MISSIVE

Volume XXXIV

March 2014

Topics Page

No

Direct Tax 1

Transfer Pricing 5

Service Tax 7

Central Excise 8

Value Added Tax 8

Customs 9

FEMA 10

Company Law 12

Transactions that made

headlines

14

Never hold your head high with pride or ego, even the winner of a gold

medal gets his medal only when he puts his head down!!!

Index

Dear Patron

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Knowledge Management Team

1

DIRECT TAX

CBDT Circular No. 5/2014 dated 11

February 2014

Disallowance under section 14A read with

Rule 8D

The current circular clarifies that the legislative

intent is to allow only that expenditure which is

relatable to earning of exempt income and it,

therefore, follows that the expenses which are

relatable to the earning of exempt income

have to be considered for disallowance,

irrespective of whether any such income has

been earned during the tax year or not.

The circular further explains that the heading

of the Section, which reads as “Expenditure

incurred in relation to income not includible in

Total income”, as also the language of Rule 8D

which refers to, “income from which does not

or shall not form part of total income”, support

that it is immaterial that the taxpayer should

have earned the exempt income during the

tax year under consideration for attracting

disallowance under the Section.

Key Highlights of Interim Budget of 2014-

15

No change in tax rates

The existing income tax rates for the tax year

2013-14 will continue for tax year 2014-15 as

well.

Tax holiday for the power sector comes to

an end

The Income Tax Act was amended by Finance

Act 2013 to extend the tax holiday for

undertakings engaged in power generation,

transmission or distribution if it begins to

generate power or starts transmission or

distribution before 31 March 2014 or

undertakes substantial renovation and

modernization of existing network of

transmission or distribution line before 31 March

2014. This being an Interim Budget, no further

extension has been proposed.

Concessional tax rate u/s 115BBD may

come to an end

Concessional tax rate of 15% on dividend

received from foreign company shall not be

available after 31 March 2014, i.e. dividends

earned from 1 April 2014 onwards would be

subject to regular tax rates.

New approach on tax benefits for funding

scientific research

A Research Funding Organization (RFO) is

planned to be set up that would fund research

projects selected through a competitive

process. Contributions to RFO shall be eligible

for tax benefits. At this stage, this is only a

proposal and for implementing this, changes

to the ITA need to be made.

Oswal Agro Mills Ltd. vs. Commissioner of

Income-tax (ITA No. 41/2000) (Delhi High

Court)

Section 43B doesn't apply to contractual

liability to pay customs duty to the

importer of goods

Facts

2

Oswal Agro Mills Ltd. (hereinafter referred to as

the “assessee”) engaged in manufacturing

and trading of products like de-oiled meals,

industrial hard oils, edible oils etc. claimed an

expenditure u/s 43B of Income Tax Act, 1961 of

Rs 1,60,33,064 and Rs 1,64,87,375 w.r.t AY 1986-

87 and 1987-88 respectively on account of

additional custom duty ( payable by the

assessee as per the terms of agreement with

the supplier “importers”) which is disputable

and pending before the Supreme Court via

writ petition filed by the importers. Assessing

Officer and Tribunal disallowed the claim

made by the assessee. Assessee is in appeal

before the High Court.

Held

High Court held against the assessee and

disallowed the expenditure so claimed based

on the following findings:

1. The liability in question is “contingent

liability” as defined under AS-29 and

the same would be payable by the

assessee (as per the terms of

agreement with the importers) only

when the importers shall be called

upon to pay the additional custom

duty. Since, the Writ petition with

respect to the same is pending before

the Supreme Court, hence, the liability

is contingent upon the happening of

an uncertain future event i.e. outcome

of the Writ petition so filed.

2. Held that a liability actually existing in

the relevant accounting year could be

deductible as expenditure for the

purposes of Income Tax, however,

contingent liabilities did not constitute

expenditure and could not be the

subject matter of deduction even

under the mercantile system of

accounting.

3. It was further explained that

expenditure is what is paid out and is

something which is gone irretrievably.

As per the facts of the case, the bank

guarantee provided by the assessee

cannot be said to be expenditure as

the same has not been encashed nor

appropriated by the customs

authorities. Also, since the ownership of

the bank guarantees remained with

the assessee, therefore, the amount

covered by the bank guarantees

would not qualify for deduction from

the total income as per the provisions

of section 43B.

Director of Income-tax vs. E Funds IT

Solution (ITA Nos. 735/2011 and others)

(Delhi High Court)

Indian subsidiary providing back office

services to foreign enterprise shall not be

deemed as its PE merely because it is

being indirectly controlled by it

Facts

E Funds Corporation and E Funds IT Solutions

Inc (assessee) are companies incorporated

and residents of US engaged in the business of

electronic payments, ATM management etc. E

Fund India (Indian Affiliate) is an Indian

company and an indirect wholly owned

subsidiary of E Funds Corporation. The Indian

affiliate supported the assessee as their back

office and also carried out data entry

operations with respect to the above

businesses of the assessee. The Tax authority

contended that the assessee had taxable

presence in India by way of business

connection as well as a PE as defined under

Article 5 of India-USA DTAA. Tribunal upheld the

Authority’s contention that a PE exists but

3

disputed the method of attribution so

adopted. Both appealed to the High Court

against Tribunal’s order.

Held

High Court held that no PE of the taxpayer

exists in India based on the following findings:

1. Business connection did exist in India as

the Indian affiliate was providing

information to the taxpayers for the

purpose of entering into contracts with

third parties. Also, the said contracts

were being performed partly or fully by

the subsidiary as an assignee or sub-

contractor. However, the taxpayers

could avail the more beneficial

provisions under the DTAA.

2. As per Article 5(6) of the DTAA, the

existence of a subsidiary does not, by

itself, constitute the subsidiary a PE of its

parent, unless the contrary is proved.

3. The competent authorities of the two

countries had agreed, under the

Mutual Assistance procedure (MAP)

provided in the DTAA, to taxation of

income of the taxpayers in India based

on a formula. This did not imply that the

taxpayer have conceded to a PE

presence in India. Whether or not a PE

exists is a matter of law and has to be

determined based on merits of the

case.

4. The taxpayers did not have any assets

or a licensed office as their presence in

India. There was no evidence that the

taxpayers had “right to use” or

“disposal right” over the premises of the

Indian affiliate. Hence, it would not

constitute fixed place PE in India.

Reliance was also placed on the SC

decision in case of Morgan Stanley and

Co.

5. None of the employees of the

taxpayers have visited India even for a

short period. Even the two employees

of the taxpayers who were transferred

to the Indian affiliate were working for

the Indian affiliate and their entire

expenditure was also to be borne by

Indian affiliate. Hence, they were not

rendering any services in India on

behalf of the foreign taxpayers.

Therefore, subsidiary cannot be

contended to constitute a service PE as

well.

6. Indian affiliate does not constitute

agency PE of the taxpayer as it was not

authorized to conclude contracts on

behalf of the taxpayer and did not

maintain any stock or merchandize or

secure orders on behalf of the

taxpayer.

M/S. KOSTUB INVESTMENT LTD. vs CIT (ITA

No. 10/2014) (Delhi High Court)

Amount spent on the higher education of

son of a Director is deductible as “business

expenditure” u/s 37 of Income Tax Act

1961

Facts

The appellant company claimed an expense

of INR 23,16,942 from the computation of total

income as the same was incurred for the

higher education of an employee who

happens to be the son of the Director. AO

disallowed the expenditure so claimed and CIT

(A) upheld the same. The Assesse is in appeal

before the High Court.

Held

4

High Court is of the opinion that the

expenditure claimed by the assessee to fund

the higher education of its employee to the

tune of `2316,942/- had an intimate and direct

connection with its business, i.e. dealing in

security and investments. The assessee

furnished its resolution authorizing disbursement

of the expenses to fund Dushyant Poddar’s

MBA. It secured a bond from him, by which he

undertook to work for five years after return

within a salary band and he had in fact

worked after graduating from the University for

about a year before starting his MBA course.

Whilst there may be some grain of truth that

there might be a tendency in business

concerns to claim deductions under Section

37, and foist personal expenditure, such a

tendency itself cannot result in an unspoken

bias against claims for funding higher

education abroad of the employees of the

concern. We do not see any such intent in the

statute which prescribes that only expenditure

strictly for business can be considered for

deduction. Necessarily, the decision to deduct

is to be case-dependent.

BBC World News Limited vs. ADIT (Delhi

High Court), Writ Petition (Civil) No.

9064/2011

Extended time limit of 6 years under

section 149(1)(b) requires data for prima

facie computation of income escaping

assessment.

Facts

BBC World News Limited (formerly known as

BBC World Ltd.), a company resident of and

incorporated in United Kingdom, a wholly

owned subsidiary of BBC Commercial Holdings

Limited which in turn is a wholly owned

subsidiary of the British Broadcasting

Corporation, has filed the present writ petition

for setting aside reassessment proceedings

initiated in respect of the assessment year

2003-04, by issue of notice dated 30th March,

2010 under Section 148 of the Income Tax Act,

1961.

Held

High Court held that reassessment is invalid

based on the following grounds:

1. In the present case reassessment

proceedings have been initiated after

four years from the end of the relevant

assessment year and as per the first

proviso to section 147 of the Act, it has

to be shown that there was failure on

the part of the assesse to disclose fully

and truly all facts necessary for the

assessment. In the reasons to believe, it

is mentioned that absence of “crucial

information” relating to income and

expenditure on account of the

activities of the petitioner in India had

resulted in improper computation of

income for the AY 2003-04. Once it is

held that the said details were

furnished, the reassessment notice

would fail and falter.

2. AO had contended that there was non

application of mind by the AO in the

original assessment proceedings, which

was apparent as the assessment order

was passed on 24th March 2006,

merely 2 days after the purported

submissions dated 22nd March 2006

running into 407 pages were filed by

the petitioner. Court held that once

detailed submissions were made, AO

had to apply his mind and form an

opinion. Added to it, the issue of

method of attribution of income to Indian PE had been examined in the

immediately preceding AY by the

same AO. Also, the original assessment

order further records and mentions the

manner and mode of attributing

income to the PE in India. Hence, it is

merely a case of change in opinion.

5

3. As per the mandate of section

149(1)(b), income escaping assessment

should be or likely to exceed 1 lac

rupees. This requires prima facie

computation of income escaping

assessment. This in turn required

examination of data and figures

relating to "Indian operations”. If we

accept the stand of the revenue, then

the said data details were not

available in the records for AY 2003-04.

In the absence of the said details, the

averment made in the reasons to

believe will only be a guess work or

surmise and not cogent or reliable

material to form prima facie view.

Commissioner of Income Tax- II vs M/s

Maruti Suzuki (India) Limited (Delhi High

Court) vide Writ petition (Civil) No.

5086/2013

Constitutional validity of Section 254(2A)

w.r.t. the power of Tribunal to grant stay

against demand for a period exceeding

365 days

Facts

CIT filed a writ petition with the High Court

impugning orders passed by ITAT, extending

the stay of recovery of demand in favour of

the assessee beyond period of 365 days, in

respect of the stay applications filed by Maruti

Suzuki (India) Limited and Bose Corporation

India Pvt Ltd. The Revenue contended that

Tribunal does have power to grant stay of

demand pending consideration of the appeal

but the same could be exercised within the

four corners of Section 254(2A) which prohibits

extension beyond period of 365 days.

Held

High Court held as below:

1. The amendment made to the third

proviso vide Finance Act 2008 w.e.f.

1st October 2008, adding the words

“not attributable to the assessee”,

clearly highlights the intention of the

legislature that in any case, tribunal

cannot extent stay beyond the

period of 365 days from the date of

first order of stay.

2. In case default and delay is due to

lapse on the part of the revenue,

the tribunal is at liberty to conclude

hearing and decide the appeal, if

there is likelihood that the third

proviso to Section 254(2A) would

come into operation.

3. An assessee can file writ petition in

the High Court pleading and asking

for stay as High Court in exercise of

powers provided under Articles 226

and 227 of the Constitution, may

grant stay and issue directions to

the Tribunal as may be required.

TRANSFER PRICING

DCIT vs. Panasonic AVC Networks India Co

Ltd

(I.T.A. No. : 4620/Del/2011)

Adjustment to profit margin for “capacity

underutilization” can be made.

The Delhi bench of ITAT held that-

Rule 10 B (1)(e)(ii) of the Income Tax Rules 1962

provides that the net profit margin realized in

a comparable uncontrolled transaction is

adjusted for differences in enterprise entering

into such transactions, which could materially

affect the net profit margin in open market.

Capacity underutilization by enterprises is

certainly an important factor affecting net

profit margin in the open market because

6

lower capacity utilization results in higher per

unit costs, which, in turn, results in lower profits.

Thus such an adjustment cannot be denied.

In choosing comparables, there cannot be

a cherry picking for deciding parameters

of rejection.

The parameters for rejection of a comparable

have to be broad enough of being general

application. If a comparable is being sought to

be rejected on the ground of its differences vis-

à-vis the tested party, similar criteria must be

adopted for deciding suitability of other

comparables as well. All the comparables

must face the same test on which

comparability of a particular comparable is

being sought to be rejected.

Tata Communications Limited Vs DCIT

ITA (TP) no. 3121/Mum./2013; ITA(TP) no.

3122/Mum./2013

The Income Tax Appellate Tribunal in this case

held that the Commissioner cannot exercise

the revisionary jurisdiction under section 263 on

the order passed under section 92CA (3) by

the TPO. Therefore the order passed by the

Assessing Officer cannot be set aside as the

order of the TPO under section 92CA (4) is

binding on the Assessing Officer.

Lummus Technology Heat Transfer BV vs.

DCIT

(I.T.A. No. : 6227/Del/2012)

Unaudited segmental accounts can be

relied upon for comparing profitability of

controlled transactions with uncontrolled

transactions. While size is relevant in entity

level comparison, it is not relevant in

transaction level comparison within the

same entity

In applying the Transactional Net Margin

Method under Rule 10B(1)(e) it is not necessary

that the net profit computations, in the case of

internal comparables (i.e. assessee’s

transactions with independent enterprise),

have to be based on the audited books of

accounts or the books of accounts regularly

maintained by the assessee. All that is

necessary for the purpose of computing arm’s

length price, under TNMM on the basis of

internal comparables, is computation of net

profit margin, subject to comparability

adjustments affecting net profit margin of

uncontrolled transactions, on the same

parameters for the transactions with AEs as

well as Non AEs. As long as the net profits

earned from the controlled transactions are

the same or higher than the net profits earned

on uncontrolled transactions, no ALP

adjustments are warranted.

IJM (India) Infrastructure Ltd vs. ACIT (ITAT

Hyderabad)

Held - Transfer Pricing provisions do not apply if

the AE is assessed in India & there is no chance

of shifting of profits outside India or erosion of

tax base

In the present case, there is no possibility of

shifting of profits outside India or erosion of

country’s tax base because the PE profits of

7

the AE are assessable to tax in India. Therefore,

the transactions with the AEs are outside the

purview of the transfer pricing regulations

Tilda Riceland Pvt Ltd vs. ACIT

(ITA No. : 6279/Del /2012 In this case it was held that there is no bar on

reliance of private database under section

10D(3).

Rule 10 D(3) is only illustrative in nature and

merely describes the information required to

be maintained by the assessee under section

92D The logic employed by the Transfer Pricing

Officer that since databases compiled by

private entities is not included in rule 10D (3),

such databases cannot be relied upon by the

assessee is clearly fallacious in as much as an

item not being included in illustrative list of

required documents does not take outside the

ambit of ‘acceptable document’ for the

required purposes. It was open to the TPO to, if

he had any doubts, call for further information

from this database supplier and examine

authenticity of the data so furnished. Thus the

rejection of data as unreliable on a technical

ground is not tenable in law.

TNS India Pvt. Ltd. v. ACIT [TS-21-ITAT-

2014(HYD)-TP]

The taxpayer was engaged in conducting

quantitative and qualitative market research.

It had entered into several international

transactions with its associated enterprises

(AEs), of which the disputed transaction was

that of payment of management fees. The

other international transactions were

accepted as having arm’s length pricing, after

being aggregated and benchmarked using

Transaction Net Margin Method (TNMM). The

Transfer Pricing Officer (TPO) challenged the

management fee transaction and determined

its arm’s length price (ALP) to be NIL.

However, the Tribunal, in principle, allowed the

claim of management fees. It observed that

since the TPO had not examined whether or

not the payment of management fee was in

accordance with the pricing methodology laid

out in the inter-company service agreement,

the matter relating to quantification of the

claim was restored back to the TPO.

SERVICE TAX

Amendments in mega exemption

notification

Loading and unloading, packing, storage and

warehousing of Rice have been exempted

from levy with effect from 17 March 2014

Transportation of Rice, either by rail or vessel or

a goods transport agency, was exempt from

levy vide entry number 20 (i) and 21 (d) of

mega exemption notification. However,

loading and unloading, packing, storage and

warehousing of Rice were not exempt. By

virtue of entry number 40 in mega exemption

notification, with effect from 17 February 2014,

loading and unloading, packing, storage and

warehousing of Rice would also be exempt

from service tax levy.

Specified services provided by Cord Blood

Banks have been exempted from levy with

effect from 17 February 2014

8

Services provided by cord blood banks by way

of preservation of stem cells or any other

service in relation to such preservation has

been exempted from levy of service tax by

introducing new entry numbered 2A in the

mega exemption notification

Notification No. 4/2014-Service Tax dated

17th February, 2014

Levy of service tax on services provided

by an authorized person or sub-brokers to

the member of a commodity exchange for

the period 10.09.2004 to 30.6.2012

The central government has issued notification

3/2014-ST dated 3 February 2014 to waive past

dues of service tax payable on services

provided by the authorized person or sub-

broker to a member of a recognized or

registered association in relation to a forward

contract. Prior to Introduction of Negative List

there was common practice not to charge

service tax on services provided by sub-broker

to member of recognized association or a

registered association in relation to forward

contracts. This has been done under section

11C of the Central Excise Act, made

applicable to service tax by section 83 of the

Finance Act 1994. The said section 11C

provides that where duty/tax was not levied by

prevalent practice, it can be notified as

waived for that period. Those who paid it can

apply for refund.

Notification No. 03/2014-Service Tax dated

3rd February, 2014

CENTRAL EXCISE

Amendment in notification no. 12/2012

dated 17.03.2012

The central government has issued notification

3/2014-CE dated 3 February 2014, by which it

has exempted di-calcium phosphate (DCP) of

animal feed grade from excise duty; and also

provided a concessional rate of duty (12%) for

iron and steel for construction of railway or

tramway tracks.

Notification No. 03/2014-Central Excise

dated 3rd February, 2014

VALUE ADDED TAX

Withdrawal of AR-1 Form

Filing of Audit Report in its current format in AR-

1 has been withdrawn with immediate effect.

F.3 (384)/Policy/VAT/2013/1307-1319

dated 14th February, 2014

Online details of invoice and GR in respect

of goods procured from outside Delhi

The details of Invoice and Goods Receipt (GR)

Note in respect of all goods purchased or

received as stock transfer or received on

consignment agreement from outside Delhi

shall be submitted online by dealers, using their

login id and password, before the goods

physically enter the boundary of Delhi. The

details shall be submitted by all dealers,

except dealers exclusively dealing in Tax Free

Goods, having GTO > Rs. 1 crore in 2012-13 or

on any date in the current financial year on

which the dealer attained/attains the lower

limit of GTO of Rs. 1 crore. For furnishing online

details, the Form T-2 shall be filled for each

vehicle entering Delhi and by each dealer

whose goods are carried in that vehicle.

F.7 (433)/Policy-II/VAT/2012/1332-1342

dated 28th February, 2014

9

CUSTOMS

Amendment in notification no. 12/2012

dated 17.03.2012

The CBEC has issued notification 4/2014-

Customs dated 3 February 2014, to exempt

customs duty on tunnel boring machines and

parts required for assembly of tunnel boring

machines.

Notification No. 04 /2014-Customs dated

3rd February, 2014

Conversion Rate for Foreign Exchange

Rate of exchange of conversion of each of the

following foreign currency into Indian currency

or vice versa shall, with effect from 21st

February, 2014 be the rate mentioned against

it in the given tables:

SCHEDULE-I

S.

No.

Foreign

Currency

Rate of exchange of

one unit of foreign

currency equivalent to

Indian rupees

(For

Imported

Goods)

(For Export

Goods)

1. Australian

Dollar

56.65 55.15

2. Bahrain Dinar 170.40 161.05

3. Canadian

Dollar

57.10 55.70

4. Danish Kroner 11.70 11.35

5. EURO 86.85 84.85

6. Hong Kong

Dollar

8.10 8.00

7. Kuwait Dinar 228.40 215.30

8. New Zealand

Dollar

52.25 50.95

9. Norwegian

Kroner

10.45 10.15

10. Pound

Sterling

105.30 103.00

11. Singapore

Dollar

49.95 48.75

12. South African

Rand

5.85 5.45

13. Saudi Arabian

Riyal

17.15 16.20

14. Swedish

Kroner

9.75 9.45

15. Swiss France 71.35 69.40

16. UAE Dirham 17.50 16.55

17. US Dollar 62.95 61.95

SCHEDULE-II

S. No. Foreign Currency Rate of exchange of 100 units of foreign currency

equivalent to Indian rupees

(For Imported Goods) (For Export Goods)

1. Japanese Yen 62.00 60.50

2. Kenya Shilling 74.70 70.35

Notification No.13/2014-Customs (N.T.)

dated 20th February, 2014

CASE LAWS

Global Waste Management Cell vs.

CCE

Business Auxiliary Services

The activity of the appellant providing

comprehensive sanitation assistance to

Municipal Corporation cannot be liable under

Business Auxiliary Services since Municipal

Corporation was not doing business of

10

providing sanitation work to be supported by

auxiliary service.

Manjit Singh vs. CCE (2013)

Maintenance and Repair services

Repairs and maintenance work carried out by

the appellant in respect of property of

municipality is not taxable under the category

of “management maintenance or repairs

services” since municipal roads are not

immovable properties under the Transfer of

Properties Act.

FEMA

A.P. (DIR Series) Circular No. 100 dated

February 4, 2014

Third party payments for export / import

transactions

A. P. (DIR Series) Circular No.70 dated

November 8, 2013, permitted to allow third

party payments for export of goods & software

/ import of goods subject to the conditions

stated therein.

In view of the difficulties faced by exporters /

importers in meeting the condition “firm

irrevocable order backed by a tripartite

agreement should be in place” specified in

the abovementioned Circular, it has been

decided that this requirement may not be

insisted upon in case where documentary

evidence for circumstances leading to third

party payments / name of the third party

being mentioned in the irrevocable order/

invoice has been produced. This shall be

subject to conditions as under:

AD bank should be satisfied with the

bona-fides of the transaction and

export documents, such as, invoice /

FIRC.

AD bank should consider the FATF

statements while handling such

transaction.

Further, with a view to liberalising the

procedure, the limit of USD 100,000 eligible for

third party payment for import of goods, stands

withdrawn.

All other terms & conditions mentioned in the

A. P. (DIR Series) Circular No.70 dated

November 8, 2013, remain unchanged.

A.P. (DIR Series) Circular No. 102 dated

February 11, 2014

Foreign Direct Investment – Reporting

under FDI Scheme:

Amendments in form FC-GPR

In order to further capture the granular details

of FDI as regards Brownfield/Greenfield

investments and the date of incorporation of

investee company, Form FC-GPR has been

revised. Accordingly, the details of FDI should,

henceforth, be reported in the revised Form

FC-GPR, which is annexed to this circular.

A.P. (DIR Series) Circular No. 105 dated

February 17, 2014

External Commercial Borrowings (ECB)

Policy –

Reporting Arrangements

11

In order to capture details of the financial

hedges contracted by corporates, of their

foreign currency exposure relating to ECB and

their foreign currency earnings and

expenditure, (Part-E) of the format of ECB-2

Return has been modified and the same has

been given in the Annex, annexed to this

Circular. The reporting in the modified ECB-2

Return will be applicable from the return of the

month April 2014 onwards.

There is no change in the reporting procedure

and corporates raising ECB shall continue to

submit ECB-2 Return on a monthly basis duly

certified by the designated AD Category-I

bank so as to reach Department of Statistics

and Information Management (DSIM) of

Reserve Bank of India within seven working

days from the close of month to which it

relates.

A.P. (DIR Series) Circular No. 107 dated

February 20, 2014

Foreign Direct Investment (FDI) into a Small

Scale Industrial Undertakings (SSI) / Micro

& Small Enterprises (MSE) and in Industrial

Undertaking manufacturing items reserved

for SSI/MSE

In terms of the Schedule 1 of the Foreign

Exchange Management (Transfer or Issue of

Security by a Person Resident outside India)

Regulations, 2000, an Indian company which is

a small scale industrial unit and which is not

engaged in any activity or in manufacture of

items included in Annex A, may issue shares or

convertible debentures to a person resident

outside India, to the extent of 24% of its paid -

up capital provided that such company may

issue shares in excess of 24% of its capital if:

it has given up its small scale status,

it is not engaged or does not propose

to engage in manufacture of items

reserved for small scale sector, and

it complies with the ceilings specified in

Annex B to Schedule I of the

Notification, ibid.

With the promulgation of the Micro, Small and

Medium Enterprises Development (MSMED)

Act, 2006, the extant policy for foreign direct

investment (FDI) in Small Scale Industrial unit

and in a company which has de-registered its

small scale industry status and is not engaged

or does not propose to engage in

manufacture of items reserved for small scale

sector, has since been reviewed and it has

been decided that:

a company which is reckoned as Micro

and Small Enterprises (MSE) (earlier

Small Scale Industries) in terms of

MSMED Act, 2006 and not engaged in

any activity/sector mentioned in Annex

A to schedule 1 to the Notification, ibid

may issue shares or convertible

debentures to a person resident

outside India, subject to the limits

prescribed in Annex B to schedule 1, in

accordance with the entry routes

specified therein and the provision of

Foreign Direct Investment Policy, as

notified by the Ministry of Commerce &

Industry, Government of India, from

time to time.

any Industrial undertaking, with or

without FDI, which is not an MSE, having

an industrial license under the

provisions of the Industries

(Development & Regulation) Act, 1951

for manufacturing items reserved for

manufacture in the MSE sector may

issue shares in excess of 24 per cent of

its paid up capital with prior approval

of the Foreign Investment Promotion

Board of the Government of India.

12

Further, in terms of the provisions of MSMED

Act, (i) in the case of the enterprises engaged

in the manufacture or production of goods

pertaining to any industry specified in the first

schedule to the Industries (Development and

Regulation) Act, 1951, a micro enterprise

means where the investment in plant and

machinery does not exceed twenty five lakh

rupees; a small enterprise means where the

investment in plant and machinery is more

than twenty five lakh rupees but does not

exceed five crore rupees; (ii) in the case of the

enterprises engaged in providing or rendering

services, a micro enterprise means where the

investment in equipment does not exceed ten

lakh rupees; a small enterprise means where

the investment in equipment is more than ten

lakh rupees but does not exceed two crore

rupees.

COMPANY LAW

Amendments in Schedule VII of the

Companies Act, 2013

[Order dated 27th February, 2014]

The Central Government has made the

following amendments to Schedule VII of the

Companies Act, 2013, in exercise of powers

conferred by sub section (1) of section 467 of

Companies Act, 2013 with effect from 1st April,

2014:

Previously notified items and entries in

Schedule VII shall be substituted by the

following items and entries namely:-

(i) Eradicating hunger, poverty and

malnutrition, promoting preventive health care

and sanitation and making available safe

drinking water;

(ii) Promoting education, including special

education and employment enhancing

vocation skills especially among children,

woman, elderly and the differently abled and

livelihood enhancement projects;

(iii) Promoting gender equality, empowering

women, setting up homes and hostels for

women and orphans; setting up old age

homes, day care centres and such other

facilities for senior citizens and measures for

reducing inequalities faced by socially and

economically backward groups;

(iv) Ensuring environmental sustainability,

ecological balance, protection for flora and

fauna, animal welfare, agroforestry,

conservation of natural resources and

maintaining quality of soil, air and water;

(v) Protection of national heritage, art and

culture including restoration of buildings and

sites of historical importance and works of art;

setting up public libraries, promotion and

development of traditional arts and

handicrafts;

(vi) Measures for the benefit of armed forces

veterans, war widows and their dependents;

13

(vii) Training to promote rural sports, nationally

recognized sports, paralympic sports and

Olympic sports;

(viii) Contribution to the prime ministers relief

fund or any other fund set up by the central

government for socio-economic development

and relief and welfare of the Scheduled castes

and Scheduled Tribes, other backward classes,

minorities and women;

(ix) Contribution and funds provided to

technology incubators located within

academic institutions which are approved by

Central Government;

(x) Rural development projects.

Effective date of provisions of section 135

and Schedule VII of Companies Act, 2013

[Order dated 27th February, 2014]

The Central Government has appointed the

1st day of April, 2014 as the date on which the

provisions of section 135 and Schedule VII of

the Companies Act, 2013 shall come into

force, in exercise of powers conferred by sub

section (3) of section 1 of the Companies Act,

2013.

Companies (Corporate Social

Responsibility Policy) Rules, 2014

[Order dated 27th February, 2014]

The Central Government has notified the rules

relating to corporate social responsibility which

are known as Companies (Corporate Social

Responsibility Policy) Rules, 2014 in exercise of

powers conferred by sub section (1) and (2) of

section 469 of Companies Act, 2013 with effect

from 1st April, 2014.

Clarification with regard to Section 185 of

the Companies Act, 2013

[Circular No 3/2014]

Section 372A of the Companies Act, 1956,

specifically exempts any loans made, any

guarantee given or security provided or any

investment made by a holding company to its

wholly owned subsidiary. Whereas, Section 185

of the Companies Act, 2013 prohibits

guarantee given or any security provided by

holding company in respect of any loan taken

by its subsidiary company except in the

ordinary course of business.

In order to maintain harmony with regard to

applicability of Section 372A of the Companies

Act, 1956 till the same is repealed and Section

185 of the Companies Act,2013 is notified, any

guarantee given or security provided by a

holding company in respect of loans made by

a bank or financial institution to its subsidiary

company, exemption as provided in clause (d)

of sub-section (8) of section 372A of the

Companies Act, 1956 shall be applicable till

section 186 of the Companies Act, 2013 is

14

notified. This clarification will, however, be

applicable to cases where loans so obtained

are exclusively utilized by the subsidiary for its

principal business activities.

Use of word ‘National’ in the names of

Companies or Limited Liability Partnerships

(LLPs)

[Circular No. 2/2014]

As per the Circular, no company should be

allowed to be registered with the word

‘National’ as part of its title unless it is a

government company and the Central/State

Government has a stake in it. This should be

stringently enforced by all Registrar of

Companies (ROCs) while registering

companies. Similarly, the word ‘Bank’ may be

allowed in the name of an entity only when

such entity produces a ‘No Objection

Certificate' from the RBI in this regard. By the

same analogy the word “Stock Exchange" or

"Exchange" should be allowed in name of a

company only where ‘No Objection

Certificate' from SEBI in this regard is produced

by the promoters.

TRANSACTIONS THAT

MADE HEADLINES

GSN acquires social bingo game

creator Bash Gaming for around $160M

Hitachi to acquire 76% stake in IT firm

Micro Clinic India

Piccadily Agro buys 89% stake in wine

maker Nirvana Biosys

JSW Steel to acquire 50% stake in

Vallabh Tinplate for $7.4M

Facebook buys Whatsapp for $19B:

Quatrro sells game testing firm Babel

Media to Irish company Keywords for

$8.8M

Lodha Group acquires second London

asset for $150M

IDBI-led consortium in talks to sell over

38% in rating agency CARE for more

than $140M

Asian Paints hikes stake in Singapore

arm to 96.7%, gets it delisted from SGX

DLF sells Aman Resorts back to founders

for $358M

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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

advice. No person shall act upon the information contained in this

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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