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Wednesday, December 15, 2010
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IRDA GOES STRICT ON UNIVERSAL LIFE POLICIES

After unit-linked insurance plans, the Insurance Regulatory and Development Authority (IRDA) have
introduced stringent guidelines for universal life policies (ULIPs). The guidelines stipulated that VIPs
should provide only mortality cover and no other contingency. The policy should be for a minimum of five years. The sum assured should be at least ten times that of the annualized premium. On death, a benefit equal to the guaranteed sum assured plus the balance in the policy account will be provided. On maturity, a benefit equal to the balance in the policy account together with a terminal bonus, if any, will be paid to the policyholder.
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INSURERS CAN'T OUTSOURCE WORK; M&A NORMS SOON

IRDA came out with guidelines on outsourcing by all insurers, both in life and general, which will come into practice with immediate effect. Insurers will have to terminate all outsourcing - especially core activities such as investment, underwriting and policy servicing - to third-party companies. New guidelines for mergers and acquisitions among non-life insurance companies are expected soon with the Insurance Regulatory Development Authority (IRDA) initiating the process after receiving proposals for the same from two non-life Insurance Companies.
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SEBI TIGHTENS NORMS FOR LIQUID SCHEMES

The Securities and Exchange Board of India (SEBI) in an attempt to bring in more transparency in the manner liquid schemes operate, has directed fund houses not to deploy investor funds unless credited in the scheme account. The market regulator has also extended the daily cut-off time limit for investors to avail of the previous day's net asset value (NAV).
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BROKERS TO NOW PAY MORE TAX

Stock brokers will now have to pay more service tax. The Central Board of Excise & Customs (CBEC) has clarified that turnover charges, exchange transaction charges, dematerialization charge and regulator fees recovered by brokers from clients will be added to the brokerage amount while calculating the tax. The stamp duty and securities transaction tax would be kept out of the taxable amount.
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RTI COVER NSE PROBE REPORT

The inquiry reports of the NSE in the alleged defaults by a brokerage firm should be made public, the Central Information Commission has told the SEBI. The Chief Information Commissioner, Mr. A.N. Tiwari, said, If the averment of the respondents (SEBI) that all such inquiry reports should be withheld from disclosure as these might contain commercial and business related information of the broker or brokerage firm investigated by the stock exchange or SEBI is accepted, no wrongdoing of the brokers would ever be known to the investors- the very victims of the broker's wrongdoings.
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CENTRE NOT IN FAVOUR OF MNCs IN INDIA DELISTING THROUGH IDR EXCHANGE OFFER

The Government is not in favour of allowing foreign companies to delist their share through an exchange offer of Indian Depository Receipts (IDRs). IDRs allow foreign companies to raise funds through Indian equities markets. The finance ministry believes the IDR channel should laid foreign companies in raising resources locally rather than become a tool for delisting, an official said.

  • Indian Depository Shares

In IDR, MNC issues shares to a depository, which issues receipts to Indian investors. Helps MNC
raise funds in India & investors take exposure

  • Minimum public shareholding rule

The recent move to have minimum 25% public float has prompted many MNCs listed in India
to mull delisting via an IDR exchange offer
  • Regulator's stand
In August, SEBI took up the MNCs' idea of delisting via IDRs; matter discussed in Corporate
Affairs Ministry, Finance Ministry.
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INTERIM ORDER CANNOT BE INVOKED AFTER DISMISSAL OF PETITION

The SC last week dismissed the appeal of Nava Bharat Ferro Alloys Ltd. against Transmission
Corporation of Andhra Pradesh Ltd. and confirmed the demand of additional charges/surcharge
payable on delayed payment. The power-intensive company had challenged the demand of a higher
rate in the Andhra Pradesh high court. It passed certain interim orders in its favour. However, the
petition was ultimately dismissed, leading to the demand of the charges. The company disputed it
based on the interim relief. The SC ruled that a party who fails in the proceedings cannot benefit from the interim order issued during the pending of such proceedings.
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FIRMS FREE TO FIX DUTY HOURS

The management of an establishment has discretion in fixing the hours of duty of its employees, the SC stated last week while dismissing the appeal of the Transport & Dock Workers Union against the
judgment of the Bombay High Court in which it had upheld the enhancement of working hours of the
clerical recruits of Mumbai Port Trust. The new employees had to work one hour more. This was
challenged as discriminatory. However, the SC stated that fixing of hours of work, provided they do not violate any statutory provision or statutory rule, are really management functions and the court must exercise restraint and not ordinarily interfere with such management functions.
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SC ALLOWS PROSECUTION OF MOTOROLA IN INVESTMENT CASE

The Supreme Court has set aside the Bombay high court judgment and allowed the prosecution of a
criminal complaint filed by Iridium India Telecom Ltd. against Motorola Incorporated. According to the complaint, Motorola induced Iridium India and several others to invest in a project which turned out to be a technological disaster. They collectively invested $70 million for purchasing equity in a subsidiary company as well as spent a sum of about Rs. 150 crore in setting up a gateway at Delhi in Pune. The complaint stated that the representations made by Motorola proved to be fraudulent and deceitful.
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PFL NORMS FOR OVERSEAS WORKERS

India has tightened norms for the withdrawal of provident fund (PF) by overseas workers in the
country, prohibiting them from taking back this money until they were 58 years old or were incapacitated. However, analysts said theses norms had been tightened for those countries that didn't have social security agreements with India and the move may prompt them to go in for such pacts.
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RBI CAUTION ON DEPOSIT WITH UNAUTHORIZED NBFCs

The Reserve Bank of India (RBI) issued a cautionary note warning the public not to deposit money with unauthorized non-banking finance companies (NBFCs).The RBI has put up a list of NBFCs that
are permitted to accept deposit on its website. No NBFCs outside of this list can accept deposits from
public .Doing so is clearly fraudulent & has to be investigated by law enforcement in the normal course.
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CONSTITUTION BENCH QUASHES CESTAT EXCISE RULING

A five-judge Constitution bench of the Supreme Court in its unanimous judgment stated that the Thermax case was decided on the facts of that case and was not applicable in other case like the present one. The firm in this case, manufacturers of chewing tobacco products, claimed benefit as it maintained that their intermediate goods were captively consumed for manufacture of final goods. They argued that the court should consider the 'intended use' and 'substantial compliance' of requirements of Chapter X of the Central Excise Rules 1944. The court allowed the appeal of the excise authorities, rejecting the argument of the assessee firm stating that non-compliance of those conditions enumerated under various excise rules and non-furnishing of various statutory forms are fatal to the plea of substantial compliance and intended use.
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HC: GOVERNMENT CAN TAX RENT ON IMMOVABLE PROPERTY

The Punjab and Haryana High Court has upheld the Constitutional validity and retrospective levy of service tax on renting of immovable property. The ruling, in favour of the government, will protect over Rs. 1,000 crore of revenue the tax department was expecting from the service.
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EXCISE INTELLIGENCE WANTS 3TV COs TO PAY RS.325 CRORE SERVICE TAX

The directorate general central excise intelligence (DGCEI) has asked three electronic media companies to pay service tax worth Rs 325crore. DGCEI show-cause notice where issued on Oct 21 to Turner International India (TII), a Time Warner company which beams a banquet of channels like HBO, POGO, Cartoon Network CNN & WB , ESPN software India (ESI) & ZEE Turner Limited , a company jointly promoted by the promoter & ZEE Groups. The major issue against TII & ESI the Indian subsidiaries of foreign holding is over the companies procuring TV channels Programme distribution rights and selling advertising time slots on channels on behalf of their foreign parents. The programmes are broadcast by foreign broadcasters & signals is encrypted form are disseminated by them in electro magnetic waves by up linking to satellites. The encrypted signals on electro magnetic waves are then down linked, received and encrypted by the Indian subsidiary companies holding the distribution rights for India. The Tv channels received and encrypted by TII & ESI with the help of integrated receiver decoders commonly known as set top boxes. According to DGCEI receiving programmes by down linking of signals in INDIA by TII & ESI tantamount to import of broadcasting service & the money paid to their parent companies for import of tv channel signals is liable for service tax deduction under reverse charge mechanism as per the provisions of finance act 1994 & taxation of services (provided from services outside India & received in India) RULES, 2006. TII & ESI had not discharged their service tax liabilities towards the import of broadcasting services their by attracting DGCEI worth. TII has been asked to pay more than Rs 90 Crore & ESI Rs 225 Crore. TII was found evading service tax on several other issues including intellectual properties right service by undervaluing and wrongfully claiming exemption from service tax  on 98% value of services and paying service tax on only 2% value of services. It has also evaded service tax under the business auxiliary service category. ZEE turner limited was found to be engaged I undervaluation of business auxiliary service provided by it to various broadcasters while distributing their tv channel services. It was discovered that it collected certain amounts from broadcasters under the head
reimbursement of expenses and not including the amount of such reimbursement in its assessable value thereby evading service tax. Show-cause notice has also proposes to cover wrongly availed Cenvat credit of service tax from ZTL on services which were not input services for the company. Total service tax demand raised by DGCEI on ZTL is more than Rs 5 Crore. It subsequently cleared some Rs4crore by paying the amount to the service tax department. When contacted on ESPN Star Sports spokesperson said the company was studying the contents of the notice and would respond in due course. Executive VP(legal) of ZEE group MR A Mohan said, we will contest this legally so far as the status issue is concerned . If we have to pay more service tax that won't make a difference because will get Cenvat benefit.
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I-T OFFICIALS TO BE UNDER STRICT VIGILANCE SCANNER

Worried over reports alleged corruption, especially, in issuing refunds to taxpayers, the Income Tax
Department has brought its own officials under strict vigilance scanner and has issued instructions to the top brass to constantly monitor the process. The I-T vigilance wing has also decided to conduct surprise inspections to check the process of issuing refunds from both the department and the bankers side.
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TAXMAN WON'T RUSH TO COURT OVER PETTY SUMS

The Central Board of Excise and Customs (CBEC), the apex indirect tax body, has directed its officials that an appeal will not be filed in the appellate tribunal if the amount involved, including fine and penalty, is Rs. 1 Lakh and less. Similarly, appeals will not be filed in high courts if the disputed amount is Rs. 2 Lakh and less.
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MNCs NEED TO PASS 'BENEFIT TEST' FOR CLAIMING OVERSEAS EXPENSES

Multinational companies in the country could find it difficult to reduce their tax liability by claiming
expenses in the name of a service bought from their overseas associated companies. They will be required to pass a benefit test for making such claims as per arms length conditions. The test is to prove that the tax payer benefited from the service and the amount it paid to its group firm as an expense on the service was justified.

CLOSE WATCH

  • The benefit test has assumed great significance when it comes to transfer pricing issues.
  • The co should also be able to demonstrate that it derived some benefits when it paid that amount and thus comply with the benefit test.
  • Allowing illegitimate expenses by firms can also be seen as a way to avoid tax liability in India.
  • In a recent ruling, the Bangalore tax tribunal said expenses shown on account of mgmt services fee cannot be allowed as the company concerned Gem plus India Private- failed the benefit test.


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RBI EASES RULES FOR RRBs TO OPEN BRANCHES

The Reserve Bank of India (RBI) allowed Regional Rural Banks (RRBs) to open branches without its
permission in cities with population less than 50,000. However, such RRBs should meet certain regulatory provisions like capital adequacy ratio of at least 9 per cent. Besides, the RRB should have net profit in the last financial year, RBI said in a notification.
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INSTANT MOBILE PAYMENT SERVICE IS HERE

The National Payment Corporation of India is rolling out an instant inter-bank mobile payment service that will enable retail customers of seven banks to enjoy 24x7 funds transfer. As the IMPS architecture is envisaged, down the line. The mobile will prove handy. The State Bank of India, Bank of India, Union Bank of India, ICICI Bank, HDFC Bank, Axis Bank and YES Bank became the first set of banks to go live with the IMPS. While seven banks are in the process of going live with IMPS, 22 others are in the preliminary phase. To avail themselves of the mobile banking service, the customers need to register with their banks, which will issue them a unique seven digit mobile money identifier (MMID) and mobile banking personal identification number (MPIN). Irrespective of whether their mobile is low-end or high-end, customers can download and activate the mobile banking application. To initiate a mobile payment, all that a sender has to do is key in the beneficiary's mobile number, the beneficiary's MMID, the amount to be sent and the MPIN. The sender will get SMS confirmation for the money sent.
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CRISIL PUTS 12 MICROFIN FIRMS ON RATING WATCH

A quarter of Indian micro finance companies may fail after a clampdown last month in their biggest market pared debt payments and curtailed bank financing. As many as 60 to 70 of the 260 micro finance institutions are likely to collapse in coming months as banks halt lending to them to curb risks.
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BANKS MUST MATCH RISING GLOBAL INFLUENCE OF INDIA INC: SUBBARAO

The RBI chief said banks needed to increase their deposit rates and reduce lending rates to accelerate
the savings, investment rate and boost a double-digit growth. This means banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers-in other words, reduce their inter mediation costs, or in technical terminology, reduce the net interest margin (NIM).
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A Major Threat - Inclusive Economic NAXALISM Growth is Solution

The Naxalim is growing not only in Andhra Pradesh, Orissa, Manipur and West Bengal but also in Bihar, U.P. and Punjab. The challenge of Naxalism is more deeper and has to be addressed on a top priority even as compared to the problem of drug or terrorism. The impact of naxalism is deep and widespread among the youths and the landless farmers who are in needy besides tribal community.
India has grown economically very significantly and the pace of growth has taken momentum. The crores have been replaced by the bullion for businesses and service sector. The mine workers and the intelligentsia have also grown in its economic stature and is in a commending position now. The politicians, doctors, engineers, chartered accountants, scientists, lawyers, teachers, economists and all other professions have grown from strength to strength both economically as well as strengthening their roles in the society. On the other hand, the hand-workers, poor farmers, craftsmen, fitters, carpenters, plumbers, drivers, peons, labours and other artisans of the society who depend on the manual skill and labour for their livelihood have not got their rightful share in the growth the economy, business, income and wealth. The mine owners have become wealthy whereas the mine workers, and the people living around the mines have not gained adequate shares out of the same. It is important for all of us and specially the leadership of India, business leaders and professionals to plan and promote the economic affairs in a manner that the benefit of the economic growth is percolated down to the lowest run of the society. We need to ensure that every Indian should have a proper home, reasonable good employment, adequate food, nutrition, medical support and education.
The gap in the society should not be too wide. While on the other hand we all to work as capitalist society towards growth of business, industry, service sector and agriculture at the same time we need to ensure that the growth is shared in a reasonable proportion at all levels. We will not only kill the problem of Naxalism but India will also grow and prosper as world's most developed economy, with inclusive growth.
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CA PROGRAM - UPGRADING BENCHMARK

The CA profession is the most attractive profession these days which is apparent from the fact it is
attracting a very large number of students to its fold. The current number of students undergoing CA
education consist of

  • CA Final                                1.0 lakh
  • PCC (Intermediate)              1.0 lakh
  • IPCC (Intermediate)            1.0 lakh
  • CPT                                      3.5 lakh
        Total                                      6.5 lakh


The regulatory authorities, business world and public at large have great expectations from CA profession. The quality of CA profession depends on quality of CA education being imparted the CA students. The Institute of Chartered Accountants of India has taken a major initiative to upgrade the quality of CA education to meet the increasing expectation. Some of the steps include -

  • Significant up-gradation and updation of syllabus and study material for CA Intermediate (IPCC) as well as for CA Final;
  • The examination pattern has been made more practical oriented, case studies and practical questions are being included to ensure that only those who undergo their practical training seriously are only to pass the CA examination.
  • Very comprehensive practice manuals have been issued in all subjects at IPCC and CA Final level to cover practical questions.
  • Latest landmark judgments are being provided to the students in respect of direct tax laws.
  • General Management Communication Skill Course for 15 days is being significantly upgraded, with a view to offer the same in 2 lots of 15 days each.
  • A compulsory orientation program of 7 days have been introduced and upgraded to be undergone by all the students before joining training.
  • The Information Technology Training for 100 hours is being provided from 150 ICAI own centers before joining training.
Some more major initiatives taken by the Institute in this regard include introduction of live classes for students. ICAI, under the able leadership and guidance of Mr. Amarjit Chopra, President has taken a very bold initiative to launch Live Classes on behalf of the ICAI on a national basis. The vision of the Council is to initially provide classroom teaching in about 19 locations and to be expanded to more than 200 cities with about 1850 classrooms all across India to enable oral teaching to all the CA students. The Institute is proposing to utilize 2-way Video Conference Technology to provide a reach to each and every nuke and corner of the country by topmost leading faculties in the country including faculties from Board of Studies, faculties drawn from IIM, XLRI, Technical and Specialized experts from top leading institutions of the country including Shri Ram College of Commerce, St. Xavier College Calcutta and Sydnem, Mumbai. The practical knowledge will be shared by leading experts and top practitioners. This will enable a high level of education reaching all across the country. Initially the Live Classes will be provided on optional basis. CA Education is facing some very significant threat from Dummy Training. Training to CA students is the back bone of training. The students learn while on job, implementing academic knowledge to practical situations. Students who prefer dummy training never get that kind of exposure and resulting in significant impact on quality of CA profession. 

To address the menace of dummy training and its impact on the quality of CA students, examination
system has been toned up to ensure that CA students are not able to pass in the absence of real practical training. The latest examination papers in last couple of attempts are a clear indication in this regard. The transfer of articles trainee have been banned except in extraordinary genuine cases. The practicing chartered accountants need to come forward and ensure that the stigma of dummy training is completely killed. Let us take a pledge from all our colleagues that under any circumstances dummy training or partial training will not permitted by them. The entire future of CA profession is at stake. Let us all unitedly eradicate "Dummy". ICAI is considering further up-dation and up-gradation of the CA course including providing Indian CA education in various parts of the world. ICAI qualification is already recognized to mutual recognition agreement with England & Wales, Australia. Canada and Singapore negotiations are in advance stage. Let us work together to make ICAI a truly international topmost qualification in accounting and finance.
Monday, November 15, 2010
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FINMIN, RESERVE BANK OPPOSE ECB FOR LLPs

LIMITED Liability Partnerships in the country may not have access to cheap overseas funds,
which could discourage big firms from switching to this form of business that combines the features
of companies and partnerships. The finance ministry and the Reserve Bank of India (RBI) have
opposed changes in the external commercial borrowings (ECB) policy to allow overseas
borrowings by LLPs.
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AUTHORITIES NOT OBLIGED TO HAND OVER DOCUMENTS ON FEMA AGAINST FIRM

The Supreme Court stated that the adjudicating authorities under the Foreign Exchange
Management Act and Rules are not bound to furnish all documents in their possession to the
person to whom they issue show cause notice. Only those documents they rely on are required
to be shown to the person under notice.
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SLBM SCHEME


  • The SLB mechanism enables an investor to sell security in the cash market without actually owing them.
  • Investor need not square off their positions as the SLB platform enables borrowing via an approved intermediary
  • SLBM period extended up to 1 year
  • 100% upfront margin is called.
  • Stock borrowers must return dividends to lender on record date on T + basis.
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HYBRID SECURITY FDI COMPLIANCE NORMS

The Reserve Bank of India (RBI) has thrown a spanner in the works of a government proposal to liberalise the pricing guidelines of hybrid securities such as foreign direct investment (FDI)
compliant instruments. RBI fees that only shares, as well as fully and compulsorily convertible
debentures (CCDs) and preference shares (CCPs), should continue to be considered FDI compliant.
If any of these instruments have an option, under which the price is determined at a future date based
on performance, it ought not to be considered FDI compliant.
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DECLARE ALL CONSIGNMENT FOR TRANSIT TO CLAIM INSURANCE

When the insurance policy for transit of goods insists on declaration of 'each and every consignment', failure to comply with it would result in rejection of the claim by the insurer, the Supreme Court stated while dismissing the appeal case, Suraj Mal Ram Niwas Oil Mills vs United India Insurance Co. A huge consignment of oil tins from Jaipur to Agartala was damaged in a rail accident. The surveyors found that it contained more than that was declared. So the insurance company rejected the claim, arguing that it was against the term of the cover note. Though the mill was successful in the Rajasthan consumer commission, the national commission and the Supreme Court justified the stand of the insurance company and dismissed its appeal.
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15-MIN CALL-AUCTION WINDOW

NSE and BSE have introduced a special call auction window to enable market to determine opening rates of major securities in a systematic manner

  • Call-auction session for Sensex & Nifty shares to last 15 mins from 9-9.15 am
  • Orders for this session not executed directly, but will go to a common pool
  • Price for maximum orders matched to be the equilibrium price for each share.
  • Orders priced other than at equilibrium will be shifted to the normal segment.
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USE SIGNS MOU WITH ICAI FOR CURRENCY DERIVATIVES

In a move to impart knowledge about financial markets, United Stock Exchange (USE) has signed
on MoU with the Institute of Chartered Accountants of India (ICAI). As part of MoU, the exchange plans to educate members of ICAI by organizing seminars, workshops on financial markets and corporate governance.
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USE, NSE GET NOD FOR CURRENCY OPTIONS

The booming exchange-traded currency derivatives segment will soon see the introduction of options trading. The National Stock Exchange (NSE) and the United Stock Exchange (USE) have received the regulator's approval for launching options trading on the rupee-dollar spot rate. According to market participants, the move will boost the turnover of exchange-traded currency derivatives, where only futures trading is allowed at present. Options will provide an additional tool to hedge against currency volatility. Apart from NSE and USE, the MCX stock exchange (MCXSX) offers currency futures.
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CHAIRMAN ABSOLVED FROM CHARGE AGAINST COMPANY

In the case of MSEB vs Datar Switch gear Ltd. the Supreme Court has decided that though the ex-
chairman was in charge then, it is a settled proposition of law; one cannot draw a presumption that the chairman of a company is responsible for all acts committed by or on behalf of the company.
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CII- RECOMMENDATIONS ON THE COMPANIES BILL 2009


  • Rotation of audit firms should not be made mandatory.
  • Pyramid Structure  on the recommendation of the standing Committee of dismantling the pyramid structures of companies, CII is of the view that no such restrictions should be imposed. Allow flexibility of corporate planning, structuring and business operations as per CII.
  • CSR should be left to the board. Promote voluntary CSR backed by Government recognittion and honour.
  • Independent Directors Recommendations  The committee had suggested that independent directors should not be entitled to stock options in order to preserve their independence. CII is of the opinion that the board should be free to design remuneration structures, including stock options subject to shareholders' approval.
  • Tenure The tenure of independent directors should be left to the board and shareholders to decide. It may be fixed by companies in their Article of Association, said CII. The committee had recommended a six- year tenure for the independent directors with a lapse of three year in between two tenures with the same company.
  • Directors Responsibility  CII recommends that non-obstante clause should be incorporated in the bill to exclude non- executive directors, including independent directors from any criminal liability for the offences committed by the company. This provision should have overriding effect on all other laws. The committee had not suggested immunity from other laws for independent directors. The liability of independent directors would arise only when any act of omission or commission occurred with his knowledge and consent or connivance and where he had not acted diligently, the committee had said. CII recommends that devolution from liability should also be extended to non-executive directors.
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NEW SERVICE TAX PAYMENT SCHEME FOR LOTTERY TICKET DISTRIBUTORS AND PRIZE PAYOUT

Under the composition scheme, a distributor or lottery selling agent who is liable to pay service
tax, can opt to pay flat service tax of Rs.6000 on every Rs 10 lakh of aggregate face value of lottery
ticket printed by the organizing state for a draw. This rate will apply in those lottery schemes were
the guaranteed prize payout is more than 80 per cent, the Finance Ministry has said. For lottery
schemes where the guaranteed prize payout is less than 80 per cent, a distributor or selling agent will
have to pay service tax of Rs.9000 on every Rs 10 lakh of aggregate face value of lottery ticket
printed by the organizing state for a draw.
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SERVICE TAX ON LEASING SERVICES GETS SC NOD

The Supreme Court has held that banks and financial institutions, including non-banking financial companies (NBFCs), are liable to pay service tax on transactions of leasing and hire purchase of moveable goods. While bringing such service within the service tax net, a Bench headed by chief justice SH Kapadia has upheld the levy of service tax on hire purchase and leasing transactions, notwithstanding that the same transactions are chargeable to the sales tax (now VAT). The decision in effect has upheld the double taxation of the same transaction of hire purchase and leasing to both the service tax as well as the VAT.
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AFTER-SALES SERVICE CHARGES AND INSPECTION COST TO BE INCLUDED IN COST OF GOODS FOR EXCISE DUTY LEVY

TThe freebies such as extended warranty and free maintenance and service thrown in with cars and
consumer durables will now be included in the costs of goods and taxed appropriately, pushing their prices higher. The apex indirect taxes body, the Central Board for Excise and Customs, has said after-sales service and pre-delivery inspection charges are to be included in the assessable value, the value on which excise duty is levied.
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DOES THE CENTRAL BOARD OF DIRECT TAXES (CBDT) HAVE THE POWER UNDER SECTION 119(2)(B) TO CONDONE THE DELAY IN FILING RETURN OF INCOME?

The High Court held that the Board has the power to condone the delay in case of a return which
was filed late and where a claim for carry forward of losses was made. The delay was only one day
and the assessee had shown sufficient reason for the delay of one day in filing the return of income.
If the delay is not condoned, it would cause genuine hardship to the petitioner. Therefore, the
Court held that the delay of one day in filing of  the return was to be condoned.

Note - Section 119(2)(b) empowers the CBDT to authorise any income tax authority to admit an
application or claim for any exemption, deduction, refund or any other relief under the Act after the
expiry of the period specified under the Act, to avoid genuine hardship in any case or class of
cases. The claim for carry forward of loss in case of a loss return is relatable to a claim arising under
the category of any other relief available under the Act. Therefore, the CBDT has the power to
condone delay in filing of such loss return due to genuine reasons.
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CAN THE ASSESSING OFFICER REOPEN AN ASSESSMENT ON THE BASIS OF MERELY A CHANGE OF OPINION?

The power to reopen an assessment is conditional on the formation of a reason to believe that income
chargeable to tax has escaped assessment. The existence of tangible material is essential to safeguard against an arbitrary exercise of this power. In this case, the High Court observed that there was no tangible material before the Assessing Officer to hold that income had escaped assessment within the meaning of section 147 and the reasons recorded for reopening the assessment constituted a mere change of opinion. Therefore, there assessment was not valid.
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DOES THE APPELLATE TRIBUNAL HAVE THE POWER TO RECALL ITS OWN ORDER UNDER SECTION 254(2)?

In this case, the High Court observed that the power under section 254(2) is limited to rectification of a mistake apparent on record and therefore, the Tribunal must restrict itself within those parameters. Section 254(2) is not a carte blanche for the Tribunal to change its own view by substituting a view which it believes should have been taken in the first instance.
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CAPITAL-GOODS TRANSFER TO SEZ LIMIT CLARIFIED

The Government clarified the policy concerning the transfer of used capital goods into special
economic zones (SEZ) from outside of the enclaves, stating that a company can shift the equipment to set up units into the SEZs. However, the value of such second-hand goods should not exceed (20 per cent) to avail of the tax benefits.
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SOFTWARE TAXABLE AS ROYALTY

The Delhi Income-Tax Appellate Tribunal (ITAT) has held that payments received by Microsoft
Corporation from end user (in India) through distributors for sale of Microsoft software, are taxable as royalty. This would also be applicable for all the payments made before January 1, 1999, the ITAT has said. From January 1, 1999, the business model was changed and Microsoft granted exclusive licence to Grace mac Corporation of the US to manufacture the Microsoft software and distribute it in terms of the licence agreement. Even under the changed business model, the ITAT has now held that
payments for the software licensing should be treated as royalty for tax purposes. The Judgement
has also not fully accepted the supremacy of DTAT over Indian Tax Law.
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RBI MAY CHECK RUPEE EXCHANGE RATE RISE

Reserve Bank of India ruled out curbs on foreign portfolio investment into the equity market but said
the Central Bank may intervene in the forex market to check rupee appreciation that was hurting
exports. Finance minister Pranab Mukherjee said at the Annual Economic Editors' conference that
he was not thinking of putting any cap on FII (Foreign Institutional Investment) inflows. SEBI has also confirmed of having no plans to curb FII inflow.
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ICRA LAUNCHES EQUITY RESEARCH SERVICES

Credit Rating Agency (ICRA) launched its equity research service, through its wholly-owned
subsidiary, ICRA Online. The assessments by the agency will not specify any target price for the
shares evaluated, but will look into two key factors - Fundamental earning quality or fundamental
grade and relative valuation or valuation grade. The fundamental grades are on a five-point scale,
with 5 being the highest grade and one the lowest.
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MFIs TO INCREASE LOAN TENURE UP TO 100 WEEKS

Micro finance Institutions (MFIs) have agreed to restructure loans from 50 weeks to 75 or even 100
weeks for those who find it difficult to repay the same, according to Micro finance Institutions'
Network (MFIN) president, and founder of Basix, Vijay Mahajan. The interest rates, however, would
be only for 50 weeks. The five members of MFIN- who account for 60 per cent of all loans disbursed
have agreed to restructure the loans. These members are SKS, Spandana, Basix, Share and Trident. More members are expected to follow suit.
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IMF PROJECT INDIA'S GROWTH AT 9.7 % IN 2010

The International Monetary Fund (IMF) raised India's growth forecast for 2010, citing robust
industrial output and strong macro-economic indicators, but warned that global economical recovery remained fragile. Indian economy will expand 9.7% this year, up from July forecast of 9.4%, IMF said in its World Economic Outlook Report. Asia's third largest economy is projected to slow down to 8.4% in 2011.
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CII OPPOSE NBFC PREFERENCE FOR BANK LICENCE

The Confederation of Indian Industry (CII) told the Reserve Bank of India that it did not favour
automatic conversion of non-banking finance companies (NBFCs) into banks. The industry body sought minimum capital requirement of Rs. 1,000 crore for setting up a bank. NBFCs, whether part of an industrial group or not, (should) be treated on par with other applicants and allowed to promote a bank with fresh capital. NBFCs are complementary financial institutions to banks, typically focusing on niches that are under served and neglected by the normal banking channel.
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SEBI WANTS MONTHLY INFO FOR SECURITIZED PAPER LISTING

LENDERS who sell their loans through the securitization route will now have to make monthly disclosures to stock exchange if they wish to list their securitized paper. SEBI announced a standard listing agreement with continuous disclosure requirements for securitized instruments. Securitization refers to the process where an entity gets money upfront by converting future cash inflows into marketable securities. The process enables the lenders to transfer their loan assets to a special purpose vehicle which will make regular payments to investors who put money upfront. Besides loan repayment, any form of receivables can be securitized. Instances of securitization in the past include toll collection and royalty payment due to artists. In India bulk of securitization deals relate to either mortgaged- backed securities or asset-backed securities.
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CORRUPTION UNABATED...

In the recent months several corruption oriented financial scams have come to surface. Serious
allegations and counter-allegations have been raised against topmost politicians and bureaucrats of the country. Our Prime Minister Dr. Man Mohan Singh is known for his honesty and the time has come for him to stand up and address the issue of corruption aggressively by bringing out systematic changes in the working and operations of the Government in such a manner that the corruption cannot breed. It is important to bring complete transparency, honesty and dedication at the highest level of the politicians as well as bureaucracy to enable India to grow in a sustained manner. The Government of India has set up various inquiry committees; CBI has been mandated investigation
besides Public Accounts Committee has been advised to review the CAG report matter. The UPA
government is clearly in a defensive mood. It is important that the topmost leadership of UPA stand
together and eradicate corrupt politicians from their cadres. Also the opposition led by BJP should fully support all such initiative and may provide political support to the Government on such crucial and decisive actions needed. The government has to play its cards in a transparent and strategic manner.

The real test of Indian political system and democracy is ahead of us. In case the government
fails to address this issue effectively, the working of parliament may get derailed and the economy
of the country will unnecessary suffer.

The profession of Chartered Accountants is highly qualified and experienced to address this menace
and through the columns of this journal we hereby offer services of profession of chartered accountants to the Government of India as well as to the State Government to design and develop
operating procedures, operating systems, controls and guidelines in such a transparent manner that
the likelihood of corrupt practices can be minimized substantially. It will also be important to have a proper mandatory double entry accounting system to be implemented in various government departments including a detailed methodology for accounting of fixed assets and other resources. The profession of Chartered Accountants will be glad to design, develop and implement most sophisticated, transparent and simple internal control system so that the menace of corruption can be completely eradicated.

It is important to provide for 100% detailed audit of all government expenditure including
government department, autonomous institutions and other bodies created by an Act
of Parliament or are promoted by the Government.

We are here to support our great nation in the war against corruption. Dr. Manmohan Singh and
other honest politicians and bureaucrats can fully rely on the team of independent chartered
accountants to eradicate corruption from the root of the Indian Economic System.
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INDIA MOVING TO GLOBAL CENTRE STAGE : ROLE OF CHARTERED ACCOUNTANTS

India is poised to achieve a double digit growth of 10% plus in the year 2011 and is expected to touch
the growth rate of 9% to 9.5% in the year 2010. This is a great news in the backdrop of limping growth of the US and European economy in the range of 2% to 3%. Other developed economies are also growing between 1% to 4%. China is also expected to grow between 9.5% to 11%. It is also important to note that most of the developed economies have large negative balance of trade during last 2 years and the United States of America has requested the G-20 nations to allow more freedom in the exchange rates to adjust according to economic reality and not to artificially manage the same.
India is moving towards the centre stage of the world economy. The dream of every Indian to shift the world economic market to India may become a reality very soon. The American Financial Market as well as the European Financial Market are having much lower level of activity. Singapore, Hong Kong and Mumbai can provide a larger supplementary strong modern sophisticated market to the world to channelized investment and financial resources. The CA community in India is preparing itself for new challenges and opportunities which are arising from the economic development. The profession of chartered accountants will need to play a very important role in designing, development and implement of a rugged market infrastructure and regulatory mechanism which is more open,
transparent and liberal. Government need to consider limited capital account convertibility and
provide for a free international market in India. The proposals of the Direct Taxes Code are to be
reconsidered with a view to provide for certain special economic zones, where International Financial Market may be established with a complete freedom for currency inflow and outflow. The financial market regulatory mechanism has to be upgraded to international levels with a developmental mindset rather than control.
Friday, October 15, 2010
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INSURANCE IPOS LIKELY BEFORE MARCH' 11

According to leading rating agency CARE, Life insurance companies instead of general insurers would hit the capital market earlier and the market would witness a number of insurance IPOs before March 31 next. CARE, the agency which grades IPO based on companies' fundamental, said
insurance IPOs would do better than expected as the sector has a tremendous potential though it went through a bad phase during the SEBI-IRDA tussle over the sale of unit linked insurance plans.
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IRDA SUPPORTS EQUAL STAKES FOR PARTNERS IN INSURANCE VENTURES AFTER PUBLIC FLOAT

Insurance Regulatory Development Authority (IRDA) would prefer equal stakes for both local and foreign partners once life insurers went public. The IRDA chief indicated that the norms for initial public offering (IPO) would be framed in such a manner that after the IPO, both partners would have to dilute their stakes, ensuring that a foreign player wouldn't end up with a majority stake in a joint venture, in violation of the law.
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GOVT CLEARS DRAFT BILL TO GIVE FMC MORE TEETH

The Union Cabinet approved long-pending amendments to the Forward Contracts (Regulation) Act. This is a prelude to seeking parliamentary approval to make the Forward Markets Commission (FMC) an independent regulator and allow the launch of options in the commodity market, among a host of other changes. In addition, the government proposes to enhance the powers of FMC. The power would be akin to those of the Securities and Exchange Board of India (SEBI).
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SEBI DEBARS 197 FIIS ON NON- COMPLIANCE GROUNDS

Stock market regulator SEBI debarred 197 FIIs and 342 sub accounts handled by FIIs from taking
fresh position in capital markets until they comply with the SEBI directive of providing requisite
declarations and the undertaking about their structure. Failure to comply by September 30, 2010
prompted the regulator to debar these entities.
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JUDGE REFUSES TO DISMISS AIG CLASS-ACTION SUIT

A federal judge refused to dismiss a class-action lawsuit accusing American International Group of
misleading investors about its exposure to subprime mortgages, which led to a liquidity crisis
and $182.3 billion of fedral bailouts. US District Judge Laura Taylor Swain said the plaintiffs
alleged facts "giving rise to a strong inference of fraudulent intent" in how AIG communicated
publicly about the risks in its portfolio of credit default swaps. AIG did not immediately return a
call seeking a comment.
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HC SEAL ON "RIGHT OF FIRST REFUSAL" TO BENEFIT PES

A recent judgment by a divisional bench of the Bombay High Court, up-holding the validity of
agreement like 'right of first refusal' between promoters of unlisted firms and strategic investor,
has come as a big relief for both companies and private equity funds which invest in these firms.
The court ruled that such arrangements do not violate Section 111A of the Companies Act, which holds that share and debenture of companies must be freely transferable.
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RBI WARNS BANKS ON INVESTING IN ZERO COUPON BONDS

The Reserve Bank of India has told banks to put 'conservative limits' on their investments in zero
coupon bonds, including those by non-bank finance companies (NBFCs). Banks should invest
in zero coupon bonds only if the issuer builds up a sinking fund for the accrued interests and invests
in liquid investments or securities such as government bonds.
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PRUDENTIAL NORMS FOR OFF- BALANCE SHEET EXPOSURES OF BANKS - BILATERAL NETTING OF COUNTERPARTY CREDIT EXPOSURES

Since the legal position regarding bilateral netting is not unambiguously clear, it has been decided
that bilateral netting of mark-to-market (MTM) values rising on the account of such derivative
contracts cannot be permitted. Accordingly, banks should count their gross positive MTM value of
such contracts for the purpose of capital adequacy as well as for exposure norms.
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FINMIN IN A FIX OVER SERVICE TAX RULES

The finance ministry is in a fix over the proposed implementation of point of taxation rules for service tax from October 1 this year with the industry resisting transition to the accrual basis
for taxation of services. Simply put under the accrual based method, the tax will be considered
"paid" when the invoice is made, irrespective of whether or not it is actually paid. This means that
once the invoice is issued, the service provider will have to account for the tax even if he has not
received the amount.
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EXCISE RELIEF FOR UNITS SUPPLYING GOODS TO EXPORTERS

The penultimate sale before export will be exempt from central sales tax if it is "inextricably"
connected with the export of goods, a Constitution bench of the SC ruled. This judgment in, State of
Karnataka vs Azad Coach Builders Ltd, will benefit ancillary industries catering to exporters.
In this case, Azad Coach Builders was requested to build bus bodies by the exporter, Tata
Engineering Locomotive Co, in accordance with the specifications provided by the foreign buyer,
Lanka Ashok Leyland Ltd, Colombo. Azad built bodies on the chassis made by Telco. It claimed
exemption from sales tax as it was a penultimate operation exempted from duty. The revenue
authorities rejected the claim.
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SC: PENALTY ONLY IN CASE OF FALSE INTENTION

In a breather to the assesses, the Supreme Court has ruled that revenue department cannot impose
penalty under provisions of the Central Sales Tax Act for furnishing incorrect representation without
proving the intention (mens rea) for false representation. The penalty in tax matters is to levied strictly in accordance with the intention of the statutes, said the apex court over-ruling an Allahabad High Court order. The bench is of the opinion that a finding of mens rea is a condition precedent for levying penalty under section 10(b) read with section 10A of the Central Sales Tax Act, 1956.
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SC: GOVT CAN IMPOSE DUTY ON ENGG DESIGN CD

THE SUPREME COURT has ruled that the revenue department can impose appropriate duty
on the import of CD ROMs containing image of drawing and design of engineering goods. The
assessees cannot claim clearance of such goods at zero duty, said the apex court. According to the
bench, such engineering drawings or design data in CD cannot be placed in the category of the term
software.
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SC REVERSES HC RULING ON STOCK EXCHANGE CARD

The Supreme Court reversed a ruling of the Bombay High Court, which had held that the stock
exchange card is not an 'intangible asset' eligible for depreciation under Section 32 of the Income-Tax Act. In the appeal against the High Court judgment, the Supreme Court bench, headed by the Chief Justice S H Kapadia, ruled that a stock exchange card is a "licence" and eligible for depreciation under Section 32(1)(ii).
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TAXMAN CANNOT IMPOUND PASSPORT

In the Avinash Bhosale vs UOI (2010 322 ITR 381) case, which came up before the Bombay
High Court, it was held that a passport cannot be impounded under Section 131(3) of the I-T Act
which confers power on the Income-Tax (I-T) authorities to seize and retain in its custody any
books of accounts or other documents. According to the court, the term 'document' does not include
'passport'.
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BANKS' WILFUL-DEFAULTERS LIST UNDER SC SCRUTINY

The practice of RBI allowing banks to publish the names of wil ful defaulters has come under the
Supreme Court's scrutiny for its alleged circumvention of the judicial process and legislative supervision. The petitioner contended that passing such judgments on the character of a person pre-eminently falls within the domain of the legislature as it involves one's fundamental right to good reputation and challenged RBI's giving such powers to itself. In 2004, RBI authorized CIBIL to publish a list of defaulters of Rs 1 crore and above and also give out details of wil ful defaulters of Rs. 25 lakh and above against whom suits have been filed. The measure that followed the 2002 scheme that defined 'wilful defaulters' and terms like 'diversion of funds' and 'siphoning of funds'. In July this year, RBI issued a master circular combining all its instructions and directions in this regard, with a view to making available credit information pertaining to wilful defaulters to banks and blocking further bank finance to these firms.
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LOANS SET TO PINCH MORE AS RBI HIKES REPO RATE 25 BPS

For the fifth time this year, the central bank raised the repo rate- the rate at which it lends to bank- by
25 basis points to 6% and the reverse repo rate- at which it absorbs funds from bank- by 50 basis
points to 5%, prompting lenders to review the rates they charge both retail and corporate customers.
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PARTICIPATION IN CURRENCY OPTIONS

It has been decided that NBFCs may participate in the designated currency options exchanges
recognized by SEBI as clients, subject to RBI (Foreign Exchange Department) guidelines in the
matter only for the purpose of hedging their underlying forex exposures. Appropriate disclosures may be made regarding transactions undertaken in the Balance sheet.
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ITEMS EXCLUDED FROM CAPITAL MARKET EXPOSURE

It has been decided to include the National Payments Corporation of India(NPCI) and United
Stock Exchange of India Ltd. (USEIL) as part of institutions forming crucial financial infrastructure.
Accordingly, banks' investments in NPCI and USEIL will also be excluded from the aggregate
Capital Market Exposure ceiling of 40 percent of net worth and direct investment ceiling of 20
percent of net worth, till they are listed. After listing, the exposure in excess of the original
investment (i.e. prior to listing) would form part of capital market Exposure.
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FIIS GET TO INVEST $10 BILLION MORE IN DEBT MARKET

The government permitted FIIs to put in an additional $10 billion in corporate and government papers. The move to raise the investment limit for FIIs will deepen the domestic debt market, helping infrastructure companies. The marginal cut in government's market borrowing by Rs 10,000 crore will help the domestic private sector to raise capital at competitive rates and reduce the fiscal deficit
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AUDITORS AND COMPANIES BILL - AN ANALYSIS

The Companies Bill 2009 as amended by the 21st Report of Standing Committee on Finance, Parliament of India proposes to bring out several major changes impacting the working of corporate sector, accounts, and audit besides corporate administration, fines, penalties and prosecutions.
There are number of provisions proposing important changes in the field of auditing. The following paragraph proposes to outline various changes and their impact on the auditing profession as well as the corporate sector :

Rotation of Auditors

The bill proposes to introduce mandatory rotation of auditors in case of all Companies including small private limited companies, closely held public limited companies as well as listed companies. The bill proposes mandatory rotation of audit firms after every 5 years and mandatory rotation of
audit partners after every 3 years. The same audit partners/ proprietor cannot be reappointed for a period of 3 years. Rotation is proposed, with a view to achieve independence of auditors and to make audit more effective. This noble objective will not be achieved by the proposed changes.
There are no convincing reasons to mandatory rotate auditors in case of Companies. There is no need to extend the concept of rotation of auditors to all 8 lakh Companies. The rotation by itself will not improve the independence of auditors. This decision should not be mandated and may be left to corporate democracy.

Joint Auditor

It may be more appropriate to consider appointment of joint auditors in case of all large Public Limited Listed Companies as well as Companies in which public is substantially interested. The appointment of joint auditors should also be left to the shareholders. The appointment of one of the joint auditors can be made by the shareholders who are not directly or indirectly engaged into the day-to-day management of the company. The work among joint auditors can rotate.

Auditors - Other Services Prohibition

The Companies Bill proposes to bar the auditors of companies from providing non audit services to their audit clients. This prohibition extent even to small and mid size companies is completely unwarranted. A complete bar on auditors to provide other services is not relevant for independence of auditors. The non audit services may be allowed to be provided by the auditors including tax audit,
special statutory compliance and auditors' certificate as well as tax representation subject to approval by the audit committee. The code of ethics in this regard and specific prohibition to provide non audit services like accounting, internal audit and others may be left to ICAI based on internationally acceptable Code of Ethics as promulgated by International Federation of Accountants from time to
time.

Auditors of Subsidiary Companies

The Standing Committee of Parliament proposed that auditors of holding companies should not be auditing the accounts of subsidiary companies. This provision has been proposed on the basis of completely unacceptable logic where some miscreants have wrongly pleaded before the Parliamentary Committee that the auditors of holding companies do not undertake audit of subsidiary
companies carefully. This is completely without any basis. In fact in terms of mandatory auditing standards which are acceptable even internationally the auditors of holding companies would be required to not only vet the accounting policies of subsidiary companies but is also required to exercise necessary due diligence before audit undertaken by separate auditors of subsidiary companies is accepted for the purpose of consolidation.

Panel of Auditors

The Companies Bill 2009 proposes to prepare a Panel of Auditors for the purpose of appointment of auditors of the companies including small and mid size companies. The purpose of such panel and criteria of categorization of panel have not been provided for in the bill. The proposal to appoint auditors by Registrar of Companies as suggested by some people and as recorded by the Parliamentary Committee is completely non acceptable.  Any proposal to withdraw rights of shareholders to appoint auditors even in case of small , mid size companies will have far-reaching implications and may bring forth corrupt and malpractices.

Auditors' Independence

The Companies Bill 2009 has miserably failed to provide necessary checks and balances to ensure independence of auditors. It is important that the removal of auditors as well as retirement of auditors before a specific period is approved at least by 75% of the total strength of votes (and not alone by those present and voting).

That the Standing Committee has made a very abnormal suggestion, according to which it would be mandatory for the auditors to file the reasons for their resignation or removal. In case of failure to file such reasons a minimum penalty of Rs. 50,000 extendable to a penalty of Rs. 5 lakh is proposed.
It may be necessary to shift the responsibility to the companies concerned to file reasons for resignation, removal or retirement of auditors, including the comments of the retiring auditors, with the Registrar of Companies for public knowledge. Punishment of auditors for non-filing reasons for their own removal is criminal.

Auditors' Disqualification

The Provisions of Companies Bill 2009 has proposed to restrict shareholding beyond a prescribed percentage by the Auditors and their relatives. In principle this is a welcome move. However extending the list of relatives to 34 distant categories makes the provision completely illogical and unsustainable. This should be restricted only to dependant relatives. The distant relatives may not
inform the auditors at the time of acquisition of shares and some distant relatives having bad intention may even purposefully acquire shares to displace the auditors.

Auditors Remuneration

The proposal to develop benchmark for auditors remuneration is a positive move, provided it takes into account ICAI recommended scale of fee while determining the benchmark. It would be important to provide for the quantum of work and time spent to be considered as important criteria while determining auditors' remuneration benchmark. This benchmark may be used for the purpose of minimum auditors' remuneration. The final remuneration payable by the company may be left
to the shareholders democracy. The remuneration of auditors should not be delegated to the Board or to the Audit Committee and the proposal to include the remuneration and the basis of remuneration in the AGM notice is a welcome move. The management / audit committee can always allow variation of auditors' remuneration, subject to its approval by shareholders in the next General Body Meeting.

Auditors' Dues

The proposed mandatory dues prescribed for auditors include mandatory confirmation of balances of all loans, advances, debtors and liabilities above Rs. 5 lakh. The limit of Rs. 5 lakh cannot be applied across the board and even for very large companies. This limit may be decided on the basis of a percentage of net worth or similar other criteria. The delegation of this responsibility on the auditors may not be appropriate. The balance confirmation from the respective parties should be sent by the
management to the parties for direct submission to auditors, in terms of auditing standards. Financial Statements - Compliance with Auditing Standards
It was enough to prescribe that the financial statements was prepared in accordance with the mandatory accounting standards. It is difficult to appreciate as to how the financial statements can comply with auditing standards. In fact the Companies Act has no jurisdiction on the auditing standards or their applicability. The auditing standards should be left to be decided by ICAI based on internationally best practices and any bureaucratic or political interference in technical matters
will vitiate the application of auditing standards. In the present constitutional framework of Indian
democracy the political parties as well as bureaucratic cannot be given a liberty to play with professional and technical matter. This is a very dangerous direction and may tomorrow result into government interference as to how a bypass operation should be done or how medicine is given. The government may tomorrow start designing and prescribing architectural design, medical treatment
and even legal presentation/opinions.

Auditors' Punishment

The Companies Bill 2009 proposes to impose severe fine and penalties including criminal prosecution and imprisonment for auditors even for technical or other non-compliance. The proposal to include prosecution and punishment of firms has to be restricted to fine, penalty and disgorgement in case where conspiracy and abatement of firm is proved sever action could be taken if they have
fraudulently acted. The principle adopted in the LLP Act should actually be adopted and the punishment and prosecution should be restricted only to those who are actually guilty. It is completely inappropriate to extend the scope of criminal prosecution to the entire firm. The fault committed by one of the audit partners or may be an audit team cannot be the basis of prosecution of the tax partner, consulting partner or even to audit partner who have no direct or indirect role in the concerned audit. In a large number of cases the other partners might be working from different
geographical location and to involve everybody into prosecution is completely uncalled for.
In case a doctor is grossly negligent in undertaking an operation, this should not entitle a democratic government to close down the hospital and its branches all across the country. This is nothing but "va/sj uxjh pkSiV jktk" How can we permit closure of entire firm because of fault of a handful of individuals? We fully support strict punishment to all those auditors who are party to fraud (which will happen only in very exceptional circumstances) but the Chartered Accountants community cannot tolerate such a great injustice in the name of transparency, corporate governance and public
interest.

No arrest before Conviction

It is completely improper of the government and its administrative and judicial machinery to arrest
professionals like auditors based on allegation. Auditors should be arrested only on conviction and when the guilt is proved.

Class Action Suit

The government proposed to bring in a legislation thereby empowering shareholders and other stake holders to file Class Action Suit against auditors. These provisions are proposed to be inbuilt in a chapter dealing with oppression and mismanagement and will result into unnecessary litigation against auditors by disputing group of shareholders. The auditors liability towards shareholders and others who rely on the financial statement signed by the auditors is definitely understood and appreciated but providing a mechanism of Class Action Suit will only promote a litigative society on the lines of America and will bring pendency of civil and criminal suits to a very large level.
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COMPANIES BILL 2009- A DRACONIAN LAW

The Companies Bill 2009 read with 21st standing committee of Finance of Parliament on the Companies Bill, has miserably failed to achieve the prime objective of redrafting of the Companies Act:

  • To simplify the law
  • To reduce unnecessary procedure
  • To improve corporate culture and
  • Voluntary corporate Governance
  • Investors protection mechanism similar to consumer courts.

The bill as proposed will discourage corporation and will encourage inspector raj and corruption. The bill envisages very severe penalties and prosecution even for small technical delays and defaults having no impact on the public interest. The government is also proposing to interfere into the independence of private corporate sector.

Smaller companies neglected

The government has also failed to provide separate legal requirements and procedures for 1 person companies, small companies and unlisted mid size companies. Most of the procedures and compliance's for larger companies have been made applicable even for smaller and tiny companies. The bill proposes to levy heavy fines and imprisonment in 26 cases and a large number of such defaults are of non-serious and are of routine nature. This will only breed corruption. The imprisonment should be restricted only to the cases of fraud, misfeasance and similar default only. In case of technical delays and defaults only additional filing fee can be prescribed.

Procedures and compliance's increased

The corporate sector in India has been working reasonably effectively and except very few exceptional cases, there is no large scale failure of corporate governance or frauds committed by the corporate sector. The exceptional cases, actually relates to human greed, which cannot be addressed by the proposed provisions and would require a basic structural change to correct the cause of such
failure, rather than providing for severe detailed and unnecessary regulation, which may impact the growth of the corporate sector itself.

Accounting Standards

The government proposed to continue National Advisory Committee on accounting standards (NACAS). This committee was constituted through Companies Amendment Act 1999. NACAS has not been able to contribute very effectively and has brought out only cosmetic changes to the accounting standards framed and passed by the Institute of Chartered Accountants of India.
Due to time undertaken by NACAS the implementation of mandatory accounting standard got substantially delayed and it took about l0 years to bring out Companies Accounting Standard Rules, 2009 although most of the accounting standards were already notified and prescribed by the Institute of Chartered Accountants of India. The accounting standards being implemented in India are based on international accounting standards as well as international financial reporting standards. The
government need not interfere into the technical process of framing of accounting standards and their prescription and it is important to leave it to the experts i.e. to the profession of Chartered Accountants. The bureaucracy or the polity need to concentrate on clean, efficient and effective government, rather than getting into the nuts and bolts how the businesses are managed. Medical, legal, architecture, accounting are specialised professional stream and all such matters need to be left to the expert professionals.

Auditing Standards

The proposal of the government to also commence framing and prescription of auditing standards is another major lope sided move and is a result of thinking whereby the government bureaucracy always lure to start exercising power and duty of specialized profession. The Institute of Chartered Accountants has implemented international level auditing standards in India and any move on the
part of government to interfere in framing of auditing standards will only reduce the quality of audit. It may be more appropriate that the auditing standards are recognized in the companies' bill and the power to prescribe auditing standards can be delegated to ICAI. The government needs to consider withdrawing the Companies Bill 2009. It may be important to set up a specialized committed of experts to review the existing Companies Act, 1956, with a view to analyze specific areas where amendments may be needed to simplify the existing Companies Act and to bring out specific initiative to improve corporate governance, reduce procedures and compliance's and concentrate prosecutions and penalties only on grave misconduct or fraud having impact on public interest in general. The Companies Bill 2009, as amended by the 21st report of the Standing Committee on finance of Parliament, will not be able to achieve any of the objectives. The Companies Bill is neither based on Naresh Chandra Committee Report nor based on JJ Irani Committed Report but has actually mixed up the entire thinking process and lost the corporate culture and its independence. There are number of areas in which fresh suggestions have been brought out by the Standing Committee on Finance of Parliament of India. More than 500 changes have been agreed between the Government and the committee. The amendments proposed now have not been debated by the corporate sector and the professionals. Even the Parliamentary Committee did not have a chance to consider response of corporate sector and professionals on most of the new amendments. In view of this, either the entire report or the Companies Bill can be again referred to a Select Committee of Parliament or the government can redraft the Companies Bill and present the same as a final discussion paper before it is framed into a new Companies Act. The best alternative would be to seek necessary amendments in the current Companies Act, 1956, in a phased manner, so that all the proposed changes are adequately understood and debated.
The Companies Bill 2009 need to be withdrawn from the Parliament.


Wednesday, September 15, 2010
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SC REFUSES TO DIRECT PSBS TO RECOVER NPAs

While disposing of a Public Interest Litigation (PIL), a Bench headed by Justice J M Panchal and AK Patnaik hoped that the Centre would make the Serious Fraud Investigation Office (SFIO), set up by the government under the department of company affairs, an independent agency to deal with the problem of investigation and prosecution of serious and complex frauds.
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COURT CANNOT ORDER PAYMENT OF INTEREST AGAINST THE CONTRACT - SC

If an arbitration agreement says that no interest would be payable for an award amount from the date when the cause of action arose and the date of the award ,SC court decided in the case, Sree Kamatchi Amman Construction vs Divisional Railways Manager . In this case the contract stated that no interest would be payable on this clause, the arbitral tribunal refused to order interest from the date of the cause of action to the date of award. This was upheld by the madras high court. The Supreme Court dismissed the appeal of the contractor.
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CONCEALING FACTS BEFORE ARBITRATOR IS FRAUD - ANDHRA PRADESH HC

The Supreme Court stated that concealment of facts from an arbitrator is an act of fraud and new facts which have a bearing on the award should be allowed to be brought before him. The court stated so while allowing the appeal of US-based Venture Global Engineering against the ruling of the Andhra Pradesh high court in its dispute with Satyam Computer Services. The high court had ruled that Satyam founder Ramalinga Raju's admission of fraud could not be used three years after the international award in a dispute between the parties. According to the Supreme Court, if concealed facts, disclosed after passing of the award have a causative link with the facts inducing the award,
such facts are relevant in a setting aside proceeding and the award may be set aside as affected or induced by fraud.
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NEW LAW TO REGULATE FOREIGN CONTRIBUTIONS-FCRA

Parliament enacted a new law to enforce stricter regulations for foreign contributions in form of gifts,
funds and other forms to individuals and social organizations in the wake of changed internal security
environment and large fund flow. Parliament's approval of the foreign contribution (Regulation)Bill,
2010 came against the backdrop of only 18000 of the over 40,000 organisations, which received foreign contribution in the country reporting the inflows of funds and submitting their accounts. Highlights are:

  • Annual return to be filed by NGOs on foreign fund receipts and expenses
  • Apply for renewal every five year s
  • Cancellation if returns not filed
  • NGOs against national interest not eligible for foreign funds
  • FCRA silent on definition of national interest
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RETURN IDLE CASH TO INVESTORS

Concerned over brokers misusing funds lying in investors' trading accounts, market regulator SEBI
has asked the broking entities to return the clients' unutilized cash at the end of every month or quarter. Although some resisting the move citing high costs associated with such frequent transfers of funds to and from the clients' accounts, SEBI has also asked them to transfer within a day the funds withdrawn by the investors.
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SEBI GETS TOUGH ON KYC NORMS FOR MUTUAL FUNDS

The Securities and Exchange Board of India has directed that new folios (mutual fund accounts) will
be opened only after ensuring that all investor-related documents, including account opening documents, PAN, KYC, Power of Attorney (if applicable), specimen signature are made available with MCs or the Registrar and Trade Agents, and not just with the distributor of mutual funds.
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PSUs OUT OF 25% PUBLIC FLOAT NORM

The finance ministry has exempted state-owned firms from the recent rule that requires listed companies to achieve at least 25% public holding within three years after some of them said they will not participate in disinvestment if the rule was forced on them. Public sector firms will now have to maintain a minimum public float of only 10%. The modified rules also gave a breather to the private sector companies. They will have to comply with the minimum 25% public float CORPORATE LAWS within three years but they will now have flexibility in how the limit is reached, without the annual 5% increase mandated in the current rules.
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GOVT. TO BEAR BROKERAGE IN ALL PSU ISSUES

To improve retail participation in the public issues of state- run companies, the finance ministry has decided to bear brokerage charges in all PSU(Public Sector Undertaking) offer that came after April. The move is expected to encourage brokers to sell issues, which have not received a very encouraging response so far.
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CAG CAN NOW VET NGOs IN SOCIAL SECTOR SCHEMES

The comptroller and auditor general of India (CAG) has now been empowered to vet all non government organization (NGOs) and other agencies involved in the Governments Social Sector Scheme. The planning commission has decided that approvals for all social sector projects undertaken by various NGOs, normally outside the purview of CAG, will come with the rider that they will be subject to audit if required.
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TELECOM COs SUBMIT BOOKS TO CAG FOR AUDITING

The Comptroller and Auditor General (CAG) will look into the financial books of leading telecom to see whether there was any under reporting of revenues by them, causing revenue loss to the government on annual licence fees. While Reliance Communications and Tata Tele services have submitted their books in full, Vodafone and Airtel have given access to their documents partially.
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AUDITORS OWE A DUTY TO ALL SHAREHOLDERS - BOMBAY HIGH COURT

The SEBI Act (Section 11) has wide amplitude and empowers the regulator SEBI to take within its sweep a CA, if his activities are detrimental to the investors or the securities market, the Bombay High Court observed in its order on the Price Water house vs. SEBI case. The Court had ruled that SEBI can regulate the securities market but cannot regulate the profession of Chartered Accountants. SEBI has the powers to issue show cause notices to CA firms and individual CAs. The auditors on their part have been appointed by shareholders by majority and they owe a duty to all shareholders and are required to give a correct picture of the financial affairs of the company, observed the High Court. While SEBI had no powers to debar a CA firm or a CA from practicing, it could safeguard investor interest by taking appropriate remedial steps including keeping a person (including a CA) at a safe distance from the securities market.
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RBI AMENDS HTM NORMS FOR BANKS

Reserve Bank of India said banks need to disclose the value of investments under the hold-to-maturity (HTM) portfolio if transactions in that category are above 5% of investments at the start of the year. Banks also need to indicate the excess of book value over market value for which provision is not made in the HTM segment. This disclosure is required to be made in 'Notes to Accounts' in banks' audited annual financial statements.
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COMPUTATION OF TOTAL INCOME

The DTC 2010 is giving a comprehensive definition of 'Income' so as to include all accruals to spending power. It classifies incomes into two categories viz. 'special sources' and 'ordinary sources'. The special sources (specified in a separate Schedule) shall include Royalty, Fees for Technical Services (FTS), investment income. All other sources of income (including 'Income from Residuary Sources') will be considered as income from ordinary sources. Special sources would be subject to tax on the gross amount.

Scope of total Income

DTC adopts residence based taxation for residents and source based for non-residents. Income arising
from indirect transfer of capital assets situated in India would also be taxable in India. Tax residence of foreign companies shall be in India if, 'place of effective management' is located in India.

TAX RATES FOR INDIVIDUALS

  • Threshold exemption limits for Individuals and HUF
  • For Men as well as for Women Rs. 2,00,000
  • For Resident Senior Citizens Rs. 2,50,000
Slab Rates

  • 10% on income level of INR 200,000 to INR 500,000
  • 20% on the next INR 500,000 to INR 1,000,000
  • 30% on income in excess of INR 1,000,000
TAX RATES FOR COMPANIES
  • Tax rate in case of companies is proposed at 30%.
  • DDT on dividend of domestic company - 15%.
  • A foreign company is required to pay an additional branch profits tax of 15%.
  • MAT rate - 20% of book profits. MAT Credit carry forward period would be allowed for 15 years. It would be applicable to SEZ undertakings also.
COMPUTATION OF INCOME FROM EMPLOYMENT AND HOUSE PROPERTY
  • HRA exemption restored.
  • Amount received by employee from NPS trust is tax-free. Thus, NPS which is taxed on EET basis is proposed to be made EEE (Exempt-Exempt- Exempt) for employees.
  • Only Actual Rent from house property to be taxed. Present system of taxing notional value called 'annual value' proposed to be done away with.
  • Deduction for interest on housing loan/loan taken for repair or renovation of house property up to limit of Rs. 1,50,000 in respect of one house property not let out. No deduction for re-payment of principal under the Code.
  • Rent received in arrears to be included in the year of receipt, whether person is owner of property or not, after allowing 20% deduction towards repairs & maintenance.
COMPUTATION OF INCOME FROM BUSINESS
  • All assets are classified into business assets and investment assets. The business assets are further classified into business trading assets and business capital assets.
  • Income from transactions in all business assets will be taxed under the head 'income from business' while income from transactions in all investment assets will be taxed under the head 'capital gains'.
  • The profits from business will be computed by deducting business expenditure from gross earnings of the business.
  • Gross earnings will ordinarily include all accruals and receipts derived from or connected with business assets, whether trading or capital.
  • Business expenditure will be classified into 3 mutually exclusive categories
  • Operating expenditure
  • Permitted financial charges
  • Capital allowances.
  • The benefit of weighted deduction at 150% proposed in the DTC 2009 has been enhanced to 200% for any expenditure (both revenue and capital except land and building) incurred on in house scientific research and development by a company is proposed for all industries (not restricted to manufacturing).
  • Consideration received from transfer of carbon credits to be taxed as business income.
  • Remission or cessation of any liability by way of loan/ deposit/advance/credit to be taxed as business income.
  • Scientific Research and Development in house facility expenses - weighted deduction proposed to be increased from 150% to 200%.
COMPUTATION OF CAPITAL GAINS

The concept of 'investment asset' is made applicable to any undertaking or division of a business. As a result, slump sale would now be capital gain income unlike the earlier proposal of DTC which sought to tax it as business income 
  • Transfer of land of a sick industrial company made under a scheme sanctioned under section 18 of SICA where such company is being managed by worker's co-operative not to attract capital gains tax.
  • Reverse mortgage under notified scheme to continue to be exempt from capital gains tax.
  • Exemption for long-term capital gains from equity shares/ units of equity oriented mutual funds retained. STT to be retained.
  • Short-term capital gains (where equity shares/units are held for 1 year or less) - deduction of 50% to be are allowed and balance 50% taxed. Likewise short-term capital loss to be scaled down by 50%.
OTHERS
  • Wealth tax - threshold increased from Rs. 30,00,000 to Rs. 1 crore. Tax rate will be 1% of net wealth in excess of Rs. 1 crore.
  • Profit linked incentives to continue under grandfathering provisions for SEZ units (Setup before 31st March 2014) and also for SEZ Developers (Notified before 31st March 2012)
  • GAAR (General Anti-Avoidance Rule) - proposed to introduce GAAR as a deterrent and a tool against tax avoidance, some safeguards are proposed without any specific threshold. Rules provide that any business arrangement may be declared impermissible by CIT, it in his opinion, it has been entered to take tax benefits. CBDT shall issue guidelines as to when GAAR can be invoked and shall also prescribe threshold limits. A Dispute Resolution Panel shall be available where GAAR is invoked.
International Taxation
  • A Company Incorporated Outside India to be resident in India if its "Place of Effective Management" (POEM) is situated in India
  • Exclude from Taxation - Income from transfer outside India, of any share or interest in a foreign company if the value of assets in India represents less than 50% of the value of assets held by the foreign company.
  • Include 2 More Criteria to the definition of Associate Enterprise re: Transfer Pricing
  • Introduces Advance Pricing Agreements (APAs)
  • Empowers Government to determine Arms' Length Price, subject to Safe Harbor Rules
  • Concept of Controlled Foreign Companies (CFCs) Introduced
Advance Ruling and Dispute Authority decisions to be binding.
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INFORM CLIENTS IF PREFERRED NETWORK IS CHANGED

Following the hassle caused after four public sector non-life insurance companies withdrew cashless
facility from certain hospitals, th Insurance Regulatory & Development Authority (IRDA) has asked all life and non-life insurance companies to inform policyholders about the nearest alternative hospitals where the cashless facility is available, in case of change in the preferred provider network (PPN) of hospitals.
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SOFTWARE IS GOODS - MADRAS HIGH COURT

The Madras high court dismissed the writ petition of Info tech Software Dealers' Association raising the question whether a software would amount to goods and if so, when it is supplied to a customer pursuant to the End User Licence Agreement (EULA), the transaction is liable to be treated as sale or service. It is also raised the constitutional validity of the new provision in the Finance Act 2009, Section 65(105)(zzzze), arguing that it was the state government which had the power to impose duty.
Dismissing the challenge, the division bench of the high court stated that software is goods and whether the transaction would amount to sale or service would depend upon the individual transaction. The new provision cannot be held to be unconstitutional so long as Parliament has the legislative competency to enact law in respect of tax on service in exercise of powers under Entry 97 of List I.