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Monday, September 15, 2008
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Foreign companies having their operations in India would not have to be taxed in the country if their Indian activities have been adequately remunerated in the hands of the Indian entity. In a landmark judgment, the Bombay High court overturned the earlier order of Income Tax Appellate Tribunal Mumbai in a case involving Sony Entertainment Television (SET) Satellite, Singapore and its Indian agent SET Satellite India, and said there is no tax liability on its income generated in the country but relayed abroad. The ruling would imply that foreign companies remunerating their dependent agents in India on an arm’s length basis will not be liable to pay tax in the country. This is because although the agents will constitute a permanent establishment (PE), no profits can be attributed to them. Arms
length price means a price, which is applied or proposed to be applied in such transactions between persons other than, associated enterprises, in uncontrolled conditions.
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Profits of a foreign company arising from offshore supplies to Indian projects are not liable to be taxed in India if the foreign company’s office in India has no role in these projects, according to a ruling by the Income-Tax Appellate Tribunal. The ITAT order last week was on an appeal filed by South Korean company LG Cables Ltd. In this case, the ITAT bench headed by president Vimal Gandi, held that though the agreement for supply of equipment was entered in India, this alone cannot be the ground for taxing the income of the foreign company from these projects.
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In a recent judgment, the Tax Tribunal in New Delhi has held that revenue earned by a non-
resident company from services, which are in the nature of processing of seismic data for oil exploration / extraction project in India, cannot be taxed as fees for technical services as per the provisions of the Indo- Australian Tax Treaty. As per the relevant article of the treaty, if rendering of services results in making available technical knowledge, experience, skill etc. then the same are said to be in the nature of fees for technical services and may be taxed accordingly. Considering the
provisions of this article, the tribunal observed that the processing of seismic data provided by the Indian company to the Australian company, being area specific, cannot be made use of by the Indian company in future without referenced to the Australian company. Therefore, the provisions of said article of the treaty are not attracted and the receipts are not taxable as fees for technical services.
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The Supreme Court ruled that penalty can be imposed on an assessee even if the return income is a loss. The amendment made by the Finance Act, 2002, which came into effect from April 1, 2003, in Explanation 4 to Section 271(1)(c)(iii) of the Income Tax Act could be applied retrospectively. A bench comprising Justice Arijit Pasayat, Justice P Sathasivam and Justice Aftab Alam said Explanation 4(a) to Section l271(i)(c) of the Act intended to levy the penalty not only in a case where after addition of concealed income a loss returned, after assessment becomes positive income but
also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or a minus figure. The court said that even during the period between April 1, 1976 to April 1, 2003 the position was that the penalty was leviable even in a case where addition of
concealed income reduces the returned loss. It said that when the word “income” is read to include loss it becomes crystal clear that even in a case where on account of addition of concealed income the returned loss stands reduced and even if the final assessed income is a loss, still penalty was leviable
prior to the period of April 1, 2003.
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The Mumbai Income-Tax Tribunal has held that in case of a refund claim that was returned by the authorities to the assessee with directions to submit additional information, the limitation period in relation to such a claim will be computed from the date on which the original claim was filed. In this
case, the assessee, a telecom service provider who was selling recharge coupons for pre-paid services to its distributors, filed a refund claim. The claim filed was returned by the revenue authorities after three months, directing the assessee to submit evidence. When the assessee resubmitted the claim providing the additional information, the department contended that the re-submitted application will be seen as a fresh refund claim and the relevant date of the claim would be the date of the re-submitted application. The tribunal held that the refund claim re-submitted by the assessee was to be treated as being in continuation of the original claim. Hence, the resubmitted application could not be treated as a fresh claim and there was therefore no question of barring it on the ground of limitation.
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The controversy over the ownership of stock options by nominee directors of financial institutions (FIs) may be over. The market regulator SEBI has said that nominee directors can own stock options if the FI which has nominated them permit them to do so, clarifying a hitherto grey area in the employees stock option plan.
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SEBI has amended the norms for portfolio management services (PMS), including asking portfolio managers to maintain an enhanced net worth of Rs. 2 crore from Rs. 50 lakh earlier and PMS to keep assets of their clients in different accounts. SEBI has also notified the SEBI (Stockbrokers and Sub-brokers) (amendment) regulations, 2008 to Include registration of trading and clearing members of
currency derivatives segment.
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Reduction in timelines for rights issue

In order to mitigate risks and to enable listed companies to raise funds from its shareholders in a
more time effective manner, SEBI has decided to reduce the timeline taken for rights issues to 43 days from 109 days currently. The timeline includes starting from the notice period required for calling a board meeting of the issuer to consider the rights issue up to the period stipulated for completion of allotment and commencement of listing and trading of the shares so issued.

Definition of “Qualified Institutional Buyers (QIBs)”

Presently, Foreign Institutional Investors (FIIs) registered with SEBI are included in the definition of QIBs. These FIIs invest in securities in the primary market, either on their account or on behalf of their sub-account(s), in terms of the SEBI (FII) Regulations, 1995. It has been decided to exclude
sub-accounts falling in the categories of “foreign corporate” and “foreign individual” from the definition of QIBs.

Eligibility for making Qualified Institutions Placement (QIP)

Presently, the eligibility criteria for listed companies desirous of making QIP include a condition
that the equity shares of the same class of such companies shall have been listed on a stock
exchange having nationwide terminals, for a period of at least one year as on the date of issuance of notice to shareholders for considering the QIP. It is noted that companies, which have been listed during the preceding one year pursuant to approved scheme(s) of merger/demerger/ arrangement entered into by such companies with companies which have been listed for more than one year in
such stock exchange(s). Such companies may take into account the listing history of the listed companies with which they have entered into the approved scheme(s) of merger / demerger/arrangement.

Pricing norms for QI Placement

In order to facilitate eligible listed companies to raise funds through QIP route, it has been decided to modify the pricing guidelines for QIP by bringing the issue price of the securities offered closer to their market price. The pricing norms for QIPs and for preferential allotment will now be based on
the last two weeks’ average price. Earlier, it was the last 6 months’ average price or the last 2 weeks, whichever was higher.

Lock-in on shares on exercise of warrants issued on preferential basis

Presently, as per the guidelines on preferential allotment, warrants issued on preferential basis are subject to lock-in for a period of one year or three years, as the case may be and lock-in on shares allotted on exercise of such warrants is reduced to the extent such warrants have already been locked-in. It has been decided to subject the shares so allotted pursuant to exercise of warrants to full lock-in period of one year or three years, as the case may be, from the date of allotment of such shares.

Eligibility of shares for promoters’ contribution and offer for sale-Restructuring

Presently, the SEBI (DIP) Guidelines provide that only those shares, which are held by shareholders for a period of at least one year at the time of filing of draft offer document with SEBI, are eligible (i) to be offered for sale and (ii) to be included for the purpose of promoters’ contribution (except in cases where the shares have been issued at the same issue price during the preceding one year). It has been decided to permit offer for sale and inclusion in the promoters’ contribution of those shares which have been acquired pursuant to a restructuring exercise approved by High Court(s), in lieu of business and invested capital which had been in existence for a period of more than one year prior to the restructuring exercise.

Filing of offer documents at SEBI Regional Offices

At present, draft offer documents of issue size up to Rs.20 crores can be filed by lead merchant bankers with such Regional Office of SEBI under the jurisdiction of which the registered office of the issuer company falls. It has been decided to increase this limit to Rs.50 crores.
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The Reserve Bank of India has revamped the norms for restructuring advances, including non-industrial credit. Now, the non industrial companies can also use the corporate debt restructuring mechanism (CDR). The new regulations harmonize the prudential norms across all debt restructuring mechanisms. “Since the principles underlying the restructuring of all advances are identical, the prudential regulations too need to be aligned in all cases.”
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Private sector managed provident funds and superannuation trusts can now have greater exposure in the stock markets. They can soon directly invest up to 15 per cent of their investible funds in share of
companies on which derivatives are available in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) This has been provided in the new investment pattern for non-government provident, superannuation and gratuity funds issued by the Finance Ministry.
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Bank customers who do not operate their accounts regularly will continue to earn interest rate
of 3.5% on savings bank accounts and on fixed deposits after the maturity period. “Interest on savings bank account should be credited on regular basis whether the accounts is operative or not. If
a fixed deposit matures and proceeds are unpaid, the amount left unclaimed with the bank will attract savings bank rate of interest. Currently, banks pay interest rate of 3.5% on savings bank deposits. RBI has also barred banks from charging any fee of activation of inoperative accounts.
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AD Category – I banks may make remittances for imports, where the import bills / documents have been received directly by the importer from the overseas supplier and the value of import bill does not exceed USD 300,000, subject to the following conditions :

  • Prevailing Foreign Trade Policy.
  • Bonafides of the transactions.
  • KYC / AML guidelines
  • Due diligence about the financial standing / status and track record of the importer customer.
  • It is customary in that trade to receive import documents directly from the overseas exporter.
  • In case the AD Category – I bank has suspicions about the genuineness of the transaction, it should be reported through the Suspicious Transaction Report (STR) to FIU_IND (Financial Intelligence Unit in India).
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It has been decided to allow AD Category - I banks, to regularize cases of dispatch of shipping
documents by the exporter direct to the consignee or his agent resident in the country of the final destination of goods, up to USD 1 million or its equivalent, per export shipment, subject to the following conditions:

  • The export proceeds have been realized in full.
  • The exporter is a regular customer of bank for a period of at least six months.
  • KYC / AML guidelines.
  • Bonafides of the transaction.
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The fluctuations in the foreign exchange market in the recent months have resulted into large foreign exchanges losses. The foreign exchange exposure is becoming a matter of concern.RBI has permitted forward contract, options, swap and similar other structures for hedging foreign exchange risk. Recently there have been serious complaints from the banks’ customers that banks have written options on their behalf without properly apprising them of the risk involved resulting into losses of several hundred crores to business community. Writing of forex options by the banks customers are prohibited by RBI. But banking industry took the liberty in view of certain loopholes in the language of RBI Circular permitting banks to offer cost reduction structures. This is required to be appropriately clarified and corrected by RBI on an urgent basis. A significant lesson has been learnt by financial experts that buying simple vanilla options is most advantageous. RBI and SEBI have recently permitted currency future to be traded on stock exchanges. This is an excellent idea; however, the currency future should be restricted only to persons having underlying currency risk for hedging and not for the purpose of speculation.

The foreign currency future dealings by speculators could be very dangerous and is against the spirit of RBI policy of permitting hedging in foreign currency on the basis of underlying or expected exposures only. The government of India may reconsider the matter in consultation with SEBI and RBI to ensure that large losses are not incurred by small uninformed investors in the currency futures
market. It may also be worthwhile to consider permitting vanilla options contract through transparent
mechanism of the stock exchanges, wherein the authorized dealer category-1 (Banks) may be permitted to write the option and the user of the banking system can buy the option. Risk management for banks also needs detailed regulatory advice.
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The Government of India, as it appears from the media report, is considering a mandatory approval by Foreign Investment Promotion Board (FIPB) / Secretariat of Industrial Approval (SIA) Govt. of India before any downstream investments are made by the Companies who are currently owned partly or fully by non-resident Companies or non- resident individuals.
As per the current policy investments in India by foreign companies and foreign nationals besides non-resident Indians are quite liberal and except a very small list of activities in which foreign investments are banned and some sectoral caps in certain specific industries / service sectors, the investment by foreign companies, foreign nationals and non-resident Indians are under automatic route. In only some specific circumstances the list being very small, permission of the Government of India is necessary. The proposed amendment is being brought in, in view of apprehended misuse of the automatic approval scheme. The proposal of the Government would create a big hurdle in operation of a large number of Indian Companies where there is a certain degree of foreign shareholding and almost all major or minor investments made by these Companies will require approval of the Government of India. This is against the liberalized policy and the Government should reconsider its thinking.

Government of India to prescribe that all the Companies having shareholding of foreign companies, foreigners and non resident Indians may disclose such shareholding in their financial statements and / or annual returns filed with the Registrar of Companies. Besides such a disclosure they should also enclose a certificate from the auditors of the Company that the downstream investments made by these Companies adhere to FEMA restrictions including sectoral caps and the fact that neither directly nor indirectly, the beneficial interest of foreigners and foreign companies have breached beyond sectoral limits. This Certificate from auditors can also confirm that no such investments have been made by such companies in the prohibited sectors including real estate, agriculture, SSI etc. The Reserve Bank of India may consider making it mandatory for all the Companies having foreign shareholding to file the aforesaid Certificate with RBI on an annual basis. The Department of Industrial Policy and Promotion, Ministry of Industries, Government of India may please consider an appropriate revision of Press Note No. 9 (1999 series).
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In continuation with the Circular No.F.1/5/SE/83 dated May 31, 1984 of Government of India, Ministry of Finance, Department of Economics Affairs, Stock Exchange Division, stock brokers/clearing members are directed to carry out complete internal audit on a half yearly basis by independent qualified Chartered Accountants. The scope of such audit shall cover, interalia, the existence, scope and efficiency of the internal control system, compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye Laws of the Exchanges, data security and insurance in respect of the operations of stock brokers/clearing members. The first such audit period should be from October 1, 2008 to March 31, 2009.
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The government has directed all commodity exchanges to divest foreign equity exceeding the
permitted ceiling of 49% by June 30, 2009. According to guidelines for foreign investment in commodity INSURANCE exchanges, a composite ceiling of 49% is allowed, comprising 23% under portfolio investment and 26% under FDI route. The direction by the Department of Industrial Policy and Promotion (DIPP) forms part of Press Note 2 of 2008.
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It has been decided, in consultation with the Government of India, to allow Registered Trusts and Societies which have set up hospital(s) in India to make investment in the same sector(s) in a Joint
Venture or Wholly Owned Subsidiary outside India, with the prior approval of the Reserve Bank. Trusts / Societies satisfying the eligibility criteria as prescribed in the Annex to the above mentioned circular may submit the application/s in Form ODI-Part I, through their AD Category - I bank/s to the
Reserve Bank for consideration. The other terms and conditions and reporting requirements listed in the above mentioned A.P. (Dir Series) Circular No. 53 dated June 27, 2008 remain unchanged.
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The finance ministry exempted from excise duty small-scale industries (SSI) that manufacture branded goods for large companies. The exemption shall be available for a turnover of goods not exceeding Rs. 90 lakh in the remaining part of the financial year. SSI units with clearances not exceeding Rs. 4 crore in 2007-08 would be eligible for the exemption.
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The Centre has pitched for a unified goods & services Tax (GST) model as opposed to the
position taken by the states. The empowered committee, which represents the states, had suggested separate goods and services taxes. The Centre, which is giving finishing touches to its response
to empowered committee’s report on GST, is understood to be in favour of the conventional model followed globally.
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In a significant ruling, the larger Bench of the Delhi Income-Tax has held that service tax liability
of the recipient of a taxable service who receives such service in India from a non- resident, commences from January 1, 2005 and not since August 16, 2002. The tribunal held that a definition clause cannot be read as a substantive provision creating a liability in a tax statute. As the taxable
services were only notified through Jan 1, 2005 notification, the recipient could be made liable to tax from that date alone.