We have an MSME unit, which has accumulated depreciation on buildings. Meanwhile the unit has accumulated losses for a few years. (i) Can the depreciation be written back and set off against losses? (ii) Can this make the fixed asset free from depreciation? (iii) Does this exempt any capital gains or sale of the asset (long term)? (iv) Are there any preconditions for such a sale?
It is not clear whether the query is from an accounting perspective or a tax perspective. Under the Income Tax Act, 1961 (the Act), there is no concept of writing back of depreciation, which has been already reduced from the Written Down Value (WDV) of the asset. Depreciation would be either allowed as deduction while computing taxable income or would be carried forward to be allowed as deduction in a future year(s) (in case of unabsorbed depreciation). In any case, under the income tax law, sale of a depreciable asset results in removal of asset from the block of assets and leads to a reduction of the block of assets by the amount of sale consideration of the asset. In the event of sale consideration wiping off the entire block of assets i.e. sale consideration exceeding the WDV of entire block, the surplus would be taxable as short-term capital gains at normal tax rates, as applicable to the taxpayer.
Merchanting trade and agency commission
WE are an SME unit and would appreciate guidance on the following:-
(i) Third Country Exports:- Being representatives of a European company, we sell and service their equipment in India and in neighbouring countries. We have our own sub-agents doing the liaisoning work in those neighbouring countries. Two situations arise here.
(i) We advise our principals in country (A) to ship materials directly from their country to our sub-agent in the neighbouring country (B).
(ii) We pay the principal from our account and we raise a sub-bill on sub-agent for the export made to him.
Can we send those documents raised on B by us directly to the customer for payment or is it necessary to route it through bank?
As per our understanding the above arrangement is considered as ‘Merchanting Trade’ under Foreign Exchange/FEMA laws. Accordingly, please ensure the compliance with the conditions explained in AP (DIR Series) Circular No.115 dated March 28, 2014. As far as we understand your query, please note that any document in relation to cross-border trade and payment in relation thereto is required to be routed through the AD (authorised dealer) bank only.
(iii) Further, sometimes the agent (B) gets an order for direct supply to his customer in his country which are shipped from the principals directly to the customer (C) or we import and re-export and invoice on C (re-export or third-country export). On such sales created by him (B), he is eligible to receive commission for the sales. The issue here is, can we treat the transaction in equivalent rupees i.e. debit for export to the sub-agent and credit to sub-agent for third party sales commission account and remit him only the net due amount or recover from him only the net due amount? In this event, how do VAT authorities view this? Is there any likelihood of any FEMA violation?
In this regard, provisions relating to Agency commission specified under the Master Circular on Exports of Goods and Services may be referred to, which permits payment of commission, either by remittance or by deduction from invoice value, on application submitted by the exporter. This is subject to conditions and should be referred to from the said circular.
Further, how do we to get the Export Realisation Certificate for the supply to the sub-agent which has been paid by setting off against commission due to him from us on another deal?
As there is a specific provision in respect of deduction of agency commission (as discussed above), a realisation certificate may be obtained from the AD bank subject to fulfilment of the aforesaid conditions.
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