Tax & Regulatory QuarterSeptember 2013

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Dear readers,We are pleased to release the September 2013 edition of EY’s Tax & Regulatory Quarter — a quarterly e-newsletter that summarizes significant ongoing tax and regulatory developments.

This newsletter covers landmark judgments and update on tax treaties. The “In the press” and “What’s new” sections provide links to thought leadership and published articles on various issues in the tax realm and other topics that you may be interested in. This newsletter also includes a compilation of tax alerts released by EY India during the quarter.

We hope you find this edition both timely and useful.

Best regards,

EY Tax Update team

Contents(Click to navigate)

Direct tax

• Verdicts• Treaty connections • Tax happenings across the border• From the Tax Gatherer’s desk

Indirect tax

• Service tax • CENVAT credit• Excise duty• Customs duty

• VAT• Key statutory developments

Regulatory

• Foreign direct investment • Reserve Bank of India • Securities and Exchange Board of India

Compilation of alerts

• Direct Tax • Indirect Tax• Regulatory

In the Press

What’s new Useful links

For the significant updates on the new Companies Act 2013: India Inc - Companies Act 2013 - An overviewFor the latest tax updates from across the APAC region, read our monthly newsletter: APAC Tax Matters For the latest tax insights for business leaders, read our quarterly magazine: T Magazine

Direct Taxes Code Tax and Regulatory ServicesTax Library Doing Business in India 2012-13India tax webcast serieswww.ey.com

(Click to navigate)

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Verdicts

Direct taxReported decisions supported by our Litigation team

Depreciation allowability on sale and leaseback transactions

The Mumbai Tribunal, in the case of State Bank of India (Taxpayer) v. DCIT [TS-355-ITAT-2013(MUM)], held that a sale and lease back transaction is merely a financing arrangement between the parties without involving any real intention of transferring the asset. Therefore, the Taxpayer-lessor is not entitled to depreciation. Furthermore, in another case of Hathway Investments Pvt. Ltd. (Taxpayer) v. ACIT [TS-386-ITAT-2013(Mum)], the Taxpayer had purchased energy meters from Gujarat State Electricity Board (GEB) and immediately leased them back to GEB and claimed depreciation on such meters. The Tribunal held that the lease agreement was a transaction of finance only and the assets were held just as a security for the finance given. The Tribunal further held that the whole transaction was a paper transaction. Accordingly, the claim for depreciation was disallowed.

However, in the case of SICOM Ltd. v. JCIT [ITA No. 7901 of 2003, dated 22 May 2013] argued by our Litigation team, the Taxpayer had claimed depreciation in respect of leased assets, which the Tax Authority considered as not genuine. However, The Mumbai Tribunal held that the approach of the Tax Authority in considering the transaction as not genuine was not right. The lease transaction was not properly examined and, therefore, the matter was restored back to the Tax Authority with a specific direction that lease agreement has to be examined in light of decisions in case of Cosmo Film Ltd. [245 CTR 23 (Del HC)] and IndusInd Bank Ltd. [135 ITD 165(SB)], wherein the courts have ruled in favor of the Taxpayers permitting depreciation claim in respect of leased assets.

Remunerating DAPE at arms-length obliterates Tax Authority from attributing further income

In the case of ANL Singapore Pte. Ltd. (Taxpayer) v. DDIT(IT) [TS-194-ITAT-2013(DEL)], the Taxpayer, a non-resident shipping company, earned freight income from an Indian company (ICo) with which the Taxpayer had an agency agreement. Before the Tribunal, the Taxpayer

accepted that ICo might be considered as Dependent Agent Permanent Establishment (DAPE) of the Taxpayer. The Tribunal noted that the Taxpayer had paid commission to ICo in respect of shipments, income in respect to which had been brought to tax by the Tax Authority. Accordingly, the Tribunal observed that no further income could be taxed in the Taxpayer’s hand, once the DAPE, which was also an Associated Enterprise (AE) of the Taxpayer, was remunerated on arm’s length basis.

Other significant developments

Supreme Court rules high courts not to entertain writ petitions where alternate remedy is available to the Taxpayer

The Supreme Court (SC), in the case of CIT v. Chhabil Das Agarwal (Taxpayer) [TS-391-SC-2013], upheld a special leave petition (SLP) filed by the Tax Authority questioning Sikkim High Court’s (HC) ruling of upholding a writ petition. The writ petition was filed before the HC by the Taxpayer questioning the correctness of notices issued for reassessment. The Taxpayer had not resorted to available alternate remedies before filing the writ petition. The SC ruled that, it is within the discretion of the HC to grant relief despite the existence of an alternative remedy. However, the HC cannot interfere where efficacious alternative remedy was available, unless exceptional case is made out, warranting such interference. The SC further held that, when a statutory forum is created by law for grievance redressal, a writ petition cannot be entertained ignoring the statutory dispensation. Observing the fact that the Taxpayer neither opted for alternate remedy nor claimed such remedy as ineffectual and non-efficacious, the SC held that the HC ought not to have entertained the writ petition filed by the Taxpayer and set aside the order of the HC.

Furthermore, on similar facts, in the case of CIT v. Vijaybhai N. Chandrani (Taxpayer) [TS-343-SC-2013], the SC held that the Gujarat HC ought not to have entertained the writ petition and, instead, should have directed the Taxpayer to file reply to the notices issued to the Taxpayer by the Tax Authority and upon receipt of a decision from the Tax Authority, if for any reason it is aggrieved by the said decision, to question the same before the forum

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provided under the Income Tax Act (ITA).

Judiciary view on penalty levy

Determining whether a claim is bona fide

In the case of Morgan Finvest (P) Ltd. (Taxpayer) v. CIT [TS-345-SC-2013], the Taxpayer could not substantiate the business use of the property on which it claimed depreciation. Furthermore, depreciation was erroneously claimed on cost of land, which was contrary to the provisions of law. The Delhi HC levied penalty in respect of claim of depreciation. According to the HC, claim for depreciation was not bona fide and was frivolous in nature. On appeal by the Taxpayer before the SC, the SC rejected the Taxpayer’s appeal on the basis that no substantial question of law was involved.

The Delhi HC, in the case of CIT v. HCIL Kalindee ARSSPL (Taxpayer) [TS-368-HC-2013(Del.)], upheld the levy of penalty for furnishing inaccurate particulars of income and making a non bona fide claim. The HC laid down the following important principles on levy of penalty:

• ► Penalty provisions are not criminal and do not require culpable mens rea.

• ► Mere certificate from a Chartered Accountant cannot protect the taxpayer from levy of penalty, who furnishes inaccurate particulars if the attempt in claiming deduction is not bona fide.

• ► Penalty cannot be levied if the taxpayer has a different possible interpretation or view which has not been accepted by the Tax Authority. However, penalty can be levied where the taxpayer’s claim is farcical and far-fetched.

• ► Dubious and fanciful claims under the garb of interpretation are mere pretense and not bona fide. Absurd and illogical interpretations cannot be pleaded and become pretense and excuses to escape penalty. Bona fides have to be shown and not assumed.

The Karnataka HC, in the case of CIT v. Manjunatha Cotton & Ginning Factory & Ors. (Taxpayer) [(2013) 35 taxmann.com 250 (Kar.)], has explained in detail, the law relating to penalty levy on concealment of income in a batch of appeals relating to seven Taxpayers. The HC, ruling in favor

of the Taxpayers by deleting the penalty on the ground of being bona fide, also made certain key conclusions. Some of them are as under:

• ► Penalty for concealment of income is a civil liability.• ► Willful concealment is not an essential element for

imposing penalty for breach of civil obligations or liabilities.

• ► “Concealment of income” or ”furnishing of inaccurate particulars of such income” is precondition for initiation of penalty proceedings.

• ► The imposition of penalty is not automatic, even if the tax liability is admitted.

• ► Even if the taxpayer has not challenged the order of assessment levying tax and interest and has paid tax and interest to buy peace, that by itself will not be sufficient for the Tax Authority either to initiate penalty proceedings or impose penalty.

• ► Only when no explanation is offered or the explanation offered is found to be false or when the taxpayer fails to prove that the explanation offered is not bona fide, an order imposing penalty can be passed.

• ► If the explanation offered, even though not substantiated by the taxpayer, is found to be bona fide and all facts relating to the same and material to the computation of total income have been disclosed by the taxpayer, no penalty can be imposed.

These decisions highlight the importance of care and attention that needs to be taken while making a claim in the return of income (RoI) to avert a future penalty levy, in case the claim itself is not ultimately sustained.

Failure to furnish tax audit report by due date

In the case of CIT v. U.P. Rajya Sahkari Evam Bhoomi Vikas Bank Ltd. (Taxpayer) [(2013) 35 taxmann.com 471 (Allahabad)], the Taxpayer had provided books of account to auditors in time, but failed to get its accounts audited within the due date stipulated under the ITA due to delay on the part of auditors. In this regard, the Allahabad HC ruled that penalty under the ITA for “failure to get accounts audited” was not leviable as there was reasonable cause for delay.

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In another case of Himalayan Labour & Construction Coop Society Ltd. (Taxpayer) v. DCIT [TS-259-ITAT-2013 (CHANDI)], the Taxpayer filed belated e-return. Since it was an e-return, no annexure, (including tax audit report) was furnished. The Tax Authority levied penalty for the Taxpayer’s failure to furnish the tax audit report before the due date. The Chandigarh Tribunal upheld the levy of penalty. The Tribunal held that the facility of filing annexure-less return in electronic mode does not extend to cases where the RoI itself is not filed on or before the due date. In case of belated furnishing of RoI, the tax audit report has to be furnished independently in hard copy with the Tax Authority before the due date.

Availability of discretion on levy of penalty in certain cases

The Mumbai Tribunal, in the case of IL & FS Maritime Infrastructure Company Ltd. (Taxpayer) v. ACIT [TS-204-ITAT-2013(Mum)-TP], ruled that the word ”may”, used in ITA to levy penalty for ”failure to furnish transfer pricing report”, denotes that the imposition of penalty is discretionary against the mandatory levy denoted by the word “shall” in other sections of the ITA. Since a satisfactory explanation was furnished by the Taxpayer to prove reasonable cause for delay, the Tribunal deleted the penalty.

Significant High Court decisions

Tax planning within the framework of law, is legitimate

The Karnataka HC, in the case of Bhoruka Engineering Inds. Ltd. (Taxpayer) v. DCIT [TS-252-HC-2013 (Kar)], held that sale of a company’s shares cannot be treated as sale of immovable property held by that company. The Taxpayer sold its shareholding in a company (ACo) to another company (BCo) through a registered stock broker on a recognized stock exchange after paying Securities Transaction Tax and claimed exemption from tax on the long-term capital gain on sale of shares. ACo owned land, which was the only asset owned by ACo at the time of sale of shares. The HC, held that, merely because the land had been sold directly, it would have attracted tax, is no reason to deny the tax exemption on sale of shares. The HC further observed that the transaction was real, as valuable consideration had been paid and shares were transferred.

Stock derivative loss is speculation loss for companies

The Delhi HC, in the case of CIT v. DLF Commercial Developers Ltd. (Taxpayer) [(2013) 35 taxmann.com 280(Del)] decided on the issue of whether loss suffered in trading of stock derivatives can be treated as a speculative loss. Eligible derivative transactions on recognized stock exchanges are not treated as speculative transactions for business income computation. Nevertheless, the HC held that such exclusion, which may be relevant for computing business income, will not be relevant in interpreting the provision dealing with set off and carry forward of loss. As a result, such loss is deemed to be speculative. Since stock derivatives derive their value from underlying shares, the derivatives also fall within the scope of the deeming provision. Restrictions, as applicable for set off and carry forward of share trading loss for companies, will equally apply to stock derivative loss.

Significant Special Bench ruling

Deductibility of ESOP discount

A Special Bench (SB) of the Bangalore Tribunal, in the case of Biocon Ltd. (Taxpayer) v. DCIT [TS-322-ITAT-2013], ruled on the issue of allowability of Employees Stock Option Plan (ESOP) discount, being the difference between the market value of the shares and the value at which the employees are granted option to acquire shares of the employer (ESOP discount). The SB held that, in principle, ESOP discount is deductible business expenditure, since it represents consideration/compensation for services rendered by employees. The SB further held that, ESOP discount deduction is allowable on provisional basis on each vesting date. The exact quantum of ESOP discount is, however, determined on the date of exercise of options, i.e., the difference between market value on the date of exercise and exercise price represents the cost which is actually incurred by the employer. Hence, deduction provisionally allowed in earlier periods based on vesting of options should be adjusted based on market value as on the date of exercise. This adjustment is over and above adjustments that are necessitated on account of lapse or forfeiture of options.

[For more details, please refer EY Tax Alert dated 19 July 2013]

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Significant rulings on withholding tax

No withholding on “contract manufacturing arrangement” and “contract for sale”

Under a contract manufacture arrangement, vendor manufactures a product by procuring raw material according to specifications and requirements of customer and supplies it to customer after levying applicable Excise duty or Sales tax. The title to property passes on to customer on delivery of goods. Following the amendment in 2009, definition of “work” under section 194C of the ITA inter alia excludes contract in the nature of “contract manufacturing arrangement” with effect from 1 October 2009. In this regard, the SC in the case of CIT v. Silver Oak Laboratories Pvt. Ltd. (Taxpayer) [SLP No 18012/2009 dated 17 August 2010], held that this amendment will apply only for the period on or after 1 October 2009. However, considering the facts of the case, in respect of the pre-amendment period, the SC held that there is no material on record to indicate that the transaction was a “contract for carrying out work” to trigger withholding obligation.

In the case of Kribhco Shyam Fertilizers Ltd. (Taxpayer) v. ITO [TS-284-ITAT-2013(LKW)], the Taxpayer purchased natural gas from a company (ACo), which was transported to the manufacturing unit of the Taxpayer through ACo’s pipeline for which the Taxpayer paid transmission charges. The Taxpayer did not withhold taxes on such payments. The Tribunal held that transmission charges paid by the Taxpayer to ACo forms an essential part of the sale of natural gas transaction and, therefore, the entire transaction is not a “works contract”. However, where ACo transported gas purchased by the Taxpayer from other sellers, the Tribunal held that the transmission charges paid to ACo attracted tax withholding.

No withholding on Service tax payable on professional/technical fees

The Rajasthan HC, in the case of CIT(TDS) v. Rajasthan Urban Infrastructure Development Project [(2013) TaxCorp(LJ) 1553], decided on whether tax is required to be withheld on Service tax payable on professional/technical fees payments to consultants. Taking note of the findings of lower authorities that the agreements between the parties provided that Service tax was payable by the

Taxpayer in addition to professional/technical fees, the HC held that tax was not required to be withheld on the Service tax component.

[For more details, please refer EY Tax Alert dated 7 August 2013]

No disallowance of expense on short withholding

In the case of Apollo Tyres Ltd. (Taxpayer) v. DCIT [(2013) 35 taxmann.com 593 (Cochin-Trib.)], the Cochin Tribunal has held that, under the provisions of the ITA for ”failure to deduct or pay” [section 201(1A)], the Legislature intended to levy interest even in case of shortfall in deduction of tax. However, the language of section 40(a)(ia), which provides for disallowance of expenses in case of non-deduction of tax, does not state that for shortfall in deduction, disallowance has to be made proportionately. Therefore, the Tribunal allowed the deduction of the entire expense.

The Chennai Tribunal, in the case of ACIT v. Leather India [TS-303-ITAT-2013(CHNY)], has also taken a view that disallowance of payment is not attracted in case of short withholding of taxes.

Burden of proof on Tax Authority to establish non-payment of taxes by the recipient before proceeding against payer

In the case of ICICI Bank Ltd. (Taxpayer) v. DCIT [TS-274-ITAT-2013(LKW)], the Lucknow Tribunal ruled on the issue of treating the Taxpayer as an “assessee-in-default” (AID) for non-deduction of taxes at source on interest payments. The Tribunal held that non-deduction of taxes at source, by itself, does not lead to a valid demand of taxes from the payer of income as an AID. It must first be established that there is indeed a loss of revenue because the recipient has failed to pay the taxes due. Furthermore, once the payer has submitted the basic information about the recipient, the onus of demonstrating that the recipient has not paid the taxes due is on the Tax Authority.

[For more details, please refer EY Tax Alert dated 21 June 2013]

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Controversy on whether withholding tax default includes expenses “paid” during the year

In the June 2013 edition of this newsletter, we had dealt with the controversy of whether Section 40(a)(ia) (Section) disallowance applies to amounts which are already “paid” during the year without taxes being withheld. While the Special Bench (SB) of Vishakhapatnam Tribunal1 ruled that the Section does not apply to withholding tax defaults where the amounts are actually “paid” during the tax year without deducting tax, the Gujarat HC2 and the Calcutta HC3 took a different view.

Recently, the Allahabad HC, in the case of ACIT v. Vector Shipping Services Pvt. Ltd. [TS-352-HC-2013(All.)], confirmed the view taken by the SB ruling. However, the Mumbai Tribunal, in the case of ACIT v. Rishti Stock and Shares Pvt. Ltd. [TS-359-ITAT-2013 (Mum.)], considered the rulings of SB and all the HCs and did not accept the observations of the Allahabad HC, since they were not on question of law but a mere obiter dicta (statement or remark in passing). The Mumbai Tribunal instead, followed the decisions of Gujarat and Calcutta HCs, as they specifically dealt with the issue on merits.

[For more details on this controversy, please refer June 2013 edition of EY Tax & Regulatory Quarter]

[For more details (Sikandarkhan N Tunvar), please refer EY Tax Alert dated 10 May 2013]

[For more details (Merilyn Shipping) please refer EY Tax Alert dated 17 April 2012]

Judicial decisions on taxable presence in India

Sourcing support activities of an FCo does not create a taxable presence in India

The Karnataka HC, in the case of CIT (IT) v. Nike Inc. (Taxpayer) [TS-248-HC-2013(KAR)] ruled on whether sourcing support activities carried out by a Liaison Office (LO) of the Taxpayer in India results in a taxable presence.

1 Merilyn Shipping & Transports v. ACIT [(2012) 136 ITD 23 (Vi-sakhapatnam) (SB)]

2 CIT v. Sikandarkhan N Tunvar [TS-186-HC-2013(Guj)]3 CIT v. Crescent Export Syndicate [TS-199-HC-2013(Cal)] and CIT

v. Md. Jakir Hossain Mondal [ITAT No. 31 of 2013/ G.A. No.320 of 2013]

With regard to the facts of the case, the HC ruled that the Taxpayer was not carrying on any business in India and no income accrued or arose in India. Furthermore, the Taxpayer’s activities undertaken through the LO to assist foreign buyers in purchase of goods from Indian manufacturers would fall under the exclusion provided in the ITA for purchase of goods for the purpose of export out of India. Accordingly, the income of the Taxpayer was not taxable in India under the ITA.

[For more details, refer EY Tax Alert dated 12 June 2013]

Indian company purchasing online advertising

The Mumbai Tribunal, in the case of ITO v. Pubmatic India Pvt. Ltd. (Taxpayer) [TS-357-ITAT-2013(Mum)], ruled on whether purchase of online advertisement space from the Taxpayer’s holding company in the US (USCo) was taxable in India. The Tribunal, based on facts of the case, held that the transactions of the Taxpayer with USCo were independent business transactions. Furthermore, it was held that the Taxpayer was not conducting its business on behalf of the USCo in India as its agent and did not constitute a permanent establishment (PE) for US Co in India under the India-US Double Taxation Avoidance Agreement (DTAA).

[For more details, refer EY Tax Alert dated 6 August 2013]

Marketing and distribution activities carried out by an Indian branch for group companies

In the case of Varian India Pvt. Ltd. (Taxpayer) v. ADIT [TS-292-ITAT-2013(Mum)], the Taxpayer, a US company with an Indian branch, was engaged primarily in marketing and distribution of products manufactured by its group entities worldwide. The group entities were resident in countries such as Australia and Italy. On facts, the Mumbai Tribunal held that distribution and representation activities of the Taxpayer such as liaison, marketing and promotion of products of its group entities do not create a PE in India for any of the group entities. Since the Taxpayer represents many group entities, its activities cannot be said to be devoted on behalf of one particular enterprise. Furthermore, its transactions with its group entities have been determined to be at arm’s length. Hence, it cannot be considered as a dependent agent of any of the

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enterprises it represents. In the absence of a PE, the Force of Attraction Rule under the India-US DTAA, India-Australia DTAA and the India-Italy DTAA cannot be applied.

[For more details, refer EY Tax Alert dated 4 July 2013]

Decisions on income attribution

“Force of Attraction Rule” in case of services rendered outside India

The Mumbai Tribunal, in the case of ADIT v. WNS North America Inc. (Taxpayer) [TS-373-ITAT-2013(Mum)], held that two essential conditions emerge for applying the “Force of Attraction Rule”. These are: (i) The business activity carried on should be in the other state where the PE is situated (ii) The business activity carried on must be of the same or similar kind as those effected through the PE. In the present case, the condition of business activity carried on in the other state where the PE is situated is not satisfied, as the services were provided by the Taxpayer outside India. Accordingly, existence of a Service PE in India (as Taxpayer’s employees visited India for providing services) does not make income earned for rendering services outside India, taxable in India.

Non-commercial services rendered by an Indian PE of a US enterprise

The Hyderabad Tribunal, in the case of Wellinx Inc. (Taxpayer) v. ADIT [TS-288-ITAT-2013(HYD)], ruled on the issue of exclusion of payments received by an Indian branch office (BO) from its US head office (HO). Considering Article 7 of the India-US DTAA, the Tribunal held that where services performed by the BO were on account of outsourced commercial activities, they will be included as profits of the Indian PE of the US enterprise. Where, however, if some non-commercial activities are carried out by the BO on specific instruction from the HO, then payments for such services will be excluded in computing the profits of the Indian PE under Article 7 of the DTAA.

[For more details, please refer EY Tax Alert dated 2 July 2013]

Profits of holding company cannot be attributed to BO of its subsidiary

In the case of St. Jude Medical (Hongkong) Ltd. (Taxpayer) v. DDIT [TS-229-ITAT-2013(Mum)], the Taxpayer, a non-resident wholly owned subsidiary company of another non-resident company (FCo), set up an liaison office (LO) in India. The Taxpayer and FCo were in the same line of business. At a later date, the Taxpayer set up a BO and closed its LO. The Mumbai Tribunal held that the procedure adopted by the Tax Authority, to attribute income of FCo in the hands of the Taxpayer, was not correct since there should be separate proceedings for the two separate companies established in different countries. It is legally not possible to consider the profits attributable to FCo in the hands of the Taxpayer and, therefore, profit of FCo was excluded from the income of the Taxpayer. There was a clear distinction between the liaison activities and the branch activity and the Taxpayer was not involved in business activity when they were only permitted to do liaison activity by the Reserve Bank of India (RBI) and, accordingly, the profit attributable to the liaison period was deleted.

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Case law Payment description Tribunal ruling

Credit Agricole Indosuez v. DDIT(IT)

[TS-381-ITAT-2013(Mum)]

Mumbai Tribunal

S. 9(1)(vi) of the ITA

Data processing charges paid by the Indian branch (BO) of a foreign bank to its foreign head office (HO).

• The payment made on account of data processing costs cannot be considered as a consideration for the use of the asset, amounting to royalty.

• The payment is in the nature of ”head office expenses” covered under section 44C of the ITA

ITO v. Kendle India Pvt. Ltd.

[TS-349-ITAT-2013(Del)]

India-Sri Lanka DTAA

Indian company (ICo) entered a master clinical services arrangement with a foreign company (FCo) for clinical trials. Pursuant thereto, ICo entered an arrangement with a Sri Lankan company (SCo) and paid for procurement of information on clinical trials for onward transmission to FCo.

• The services rendered by SCo are for supply of information, which ICo is not using for any technical know-how.

• The remittance is for procurement of commercial information for onward transmission to FCo.

• Therefore, the remittance made by ICo to SCo is neither for availing technical services, nor amounts to royalty.

(Note: India-Sri Lanka DTAA does not have FTS clause)

Gartner Ireland Ltd. v. ADIT

[TS-346-ITAT-2013(Mum)]

Mumbai Tribunal

India-Ireland DTAA S.9(1)(vi) of ITA

Subscription fees received by a foreign company (FCo) for access to its online database (located outside India) from Indian customers.

• Karnataka HC in the case of Wipro• Ltd. [(2011) 203 Taxman 621 (Kar.)] had

considered a similar issue wherein, the payee before HC was a foreign company (FCo) itself and had held that the payments made by Wipro to FCo for online use of database was for license to use said database and hence, the consideration was royalty, liable for withholding.

• Considering this, the Tribunal held that the payments for accessing this database would be taxable in India as royalty and, accordingly, would be subject to tax withholding under the ITA.

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Recent decisions on taxation of royalty/FTS payments

Summarized below are some decisions that have analyzed whether the payments are taxable as royalty and fees for technical services (FTS), also considering the scope under a relevant DTAA:

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Case law Payment description Tribunal ruling

Sargent & Lundy, LLC (USA)

[TS-341-ITAT-2013(Mum)]

Mumbai Tribunal

India-US DTAA

Payments received by an US company (FCo) for rendering services in the nature of technical review and evaluation of projects; preparation of necessary designs and documents; from an Indian company (ICo)

• FCo’s rendering of technical services during pre-bid stage are nothing but blueprints of the technical side of the projects.

• The technical plans etc., are meant for use in future, if and when, ICo takes up the bid for installation of the projects. This would satisfy the test of “make available” as envisaged under the India-US DTAA and qualify as Fees for Included Services (FIS) and consequently, taxable in India.

[For more details, please refer EY Tax Alert dated 26 July 2013]

Mckinsey & Company (Thailand) Co. Ltd.

Mumbai Tribunal

[TS-332-ITAT-2013(Mum)]

India-Thailand DTAA

Payments received by Thailand Company (FCo) for rendering strategic consultancy services to Indian clients, which, inter alia, include the analysis of performance, developments, strengths and weaknesses of their clients, improving their profitability and productivity and similar other parameters

• India-Thailand DTAA covers only royalty and not FTS under Article 12. Therefore, the receipt is not taxable as royalty.

• FCo has earned income by rendering the services, which are in the course of its business, and get covered under “Business Profits” Article of the DTAA, unless specifically dealt by other Articles.

• The nature of the extant income is such that it is specifically covered under “Business Profits”, it cannot, therefore, be considered in the residual provision as “Other Income”.

• In the absence of PE of FCo in India, income is not taxed under “Business Income” in India.

(Note: India-Thailand DTAA does not have FTS clause)

Delhi Race Club (1940) Ltd. v. ACIT

[TS-276-ITAT-2013(Del)]

Delhi Tribunal

S.9(1)(vi) of ITA

Sharing of commission income between the Taxpayer club and other clubs, earned from various persons who bet on horse races telecast live by the Taxpayer club, conducted by other clubs

• The existence of work is a pre-condition and must precede the granting of exclusive right for doing of such work. Live telecast of any event is not a transfer of “copyright”, as no “work” comes into existence.

• Therefore, income shared with other clubs by Taxpayer club will not qualify as “royalty” and no withholding is applicable.

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Case law Payment description Tribunal ruling

ITO (IT) v. Veeda Clinical Research Pvt. Ltd.

[TS-300-ITAT-2013(Ahd)]

Ahmedabad Tribunal

India-UK DTAA

Consideration paid by an Indian company to UK company for training services provided for market awareness and in-house training/ development of employees.

• The fees paid to the UK service provider was for training services that were general in nature and did not involve transfer of technology and, hence, does not satisfy the make available condition to trigger FTS under DTAA. Therefore, it is not taxable.

• Even though the consideration may qualify as FTS under the ITA, the provisions of the UK DTAA, being more favorable, will apply.

ACIT v. Farida Shoes (P) Ltd.

[(2013) 34 taxmann.com 268]

Chennai Tribunal

S. 9(1)(vi)/(vii) of the ITA

Commission paid by an Indian company to an overseas agent (OA) for procuring export orders.

• Relying on co-ordinate bench ruling in which it was held that the commission paid to non-resident agent for the services rendered outside India was not chargeable to tax in India, the Tribunal ruled that the OA has not provided any managerial or technical services and consequently not taxable as FTS under the ITA.

Sundaram Assets Management Co. Ltd. v. DCIT

[TS-336-ITAT-2013(Chny)]

Chennai Tribunal

S. 9(1)(vi) and 194J of the ITA

Payments made by an Indian company (ICo) to a French company (FCo) for providing investment advisory services in relation to investments to be carried outside India. The services include compiling and transmitting information to ICo in the form of database, which facilitates ICo to make investment decisions.

• The term “Royalty”, as defined under the ITA, shows that it does not include any information provided in the course of advisory services.

• Since, payments made to FCo are not in the nature of “Royalty” and the services were rendered abroad, no part of income had accrued or arisen in India and the payment is not taxable in India.

Commission/brokerage payments made by ICo to Mutual Fund (MF) brokers for brokerage services rendered.

• Services rendered by MF brokers do not fall within the realm of “Professional Services”.

• MF brokers’ services cannot also be termed as “technical services”, as brokers do not require any special qualification in the field of law, engineering, accountancy or technical consultancy.

United Helicharters Pvt. Ltd. v. ACIT

[TS-409-ITAT-2013(Mum)]

Mumbai Tribunal

India-US DTAA

Pilot training fees paid by an Indian company to an US company

• Training to pilots/engineers was given as per Rules framed by Directorate General of Civil Aviation of India, and is only a part of eligibility for working in the aviation industry.

• Such training services do not “make available” technical skills, knowledge etc. and hence, not taxable as FIS under India-US DTAA

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Treaty connections

DTAA updates

Protocol amending the 1997 DTAA between India and Sweden enters into force

The Government of India (GoI) and the Government of the Kingdom of Sweden signed a protocol on 7 February 2013 that came into force on 16 August 2013 to amend the existing 1997 India-Sweden DTAA. The Protocol will replace the Article concerning Exchange of Information in the existing DTAA and will allow exchange of banking information as well as information without domestic interest. It allows use of information for non-tax purpose if allowed under the domestic laws of both the countries, after the approval of the supplying country.

Source: Notification No. 63/2013 [F. NO. 505/02/1981-FTD-I]/SO 2459(E), dated 14 August 2013

DTAA between India and Uruguay effective from 1 April 2014

India and Uruguay had signed a DTAA on 8 September 2011, which came into force on 21 June 2013. This DTAA is effective in India from 1 April 2014. The DTAA contains a Limitation of Benefits (LOB) clause denying the benefits of the DTAA if the main purpose or one of the main purposes of the resident is to obtain the benefits of the DTAA. The LOB clause also provides that the DTAA will not prevent application of provisions of domestic law and measures concerning tax avoidance or evasion.

Source: Notification No. 53/2013 [F.NO.500/138/2002-FTD-II]/SO 2081(E), dated 5 July 2013

Protocol between Bangladesh and India comes into force

The GoI and the Government of the People’s Republic of Bangladesh signed a protocol on 16 February 2013 that came into force on 13 June 2013 to amend the existing 1991 India- Bangladesh DTAA. The Protocol will replace the Article concerning “Exchange of Information” and “Students” in the existing DTAA.

Source: Notification No.50/2013 [F.NO.500/27/2007-FTD-II]/SO 2005(E), dated 4 July 2013

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Protocol amending DTAA between India and Morocco signed

A protocol amending the 1998 DTAA between the GoI and the Kingdom of Morocco was signed on 8 August 2013. The Protocol provides for effective exchange of information including banking information between tax authorities of the two countries. The Protocol also provides that each treaty partner shall use its information gathering measures to obtain the requested information even though it may not need such information for its own domestic tax purposes.

Source: PIB Press release dated 8 August 2013

New DTAA between India and Albania signed

The GoI signed a DTAA with the Republic of Albania on 8 July 2013. The significant aspects of the DTAA are low withholding tax of 10% in case of income in the nature of dividend, interest, royalties and FTS; provisions for effective exchange of information; LOB provisions etc. to ensure that the benefits of the Agreement are availed of by genuine residents of the two countries.

Source: PIB Press release dated 8 July 2013

Tax Information Exchange Agreements (TIEA) updates

India-Monaco TIEA enters into force

The GoI had signed a TIEA with the Government of the Principality of Monaco for exchange of information relating to tax matters on 31 July 2012. This TIEA has come into force and is effective from 27 March 2013.

Source: Notification No. 43/2013 [F.NO.503/05/2009-FTD-l]/SO 924(E), Dated 12 June 2013

India-Bahrain TIEA comes into force

GoI had signed a TIEA with the Government of the Kingdom of Bahrain for exchange of information with respect to taxes on 31 May 2012. This TIEA has come into force and is effective from 11 April 2013.

Source: Notification No. 44/2013/F.NO.501/03/1994-FT&TR-II, Dated 19 June 2013

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OECD releases G8 report on automatic exchange of financial account information

On 18 June 2013, the Organization for Economic Cooperation and Development (OECD) publicly released a report that it provided to members of the Group of Eight (G8 group) of countries in advance of their recent summit in Lough Erne, Northern Ireland (the OECD report). The OECD report, A step change in transparency: Delivering a standardised, secure and cost effective model of bilateral automatic exchange for the multilateral context, was prepared at the request of the Group of Eight (G8) Presidency. The OECD report focuses on the development of an efficient approach for implementing automatic exchange of information regarding financial accounts. The OECD report describes three key matters that would need to be addressed in developing a standard multilateral model for automatic exchange of financial account information — (1) the scope of coverage for information to be reported and exchanged; (2) the legal basis and confidentiality restrictions with respect to information exchange; and (3) the technical and IT requirements for information exchange.

[For more details on this development, please click here to refer EY Global Tax Alert dated 2 July 2013]

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OECD issues Action Plan on Base Erosion and Profit Shifting (BEPS)

On 19 July 2013, the OECD issued its much-anticipated Action Plan on Base Erosion and Profit Shifting (the Plan). (Please click here to view the Plan.) The Plan reiterates the themes of the initial report on BEPS, Addressing Base Erosion and Profit Shifting, that, in the OECD’s view, gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multijurisdictional arrangements, and the rise of the digital economy with the resulting relocation of core business functions have led to weaknesses in the international tax system. The Plan acknowledges that in several circumstances, existing domestic law and treaties yield the correct result. However, it states that without coordinated action in the areas that give rise to policy concerns, countries that wish to protect their tax base may resort to unilateral action that could result in a resurgence of double taxation as well as global tax uncertainty. Thus, the Plan concludes that fundamental, consensus-based changes are needed to address double non-taxation and cases of no or low taxation where taxable income is artificially separated from the activities that generate it. The Plan contains 15 Actions, each of which is linked to specific outputs that are to be completed in 2014 or 2015.

[For more details on this development, please click here to refer EY Global Tax Alert dated 22 July 2013]

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OECD issues discussion draft on tax treaty treatment of termination payments

The OECD Committee on Fiscal Affairs (CFA) invited public comments on a discussion draft on the tax treaty treatment of various payments that are likely to be made following the termination of an employment. The analysis and suggestions were made by a subgroup of Working Party 1 on Tax Conventions and Related Questions. The OECD has sought public comments before 13 September 2013. The draft discusses treatment of various types of payments such as remuneration received for previous work, damages for unlawful dismissal, payment in lieu of notice of termination, payment for unused holiday and sick leave etc., and proposes certain amendments, mainly to Commentaries on Article 15 of the OECD Model (2010).

[For more details on this development, please click here to refer EY Global Tax Alert dated 10 July 2013]

Global Forum on Tax Transparency: new reports review jurisdictions’ information exchange

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has released peer review reports assessing the tax systems of 13 jurisdictions for information exchange. The new reports cover key players in a move toward increased tax co-operation. The 11 “Phase 2” reports review the exchange of information in practice in Austria, Bermuda, Brazil, British Virgin Islands, India, Luxembourg, Malta, Monaco, Qatar, San Marino and The Bahamas. The two “Phase 1” reports look at the legal and regulatory framework for transparency and exchange of information in Israel and Lithuania. All the reports assess the jurisdictions’ commitment to the international standard for tax information exchange.

The review shows that India’s exchange of information practice is in line with the international standard for transparency and exchange of information for tax purposes. India’s legal framework and its practical implementation ensure that ownership, accounting and bank information is available and accessible by the tax administration in line with the standard. India now has in place appropriate organizational processes and resources to ensure effective exchange of information and considerably improved the timeliness of responses during 2011 and 2012. India’s treaty partners consider it to be a very important and fully committed partner with long experience in exchange of information.

Source: www.oecd.org

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Tax happenings across the border

Swiss Federal Supreme Court upholds tax information exchange with the US

After receiving a request for administrative assistance from the US tax authorities, the Swiss Federal Tax Administration decided in November 2012 to transfer the bank records of a US resident, who was the beneficial owner of a non-US company holding an account with Credit Suisse. An appeal raised against this decision by the account holder was rejected by the Swiss Federal Administrative Court (AC) on 13 March 2013.

On 5 July 2013, the Swiss Federal Supreme Court (SC) rejected the appeal against the decision of the AC. A press release of the SC explained that it considered that the mere absence of indications relating to the identity of the persons involved did not constitute an inadmissible fishing expedition, provided that the request for administrative assistance fulfills the strict requirements concerning the degree of detail in the description of the facts.

[For more details on this development, please click here to refer EY Tax Alert dated 9 August 2013]

Canada launches consultation on measures to prevent treaty shopping

On 12 August 2013, Canada’s Department of Finance released a consultation paper titled Treaty shopping — the problem and possible solutions. In the accompanying documents, the Department requested that stakeholders submit their comments on any aspect of the paper by 13 December 2013. In addition, stakeholders were asked to consider seven questions.

The 2013 Federal Budget announced a consultation process to be undertaken with regard to “treaty shopping.” The Government of Canada noted that it has “been largely unsuccessful in challenging treaty shopping cases in court,” and signaled its openness to proceed perhaps with unilateral measures in this regard, as some other countries have done. The preamble to the consultation paper states that “the intention of this consultation process is to

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examine a range of possible approaches to address the practice of treaty shopping into Canada. The purpose of this paper is to serve as the basis for a discussion aimed at reaching a workable solution to the problem of treaty shopping. In finding a solution to treaty shopping, the main goals are to ensure that Canada remains an attractive destination for foreign investors and that all of the purposes of Canada’s tax treaties are achieved.”

[For more details on this development, please click here to refer EY Tax Alert dated 23 August 2013]

China clarifies implementation of preferential corporate income tax policies for software and integrated circuit (IC) industries

On 25 July 2013, China’s Ministry of Finance and the State Administration of Taxation (SAT) released SAT Announcement [2013] No. 43 (Announcement 43) to provide clarifications related to the implementation of preferential corporate income tax policies for the software and IC sectors. Announcement 43 is retroactively effective from 1 January 2011.

[For more details on this development, please click here to refer EY Tax Alert dated 20 August 2013]

Argentina introduces amendments to its rules on tax-havens

The Government of Argentina has issued Decree 589/2013, published in the Argentine Official Gazette on 30 May 2013, modifying the rules on low or nil tax jurisdictions (tax-havens). Till now, the Regulatory Decree to the Income Tax Law contained a list of 87 countries, jurisdictions and territories considered as tax-havens for tax purposes. Now, the list has been eliminated and the Federal Tax Authorities (AFIP) have been empowered to establish a new list, which will include the countries, jurisdictions, territories and tax systems that will be considered as “cooperators for purposes of fiscal transparency.” The new Decree establishes that any reference in the tax law to “tax-havens” now means jurisdictions that do not qualify as “cooperators for purposes of fiscal transparency.”

[For more details on this development, please click here to refer Ernst & Young Tax Alert dated 4 June 2013]

Italy approves new non-resident forms for mitigation of withholding taxes

On 10 July 2013, the Italian Revenue Agency (Revenue) approved a set of new forms to be filed by nonresidents claiming an exemption, refund or reduction of Italian taxes on dividends, interest, royalties and other income sourced in Italy. The Revenue also approved a specific tax residence certificate to be used by Italian residents when applying for foreign tax mitigation under bilateral treaties. The forms are specifically aimed at the application of the favorable regimes provided under:

• Bilateral tax treaties for the avoidance of double taxation;

• EU Directive n. 90/435/EEC of 23 July 1990 (Parents-Subsidiary Directive); and

• EU Directive n. 2003/49/EC of 3 June 2003 (Interest and Royalties Directive).

[For more details on this development, please click here to refer EY Tax Alert dated 12 July 2013]

EU commission requests Spain to amend its rules governing international double taxation relief

The EU Commission recently announced (MEMO/13/583 published on 20 June 2013) that it has formally requested Spain to amend its rules governing the methods that provide relief from double taxation applicable to income from foreign subsidiaries. The Commission contends the Spanish rules are more burdensome than the rules, which apply to dividends received from Spanish tax resident subsidiaries.

[For more details on this development, please click here to refer EY Tax Alert dated 8 July 2013]

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From the Tax Gatherer’s desk

CBDT prescribes information to be provided along with TRC to claim tax treaty benefit

A provision was recently introduced in the ITA, which required a non-resident taxpayer to provide such other documents and information, as may be prescribed, in addition to obtaining a certificate of it being a resident of a country, i.e, a Tax Residency Certificate (TRC). This was required for the taxpayer to claim relief under the relevant DTAA. Pursuant to the above, the Central Board of Direct Taxes (CBDT) has issued a Notification prescribing the information to be provided. This Notification is deemed to have come into force from 1 April 2013.

[For more details on this development, please refer EY Tax Alert dated 6 August 2013]

Source: Notification No. 57/2013 [F.NO. 142/16/2013-TPL]/SO 2331 dated 1 August 2013

Setting up of Tax Administration Reform Commission approved

The Union Cabinet of India approved a proposal to set up the Tax Administration Reform Commission (TARC). The Commission will review the application of tax policies and tax laws in India in the context of global best practices and recommend measures to strengthen the capacity of the tax system in India that would reflect best global practices. Furthermore, the Commission would help in removing ambiguity in application of tax policy and tax laws, thereby establishing a stable tax regime and a non-adversarial tax administration. Moreover, the Commission will facilitate an efficient tax administrative system that will enhance the tax base as well as taxpayer base.

Source: PIB Press release dated 13 August 2013

Revised guidelines on prosecution for default in depositing taxes withheld

Not depositing taxes withheld by tax deductors within the due date is an offence liable for prosecution under ITA for up to seven years, if convicted. On this aspect, the CBDT has partly modified existing guidelines for identification of cases for launching prosecution. According to the revised guidelines, the criterion of minimum retention period of 12 months has been dispensed with. It is clarified

that the defaulters, who have failed to deposit the taxes withheld within the due date, will be liable for prosecution, irrespective of the period of retention. However, the offence can be compounded by the jurisdictional Chief Commissioner.

Source: PIB Press release dated 6 August 2013

Constitution of forum for exchange of views between industry groups and GoI

The Finance ministry has constituted a Forum chaired by adviser to the Finance Minister for exchange of views between industry groups and the GoI on tax-related issues or disputes. The Forum is scheduled to meet every Wednesday, commencing 7 August 2013.

Source: PIB Press release dated 17 July 2013

Revised rules for furnishing information on payments to nonresidents

The CBDT has revised the existing Rule prescribing the manner and forms for furnishing information electronically by a person responsible for making any payment to a nonresident. The revised Rule mandates reporting of certain additional information and a new format for furnishing information in revised Forms. The revised Rule comes into force from 1 October 2013 and seeks to widen the ambit of reporting remittances outside India and covers all payments even if they are claimed to be not chargeable to tax in India.

Source: Notification No. 58/2013 [F.NO.149/119/2012-SO (TPL)]/SO 2363(E), dated 5 August 2013

[For more details, please refer EY Tax Alert dated 12 August 2013]

Prerequisites for claiming deduction on transactions with persons located in notified non-cooperative tax jurisdictions

Rules have been notified in respect of transactions entered by a taxpayer where one of the parties is located in notified non-cooperative tax jurisdiction known as Notified Jurisdictional Area (NJA). The Rule enlists details such as (a) requisite documents to be maintained by a taxpayer

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who has entered a transaction with a person located in a NJA, (b) format of authorization to be given to the CBDT to access taxpayer’s information with financial institution in NJA, (c) the time period until which the information is to be maintained and furnished etc. On complying with these conditions, deduction of the concerned expense is allowed. However, as on date, no country or jurisdiction has been notified as a NJA.

Source: Notification No. 47/2013, dated 26 June 2013

[For more details, please refer EY Tax Alert dated 1 July 2013]

Maximum rate of interest notified on rupee-denominated bonds to avail concessional rate of tax by FIIs/QFIs

Finance Act (FA), 2013 inserted a new provision in the ITA to provide that the tax rate on interest payable to Foreign Institutional Investors (FIIs) or Qualified Foreign Investors (QFIs) between 1 June 2013 and 31 May 2015 on rupee-denominated bonds of an Indian company or Government security will be 5% (plus applicable surcharge and cess) on gross basis. The concessional tax rate is subject to the condition that it does not exceed the rate as may be notified by the GoI in this behalf. This Notification prescribes the maximum rates, which is given in the table below:

Date of issue of bonds Maximum rate

Prior to 1 July 2010 500 basis points (5%) over SBI Base Rate as on 1 July 2010

On or after 1 July 2010 500 basis points (5%) over SBI Base Rate as on date of issue

Source: Notification No. 56/2013/F.No.149/81/2013-TPL dated 29 July 2013

[For more details, refer EY Tax Alert dated 31 July 2013]

Circular on set off of eligible unit profits against ineligible unit loss

The CBDT has issued a Circular giving its view on whether profit of a unit eligible for deduction u/s 10A/10B has to be first set-off against loss suffered by an ineligible unit before computing the available deduction u/s 10A/10B. The CBDT has expressed a view that as section 10A/10B is now a “deduction” provision, first, income/loss from various sources, i.e., eligible and ineligible units, under the same head have to be aggregated. After such aggregation, brought forward loss if any, needs to be adjusted. Where after this exercise, if there income still remains, it is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc.

Source: Circular No. 279/Misc./M-116/2012-ITJ, dated 16 July 2013

Rules for tax withholding on immovable property transactions notified

Tax withholding provisions as introduced by FA 2013 pertaining to transfer, by a resident, of immovable property (other than agricultural land) where consideration exceeds INR5 million would attract withholding tax at 1% under section 194 IA of the ITA effective from 1 June 2013. By way of this notification, the CBDT has notified that the deductor will be required to deposit the tax along with a challan-cum-statement in Form No 26QB within seven days from the end of the month in which the tax is required be withheld. The format for Form 26QB has also been notified.

Source: Notification No. 39/2013 [F.No.133/23/2013-SO(TPL)(Pt.)], dated 31 May 2013

Procedural instructions issued to address taxpayer woes

Pursuant to the decision of the Delhi HC1 , the CBDT has issued certain instructions aimed at improving administrative aspects, prevent undue harassment of honest taxpayers and iron out deficiencies in procedural matters.

1 Court on its own motion v. UOI and Ors [(2013) 352 ITR 273 (Delhi)]

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Instruction Instruction pertaining to

3 / 2013 Procedure to be followed for receipt and disposal of applications for rectification under section 154

4 / 2013 Identification of un-served intimations under section 143(1) for returns processed prior to 31 March 2010

5 / 2013 Credit for taxes withheld when taxes have been deposited by the deductor — The instruction states that when a taxpayer approaches the Tax Authority with requisite details and particulars in the form of withholding tax certificate as evidence against any mismatched amount, the Tax Authority should grant credit of taxes withheld to the taxpayer after ascertaining whether the deductor has made payment of the taxes withheld to the GoI.

6/2013 Past adjustments of arrears of tax demand against refunds when procedure under section 245 was not followed

7/2013 Payment of interest under section 244A when taxpayer is not in default

Source: Instruction No. 3 and No. 4/2013 [F.No.225/76/2013/ITA.II], dated 5 July 2013; Instruction No. 5/2013 [F.No.275/03/2013-IT(B)], dated 8 July 2013; Instruction No. 6/2013 [F. NO. 312/53/2013-OT], dated 10 July 2013; Instruction No. 7/2013 [F.No.312/54/2013-OT], dated 15 July 2013

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Service Tax

Indirect TaxHigh Court, Kerala

Levy of Service tax on services provided by restaurants and hotels beyond the legislative competence of the Parliament

Finance Act, 1994; in favor of assessee

The main issue in this writ petition was with regard to the validity of levy of Service tax on the services provided by restaurants and short-term accommodation services provided by hotels. The petitioners challenged the levy of Service tax on restaurants on the ground that the sale of food and beverages come under Entry 54 of List II (State List), which is within the exclusive competence of state legislature.

Similarly, levy of Service tax on hotels was challenged on the ground that it infringes state governments’ power to levy tax on luxuries (Entry 62 of State List).

Held, that relevant clauses of the Finance Act, 1994 relating to levy of Service tax on services provided by restaurants and hotels are beyond the legislative competence of the Parliament (GoI) and that they are already covered by Entry 54 and 62 of the State List. Accordingly, petitioners are entitled to seek refund of the tax paid.

Kerala Classified Hotels and Resorts Association & Ors. v. UOI & Ors. [2013-TIOL-533-HC-KERALA-ST]

High Court, Madras

Service tax circular providing clarifications on transactions between the distributor/sub-distributor and owners of theatres held to be constitutional

Finance Act, 1994; in favor of revenue

This writ petition challenged the legality and constitutionality of the Circular No. 148/17/2011-ST dated 13 December 2011 bearing F. No. 354/27/2011-TRU, which was issued for the purpose of collecting Service tax from film distributors/sub-distributors/theater owners and sought for a direction for not giving effect to the said circular. The said circular pointed out that the earlier Circular No. 109/03/2009 dated 23 February 2009

had been misinterpreted to exclude all revenue sharing arrangements between distributors/sub-distributors or exhibitors of movies from the levy of Service tax. Held, that the Central Board of Excise and Customs (CBEC) was justified in issuing the Circular providing clarification on the levy of Service tax on the transactions between the distributor/sub-distributor and owners of the theaters. It was also held that the nature of transaction determines the leviability of Service tax and the decision should be taken on a case-to-case basis.

Mediaone Global Entertainment Ltd. v. The Chief Commissioner of Central Excise, Chennai & Ors. [2013-VIL-50-MAD-ST]

CESTAT, Mumbai

The activity of trading in cargo space would be subject to Service tax and cannot be considered as sale of goods

Finance Act, 1994; in favor of revenue

The assessee was engaged in booking cargo space in shipping lines and, thereafter, allotting that space to their customers. The assessee was of the opinion that since they are purchasing cargo space and selling the same to their customers, it amounts to a trading activity, which is not subject to Service tax. Held, that prima-facie, the activity of trading in cargo space cannot be considered as sale of goods, as cargo space is not considered goods. Hence, the activity should be subject to Service tax. Pre-deposit ordered.

Commissioner of Service Tax, Mumbai v. Greenwich Meridian Logistics (I) Pvt. Ltd. [2013-TIOL-1206-CESTAT-MUM]

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CENVAT credit

CESTAT, Delhi

Balance 50% CENVAT Credit cannot be denied on the grounds that the capital goods were not used in the manufacture of dutiable goods in the subsequent year

CENVAT Credit Rules, 2004; in favor of assessee

The assessee, engaged in manufacturing activities, purchased a packing machine. It availed 50% of the CENVAT credit on that machine in the year of purchase of the machinery and the balance 50% in the subsequent year. The revenue denied the 50% credit taken in the subsequent year on the grounds that during such period, the machine was being exclusively used for the manufacture of exempted goods (which were dutiable in the year of purchase of the machinery). The question before the Tribunal was whether the assessee is eligible to claim the balance 50% credit in the subsequent year when the goods being manufactured were subsequently exempted under a notification. Held, that if the assessee was entitled to take credit when the machinery was received in the factory, the credit cannot be denied in the subsequent financial year on the grounds that it was no more used in the manufacture of dutiable goods.

Commissioner of Central Excise, Meerut-I v. Backwell Agro Ltd. [2013 (291) ELT 365 (Tri.-Del.)]

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Central excise duty

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CESTAT, Delhi

Refund claim allowed in a situation where assessments were not made provisionally but there was a subsequent downward reduction in prices as per the price variation clause

Central Excise Act, 1944; in favor of assessee

The assessee, engaged in the manufacture of LPG cylinders, paid Excise duty on the basis of the price agreed to between the parties as on the date of clearing the goods. The assessments were not done on a provisional basis. The assessee subsequently filed refund claims when there was a downward revision in prices with retrospective effect. The question before the Tribunal was whether the assessee is entitled to the refund. Held, that refund can be granted to the assessee in a situation where assessments were not made provisionally, but there was a downward reduction in the prices according to the price variation clause and the buyer adjusted the excess price paid from the price of the goods sold subsequently.

Commissioner of Central Excise, Ghaziabad v. Mahavir Cylinders. [2013-TIOL-48-CESTAT-DEL]

CESTAT, Bangalore

Cost of consultancy charges and product development charges should not be included in the assessable value of the goods manufactured by a job worker

Central Excise Act, 1944; in favor of assessee

The assessee manufactured certain medicaments on job work basis for a principal manufacturer, which supplied the necessary raw material. The assessee paid Excise duty on the basis of the assessable value comprising the cost of raw material and conversion charges, which included an element of profit. The assessee also collected consultancy and product development charges from the principal manufacturer by raising debit notes. Such charges were not included in the value of goods for levy of Excise duty on the grounds that these charges were anterior to manufacture (and hence, should not be considered as a part of conversion charges). The question before the Tribunal was whether the said charges can be included in the assessable value of the medicaments. Held, that the consultancy charges and product development charges should not be added to the assessable value, as expenses, which were not attributable to job work should not be included in the cost of conversion.

Commissioner of Central Excise, Bangalore v. Ontop Pharmaceuticals Ltd. [2013-TIOL-1360-CESTAT-BANG]

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Customs duty

High Court, Madras

Norms that are applicable on the date of issue of license will be valid in respect of the goods imported under the said license

Customs Act, 1962; in favor of assessee

The assessee imported a consignment of lactose and sought to clear the same under a transferred Duty Free Import Authorization (DFIA) license, issued under the Standard Input Output Norms (SION), which permitted import of lactose as an alternative for sugar. The revenue denied the benefit under the said license on the grounds that the goods had been imported subsequent to the issue of a clarification and policy circular, which disallowed the import of lactose as an alternative input under DFIA. The question before the court was whether the rights will accrue to the license holder based on the date of issuance of the license or not. Held, that the license will get the benefit of the clarification and the policy circular, which were in force on the date of issue of license and that subsequent change in policy would have no effect in respect of license that was already issued.

Hoewitzer Organic Chemical Ltd. v. Director General of Foreign Trade & Ors. [2013-TIOL-612-HC-MAD-CUS]

High Court, Madras

Export duty would not be leviable when goods are supplied from Domestic Tariff Area (DTA) units to Special Economic Zones (SEZ) units

Special Economic Zones Act, 2005; in favor of assessee

This writ petition challenged the Circular F. No. 6/2/2008-SEZ (pt) dated 30 June 2008, which permitted the supply of steel products from DTA units to the SEZ units, only after the payment of the prescribed amount of Customs duty. Held, that export duty will not be leviable, as there was no movement of goods from India to a place outside India in this case, and there is no provision in the SEZ Act to levy Customs duty. It was also held by the Court that it was not open for the revenue to levy Customs duty by way of notifications or circulars.

Advait Steel Rolling Mills Pvt. Ltd. v. UoI [2013 (8) TMI 33-MADRAS HIGH COURT]

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VAT

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High Court, Kerala

Franchise agreement, permitting the use of trademark, will not attract VAT

Kerala Value Added Tax Act, 2003; in favor of assessee

The assessee, engaged in the marketing and trading of jewellery, entered franchise agreements, by which the franchisees were permitted the use of trademark of the assessee. The assessee received royalty for the same on which it discharged its Service tax liability. The question before the court was whether the franchise fee, on which Service tax has already been paid, be liable for VAT again. The earlier decision of the single judge (2012-VIL-112-KER) that the royalty received by the assessee would be subject to VAT was appealed against. On analysis of the franchise agreement, it was observed by the court that the effective control remained with the assessee during the term of the agreement and that it was only a license to use the trademark, as the transfer of its use was not to the exclusion of the transferor. Held, that the franchise transaction will not attract VAT.

Malabar Gold Pvt. Ltd. v. Commercial Tax Officer & Ors. [2013-TIOL-512-HC-KERALA-ST]

High Court, Madras

Customized goods manufactured according to the specifications of the customer and sent directly to the customer were in pursuance of inter-state works contract and there was no sale effected by the local branch office

Tamil Nadu General Sales Tax Act, 1959; in favor of assessee

The assessee manufactured lifts at its factory, according to the specifications of the customer indicated in the job order sent by the branch office. Thereafter, the finished goods were dispatched directly to the customer’s site outside the state and erected there. The question before the court was whether it was an intra-state sale effected by the branch office or an inter-state sale effected from the factory outside the state. Held, that since the goods are customized and manufactured according to specifications of customers, the movement of goods was in pursuance of

the sale contract and there was no further sale effected by the branch office. Hence, the transaction was an inter-state works contract and would not be subject to local sales tax.

ECE Industries Ltd. v. State of Tamil Nadu [2013-VIL-51-MAD]

High Court, Madras

Sale of DEPB license would be subject to VAT/Sales tax

Tamil Nadu General Sales Tax Act, 1959; in favor of revenue

The assessee, a dealer in finished leather, effected sale of Duty Entitlement Pass Book (DEPB) license in the course of trade and commerce. The contention of the assessee was that the sale of DEPB license was not liable to be included in the turnover as there was no business being carried out in that line. The question before the court was whether the assessee was carrying out business for the purpose of the Tamil Nadu General Sales Tax Act. Held, that incidental or ancillary activity to the main business does not contemplate the frequency, regularity or continuity of the activities. It was also observed that the contention of the assessee that the DEPB license was not purchased by the assessee was not a justifiable ground to claim that it was not a dealer dealing in DEPB license. Hence, the sale of the DEPB license will be subject to VAT/Sales tax.

Prakash Impex v. State of Tamil Nadu [2013 (8) TMI 679-MADRAS HIGH COURT]

High Court, Calcutta

West Bengal Tax on Entry of Goods into Local Areas Act, 2012 held to be ultra vires the Constitution

West Bengal Tax on Entry of Goods into Local Areas Act, 2012; in favor of assessee

This writ petition challenged the validity of the West Bengal Tax on Entry of Goods into Local Areas Act, 2012 (Entry Tax Act), which provided for the levy and collection of tax on the entry of certain goods into local areas of the State of West Bengal (for consumption, use or sale therein) for the purpose of creating a compensatory Entry Tax Fund. Held, that since the Entry Tax Act did not

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indicate the quantifiable or measurable benefits to be provided in lieu of the levy and since there is no disclosure of the quantifiable benefits either in the Entry Tax Act or by way of affidavit, the levy does not meet the test of compensatory tax. Since the sanction of the President of India has not been obtained prior to enactment of the Entry Tax Act, it was held to be ultra vires the Constitution.

Bharti Airtel Ltd. & Ors. v. State of West Bengal & Ors. [2013-VIL-48-CAL]

Maharashtra Sales Tax Tribunal, Mumbai

Sale by the assessee to the ultimate buyer outside the state, held to be subsequent sale, which would be exempt under the provisions of the Central Sales Tax Act (CST)

Central Sales Tax Act, 1956; in favor of assessee

The assessee, engaged in trading of machinery, received an order for machinery from buyers located outside the state (ultimate buyers). The assesse, thereafter, placed an order on local manufacturers with a specific

instruction to dispatch the goods to ultimate buyers. The local manufacturers raised an invoice on the assessee levying CST and also sent the dispatch proof including lorry receipts and delivery challans with the invoice. The assessee, in turn, raised an invoice on the ultimate buyers without the levy of CST by claiming the exemption for subsequent sales under section 6(2) of the CST Act. The question before the Tribunal was whether the sale effected by the assessee to the ultimate buyers would qualify as subsequent sale to qualify for the exemption under the CST Act. Held, that the sale effected by the local manufacturer to the assessee was an inter-state sale and the sale of goods by the assessee to the ultimate buyer was a subsequent sale, which would be exempt from CST.

Ajay Trading Company v. State of Maharashtra (Maharashtra Sales Tax Tribunal)

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26 Tax & Regulatory Quarter

Key statutory developments

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Service tax

Change in policy and procedure to claim Service tax exemption for specified services received by SEZ units or developers and used for authorized operations

With effect from 1 July 2013, services received by SEZ units or developers exempted from levy of Service tax, by way of:

• ► Refund of Service tax paid on specified services. • ► Ab-initio exemption in case the specified services are

exclusively used for authorized operations.

Prior to 1 July 2013, ab-initio exemption was provided only when specified services were “wholly consumed” for authorized operations within the SEZ.

Notification No. 12/2013 – ST dated 1 July 2013

Customs duty and Foreign Trade Policy

Import of electrical energy without any authorization/license permitted

With effect from 5 July 2013, restrictions imposed on import of electrical energy removed. Electrical energy can now be freely imported into India, i.e., without any authorization/ license.

Notification no 27(RE-2013)/2009-2014 dated 5 July 2013

Sale of waste/scrap permitted from SEZ to DTA without any authorization

A SEZ unit/developer is now allowed to dispose waste/scrap generated during manufacturing/-processing activity, in DTA without a need to obtain any authorization. Prior to the same, waste/scrap (“not freely importable” under Customs law) could not be cleared to DTA without authorization.

Notification no 28 (RE-2013)/2009-2014 dated 24 July 2013

Transfer of goods imported/procured using SFIS scrips now permitted

Goods imported/procured against Served from India Scheme (SFIS) scrips can be alienated after three years from date of import/procurement. Prior to the amendment, goods procured against such scrips could not be transferred except within a group company or managed hotels.

Notification no 30(RE-2013)/2009-2014 dated 1 August 2013

VAT

VAT rate under Karnataka Value Added Tax Act, 2003 retained

Notification – IX no. FD 143 CSL 2 dated 31 July 2012, which made the increased VAT rates of 5.5% and 14.5%, applicable only till 31 July 2013, has now been rescinded. Accordingly, the rates of 5.5% and 14.5% shall continue.

Notification - VII no. FD 165 CSL 2013 dated 30 July 2013

27 Tax & Regulatory Quarter

Foreign direct investment

Regulatory

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FDI policy: definition of group company In line with the definition given in the EXIM policy, Department of Industrial Policy & Promotion (DIPP), vide Press note 2 of 2013 series, has incorporated definition of group company in the FDI policy, which is given below:

“A group company means two or more enterprises, which, directly or indirectly, are in a position to:

(i) Exercise 26% or more of voting rights in other enterprise; or

(ii) Appoint more than 50%, of members of board of directors in the other enterprise.”

The above definition, will lay to rest the ambiguity surrounding the definition of the group company.

DIPP Press note 2 of 2013 dated 3 June 2013

Liberalization of FDI policyThe GoI has announced the reforms in the FDI policy by listing out relaxation in various sectors including telecom, defense, single brand retail trading etc.

These decisions have become effective following the issuance of press notes by the DIPP, Ministry of Commerce and will form part of the Consolidated FDI Policy (Circular 1 of 2013).

Definition of control

The definition of “control” has been amended to include control exercisable through management and policy decisions, management rights, shareholder agreements or voting agreements to align it with the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and Companies Bill, 2012. The definition of control will be applicable prospectively from the issuance of the notification.

The new definition shall read as follows:

“Control shall include the right to appoint a majority of the directors or to control the management or policy decisions

including by virtue of their share-holding or management rights or shareholders agreements or voting agreements.”

Relaxation in Multi-Brand Retail Trading (MBRT)

The following amendments have been approved in the MBRT:

50% investment in backend infrastructure

It has been clarified that the condition of 50% investment in backend infrastructure will be considered only for the first tranche of US$100 million.

Amendment in sourcing condition

• ► Sourcing from micro and medium industries allowed in addition to existing small industries.

• ► The criteria for investment in plant and machinery, to ascertain Indian micro, small and medium industries, has been increased to US$2 million from the existing limit of US$1 million.

• ► The investment limit of US$2 million to be reckoned at the time of first engagement with the retailer.

• ► Sourcing from agricultural co-operatives and farmers co-operatives will also be considered in this category.

Retail sales outlets

The amendment includes retail sales outlets to be set up in cities other than those with a population of more than 1million according to the 2011 census to include any other cities as per the decisions of respective state governments.

Single brand retail trading (SBRT)

The following changes have been made in the SBRT:

• ► Allowing more than one non-resident entity/investors to invest in a company engaged in SBRT.

• ► Investments up to 49% allowed under the automatic route. Investments beyond 49% require Foreign Investment Promotion Board (FIPB) approval.

Test marketing

This activity has lost its relevance due to liberalization of the trading sector and has been accordingly deleted from the FDI Policy.

28 Tax & Regulatory Quarter

Tea sector including tea plantations

There is no change in the approval requirement. However, the condition related to divestment of 26% to Indian partner within five years has been removed.

The other FDI amendments announced are as follows:

Sector Existing sectoral cap and route

Revised sectoral cap and route

Petroleum & Natural Gas

(Refining)

49% - Approval route

49% - Automatic route

Commodity Exchanges

49% (FDI + FII) - Approval route

49% (FDI + FII) - Automatic route

Power Exchanges

49% (FDI + FII) - Approval route

49% (FDI + FII) - Automatic route

Asset Reconstruction Company (ARC)

74% of paid-up capital of ARC

(FDI+FII) (Approval route)

100% of paid-up capital of ARC

(FDI+FII)

Up to 49% Automatic route Beyond 49% - Approval route

Credit Information Companies

49% (FDI + FII) - Approval route

74 % (FDI + FII) - Automatic route

Sector Existing sectoral cap and route

Revised sectoral cap and route

Stock Exchanges and Clearing corporations

49% (FDI + FII) - Approval route

49% (FDI + FII) - Automatic route

Telecom

(Basic and Cellular Services etc.)

74% - Approval route

100%;

Up to 49% - Automatic route Beyond 49% - Approval route

Courier Services

100% - Approval route

100% - Automatic route

Defense

(Foreign Investment in State of the Art Technology Manufacturing)

26% - Approval route

Cabinet Committee on Security may approve proposals on case-to-case basis beyond 26%, which are likely to result in access to modern and state of the art technology in the country.

DIPP Press Note 4,5,6 dated 22 August 2013

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29 Tax & Regulatory Quarter

Reserve Bank of India

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Updates in external commercial borrowings (ECB) policy• ► Low cost affordable housing projects

The RBI has relaxed the conditions on low-cost affordable housing by withdrawing minimum capital requirement of INR500 million and lowering total experience of developers/builders to three years from five years. The scheme is extended till the next financial year 2014–15.

RBI/2012-13/539 A.P. (DIR Series) Circular No. 113 dated 24 June 2013

• ► 3G spectrum allocation

The RBI has extended the ECB window for financing outstanding 3G spectrum rupee loans, up to 31 March 2014.

RBI/2012-13/543 A.P. (DIR Series) Circular No. 114 dated 25 June 2013

• ► Civil aviation sector

The RBI has extended the scheme of availing of ECB for working capital for the civil aviation sector till 31 December 2013.

RBI/2012-13/545 A.P. (DIR Series) Circular No. 116 dated 25 June 2013

• ► Facility of Renminbi (RMB)

The RBI has decided to discontinue the facility of ECB in RMB as no one has availed this scheme.

RBI/2012-13/546 A.P. (DIR Series) Circular No. 117 dated 25 June 2013

• Import of services, technical know-how and license Fees

The RBI has decided to include import of services, technical knowhow and payment of license fees as part of import of capital goods by the companies for the use in the manufacturing and infrastructure sectors as permissible end use of ECB under the automatic/approval route as the case may be, subject to certain conditions as specified in the circular.

RBI/2012-13/552 A.P. (DIR Series) Circular No.119 dated 26 June 2013

• ► Structured obligations

RBI has decided to include eligible nonresident entities for credit enhancement to the domestic debt raised through issue of INR bonds/debentures by all borrowers eligible to raise ECB under the automatic route.

It has further decided to reduce the minimum average maturity of the underlying debt instruments from seven years to three years.

RBI//2012-13/553 A.P. (DIR Series) Circular No.120 dated 26 June 2013

ECB policy for Asset Finance Companies

RBI has decided to permit Non-Banking Finance Company – Asset Finance Company (NBFC-AFC) to avail ECB subject to the following conditions:

• ► NBFC-AFCs are allowed to avail of ECB under the automatic route from all recognized lenders as per the extant ECB guidelines with minimum average maturity period of five years in order to finance the import of infrastructure equipment for leasing to infrastructure projects.

• ► Where the NBFC-AFCs avail ECB in the form of Foreign Currency Bonds (FCBs) from international capital markets, such ECBs will be permitted to be raised only from those markets that are subject to regulations prescribed by the host country regulator in a Financial Action Task Force (FATF) member country compliant with FATF guidelines.

• ► ECBs (including outstanding ECBs) under the automatic route can be availed up to 75% of owned funds of NBFC-AFCs, subject to a maximum of US$200 million or its equivalent per financial year.

• ► ECBs above 75% of the owned fund will be considered under approval route of RBI.

• ► The currency risk of such ECBs is required to be hedged in full.

RBI/2013-14/126 A.P. (DIR Series) Circular No. 6 dated 8 July 2013

30 Tax & Regulatory Quarter

ECB policy for repayment of Rupee loans and/or fresh Rupee capital expenditure – US$10 billion scheme

The current RBI guidelines allow Indian companies in the manufacturing, infrastructure and hotel sector, which are consistent foreign exchange earners, to avail of ECB for repayment of outstanding Rupee loan(s) availed from the domestic banking system and/or for fresh Rupee capital expenditure under the approval route. It has now decided to extend the benefit of the scheme to Indian companies in the aforesaid sectors, which have established joint venture (JV)/wholly owned subsidiary (WOS)/have acquired assets overseas subject to the conditions as provided in the circular.

RBI/2013-14/137 A.P. (DIR Series) Circular No. 12 dated 15 July 2013

Export of goods and services:realization and repatriation period for units in SEZ

The RBI has decided that the units located in SEZs should realize and repatriate full value of goods/software/ services, to India within a period of 12 months from the date of export.

Any extension of time beyond the above stipulated period may be granted by the RBI, on case-to-case basis.

Earlier no time limit was prescribed for realization and repatriation of export proceeds, for the exports made by units in SEZs.

RBI/2012-13/527 A.P. (DIR Series) Circular No. 108 dated 11 June 2013

Export of goods and services: project exports

The RBI has decided to increase the time limit for exporter undertaking Project Exports and Service contracts abroad to submit form DPX1, PEX-1 and TCS-1 to the Approving Authority (AA), i. e., AD Bank/Exim Bank/Working Group within 30 days of entering a contract for grant of post-award approval.

Prior to this circular the time limit was 15 days.

RBI//2012-13/548 A.P. (DIR Series) Circular No.118 dated 26 June 2013

Export of goods and software: realization and repatriation of export proceeds — Liberalization

In furtherance to the circular, where the RBI has reduced the realization period from 12 months to 9 months, it has clarified that the time period for realization and repatriation of export proceeds from 1 April 2013 onwards till 30 September 2013, will be reckoned as nine months from the date of export.

RBI/2013-14/147 A.P. (DIR Series) Circular No. 14 dated 22 July 2013

NBFCs not to be partners in partnership firms: clarifications

Currently, NBFCs are prohibited to contribute to the capital of a partnership firm and in case of existing partnerships the NBFCs are to seek early retirement.

RBI has clarified that:

(a) Partnership firms mentioned above will also include limited liability partnerships (LLPs).

(b) Further, the aforesaid prohibition will also be applicable with respect to Association of Persons (AOPs); these being similar in nature to partnership firms;

NBFCs, which have already contributed to the capital of a LLP/AOPs or is a partner of a LLP/AOPs are advised to seek early retirement from the LLP/AOPs.

RBI/2012-13/526 DNBS.PD/CC.No. 328 / 03.02.002 / 2012-13 dated 11 June 2013

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31 Tax & Regulatory Quarter

Financing of infrastructure: definition of “Infrastructure Lending”

The GoI had harmonized Master List of Infrastructure sub-sectors and added the following new sub-sectors:

i. Capital Dredging, under the sub-sector “ports.”

ii. Slurry pipelines

iii. Telecommunication and telecom services

The RBI has decided that this new definition of infrastructure loan will find place in the NBFC Prudential Norms Directions, 2007 thereby amending these Directions.

RBI/2013-14/ /172 DNBS .PD. CC. No. 354 / 03.10.001 / 2013-14 dated 2 August 2013

FDI – Reporting of issue/transfer of shares to/by a Foreign Venture Capital Investor (FVCI)

The RBI has clarified that wherever a SEBI registered FVCI acquires shares of an Indian company under the FDI scheme in terms of Schedule 1 of FEMA 20, such investments have to be reported in form FC-GPR/FC-TRS only. Where the investment is under Schedule 6, i.e., investment in an Indian venture capital undertaking by a registered FVCI , of the aforesaid notification, no FC-GPR/FC-TRS reporting is required.

Transactions covered under Schedule 6 are required to be reported by the custodian bank in the monthly reporting format as prescribed by the RBI from time-to–time, thereby, removing the duplication in reporting of FVCI investment.

RBI/2012-13/529 A.P. (DIR Series) Circular No.110 dated 12 June 2013

Foreign investment in India by SEBI registered long-term investors in government dated securities

The RBI, in consultation with GoI, has decided to enhance the existing limit for foreign investment in government dated securities from US$25 billion to US$30 billion with immediate effect. The enhanced limit of US$5 billion will

be available only for investments in government dated securities by long-term investors registered with the SEBI — Sovereign Wealth Funds (SWFs), multilateral agencies, pension/ insurance/endowment funds, foreign central banks. The operational guidelines in this regard will be issued by the SEBI.

RBI/2012-13/530 A.P. (DIR Series) Circular No.111 dated 12 June 2013

Buyback/prepayment of Foreign Currency Convertible Bonds (FCCBs)

Considering the developments in the global financial markets the RBI has extended the scheme of buyback /prepayment of FCCBs under the approval route till 31 December 2013.

RBI/2012-13/544 A.P. (DIR Series) Circular No. 115 dated 25 June 2013

Master circulars issued by the RBI

RBI issued the master circulars for 2013 on 1 July 2013. The circulars are available on the website of the RBI.

Source - www.rbi.org.in

[RBI Master Circulars dated 1 July 2013]

Aligning the foreign exchange regulation with the FDI policy

The RBI has issued a circular aligning the Foreign Exchange Management (transfer or issue of security by a person resident outside India) Regulations, 2000 with the FDI Policy.

The amended regulations have incorporated the changes brought about by the following:

• Press Notes 2 & 3 of 2009 issued by DIPP (Calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies)

• Press Note 2 of 2012 (Downstream investment by banking companies)

The above changes are already incorporated in the Consolidated FDI Policy (Circular 1 of 2013).

Investments made between 13 February 2009 and 21

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32 Tax & Regulatory Quarter

June 2013 will require intimating RBI within 90 days, the detailed position where the issue/transfer of shares or downstream investment is not in conformity with the regulatory framework.

Furthermore, the circular provides that for the purpose of downstream investment, the Indian companies making downstream investments will have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This will, however, not preclude downstream operating companies, from raising debt in the domestic market. Downstream investments, through internal accruals are permitted by an Indian company engaged only in the activity of investing in the capital of another Indian company(ies).

RBI/2013-14/117 A.P. (DIR Series) Circular No.01 dated 4 July 2013

Overseas Direct Investment (ODI)

According to the extant ODI guidelines, an Indian party is permitted to invest up to 400% of its net-worth in its JVs and/or WOSs abroad engaged in any bona fide business under the automatic route. The RBI has revised these investment limits, which are as under:

• ► Reduction in existing investment limit of 400% of net-worth of Indian party to 100% of its net worth under the automatic route

• ► Reduction in existing investment limit of 400% of net worth of Indian party to 100% of its net-worth investing in the overseas unincorporated entities in the energy and natural resources sector

• ► Any ODI in excess of 100% of the net-worth shall be considered under the approval route by the RBI.

• ► The above revised limits will not be applicable to the investments by Navratna Public Sector Undertakings (PSUs), ONGC Videsh Ltd. (OVL) and Oil India Ltd. (OIL) in overseas unincorporated entities and overseas incorporated entities in the oil sector, which are duly approved by the GoI.

The above provisions have become effective from the date of issue of the circular and will apply to all fresh ODI proposals on a prospective basis and will not apply to existing JV/WOS set up under the extant regulations.

RBI/2013-2014/180 A.P. (DIR Series) Circular No.23 dated 14 August 2013

Liberalized Remittance Scheme (LRS) for resident individuals

The existing LRS allows resident individuals to make remittance outside India up to a limit of US$200,000 in one financial year for any permitted current and capital account transaction or combination of both.

The RBI has reduced the existing limit of US$200,000 per financial year to US$75,000 per financial year (April-March) with effect from the date of the circular. Furthermore, the following changes/clarifications have been made in LRS, which will come into effect from the date of the circular:

• ► The scheme will no longer be used for acquisition of immovable property directly or indirectly outside India.

• ► The scheme should not be used to make remittances for any prohibited or illegal activities such as margin trading, lottery etc.

• ► The resident Individuals have now been allowed to set up JV/WOS outside India for any bona fide business activities within the limit of US$75,000. All the conditions/compliances in relation to ODI guidelines will need to be complied by an individual investor. However, the individual investor can only make investment in an operating JV/WOS engaged in a bona fide business and no step-down subsidiary is permitted by JV/WOS.

• ► The limit for gift in rupees by resident individuals to close NRI relatives and loans in rupees by resident individuals to NRI close relatives accordingly stand modified to US$75,000 per financial year from the previous overall limit of US$200,000 per financial year.

However, the RBI has stipulated that any genuine requirement beyond these limits under ODI/LRS will continue to be considered by the RBI under the approval route.

RBI/2013-2014/181 A.P. (DIR Series) Circular No.24 dated 14 August 2013

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33 Tax & Regulatory Quarter

Security Exchange Board of India (SEBI)

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Scheme of arrangement under the Companies Act, 1956: revised requirements for the stock exchanges and listed companies - Clarification

The SEBI has clarified some of the outstanding issues pertaining to circular on Scheme of arrangement dated 4 February 2013.

The SEBI has clarified that the scheme is not limited to reverse listings or other schemes that may require an exemption under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, but is applicable to all types of schemes of arrangement including amalgamation, reconstruction and reduction of capital.

SEBI CIR/CFD/DIL/8/2013 Dated 21 May 2013

Operational, prudential and reporting norms for Alternative Investment Funds (AIFs)

The SEBI has issued new directions under operational, prudential and reporting norms for AIF to put a check on speculative trading by these funds. The market regulator has tightened the norms for AIFs such as hedge funds that use complex trading strategies and employ leverage.

The AIF are required to have comprehensive risk management, strong compliance, maintain records of their trades and provide full disclosure of any conflict of interest.

Bringing in some nominal changes on disclosure for the AIFs falling in Category I (those investing in start-ups, social ventures, infrastructure and SMEs etc.) and Category II (PE funds debt funds that don’t undertake leverage), the disclosure norms have been tightened mostly for those falling in Category III (hedge funds that employ diverse or complex trading strategies and may employ leverage).

Funds that do not undertake leverage are required to submit their periodical reports on a quarterly basis and those funds, which undertake leverage to do so on a monthly basis.

The SEBI has also directed open-ended Category III AIFs to maintain sufficient liquidity to meet redemption obligations and other liabilities.

Furthermore, AIFs will also have to provide full disclosure

and transparency, about conflict of interest and how they manage them from time to time, to investors.

SEBI CIR/IMD/DF/10/2013 dated 29 July 2013

Change in category of the AIF

According to the extant guidelines specified in AIF regulations, an AIF, which has been granted registration under a particular category, cannot change its category subsequent to registration, except with the approval of the SEBI.

In this regard, the SEBI has specified that change can be made on satisfying the following conditions:

• ► Only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make application for change in category.

• ► Any AIF proposing to change its category shall make an application to SEBI along with application fees of INR 0.1 million and other related document and rationale for the proposed change. Registration fees shall not apply for such applications.

• ► If the AIF has received commitments/raised funds prior to application for change in category, the AIF shall be required to send letters/emails to all its investors providing them the option to withdraw their commitments/funds raised without any penalties/charges. Any fees collected from investors seeking to withdraw commitments/funds shall be returned to them. Partial withdrawal may be allowed subject to compliance with the minimum investment amount required under the AIF Regulations.

• ► The AIF shall not make any investments other than in liquid funds/banks deposits until approval for change in category is granted by the SEBI.

• ► On approval of the request from the SEBI, the AIF shall send a copy of the revised placement memorandum and other relevant information to all its investors.

SEBI CIR/IMD/DF/12/2013 dated 7 August 2013

34 Tax & Regulatory Quarter

Click on the links provided below to access some of our recently published articles.

Continued...

In the press

GST won’t be a game-changer, only a name changer Satya Poddar, Business Standard

International workers: EPFO gets tough on employers Aditya Modani, The Financial Express

Taxation: Supplementary invoice and excise liability Vivek Sharma, Manav Saneja, The Financial Express

Getting PE funds Ajit Krishnan, The Financial Express

Key to supply chain management Harishanker Subramaniam, The Hindu Business Line

Taxman calls up conciliation Pranav Sayta, The Hindu Business Line

Buying overseas oil and gas assets? Local taxes apply Raju Kumar, The Hindu Business Line

How to file tax returns electronically B.Venkatesan, The Hindu Business Line

Reporting of foreign assets, income in your tax returns Sreenivasulu Reddy, The Financial Express

No tax on services used within SEZ Vivek Sharma, Manav Saneja, The Financial Express

New procedure for disposal of rectification applications Vaibhav Kulkarni, The Financial Express

Service tax on under-construction property Amit Bhagat, Jayanta Kalita, The Financial Express

Govt’s efforts on transfer pricing should be applauded Vijay Iyer, The Financial Express

Sebi gears up to clamp down on shell employee benefit schemes Pinky Khanna, The Financial Express

Reporting your foreign income & assets Sonu Iyer, Business Standard

E-filing of tax returns is not so complicated Pramod Achuthan, Business Standard

Tax Return Simplified: Accuracy is the key Amarpal S Chadha, Business Standard

Revised circulars: A change in FinMin stance Satya Poddar, Business Standard

Better deal for R&D centres Rajendra Nayak, The Hindu Business Line

Dialling the right number Dev Raj Singh, The Hindu Business Line

Remember to take your TRC for foreign assignments Amarpal S. Chadha, The Hindu Business Line

Does taxman know you’ve moved? Alok Agrawal, The Hindu Business Line

Time for states to exit from entry tax Satya Poddar, Business Standard

Companies Bill: The new law should set the M&A market on fire Amrish Shah, The Economic Times

Tax credit on debit notes Amit Bhagat, Jayanta Kalita, The Financial Express

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35 Tax & Regulatory Quarter

Click on the links provided below to access some of our recently published articles.

Home | Previous | Next

New law is a step towards responsible India Inc Narendra Rohira, The Financial Express

Amnesty scheme and Cenvat credit Vivek Sharma, Manav Saneja, The Financial Express

Working abroad? Tax residency certificate norms relaxed Alok Agrawal, The Financial Express

Excise duty on value of subsidy Amit Bhagat, Jayanta Kalita, The Financial Express

For a corporate world without borders Nitin Savara, The Hindu Business Line

Count your steps before you invest Amrish Shah, The Hindu Business Line

New hurdles to foreign buys Raju Kumar, The Hindu Business Line

How ‘impossible’ GST became ‘inevitable’ Satya Poddar , Business Standard

Will gold rush past the import duty hike? Suresh Nair, The Hindu Business Line

Marginally safe harbor Vijay Iyer, The Hindu Business Line

36 Tax & Regulatory Quarter

Direct Tax

Compilation of Tax Alerts

Sl No Title Tax Alert Date Citation/Notification/Circular

1 Karnataka HC rules that sourcing support activities of a foreign company does not create a taxable presence in India

12 June 2013 CIT (IT) v. Nike Inc. (ITA No. 976 of 2008) [TS-248-HC-2013(KAR)]

2 Pune Tribunal rules remission of time barred losses are not taxable

13 June 2013 The Mula Pravara Electric Co-op. Society Ltd. v. DCIT [ITA No. 1308/PN/2010] [TS-238-ITAT-2013(PUN)]

3 ITAT rules onus of proof is on Tax Authority to establish nonpayment of taxes due by the recipient before proceeding against the payer to collect the taxes

25 June 2013 ICICI Bank Ltd. v. DCIT (ITA No. 668/Lkw/ 2011) [TS-274-ITAT-2013(LKW)]

4 Key decisions in SEBI Board Meeting on 25 June 2013

27 June 2013 Key decisions taken by SEBI in its Board meeting on 25 June 2013

5 India Tax administration issues revised circulars on transfer pricing issues relating to development centers

1 July 2013 Revised CBDT Circulars - Circular No 5/ 2013 & Circular No 6/ 2013 dated 29 June 2013.

6 CBDT prescribes prerequisites for transactions with persons located in notified non-cooperative tax jurisdictions

1 July 2013 Notification No. 47/2013 dated 26 June 2013 issued by CBDT

7 ITAT distinguishes between commercial and non-commercial services rendered by an Indian PE of a US enterprise

2 July 2013 Wellinx Inc. v. ADIT (ITA No. 1651/Hyd/2011) [TS-288-ITAT-2013(HYD)]

8 Indian tax administration issues revised circulars on TP issues relating to development centres (Global Tax Alert)

4 July 2013 Revised CBDT Circulars - Circular No 5/ 2013 & Circular No 6/ 2013 dated 29 June 2013

9 Mumbai Tribunal rules on DAPE in case of marketing and distribution activities carried out by an Indian branch for group companies

4 July 2013 Varian India Pvt. Ltd. v. ADIT (Intl. Tax) (ITA No. 4672 to 4676/Mum/2011) [TS-292-ITAT-2013]

10 Tribunal rules general training services do not satisfy “make available” condition of FTS

8 July 2013 ITO v. Veeda Clinical Research Pvt. Ltd. (I.T.A. No. :1406/Ahd/2009) [TS-300-ITAT-2013]

11 Delhi High Court rules stock derivative loss is speculation loss for companies

8 July 2013 CIT v. DLF Commercial Developers Ltd. (ITA 94/2013) [2013]35 taxmann.com 280(Del)

12 Special Bench rules ESOP discount is deductible on vesting of options

19 July 2013 Biocon Ltd. vs. DCIT (ITA Nos. 368, 369, 370, 371, 1206, 248/Bang/2010)

13 Mumbai ITAT rules that blueprints, to be used in future, satisfy the test of ‘make available

26 July 2013 Sargent & Lundy, LLC v. ADCIT (ITA No.8986/Mum/2010) [TS-341-ITAT-2013(Mum)]

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37 Tax & Regulatory Quarter

Sl No Title Tax Alert Date Citation/Notification/Circular

14 GoI notifies maximum rate of interest on rupee denominated bonds for concessional rate of tax to FIIs/QFIs

31 July 2013 CBDT Notification No. 56 /2013/F.No.149/ 81/2013-TPL

15 Mumbai ITAT rules Indian company purchasing online advertising

6 August 2013 ITO v. Pubmatic India Pvt. Ltd. (I.T.A. No. 7044/Mum/2011)[TS-357-ITAT-2013(Mum)]

16 CBDT prescribes information to be provided along with TRC to claim tax treaty benefit

6 August 2013 CBDT Notification No. 57 of 2013 dated 1 August 2013

17 Rajasthan HC rules no withholding on service tax payable on professional/technical fees

7 August 2013 CIT(TDS) v. Rajasthan Urban Infrastructure Development Project [(2013) TaxCorp (LJ) 1553)/(DB ITA No.235/2011)]

18 Delhi Tribunal rules in Maruti Suzuki Ltd. royalty payment case

9 August 2013 Maruti Suzuki India Ltd. v. ACIT - (I.T.A. No. 5237/Del/2011) [TS-212-ITAT-2013(DEL)]

19 CBDT revises rules relating to furnishing information in respect of payments to non-residents

12 August 2013 Notification No. 58/2013 revising the existing Rule 37BB (Rule) of the Income Tax Rules 1962

20 Indian Tax Administration announces draft rules on Transfer Pricing Safe Harbours

16 August 2013 Draft safe harbour rules for public comments released by CBDT on 14 August 2013

21 GoI notifies the entities eligible to issue tax free bonds for financial year 2013-14

19 August 2013 CBDT Notification S.O. 2424E dated 8 August 2013

22 Indian Tax Administration announces draft rules on Transfer Pricing Safe Harbours (Global Tax Alert)

20 August 2013 Draft safe harbour rules for public comments released by CBDT on 14 August 2013

23 Delhi Tribunal overturns transfer pricing adjustment for excess advertising expenses in the case of a distributor

23 August 2013 Taxpayer v. ADIT

24 Bangalore Tribunal rules on applicability of transfer pricing provisions to assignment of contract

27 August 2013 Tellabs India Pvt. Ltd. v. ACIT (IT(TP)A Nos. 1037 & 1038/Bang/2008) [TS-219-ITAT-2013(Bang)-TP]

25 SEBI amends Preferential Issue rules for listed companies

3 September 2013 SEBI Notification dated 26 August 2013 amending Chapter VII of the SEBI (Issue of Capital Disclosure Requirements) Regulations, 2009.

26 CBDT amends recently revised rules relating to furnishing information in respect of payments to nonresidents

6 September 2013 CBDT Notification No. 67/2013 revising the existing Rule 37BB of the Income Tax Rules 1962

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38 Tax & Regulatory Quarter

Sl No Title Tax Alert Date Citation/Notification/Circular

1 Change in policy and procedure for claiming service tax exemption for specified services received by SEZ units or Developers and used for authorized operations

4 July 2013 Notification No. 12/2013-Service Tax dated 1 July 2013 issued by the Ministry of Finance,

2 Parliamentary Standing Committee report on the Constitution (115th Amendment) Bill, 2011 relating to GST

8 August 2013 Key observations and recommendations of the Committee

3 Special Economic Zones (Amendment) Rules, 2013

16 August 2013 Key changes introduced in the Special Economic Zones (Amendment) Rules, 2013.

Indirect Tax

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39 Tax & Regulatory Quarter

Regulatory

Sl No Title Tax Alert Date Citation/Notification/Circular

1 Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments

21 June 2013 Major recommendations suggested by the Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments

2 ECB Policy for Asset Finance Companies

8 July 2013 Circular no. RBI/2013-14/126 A.P.(DIR Series) Circular No. 6, dated 8 July 2013 issued by the RBI

3 FDI policy updates 17 July 2013 Press release dated 16 July 2013

4 Liberalisation of FDI Policy 2 August 2013 Decision taken by the Cabinet on 1 August 2013 liberalizing FDI norms for MBRT/SBRT

5 Rationalization of Overseas Investment Norms

15 August 2013 A.P.(DIR Series) Circular No. 23 & A.P.(DIR Series) Circular No. 24 issued by the RBI on 14 August 2013

6 FDI policy updates 23 August 2013 DIPP Press Notes 4 to 6 (2013 Series) notifying FDI policy decisions taken on 1 August 2013

7 RBI circular liberalizing ECB end use restrictions & clarification on circulars amending investment conditions under ODI & LRS

5 September 2013 RBI A.P. (Dir Series) Circular No. 30, 31 & 32 issued on 4 September 2013

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40 Tax & Regulatory Quarter

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