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

Dear Patron Here we are with the Ninth successive issue of our monthly ‘Missive’. India's internet users crossed 100 million in September 2011, a growth of 13 per cent against last year, according to a survey conducted by Internet and Mobile Association of India and IMRB. This news would be music to ears for PE & VC funds that have been making host of investments in E-Commerce businesses in India. With leading E-Commerce players now investing in supply chain and back-end systems in an effort to facilitate a smoother movement of the product or service from the supplier to the consumer, the industry is also starting to exhibit signs of maturity. It is expected that the Indian E-Commerce shall be witnessing lot of action in coming months with number of funds chasing so many startups. We trust you will enjoy reading this Missive, even while soaking in the contents. We would very much appreciate your feedback which consistently helps us in improving and upgrading the contents. Thanks and regards, Akhil Bansal Editor, Knowledge Management Team

Topics Page No Corporate law 1 SEBI 2 FEMA 3 International Taxation 6 Transfer Pricing 6 Recent Transactions that made headlines

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“Don’t ask what the meaning

of life is ….. You define it”

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Corporate Law XBRL Filing due date extended to 31.12.2011 or 60 days from due date, whichever is later MCA has issued general circular number 69/2011, which extends the due date for filing Balance Sheet and Profit and Loss Account in extensible Business Reporting Language (XBRL) mode without any additional fee due to delay by those Phase-I class of companies (excluding exempted class) whose Balance Sheet date for FY 2010-11 is on or after 31.03.2011. The Filing due date has been extended up to 31.12.2011 or within 60 days of their due date of filing, whichever is later. Impact: In case of a company whose financial year is ending on 31-03-2011 and if its date of AGM is 30th September 2011, then its Due date for filing financial statements is 30 days from the AGM date i.e. up to 30th October, 2011. Hence, as per the time lines provided in the circular, the company can file its financial statements in XBRL mode without additional fees up to 30th November, 2011 or 60 days from its due date of filing financial statements, which is 29th December, 2011 (i.e. 60 days from due date of filing- 30th October, 2011) whichever is later. Cost Accounting Records and Cost Audit – clarifications regarding applicability and compliance requirements [General Circular No. 68/2011, dated the November 30, 2011.] In connection with the recently issued circulars/notifications concerning cost accounting records and cost audit, following clarifications are issued:

§ Filing of a simple compliance report as per the notified Form-B (copy enclosed) and no other details of cost records are required to be filed with the Government

§ On applicability of rules for the first time, cost records and cost

details, statements, schedules, etc. to be kept in good order for the next eight financial years

§ If more than one products of a company are under cost audit for

which it has appointed either same or separate cost auditors, then they may either submit separate cost audit report for each product group or submit only one consolidated report containing details of each product group

Corporate Law News Snippets & Decisions § Cabinet had cleared Companies Bill 2011; likely to be tabled for

consideration and passage in the ongoing Winter Session. Bill retains the provision for rotation of auditors every five years. Also, NCLT and NCLAT to replace Corporate Tribunals.

§ EPF dues from a company under liquidation has to get priority [Employees Provident Fund Commissioner Vs. O.L. of Esskay Pharmaceuticals Limited (Supreme Court)]

§ Director can’t be held liable for all wrongs in a company [Mrs. Anita Malhotra Vs. Apparel Export Promotion Council & ANR. (Supreme Court)]

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SEBI Review of limits for foreign institutional investors (FII) investments in Government Securities and Corporate Bonds [PRESS RELEASE [F. No. 9/2/2009-ECB], dated 17-11-2011.] The policy has been reviewed in the context of India’s evolving macroeconomic situation, the need for enhancing capital flows and making available additional financial resources for India’s corporate sector. It has now been decided to:

§ Increase the current limit of FII investment in Government

Securities by US $ 5 billion raising the cap to US $ 15 billion.

§ Increase the current limit of FII investment in corporate bonds by US $ 5 billion raising the cap to US $ 20 billion.

Impact: The last enhancement in these investment limits for FII was done on September 23, 2010. The present enhancements would increase investments in debt securities and help in further development of the Government securities and the Corporate bond markets in the country.

SEBI Board discusses Tenure for conversion of warrants issued along with public/rights issues, Disclosures where Funds are shown as promoters, Review of net worth for Debenture Trustees etc. [PR No. 145/2011] The Board took the following decisions: § Business Responsibility Reports: In order to assess fulfilment of the

environmental, social and governance responsibilities of listed

entities, it has been decided to mandate listed entities to submit Business Responsibility Reports, as a part of their Annual Reports, describing measures taken by them along the key principles enunciated in the ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ framed by the Ministry of Corporate Affairs (MCA). To start with, the requirement will be applicable to top 100 companies in terms of market capitalisation and would be extended to other companies in a phased manner. \

§ Tenure for conversion of warrants issued along with public/rights issues: Presently, the Regulations are silent on the tenure of warrants offered along with public/rights issues. It has been decided to specify a maximum tenure of 12 months for warrants issued along with public/rights issue of securities to avoid the possible misuse.

§ Review of policy on ‘Anchor Investors’: The concept of Anchor Investors (AIs) was introduced by SEBI in June 2009 as a class of committed investors who can be relied upon to anchor an issue of capital in all market conditions, adverse or otherwise. To make the concept more effective, it has been decided to prescribe a minimum allotment size of Rupees Five crore and maximum number of AIs, slab-wise.

§ Disclosures where Funds are shown as promoters: Considering the constraints in disclosure by investee companies regarding Funds (such as Venture Capital Funds, etc.) which are shown as one of the promoters of such investee company, it has been decided to specify a separate set of disclosures for them.

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§ Review of net worth for Debenture Trustees : The Board approved amendment to Regulation 7A of the SEBI (Debenture Trustee) Regulations, 1993 to increase the net worth requirement of Debenture Trustees from existing Rupees One crore, which was fixed as back as 2003, to Rupees Two crore. The Board also approved to grant a time period of two years to existing Debenture Trustees, from the date of notification of Regulations, to the new level.

SEBI News Snippets § SEBI had allowed Mutual Funds to participate in repo corporate

debt securities [CIRCULAR No. CIR / IMD / DF / 19 / 2011, Dated- November 11, 2011]

§ SEBI has advised Stock Exchanges / Depositories to conduct an annual System Audit as per the System Audit Framework and the system audit report along with comments of Stock Exchanges / Depositories should be communicated to SEBI.

FEMA Export of Goods and Software – Realization and Repatriation of export proceeds – Liberalization [RBI/2011-12/241 A.P. (DIR Series) Circular No.40, Dated- November 01, 2011.] RBI had earlier enhanced the period of realization and repatriation to India of the amount representing the full export value of goods or software exported, from six months to twelve months from the date of export. This relaxation was available up to September 30, 2011. RBI has now decided to extend the above relaxation w.e.f. October 01, 2011 till September 30, 2012. RBI liberalizes FDI rules related to transfer of shares RBI/2011-12/247 A.P. (DIR Series) Circular No. 43 RBI has told that transfer of shares between Indians and non-residents will not require its permission in several key areas like financial services. Amending the Regulations, RBI said that its prior permission would not be necessary where the company whose shares are being transferred is engaged in any financial service. Besides, the RBI permission has also been done away with for transfer of shares between residents and non-residents in cases where the Foreign Investment Approval Board (FIPB) has already given its clearances and the SEBI guidelines have been adhered to. Impact: These steps have been taken as a measure to further liberalize and rationalize the procedures and policies governing foreign direct investment in India. However, it is to be noted that the transactions will have to comply with the SEBI regulations, FDI sectoral caps, and the pricing guidelines as specified by RBI.

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Foreign investment in India by SEBI registered FIIs in other securities RBI/2011-12/244 A.P. (DIR Series) Circular No. 42, Dated- November 03, 2011 In April 2011, the limit for FII investment in non-convertible debentures / bonds issued by Indian companies in the infrastructure sector was enhanced from USD 5 billion to USD 25 billion. On a review it has been decided to make some amendments in the policy, some important provisions are as under: § FIIs are now also allowed to invest in non-convertible debentures /

bonds issued by NBFCs categorized as ‘Infrastructure Finance Companies’(IFCs) by RBI within the overall limit of USD 25 billion.

§ The lock-in-period of three years for FII investment stands reduced to one year up to an amount of USD 5 billion within the overall limit of USD 25 billion.

Trade Credits for Imports into India – Review of all-in-cost ceiling [RBI/2011 -12/257 A. P. (DIR Series) Circular No. 44] On a review of developments in the global financial markets and the fact that domestic importers are experiencing difficulties in raising Trade Credit within the existing all-in-cost ceiling, RBI has been decided to revise the all-in-cost ceiling for Trade Credits as under:

The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any. The change in the all-in-cost ceiling will come into force immediately. The enhancement in all-in-cost ceiling is applicable up to March 31, 2012 and subject to review thereafter. Interest Rates on Export Credit in Foreign Currency [RBI/2011-12/258 DBOD. DIR.No. 52 /04.02.001/2011-12, Dated- November 15, 2011.] Keeping in view the tight liquidity conditions and widening of credit spreads due to recent developments in international financial markets, RBI has decided to increase the ceiling rate on export credit in foreign currency by banks to LIBOR plus 350 basis points from the present ceiling rate of LIBOR plus 200 basis points with immediate effect, till March 31, 2012, subject to the express condition that the banks will not levy any other charges viz. service charge, management charge etc except for recovery towards out of pocket expenses incurred. The revision in the rates of interest would be applicable only to fresh advances and are subject to review after March 31, 2012. “Set-off” of export receivables against import payables – Liberalization of Procedure [RBI/2011-12/264 A.P. (DIR Series) Circular No. 47, Dated- November 17, 2011.] RBI has been allowing requests from the exporters through their Authorised Dealer Category 1 banks for “set-off” of export receivables against import payables in respect of the same overseas buyer and supplier subject to certain terms and conditions.

Existing RevisedUpto one yearMore than one year and upto three years

Maturity PeriodAll-in-cost over 6

month LIBOR*

200 bps 350 bps

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As a measure of further liberalization, it has been decided to delegate power to AD Category – I banks to deal with the cases of “set-off” of export receivables against import payables, subject to certain conditions § The import is as per the Foreign Trade Policy in force. § Invoices/Bills of Lading/Airway Bills and Exchange Control copies of

Bills of Entry for home consumption have been submitted by the importer to the Authorized Dealer bank.

§ Payment for the import is still outstanding in the books of the importer.

§ Both the transactions of sale and purchase may be reported separately in ‘R’ Returns.

§ The relative GR forms will be released by the AD bank only after the entire export proceeds are adjusted / received.

§ The ” set-off” of export receivables against import payments should be in respect of the same overseas buyer and supplier and that consent for ”set-off” has been obtained from him.

§ The export / import transactions with ACU countries should be kept outside the arrangement.

§ All the relevant documents are submitted to the concerned AD bank who should comply with all the regulatory requirements relating to the transactions.

Impact: This move will benefit several Indian parties who have import and export transaction with the same overseas party. The circular is in line with netting-off permitted through AD Banks to Units in Special Economic Zones. The above circular seems to relate primarily to ‘Set-off’ relating to import and export of goods. The cases falling outside the above liberalisation would continue to require prior approval of the RBI vide an application made to them through the AD Bank.

External Commercial Borrowings (ECB) Policy modified – Parking of ECB proceeds [A.P. (DIR Series) Circular No. 51 & 52] On a review of the developments in the global financial markets and current macro-economic conditions, it has been decided, in consultation with the Government of India, to modify certain aspects of the ECB policy as under: (i) Enhancement in all-in-cost ceiling The all-in-cost for ECBs has been revised as under:

The enhancement in all-in-cost ceiling is applicable up to March 31, 2012 subject to review thereafter. (ii) Parking of ECB Proceeds The proceeds of the ECB raised abroad for Rupee expenditure in India, such as, local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment for spectrum allocation, etc., is to be brought immediately for credit to Rupee accounts with AD Category I banks in India. In other words, ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization.

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International Taxation Significant Decisions

§ Expenditure on ‘Application Software’ is revenue – [CIT vs. Asahi

India Safety Glass Ltd (Delhi High Court)]

§ Taxpayer did not constitute a Construction PE under the DTAA as the contract carried on by the Taxpayer did not exceed the threshold period provided under the DTAA Income Tax [CIT vs. M/s BKI/HAM v.o.f. (Uttarakhand High Court)]

§ B/F business loss , unabsorbed depreciation and loss incurred by a non-eligible unit shall not be adjusted while computing the profit eligible for relief u/s. 10A of the Income Tax Act [CIT vs. Yokogawa India Ltd (Karnataka High Court)]

§ Transfer of shares by initial subscribers to a MOA does not amount to a change in shareholding as per section 79 of the Income-tax Act, 1961 and therefore, benefit of brought forward loss is available [ITO V. M/s. S-Net Freight (India) P. Ltd. (ITAT Chennai)]

§ Payment made for supply of software is not ‘royalty’ since it is copyrighted software and not copyright in the software [DCIT v. ABAQUS Engineering Pvt Ltd (ITAT Chennai)]

§ Capital gains on sale of Indian Companies shares by Mauritius Company to German Company not chargeable to tax in view of Article 13.4 of the India-Mauritius Tax [TreatyRe -Ardex Investments Mauritius Ltd. (AAR)]

§ When non-resident technology partner does not pass on proprietary right to assessee on transfer of knowhow, the royalty paid by the assessee under a knowhow transfer agreement is revenue expenditure [ACIT Vs Modi Revlon Pvt Ltd (ITAT Delhi)]

§ Non-resident lessor does not have PE or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principle to principle basis [DCIT vs. M/s Calcutta Test House Pvt. Ltd. (ITAT Delhi) ]

§ Commission paid to a foreign agent without deduction of tax for services rendered outside India cannot be disallowed under the Income-tax Act [Dy. CIT VS M/s. Divi’s Laboratories Ltd. (ITAT Hyderabad)]

§ Proof of service outside India pre-requisite for beneficial tax claim [ ITAT Pune Madhukar Vinayak Dhavale Vs. ITO, International taxation (ITAT Pune)]

Transfer Pricing § Comparable rejected by TPO without giving cogent reasons must be

presumed to be comparable and Departmental Representative cannot argue to the contrary [ACIT vs. Maersk Global Service Center (ITAT Mumbai) ]

§ Assessee to ‘keep and maintain’ information and documents in respect of international transaction entered into with AE [ITAT Mumbai ACIT vs. Smith & Newphew Healthcare (P) Ltd. (ITAT Mumbai)]

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Recent Transactions that made Headlines § Synopsys to Acquire Magma Design § SABMiller to acquire Foster's this month § SAP to Acquire Cloud-Based Software Company Success Factors for

$3.4B § Siemens to acquire eMeter to enhance smart grid offering § Facebook Buys Gowalla Team § Tata Capital's PE fund acquires 10% stake in Ginger Hotels: reports § Bharti Telecom buys 14.9 lakh Airtel shares § Delphi Automotive eyes acquisitions: Reports § Polaris Software to acquire stake in Indigo Tx Software § Lucha Libre USA announces partnership with Reliance Broadcast

Network § Jaypee Group to acquire Andhra Cements for Rs 2.35bn § India Cements acquires coal mine in Indonesia: Reports § Huawei to buy out Symantec in JV for US$530mn § Aditya Birla Group in talks to buy part of Jaypee cement business:

Reports § Portman Holdings acquires stake in Tuscan Estate § Goldman Sachs buys 32mn Suzlon shares: Reports

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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