1. MISSIVE Volume XXXIII February 2014

2. Topics Page No Direct Tax 1 Transfer Pricing 5 Service Tax 6 Central Excise 7 Value Added Tax 8 Customs 8 FEMA 9 Company Law 14 Transactions that made headlines 14 Never hold your head high with pride or ego, even the winner of a gold medal gets his medal only when he puts his head down!!! Index Dear Patron Here we are with the Thirty third successive issue of our monthly Missive. We trust you will enjoy reading this Missive, even while soaking in the contents. We would very much appreciate your feedback which consistently helps us in improving and upgrading the contents. Thanks and regards, Knowledge Management Team 3. 1 DIRECT TAX CBDT Circular No. 1/2014 dated 15.01.2014 CBDT Directs Assessing Officers to Respect Citizens Charter In TDS matters The CBDT has issued Instruction No. 1/2014 dated 15.01.2014 to the Chief Commissioners stating that though the Citizens Charter prescribes a time limit of one month for a decision u/s 197 on application for no deduction of tax or deduction of tax at lower rate, there is considerable delay in issuing the lower/non deduction certificate. The CBDT has directed that the commitment to tax payers as per the Citizens Charter must be thoroughly adhered by the Assessing Officers and all applications for lower or no deduction of tax at source filed u/s 197 of the Income-tax Act, 1961 must be disposed of within the stipulated time frame. CBDT Circular No. 1/2014 dated 13.01.2014 CBDT Accepts High Court Verdict Of No TDS On Service-Tax Component The CBDT has issued Circular No. 1/2014 dated 13.01.2014 pointing out that the Rajasthan High Court has taken the view in CIT(TDS) vs. Rajasthan Urban Infrastructure (copy attached) that if as per the terms of the agreement between the payer and the payee, the amount of service-tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service-tax component u/s 194J of the Act. Pursuant thereto, the CBDT has decided in exercise of powers u/s 119 that wherever the terms of the agreement/ contract between the payer and the payee, the service tax component comprised in the amount is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component. CIT vs. Jaipur Vidyut Vitran Nigam Ltd. (Rajasthan High Court) Employees PF/ ESI Contribution is also covered by s. 43B & allowable as a deduction u/s 36(1)(va) if paid by the due date for filing ROI Facts In AY 2001-02 etc, the assessee claimed a deduction for payment of (employees contribution) to GPF, CPF and ESI u/s 36(1)(va) read with s. 43B of the I.T. Act. The basis of the claim was that though the amount was not paid on or before the due date under the respective Act, the same was deposited on or before the due date of furnishing of the Income-tax returns u/s 139 of the I.T. Act and, therefore, in view of s. 43B read with s. 36(1)(va), the entire amount was allowable. The AO rejected the claim for deduction though the Tribunal allowed it. Aggrieved, the department approached to the High Court Judgment The High Court HELD dismissing that, No substantial question of law arise out of the orders of the ITAT as it is an admitted fact that the entire amount was deposited by the assessee at least on or before the due date of filing of the returns u/s 139 of the I.T. Act. If the amount has been deposited on or before the due date of filing the return u/s 139 then the amount cannot be disallowed u/s 43B or u/s 36(1)(va) of the Act ITO vs. Haresh Chand Agarwal HUF (ITAT Agra) 4. 2 Section 147: Failure to compute capital gains u/s 50C does not lead to escapement of income Facts The assessee sold property for Rs.6 lakh and offered capital gains on that basis. The AO accepted the claim without examining the applicability of s. 50C. He later (within 4 years from the end of the AY) reopened the assessment on the basis that the stamp duty valuation was Rs. 25 lakhs and the capital gains had to computed on that basis u/s 50C. The assessee challenged the reopening inter alia on the ground that the failure to apply s. 50C did not mean income had escaped assessment. The CIT(A) accepted the plea. Aggrieved, the department approached to the Tribunal. Judgment Section 50C is not a final determination to prove that it is a case of escapement of income. The report of the approved valuer may give estimated figure on the basis of facts of each case. Therefore, mere applicability of section 50C would not disclose any escapement of income in the facts and circumstances of the case. The AO at the original assessment stage considered all the documents and material produced before him and has accepted the cost of property as was declared by the assessee. The reassessment is on change of opinion which is not justified CIT vs. DHTC Logistics Ltd (Delhi High Court) Section 272B penalty on deductor for wrong/ non-stating of PAN in TDS return is not applicable if information is not furnished by deductee. Penalty is Rs. 10000 per deductor and not per wrong PAN Facts The assessee filed a TDS return in which the PAN of 30,706 deductees was either missing or was incorrectly stated. The AO held that as penalty of Rs. 10,000 u/s 272B was levaible for the non-mentioning of the PAN, the penalty had to be computed per PAN/deductee. He accordingly levied penalty of Rs. 30.70 crore at the rate of Rs. 10,000 per deductee. The CIT(A) restricted the penalty to Rs. 10,000 on the ground that as per the CBDTs letter dated 05.08.2008 bearing No. 275/24/2007- IT(B), s. 272B penalty is linked to the person/ deductor and not with the number of defaults in the PAN quoted in the TDS return. The Tribunal upheld the view of the CIT (A). Aggrieved, the department approached to the High Court . Judgment The High Court held dismissing the appeal that, there are two reasons why the appeal cannot be entertained: Firstly, the AO in the penalty order u/s 272B has not specifically referred to any default or failure by the assessee mentioning PAN Number even when the said particulars and details were available. The stand taken by the assessee was that the PAN Numbers were not furnished by the truck owners and, therefore, they were not quoted by them or PAN Numbers as informed were quoted. In case, the PAN Numbers are not furnished by the deductees, the assessee cannot be penalized u/s 272B. Section139A also imposes the obligation on the deductees to furnish PAN Number to the deductor. Secondly, the stand taken by the revenue is contrary to the stand taken by the CBDT. The AO had imposed penalty of Rs.10, 000/- in each case where PAN Number was not provided by the deductee. However, the CBDT has in letter dated 5.8.2008 vide No.275/24/2007-IT(B) clarified that penalty of Rs.10,000 u/s 272B is linked to the person, i.e., the deductor who is responsible to deduct TDS, 5. 3 and not to the number of defaults regarding the PAN quoted in the TDS return. Therefore, regardless of the number of defaults in each return, maximum penalty of Rs.10, 000/- can be imposed on the deductor. Penalty cannot be imposed by calculating the number of defective entries in each return and by multiplying them with Rs.10, 000/-. This also appears to be a legislative intent, as in many cases, the TDS amount may be small or insignificant fraction of Rs.10, 000. Subhas Chandra Parmanandka vs.ITO (ITA No.1614/Kol/2010) Kolkata Tribunal holds the income from transfer of right to purchase flat as capital gains Facts The taxpayer had booked a space with a builder in Kolkata by paying an advance amount. Subsequently, the builder being unable to provide the booked space paid compensation towards cancellation of the agreement. The taxpayer offered the differential amount of compensation received and advance paid as long term capital gain and claimed exemption under section 54F The AO treated the compensation as Income from undisclosed source. As per the AO, the booking of the space was never converted into ownership of the flat and hence was not a long term capital asset, consequently denying exemption on the LTCG Aggrieved, the taxpayer approached to the tribunal with the issue that, whether gain from the relinquishment of the right to purchase a flat is a Long Term Capital Gain & for the same exemption can be claimed under section 54 of the Income Tax Act. Tribunals ruling The Tribunal held that the receipts on the transfer of the right to purchase the flat was LTCG, and was eligible for deduction under section 54F of the Act. The observations of the Tribunal were as follows: Once the taxpayer has entered into an agreement, it becomes the right of the taxpayer and such right is an asset which has a value. When surrendered or transferred after 36 months, gains if any, arising on the transfer of such asset is liable to be treated only as LTCG. Further, when an income falls under a specific head (income from capital gains) it cannot be taxed under a residuary head (income from other sources). Since the source of the income is not disputed, the income cannot be treated as undisclosed income Samsung Heavy Industries Co. Ltd.vs. DIT (ITA No. 01 of 2012) Tax liability cannot be fastened on foreign company without establishing that the income is attributable to the Permanent Establishment situated in India Facts The taxpayer, a foreign company, entered into a contract with ONGC and Larsen & Toubro as consortium partners. The taxpayer was having Project Office (PO) in India Under the contract, the taxpayer received revenue in respect of inside India activities as well as outside India activities. In respect of inside India activities, it has incurred certain expenses and after deducting such expenses, 6. 4 it has earned a loss and therefore, filed loss return of income The Assessing Officer (AO) refused to accept the deduction claimed by the taxpayer. The AO also held that 25 percent of the revenues claimed by the taxpayer have been earned from outside India activities should be brought to tax in India. Judgment Article 7(1) of the tax treaty, provides that profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE. The said paragraph also provides that the profits of the enterprise may be taxed in the other State only so much of the same as is attributable to that PE. There was no finding recorded by the tax authority that the revenue earned by the taxpayer were said to have been received on account of within India activity. As per the tax treaty, if an enterprise does not have PE in India, it has no obligation to either submit any tax return with, or pay any tax to India. Neither the AO, nor the Tribunal has recorded any evidence to justify that the PO of the taxpayer is a PE in India through which it carried on business and 25 per cent of the gross receipt is attributable to the said business. The High Court set aside the judgment and order under appeal as well as the assessment order, in so far as the same relates to imposition of tax liability on the 25 percent of the gross receipt upon the taxpayer. Accordingly, the High Court held that tax liability could not be fastened without establishing that the same is attributable to the tax identity or PE of the enterprise situate in India Delhi High Court vs. Infrsoft Pvt Ltd. (IT Appeal No. 1034 of 2009) India's Delhi High Court distinguishes copyright rights and copyrighted article in software transactions Facts The Assessee is an international software marketing and development company of an international group. The holding company is based in US being Assessee Corporation. The Assessee opened a branch office in India. The branch in India imports the package in the form of floppy disk or CDs depending on the requirements of their customers. The system is delivered to a client. The delivery of system entails installation of the system on the computers of the customers and training of the customers for operation of the system. The branch office further undertakes the responsibility of updation and operational training apart from providing support for solving any software issues. The Assessee customizes the software depending on the needs of Indian customers and then license is granted to Indian customers for use of the software The taxpayer filed its return of income in India declaring business loss. The same was assessed under Section 143(3) of the Act. The Assessing Officer taxed the receipt on sale of licensing the software as royalty as per Article 13 of Indo-US Double Taxation Avoidance Agreement. Aggrieved by the order of the AO, the Assessee filed an appeal before the Commissioner of Income-tax (Appeals) (hereinafter referred to as the 'CIT (A)'). The CIT(A) rejected the submission of Assessee. Aggrieved by the order of the AO as confirmed by the CIT(A), the Assessee 7. 5 Company filed an appeal before the Income- tax Appellate Tribunal (ITAT for Short. The ITAT held that the amount received by the Assessee under the licence agreement for allowing the use of the software was not royalty either under the Income-tax Act or under the DTAA. The ITAT set aside the order of the CIT(A) and restored the matter to the file of the AO with a direction to reframe the assessment in terms of the said decision. Aggrieved by the decision of the ITAT, the Revenue has filed the present appeal. Judgment The High court held that consideration received by the taxpayer for the grant of license for use of customized software is a Royalty within the meaning of Indian-US tax Treaty. The observations of the High Court were as follows: (i) We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. (ii) The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. (iii) What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. TRANSFER PRICING SINOSTEEL INDIA (P.) LTD. DY. CIT Under CUP method, a quotation which hasn't fructified into a transaction cant be used for benchmarking The Delhi Tribunal in the case of Sinosteel India (P.) Ltd. Dy. CIT held as under:- The statute read with rules specifically provides that the ALP under the CUP method should be determined by considering 'the price charged or paid' in a comparable uncontrolled 'transaction', any 'quotation' which has not fructified into a 'transaction' can be substituted with the actual price charged or paid in a transaction; As the law provides for considering the price charged or paid in a comparable uncontrolled transaction, there can be no scope for considering a quotation price in isolation which is not preceded with or succeeded by any actual transaction. M/s. Net Freight (India) Private Limited TS-363-ITAT-2013-TP(DEL)-TP. Delhi Tribunal rules on application of Profit Split Method 8. 6 The Tribunal observed that under Indian transfer pricing rules, the PSM is applicable mainly in international transactions: (a) Involving transfer of unique intangibles; or in multiple international transactions that are so interrelated they cannot be evaluated separately. Under the transfer pricing rules, a taxpayer can adopt either contribution PSM, where the entire system profits are split among the various AEs who are parties to the transaction or RPSM, where each of the AEs who are parties to the transaction in question are first assigned basic returns for the routine functions performed by them, and thereafter the residual profits are split among the AEs. Where RPSM is adopted, the Tribunal held that in the first stage the profits need to be split among the AEs on the basis of reliable external market data, which indicate how unrelated parties have split the profits in similar circumstances. At the first stage, benchmarking with reliable external market data is to be done. In this step, the combined net profits are partially allocated to each enterprise so as to provide it with an appropriate base return keeping in view the nature of the transaction. The residual profits may be split as per relative contribution of the AEs, which need not be benchmarked by external market or comparable data. However, a scientific methodology may be applied for allocating the residual profits. Based on the facts of the case, the Tribunal upheld in favor of the taxpayer the use of RPSM as the MAM. SERVICE TAX Exemption for Sponsorship of Sporting events extended even if participating team represents Country Services by way of sponsorship of sporting events organized by a national sports federation, or its affiliated federations were exempt if participating teams or individuals represent any district, state or zone. The aforesaid exemption has been extended even if participating teams or individuals represents Country. Notification No. 1/2014-Service Tax dated 10th January, 2014 Clarifications relating to exemption provided to Resident Welfare Association With reference to serial No. 28(c) of notification No. 25/2012 dated June 20, 2012 which provides for exemption to service by RWA to its own members by way of reimbursement of charges or share of contribution up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex, the Board had clarified certain doubts regarding such exemption vide Circular No. 175 /01 /2014 ST dated January 10, 2014 which have been discussed below: S. No Doubt Clarification 1 If the per month per member contribution of any or some members of a RWA exceeds five No 9. 7 thousand rupees, whether the exemption of five thousand rupees be available for such members? 2 Is threshold exemption under notification No. 33/2012-ST available to RWA? Yes 3 Does aggregate value for the purpose of threshold exemption, include the value of exempt service? No 4 If a RWA provides certain services such as payment of electricity or water bill issued by third person, in the name of its members, acting as a 'pure agent' of its members, is exclusion from value of taxable service available for the purposes of exemptions provided in Notification 33/2012-ST or 25/2012-ST? Yes 5 Is CENVAT credit available to RWA for payment of service tax? Yes Circular No. 175 /01 /2014 ST dated 10th January, 2014 CENTRAL EXCISE Amendment to CENVAT Credit Rules(CCR), 2004 Rule 3, sub rule 5(c) of CCR, provides that where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under Rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on inputs used in the manufacture or production of said goods shall be reversed. The aforesaid provision has been amended. Now, even the CENVAT credit on input services used in or in relation to the manufacture or production of said remitted goods is required to be reversed. Further, an explanation has been inserted after Sub-rule 5(C) which clarify that the amount payable under sub-rules (5), (5A), (5B) and (5C), unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or before the 5th day of the following month except for the month of March, where such payment shall be made on or before the 31st day of the month of March. Also, an earlier explanation which provide for the recovery of cenvat credit taken by the manufacturer of goods or the provider of output services under sub-rules (5), (5A) and (5B) in the manner as provided in rule 14, has been amended. Now if the manufacturer of goods or the provider of output services fails to pay the amount payable under sub-rules (5), (5A), (5B) and (5C) , it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken and utilised." 10. 8 Notification No. 01/2014-Central Excise (N.T.) dated 8th January, 2014 VALUE ADDED TAX De-notification of Bank of India as appropriate Government Treasury Bank of India, which was earlier notified as Appropriate Government Treasury for the purpose of depositing VAT/CST dues in relation to a dealer who is, or liable to be, registered under DVAT Act, 2004, is denotified for collections of VAT/CST dues from the dealers referred above with effect from 15th January, 2014. Notification No.F.7 (400)/Policy/VAT/2011/PF/1207-1220 dated 8th January, 2014 CUSTOMS Conversion Rate for Foreign Exchange Rate of exchange of conversion of each of the following foreign currency into Indian currency or vice versa shall, with effect from 17th January, 2014 be the rate mentioned against it in the given tables: SCHEDULE-I S. No. Foreign Currency Rate of exchange of one unit of foreign currency equivalent to Indian rupees (For Imported Goods) (For Export Goods) 1. Australian Dollar 55.05 53.70 2. Bahrain 168.30 159.10 Dinar 3. Canadian Dollar 57.05 55.75 4. Danish Kroner 11.45 11.10 5. EURO 85.05 83.05 6. Hong Kong Dollar 8.00 7.90 7. Kuwait Dinar 224.60 211.60 8. New Zealand Dollar 52.10 50.65 9. Norwegian Kroner 10.20 9.90 10. Pound Sterling 102.15 99.90 11. Singapore Dollar 48.95 47.90 12. South African Rand 5.85 5.50 13. Saudi Arabian Riyal 16.90 16.00 14. Swedish Kroner 9.70 9.40 15. Swiss France 68.70 67.05 16. UAE Dirham 17.30 16.35 17. US Dollar 62.20 61.20 SCHEDULE-II S. No. Foreign Currency Rate of exchange of 100 units of foreign currency equivalent to Indian rupees (For Imported Goods) (For Export Goods) 1. Japanese Yen 59.55 58.15 2. Kenya Shilling 74.00 69.85 11. 9 Notification No. 3/2014-Customs (N.T.) dated 16th January, 2014 CASE LAWS Barnala Builders & Property Consultants v. Deputy Commissioner of Central Excise & Service Tax Order Rejecting VCES is appealable Recently, Honble Punjab & Haryana High Court in the case of Barnala Builders & Property Consultants v. Deputy Commissioner of Central Excise & Service Tax, (2013) 40 taxmann.com 369 (Punjab & Haryana), has appraised that an order rejecting an assessees application under Section 106(2) of The Finance Act pertaining to VCES is appealable. The Honble High Court highlighted the fact that Section 106(2) after incorporation in the Finance Act, 1994 forms a part and parcel of the Act and hence all the other provisions of the Act shall be equally applicable to it. Therefore, an appeal by an assessee under Section 86 is acceptable. Further, circular 170/5/2013 dated 08-08-2013 rejecting the right of an assessee is considered incorrect as per the cited judgment. Rajasthan State Beverages Corpn. Ltd. vs. CCE Business Auxiliary Services Where on facts, the appellant was granted an exclusive privilege to carry on wholesale trade in liquor but never had the ownership/title in the liquor supplied to it by the distilleries the Tribunal held that the appellant was providing services in relation to marketing/sale of goods belonging to the distilleries (and not purchase and sale of liquor) and accordingly the same would be liable for service tax under the category of business auxiliary services. Anand Construction Co vs. CCE Commercial or Industrial Construction service Where the assessee constructed a hostel for residence of students studying in a medical institute, it was held that the hostel was not used for an activity of commercial or industrial nature, in view of CBEC Circular No 80/10/2004-ST dated 10-9-2004 and accordingly the appellants were held as not liable to pay service tax ICC Reality (India) Pvt. Ltd vs. CCE Renting of immovable property On facts of the case, where the appellants rented out immovable property to tenants and also recovered electricity charges separately from them, the Tribunal held that electricity is goods Chargeable to excise duty (nil rate) under the Central Excise Act, 1944 and Maharashtra Value Added Tax Act, 2005 and accordingly the electricity charges collected from the tenants would not be liable for service tax under the category of renting of immovable property services FEMA A.P. (DIR Series) Circular No. 83 dated January 3, 2014 12. 10 Overseas Direct Investments Rollover of Guarantees The RBI has decided not to treat / reckon the renewal / rollover of an existing / original guarantee, which is part of the total financial commitment of the Indian party in terms of Regulation 6 of the Notification on [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004], as a fresh financial commitment, subject to the conditions, prescribed in the circular. If the conditions prescribed in the circular are not met, the Indian party shall obtain prior approval of the Reserve Bank for rollover / renewal of the existing guarantee through the designated AD bank. A.P. (DIR Series) Circular No. 84 dated January 6, 2014 Issue of Non convertible/ redeemable bonus preference shares or debentures - Clarifications In terms of Regulation 2(ii) and Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 equity shares, compulsorily and mandatorily convertible preference shares and compulsorily and mandatorily convertible debentures are treated as a part of share capital for the purpose of Foreign Direct Investment. Reserve Bank of India has been granting permission, on case to case basis, for issuing non-convertible / redeemable bonus preference shares or debentures to non- resident shareholders from the general reserve under a Scheme of Arrangement by a Court, under the provisions of the Companies Act, as applicable. On a review and to rationalize and simplify the procedures, it has been decided that an Indian company may issue non- convertible / redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders, by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable, subject to no-objection from the Income Tax Authorities. This general permission to Indian companies is only for issue of non-convertible/ redeemable preference shares or debentures to non- resident shareholders by way of distribution as bonus from the general reserves and the issue of preference shares (excluding non- convertible / redeemable preference shares) and convertible debentures (excluding optionally convertible / partially convertible debentures) under the FDI scheme would continue to be subject to A.P. (DIR Series) Circular Nos.73 and 74 dated June 8, 2007 as hitherto. A.P. (DIR Series) Circular No. 85 dated January 6, 2014 External Commercial Borrowings (ECB) Policy Liberalisation of definition of Infrastructure Sector The RBI has reviewed and decided that, for the purpose of ECB, Maintenance, Repairs and Overhaul (MRO) will also be treated as a part of airport infrastructure. Accordingly, MRO, as distinct from the related services which are other than infrastructure, will be considered as part of the sub-sector of Airport in the Transport Sector of Infrastructure. 13. 11 All other aspects of ECB policy shall remain unchanged. A.P. (DIR Series) Circular No. 86 dated January 9, 2014 Foreign Direct Investment Pricing Guidelines for FDI instruments with optionality clauses As per the extant instructions of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, only equity shares or preference shares / debentures are eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme in terms of Regulation 5 (1) of Foreign Exchange Management (Transfer and Issue of shares by a Person Resident outside India) Regulations, 2000. The extant position has been reviewed and on a review, it has now been decided that optionality clauses may henceforth be allowed in equity shares and compulsorily and mandatorily convertible preference shares/debentures to be issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme. The optionality clause will oblige the buy-back of securities from the investor at the price prevailing/value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return. The provision of optionality clause shall be subject to the following conditions: (a) There is a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher. The lock-in period shall be effective from the date of allotment of such shares or convertible debentures or as prescribed for defence and construction development sectors, etc. in Annex B to Schedule 1 of Notification No. FEMA. 20 as amended from time to time; (b) After the lock-in period, as applicable above, the non-resident investor exercising option/right shall be eligible to exit without any assured return, as under: (i) In case of a listed company, the non- resident investor shall be eligible to exit at the market price prevailing at the recognised stock exchanges; (ii) In case of unlisted company, the non- resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet. Any agreement permitting return linked to equity as above shall not be treated as violation of FDI policy/FEMA Regulations. Note: For the above purpose, RoE shall mean Profit After Tax / Net Worth; Net Worth would include all free reserves and paid up capital. (iii) Investments in Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) of an investee company may be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. The guiding principle would be that 14. 12 the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at the price prevailing at the time of exit, subject to lock-in period requirement, as applicable. All existing contracts will have to comply with the above conditions to qualify as FDI compliant. A.P. (DIR Series) Circular No. 87 dated January 9, 2014 Resident Bank account maintained by residents in India Joint holder liberalization As per the extant regulations individual residents in India were permitted to include non-resident close relative(s) (relatives as defined in Section 6 of the Companies Act, 1956) as a joint holder(s) in their resident savings bank accounts on former or survivor basis. However, such non-resident Indian close relatives are not eligible to operate the account during the life time of the resident account holder in terms of said instructions. The RBI reviewed the extant provisions and has decided that for operational convenience the Non-Resident Indians (NRIs), as defined in Regulation 2(vi) of FEMA Notification No.5 dated May 3, 2000, may be permitted to operate such accounts on Either or Survivor basis. Accordingly, AD banks may include an NRI close relative (relatives as defined in Section 6 of the Companies Act, 1956) in existing / new resident bank accounts as joint holder with the resident account holder on Either or Survivor basis subject to the conditions prescribed in the circular. A.P. (DIR Series) Circular No. 90 dated January 9, 2014 Provisions under section 6 (4) of Foreign Exchange Management Act, 1999 - Clarifications As per Section 6 (4) of FEMA, 1999, a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Vide this circular the RBI has clarified the transactions covered by this section: (i) Foreign currency accounts opened and maintained by such a person when he was resident outside India; (ii) Income earned through employment or business or vocation outside India taken up or commenced while such person was resident outside India, or from investments made while such person was resident outside India, or from gift or inheritance received while such a person was resident outside India; (iii) Foreign exchange including any income arising therefrom, and conversion or replacement or accrual to the same, held outside India by a person resident in India acquired by way of inheritance from a person resident outside India. (iv) A person resident in India may freely utilise all their eligible assets abroad as well as income on such assets or sale proceeds thereof received after their 15. 13 return to India for making any payments or to make any fresh investments abroad without approval of Reserve Bank, provided the cost of such investments and/ or any subsequent payments received therefor are met exclusively out of funds forming part of eligible assets held by them and the transaction is not in contravention to extant FEMA provisions. A.P. (DIR Series) Circular No. 93 dated January 15, 2014 Clarification- Establishment of Liaison Office/ Branch Office/ Project Office in India by Foreign Entities - General Permission In terms of Regulation 4 of Notification No.FEMA.22/2000-RB dated May 3, 2000, viz., Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, as amended from time to time, no entity or person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China shall establish in India, a branch office or a liaison office or a project office or any other place of business by whatever name called, without the prior permission of the Reserve Bank. Vide this circular it is clarified that the provisions of Regulation 4 of Notification No. FEMA 22/2000-RB dated 3rd May 2000, ibid, along with their specified conditions apply for entities from Hong Kong and Macau also. Accordingly, applications from entities registered in / resident of Hong Kong and Macau, for establishment of Liaison/ Branch/ Project Offices or any other place of business by whatever name called shall require prior approval from Reserve Bank of India. A.P. (DIR Series) Circular No. 94 dated January 16, 2014 Conversion of External Commercial Borrowing and Lumpsum Fee/Royalty into Equity In terms of A.P. (DIR Series) Circular No. 15 dated October 1, 2004, an Indian company can issue equity shares against External Commercial Borrowings (ECB) subject to conditions mentioned therein and pricing guidelines as prescribed by the Reserve Bank from time to time regarding value of equity shares to be issued. The Reserve Bank has received some references regarding how the rupee amount against which equity shares are to be issued shall be arrived at; in other words, what rate of exchange shall be applied to the amount in foreign currency borrowed or owed by the resident entity from/to the non-resident entity. It is clarified that where the liability sought to be converted by the company is denominated in foreign currency as in case of ECB, import of capital goods, etc. it will be in order to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion. Reserve Bank will have no objection if the borrower company wishes to issue equity shares for a rupee amount less than that arrived at as mentioned above by a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only. It is further clarified that the principle of calculation of INR equivalent for a liability denominated in foreign currency as mentioned in the above paragraph shall 16. 14 apply, mutatis mutandis, to all cases where any payables/liability by an Indian company such as, lump sum fees/royalties, etc. are permitted to be converted to equity shares or other securities to be issued to a non-resident subject to the conditions stipulated under the respective Regulations. A.P. (DIR Series) Circular No. 95 dated January 17, 2014 Merchanting Trade Transactions In the light of the recommendations of the Technical Committee on Services/Facilities to Exporters (Chairman: Shri G. Padmanabhan), to further liberalise and simplify the procedure, the existing guidelines for merchanting or intermediary trade transactions have been reviewed and accordingly in supersession of the existing guidelines, the revised guidelines have been laid down in this circular and will come into effect immediately. COMPANY LAW Clarification with regard to,taking accounts of comments/inputs from Income Tax Department and other sector Regulators while filing reports by Regional Directors u/s 394A of Companies Act,1956. [General Circular no.1/2014 dated 15thJanuary,2014] Pursuant to the examination carried out by the Ministry in a recent case, wherein a Regional Director had not projected the objections of the Income Tax Department under section 394, dealing with cases involving reconstruction/amalgamation, the Ministry of Corporate Affairs had decided that while responding to notices on behalf of the Central Government u/s 394A, the Regional Director concerned shall invite specific comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court. In case, no response from the Income Tax Department is forthcoming, then it may be presumed that the Income Tax Department has no objection to the action proposed u/s 391 or 394, as the case may be. In this regard, the Ministry further clarified that, the Regional Directors must also obtain the feedback from the sectoral Regulator(s), if required, in the same manner as from the Income Tax Department. Further, it has been emphasized by the Ministry that, except in the case where there are reasonable compelling reasons for doubting the correctness of the views of Income Tax Department or any other sectoral Regulator, the Regional Director should directly project the views of the concerned department/Regulator in his representation, without deciding the correctness or otherwise, of the objections/views of the Income Tax Department or other Regulators. In case of compelling reasons for doubting the correctness of such views, the Regional Director must make a reference to the Ministry for taking up the matter with the concerned Ministry, before filing the representation with the court u/s 394A. TRANSACTIONS THAT MADE HEADLINES Aditya Birla Group selling BPO arm to private investors backed by CX Partners for $260M. HPCL arm to buy stake in two gas fields in Australia for $74M` 17. 15 Japans ARKRAY to buy IVD business of Span Diagnostics for $16M. Singapores Wilmar may buy up to 25% stake in Shree Renuka Sugars. Bharat Forge sells entire 51.85% stake in Chinese JV to local partner for $28.2M. DLF set to sell Aman Resorts to a US firm for close to $350M CK Birla Group firm acquires a part of Caterpillars mining product distribution business Alstom India to sell transportation systems unit to French parent for around $29M Air Water completes acquisition of Ellenbarrie Industrial Gases for $17.3M Lenovo to buy Motorola handset business from Google for $2.91B 18. www.spnagrath.com A-380, Defence Colony, New Delhi 110024, India. This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been prepared for the general guidance on matters of interest only, and does not constitute professional advice. No person shall act upon the information contained in this publication without obtaining specific professional advice. Due care has been taken while compiling the information, however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this publication