India Spectrum

*connectedthinking

Tax and Regulatory Services

Be in the know* January 2010 Vol. 3 Issue 1

EditorialWe are delighted to again present another issue of India Spectrum and we wish you all a very Happy New Year.

The New Year brings with it the hope of revival of the India growth story. India’s GDP grew at 7.9% during the quarter ended 30 September, 2009 beating all expectations. Further, a robust growth of 23% in advance tax collections till the third quarter of the current fi nancial year 2009-10 has buoyed growth expectation.

The year gone by has witnessed historical steps being taken by the Government in introducing signifi cant legislations under preparation like the Direct Taxes Code (“Code”) and the Goods and Services Tax (“GST”)

regime, introduction of Limited Liability Partnership Act, etc.

The fi nance ministry has scheduled a meeting with the Prime Minister on 5 January, 2010 to seek the latter’s guidance on three core issues in the Code viz. the exempt-exempt-tax regime for retirement savings, the 2% minimum alternate tax on gross tax assets of companies and the proposal to tax charitable organisations at 15% arising out of the fi nal draft of the Code. Hectic lobbying by interested groups is still on for dilution or an altogether elimination of these proposals from the fi nal draft.

The GST regime originally scheduled to roll out on 1 April, 2010, would now may miss the deadline. Given

the fact that the consensus on rates, structures, etc. is not yet arrived at, and the Central and State Governments may not be able to complete all legislative and administrative process within the above set time limit. The Task force set up for the GST implementation has proposed for a postponement of GST implementation by 1 October, 2010. With the notifi cation of the Dispute Resolution Panel (“DRP”) in November 2009, the DRP has started functioning with expectation from taxpayers of expeditious resolution to issues arising out of draft orders of the Tax Offi cer.

On the global front, the Dubai fi nancial crisis resurrected fear that fi nancial crisis is not quite done and dusted, although the magnitude may appear piffl ing compared to the sub-prime crisis. Separately, while the Copenhagen meet was looked upon by one and all as one-world one response to “global warming”, news of lack of any consensus seems to suggest that the road is far longer and diffi cult than it appeared.

We trust that you will enjoy reading this India Spectrum and we welcome your comments.

Thank you

Ketan Dalal & Shyamal MukherjeeJoint Leaders-TRS Practice

Contents

Corporate Tax 1

Case Law 1

Notifi cations / Circulars 4

Corporate Tax – Financial Services 5

Case Law 5

Personal Taxes 8

Case Law 8

Notifi cations / Circulars 9

Mergers & Acquisitions 10

Direct Tax Case Law 10

Corporate Law Cases 10

Transfer Pricing 12

International Developments 12

Indirect Taxes 14

VAT / Sales Tax 14

CENVAT 14

Service Tax 15

Customs / Foreign Trade Policy 15

Foreign Exchange Management Act 16

External Commercial Borrowings 16

Miscellaneous 17

Glossary

Do mail your feedback at pwctrs.knowledgemanagement@in.pwc.com and we shall be pleased to respond

AY Assessment Year

CBDT Central Board for Direct Taxes

CESTATCustom Excise and Service Tax Appellate

Tribunal

CIT Commissioner of Income-tax

CIT(A) Commissioner of Income-tax (Appeals)

DRP / Panel Dispute Resolution Panel

ECB External Commercial Borrowings

FII Foreign Institutional Investor

HC High Court

NBFC Non-Banking Financial Company

PE Permanent Establishment

RBI Reserve Bank of India

Rules Income-tax Rules, 1962

SC Supreme Court of India

SEBI Securities and Exchange Board of India

The Act The Income-tax Act, 1961

The Tribunal The Income-tax Appellate Tribunal

TO Tax Offi cer

TP Transfer pricing

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India Spectrum*

Case Law

Assessment Proceedings

Reasons not communicated within reasonable period of time – Reassessment invalid

The assessee company was engaged in providing international telecommunication services. On the last day of the prescribed statutory time limit for reopening the assessment, the Tax Offi cer (“TO”) issued a notice under section 148 of the Income-tax Act, 1961 (“the Act”). In response to notice, the assessee fi led return of income and requested the TO to provide the assessee with reasons for reopening of the assessment. Subsequently, during the course of reassessment proceedings, requests were made to the TO to provide the reasons recorded, however; the same were provided on the day of passing of the reassessment order. The assessee challenged the reassessment

proceedings before the Commissioner of Income-tax (Appeals) (“CIT(A)”) and the CIT(A) upheld the reassessment proceedings.

On further appeal, the Income-tax Appellate Tribunal (“the Tribunal”) held that:

• The reasons recorded were not communicated to the assessee prior to completion of the assessment.

• In the case of S. Narayanappa v. CIT [1967] 63 ITR 219 (SC), it was held that non-communication of reasons along with the notice for reassessment was not fatal. However, in the case of GKN Driveshaft (India) Ltd. v. ITO [2003] 259 ITR 19 (SC) it was held that upon a request being made by the assessee, the TO was bound to furnish the reasons within a reasonable time of fi ling of the return of income. Thus, both these decisions operated in different fi elds, and hence, there was no

Corporate Taxconfl ict between them.

• Initiation of reassessment proceedings is an administrative act and during that period, the TO is not bound to communicate the reasons for reopening the assessment. However, once the reassessment proceedings start, they become quasi-judicial proceedings and in such a situation, the TO is bound to communicate the reasons for reopening the assessment to the assessee.

• The ratio of judgment of the Supreme Court of India (“SC”) in the case of S. Narayanappa (above) had not been correctly applied in the case of ITO v. Gurinder Kaur [2006] 102 ITD 189 (Del) and other decisions relied upon by the Revenue.

• As the TO had not furnished the reasons to the assessee before concluding the assessment, much less within a reasonable period of time as stipulated by the SC, the reassessment proceedings were held to be null and void.

Assisted by PwC Tax Litigation Team

Videsh Sanchar Nigam Limited v. JCIT [2009] 54

ITATINDIA 677 (Mum)

Business Disallowance

Deletion of second proviso to section 43B by the Finance Act, 2003 is retrospectively effective from 1 April, 1988

The SC, in this case, analysed whether the second proviso to section 43B of the Act deleted by the Finance Act, 2003 was effective from 1 April, 2004 or retrospectively with effect from 1 April, 1988.

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The SC held that the deletion of second proviso to section 43B of the Act operates retrospectively from 1 April, 1988, since it is curative in nature (although it has been made applicable by Parliament only with effect from 1 April, 2004), on the following reasoning:

• Section 43B of the Act was inserted with effect from 1 April, 1984. It provided that certain deductions like tax, duty, contribution to welfare funds, etc. may be claimed on payment basis. However, Parliament realised that the accounting year of a company did not always tally with the due dates under other laws. Therefore, relaxation was provided by the fi rst proviso to section 43B of the Act whereby if tax, duty, fee, etc. is paid on or before the due date of fi ling return of income, then it is to be allowed as a deduction in the year in which the expenditure is incurred. This relaxation, however did not apply to contributions to labour welfare funds, which were covered by the second proviso. The second proviso stipulated that where the employer had not deposited the contribution before the specifi ed date under welfare fund regulations, it is not entitled to the deduction. However, there were some implementation problems in the second proviso. Therefore, the second proviso was deleted and the fi rst proviso was amended by the Finance Act, 2003 to equate the two. Consequently, the amendments, though made applicable by the Parliament only with effect from 1 April, 2004, were curative in nature and would apply retrospectively with effect from 1 April, 1988.

• Reliance was placed on the SC decision in the case of Allied

Motors (P.) Ltd. v. CIT [1996] 224 ITR 677 (SC), in the context of section 43B of the Act.

• The acceptance of the contention that the deletion of the second proviso to section 43B of the Act is prospective, would cause hardship and discrimination to the assessee because a person who has paid the contributions after the date specifi ed under the welfare fund regulations would be denied deduction for all times, while a person who pays the contribution after 1 April, 2004 would get the benefi t of the deduction under section 43B of the Act. Therefore, to avoid this discrimination, the amendment made by the Finance Act, 2003 should be read as retrospective.

CIT v. Alom Extrusions Ltd. [2009-TIOL-125-SC-IT]

Computation of profi t of a PE

Until specifi cally provided in the Tax Treaty, restrictions provided under the Act cannot be enforced in calculating the profi ts of a PE

The assessee was a Mauritius based company with a PE in India. During the relevant year, while computing the profi t of the PE, it had claimed expenses incurred in relation to traveling and entertainment. The TO rejected the assessee’s claim on the basis of restriction provided under section 37(2) the Act (the section is omitted by Finance Act, 1997) of and rule 6D of the Income-tax Rules, 1962 [omitted by the Income-tax (Thirty Second Amendment Rules, 1999)]. The provisions included a restriction

on the allowance of entertainment and traveling expenditure above a specifi ed limit. On appeal, the CIT(A) deleted the additions.

On further appeal, the Tribunal observed that Article 7(3) of the India-Mauritius Tax Treaty prescribes the methodology for computing the business profi t, in terms of which expenditure incurred for the purposes of business of the PE would be allowable. Hence the restriction provided in the Act cannot be applied; however, any restriction required was to be provided in the Tax Treaty itself. To support this position reliance was placed on the India-France Tax Treaty. Clause 3(a) of the Article 7 of the India- France Tax Treaty provides that the expenditure is to be allowed subject to the limitation of the taxation laws of the contracting states, however, no such restriction was incorporated in the India-Mauritius Tax Treaty. As a result, restriction provided under section 37(2) of the Act cannot be enforced. Accordingly, the CIT(A) order was confi rmed.JCIT v. State Bank of Mauritius Ltd. [2009-TIOL-712-ITAT-MUM]

Note: While section 37(2) and rule 6D has been omitted, however, the ratio of the decision may be relevant to contend that provisions of the Act, will not apply unless specifi cally provided in the Tax Treaty

Until specifi cally provided in the Tax Treaty, restrictions provided under the Act not apply in computing profi ts of a PE

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India Spectrum*

Corporate Tax

Minimum Alternative Tax

The TO has the power to re-work the book profi t if accounts were not prepared in accordance with Schedule VI of the Companies Act, 1956

The assessee had earned profi t of INR 103.81 million on the sale of rights in an immovable property, which was taken directly to the balance sheet as “capital reserve” without routing it through the profi t and loss account. While computing the book profi t under section 115JB of the Act, the assessee did not consider the above profi t on the ground that no adjustment could be made to its book profi t under section 115JB of the Act for this profi t, in view of the decision of the SC in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC). The TO recomputed the book profi t for the purpose of section 115JB of the Act on the ground that the accounts were not prepared in accordance Parts II and III of Schedule VI to the Companies Act, 1956.

The Tribunal referred to Parts II and III of Schedule VI to the Companies Act, 1956, and observed that the profi t from the sale of rights in an immovable property was not routed through the P&L Account and had been directly taken to the Balance Sheet. Thus, the accounts were not prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Hence, the fact that the auditors had certifi ed the accounts was not relevant, and thus, the decision of the SC in the case of Apollo Tyres Ltd. (above), was not applicable. Accordingly, the TO had the power to re-work the book profi t by recasting the accounts in the manner provided in Parts II and III of Schedule VI to the Companies Act, 1956.DCIT v. Bombay Diamond Co. Ltd. [2009-TIOL-760-ITAT-MUM]

Notional Income

Notional interest income cannot be taxed notwithstanding the fact that interest was charged and offered to tax in earlier years on the same loan

The assessee company granted a loan to its sister concern in earlier years out of its own funds. In the earlier years, the assessee charged interest on the loan and offered the same for taxation. However, during the year under consideration, the assessee from a commercial perspective decided not to charge any interest on the loan and passed a board resolution to that effect.

The TO, during the assessment proceedings, specifi cally asked the assessee to show cause as to why interest income was not charged in the relevant year. After verifi cation of the details he accepted the explanation given by the assessee. However, the Commissioner of Income-tax (“CIT”) invoked revisionary powers under section 263 of the Act. This was done on the grounds that since the assessee was following mercantile system of accounting, there was no option but to account for the interest income on mercantile basis since interest on the same loan was charged in the earlier years and offered to taxation. He further contended that the board resolution is prospective and applicable to the advances which the company will be making after the date of the resolution and thus, it did not waive the right of the company to charge interest on the outstanding amount of the relevant year.

The Tribunal held that since the TO had taken a possible legal view after considering details and explanations given by the assessee, there is no error in the assessment order. Even on merits, the Tribunal, in light of the various decisions of SC and High Court (“HC”), held that notional income cannot be taxed in the hands of the assessee notwithstanding the fact that the company is following the mercantile system of accounting and that interest was charged and offered to tax in earlier years, on the loan in question.Argued by PwC Tax Litigation Team

Wockhardt Infrastructure Development Ltd. v. ITO [2009]

49 ITATINDIA 866 (Mum.).

Royalty / Fees for Technical Services

Payments for use of software under a license to use for own business is not ‘Royalty’

The assessee a non-resident company was engaged in the development of software. It sold certain customised software to clients in India, with a right or license to operate for their business purposes. They also had a right to make copies of the software but only for their business purposes. It treated the revenue generated from such transaction as ‘business income’ and, since the company did not have Permanent Establishment (“PE”) in India, nothing was offered to tax pursuant to the India-USA Tax Treaty.

The TO observed that it is immaterial whether the vendor retains or grants the rights to licensee to use the software, and accordingly, brought the revenue from sale of software to

Payments for use of software under a license to use for own business is not ‘Royalty’

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tax by treating it as ‘royalty’.

The CIT(A) observed that under the software contract the other party acquired only a copy of the software program i.e. a copyrighted article and did not acquire any ‘copyright’ over such software, as envisaged by section 14 of the Copyright Act. The CIT(A) therefore held that payment made by the client in India to the assessee cannot be said to be payment for the use or right to use of copyright, and accordingly it did not amount to royalty within the meaning of Article 12(3) of India-USA Tax Treaty.

The revenue argued before the Tribunal that the payments received was for use of copyright, and accordingly, it was ‘royalty’ in nature. The Tribunal relying on the Special Bench decision in the case of Motorola Inc., Ericsson Radio System AB and Nokia Corporation [2005] 96 TTJ 1 (Del) (SB) held that the amount received under the license agreement was in lieu of allowing the use of the software and thus it cannot be termed as a royalty either under the Income-tax Act or under the Tax Treaty. Argued by PwC Tax Litigation Team

Dy. DIT v. Alcatel USA Marketing International Inc.

[2009-TIOL-733-ITAT-MUM]

Income from technical services provided in relation to prospecting / extraction of mineral oil is governed by section 44BB of the Act

The applicant non-resident company was engaged in providing geophysical services to the international oil and gas industry. The applicant conducted seismic surveys and provided on-shore seismic data acquisition and other associated services such as processing and interpretation of such data to oil companies. The applicant was of

the view that the services related to seismic data acquisition being the fi rst step in oil and gas exploration activity would be covered within the ambit of section 44BB of the Act.

The revenue contended that the services extended by the applicant would be covered under Explanation 2 of section 9(1)(vii) of the Act. Furthermore, the income by way of fees for technical services chargeable under section 9(1)(vii) of the Act had to be computed under section 44DA of the Act if the service provider had a PE in India.

The AAR observed that to attract provisions of section 44BB of the Act, the non-resident must be • engaged in the business of

providing services or facilities; • providing services that must be ‘in

connection with’ the prospecting for or extraction or production of mineral oils.

Both these were present in relation to the activities undertaken by the applicant in India. The phrase ‘in connection with’ is important and has to be construed to have an expansive meaning. Thus, the services provided by the applicant were in connection with prospecting for mineral oil. The AAR also observed that Instruction No. 1862 issued by the Central Board for Direct Taxes (“CBDT”) on 22 October, 1990 answers the revenue’s contention that the technical services rendered for exploration of mineral oil / natural gas were outside the ambit of Explanation 2 to section 9(1)(vii) of the Act. Accordingly, the AAR held that the income received by the applicant for the technical services provided in relation to prospecting and extraction of mineral oil would be governed by section 44BB of the Act. Geofi zyka Torun Sp. Zo.O., In re [2009-TIOL-31-ARA-IT]

Notifi cations / Circulars

Applicability of withholding tax in the case of transactions made by the TPAs with hospitals, etc.

The CBDT has clarifi ed that the services rendered by hospitals to various patients are primarily medical services and therefore, the provisions of section 194J of the Act are applicable on payments made by Third party Administrators (“TPAs”) to hospitals etc. Further, for invoking provisions of section 194J of the Act, there is no stipulation that the professional services have to be necessarily rendered to the person who makes payments to the hospital. Therefore, TPAs who are making payment on behalf of insurance companies to hospitals for settlement of medical / insurance claims etc. under various schemes, including cashless schemes, are liable to withhold tax under section 194J of the Act on all such payments to hospitals etc.CBDT Circular No. 8 / 2009 dated 24 November, 2009

Income-tax (Dispute Resolution Panel) Rules, 2009

The CBDT has notifi ed the Income-tax (Dispute Resolution Panel) Rules, 2009 to regulate the procedures to be observed by the Dispute Resolution Panel (“the Panel”). The notifi cation prescribes the modalities regarding the constitution of the Panel, the procedure for fi ling objections, the notice for hearing, the power to call for or permit additional evidence, the hearing of objections, the direction to be communicated to parties, the passing of assessment orders and rectifi cation of mistakes or errors. It also prescribes the Form (Form No 35A) to be used for the purpose of fi ling objections with the Panel. CBDT Notifi cation No. 84 / 2009 dated 20 November, 2009

India Spectrum*

Case Law

Eligibility for deduction under section 35D for a real estate construction company

The assessee was engaged in the business of construction and sale of multi-storeyed residential buildings and complexes.

The question before the HC was whether the assessee qualifi es as an industrial undertaking under the provisions of section 35D of the Act.

The HC held that the activity of business and civil construction can by no stretch of imagination be treated as manufacturing activity as it does not amount to manufacture or production of any article or thing and thus would not be considered as an industrial undertaking. Accordingly, the HC disallowed the assessee’s claim. Ansal Housing and Construction Ltd v. CIT

[2009-TIOL-605-HC-DEL-IT]

Allowability of interest on deep discount bonds

The assessee, a public limited company, was engaged in the business of providing infrastructure facility. The assessee issued deep discount bonds which were subscribed to by mutual funds, public fi nancial institutions and scheduled banks.

The lower tax authorities observed that the assessee claimed deduction of interest liability on deep discount bonds issued to banks and fi nancial institutions. However, since it was a liability which remained unpaid before the due date of fi ling the tax return, such interest was disallowed under the provisions of section 43B of the Act.

The Tribunal held that in the case of interest paid to fi nancial institutions,

Corporate Tax – Financial Servicessection 43B of the Act would be attracted if the interest accrued on loans and not bonds. Accordingly, the Tribunal concluded that the lower tax authorities and the CIT(A) were not justifi ed in disallowing interest on deep discount bonds and allowed the deduction to the assessee.Gujarat Toll Road Investment Co. Ltd. v. ACIT

[2009-TIOL-723-ITAT-AHM]

F&O transactions are not speculative transactions

The assessee, an individual, claimed set off of speculation loss and brought forward speculation loss against income earned from Futures & Options (“F&O”) transactions, considering these F&O transactions as speculative, since the meaning of the term ‘speculative transaction’ as defi ned in the Act did not include derivative transactions within its ambit in that year.

The Tribunal held that F&O transactions, being intangible in nature, are not capable of delivery or transfer and therefore do not satisfy the basic ingredients of the defi nition of a speculative transaction. The Tribunal also agreed that the amendment was merely clarifi catory in nature and accordingly would have retrospective application.ACIT v. Shreegopal Purohit [2009] 33 SOT 1 (Mum.)

Futures & Options transactions are not speculative transactions

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All transactions treated as speculative, even if part of the business consists of dealing in shares

The assessee company was dealing in cement and shares. It earned capital gains from the sale of shares held as investments and accounted for such gains as speculation profi t. The assessee set off its brought-forward speculation loss from the speculation profi t on the basis that its business consisted of purchase and sale of shares and such profi t was speculative in nature in light of the set off provisions contained in the Act.

The Tribunal held that while referring to section 73 of the Act for set off of speculative losses, the defi nition under section 43(5) of the Act is not to be considered as section 73 provides for a specifi c explanation in order to determine whether a transaction will be speculative or non-speculative for set off of losses. Section 43(5) denotes transactions which are settled otherwise than by actual delivery as speculative transactions. However, section 73 does not differentiate a speculative transaction based on delivery. Hence, the Tribunal agreed with the assessee’s claim and allowed its appeal. Metropolitan Traders (P.) Ltd. v. ITO [2009] 33 SOT 168 (Mum.)

FIIs not entitled to opt for general provisions in place of special provisions applicable to them

The assessee non-resident company, a Securities and Exchange Board of India (“SEBI”) registered Foreign Institutional Investor (“FII”), earned dividend income and incurred capital loss on the sale of securities during the year under consideration. The assessee claimed that while computing capital loss, it should be entitled to the benefi t of indexation of

cost as per the proviso to section 48 of the Act. The assessee also contended that if the special provisions applicable to it are more burdensome then it could opt to be governed by the other provisions of the Act.

The Tribunal, relying on one of the AAR rulings, held that the provisions of section 115AD of the Act are benefi cial provisions applicable to FIIs. It is true that the Act intends to provide indexation benefi t to residents as well as non-residents. The Tribunal held that special provisions prevail for such FIIs and dismissed the assessee’s appeal.Advantage Advisors Inc. v. DDIT [2009] 33 SOT 46 (Mum.)

Method of accounting to be followed for bill discounting

The assessee, a Non Banking Financial Company (“NBFC”) engaged in the business of leasing, hire purchase, bill discounting and mortgage loans.

The HC upheld the order of the Tribunal considering the following;

• In the case of bill discounting, the assessee takes the interest amount upfront when he discounts the bill by way of front end discount therefore the income accrues at that point in time and therefore should be taxed at the point of discounting as that is the point at which the assessee becomes entitled to it.

• Relying on the extract from Tannan’s Banking Law and

Practice in India, the Tribunal was correct in concluding that discount is equivalent to interest and that its accrual is certain on the date of discounting itself.

• It was further held that the uncertainty regarding the discharge of bill or rediscounting has no relevance and on that ground income cannot be postponed or spread over the period of the discount since discounting and encashment of bills are separate transactions.

TVS Finance and Services Ltd v. JCIT [2009] 318 ITR 435 (Mad.)

Disallowance of provisions for bad debts made as per RBI prudential norms

The assessee NBFC was engaged in the business of leasing, hire purchase, bill discounting and mortgage loans.

The assessee claimed that according to the prudential norms for NBFCs, loans and advances are to be classifi ed into four different groups and accordingly provisions should be made for doubtful assets and loss assets. The assessee argued that since it had made the provision in its books as per the Reserve Bank of India (“RBI”) norms and debited it to its profi t and loss account, such provisions amounted to write-off of bad debts and hence the deduction should be allowed.

However, the Tribunal held that in order to claim deduction of bad debts under section 36(1)(vii) of the Act, the bad debts have to be actually written-

FIIs not entitled to opt for general provisions in place of special provisions applicable to them

7

India Spectrum*

off in the books. It further held that the explanation to this section was clear and unambiguous and thus mere provision for bad debts should not be treated as a write-off of bad debts and thus rejected the claim of the assessee. The HC upheld the order of the Tribunal. TVS Finance and Services Ltd. v. JCIT [2009] 318 ITR 435 (Mad.)

Provision for lease equalisation charges are to be added back while computing the book profi t under section 115JA

The assessee, a NBFC was engaged in the business of leasing, hire purchase, bill discounting and mortgage loans.

The lower tax authorities held that the provision for lease equalisation charges was to be added back while computing the book profi t since the Act does not recognise the concept of these charges. The CIT(A) and the Tribunal upheld the order of the lower authorities. However, the HC held that since these charges were debited to the profi t and loss account in line with the guidance note issued by Institute of Chartered Accountants of India (“ICAI”) and since the department had also accepted this fact, the amount could not be added back while computing book profi t under section 115JA of the Act. The HC accordingly held in favour of the assessee.TVS Finance and Services Ltd v. JCIT [2009] 318 ITR 435 (Mad.)

SEBI Turnover fees - Deduction on actual payment

The assessee was a stock broker registered with SEBI. The TO observed that the SEBI turnover fees was debited in its profi t and loss account but no payment had been made during the year. The TO disallowed

the same, treating it as a statutory liability, disallowable under section 43B of the Act. The CIT(A) confi rmed the disallowance and the assessee preferred appeal to the Tribunal.

The Tribunal noted that the matter stands covered against the assessee by the case of ITO v. Sureshchand Jain [2005] 100 ITD 435 (Mum.) wherein the SEBI turnover charges have been held to be a cess. The TO observed that the SEBI is a creature of the SEBI Act, 1992, armed with the same powers as are vested in a Civil Court. Since the SEBI has been given all powers by the Government to regulate the business and to recover its dues, the turnover charges payable by the assessee is certainly a cess or a duty payable under the law. Accordingly, it was held that SEBI turnover fees are liable for disallowance under section 43B of the Act.I. Kay Holding Co. (P) Ltd. v. DCIT [2009] 32 SOT 586 (Delhi)

Loss on account of valuation of stock-in-hand of shares is speculation loss

The assessee a NBFC had no transactions of purchase or sale of shares during the year. It had incurred loss during the year mainly on account of valuation. The matter before the TO was, whether this loss can be said to be speculative loss in terms of Explanation to section 73 of the Act.

The HC examined the provisions of section 73 of the Act and Circular 204 dealing with explanatory notes to taxation laws, wherein the object of

Provision for lease equalisation charges to be added back while computing the book profi t under MAT

introduction of provisions of section 73 of the Act were discussed. The HC observed that there can be no difference between the losses in the course of trading by delivery and losses in terms of the book value. As long as the assessee is carrying on its business of trading by way of purchase and sale of shares (even if in respect of any fi nancial year, there are no transactions and yet the company has stock-in-trade of shares), the book value will have to be considered for the purpose of considering the profi t or loss in the case of speculative business. The HC held that there can be no doubt that the Explanation to section 73 of the Act cannot be read to mean only when there is a purchase and sale of shares in the course of the fi nancial year. The Explanation will cover both shares that are held as stock-in-trade and shares which are traded in the course of the fi nancial year for the purpose of considering the loss and profi t for that year. It upheld the Tribunal’s view that that the loss or profi t on account of valuation amounts to a revenue loss. Prasad Agents (P.) Ltd. v. ITO [2009] 226 CTR 13 (Bom)

Corporate Tax – Financial Services

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Case law

Salary / Perquisite

No interest payable by the employee if withheld tax and interest liability thereon has been paid by the employer

The assessee was an employee with a US multinational deputed to work in the Indian company. He received salary in India and outside India. The assessee submitted his original tax return declaring the salary received from Indian company; however income received from the US company was not included in the total income. On issuance of a reassessment notice under section 148 of the Act by the TO, the assessee fi led a revised tax return including the income from US company in the total income. The Indian company deposited the taxes on the income disclosed in the revised tax return and also paid interest thereon under section 201(1A)

of the Act. The TO completed the assessment and levied interest under sections 234A, 234B and 234C of the Act for default in payment of advance tax by the assessee.

On appeal, the CIT(A) confi rmed the order of the TO. In the appeal before the Tribunal, the order of the TO was reversed based on the earlier decision of the Tribunal in the case of Sumit Bhattacharya v. ACIT [2008] 300 ITR 347 (Mum) holding that interest under sections 234B and 234C of the Act could not be levied if the employer had already paid the interest on delayed payment of withheld taxes. Furthermore, relying on the judgment of the SC in the case of Dr. Prannoy Roy v. CIT [2002] 254 ITR 755 (SC), it was held that where entire tax liability has been

met, no interest was chargeable under section 234A of the Act.

On further appeal to the Mumbai HC by the revenue, it was contended that section 192 of the Act was not applicable to the non-resident companies and the payments made by the Indian employer pursuant to the reassessment notice issued by the tax department could not be considered as towards withheld tax. The assessee contended that he was not liable to pay advance tax as the entire salary income was subjected to tax withholding. Moreover, as the company had already paid interest on delay in payment of withheld taxes, no further interest was leviable on the assessee. The Mumbai HC held that interest under sections 234A, 234B and 234C of the Act was compensatory in nature, for the delay in payment of taxes by the due date. It is not chargeable by way of penalty. Where a duty has been cast on the payer to deduct and pay tax at source, no interest is imposable on the payee (assessee). Therefore, in such circumstances, no further interest was chargeable in the case of the assessee.CIT v. Emilio Ruiz Berdejo [2009-TIOL-642-HC-MUM-IT]

Personal Taxes

No interest payable by the employee if withheld tax and interest liability thereon paid by the employer

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India Spectrum*

Deposits in Indian Banks with money remitted through normal banking channels – income not taxable in India The assessee, a non-resident Indian holding an Indian passport, made substantial deposits in specifi ed non-resident accounts in Indian Banks. The TO issued a notice for fi ling the tax return in India and in pursuance thereof the assessee fi led a tax return showing Nil income. The TO assessed the entire deposits made to the tune of INR 47 million as income from unexplained investments. The appeal fi led before the CIT(A) was also dismissed and the order passed by the TO was upheld.

On appeal to the Tribunal, it was held that the assessee, who is a non-resident, brought the money into India through banking channels and the manner in which this money was utilised in India was fully described. The onus on the assessee to explain the investments was discharged by proving that the remittances were made into India through banking channels and therefore, the same was not taxable in India. The Tribunal also relied on the circular issued by CBDT which squarely supported the case of the assessee. Smt. Susila Ramasamy v. ACIT [2009-TIOL-726-ITAT-MAD]

Notifi cations / Circulars

New developments under foreign exchange laws

The RBI has issued Notifi cation No. FEMA 199/2009-RB permitting direct receipt / remittance of salary outside India in the following cases:

• Foreign nationals resident in India or Indian citizens employed with foreign companies on deputation

to the offi ce / branch / subsidiary / joint venture in India of such foreign company are now allowed to open, hold and maintain a foreign currency account with an overseas bank and receive their full salary in such overseas bank account provided income tax is paid on that salary in India. Earlier, such individuals were allowed to receive 75% of their salary in the overseas account and the remaining salary was required to be paid in Indian rupees in India.

• A citizen of a foreign state, resident in India being in the employment of with an Indian company is allowed to open, hold and maintain a foreign currency account with an overseas bank and remit the whole of the salary received in India in Indian rupees to such overseas account, subject to payment of income tax in India. It is important to note that this facility is available where the salary is received by the employee from the Indian company into the Indian bank account and from where it is permitted to be remitted outside India.

Notifi cation No. FEMA 199/2009-RB dated 30

September, 2009

Personal Taxes

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Direct Tax Case Law

Computation of Capital gains - indexed cost of gifted assets

The assessee transferred a capital asset which was previously received by her by way of a gift on 1 February, 2003. The previous owner had acquired the asset on 29 January, 1993. The assessee computed indexed cost of acquisition considering the date of acquisition of the previous owner. The TO rejected the claim. The CIT(A) accepted the claim. On appeal by the Revenue, the issue was referred to the Special Bench.

The Special Bench considered Explanation (iii) to section 48 of the Act which defi nes “indexed cost of acquisition”. A literal reading of the Explanation suggests that only the period of holding of the assessee should be considered. This is inconsistent with the scheme of the Act as section 2(42A) of the Act provides that the period of holding

of the previous owner also has to be taken into account.

Hence, it was not logical to consider the cost of acquisition and the period of holding determined with reference to the previous owner and to consider the indexation factor with reference to the date of acquisition by the assessee. Such an interpretation would not only lead to absurdity or unjust results but also defeat the purpose of the concept of ‘indexed cost of acquisition’.

In accordance with the principles of purposive interpretation of statutes, indexed cost of acquisition should be computed after considering the period for which the asset was held by the previous owner. The revenue’s appeal was dismissed.DCIT v. Manjula J Shah [2009–TIOL–698–ITAT–MUM–SB]

Mergers & AcquisitionsCorporate Law Cases

Merger – companies incorporated outside India can be merged

ICP Ltd., Alpha Venture Ltd. and Zenta (P.) Ltd., registered under Mauritian law were being merged with Zenta International an Indian company.

The Regional Director objected on the following grounds:• These companies were not

incorporated in India and no Indian Court has jurisdiction over them,

• The sections of the Companies Act, 1956 are silent about amalgamation of foreign companies,

• The companies have no authority to merge.

It was contended that according to section 2(7) of the Companies Act, 1956, the term ‘body corporate’ includes an entity incorporated outside India. According to section 394(4)(b) of the Companies Act, 1956, the ‘transferee company’ needs to be an Indian company which is true in this case; however, the ‘transferor company may or may not be an Indian Company.

It was held by Court that the term ‘body corporate’ in section 2(7) of the Companies Act, 1956 includes a company incorporated outside India and as such the Court has

Companies incorporated outside India can be merged

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India Spectrum*

jurisdiction to entertain petition seeking sanction for the scheme if the ‘transferee company’ is an Indian company within the meaning of the Companies Act, 1956.Zenta (P.) Ltd. In re [2009] 93 CLA 25 (Bom)

SEBI Guidelines – Minimum promoter’s shareholding maintained post-issue

A scheme of amalgamation of company RPUPL with RPL was approved by HC, whereafter a public issue of equity shares having price bands of Rs. 405 and Rs. 450 was made by RPL. A red herring prospectus was fi led with the SEBI as per the guidelines, before the issue.

The appellant asked the SEBI for restraining the go-ahead of the Initial Public Offer (“IPO”) on the ground that the scheme of amalgamation was obtained from the HC fraudulently and that according to clause 4.1-1 of guidelines the promoter’s contribution to IPO’s post-issue capital was less than 20 per cent. It was further stated that as per clause 4.6-2, the promoter’s share contribution should exclude the shares acquired by them at face value one year prior to the issue of IPO.

It was held that the chart clearly revealed that prior to the opening date of the issue the promoter’s contribution was more than 20 per cent as per clause 4.9 of the guidelines. According to the provisions of sections 87(1)(b) and 110(2) of the Companies Act, 1956, even owners of partly paid equity shares are legal members of company and that the promoters had paid the unpaid amount to make the shares fully paid-up before the issue opening

date. As per clause 6-4 of guidelines, the shares acquired by REL and their promoters at face value one year prior to the IPO were eligible for inclusion in the computation of promoter’s contribution of 20 per cent.Rajkot Saher / Jilla Grahak Suraksha Mandal v. SEBI,

[2009] 96 SCL 113 (SAT-MUM)

Delisting – pursuant to rights issue

Uniproducts made a rights issue to its existing shareholders with a view to expand its manufacturing activities. The offer letter stated that the promoters would themselves subscribe to the unsubscribed portion of the rights issue and, in the event, the public shareholding fell below the minimum level as prescribed under the listing agreement, the promoters would either sell their holding to raise public shareholding to the minimum level as prescribed under clause 17(1) and (2) of the delisting guideline or alternatively, buy out the remaining shares at the offer price and get the company delisted. The promoters opted for delisting the company by buying remaining shares of public at the offer price in the rights issue.

According to SEBI, the delisting price should be determined through reverse book building process and should not be at the offer price of rights issue.

Clause 17(1) of the SEBI (Delisting of Securities) Guidelines, 2003 deals with delisting pursuant to a rights issue. It specifi cally provides that in case of delisting of a company pursuant to a rights issue, the price to be paid to the public shareholders for acquiring their shares is the “price of rights issue” and not the price determined by the reverse book building process. The appeal was allowed and order of SEBI was set aside.

Uniproducts (India) Limited v. SEBI, [2009] 96 SCL 17

(SAT – MUM)

Note : The above decision may not be relevant under the new “Delisting regulation 2009” as it does not provide for delisting pursuant to the Rights Issue

Mergers & Acquisitions

The CBDT recently issued notifi cation on the eagerly-awaited rules to regulate the procedure of Dispute Resolution Panel (“DRP”). As one would be aware, DRP was introduced by the Finance (No. 2) Act, 2009 as an initiative towards expeditious resolution of international tax and transfer pricing (“TP”) disputes and improve the investment climate in India. The rules prescribe the specifi c Form to be fi led before the Panel, the factual and procedural details required in the Form and also the constituents of the Panel, comprising CIT.

With the liberalisation of payment towards royalty and technical fee by the Union Government recently and by bringing in stability and certainty in the dispute resolution process, it is expected that the foreign investors would look favorably towards making additional commitments in India.

The developments around the world, apart from those detailed

below, are the issuance of Note No. 46 by the Hong Kong’s Inland Revenue providing a tax payer with greater clarity on the Revenue’s view point regarding the legal basis of TP and the application of TP principles and methodologies, proposal of the Australian TO to issue detailed questionnaires to large business houses as a part of strategic compliance initiative announced in May 2009 focussing particuarly on low profi t / loss making companies, intra-group fi nance, guarantee fees, business restructures and transformations, inbound and outbound intellectual property transactions and foreign banks and also the announcement by the Internal Revenue Service to establish a new “Transfer Pricing Practice” within large and mid-size business divisions to strategically and systematically administer TP issues.

Transfer PricingInternational Developments

PKN Alert Canada : Tax Court of Canada rules on guarantee fees

During early December 2009, the Tax Court of Canada (“the Court”) allowed the tax payers’ plea on the arm’s length nature of the payment of the guarantee fees to the parent company. The tax payer, over a period, deducted the guarantee fees for the fi nancial guarantees provided by the parent company. The Revenue argued that the arm’s length price of the guarantee fee is NIL as in the absence of the guarantee fee the credit rating of the tax payer would be equal to that of the parent company solely by reason of affi liation; as such the tax payer can borrow from the market at the same interest rate without any guarantee from the parent.

The tax payer argued that the credit rating of the company should be evaluated on a stand-alone basis, without factoring any support from the parent company. Further, it was demonstrated with evidence that the credit rating of the tax payer on a standalone basis is unfavorable and the tax payer was able to obtain large amount of loan at the interest rate enjoyed by the parent only because of the guarantee provided by the latter.

Some of the observations from the rulings are as below:

• Business judgment : The Court, in giving its verdict did consider the underlying business judgment in providing such a guarantee. During the proceedings, the

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India Spectrum*

Court examined evidence and testimony of the Treasurer of the parent company to understand the business reason for the guarantee. It was brought before the Court that the guarantee was provided to the tax payer so as to obtain capital from the market at the lowest cost so that the tax payer could compete with the other players in the market effectively.

• Arm’s length principle: In applying the arm’s length principle, the Court sought to identify all of the economically relevant characteristics of the transactions that may infl uence arm’s length parties in their negotiation, despite some of these characteristics being rooted in the non arm’s length relationship.

• The Court took a view that the parent would endeavor to protect their credit rating, as debt holders would react negatively in case of default by the tax payer. Similarly, on a cost benefi t analysis, the tax payer would be aware of the reputational pressure on the parent and would negotiate the transaction accordingly. The Court heard evidence that the implicit support could result in up to a three notch increase in a stand-alone credit rating for un-guaranteed debt.

• Further, one of the important considerations recognised by the Court in identifying arm’s length price is that the parent was controlling the treasury function and therefore the default risk. In a true arm’s length transaction, a third party guarantor would not control the treasury function and practically, would have to provide a guarantee for a set term unlike in the present case, wherein the

guarantee was provided for all the debts. The third party guarantor would assume more risk than the parent.

• The Court recognised that the guarantee had been in place for a very long time, and as such, in determining the arm’s length price, the impact of removing the guarantee must be taken into account.

• Yield approach: In determining the arm’s length nature of the guarantee fee, the yield approach was considered as the best approach as it calculates the benefi t enjoyed by the tax payer by evaluating the interest cost differential between un-guaranteed and guaranteed debt. In deciding the case, the Court also considered the expert testimony from two credit rating experts.

Finally, in concluding the case in favour of the tax payer, the Court observed that the guarantee was executed solely for legitimate business reasons. The tax payer received a signifi cant economic benefi t from transaction as otherwise it would not have had access to the capital at the interest rate available to the parent.

PKN Alert Austria : Administrative High Court decision on Transfer Pricing documentation

The Administrative HC of Austria (“the Court”) ruled that a precise and detailed description of the nature and market value of all inter-company services rendered to a domestic recipient is required for the fee paid for those services to be tax deductible.

The tax payer received technical know how as well as certain other services in the nature of marketing, fi nance, administration, legal, tax, human resources, etc. from the parent company under the ‘technical assistance’ agreement. For the services received, the tax payer paid a fee of 3.3% of its yearly turnover for these services. During the audit, the tax authorities accepted only those services rendered under the title “provision of technical know-how” amounting to 1.8% of the tax payer’s turnover as tax deductible expenses as being in line with the arm’s length principle. The tax authorities argued that all other expenses paid for the further services were qualifi ed as a hidden profi t distribution to the parent company since the actual provision of these services by the parent company was not adequately documented.

While deciding the case in favour of the Revenue, the Court stated that the tax authority should require the tax payer to prove evidence on all of its expenses in a comprehensible and detailed way. A simple submission of a large set of fi les consisting of several (stand-alone or incoherent) documents cannot be accepted as suffi cient. The documents have to satisfactorily demonstrate and to clearly represent the content and the market price of each service received. Courtesy: PricewaterhouseCoopers Pricing

Knowledge Network

Transfer Pricing

VAT / Sales Tax

Case Law

Hire charges received under a contract for dredging the sea-bed cannot be charged to sales tax

The Orissa HC has held that hire charges received under a contract for dredging the sea-bed with men and machines deployed for the purpose cannot be charged to sales tax as relating to the transfer of dredgers on a right to use basis, since no transfer of effective control and possession in dredgers had taken place.State of Orissa v. Dredging Corporation of India Ltd.

[2009] 25 VST 527 (Orissa)

Interest not leviable on the differential tax payable on account of non-fi ling of C forms

The Uttrakhand HC has held that no interest is payable on the differential tax becoming due upon failure to furnish statutory form C at the time

of assessment, provided such tax is deposited within the period specifi ed in the assessment order.Commissioner of Commercial Tax v. Jalpac India Ltd

[2009] 26 VST 168 (Uttrakhand)

Sale of hypothecated vehicles by a fi nancial institution for realisation of loan amounts cannot be regarded as a ‘sale’ by the fi nancial institution

The Andhra Pradesh Sales Tax Appellate Tribunal has held that the sale of hypothecated vehicles by a fi nancial institution for realisation of loan amounts cannot be regarded as a ‘sale’ by the fi nancial institution, since the title of such vehicle was always with the customers and the sale was effected by the fi nancial institutions at the instance of the customers, to recover the loan amount. T.V.S. Finance Limited v. State of Andhra Pradesh

[2009] 49 APSTJ 137(Andhra Pradesh)

Notifi cations / Circulars

E-payment of taxes has been made

Indirect Taxesmandatory in the state of West Bengal for certain dealers

E-payment of taxes has been made mandatory in the state of West Bengal with effect from 1 January, 2010 (previously 1 November, 2009) for dealers who have paid commercial taxes in excess of Rs. 1 million during FY 2008-09.Trade Circular No. 11/2009 dated 13 November, 2009

VAT rates of products taxable at 4% and 12.5% enhanced to 5% and 13.5% respectively in Assam

The Assam VAT rates of 4% and 12.5% have been enhanced to 5% and 13.5% respectively with effect from 1 November, 2009. Declared goods will continue to be taxed at the rate of 4%.Notifi cation No. FTX.55/2005/Pt-III/118 dated 31

October, 2009

CENVAT

Case Law

Ducts coming into existence at site during installation of heat ventilators and air conditioning systems are not marketable and hence not excisable

The Bangalore Customs, Excise, and Service Tax Appellate Tribunal (“CESTAT”) has held that ducts coming into existence at site during installation of heat ventilators and air conditioning systems cannot be considered to be marketable and are hence not excisable.CCE v. HVAC Systems Pvt. Ltd. [2009] 243 ELT 637

(Bangalore)

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India Spectrum*

If goods are manufactured on jobwork basis, value for payment of excise duty to be determined as per Rule 10A

The Delhi CESTAT has held that the activity of fabrication of body by body builder on chassis supplied by the manufacturer free of cost would amount to carrying out of job work on behalf of the manufacturer and is required to be valued under Rule 10A of the Valuation Rules. Audi Automobiles v. CCE [2009] 95 RLT 260 (Delhi)

Penal interest collected from buyers for delayed payments is not includible in the value of goods

The Bangalore CESTAT has held that penal interest collected from buyers for delayed payments is not includible in the excisable value of goodsAndhra Pradesh Paper Mills Ltd. v. CCE [2009-TIOL-

1680-CESTAT-BANG]

Service Tax

Case Law

Construction of a residential complex by a co-operative society for its own members is not a taxable service

The Ahmadabad CESTAT has held that construction of a residential complex by a cooperative society for its own members is not taxable service.Shrinandnagar Co-op. Housing Society Ltd. & Ors. v.

CST [2009] 94 RLT 745 (Ahmadabad)

Credit is admissible on input services even if the invoices indicate the name of the head offi ce or any branch offi ce

The Ahmadabad CESTAT has held that credit is admissible on input services received by the assessee even if the invoices indicate the name of the head

offi ce or any branch offi ce.CCE v. ITW India Ltd. [2009] 95 RLT 219 (Ahmadabad)

Services received outside the factory in relation to manufacture of fi nal products are eligible for claiming input tax credits

The New Delhi CESTAT has held that services received outside the factory in relation to manufacture of fi nal products are eligible input services.CCE v. Vikram Cement [2009] 94 RLT 748 (New Delhi)

Notifi cation / Circulars

Business Auxiliary Services in relation to specifi ed processes of manufacture of cycle parts or sewing machines exempted from tax

The Central Government has issued a notifi cation exempting the services provided in relation to one or more of the specifi ed processes during the course of manufacture of parts of cycles or sewing machines from service tax, subject to fulfi llment of certain conditions. Notifi cation No. 42/2009 dated 12 November, 2009

Customs / Foreign Trade Policy

Case Law

Mere modifi cations to already existing software packages will not qualify as customisation

The Mumbai CESTAT has held that to qualify as customised software, the software has to be developed from the basic building blocks, whereby a new software product should emerge as per specifi c requirements of the clients. Mere modifi cations to already existing established software packages will not qualify as customisation.

Steag Encotec India Pvt. Ltd. v. CC [2009-TIOL-1776-

CESTAT-Mum]

Notifi cation / Circulars

Clarifi cation regarding customs duty on import of packaged software issued

The Central Government has issued instructions to clarify the following:

• customs authorities should not reject the splitting up of the value of imported packaged software into the media value and the value for right to use the software unless there are reasons to believe that such a splitting has been done in order to evade payment of duty.

• exemption from levy of Countervailing Duty (“CVD”) on import of packaged software under Customs Notifi cation No. 80/2009 is available even if any of the activities such as the right to reproduce, right to distribute, right to sell etc. is undertaken by the importer and that all the activities described in the Notifi cation are not required to be undertaken by the importer.

Customs Instructions F. No. 354/189/2009/TRU dated

4 November, 2009

Indirect Taxes

External Commercial Borrowings

Extensive review of the External Commercial Borrowings (“ECB”) Policy

The RBI has made the following changes in the ECB policy:

Payment for Spectrum Allocation – Permissible end use

To provide a further boost to the telecommunications sector, the RBI has permitted eligible borrowers to avail ECB for the purpose of payment for spectrum allocation (presently, only for obtaining license / permit for the 3G Spectrum).

ECB for NBFC involved in fi nancing the Infrastructure Sector

NBFCs exclusively engaged in the business of fi nancing the infrastructure sector are permitted to avail ECB from multilateral / regional fi nancial institutions and Government

owned development fi nancial institutions for on-lending to the borrowers in the infrastructure sector.

Such NBFCs are now permitted to avail ECB from the recognised lender category including international banks provided the currency risk is fully

Foreign Exchange Management Act

hedged under the RBI’s approval route. Further, NBFCs availing such ECB would be required to comply with the RBI’s prudential standards.

Integrated Township

Corporates engaged in the development of integrated township (as defi ned in Press Note 3 of 2002) were permitted to avail ECB under the approval route, which was subject to

16

Average Maturity PeriodAll-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

review in December 2009. This facility has now been extended up to 31 December, 2010.

Buyback of FCCBs

The RBI policy permitting Indian Companies to buyback Foreign Currency Convertible Bonds (“FCCBs”) has be discontinued effective 1 January, 2010.

ECB - All-in-cost ceilings

ECBs with all-in-cost ceilings beyond the prescribed rate are presently considered by the RBI under the approval route. This facility has been withdrawn, effective 1 January, 2010.

Under the revised policy, the all-in-cost ceilings under the approval route for Loan Agreements signed on or after 1 January, 2010 would be:

In cases where the Loan Agreement has been signed on or before 31 December, 2009 and the ECB is proposed to be availed after 31 December, 2009 beyond the aforesaid all-in-cost ceilings, RBI would continue to consider such proposals under the approval route. In such cases, the borrowers would need to furnish a copy of the Loan Agreement to the RBI.Source : A.P. (DIR Series) Circular No.19 dated 9

December, 2009

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India Spectrum*

Miscellaneous

Branch and offi ce (other than project offi ce) - remittance of winding-up proceeds

Foreign companies are required to obtain prior approval of the RBI for remittance of winding-up proceeds of branch and offi ce (other than project offi ce) from India. In this connection, following documents are presently required to be fi led with the RBI:

• RBI Approval obtained for establishing offi ce in India;

• Various Auditor’s Certifi cates;• No-objection or tax clearance

certifi cate from Tax authority; and • Confi rmation that no legal

proceedings in any Court in India are pending and there is no legal impediment to the remittance.

In addition to the aforesaid documents, foreign companies would now be required to submit a report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956.Notifi cation No. FEMA 198/2009-RB dated 24

September, 2009

Acquisition and transfer of immovable property in India – defi nition of PIO

A person of Indian origin (“PIO”) is permitted to acquire / transfer specifi ed immovable property in India subject to compliance with prescribed conditions.

A PIO is defi ned as an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who:

Foreign Exchange Management Act

• At any time, held Indian passport; or Who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955).

• The defi nition of PIO has now been widened to include an individual whose mother or grandmother was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955.

Notifi cation No. FEMA 200/2009-RB dated 5 October, 2009

18

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