India Spectrum

*connectedthinking

Tax and Regulatory Services

Be in the know* June 2009 Vol. 2 Issue 11

EditorialWe are delighted once again to present the new issue of India Spectrum.

India has voted for stability and the UPA has formed a government and appointed the key ministers. The heartening point is that this government will be less dependent on coalition partners compared to the previous one. This should hopefully result in bold and necessary decisions, which will enhance the economic prospects for the country. While it is expected that the new Government will further intensify its liberalisation agenda, the key expectation is the announcement of measures to hasten the country’s economic recovery, in line with the 100 day program that the Government has said it will announce. Encouragingly, there are already some early signs of the economy coming back on track, although it may be too early to form any conclusive judgment in this regard. I am however very confi dent that

the entrepreneurial spirit that is manifestly present in the country will capitalise on these early signs and accelerate the progress to recovery.

After the announcement of the election results, we had done a quick exercise in crystal ball gazing, the outcome of which was highlighted in our recent News Alert on the expected way forward on tax and regulatory reforms. The key announcements that are expected are the introduction of the New Direct Tax code, the New Companies Bill and the continuing liberalisation of the FDI Regime as well as on banking and pension sector reforms. Furthermore, the momentum towards an early introduction of the Goods & Services Tax is expected to be maintained. Also, clarity on the taxation of LLPs should give a boost to this new way of organising businesses, which is suited to the current operating and regulatory environment qua business.

On the tax front, there have been some important decisions given by the Courts. For instance, the recent case of E*trade Mauritius has made everyone wake up to the possibility of the Indian Tax Offi ce denying tax treaty benefi ts. This case refl ects the increasingly aggressive stance of the Indian Tax Offi ce and reiterates the fundamental tax principle of establishing substance in special purpose vehicles. PwC had conducted a webcast on this matter, and received an overwhelming response.

The Supreme Court, in the recent case of Rajasthan Spinning & Weaving Mills and Lanco Industries Ltd., clarifi ed that its earlier decision in the case of Dharmendra Textile Processors cannot be interpreted to mean that the levy of a penalty is automatic and is to be mechanically imposed in all cases of the non-payment of taxes. This is a very welcome development in that it clarifi es the true meaning of earlier decision on the point.

I would like to end this note by mentioning that due to the very gratifying response received from our readers, we have decided to make India Spectrum a monthly newsletter with effect from this issue. We are confi dent that this will provide our esteemed readers with a more regular and ongoing update on the various tax and regulatory developments.

We trust you will enjoy this issue of India Spectrum. We would, as always, welcome your suggestions to improve the newsletter.

Warm regards

Dinesh KanabarLeader–TRS Practice

Contents

Direct Taxes 1Case Law 1

Notifi cations / Circulars 5

Financial Services 6Direct Tax Cases 6

Regulatory Developments 7

International Assignment Services 8

Direct Tax Cases 8

Notifi cations / Circulars 9

Mergers & Acquisitions 10Direct Tax Cases 10

Corporate Law Cases 10

Transfer Pricing 12Direct Tax Cases 12

International Developments 13

Indirect Taxes 14Value Added Tax / Sales Tax 14

CENVAT 15

Service Tax 15

Customs / Foreign Trade Policy 15

Foreign Exchange Management Act 17Foreign Direct Investment 17

External Commercial Borrowing 17

Miscellaneous 17

Glossary AAR Authority for Advance RulingsAMC Asset Management CompanyAPA Advance Pricing Agreement AY Assessment YearCBDT Central Board of Direct TaxesCENVAT Central Value Added TaxCIT(A) Commissioner of Income-tax (Appeals)CST Central Sales Tax CUP Method Comparable Uncontrolled Price MethodDGFT Director General of Foreign TradeECB External Commercial BorrowingsFMV Fair Market Value FTP Foreign Trade PolicyICD Inter-corporate Deposits IRDA Insurance Regulatory Development AuthorityITR Income-tax ReturnJV Joint VentureMAT Minimum Alternate Tax MVAT Maharashtra Value Added Tax PE Permanent EstablishmentRBI Reserve Bank of IndiaRC Reconstruction CompaniesSAT State Administration of TaxationSC Securitisation CompaniesSEBI Securities Exchange Board of IndiaSEZ Special Economic ZoneSPA Securities Premium AccountTCS Tax Collected at SourceTDS Tax Deducted at SourceThe Act The Income-tax Act, 1961TNMM Transactional Net Margin MethodTO Tax Offi cerw.e.f. With effect from

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India Spectrum*

Case Law

Accrual of expense

Overseas payments allowable as deduction in the year of RBI approval though related to the prior period

The Tax Offi cer (“TO”) had disallowed the claim of the legal fees paid to the overseas lawyers on the ground that they were prior period expenses since these legal fees related to the fi nancial year 1998-99, i.e. the earlier previous year.

The Tribunal observed that the approval of the Reserve Bank of India (“RBI”) for making the payments had been obtained and the remittances of funds had also been made during the previous year. Hence, the liability could be said to have accrued or arisen during the previous year.

Accordingly, it was held that the legal fees would be allowed as a deduction during the relevant assessment

year (“AY”).Argued by PwC Tax Litigation Team

UBS Securities India Pvt. Ltd. v. DCIT [2009] 8

ITATINDIA 616 (Mum)

Assessment Procedure

‘Agent of non-resident’ means ‘agent’ under the provisions of section 160 of the Act

The assessee was an agent of a non-resident Singapore based shipping company. Notices under section 148 were issued after the expiry of a period of two years from the end of the relevant AYs, and hence were claimed by the assessee to have been issued after the expiry of the time-limit prescribed under section 149(3) of the Income-tax Act, 1961 (“The Act”).

The Tribunal observed that the liability

Direct Taxesof an agent under section 163(1) of the Act is the same as the liability of the agent of a non-resident under section 160(1)(i) of the Act, since the provisions of section 160 include an agent as defi ned under section 163, and the word ‘including’ or ‘includes’ enlarges the meaning of the expression.

Furthermore, a person who admits its status as an agent of a non-resident is not a person ‘treated’ as an agent of the non-resident. Accordingly, the assessment of a person as an agent of a non-resident is not the ‘treatment’ envisaged under section 163(2).

Accordingly, it was held that the provisions of section 149(3) would not apply since there was no question of ‘treating’ the assessee as an agent of the non-resident in the sense meant by section 163(2). Thus, the assessee would be required to comply with the provisions of sections 147 / 148 of the Act.J. M. Baxi & Co. Ltd. v. DDIT [2009] 117 ITD 131(Mum)(SB)

Levy of penalty – Interpretation of Dharmendra Textile Processors decision – Supreme Court

The Tribunal had set aside the imposition of the penalty under section 11AC of the Central Excise Act, 1944 on the grounds that the assessee had deposited the balance amount of excise duty, which had been under-paid in the fi rst instance even before

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Levy of penalty not tenable for non / short payment of duty

2

the show cause notice was issued.

The revenue placed reliance on the decision in the case of UOI & Ors. v. Dharmendra Textile Processors & Ors. [2008] 306 ITR 277 (SC), and contended that non-payment or short-payment of duty would inevitably lead to the imposition of a penalty equal to the amount by which duty was short paid.

The Supreme Court held that:• The misstatement or suppression of

facts must be willful. • The decision in the case of

Dharmendra Textile Processors (supra) would not apply to every case of non-payment or short-payment of duty. However, its applicability would be subject to the conditions mentioned in section 11AC; and if that section was applicable, the authority concerned would have no discretion in quantifying the amount.

• It was also clarifi ed that the interpretation of the decision in the case of Dharmendra Textile Processors (supra) was made only to the extent of the provisions of section 11AC, and not with regard to other statutory provisions.

Accordingly, the Supreme Court set-aside the orders of the Tribunal on the ground that the orders passed by the Tribunal were made on false premises, and remitted the orders back to the Tribunal for fresh consideration in accordance with the law and in light of this judgement.UOI v. M/s. Rajasthan Spinning & Weaving Mills and CCE

v. Lanco Industries Ltd. [Unreported order dated 12 May

2009, Civil Appeal No. 3527 of 2009 and 3525 of 2009]

Business Expenditure / Deductions

Loss on account of foreign exchange fl uctuation is allowable

The TO had disallowed the unrealised foreign exchange fl uctuation loss on revenue account on the ground that it was a contingent liability and not an ascertained liability.

The Supreme Court observed that the Tax Department had applied double standards by taxing the gains whenever the dollar rates were reduced but disallowing the loss incurred when the dollar rates were increased. Furthermore, the expression “expenditure” as used in section 37 covers an amount of “loss”, even if this amount has been borne by the assessee.

Accordingly, it was held that the loss suffered by the assessee on account of exchange rate difference as at the date of the balance sheet should be treated as expenditure under section 37(1) of the Act.

Another issue before the Supreme Court was whether the assessee would be entitled to adjust the actual cost of imported assets acquired in foreign currency on account of foreign exchange fl uctuation at each balance sheet date pending actual payment of the varying liability.

The Supreme Court observed that under the unamended provisions of section 43A, i.e. prior to the amendment brought in by the Finance Act, 2002, the words used were “for making payment” and not “on payment”.

Accordingly, it was held that under the unamended section 43A adjustment to the actual cost should take place at the time of a change in the rate

of exchange whereas under the amended section 43A, the adjustment in the actual cost would be made on a cash basis. It was also held that the amendment to section 43A was mandatory, and not clarifi catory, in nature.CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC)

Right of deduction claim is not affected by change in name of the company

The assessee was a 100% subsidiary of Bicron, USA. The parent of the assessee i.e. Bicron, USA was taken over by M/s. Saint Gobain, Bangalore, and subsequently, there was a change in name of the company.

The TO denied the benefi t of deduction under section 10B of the Act on the ground that the assessee neither applied for a change of name, nor sought fresh permission, from the Ministry of Industry, to carry on the business of the 100% Export Oriented Undertaking.

The assessee contended that benefi t under section 10B should be available since the same project was continued after the change of name and there was no change in the shareholding pattern of the assessee company.

The Tribunal observed that there was no change in the shareholding pattern or in the business of the assessee. Accordingly, it was held that the deduction under section 10B should not be denied on grounds of reconstruction of business.Saint Global Crystals & Detectors India Pvt. Ltd. v.

ACIT [2009-TIOL-222-ITAT-BANG]

Allowability of foreign exchange fl uctuation loss

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India Spectrum*

Direct Taxes

Residential-cum-commercial housing projects eligible to claim deduction under section 80-IB(10) even prior to amendment w.e.f. AY 2005-06

The assessee was engaged in the construction of a housing project in Pune which comprised residential fl ats as well as commercial premises. The project was approved by the Municipal Corporation as a “New Residential and Commercial” project. The assessee claimed deductions under section 80-IB(10) in respect of the profi ts earned from this project.

The TO rejected the assessee’s claim for deduction on the following grounds: • Deduction under section 80-IB(10)

is available only to housing projects comprising ‘residential units’ only.

• Clause (d) of section 80-IB(10) inserted with effect from (“w.e.f.”) 1 April 2005, provides that commercial construction in a housing project should not exceed fi ve per cent of the aggregate built-up area of the project, or 2000 sq. ft., whichever is less.

• Though the assessee’s case pertains to the pre-amendment period, nonetheless, since the amendment was clarifi catory in nature, it was applicable to this case.

The Special Bench of the Tribunal inter alia held that,• The restriction imposed on the

construction of commercial premises in terms of section 80-IB(10)(d) with effect from 1 April 2005 was prospective in nature.

• The ‘predominant purpose’ of section 80-IB(10) was to encourage the building of ‘dwelling units’ and not to encourage house building activity. However, in terms of the Municipal Corporation’s

requirements, an element of commercial use is implicit and permissible in a housing project. Local authority approval for a project as a housing project was considered adequate for claiming the deduction. Furthermore, the specifi c insertion of the restriction in terms of clause (d) of section 80-IB(10) for commercial construction demonstrated that the inclusion of some commercial area in a project was allowed before the amendment to section 80-IB(10).

• Hence, the deduction under section 80-IB(10) in respect of a housing project comprising residential units and commercial establishments is available even for AY 2004-05 and earlier years. However, based on a purposive interpretation of the provisions, the permissible area of commercial construction would be up to 10% of the total area.

Brahma Associates v. JCIT [2009-TIOL-218-ITAT-PUNE-SB]

Capital Gains

Non-resident assessee has the option to adopt fair market value of shares as at 1 April 1981 as cost of acquisition

The TO denied a non-resident assessee the benefi t of using the option available under section 55(2)(b)(i) of the Act to adopt the Fair Market Value (“FMV”) as at 1 April 1981 as the cost of acquisition of shares in foreign exchange while computing long-term capital gains.

The assessee contended that it was entitled to the benefi t of the option under section 55(2)(b)(i) of the Act. In this regard, reliance was placed on the decision in the case of Alcan Inc. v. DDIT(IT) [2007] 112 TTJ 328 (Mum), in which it was held that the assessee had the option to adopt the FMV as at 1 April 1981 under section 55 of

the Act, and that the provisions of the fi rst proviso to section 48 relating to re-working of capital gain in foreign currency did not restrict the options available to the assessee.

The Tribunal held that the assessee was entitled to use the option to adopt the FMV as at 1 April 1981 as the cost of acquisition of shares while computing long-term capital gains. Argued by PwC Tax Litigation Team

Chicago Pneumatic Tool Company v. DDIT [2008] 79

ITATINDIA 146 (Mum)

Deemed Dividend

Inter-corporate deposits cannot be treated as loans or advances for the purpose of determining deemed dividend

The TO treated the inter-corporate deposits (“ICDs”) received by the assessee as deemed dividend under section 2(22)(e) of the Act.

The assessee contended that ICDs are not loans or advances under the provisions of section 2(22)(e) of the Act. Furthermore, the lending companies were engaged in the business of advancing funds, and hence, would be covered by the exception under clause (ii) of section 2(22)(e) of the Act.

The Tribunal observed that ICDs were different from loans and advances. Accordingly, it held that ICDs were not to be treated as deemed dividend under section 2(22)(e) of the Act.Bombay Oil Industries Ltd. v. DCIT [2009] 28 SOT 383 (Mum)

Income from Exploration of Mineral Oil Activities

Catering charges can be included when computing deemed profi t under section 44BB of the Act

4

The non-resident assessee was engaged in the business of the exploration, and exploitation of mineral oil. It had received an amount on account of catering charges which was not offered to tax as income in the relevant AY.

The TO added the amount of catering charges received by the assessee to the other receipts, on the ground that the catering charges should form part of the amount on which 10% deemed profi t would be calculated under section 44BB of the Act.

The High Court observed that section 44BB is a special provision for computing profi ts and gains by non-resident assessees engaged in the business of the exploration, and exploitation of mineral oil. Thus, the amount received by the assessee on account of catering charges was covered within the scope of the term ‘amount’ used in sub-section (2) of section 44BB since the catering charges did form part of the ‘services and facilities’ used in connection with the extraction or production of mineral oil.

The High Court upheld the order of the TO holding that catering charges can be included when computing deemed profi t under section 44BB of the Act.CIT and DCIT v. Ensco Maritime Ltd. [2009-TIOL-204-

HC-UTTRANCHAL-IT]

Minimum Alternate Tax

MAT credit is available for set-off before interest is charged under sections 234B and 234C of the Act

In the relevant AY 2002-03, the TO denied the benefi t of setting-off Minimum Alternate Tax (“MAT”) credit available under section 115JAA before charging interest under sections 234B and 234C of the Act.

The High Court observed that in terms of the provisions of sub-section (5) of section 115JAA, the intention of the Legislature was to allow the set-off of the MAT credit from the tax and not from the total amount including tax and interest.

The High Court held that the MAT credit under section 115JAA should be given effect before the interest was charged under sections 234B and 234C of the Act. It was also held that the provisions of Rule 12(1)(a) and Form-I could not go beyond the provisions of the Act, and Form-I could not lay down the order of priority of adjustments of withholding tax or tax deducted at source (“TDS”), advance tax or MAT credit under section 115JAA, which would be contrary to the provisions of the Act.CIT v. Chemplast Sanmar Ltd. [2009-TIOL-206-HC-MAD-IT]

Permanent Establishment

Period of stay in India to be considered in aggregate and not separately for each contract in order to determine the existence of a service PE

The assessee Australian company entered into six different contracts with the Oil and Natural Gas Commission (“ONGC”) to conduct a

review of technical and commercial bid documents in connection with the installation of a new platform and to give its recommendations.

One of the issues before the Authority for Advance Ruling (“AAR”) was whether the employees’ presence in India was to be calculated separately in respect of each contract in order to determine the existence of a service permanent establishment (“PE”) in India.

The AAR observed that:• The assessee had various

contracts for rendering services in India with a single party, viz. ONGC.

• The activities in connection with the contracts were to be carried out in and around Mumbai.

• The nature of the work and services would be in the same pattern for each contract.

Thus, the services could be dissociated from the geographical and commercial point of view in terms of the provisions of Article 5(3)(c) of the tax treaty between India and Australia.

Accordingly, it was held that the duration of the totality of the services furnished under the various contracts between the parties during the 12 month period would be taken into account. It was also held that the yardstick of 91 days’ presence would be satisfi ed, and hence, the income would be taxable in India.WorleyParsons Services Pty. Ltd., In re [2009-TIOL-11-ARA-IT]

Withholding Tax

Withholding tax provisions not applicable in cases of profi t-sharing agreements

The assessee was engaged in the

Catering charges includible when computing deemed profi t under section 44BB of the Act

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India Spectrum*

business of running a cinema hall, canteen and food courts. It had made certain payments to M/s. Mukta Movie Distributors (“the distributor”) on the basis of a memorandum of understanding entered into without withholding any tax.

The TO disallowed the payment made to the distributor under section 40(a)(ia) on the ground of failure to withhold tax under section 194C of the Act.

The Tribunal observed that the distributor had given the assessee the right to exhibit the fi lms and the assessee had rendered the services of exhibiting the fi lms. Furthermore, the agreement entered into by the assessee was a profi t sharing agreement and not a works contract.

The Tribunal applied the ratio of the decisions in the cases of Sunsel Drive-in-Cinema (P.) Ltd. v. ITO [2006] 5 SOT 64 (Ahd.) and ITO v. Shrinagar Cinemas (P.) Ltd. [2008] 20 SOT 480 (Mum.), and allowed the claim of the assessee by holding that the assessee was not liable to withhold tax under section 194C of the Act. Competent Films Pvt. Ltd. v. ITO [2009-TIOL-273-ITAT-DEL]

Notifi cations / Circulars

New ITR Forms announced

The Central Board of Direct Taxes (“CBDT”) has amended Rule 12 by the Income-tax (9th Amendment) Rules, 2009.

It has replaced the existing Income-tax return (“ITR”) forms, viz. ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, ITR-7, ITR-8 and ITR-V with the new forms as contained in Appendix-II to the Income-tax Rules, 1962. These forms are available for download from the tax department website www.

incometaxindia.gov.in.CBDT Notifi cation No. 32 / 2009 dated 27 March 2009

Date of applicability of revised tax treaty between India and the Syrian Arab Republic

The CBDT has revised the existing tax treaty between India and the Syrian Arab Republic. The provisions of the revised tax treaty between India and the Syrian Arab Republic, which was signed on 18 June 2008, came into effect in India from 1 April 2009.

The revised tax treaty incorporates improvements over the existing tax treaty inter alia by including anti-abuse provisions and provisions for the source-based taxation of capital gains from the alienation of shares.CBDT Notifi cation No. 33 / 2009 dated 30 March 2009

Date of purchase and put to use of new commercial vehicles extended for claiming the higher rate of depreciation

The CBDT had earlier issued Notifi cation No. 10 / 2009 dated 19 January 2009, whereby the higher rate of depreciation was allowed in cases of new commercial vehicles purchased and put to use between 1 January 2009 and 31 March 2009.

The CBDT has now extended the date for claiming of depreciation at the rate of 50 per cent on acquisition of new commercial vehicles. Hence, new commercial vehicles acquired on / after 1 January 2009 and put to use before 1 October 2009 would be eligible for the enhanced rate of depreciation. CBDT Notifi cation No. 37 / 2009 dated 21 April 2009

Explanatory Notes to the Finance Act, 2008

The CBDT has issued a circular explaining the provisions of the amendments made by the Finance Act, 2008 relating to direct taxes.CBDT Circular No. 1 / 2009 dated 27 March 2009

Clarifi cation of new TDS and TCS payment and information reporting system

The CBDT has issued circular clarifying the new relating procedures to TDS and Tax Collected at Source (“TCS”) payments and information reporting system issued vide Notifi cation No. 858(E) dated 25 March 2009.

The Circular inter alia provides certain useful dos and don’ts in connection with payments made or certifi cates issued for a period up to and after 31 March 2009.CBDT Circular No. 2 / 2009 dated 21 May 2009

New provisions for fi ling income-tax returns using the new return forms applicable for AY 2009-10

The CBDT has issued a circular explaining the provisions regarding the fi ling of new ITR forms for AY 2009-10 (announced vide Notifi cation No. 866(E) dated 27 March 2009).

The Circular inter alia provides for the central submission of ITR-V at Bangalore within 30 days of the date of e-fi ling and the compulsory quoting of Unique Transaction Numbers to claim credit for withholding taxes. CBDT Circular No. 3 / 2009 dated 21 May 2009

Direct Taxes

6

Direct Tax Cases

Rental income incidental to broking business is business income

The assessee, Sateo Securities and Financial Services Ltd. (a share broker) provided table space to three sub-brokers and a sister concern along with electricity, air conditioning and other facilities. The assessee treated the income arising from the provision of such table space as business income. The TO assessed the rental income under the head House Property. The CIT(A) confi rmed the order of the TO.

The Tribunal observed that as part of its business activity, the assessee had to deal with sub-brokers and the sister concern, to which table space, along with other facilities, had been provided. Thus, the table space had been provided in connection with the smooth carrying on of the assessee’s business and on account of commercial expediency. Hence, the rental income received was held to be

in the nature of business income.Sateo Securities and Financial Services Ltd. v. ITO

[2009-TIOL-265-ITAT-MUM]

Applicability of section 194D to reinsurance commission

The assessee, General Insurance Corporation of India, is a public sector undertaking engaged in the business of reinsurance. The assessee did not withhold tax on the payment of / credit for commission towards reinsurance accepted by it. However, it did withhold tax from the brokerage paid to insurance companies for procuring business from them.

The Assistant Commissioner of Income-tax (TDS) held that the assessee was liable to pay interest for non-deduction of tax under section 194D for the payments made to the insurance companies. Subsequently, the TO retracted the tax demand

Financial Serviceson fi nding that the payees had fi led tax returns and paid income tax. However, the levy of interest was recalculated and reduced to the extent of taxes paid directly by the payees. The CIT(A) upheld the order of the TO. The assessee appealed to the Tribunal.

The assessee claimed that the arrangement between the assessee and the insurance companies was made on a principal-to-principal basis and there was no agency element. The assessee procured business from the insurance companies as payment of premium reduced by a certain percentage called commission which is in the nature of discount. The Tribunal observed that in order to attract the provisions of section 194D, the payment would have to be made by way of remuneration / reward not for giving business to the assessee but for soliciting or procuring insurance business. The insurance companies had not provided any service of soliciting or procuring insurance business for the assessee company. If any commission had been paid by them to agents, the provisions of section 194D would have been attracted as the commission would have been paid for services rendered in soliciting or procuring insurance business. It was held that, based on the facts of the case, the provisions of section 194D were not attracted.General Insurance Corporation of India v. ACIT [2009]

28 SOT 453 (Mum)

Rental income incidental to broking business taxable as business income

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7

India Spectrum*

Loss in valuation of investment portfolio allowed as tax deduction for banks

The assessee bank claimed a tax deduction on account of the loss in value of its portfolio of investments treating the investments as stock-in-trade. The TO and the CIT(A) disallowed the claim holding that a bank cannot treat its entire investment portfolio as stock-in-trade under the RBI guidelines. Referring to the Supreme Court’s decision in the case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC), the Tribunal held that the preparation of the balance sheet in accordance with the statutory provisions would not disentitle the assessee to submit the tax return on the basis of its real taxable income computed in accordance with the method of accounting regularly and consistently adopted by the assessee. The claim of the assessee was hence allowed.Corporation Bank v. ACIT [2009-TIOL-75-ITAT-BANG]

Regulatory Developments

Portfolio format for debt oriented close-ended and interval schemes / plans

In order to enhance the transparency of portfolios of debt oriented close-ended and interval schemes / plans, the Securities Exchange Board of India (“SEBI”) has made it mandatory for Asset Management Companies (“AMC”) to disclose their portfolios of such schemes in the prescribed format on a monthly basis on their respective websites. SEBI / IMD / CIR No.15 / 157701 / 2009 19 March 2009

Request for interpretative letter under the SEBI (Informal Guidance) Scheme, 2003

A letter was fi led by an applicant with SEBI seeking an interpretative letter

under the SEBI (Informal Guidance) Scheme, 2003. The question raised was whether a SEBI registered portfolio manager could maintain the funds of clients in a pooled manner, and segregated client-wise in the back offi ce, or whether they were required to be maintained in separate client bank accounts.

SEBI replied that a portfolio manager is required to maintain the segregation of each client’s funds by opening separate bank accounts. The requirement of segregation of clients’ assets is further emphasised by the SEBI (Informal Guidance) Scheme, 2003, according to which a portfolio management scheme cannot operate like a mutual fund, and hence, any pooling of clients’ assets is not permitted under the SEBI Regulations.SEBI / IMD / PMS / 162090 / 2009 4 May 2009

Clarifi cation on acquisition of fi nancial assets by SC / RC

In relation to the acquisition of fi nancial assets by securitisation companies / reconstruction companies (“SC / RC”), the RBI has clarifi ed that:

• The acquisition of fi nancial assets by one SC / RC from another SC / RC is not in conformity with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

• The restructuring of loans by an SC / RC is allowed for the realisation of its dues.

RBI / 2008-09 / 446 DNBS / PD (SC / RC) CC. No. 13 /

26.03.001 / 2008-09 dated 22 April 2009

Investment portfolio of banks – transactions in securities

According to the extant instructions of the RBI, banks were required to

hold securities in the permanent category for the purpose of statutory liquidity ratio compliance or for yield or capital growth purposes and they were usually intended to be held to maturity. The interchanging of investments from the permanent to the current category and vice versa had to be done with the prior authorisation of the Board of Directors of the company.

The matter has since been reviewed and it has now been decided that banks may shift investments to / from the permanent category with the approval of their Board of Directors only once a year. Such shifting will normally be allowed at the beginning of the accounting year. RBI / 2008-09 / 473 RPCD.CO.RF.BC.No.104 /

07.37.02 / 2008-09 dated 7 May 2009

Disclosures forming part of Financial Statements

Apart from the disclosures prescribed under the Insurance Regulatory Development Authority (“IRDA”) Regulations, all insurers are required to provide the details of penal actions taken by various Government Authorities from the fi nancial year 2008-09 onwards in the format prescribed. This information is required to be certifi ed by the statutory auditor of the insurer. In view of the advanced stage of fi nalisation of accounts by insurers, this disclosure for fi nancial year 2008-09 may be made to the IRDA through a separate fi ling. It must, however, be ensured that the information is incorporated in annual reports w.e.f. fi nancial year 2009-10. Circular No.005 / IRDA / F&A / CIR / MAY-09 dated 7

May 2009

Financial Services

8

Direct Tax Cases

Salary / Perquisites

Indian citizens going abroad for employment are considered non-resident if stay in India is more than 60 days but less than 180 days The assessee was an employee of an Indian company and was seconded to a non-resident joint venture (“JV”) company. The assessee stayed in India for 98 days during the relevant fi nancial year and claimed exemption in relation to income earned during the period of deputation outside India. The TO contended that the salary received by the assessee from the non-resident JV company was not exempt as the assessee was in full employment of the Indian company and was sent to perform work for the Indian company outside India. Accordingly, it held that the employment terms and conditions of secondees were in line with the terms available to the employees

of the Indian company working in India. Also, the overall control and management of the employee was with the Indian company and not the JV company.

On appeal, the CIT(A) held, on the basis of documentary evidence, that no salary was paid by the Indian company during the assessee’s stay outside India. The CIT(A) further held the assessee to be a non-resident by virtue of the Explanation to section 6(a) of the Act, since he was in India for less than 180 days in the tax year, and directed the TO to exclude the salary received from the non-resident JV company from the total income of the assessee. On further appeal, the Tribunal confi rmed the CIT(A)’s order. DCIT v. Shri Ashok Kumar [2009-TIOL-26-ITAT-DEL]

TDS on salary to be deducted at the time of payment and not on accrual in the books of the employer

The assessee was engaged in the business of research based stock

broking trading and investment banking. The assessee was to disburse salary outside India to an expat employed by it. For this purpose, it entered into an inter-corporate disbursement agreement with a foreign company to remit the salary for onward disbursement to the expat employee. The salary for the fi nancial year 2001-02 was remitted in the month of June 2002 after the deduction of TDS under section 192(1) of the Act. The assessee also provided certain perquisites (accommodation, gas, electricity, etc) directly to the expat employee in India. The TO disallowed the corporate tax deduction claimed by the assessee on account of salary payment and perquisites by invoking the provisions of section 40(a)(iii) of the Act.

On appeal, the Tribunal held that the provisions of section 192(1) of the Act were applicable on payment made outside India and TDS was required to be deducted at the time of payment and not at the time of the accrual or crediting of salary in the account of the employee in the books of the employer. Accordingly, no disallowance could be made under section 40(a)(iii) with respect to salary payments made outside India. Furthermore, the valuation of perquisites forms part of salary while computing the income under the head ‘salaries’ under the Act. In view of the provisions of section 192 of the Act, income-tax is to be deducted from the salary at an average rate of income tax on the estimated income of the assessee. There is no separate identity / treatment given under

International Assignment Services

8

9

India Spectrum*

section 192 of the Act in respect of TDS on perquisites. Therefore, no disallowance under section 40(a)(iii) could be made in respect of perquisites.Citigroup Global Markets India Pvt. Ltd. v. DCIT

[2009-TIOL-244-ITAT-MUM]

Income tax refund granted to the assessee - not to be treated as a perquisite

The assessee was employed as a technician in an Indian subsidiary of a Japanese company. The tax paid on salary by the employer of the assessee was exempt under section 10(5B) of the Act. The tax returns submitted by the assessee claiming exemption under section 10(5B) were accepted and refunds were issued. Later, the TO reopened the assessment and treated the refund issued as perquisite in the hands of the assessee. The assessee contended that the refund issued in the name of the assessee could not be treated as a perquisite as it was neither a benefi t, nor any amenity, provided to him. The amount of tax was deposited by the employer and the refund issued belonged to the employer. The TO rejected the contention of the assessee and held that the amount which was paid over and above the amount due was not exempt under section 10(5B) of the Act and was taxable as a perquisite.

On appeal, the Tribunal held that the excess amount of tax deposited by the employer over and above the amount due and refunded to the assessee could not be treated as either salary or perquisite in the

hands of assessee. If inadvertently, on account of miscalculations, the amount paid was in excess of the amount due to the Central Government, the excess amount did not belong to the assessee. It would continue to belong to the employer, who had a legal right to take back the amount paid in excess. Hence, since the amount was returnable to the employer, it could not be treated as taxable income in the hands of the assessee.Satoru Tanaka v. ACIT [2009] 121 TTJ 654 (Del)

Remuneration for period outside India for work incidental to India assignment is taxable in India

The assessee was an employee of a newspaper publishing company in the UK was receiving salary in the UK, which remained untaxed in the UK. The newspaper company had a permanent base in India and the assessee worked in his capacity as the South East Asia region’s Bureau Chief. The assessee was to collect news from the South East Asia region and send to the head offi ce. During the relevant AY, the assessee was out of India for 59 days for visits to Pakistan, Sri Lanka and the UK. The assessee claimed that the salary relating to the 59 days when he was rendering services outside India was not taxable in India. The TO rejected the assessee’s contentions. However, on fi rst appeal, the CIT(A) accepted the claim of the assessee. On appeal by the revenue authorities, the Tribunal held that assessee had not fi led any evidence to show that his duties outside India were under any separate arrangement.

Furthermore, no material was brought on record to show that the terms of his appointment were different when he visited other countries. Hence, it was held that the visits by the assessee outside India were in the nature of tours in connection with his assignment in India, and therefore, the income in relation to the 59 days was taxable in India.ACIT v. Unger Booke David [2009] 28 SOT 42 (Delhi) (URO)

Notifi cations / Circulars

Investment norms for Recognised Provident Fund amended

The CBDT has amended the rules relating to investment norms for Recognised Provident Funds defi ning the investment pattern and maximum percentage amount to be invested under each investment avenue. CBDT Notifi cation No. 24 / 2009 dated 12 March 2009

Extension of scope of New Pension Scheme w.e.f. 1 May 2009

The Pension Fund Regulatory and Development Authority has extended the scope of the new pension scheme w.e.f. 1 May 2009 to all Indian citizens (resident or non-resident) including workers in the unorganised sector. Every citizen of India between the age of 18 and 55 years is eligible to join the scheme.

On attaining the normal retirement age, the individual must annuitise at least 40% of its pension wealth and the remaining 60% can be withdrawn as a lump sum or in a phased manner.

International Assignment Services

Remuneration paid for services rendered outside India for work incidental to the assignment in India taxable in India

10

Direct Tax Cases

Allowability of expenses incurred on buy-back of shares

The TO disallowed for tax purpose expenses incurred in relation to buy-back of shares on the ground that these expenses were directly related to the capital of the assessee and were paid out of reserves and surplus. Hence, they should have been treated as capital expenditure. The assessee contended that the buy-back of shares was undertaken by the company as a normal business activity for the purpose of providing reasonable exit opportunity to those shareholders who wanted to leave the company while at the same time safeguarding the interests of the continuing remaining shareholders. An appeal to the CIT(A) did not bring vindication to the assessee. As a consequence, an appeal was fi led with the Tribunal.

The Tribunal held that the expenditure

had not resulted in bringing into existence any asset or advantage of an enduring benefi t to the assessee. Accordingly, the expenditure could not be treated as a capital expenditure since the capital employed had not gone up but had actually gone down.Selan Exploration Technology Ltd v. ITO [2009-TIOL-

10-ITAT-DEL]

Corporate Law Cases

Utilisation of securities premium account and general reserve for declaring special dividend to shareholders

The appellant company fi led an application to utilise the amount lying in the securities premium account

Mergers & Acquisitions(“SPA”) and the general reserve for the purpose of declaring a special dividend.

The Regional Director raised the following objections:

• An SPA could be utilised only for the purposes mentioned in section 78(2) of the Companies Act, 1956; and

• The declaration of a dividend from the general reserve could only be done subject to the limits specifi ed in the Companies (Declaration of Dividend out of Reserves) Rules, 1975.

As regards the utilisation of the SPA, it was held that:

• The SPA could be used for any purpose other than that mentioned in section 78(2) by following the procedure given in the section relating to reduction of share capital.

• However, for the utilisation of the SPA for the purposes mentioned in section 78(2), no such procedure need be followed.

• As neither the shareholders nor the creditors had objected to the scheme, and since the scheme appeared to give an opportunity to

Utilisation of securities premium account allowable for declaring special dividend to shareholders

10

India Spectrum*

the shareholders to earn superior returns, the utilisation of SPA for the purposes of the declaration of special dividend was allowed.

As regards the utilisation of the general reserve, the petitioner company proposed to transfer to the profi t and loss account only that part of the general reserve which was in excess of the statutorily required amount that it was obliged to maintain under the Companies (Transfer of Profi ts to Reserve) Rules, 1975. Here, it was held that:

• As the company had earned an adequate amount of profi ts in past years as well as the year in which it proposed to declare a special dividend, the special dividend so proposed was neither governed by the provisions of section 205A(3) of the Companies Act, 1956 nor the Companies (Declaration of Dividend out of Reserves) Rules, 1975.

• The general reserve is a ‘free reserve’ and the company was not prohibited by any provision of the Act or the Rules from dealing with its free reserves in any manner not opposed to any provision of law.

• The petitioner company was allowed to declare the entire amount as mentioned above as a special dividend.

Nestle India Ltd., In re [2008] 4 CLJ 490 (Del)

11Mergers & Acquisitions

12

Transfer Pricing

Transfer pricing continues to be in the news. In a recession, transfer pricing risk is intensifi ed as tax authorities scrutinise inter-company payments rigorously in an attempt to recover cash. Groups choosing to ignore this reality risk facing the wrath of the tax administrations, but more importantly losing out on the much needed liquidity. They could face steep penalties or chance expensive and time-consuming litigation if the tax authorities do not accept that their prices are at arm’s length. However, it is not all bad news. Paying more attention to transfer pricing in a recession provides opportunities for groups that will put them in a better position when the economy eventually bounces back. Hence, on the global front, the U.S. Advance Pricing Agreement (“APA”) Program is considering various ways that current and prospective APA’s might be tailored to take into account the current recessionary economic conditions. In a nutshell, getting

transfer pricing right in recession is the new mantra of multinationals.

Although there is a substantial increase in the number of transfer pricing audits and disputes across the globe, various Tribunal / Court rulings continue to bring about greater transparency in the determination of the tax outcome arising from transfer pricing adjustments. Transfer pricing cases have only just begun reaching the High Court stage almost seven years after the introduction of TP regulations in India. The Karnataka High Court stayed the implementation of the Bangalore bench of the Tribunal ruling in the case of Philips Software Centre Pvt. Ltd. v. ACIT and admitted the department’s appeal on various substantial questions of law. A similar stay was granted by the High Court in respect of the decision of the Special bench of the Bangalore Tribunal in the case of Aztec Software and Technology v. ACIT.

Global changes in business and tax environment are having profound

Transfer Pricingimpact on the volume and direction of intra-fi rm trade and transfer pricing strategies. Amidst all these, the UK charity Christian Aid claims that transfer pricing is hurting world’s poorest countries.

Direct Tax Cases

Fundamental principles for selection and application of transfer pricing methods

Transfer Pricing disputes are essentially fought on large ocean of facts and details and in many cases the facts overpoweringly overshadow the legal points. These characteristics of transfer pricing cases are to be seen emphatically in the latest decision of the Mumbai Tribunal in the case of UCB India Pvt. Ltd. (an Indian subsidiary of a Belgian drug company), where the Tribunal held that the methods deployed by both the assessee in choosing the Transactional Net Margin Method (“TNMM”) to work out profi ts with its associated enterprises and the Revenue in insisting on the Comparable Uncontrolled Price (“CUP”) method as the fi rst and foremost method to be preferred over others were apparently in error.

The Tribunal held that the assessee had mistakenly compared the operational margin at entity level and termed it the transactional net margin. On the part of the Revenue, the adoption of the CUP method was not appropriate as this method suffers from many defi ciencies and infi rmities and specifi cally in cases where there is a lack of information and data on comparables transactions.

12

13

India Spectrum*

While returning the issue to the fi le of the TO, the Tribunal ruled that the assessee was free to adopt any method prescribed by law, if it considered that method to be the most appropriate method. The TNMM could also have been considered if the transaction or classes of transaction had been evaluated in accordance with the law. In cases where external comparables were not available due to a lack of data in the public domain, the TO could have accepted internal comparables including segmental data or the internal TNMM.UCB India Pvt. Ltd. v. ACIT [I.T.A. No. 428 and 429 /

Mum / 2007, Order dated 6 February 2009] (Mumbai

Tribunal)

Economic adjustments are permissible for functional differences and unusually high costs incurred in the initial stages of business

The Pune bench of the Tribunal in the case of Skoda Auto India Pvt. Ltd. ruled that for differences between the functional profi le of the tested party and the comparable companies’ profi les, economic adjustments to the results of tested party / comparable companies should be carried out as necessary in order to match the profi les (eg. assembly v. full fl edged manufacturing), and accordingly, to arrive at a better level of comparability. The Tribunal also held that transactions between associated enterprises could not be considered for the purposes of the internal CUP method. The Tribunal remanded the matter to the Transfer Pricing Offi cer for consideration of (i) the impact of additional non-Central Value Added Taxes (“CENVAT”) import duties, (ii) the analysis of imports to determine the reductions needed in subsequent years, (iii) the relevance of product cycles, and (iv) options to neutralise higher costs. Skoda Auto India Pvt. Ltd. v. ACIT [2009-TIOL-214-ITAT-PUNE]

International Developments

PKN Alert United States - APA Program open to adjustments to address the current recession

The U.S. APA Program is considering various ways that current and prospective APA’s might be tailored to take into account the current recessionary economic conditions. The modifi cations the APA Program may consider to account for the impact of the recession on potential comparable company fi nancial results include : refi ning the selection of comparables to exclude companies that have experienced different effects, refi ning the selection of the averaging period, allowing comparables that experienced different effects but adjusting them for differences; and measuring the arm’s-length range using a statistical technique other than the inter-quartile range.

In addition, the APA Program is open to considering fl exible approaches that can be adjusted to future economic conditions, such as: having the parties commit up front to using future fi nancial data for comparables to test open APA years, including a critical assumption in the APA under which the agreement is terminated if the economy declines below a specifi c threshold, having an APA range adjustment based on an agreed index; and placing contingencies in the APA that would modify the transfer pricing method if a downturn occured. However, it has been observed that these measures would come at the cost of reducing some of the certainty normally associated with an APA.

PKN Alert China - China’s SAT provides further explanation on transfer pricing measures

China’s State Administration of

Taxation (“SAT”) held an open dialogue with taxpayers and their representatives, asking them to provide feedback on the recently introduced Circular 2 - Implementation Measures of Special Tax Adjustments (Trial) and inviting them to ask for clarifi cation relating to any ambiguous tax or transfer pricing issues in respect of the annual reporting of related party transactions or special tax adjustments. Below are e excerpts of the conclusions of the discussion with the SAT offi cials.

Depending on the transfer pricing method used, if the profi tability of an enterprise is consistently below the median (albeit within the inter-quartile range), in the long term, there is the risk transfer pricing investigation and adjustments.

An APA is considered a very good tool for the taxpayer to manage their transfer pricing adjustment and double taxation risks.

Cost sharing arrangements are helpful in attracting more advanced intellectual property and sophisticated services from overseas enterprises. SAT offi cials recommend maintaining evidence that the anticipated benefi ts from the intangible assets or services under the cost sharing arrangements are reasonable and quantifi able.

SAT also provided comments on various other issues covering transfer pricing in the economic downturn, the preparation of contemporaneous documentation, new anti-avoidance measures, etc.Courtesy PricewaterhouseCoopers Pricing Knowledge

Network

Transfer Pricing

14 Transfer PricingIndirect Taxes 14Transfer Pricing

Value Added Tax / Sales Tax

Case Law

Where the inter-state movement of goods is a covenant of the contract of sale, the delivery of goods within the State will not vitiate the character of the sale as an inter-state sale

The Supreme Court has held that the sale of chemicals by an assessee to dealers who are contractually obliged to sell such goods in their respective territories outside Delhi involves the inter-State movement of goods even if such dealers take delivery of goods in Delhi. Accordingly, the sales in question are inter-state sales.DCM Limited v. Commissioner of Sales Tax [2009-VIL-

04-SC]

Despatch of goods outside the state after conclusion of sale in the State does not alter the nature of such a sale as an intra-state sale

The Andhra Pradesh High Court has

held that the despatch of goods outside the state after delivery has been taken within the state cannot be used as a basis to hold that the sale was inter-state in nature, even if the person who took delivery was an agent of the person situated outside the state to whom the goods were eventually despatched.State of AP v. Computer Graphics Pvt. Ltd. [2009] 21

VST 42 (AP)

Credit notes received from the manufacturer against free of cost replacements of spare parts under warranty schemes are not subject to sales tax

The Rajasthan High Court has held that credit notes received from the manufacturer by the dealer cannot be

Indirect Taxessubjected to sales tax as amounting to sales consideration for spare parts replaced free under a warranty scheme. This is because the transfer of spare parts by the dealer to the customer free of cost under warranty, and the receipt of such credit notes were two independent transactions. The judgment of the Supreme Court in the Mohd. Ekram Khan and Sons. v. Commissioner of Trade Tax [2004] 136 STC 515 (SC) was distinguished.C.T.O (AE) v M/s Marudhara Motors [2009-VIL-14-HC-

JDPR]

Circulars / Amendments

Due date for fi ling of returns revised to 15 of the subsequent month in Karnataka

The due date for the payment of tax and the submission of prescribed returns has been revised w.e.f. 1 April 2009, to 15 days from the end of the preceding month. Formerly, the due date for such fi ling was 20 days from the end of the preceding month.The Karnataka Value Added Tax (Amendment) Act, 2009

CST return not required to be fi led in Maharashtra if there are no inter-state sales in the relevant return period

A dealer is not required to fi le a return under the Central Sales Tax (“CST”) Act, 1956 for a tax period if there

Credit notes received against free replacement of spare parts under warranty scheme not subject to sales tax

14

15

India Spectrum*

have been no inter-state sales that period and if the returns fi led under the Maharashtra Value Added Tax (“MVAT”) Act indicate a NIL turnover of inter-state sales.Trade Circular No 15 T of 2009 dated 21 April 2009

CENVAT

Case Law

Freight and insurance charges cannot be included in the value of goods merely for the reason that the goods are delivered at the buyer’s premises under a separate contract

The Supreme Court has held that expenses in relation to freight and insurance are cannot included in the value of goods for VAT purposes merely for the reason that the goods are delivered to the purchaser at its premises under a contract for the transportation of goods that is independent of the contract for the sale of goods.CCE v. Accurate Meters Ltd. [2009] 235 ELT 581 (SC)

No credit need be reversed on inputs used in exempted product exported out of India

The Mumbai High Court has held that no CENVAT credit need be reversed on inputs used in the manufacture of exempted goods which are fi nally exported out of India.Repro India Ltd. v. UOI [2009] 235 ELT 614 (Mum)

Service Tax

Case Law

The term ‘taxable services’ in respect of renting immoveable property is applicable to any service rendered in relation to the renting of property and not only to the renting of immoveable property as such

The Delhi High Court has held that the term ‘taxable services’ in respect of renting immoveable property was applicable to any service rendered in relation to the renting of property and was not only applicable to the renting of immoveable property as such. Consequently, the High Court held that the levy of service tax on the renting of immoveable property itself, in terms of the relevant notifi cation issued subsequent to the rendering of the taxable service, was outside the authority of the provisions of the Finance Act, 1994.Home Solution Retail India Ltd. & Others v. UOI & Ors.

[2009-TIOL-196-HC-DEL-ST]

Outward freight to the customer’s premises will be considered as an eligible input service upon satisfaction of the prescribed conditions

The Punjab and Haryana High Court has held that outward freight to the customer’s premises will be considered as an eligible input service under the pervious defi nition of an input service, if the conditions of (a) ownership and possession of goods remaining with the seller until the delivery of the goods, (b) risk of loss and damage remaining with the seller during transit, and, (c) the freight

charges forming an integral part of the price of the goods, were satisfi ed.Ambuja Cements v. UOI [2009] 14 STR 3 (P&H)

Notifi cations

SEZ developers / units are eligible to refund of service tax paid on input services provided in relation to the authorised operations in a SEZ

The Central Government has announced that Special Economic Zone (“SEZ”) developers and SEZ units can claim refunds of the service tax paid on all input services, regardless of whether or not the input services are provided inside the SEZ. These provisions will also apply on reverse charge tax payments. The previously applicable Notifi cation No. 4 / 2004 dated 31 March 2004 exempting service tax on services consumed within the SEZ has been rescinded. Detailed procedures have been laid down for the payment of taxes on such services by the service providers and for the refund claims to be subsequently fi led by the developers / units. ST Notifi cation No.9 / 2009 dated 3 March 2009

Customs / Foreign Trade Policy

Case Law

Liberal interpretation of the exemption notifi cation must be adopted once the importer satisfi es the eligibility criteria for such exemption

The Supreme Court has held that the conditions of an exemption notifi cation must be strictly interpreted in order to ascertain eligibility of an importer, and that once an importer has satisfi ed the eligibility criteria, a liberal interpretation of the notifi cation must be adopted.CC v. Malwa Industries Ltd. [2009] 91 RLT 467 (SC)

Service tax not leviable on renting of immovable property

Indirect Taxes

16

Technical know how fees paid to foreign suppliers for the manufacture of goods in India, not related to imported goods and not a condition of sale of such goods, are not to be included in the transaction value of the goods The Chennai Tribunal has held that technical know how fees paid by an importer of goods to a foreign supplier towards contract material proposed to be manufactured in India, and not related to the imported goods, cannot be included in the transaction value of the goods.Hosur Instruments Pvt. Ltd. v. CC [2009] 235 ELT 492

(Chennai)

Invocation of a bank guarantee by the customs authorities during the pendency of a stay petition amounts to a “coercive measure”

The High Court of Andhra Pradesh has held that the invocation of a bank guarantee by the customs authorities during the pendency of a stay petition amounts to a “coercive measure” and is in violation of the binding instructions of the Central Board of Excise and Customs.Lanco Kondapalli Power Pvt. Ltd. v. UOI [2009] 162

ECR 181 (Andhra Pradesh)

Power to amend the FTP is exclusively vested with the Central Government

The Supreme Court has held that the

power to amend the Foreign Trade Policy (“FTP”) is exclusively vested in the Central Government. It is not open to the Director General of Foreign Trade (“DGFT”) to change the categorisation of items of import from ‘freely importable’ to ‘restricted’ by issuing circulars.Atul Commodities Pvt. Ltd. v. CC [2009] 235 ELT 385

(SC)

Notifi cations / Circulars

Exemption of imports under the Integrated Guided Missile Development Programme extended

The Central Government has extended the exemption granted to imports under the Integrated Guided Missile Development Programme until 31 December 2009. Customs Notifi cation No. 23 / 2009 dated 3 March

2009

Cellular phones covered by Customs Tariff Heading 8517 and chargeable to National Contingency Calamity Duty

The Central Government has clarifi ed that telephone sets for cellular networks or other wireless networks are covered under Tariff Heading

8517 and are chargeable to National Calamity Contingent Duty at the time of import, on the basis of their declared maximum retail price / retail sale price. Customs Circular No. 12 / 2009 dated 12 March 2009

Power to amend FTP exclusively vested with the Central Government and not with the DGFT

Technical fees paid to the foreign suppliers unrelated to imported goods – not includible in transaction value of the goods

17

India Spectrum*

Foreign Exchange Management Act

Foreign Exchange Management Act

Average Maturity Period

All-in-cost ceilings over six months

LIBOR*Three years and up to fi ve years 300 bps

More than fi ve years 500 bps

* for the respective currency of borrowing or applicable benchmark

Foreign Direct Investment

Foreign Direct Investment in Commodity Exchanges

In March 2008, the Government of India had, vide Press Note 2 (2008), allowed foreign investment in commodity exchanges subject to a composite ceiling of 49%.

However, considering that the foreign investment in some commodity exchanges was above the permitted level of foreign investment as at the date of issue of the press note, the exchanges were advised to divest excess foreign equity by 30 June 2009 to be in compliance with Press Note 2 (2008).DIPP Press Note No. 5 (2009) dated 14 May 2009

External Commercial Borrowing

Extension of Relaxation of all-in-cost ceilings

The RBI, vide its A.P. (DIR Series) Circular No. 46 dated 2 January 2009, had relaxed the all-in-cost ceilings on External Commercial Borrowings (“ECB”) as follows:

Eligible borrowers proposing to avail ECBs beyond the above mentioned all-in-cost ceilings are required to obtain prior approval from the RBI.

The relaxation was to be reviewed in June 2009 by the RBI. However, considering the continuing tightness of credit spreads in international markets, the RBI has extended the relaxation of all-in-cost ceilings to 31 December 2009.A. P. (DIR Series) Circular No. 64 dated 28 April 2009

Miscellaneous

Liberalisation of policy on the buyback of foreign currency convertible bonds

In line with the announcement made in its annual policy statement, the

RBI has increased the total amount of permissible buyback of foreign currency convertible bonds from USD 50 million to USD 100 million out of internal accruals under the approval route, subject to minimum discounts as follows: • 25 per cent of book value for

redemption amounts of up to USD 50 million;

• 35 per cent of book value for redemption amounts of more than USD 50 million and up to USD 75 million; and

• 50 per cent of book value for redemption amounts of more than USD 75 million and up to USD 100 million.

A. P. (DIR Series) Circular No. 65 dated 28 April 2009

Issue of Guarantee for operating lease

Currently, Authorised Dealer Category–I banks can permit the payment of lease rentals, the opening of letters of credit towards security deposits etc. in respect of the import of aircraft / aircraft engines / helicopters on an operating lease basis, subject to certain specifi ed conditions.

The RBI now permits Authorised Dealer Category – I banks to convey its ‘no objection’ for the issuing of corporate guarantees in favor of the overseas lessor, for operating leases in respect of the import of aircraft / aircraft engines / helicopters, subject to their compliance with certain conditions.A.P. (DIR Series) Circular No. 62 dated 20 April 2009

Loans against Non-resident Deposits

As announced in the annual policy statement, Authorised Dealer Category–I and Authorised Banks are now permitted to grant loans of up to Rs. 10 million (previously of up to Rs. 2 million) against the security of funds held in non-resident (external) rupee account and foreign currency non-resident (bank) account deposits.A. P. (DIR Series) Circular No. 66 dated 28 April 2009

17

18

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