The objective of any corporate enterprise is to maximise profits. The options available are to either reduce costs or to generate additional revenue by capturing a higher market share. Aided by today’s globalized economic atmosphere, advances in telecommunications and science, at times Multi National Enterprises (“MNE”) pursue the route of cost reduction, as it results in higher profits despite a stagnant market share.

Many MNEs have set up their operations in low cost jurisdiction to reap the inherent benefits of acquiring the talent at lower costs. India and China are two of the economies well known for providing low cost benefits, as evident from their presence in the list of top outsourcing destinations in the world. It is no surprise that the tax authorities in such countries demonstrate a very aggressive and rigid approach towards the issue of location savings and have expressed an intention of bringing back the maximum of the benefits of location savings accruing from operating in these geographies to their respective economies.

Location Savings

In common parlance, location savings can be understood as savings in cost that accrue to an organisation on account of operating in a low-cost jurisdiction vis-a-vis a high cost jurisdiction. According to OECD guidelines, location savings are the net savings that accrue to the MNE on account of relocation of its business to a location where the costs are lower than what would have been incurred in the former jurisdiction.

The United Nations (UN) manual defines location savings as “the cost savings or benefits such as cheaper production or service costs resulting from locating a manufacturing or other operation in a low cost jurisdiction”. The UN guidelines also state that there may be certain location specific handicaps, which could lead to an increase in certain cost items for the MNE. If the operations are relocated to a low cost jurisdiction, such incremental costs have been termed as ‘dis-savings’. Examples of such dis-savings are – irregularity of power supply, poor quality of raw materials, training cost of labour etc. Hence in order to determine the “net” locations savings (in terms of reduced costs) which has accrued to the MNE, it is important to consider the location specific dis-savings as well.

Location Savings and Transfer Pricing

The interconnection between location savings and attraction of transfer pricing laws on it is the crux here. The transfer pricing issue around location savings is that whether a portion of benefit derived by an MNE on account of operating in a low cost jurisdiction vis-a-vis in another high cost jurisdiction, should be allocated to and consequently taxed in low cost jurisdiction. Indian Transfer Pricing authorities are of the opinion that MNEs continuously search for alternatives to lower their costs in order to increase their profits and India provides operational advantages to the MNEs such as reduced labour costs, raw material costs, infrastructure costs, tax incentives etc. Thus India should also get a share in such profits.

Location Specific Advantages and Location Rent

The concept of Location Savings cannot be analysed on a standalone basis. There is a need to consider Location Specific Advantages (‘LSA’) and Location Rent. To identify benefits of operating in one jurisdiction vis-a-vis another, Location Savings, Location Specific Advantages and Location Rent needs to be considered. These three concepts are interlinked and have a direct bearing on each other.

LSAs are specific characteristics of a particular location that make it possible for companies operating there to take advantages of those specific characteristics to earn higher profits. It may not necessarily lead to a reduction in cost, but still be advantageous to the operations of MNE. Examples of LSAs are specialized and skilled manpower, large customer base, proximity to growing markets, distribution channels etc.

It is not necessary that entire location savings get reflected in terms of incremental profits. In these competitive times, it is quite possible that a portion of the location savings would be passed on to the customers in the form of reduced prices and only a portion is retained with the MNE as incremental profit. This incremental profit is known as Location Rent.

Apportionment of Location Savings

Where significant location savings are derived, the question arises whether it should be shared among the parties and in particular whether part of the location savings should be allocated to the entity in the low cost jurisdiction, i.e. whether an entity operating in a low cost jurisdiction should receive additional compensation on account of location savings. Secondly, the issue is in what manner the benefit derived by operating in a low-cost jurisdiction should be computed and then allocated to the associate enterprise. Under arm’s length pricing, allocation of location savings between associated enterprises should be made by reference to what independent parties would have agreed in comparable circumstances.

The general principle stated across guidelines is to apportion the benefit amongst parties on the basis of functions performed, risks assumed and assets employed (“FAR”) by each of the enterprises.

Legal Jurisprudence

Li and Fung’s Case

In Li and Fung’s case, the taxpayer was engaged in providing sourcing services to clients worldwide, including its AE in Hong Kong and was remunerated on a cost-plus mark-up of 5 percent by its AE. On the allegation that the taxpayer was performing all critical functions, was assuming significant risk and had created valuable intangibles over a period of time, the TPO rejected FAR profile submitted by the taxpayer. Considering that the AE was being remunerated on a commission-on-FOB value basis, the TPO proceeded to compute the transfer pricing addition by considering a 5 percent commission on FOB value of goods sourced by the taxpayer for its AE. TPO alleged that taxpayer should be entitled to the location savings enjoyed by AE due to the taxpayer.

Ruling against the taxpayer, the Appellate Tribunal concluded that the taxpayer was not a low-risk service provider, it performed critical functions, had incurred time and expense in creating valuable intangibles which were beneficial to the group. It was further noted that the AE did not perform any critical functions. The Appellate Tribunal noted that the taxpayer’s conduct and operations in India did create Location Savings for the AE, the benefit of which the taxpayer is entitled to. Given the facts, the Appellate Tribunal ruled that the commission received by the AE (5 percent of FOB value of goods sourced) was to be shared in the ratio of 80:20 to India. Although the case discusses Location Savings, it has not provided a definitive ruling on the aspect. The core issue was the FAR profile and remuneration model.


The issue of location savings is in a very nascent stage in India and would be a bone of stress for the MNE groups operating in India. The tax authorities have clearly stated their rigid views and are sure to approach this issue in a much stricter manner. Location savings and its apportionment will be unique in every case and it seems difficult that industry specific methodology can be formulated for it. It can be said that in coming times location savings would be an interesting issue to track, especially the statements of Indian Tax Authorities in this regard.

RBI grants Bank Licenses to IDFC & Bandhan Financial Services

RBI grants Bank Licenses

IDFC & Bandhan Financial Services get “in-principle” approval

After much speculation, today, RBI gives in principle banking licences to IDFC & Bandhan Financial Services to start banking within 18 months. Both IDFC and Bandhan had been recommended by the High Level Advisory Committee (HLAC) set up by RBI.

After withdrawal of 2 applications, 25 applications were considered by HLAC. India Post’s application to become a bank is also under consideration and discussions are on with the Government of India for the same.

RBI Governor Raghuram Rajan said “The process to award new bank licences was initiated in 2011 and it has spilled over to the election season because the due diligence process took a little longer, all regulatory processes have to come to an end.”

Click here for RBI Press Release.

Urgent Update: Letterhead Format for Companies

Letterhead & other Business Stationary Format

Mandatory Details –

  • CIN Number
  • Registered Office Address
  • Telephone Number & Fax Number (if any)
  • Email & Website address (if any)

Section 12(3)(c) of Companies Act, 2013, which will be effective from 01.04.2014, provides that every company shall get its name, address of its registered office and the corporate Identity Number along with telephone number, fax number, if any, e mail and website addresses, if any printed in all its business letters, bill heads, letter papers and in all its notices and other official publications.

Please Ensure Compliance of the same with immediate effect. KDA team will soon share a complete dossier on the Companies Act, 2013.

Corporate law highlight on Corporate Social Responsibility

Corporate Social Responsibility (CSR) becomes mandatory with effective from April 1, 2014

Corporate Social Responsibility

On 27th February, 2014, The Ministry of Corporate Affairs of India (MCA) has notified and made applicable the provisions of Section 135 (Corporate Social Responsibility) of the Companies Act, 2013, Schedule VII of the said Act and the Rules thereon effective from 1st April, 2014.

As per Section 135 of the Companies Act, 2013, every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. The Board of every company to whom section 135 applies, shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Highlights of notified CSR rules:

  • CSR activities to include preventive healthcare, sanitation, providing safe drinking water, protection of national heritage, rural development projects and measures to benefit armed forces veterans. Promoting rural sports, nationally recognized sports, setting up homes and hostels for women, orphans and senior citizens and measures to reduce inequalities faced by socially and economically backward groups and support to technology incubators in academic institutions have also been included in the CSR ambit.
  • Net profit will not include dividend income received from another Indian company which is covered under and complying with the provisions of Section 135 of the Companies Act, 2013 or from profits of its own overseas branches.
  • In the case of unlisted public companies and private limited companies covered under Section 135(1) of the Act and which are not required to appoint an independent director pursuant to sub-section 149 (4) of the Act, shall have its CSR committee without such director. Also, if the private limited company has only two directors, shall constitute its CSR committee with two such directors.
  • The CSR activities need to be undertaken as per approval of the company’s board in accordance with its CSR policy and the decision of its CSR committee.
  • A company can also carry out CSR works through a registered trust or society or a separate company.
  • The CSR spending will have to be undertaken in India and should not benefit any employees of the company.
  • Contribution of any amount directly or indirectly to any political party, shall not be considered as CSR activity.
  • The Board’s annual report of a company shall include report on CSR and the company shall be required to display CSR activities on its website.

Source: Notification dated February 27, 2014 issued by MCA.

Monthly Update – December 2013


Direct Tax

Notification: 96 Date of Issue: 23/12/2013

Employee Certificate, Bank Certificate, Aadhaar Card for PAN / TAN , Revised Form 49A, 49AA.

Important Case Laws


In view of CBDT’s Circular No. 715, dated 08-08-1995, services rendered by NR for production of programmes for purpose of broadcasting and telecasting shall be specifically characterized as ‘work’ for the purpose of section 194C – When such services are categorized as ‘work’ for Sec. 194C the income therefrom would be treated as ‘business income’ – Held, Yes – Therefore, payment to a non-resident for production of programmes for the purpose of broadcasting and telecasting shall not be treated as ‘Fees for Technical Service’ – Held, Yes

Platinum Asset Management Ltd. v/s Deputy Director of Income-tax (International Taxation), Range -4(2)
Unabsorbed depreciation and business loss of same 10A/10B unit brought forward from earlier years have to be set off against the profits before computing exempt profit.
Loss incurred from transaction in derivative by assessee, being sub-account FII, could not be treated as business loss rather it was to be considered as short-term capital loss which was eligible for adjustment against short-term capital gain arising from sale of shares.Karnataka High court v/s Dynamic Enterprise.
Money Paid to retiring partners on retirement is not taxable in Firm’s Hands.Service Tax

Service provided by One Unit to another Unit is not taxable.

SEZ unit and DTA unit of a company are not separate legal entities in general law (even though invoices have been issued and agreements have been entered) or under the definition of ‘person’ under section 2(v) of the SEZ Act read with Rule 19(7) of the SEZ Rules, and hence services provided by SEZ unit to DTA unit is not liable for service tax. [L&T Ltd. vs. CCE, Vadodara-II, 2013(32) STR 113].

Cargo Handling Service

The activity of moving coal from various quarries to the railway siding (within the mining area) using payloaders would not be liable for service tax under the category of “Cargo Handling Service” since for classifying an activity as Cargo Handling Service it must be proved that it is a service adjunct to the actual transportation of goods i.e. services just before transportation of goods or post transportation services when cargo has been discharged The movement of goods within a mine from one place to another is not such a service. [Anupama Coal Carriers Pvt. Ltd. vs. CCE 2013(32) STR 41 (Tri-Del)].


Regulatory Updates



Financial Conglomerates under Regulatory Oversight

SEBI has identified certain business groups as ‘Financial Conglomerates’ and they will be monitored by SEBI for systemic risks they may pose to Indian economy.”Going by the size of our economy and our markets, there are institutions that are quite big. We need to keep an eye on them and, through our coordination mechanism, certain institutions have been identified and they are being monitored regularly,” capital markets regulator SEBI Chairman U K Sinha said.The practice is similar to monitoring of ‘too-big-to-fail’ banks by regulators in USA.

IPO Grading now voluntary

The SEBI’s board approved the proposal to make the IPO grading system voluntary as against the current provision of being mandatory. The move is part of the regulator’s effort to boost the dormant primary market and reduce the reliance on rating agencies, who have been under scanner globally for their role in overall financial sector.

Self-Prospectus allowed for Corporate Bond Issues

The SEBI’s board has allowed shelf‐prospectus for corporate bond issues. A shelf‐prospectus enables companies to issue corporate bonds utilizing the same documents more than once, which will help cut costs and save time.

The SEBI has extended the facility to file shelf prospectus for issuing non‐convertible debt securities for non‐banking finance companies, including infrastructure debt funds (IDFCs), besides public sector financial institutions, public sector banks and scheduled banks.

Further, companies filing a shelf prospectus with the Registrar of Companies are not required to file prospectus afresh at every stage of offer of securities, within the period of validity of such shelf prospectus i.e. one year. They are required to file only an information memorandum, containing material updations, with respect to subsequent issues.

Monthly Update – November 2013


Direct Tax

Notification: 92 Date of Issue: 29/11/2013

Central Board of Direct Taxes hereby notifies Multi Commodity Exchange of India Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the section 43 of Income Act, 1961, with effect from the date of publication of this notification in the Official Gazette.

Notification: 91 Date of Issue: 27/11/2013

In exercise of the powers conferred  by clause (iii) of the Explanation 2 of clause (e) of the proviso to clause (5) of section 43 of the Income-tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income-tax Rules, 1962, the Central Government hereby notifies the Universal Commodity Exchange Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the said section, with effect from the date of publication of this notification in the Official Gazette

Notification: 90 Date of Issue: 27/11/2013

In exercise of the powers conferred by clause (iii) of the Explanation 2 of clause (e) of the proviso to clause (5) of section 43 of the Income-tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income-tax Rules, 1962, the Central Government hereby notifies the National Commodity and Derivatives Exchange Limited, Mumbai as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the said section, with effect from the date of publication of this notification in the Official Gazette.


Section 90 of the Income-tax Act, 1961

DoubleTaxation agreement – agreement for Avoidance of double taxation and prevention of fiscal evasion with foreign countries – Latvia


Important Case Laws

CIT vs. DLF Commercial Developers Ltd. (2013) 261 CTR (Del.) 127.

Definition of speculative transaction in section  43(5) is confined in its application and cannot be extended to section 73; derivatives are based on stocks and shares, which fall squarely within the Explanation to section 73 and therefore Tribunal erred in law in holding that the assessee was entitled to carry forward  its losses on account of derivatives transactions.

Himatasingike Seide Ltd vs. CIT (Supreme Court).
Unabsorbed depreciation and business loss of same 10A/10B unit brought forward from earlier years have to be set off against the profits before computing exempt profit.CIT vs. Vijay M. Mahtaney (2013) 261 CTR (Mad.) 635
For taking benefit u/s 54EC it is not necessary that assessee should first apply s. 70(3) and thereafter only, he could invest the capital gain arising from the long term capital asset into any specified bond as specified u/s 54EC.CIT vs. Petroleum India International (2013) 260 CTR (Bom.) 418.
In view of finding of fact arrived by the Tribunal that the seconded personnel were not the employees of the assessee, the amount paid as foreign allowances to the seconded personnel was not liable for deduction of tax, hence the occasion to apply s. 40(a)(iii) did not arise. The object of Section 91 (1) of the Act is to give relief from taxation in India to the extent that the taxes have been paid abroad for the relevant tax year This deduction/relief is not dependent upon the payment also being made in the tax year.Service Tax

Service Tax liable to be Reimbursed from the Service Receiver in case of no Terms of Payment of Service Tax is mentioned in the Agreement.

Service tax is imposed upon the person to whom service is being provided and the same service provider is merely a collecting agency. Thus, where the agreement did not contain terms for payment of service tax by the service recipient and the service provider was made to pay service tax by the department, the High Court held that service provider was eligible to be reimbursed by the service recipient. [Bhagwati Security Services (Regd.) vs. UOI, (2013) 31 STR 537 (All.)]

Construction of complex service

On facts, where under a development agreement with a society, the assessee was ‘entitled’ to construct a residential building on the society’s land using its own finances and thereafter sell the units in the constructed building to the members of the society by executing a sale deed after receiving all payments and completion of construction, the High Court held that the developer was not a contractor who was executing the construction work on behalf of the society but was selling flats and the construction of residential complex till the execution of such sale deed, would be in the nature of “self-service” and consequently would not attract service tax. [CST vs. Sujal Developers, (2013) 31 STR 523 (Guj.)]


Regulatory Updates

Companies Act

Removal of Difficulties order & Clarification regarding applicability of Section 372A

The Companies Act 2013 received an assent of President on 29.08.2013 and also 96 Sections are made effective from 12.09.2013 , there are certain difficulties to understand the New Sections and its implications hence a Companies (Removal of Difficulties) Order, 2013 has been issued. The Circular No.18/2013 is issued for clarification regarding applicability of Section 372A consequent upon Notifying of Section 185 of The Companies Act, 2013.


Foreign Exchange Management Act


Definition of ‘Group Company’ for FDI :

RBI vide circular RBI/2013-14/356 A.P. (DIR Series) Circular No.68 has reviewed the FDI policy and decided to incorporate the definition of group company as under:
‘Group company’ means two or more enterprises which, directly or indirectly, are in position to:
(i) exercise twenty-six per cent, or more of voting rights in other enterprise; or
(ii) appoint more than fifty per cent, of members of board of directors in the other enterprise.’

Foreign Direct Investment in Financial Sector – Transfer of Shares

It has now been decided that the requirement of obtaining NoC(s) will be waived from the perspective of Foreign Exchange Management Act, 1999 and no such NoC(s) need to be filed along with form FC-TRS in regards to the subject as required earlier. However, any ‘fit and proper/ due diligence’ requirement as regards the non-resident investor as stipulated by the respective financial sector regulator shall have to be complied with.

Third party payments for export / import transactions :

With a view to further liberalising the procedure relating to payments for exports/imports and taking into account evolving international trade practices, it has been decided as under:
AD banks may allow payments for export of goods / software to be received from a third party (a party other than the buyer) subject to conditions as under:

  1. Firm irrevocable order backed by a tripartite agreement should be in place;
  2. Third party payment should come from a Financial Action Task Force (FATF) compliant country and through the banking channel only;
  3. The exporter should declare the third party remittance in the Export Declaration Form;
  4. It would be responsibility of the Exporter to realize and repatriate the export proceeds from such third party named in the EDF;
  5. Reporting of outstandings, if any, in the XOS would continue to be shown against the name of the exporter. However, instead of the name of the overseas buyer from where the proceeds have to be realised, the name of the declared third party should appear in the XOS; and
  6. In case of shipments being made to a country in Group II of Restricted Cover Countries, (e.g. Sudan, Somalia, etc.), payments for the same may be received from an Open Cover Country.

Note: Restricted cover Group II country is country which experiences chronic political and economic problems as well as balance of payment difficulties.
AD banks are allowed to make payments to a third party for import of goods, subject to conditions as under:

  1. Firm irrevocable purchase order / tripartite agreement should be in place;
  2. Third party payment should be made to a Financial Action Task Force (FATF) compliant country and through the banking channel only;
  3. The Invoice should contain a narration that the related payment has to be made to the (named) third party;
  4. Bill of Entry should mention the name of the shipper as also the narration that the related payment has to be made to the (named) third party;
  5. Importer should comply with the related extant instructions relating to imports including those on advance payment being made for import of goods; and
  6. The amount of an import transaction eligible for third party payment should not exceed USD 100,000. This limit will be revised as and when considered expedient.

The aforesaid instructions shall come to effect immediately.

Participation of NBFCs in Insurance sector

In the operation of Insurance Company, very often, the IRDA requires an insurance company to expand its capital taking into account the stipulations of the Insurance Act and the solvency requirements of the insurance company. The restriction of a group limit of the NBFC to 50% of the equity of the insurance JV company prescribed in the above mentioned circular may act as a constraint for the insurance company in meeting the requirement of IRDA. It has hence been decided that in cases where IRDA issues calls for capital infusion into the Insurance JV  company, the Bank may, on a case to  case basis, consider need based relaxation of the 50% group limit. The relaxation, if permitted, will be subject to compliance by the NBFC with all regulatory conditions as specified in the earlier circulars.

Monthly Update – September 2013


Direct Tax

Notification: 75 Date of Issue: 23/9/2013

Central Board of Direct Taxes has hereby introduced Income-tax (17th Amendment) Rules, 2013 for application of General Anti-avoidance Rules (GAAR) to come into force from 1 April 2016 (tax year beginning 1 April 2015 and subsequent years).

Notification: 73 Date of Issue: 18/9/2013

A “safe harbor” is defined in the Indian Tax Laws as circumstances in which the Tax Authority shall accept the transfer price declared by the taxpayer. On 18 September 2013 the CBDT issued the final rules after considering the comments of various stake holders on the draft rules issued on 14 August 2013.

CBDT amends I-T Rules – information by person responsible for making any payment to non-resident

A Remitter making payment of any sum subject to tax to a Recipient is required to withhold tax at source at the prescribed rates.
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or salary or any other sum chargeable to tax under the provisions of the Act, shall furnish the following-(i) the information in Part A of Form No.15CA, if the amount of payment does not exceed fifty thousand rupees and the aggregate of such payments made during the financial year does not exceed two lakh fifty thousand rupees;(ii) the information in Part B of Form No.15CA for payments other than the payments referred in clause (i) after obtaining-(a) a certificate in Form No.15CB from an accountant as defined in the Explanation below sub-section (2) of section 288; or (b) a certificate from the Assessing Officer under section 197; or (c) an order from the Assessing Officer under sub-section (2) or sub-section (3) of section 195.The information in Form No. 15CA shall be furnished by the person electronically to the website designated by the Income-tax Department and thereafter signed printout of the said form shall be submitted to the authorised dealer, prior to remitting the payment.

Important Case Laws

Eruditus Education (p.) Ltd,In re vs. AAR

Payment received by Singaporean company from applicant towards cost of teaching in education programmes conducted by applicant in India, is not in nature of fees for technical services and is not taxable in India.

DDIT(IT) v. Reliance Infocom Ltd. (now known as Reliance Communications Ltd.) [TS-433-ITAT-2013(Mum)].:
Mumbai Tribunal characterizes payment for computer software as royalty payment: The Taxpayer, an Indian telecom company, had purchased wireless network equipment from various vendors. It had also entered into stand-alone agreements with the same vendor and other foreign companies for software specific to the equipment supplied. On the facts, the Tribunal held that the payment for a software license under a stand-alone agreement (i.e., which is not integral to the equipment purchase) is consideration for the transfer/use of a copyright and is taxable as a royalty, both under the ITL and the relevant treaties.


Regulatory Updates


RBI Circular: Overseas Direct Investments – Clarification

Securities & Exchange Board of India notified that it will now permit contracts of share purchase with pre-emptive and option clauses. So the clauses pertaining to first right of refusal, tag-along rights, drag-along rights, call-put options can be build into contracts to purchase listed securities subject to-

  • the title and ownership of the underlying securities are held continuously by the selling party to such a contract for a minimum period of one year from the date of entering into the contract;
  • the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all the laws for the time being in force, as applicable; and
  • the contract has to be settled by way of actual delivery of the underlying securities.

 This will improve the investment environment with respect to preferecial allotments and private equity investment in public listed companies.


Ministry of Finance


Overseas Listing of unlisted Indian companies

Unlisted Indian companies will now be allowed to list directly overseas. This will be allowed to an experimental period of 2 year. The monies raised can be utilized to repay foreign debt, overseas acquisition or overseas operations.
Companies will be allowed to list abroad only on markets that are compliant with the International Organization of Securities Commissions and the Financial Action Task Force or those jurisdictions with which the Securities and Exchange Board of India (SEBI) has signed bilateral agreements. The finance ministry, the department of industrial policy and promotion, and the Reserve Bank of India (RBI) will issue notifications on the scheme to change the existing rules.
The move will assist in improve in Balance of Payment situation in India.

Monthly Update – August 2013

Accounting & Auditing (India)

RBI Releases Draft Guidelines on Capital and Provisioning Requirements for Exposures to Corporate having Unhedged Foreign Currency Exposure


Applicability of SA 700, “Forming An Opinion and Reporting On Financial Statements”, to Formats of Auditor’s Reports Prescribed under Various Laws and/or Regulations – (22-08-2013)

ICAI has deferred the applicability of SA 700 to entities where there is a specific format of the auditor’s report is prescribed under the relevant law and regulation until announcement of necessary change is made by the appropriate authority.

Clarification Regarding Applicability of SA 700 on Tax Audit Report under Section 44AB of The Income-Tax Act, 1961. – (05-07-2013)

Considering the fact that all tax audit reports are now mandatorily required to be filed online and that the format of tax audit report is prescribed by the Central Government, the Council in its 325th meeting held from 1st June to 3rd June, 2013 decided to defer the applicability of SA-700 (Revised) on the tax audit report under section 44AB of the Income-tax Act,1961 by one year i.e. the requirements of SA-700(Revised) are not applicable for tax audit reports filed up to 31st March, 2014.


Direct Tax

Notification: 57 Date of Issue: 1/8/2013

Form No:10F prescribed by the CBDT government  as defined in sub rule (1) of Rule 21AB for the purpose of claiming exemption as mentioned in Sub section (5) of Section 90 and Sub Section (5) of Section 90A of the Income tax Act,1961 w.e.f 1/4/2013.

Notification: 58 Date of Issue: 5/8/2013
CBDT revises Rules relating to information required to be furnished on account of payment made to Non-residents:

Rule 37BB is substituted i.e. Furnishing of information by the person responsible for making payment to a non resident, not being a company, or to a foreign company w.e.f 1/10/2013 as below.
1.The information in part A of form 15 CA, if the amount of payment does not exceed 50,000 rupees and the aggregate of such payment made during the financial year does not exceed rupees 2,50,000.
2. The information in part B of form 15CA, if the payment is not chargeable to tax and is of the nature specified in column (3) of the specified list.
3. The information in part C of form no.15CA for payments other than the payments referred in clause (i) and (ii) after obtaining a certificate in Form No: 15 CB from an accountant or a certificate from the assessing officer under section 197.

CBDT Criteria for selection of Scrutiny Cases in F.Y.: 2013-14

The CBDT has issued Instruction No. 10 of 2013 dated 05.08.2013 announcing the procedure and criteria for selection of scrutiny cases under the compulsory manual for FY 2013-14.
The guidelines appear to have been issued pursuant to the direction of the Delhi High Court in Joginder Pal Gulati vs. OSD – CPI.O

Indian Tax Administration announces draft rules on transfer pricing safe harbours

The CBDT on 14 August 2013 released draft safe harbour rules for public comments. The draft rules propose to provide minimum operating profit margins in relation to operating expenses which a taxpayer is expected to earn for certain categories of international transactions, such as provision of software development services, contract Research & Development (R&D) services, manufacture and export of automotive components etc which will be acceptable to the Tax Authority. The draft rules also provide acceptable norms for certain categories of financial transactions such as intra-group loans made or guarantees provided to non-resident affiliates of an Indian taxpayer. The draft rules, which are optional for a taxpayer, contain the conditions and circumstances under which the norms/ margins would be accepted by the Tax Authority and the related compliance obligations.

Important Case Laws

TP adjustment for control premium upheld as it is only the seller who can demand control premium incase he is selling the controlling stake. Even if price charged for transfer of shares is as per SEBI Regulations, it can’t be deemed to be at ALP as such regulations does not in any way state that price negotiated by the assessee with the buyer is at arm’s length price.
Reebok India Co vs. ACIT (ITAT Delhi)Transfer Pricing: Scope in the context of expenditure (royalty payment) explained
The TPO’s argument that the assessee need not have paid for the technology as it did not derive any benefit there from is not acceptable. The assessee is free to conduct business in the manner it deems fit and the commercial and business expediency of incurring any expenditure has to be seen from the assessee’s point of view. The Revenue cannot step into the shoe of the assessee and decide what is prudent for the business. On facts, the very survival of the assessee in the industry depended upon the license and technology & know how provided by the AE. There has been a considerable increase in the sales figures and the growth in revenue clearly demonstrates the benefits derived by the assessee from the use of technology.

Mumbai ITAT rules Indian Company purchasing online advertising space from holding company not a PE:
The transactions of the Taxpayer (Pubmatic India Private Limitd) with US Co are independent business transactions. Furthermore, it was held that the Taxpayer was not conducting its business on behalf of US Co in India and did not constitute a Permanent Establishment (PE) for US Co in India under the India-US Double Taxation Avoidance Agreement (DTAA). The taxation of e-commerce transaction has been a subject matter of recent litigation. Some of the earlier rulings have held that purchase of online advertising space on a website is not royalty or fees for technical services. While those issues were not before the ITAT, the present ruling provides guidance as to whether a PE is created when business transactions take place between a parent and its Indian subsidiary. The present ruling highlights that when the business transactions between related parties are on principal-to- principal basis and each one of them transacts with the other in conduct of its own business on an arms’ length basis, a PE may not be created as one is not acting for or on behalf of the other. Mere presence of parent-subsidiary relationship is not a justification for constituting a PE.

Indirect Tax

One Time amnesty scheme is introduced by Finance Minister for Service Tax Defaulters. The scheme is called as Voluantary Compliance Encourgement Scheme (VCES)
Hon. Finance Minister Shri. P. Chidambaram has released a booklet namely “FAQ on Service Tax VCES” on 8th August, 2013. This FAQ brings lot of calrity on the Subject.

Regulatory Updates


RBI Circular: Overseas Direct Investments – Clarification

It is clarified that all the financial commitments made on or before August 14, 2013, in compliance with the earlier limit of 400% of the net worth of the Indian Party under the automatic route will continue to be allowed. In other words, such investments shall not be subject to any unwinding or approval from the Reserve Bank.
It has been decided further to retain the limit of 400% of the net worth of the Indian Party for the financial commitments funded by way of eligible External Commercial Borrowing (ECB) raised by the Indian Party as per the extant ECB guidelines issued by the Reserve Bank of India from time to time.

Liberalized Remittance Scheme(LRS): 

Reduction in the foreign remittance limit  from US $200,000 to US $75,000. This is applicable for Joint Ventures (JVs), Wholly owned Subsidiaries (WOS) and gifts & loans by resident individuals to NRI close relatives. Remittances under this scheme cannot be used to acquire immovable property outside India.

Corporate Law

Companies Bill 2013 becomes Companies Act 2013 with the assent of honorable President of India to it on 30-08-2013. Highlights of new companies bill, 2012 can be downloaded from the link below:
SEBI has issued Notification No. LAD-NRO/GN/2013-14/16/6348 on 08/08/2013 amendign the SEBI (Buy-back fo Securities) Regulation, 1998.