Missive Volume I – April 2011 T R A N S A C T I O N A D V I S O R S

Dear Patron With India becoming a cornerstone for future growth, global corporations are ferociously competing with each other to have their footprints in India while the Indian business houses, flushed with funds, are now looking global. In this exciting and changing scenario, it becomes imperative for us to evaluate our client’s needs vis-a-vis the tax and regulatory environment. And so here we are with our first newsletter. The month of March has witnessed some significant tax and regulatory changes, particularly in the backdrop of Union Budget 2011, which had laid down a constructive road map for Economic growth and has taken steps to align the existing tax structure with the proposed GST & DTC framework. While India is now witnessing the merger controls, scheduled to be effective from June 2011, at the same time MCA is taking steps to step next generation of reforms by simplification and automation of procedures. With implementation of IFRS underway, revised schedule VI being issued and XBRL reporting being introduced, accounting in India is going a whole new change. The move is surely to align Indian financial reporting with international standards. For any queries on the issues captured by this newsletter, you can contact Akhil Bansal at akhil@spnagrath.com. We shall be pleased to assist you. Thanks and regards Manoj Nagrath Director

Topics Page No Competition Act 1 FEMA 2 SEBI 3 Companies Act 3 Accounting 5 Direct Taxes (including International Tax)

6 Regulatory News 7 Indirect Taxes 8 Transfer Pricing 9 Recent News in Transactions that made headlines

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Competition Act Competition Commission of India gets power to approve big M&As Ministry of Corporate Affairs issued notifications relating to Combinations whereby § June 1st, 2011 has been appointed as the date on which the

provisions relating to Combinations would come into force; § Threshold limit prescribed in section 5 for an acquisition or merger to

constitute a Combination requiring mandatory notification to the Competition Commission of India (CCI) has been raised by 50%, on the basis of the wholesale price index. Revised limits are as follows

§ If an enterprise whose control, shares, voting rights or assets are

being acquired, has assets of not more than INR 2.5 billion or turnover of not more than INR 7.5 billion, it is exempt from the provisions of section 5

§ A “Group” exercising less than 5o% of voting rights in the other enterprise is also exempt from the provisions of section 5

Competition Commission of India issued draft regulations in relation to the transaction of business relating to Combinations Further, Draft regulations have been issued – some key features are § Consultation prior to filing notice of proposed combination: Parties

to a proposed combination may make written request seeking informal and verbal consultation with the CCI about filing notices. However, CCI would not be bound by any opinion or view expressed during consultation

§ Forms of notice - Regulations prescribe 3 formats of pre- merger notification Forms for obtaining approval

§ Liability to file notice - In case of merger or amalgamation, the liability to file pre-merger notifications is on the parties to jointly file notice. In case of acquisition or acquiring of control, the liability is on the acquirer.

§ Filing Fees –Filing fees ranges from INR 1 to 4 million depending on the nature and value of acquisition

§ Prima facie view: Upon filing of the pre-merger notification, the CCI to form its prima facie opinion on the proposed combination within 3o days of filing of notice.

§ Time period for review: CCI to endeavour to pass an order or issue directions within 18o days of filing of the notice. The Act however currently prescribes a period of 210 days within which the CCI has to pass order or issue directions; otherwise the combination would be deemed as having been approved.

§ Appointment of independent agencies to oversee modifications: The draft regulations give power to CCI to appoint independent agencies if it is of the opinion that modifications proposed by it and

In India (INR)

Assets worth INR 15 billion

Or Turnover of INR 45 billion

Worldwide(USD)

Assets worth USD 750 million, (of which

atleast INR 7.50 billion in India)

Or Turnover of USD 1500 million, (of

which atleast INR 15 billion in India).

In India (INR)

Assets worth INR 60 billion

Or Turnover of INR 120 billiob

Worldwide (USD)

Assets worth USD 3000 million (of

which atleast INR 7.5 billion in India)

Or Turnover of USD 9000 million (of

which atleast INR 22.50 billion in India)

Parties to the Combination jointly have

Acquiring group and

target jointly have

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accepted by the parties needs supervision. Such independent agencies may include an accounting firm, management consultancy, any professional organisation or independent practitioner of repute.

Impact: Even though the Competition Regulations have provided for target thresholds, the transaction thresholds are still missing which can result in certain transactions getting caught under the purview of the legislation even if it was not the intent to cover it. FEMA Introduction of Annual return on Foreign Liabilities and Assets reporting by Indian Companies and discontinuation of the Part B of form FC-GPR vide A.P. (DIR Series) Circular No. 45 dated March 15, 2011. RBI has notified a revised procedure for reporting of all FDI, both inward and outward. RBI has replaced Part B of Form FC-GPR (annual filing by Indian companies with regard to foreign investment) by “Annual Return on Foreign Liabilities and Assets” (the Return). The Return should be submitted by all Indian companies which have received FDI and / or made FDI abroad (i.e. overseas investment) in the previous year including the current year. Indian companies have to furnish audited balance sheet for the reporting year along with the Return. The first Return will be due by 15 July 2011 and then annually by 15 July each year. For the purposes of the Return, RBI has also provided the methodology for valuation of foreign liabilities and foreign assets.

Consolidated FDI Policy has been released (Circular 1 of 2011) Policy laid down in Consolidated Circular has the following key changes § Pricing of Convertible instruments - Instead of specifying the price of

convertible instruments upfront, companies will now have the option of prescribing a conversion formula, subject to the FEMA/ SEBI guidelines on pricing. This would help the recipient companies in obtaining a better valuation based upon their performance.

§ Inclusion of fresh items for issue of shares against non-cash

considerations - The existing policy provides for conversion of only ECB/lump-sum fee/Royalty into equity. Government has now decided to permit issue of equity, under the Government route, in the following cases, subject to specific conditions:

ü import of capital goods/ machinery/ equipment (including

second-hand machinery)

ü Pre-operative/ pre-incorporation expenses (including payments of rent etc.)

§ Removal of the condition of seeking prior approval in case of

existing joint ventures/technical collaborations in the ‘same field”

§ Guidelines relating to down-stream investments- The earlier categorisation of ‘investing companies’, ‘operating companies’ and ‘investing-cum-operating companies’ has been done away with.

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Impact: Amendments in the Circular would go a long way in improving the FDI flows in the country – removal of condition of obtaining prior approval from the Indian partner will help in genuine cases where sometimes foreign venture is held to ransom by Indian counterpart and may demand unreasonable considerations. SEBI SEBI Circular on Listing Agreement for Securitized Debt Instruments With a view to enhance information available in the public domain on performance of asset pools on which securitized debt instruments are issued, it has been decided to put in place a Listing Agreement for securitized debt instruments. The Listing Agreement provides for disclosure of pool level, tranche level and select loan level information. As per SEBI, the move would help improve the secondary market liquidity for such instruments. Budget 2011: Foreign Investors to be allowed direct investment in Mutual funds At present, only FIIs and sub-accounts registered with SEBI and NRIs are allowed to invest in mutual fund schemes. To liberalise the portfolio investment route, it has been laid down by FM in the Budget Speech to permit SEBI-registered mutual funds to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes which will enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market

Recent News § SEBI is planning to regulate the wealth management business of

large financial institutions (at present the same is not regulated)

§ SEBI has stated that the coordination among various financial market regulators needs to integrate at the operational as well as surveillance level to have a greater oversight and thereby prevent frauds in the financial markets.

Companies Act Amendment to Companies Name Availability Rules Some salient features of the Rules are § While applying for a name, the applicant has to certify that he has

searched the website of the Ministry of Corporate Affairs for checking the resemblance of the proposed name with companies already registered.

§ Option available to certify the name by CA, CS or CWA, the name will be made available by the system online to the applicant without backend processing by the Registrar of Companies

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Some of the important guidelines for name selection as provided by Rules are given below § The addition of an internet related designation, such as .COM, .NET,

.EDU, .GOV, ORG, .IN does not make a name distinguishable from another, even where (.) is written as ‘dot’.

§ Abbreviated name such as ‘ABC limited’ or ‘23K limited’ cannot be given to a new company. However the companies well known in their respective field by abbreviated names are allowed to change their names to abbreviation of their existing name (for Delhi Cloth Mills limited to DCM Limited, Hindustan Machine Tools limited to HMT limited) after following the requirement of Section 21 of the Companies Act, 1956.

§ If the proposed name includes the word “State”, the same shall be allowed only in case the company is a government company. Also, if the proposed name is containing only the name of a continent, country, state, city such as Asia limited, Germany Limited, Haryana Limited, Mysore Limited, the same shall not be allowed.

Circular Simplifying of DIN rules MCA has simplified the process of obtaining DIN and recommended the below mentioned procedure: § Application for DIN will be made in DIN 1 eForm. No physical

submission of documents will be accepted and for this purpose scanned documents along with verification by the applicant will be attached with the eForm. Only online fee payment will be allowed.

§ DIN 1 eForm can be digitally signed by the professional who shall also confirm that he has verified the particulars of the Applicant given in the application. Where the DIN 1 is verified by the

professional, the DIN will be approved by the system immediately online. In other cases, the DIN cell will examine the application and same shall be disposed of within one or two days.

§ Above procedure also apply to filing of DIN 4 i.e. changes in particulars of Directors.

MCA simplified procedure of company incorporation and establishment of principal place of business in India by Foreign Companies (Circular 6/2011) Following recommendations have been made by the MCA § Only Form-1 shall be approved by the RoC Office. Form 18 and 32

shall be processed by the system online. § There shall be one more category, i.e., Incorporation Forms (Form

1A, Form 37, 39, 44 and 68) which will have the highest priority for approval.

§ Average time taken for incorporation of company should be reduced to one (1) day only

Impact: Ever since MCA project has been conceived and commissioned, simplification of procedures by way of automation and removal of unnecessary obstacles have been the underlying theme for Ministry of Corporate Affairs. In this backdrop, MCA has issued certain circulars which will have the impact of reducing the number of days for certain procedures and getting it to international standards.

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Payment of MCA filing fees through electronic mode made mandatory – From 27th March 11, compulsorily Payment of MCA fees online where same is less than INR 50,000; from 1st October’2011 all fee to be paid online Payment of commission to Non-Whole Time Directors of the company under section 309(4) (b) of the Companies Act, 1956 (Circular 4/2011) Companies not require approval of Central Government for making payment of remuneration by way of commission to its Non- Whole Time Director(s) in addition to the sitting fee if the total commission to be paid to all those Non-WTDs does not exceed 1% of the net profit of the company if it has a WTD(s) or 3% of the net profit of the company if does not have a Managing Director or WTD(s). Recent News: Govt plans to keep track of companies with common addresses and common directors Ministry of Corporate Affairs (MCA) plans to add two more parameters to its software-based fraud detecting system, called Early Warning System (EWS), which scans unusual developments in companies and alerts the Ministry of any possible wrongdoing. Accounting Converged Indian Accounting Standard (Ind AS) notified by MCA MCA vide press release dated 25 February 2011 has notified 35 Indian Accounting Standards converged with IFRS (henceforth called IND AS).

MCA will implement the IFRS converged Indian Accounting Standards in a phased manner after various issues including tax related issues are resolved with the concerned departments. The date of implementation of the IND AS will be notified by MCA later. Impact: However, Indian companies, which were to tap the international capital market, will still have to prepare dual financial statements to raise funds overseas as the newly-notified system for local companies is not compatible with global norms and would give parallel valuations. This in turn would defeat the purpose of migration. Format of Revised Schedule VI to the Companies Act 1956 The revised Schedule VI introduces many new concepts and disclosure requirements and also does away with several existing requirements. Applicable for financial statements with period commencing on or after April 1st, 2011 Some key features of the new Schedule are as follows. § It requires that if compliance with the requirements of the Act and/

or accounting standards requires a change in the treatment or disclosure in the financial statements, the requirements of the Act and/ or accounting standards will prevail over the Schedule VI. This is a significant change in the approach since earlier the requirements of Schedule VI were prevailing over accounting standards.

§ In the existing Schedule VI, break-up of amounts disclosed in main balance sheet and profit and loss (P&L) account was given in the schedules. Additional information was furnished in the notes to account. The revised Schedule VI has eliminated the concept of

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schedule and such information will now be provided in the notes to accounts. This is in line with the practice under IFRS

§ Current and non-current classification has been introduced for presentation of assets and liabilities in the balance sheet which is more in line with the concepts used under Ind-AS/ IFRS.

§ Number of shares held by each shareholder holding more than 5% shares now needs to be disclosed.

§ Any debit balance in P&L account will be disclosed under the head “Reserves and surplus.”

§ Below the line adjustments to be presented under “Reserves and Surplus” in the balance sheet

Impact: With implementation of IFRS underway, revised schedule VI being issued and XBRL reporting being introduced, accounting in India is going a whole new change. The move is surely to align Indian financial reporting with international standards. Certain Companies have to file financial statements in XBRL mode from July 2011 (General Circular No 9/2011 dated March 31st, 2011) MCA has mandated following companies to file financial statements using XBRL taxonomy from the year 2010-2011 § All companies listed in India and their subsidiaries, including

overseas subsidiaries; § All companies having a paid up capital of INR 5 crore and above or a

Turnover of INR 100 crore or above. XBRL is a language for the electronic communication of business and financial data. Going forward, government intends to cover more categories of companies in the regime.

Impact: Companies would have to incur additional cost for complying with XBRL. Nevertheless, XBRL would be beneficial for those who collect business data, including governments, regulators, stock exchanges, financial information companies, economic agencies and the likes and those who produce or use it including accountants, auditors, company managers, financial analysts, investors and creditors. Direct Tax (including International Tax) Budget 2011 § Dividends received by an Indian company from its foreign subsidiary

(wherein the Indian company holds 51% or above of the nominal value of share capital) will be taxable at the rate of 15 % of the gross dividend received. No deduction in respect of any expenditure or allowance shall be allowed to the Indian company from such dividend income.

§ A non-resident having a liaison office in India set up in accordance with the guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act (FEMA) is required to prepare and deliver the details of activities carried on by such liaison office to the AO having jurisdiction over such liaison office within 60 days from the end of such financial year.

§ LLP subject to provisions of MAT (MAT rate increased to 18.5% of adjusted book profits)

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§ Levy of MAT introduced on developers of Special Economic Zones (SEZS) as well as units operating in SEZs. Also, DDT applicable on SEZ Developers. However, there has been news that SEZ Developers Weigh Legal Action against MAT Decision.

§ In order to discourage transactions by Indian residents with persons

located in any country or jurisdiction which does not effectively exchange information with India, anti-avoidance measures have been proposed. These includes applicability of transfer pricing regulations, non-allowability of deduction unless assesse furnishes requisite authorization and maintain prescribed documentation, receipt considered as deemed income unless satisfactory explanation provided about source of money, minimum withholding tax rate on payments to be 30%, etc).

§ Companies managing the retirement savings of their employees

through own provident fund trusts have been given more time to seek licences that make them eligible for tax exemption on contributions

Significant decisions § Interest paid by a branch of a Foreign Bank to its Head Office is

deductible in the hands of the branch [Calcutta high court]

§ Transfer of an undertaking under slump exchange is not liable to capital gains tax [Mumbai ITAT]

§ Non-Compete Fee Not Taxable [Supreme Court]

§ Payments received for leasing of transponder capacity and bandwidth cannot be taxed as ‘royalty’ under the Section 9(1)(vi) of the Act [Delhi ITAT]

§ Views expressed by smaller bench of a SC in case of Azadi Bachao Andolan on tax avoidance are binding on the HC. Also in Quippo case, AAR goes against Vodafone by relying on Azadi Bachao Andolan [AAR]

§ Benefit of set off of brought forward losses could not be denied to

the amalgamated company since there was no change in control and management of amalgamated company pre and post-merger [Delhi ITAT]

Regulatory News Progress on establishment of a strong IT infrastructure for GST on track FM announced that significant progress on the GST network (GSTN) has been made. The key business processes of registration, returns and payments, was told to be in advanced stages of finalization. NSDL has been selected a technology partner for incubating the National Information Utility that will establish and operate the IT backbone for GST. Indian Income Tax offices in other nations Government is planning to put up Income Tax Overseas Units in countries like France, Germany, the Netherlands, Cyprus, US, Britain, United Arab Emirates, and Japan in the upcoming fiscal. Income tax offices are already

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operational in Singapore and Mauritius. The major motive behind this idea is to keep track of people who evade tax and flee to foreign nations. Charities, trusts to come under one law for more transparency The intent is to smoothen their running in India and overseas, but with strict checks on the flow of tainted money. Job of drafting a model law is in progress that will replace myriad central and state laws on societies, trusts, endowments and charitable institutions. Income Tax department tells EPFO to tax premature PF withdrawals The Income Tax department has asked Employees' Provident Fund Organisation (EPFO) to tax all withdrawals by workers with less than five years of PF savings. Employers who run their own PF trusts have already been deducting tax for premature withdrawals. Cabinet approves PFRDA Bill Union Cabinet gave its nod to the long-awaited Pension Fund Regulatory and Development Authority Bill (PFRDA) that aims to grant statutory status to the pension regulator and open up the sector for FDI. Budget 2011: Stamp Act all set for a makeover As proposed by Finance Minister in his Budget speech, the government would soon amend the Stamp Act. To start with, an amendment would be made to prune the list of items on which stamp duty is levied. FM also proposed to launch a new scheme with an outlay of INR 300 crore to provide assistance to states to modernise their stamp and registration administration and roll out e-stamping in all districts in the next 3 years.

Indirect Taxes Goods transported to out-of-state depots otherwise than as a result of direct sale which would attract tax under Section 6 of the Central Sales Tax Act- SC Supreme Court laid down an important principle in the context of Central sales tax wherein an agreement to sell occasioning movement of goods from head office to branch was considered to be taxable under CST and not be considered as branch transfer. Introduction of Constitution Amendment Bill in Lok Sabha for implementation of GST The Bill seeks to amend the Constitution to authorise both the Centre and the States to levy taxes on supply of goods and services. The proposed Article 279A empowers the President of India to constitute a GST Council which would examine issues relating to GST and make recommendations. The newly proposed Article 279B provides for establishment by the Parliament of a GST Dispute Settlement Authority to adjudicate any dispute that results in a loss of revenue to a State or the Centre. The Bill will now be referred to a Standing Committee of the Parliament for scrutiny and recommendations. Post this; the Bill will be taken up for discussion and voting in the Parliament

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Budget 2011 – Concept of payment of service tax on “payment” replaced with “accrual” (except for certain specified services) Single most amendment in Service tax regime is to go from “payment” to “accrual basis”. The same involved amendment/introduction of following. Point of Taxation Rules 2011 have been framed vide notification 18/2011-ST and made effective from July 1st, 2011 (though service provider may also opt for an earlier applicability i.e. from April 1st, 2011). The general rule will be that the time of provision of service will be the earliest of the following dates: § Date when the invoice for the service provided or to be provided is

issued or § When the time of receipt of payment, to the extent of such payment. As regards the CENVAT Credit Rules, amendments have been made to provide that the credit in respect of input services can be availed on or after the day on which the invoice, bill or challan is received except in cases where the service tax is paid under reverse charge mechanism, where it will be eligible upon payment of the tax. In case the payment of the value of input service and the service tax is not made within three months from the date of invoice, then the credit availed on the basis of invoice or bill is required to be reversed. Another change is with respect to the Service Tax Rules, 1994. The amendment now provides an option to a service provider to adjust the excess service tax paid in a situation where the amount of invoice is renegotiated due to a deficient provision of service or for a variation in the terms of a contract.

Impact: The change in concept from ‘payment’ to ‘accrual’ for service tax is being seen as a run-up to the GST regime where taxation on both “goods” and “services’ will converge. Transfer Pricing Budget 2011 § Government to notify the tolerance level of variation between the

arm’s length price (ALP) and value of international transaction (Earlier it used to be 5%)

§ Jurisdiction of TPO to extend to determination of ALP in respect of other international transactions, which are noticed by him subsequently, in the course of assessment proceedings.

Significant decisions § Internal benchmarking analysis under TNMM based on segmental

results prepared by using allocation keys is justified [Delhi ITAT]

§ ITAT Delhi held that for TNMM, interest on surplus and abnormal costs to be excluded [Delhi ITAT]

§ Prior Years’ data cannot generally be relied upon to justify Arms-Length Price [Bangalore ITAT]

§ If Arms-Length Price determined by arithmetical mean, 5 percent deduction allowable [Pune ITAT]

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§ Documentation is required to be maintained contemporaneously on an annual basis [Delhi ITAT]

§ Tribunal provides guidance on recovery of pre-commencement costs [Hyderabad ITAT]

Recent News in Transactions that made headlines § International Paper to buy 75% in AP Paper for $423 mn § Walmart in talks to pick up stake in Future Group's Big Bazaar § DE Shaw, RIL in JV for financial services; shares of RIL down § PE biggies (including Goldman Sachs) get together to set up India

NBFC § Blackstone to take control at Gokaldas § Telenor to challenge Unitech stay on rights issue § Vodafone seeks AAR's opinion on tax liability in $5-bn Essar deal § SEBI clears Sesa Goa open offer for Cairn India § Beam, a mobile-commerce company, has sought the Reserve Bank of

India’s permission to make Facebook Credits available in India § Once valued at 2,200cr, Vishal Goes for 70 cr § Three PE funds (including SBI-Macquarie and the PE arm of Standard

Chartered PLC) set to invest Rs 1,440 crore in GMR Airport § RIL will pay nil or negligible tax on the $7.2 billion it would receive

from the proposed sale of its 30% interest in 23 oil and gas blocks to British Petroleum because sale proceeds would be treated as cost of hydrocarbon exploration already incurred, which is eligible for full deduction under the Income Tax

This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in this publication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this publication

This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has been prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the information contained in this publication without obtaining specific professional advise. Due care has been taken while compiling the information , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this publication

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