had examined this aspect also and held that in fact no benefit accrued to the assessee. Under these circumstances, before we discuss this issue further, we find it appropriate to discuss and reproduce .....

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3B has no application. Insofar as applicability of section 41(1)(a), there also the applicability is to be considered in the light of the liability. It is a loss, expenditure or trading liability. In this case, the scheme under which the Sales Tax liability was deferred enables the Assessee to remit the Sales Tax collected from the customers or consumers to the Government not immediately but as agreed after 7 to 12 years. If the amount is not to be immediately paid to the Government upon collect .....

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e State Government would be entitled to receive after the end of 7 to 12 years, then, we do not see how ingredients of sub section (1) of section 41 can be said to be fulfilled. The obligation to remit to the Government the Sales Tax amount already recovered and collected from the customers is in no way wiped out or diluted. The obligation remains. All that has happened is an option is given to the Assessee to approach the SICOM and request it to consider the application of the Assessee of prema .....

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nal amount to be remitted with the payment made. Mr. Gupta terms this as deemed payment and by the State to the Assessee. We are unable to agree with him. The Tribunal has found that the first requirement of section 41(1) is that the allowance or deduction is made in respect of the loss, expenditure or a trading liability incurred by the Assessee and the other requirement is the Assessee has subsequently obtained any amount in respect of such loss and expenditure or obtained a benefit in respect .....

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State Government, paid an amount of ₹ 3,37,13,393/to SICOM, which, according to the Assessee, represented the NPV of the future sum as determined and prescribed by the SICOM. In other words, what the Assessee was required to pay after 12 years in 6 equal instalments was paid by the Assessee prematurely in terms of the NPV of the same. That the State may have received a higher sum after the period of 12 years and in instalments. However, the statutory arrangement and vide section 38, 4th pr .....

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letters) 4.7. The perusal of the order of the Hon ble High Court reveals that in the earlier two years i.e. A.Ys. 2005-06 and 2006-07, it has been held by the Tribunal as affirmed by the Hon ble Bombay High Court that impugned amount will not be taxable u/s 41(1). While holding so, Hon ble Bombay High Court has also observed that, in effect, no benefit had accrued to the assessee, since ultimate effect of the transaction is that the assessee paid present value of a future liability. In case the .....

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r. In the case of Sulzer India Ltd. v. JCIT (42 SOT 457) (SB), Hon ble Special Bench had held that surplus arising on repayment of sales tax liability is on account of difference between payment of net present value against the future liability and it can neither be termed as remissions/session of liability nor it gives rise to any benefit to the assessee. According to Hon ble Special Bench, it is a simple case of collecting amount at net present value of future liability, which cannot be regard .....

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not give rise to benefit as envisaged u/s 28(iv) and therefore it was not taxable u/s 28(iv). It is further brought to our notice by Ld. Counsel of the assessee that the benefit as envisaged u/s 28(iv) is something which actually flows to the assessee in monetary terms. In support of his view, he relied upon circular of the Board No. 20D, dated 07.07.1964, relevant part of the circular is reproduced hereunder for the sake of ready reference: Assessment of the value of any benefit or perquisite a .....

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24), including the value of such benefit or perquisite in the definition of the term "income" vide new sub-clause (va) inserted in section 2(24) by section 4(c)(i) of the Finance Act, 1964. The effect of the above-mentioned amendment is that in respect of an assessment for the assessment year 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g., the value of rent-free residen .....

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oted that none of the authorities had gone into this aspect and did not quantify, in financial or monetary terms, if any amount could be worked out which could be said to be a benefit that had accrued to the assessee. Under these circumstances, we are of this considered opinion that the impugned amount cannot be brought into tax either u/s 41(1) or u/s 28(iv). Hon ble High Court while giving its decision had analysed all the aspect of this issue and therefore, this issue is not open for reconsid .....

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3,20,00,000 Marketing Network 3,75,00,000 Non-Compete fees 4,02,50,000 Total 16,47,50,000 5.1. The brief background of the issue involved is that during the year under concern, the assessee had taken over Grinding Wheel Business of M/s Orient Abrasive Ltd. ( OAL ) as a going concern on a slump sale basis under Business Transfer Agreement dated 18.04.2006 for a consideration of ₹ 26.17 crores. Out of the assets acquired from OAL, assets worth ₹ 16.86 crores were intangible assets and .....

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et share was not much, the assessee did not acquire full rights with respect to Trademark License and also found various defects in valuation report submitted by the assessee with respect to valuation of its business and its assets. Finally, AO arrived at a conclusion that in absence of any cogent evidences establishing correct value of the intangible assets claimed to be acquired under the Business Transfer Agreement or otherwise, the value of intangible assets was adopted by the assessee arbit .....

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eping in view business interest and commercial expediency. The transaction of takeover was supported with a Business Transfer Agreement dt. 18.04.2006 and also supported with a valuation report and certificate of a Chartered Accountant, earmarking separate valuation for each and every asset taken over as per the said Business Transfer Agreement. Nothing wrong has been found therein by the AO except making of suspicion without any concrete basis. Enquiry made by the AO directly with the said comp .....

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assessee as part of aforesaid deal and also doubted about the valuation of the same as was recorded by the assessee in its books. It was also held by the Ld. CIT(A) that the assessee did not acquire any Goodwill as it did not get any legal rights which were enforceable under the law and therefore it could not be considered to be eligible for depreciation. 5.4. Being aggrieved, the assessee filed an appeal before the Tribunal. 5.5. During the course of hearing before us, it has been argued by th .....

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be entitled to claim depreciation. It was brought to our notice that in subsequent year i.e. in A.Y. 2008-09, Ld. CIT(A) has himself granted benefit of depreciation on the amount of Goodwill which has not been challenged by the revenue before the Tribunal. Thus, revenue has accepted the decision of Ld. CIT(A) in A.Y. 2008- 09 with regard to admissibility of claim of depreciation on the amount of Goodwill acquired by the assessee under the same transaction of takeover of Grinding Wheel Business .....

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ng over of Grinding Wheel Business of OAL was taken by the assessee in the interest of its business and keeping in view commercial expediency and revenue cannot sit in the arms chair of a businessman to dictate as to how the business is to be conducted. The assessee was very much aware about the assets to be acquired under the deal and the price paid for the same. Since nothing non-genuine has been found by the AO, therefore he was not in a position to re-write the Business Agreement entered int .....

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ion of Grinding Wheel Business of OAL in terms of the Business Transfer Agreement dated 18.04.2006 entered by the assessee with the said company. It is noted by us that from the perusal of the business agreement enclosed at paper book no. 27 to 87 that assessee acquired Grinding Wheel Business of OAL along with its tangible and intangible assets including Goodwill, intellectual property rights e.g. patents, copyrights, past and present R & D works, brands, trademark, service marks, registere .....

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reciation on the amount of fixed assets acquired i.e. plant and machinery etc. Thus, genuineness of transaction has not been doubted, but what has been doubted merely is the valuation of intangible assets acquired under the deal. It is to be noted here that factum of acquisition of intangible assets has also not been disputed. Thus, under these circumstances, case made out by the lower authorities is that the amount paid by the assessee for its business is more than the appropriate value of its .....

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nted for in its books of accounts as Goodwill . Under these circumstances, no further exercise would be required to make precise valuation of the amount of Goodwill . There are no doubts about the legal position that as per law, the assessee is eligible to claim depreciation on the amount of Goodwill. It is worth noting that this legal position has been accepted by Ld. CIT(A) in the subsequent year i.e. A.Y. 2008-09 wherein claim of depreciation on Goodwill was accepted and order of CIT(A) has b .....

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ng a competitive advantage to an entity. This includes a strong brand, reputation, a cohesive human resource, dealer network, customer base, etc. The expression 'goodwill' subsumes within it a variety of intangible benefits that are acquired when a person acquires a business of another as a going concern. From an accounting perspective, it is well established that 'goodwill' is an intangible asset, which is required to be accounted for when a purchaser acquires a business as a go .....

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nited Kingdom and by the Institute of Chartered Accountants of Ireland in respect of its application in the Republic of Ireland, explains that the accounting requirements for goodwill reflect the view that goodwill arising on an acquisition is neither an asset like other assets nor an immediate loss in value. Rather, it forms the bridge between the cost of an investment shown as an asset in the acquirer's own financial statements and the values attributed to the acquired assets and liabiliti .....

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t provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The agreement itself indicates that slump sale included sale of goodwill and the balance sheet specifically recorded goodwill at ₹ 40.58 crore. Goodwill includes a host of intangible assets, .....

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can neither be rewritten or nor has been written by the lower authorities. The AO had made direct inquiries with OAL wherein it was confirmed that the assessee had paid sales consideration as per the terms of the agreement and the tangible assets were acquired as stated in the said agreement and accepted by the AO and depreciation was allowed on the same as per facts brought before us. Under these circumstances, any amount of consideration paid over and above the value of tangible assets would .....

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IT 167 TTJ 131 also held that where the assessee had acquired business of another company on slump sale basis, excess consideration paid by it over and above the value of net asset acquired, was to be considered as Goodwill u/s 32(1)(ii) which was eligible for depreciation. 5.9. In addition to the above, on facts also, it is noted by us that the assessee brought on record ample evidences in support of its claim to justify the acquisition of various other intangible assets and the justification o .....

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how, Goodwill of Grinding Wheel Business, rights of non- competition etc were described in the said agreement. It is further noted that proper break-up and justification for the consideration has been narrated in the said agreement. The said agreement also contains lists of employees of OAL to be taken-over by the assessee company. It also containing the list of trademarks, particulars of goodwill of business of the OAL in the form of business data, customer details, specifications and quality r .....

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ompany transferred its abrasive division situated at Bhiwadi (Rajasthan) to the assessee company for a total consideration of ₹ 26.17 crores. It is also brought to our notice that subsequent to the take- over, the assessee company filed petitions with the concerned departments for registration of trademarks in the name of Assessee Company. It is further noted by us from the perusal of the order of Ld. CIT(A) wherein it has been accepted that the assessee had produced before him (i.e. CIT(A .....

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ied while making disallowance of the depreciation on the intangible assets. The AO is directed to grant the benefit of depreciation in terms of section 32(1)(ii) upon the intangible assets acquired by the assessee. Thus, these grounds are allowed in favour of the assessee. 6. Ground Nos. 10 to 12: These grounds are with regard to disallowance made u/s 14A. The facts brought before us are that disallowance was made by the AO u/s 14A wherein disallowance on account of interest was to the tune of & .....

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owance u/s 14A. Our attention was also drawn on the order of the Tribunal for A.Y. 2006-07 in assessee s own case wherein disallowance was confirmed @ of 2% of the dividend income. 6.2. Per contra, Ld. DR did not bring before us any contrary decision. It is noted from the facts brought before us that dividend income in this year was to the tune of ₹ 4.90 crores. Rule 8D is not applicable in this year. In A.Y. 2007-08, in assessee s own case, the Tribunal held vide its order dated 28th Apri .....

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f the Tribunal we hold that the disallowance on account of expenses under section 14A should be restricted to 2% of the dividend income. The disallowance with regard to interest should be made after excluding those mutual funds which are debt funds. Thus, assessee gets part relief and these grounds are partly allowed. 6.4. As a result appeal filed by the assessee is partly allowed. Now we shall take up assessee s appeal for A.Y. 2008-09 in ITA No.5800/Mum/2013 7. Ground Nos. 1 to 4: These ground .....

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ion upon the intangible assets acquired under takeover of the business of the assessee. These grounds are identical to ground Nos. 5 to 9 of A.Y. 2007-08 wherein claim of depreciation has been directed to be allowed, and no distinction having been made in facts or law, the AO is directed to allow depreciation in this year as well. 9. Ground Nos. 10 to 12. These grounds pertain to disallowance u/s 14A. In this year, AO made disallowance u/s 14A for a total amount of ₹ 21,00,757/- comprising .....

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Notification: Seeks to amend notification No. 09/2017-IT(R) to exempt right to admission to the events organised under FIFA U-17 World Cup 2017

Notification: Seeks to amend notification No. 08/2017-IT(R) to reduce CGST rate on specified supplies of Works Contract Services

Notification: Exempts intra state supply of heavy water and nuclear fuels from DAE to NPCIL

Notification: Seeks to amend notification No. 12/2017-CT(R) to exempt right to admission to the events organised under FIFA U-17 World Cup 2017

Notification: Seeks to amend notification No. 11/2017-CT(R) to reduce CGST rate on specified supplies of Works Contract Services.

News: Tax on fuel more important for a dry state like Gujarat

Highlight: For an ayurvedic medicine to be classified under Chapter 30 has to pass the test whether it is for cure of any disease. If the same is only meant for care, then such product would not fall under medicament.

Highlight: Demand of interest - the period of limitation that applies to a claim for the principal amount should also apply to the claim of interest thereon.

Highlight: Government issues new notifications under CGST, IGST and UTGST to grant fresh exemptions in respect of certain supplies.

Circular: Extension of time limit for submitting the declaration in FORM GST TRAN-1 under rule 117 of the Central Goods and Services Tax Rules, 2017

Article: SIMPLIFIED E-WAY BILL UNDER GST

Article: SERVICES UNDER REVERSE CHARGE UNDER GST REGIME

Highlight: Rate of exchange of conversion of the foreign currency with effect from 22th September, 2017 - Notification

Highlight: Companies (Acceptance of Deposits) Second Amendment Rules, 2017 - Notification

Highlight: Implementing Electronic Sealing for containers by exporters under self-sealing procedure prescribed by Circular 26/2017-Cus dated 1st July, 2017 and Circular 36/2017 dated 28 th August, 2017. — reg. - Circular

Highlight: Amendment to Paragraph 2.72 (b) of the Handbook of Procedures of the Foreign Trade Policy (FTP) 2015-20 - Public Notice

Notification: Amendment in Appendix 3 (SCOMET items) to Schedule- 2 of ITC (HS) Classification of Export and Import Items 2012

Circular: Amendment to Paragraph 2.72 (b) of the Handbook of Procedures of the Foreign Trade Policy (FTP) 2015-20

Notification: Companies (Acceptance of Deposits) Second Amendment Rules, 2017



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