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Tax and Regulatory Services

Be in the know* September 2009 Vol. 2 Issue 14

EditorialI am delighted once again to present the monthly issue of India Spectrum.

The key highlight of this month has been the much talked about Direct Tax Code (“the Code”). Complexity and uncertainty have been the bane of the Indian tax system. It is with a view to changing the tax structure and providing simplicity and certainty in tax laws that the Hon’ble Finance Minister has released the draft Code for public comments.

The Code proposes signifi cant changes vis-à-vis personal and corporate taxation, though the basic structure continues the same. Specifi cally, the focus of the Code is on minimising exemptions and broadening the tax base. The key feature of the Code is the simplicity of the legal language used.

Especially, on the International taxation front, the Code proposes certain watershed provisions. For instance, from a tax treaty perspective, the discussion paper (released alongwith the Code) states that in case of any confl ict between the treaty provisions and the provisions of the Code, the one determined at a later point in time will prevail. Also, the Code introduces general anti-avoidance rules to discourage transactions designed for tax evasion or which lack commercial substance; such provisions would override the treaty. As the Advance Ruling facility has been continued, the availability of Advance Pricing Agreements (“APA”) raises hopes. The next few months should be interesting once public opinion gathers steam and the manner in which the Code is fi nally legislated upon remains to

be seen. Clearly, the introduction of the Code has been a positive step in Indian tax legislation history.

PwC has been leading the initiative to decode the Direct Tax Code provisions for the benefi t of one and all. I am sure the readers are receiving PwC analysis on this development, and I trust that many took advantage of the PwC webcast on the Direct Tax Code. Those who did not, may like to reach out to their respective PwC contacts to obtain access to the webcast archives.

One more key development has been made regarding the Government’s execution of its fi rst bilateral agreement on social security with Belgium, which will exempt Indian companies operating in Belgium from social security contributions in respect of their employees. This agreement will come into force on 1 September, 2009. This is the fi rst Social Security Agreement that India has concluded and is therefore likely to serve as a prototype for similar agreements with other countries.

I trust you will enjoy this issue of India Spectrum, which contains some interesting and insightful updates on the tax and regulatory front. I would welcome your suggestions, if any, to improve the newsletter.

Thanking you

Dinesh KanabarLeader – TRS Practice

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Contents

Corporate Tax 1

Case Law 1

Notifi cations / Circulars 4

Corporate Tax – Financial Services 5

Case Law 5

Regulatory Developments 7

Personal Taxes 8

Case Law 8

Mergers & Acquisitions 10

Corporate Law Cases 10

Regulatory Developments 10

Transfer Pricing 12

Case Law 12

International Developments 13

Indirect Tax 15

VAT / Sales Tax 15

CENVAT 15

Service Tax 16

Customs / Foreign Trade Policy 16

Foreign Exchange Management Act 17

Indian Depository Receipts 17

Glossary

APA Advance Pricing Agreement

AY Assessment Year

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

CBDT Central Board of Direct Taxes

CENVAT Central Value Added Tax

CESTATCustoms, Excise and Service Tax Appellate Tribunal

FII Foreign Institutional Investors

IDR Indian Depository Receipts

IDR RulesCompanies (Issue of Indian Depository Receipts) Rules, 2004

IRDAInsurance Regulatory and Development Authority

IRS Internal Revenue Service

NRI Non-resident Indians

PE Permanent Establishment

RBI Reserve Bank of India

SAT State Administration of Taxation of China

SEBI Securities and Exchange Board of India

The Act The Income-tax Act, 1961

The Co. Act The Indian Companies Act, 1956

TO Tax Offi cer

The Tribunal The Income-tax Appellate Tribunal

VAT Value Added Tax

Do mail your feedback at [email protected] and we shall be pleased to respond

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India Spectrum*

Case Law

Accrual of income

Taxability of booking revenue earned by a foreign company engaged in running a computer reservation system

The assessee a US-based company was maintaining computer reservation systems (“CRS”) for booking airline tickets. It entered into a contract with several participating carrier distribution fi rms and service agreements with various airlines in India whereby it agreed to facilitate the booking of airline tickets. From the Indian perspective, the assessee earned booking fees from contracting airlines when travel agents made travel reservations using its CRS in India. The assessee paid 60% of its booking revenue from bookings made in India to the distributors. The assessee fi led its return of income declaring total income as NIL. The Tax Offi cer (“TO”) held that the assessee had a permanent

establishment (“PE”) in India under Article 5 of the India-US-Tax Treaty in the form of equipment installed at the locations of the travel agents. Also, it held that the distributors constituted a dependent PE in India. Accordingly, it taxed the entire air booking fees originating in India after deducting certain direct expenses.

On appeal, the Income-tax Appellate Tribunal (“the Tribunal”) held that the remuneration paid to the distributor in India by the assessee (i.e. 60% of booking revenue) was more than the income attributable to the PE in India (i.e. 15%), thus no income could be taxed in the hands of the assessee in India. Accordingly, the Tribunal allowed the assessee’s appeal.Assisted by PwC Tax Litigation Team

Sabre Inc. v. DCIT [2009-TIOL-488-ITAT-DEL]

Assessment Proceedings

Notice of reassessment cannot be issued when the assessee has disclosed full facts during assessment

Corporate TaxThe assessee was a non-resident company engaged in exploration of mineral oil in India. Its income was taxed in the original assessment at the rate of 50% plus a surcharge at 15%. The assessments were reopened on the grounds that as the assessee was a foreign company, the rate of tax applicable was 65% plus surcharge, and that it had been taxed at too low a rate. There was no failure on the part of the assessee to disclose the full facts. The assessee contended that the notice under section 148 of the Income-tax Act, 1961 (“the Act”) issued after four years after the original taxation had taken place, was invalid in view of the proviso to section 147 of the Act. The deeming provision of explanation 2(c)(ii) to section 147 of the Act could be applied if there was any failure on the part of the assessee. The Tribunal set aside the order to reopen the assessment and charge income-tax at the rate of 65% as applicable to foreign companies as against the rate 55% plus surcharge as applicable to domestic companies charged earlier.

The Supreme Court dismissed the special leave petition against the judgment passed by the Uttaranchal High Court, wherein the High Court had confi rmed the order passed by the Tribunal. Therefore, the order to reopen the assessment under section 148 was held to be invalid since there was no failure on the part of the assessee to disclose the full facts. CIT v. Saipem SPA Italy [2009] 314 ITR (St.) 2 (SC)

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Business Expenditure

Penal charges paid for violation of the railway rules and regulations are not hit by the explanation to section 37(1) of the Act

The assessee was a colliery and transported coal extracted from mines to various electricity boards and other customers by rail. Occasionally, the wagons would get loaded beyond their carrying capacity plus the leeway allowed by the railway authorities and the excess load was carried by the railways at six times the normal freight charge. The railway authorities used the nomenclature ‘penalty’ for these charges collected by them according to the Rules framed under the Railways Act, 1989.

The TO observed that overloading charges were ‘penal charges’ payable for the violation of the Railway Rules and Regulations, and hence that they were hit by the Explanation to section 37(1) of the Act and not deductible as business expenditure.

The Tribunal held that merely because the railway was a Government-owned institution and operated under an Act of Parliament, overloading charges which were essentially of a commercial nature could not be characterised as penal irrespective of the nomenclature given to them by the railway. It was also noted that the overloading was not due to a deliberate act on the part of the assessee, but due to a lack of infrastructure and the nature of the commodity. Also, the expenditure was not unlawful such as protection money, extortion, hufta or bribery, which are specifi cally referred to in (and which can be disallowed by) the memorandum to the Finance Bill, 1998 by virtue of which the

explanation to section 37(1) of the Act was inserted. Hence, the Tribunal held that penalties paid for violating the Railway Rules and Regulations were not hit by the explanation to section 37(1) of the Act. Argued by PwC Tax Litigation Team

Western Coalfi elds Ltd. v. ACIT [ITA Nos. 289 and 290

/ Nag. / 2006]

Provision for estimated increases in wages, pending fi nalisation of the wage agreement, is deductible expenditure

The assessee periodically entered into agreements with labour organisations on wages and other emoluments, which were valid for a period of fi ve years. Upon the expiry of each agreement, negotiations would begin with the workers to revise its terms and these negotiations extended over quite a few years. Pending the fi nalisation and signing of the agreement, the company made provision for increases in emoluments based on a reasonable estimate.

The TO observed that, since the agreement with the workers had not been signed, the liability provided in the accounts was contingent in nature.

The Tribunal held that it was not in dispute that the employees / labourers concerned had already rendered their services and that the assessee had also earned income because of their efforts, which had been recognised in the books of account. The Tribunal placed reliance

on the Supreme Court’s judgment in the case of Rotork Controls India P. Ltd. [2009] 180 Taxman 422 (SC). It also noted that the earlier agreement had expired and according to past practice, negotiations for revisions had started. What was important was the effective date of commencement of the wage revision under the agreement. Consequently, this was a case of accrued liability which remained to be quantifi ed and discharged at a future date, and not of contingent liability. Thus, the assessee was obliged to make a provision under the mercantile system of accounting. Argued by PwC Tax Litigation Team

Western Coalfi elds Ltd. v. ACIT [ITA Nos. 289 and 290

/ Nag / 2006]

Expenditure incurred on convertible and non-convertible debenture is revenue in nature

The assessee company had incurred certain expenditure on the issuance of debentures and claimed it as revenue expenditure.

The TO disallowed the expenses as capital in nature on the grounds that a distinction should be drawn between convertible and non-convertible debentures. If debentures are converted into shares, then they are capital in character, and hence, the expenditure would not be deductible as revenue expenditure but would be capital expenditure.

The Supreme Court dismissed the special leave petition of the revenue

Provision for estimated increases in wages deductible, pending fi nalisation of wage agreement


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India Spectrum*

Corporate Tax

and confi rmed the Rajasthan High Court’s judgment in the case, where it was held that the debentures when issued were a loan, and therefore whether they were convertible or non-convertible the debenture remained a loan. Therefore, the expenditure incurred would be admissible as revenue expenditure.CIT v. Secure Meters Ltd. [2009-TIOL-93-SC-IT]

Deductions

Deduction allowable under section 80-IB(11) where the assessee runs a ‘cold storage plant’ for the preservation of agricultural produce

The assessee was engaged in running a cold storage plant for the preservation of agriculture produce. The TO contended that the farmer brought his agricultural produce to the undertaking himself and so the assessee was not concerned with where the agricultural produce came from or where it went after its successful storage. Therefore, the assessee could not be said to be running a cold chain facility but was running a cold storage plant only. Hence, the TO disallowed the claim made by the assessee.

The Tribunal held that there were no conditions attached to the use of a cold storage plant in sub-sections (3), (4) and (5) of section 80-IB of the Act, whereas sub-section (11) of section 80-IB specifi cally legislated for agricultural produce. Furthermore, sub-section (11) of section 80-IB started with a non-obstante clause and provided that even though the deduction available to a cold storage plant were covered by sub-sections (3),(4) and (5) of section 80-IB, it could also be considered for the deduction under sub-section (11) of section 80-IB of the Act. If a cold storage plant

was used for other produce then it would not be a “cold chain facility” or part of a “cold chain facility”, but where it was used for agricultural produce then it would be covered by the terms of sub-section 14(a) of section 80-IB of the Act. Therefore, the assessee was allowed the deduction under section 80-IB(11) of the Act. ITO v. Ambika Sheet Grah P. Ltd. [2009] 314 ITR (AT)

123 (Agra)

Minimum Alternative Tax

Minimum Alternative Tax applicable even in case of ‘net loss’ under the normal computation

The assessee had made an additional ground before the Tribunal as to whether the provisions of Minimum Alternative Tax would be attracted in cases where there was net loss under the normal computation provisions. It contended that there should be income-tax payable on the total income computed under the Act in order to attract the provisions of section 115JB of the Act. Furthermore, since there was a loss under the normal computation provisions, the provisions of section 115JB of the Act would not be attracted.

The revenue contended that the assessee’s contention would lead to an abnormal position, whereby a company liable to pay rupee one as tax under the normal provisions would be covered by section 115JB of the Act, while zero tax companies would not be liable under section 115JB of the Act.

The Tribunal observed that section 115JB of the Act was a code in itself. Its observation, made with due regard to punctuation, was that there was

a comma between ‘income-tax’ and ‘payable’ and a further comma before ‘is less’. Thus, full effect would have to be given to the phrase following the comma after the phrase income-tax. Hence, the provisions of section 115JB of the Act would be attracted if income-tax payable in respect of total income computed under the Act was less than 7.5% of its book profi t.

Accordingly, the Tribunal held that the provisions of section 115JB of the Act would be attracted, since the term ‘payable’ used in the section was not limited to positive fi gures and also applied if the income-tax payable was zero.DCW Ltd. v. DCIT [2009-TIOL-498-ITAT-MUM]

Penalty

No penalty is leviable for disallowances / additions made by the Tribunal where the High Court has held that a substantial question of law arises

During the year under consideration, the assessee had claimed depreciation of goodwill based on various judicial precedents. The TO, in the quantum proceedings, disallowed the claim of the assessee on the grounds that goodwill was not a depreciable asset. The Commissioner of Income-tax (Appeals) [“CIT(A)”] and the Tribunal upheld the disallowance.

During the penalty proceedings, the TO contended that in respect of the aforesaid disallowance the assessee had fi led an inadmissible claim, which had led to concealment of income, and thus that the penalty had been levied under section 271(1)(c) of the Act. The CIT(A) observed that the TO had neither established the mala fi de intention on the part of the assessee to conceal its income nor proved that


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the assessee had made irrational / illogical claims. On the contrary, the assessee had established that its claim was bona fi de based on judicial decisions. The CIT(A), thus, deleted the penalty on the grounds that the disallowance of the depreciation of goodwill was only done on account of a difference in interpretation of the issue and in such circumstances, no penalty was leviable.

The assessee contended before the Tribunal that the High Court had admitted an appeal against the quantum order of the Tribunal on the issue of the depreciation of goodwill.

The Tribunal held that it could not be said that the assessee had made a false claim in the return of income in respect of the depreciation on goodwill once the High Court had ruled on the subject, whether or not the question of whether the assessee was entitled to depreciation on goodwill was a substantial question of law. Accordingly, the Tribunal held that the CIT(A) was justifi ed in deleting the penalty. Argued by PwC Tax Litigation Team

DCIT v. Crisil Limited [2009] 31 ITATINDIA 322 (Mum)

Withholding Tax

Interest in cases of default in payment of withholding tax payable up to the due date of fi ling of a return by a Government undertaking

The assessee, an air taxi operator, had made payments to the Airports Authority of India (“AAI”) for space

rental, parking charges etc., without withholding tax thereon.

The TO held the assessee to be in default under section 201(1) of the Act and liable to pay interest under section 201(1A) of the Act for not withholding tax on the payments made to the AAI.

The Tribunal partly allowed the assessee’s appeal, and held that the assessee would not be liable to pay tax, however, it would be liable to pay interest under section 201(1A) of the Act.

The High Court affi rmed the Tribunal’s observation that since the AAI was a Government of India undertaking, it could not be presumed that it had not paid taxes.

Accordingly, the High Court held that the assessee would be liable to pay interest on the amount of tax not withheld up to the due date of fi ling of the return by the AAI, and that since the AAI was a Government undertaking, the taxes might be presumed to have been paid by the due date of fi ling of the return of income.CIT v. Trans Bharat Aviation (P.) Ltd. [2009-TIOL-374-

HC-DEL-IT]

Notifi cations / Circulars

Extension of time-limit for fi ling of Form ITR-V

The Central Board of Direct Taxes (“CBDT”), vide Circular No. 3 /

2009 dated 21 May, 2009, allowed assessees who fi led their returns in electronic form without digital signatures to submit their physical copies of Form ITR-V, within a period of 30 days from the date of the circular.

The CBDT has now extended the time-limit for fi ling a physical copy of Form ITR–V in relation to returns fi led electronically (without a digital signature) on or after 1 April, 2009, up to 30 September, 2009, or within 60 days of uploading the electronic return data, whichever is later.

It is also clarifi ed that the ITR-V should continue to be sent by ordinary post to Post Bag No.1, Electronic City Post Offi ce, Bengaluru, and Karnataka-560100.CBDT Press Release dated 13 August, 2009

Amendment to interest income clause of Article 12 of the India-France Tax Treaty

Under the existing provisions of the India-France Tax Treaty, interest income arising in a Contracting State shall be exempt from tax in that Contracting State under clause (ii) of Article 12(3) provided it is derived, and benefi cially owned, by the “the Reserve Bank of India (“RBI”) in the case of India and the Banque de France in the case of France”.

The CBDT has substituted this clause to provide exemption to the RBI in the case of India and the Banque de France and the Agence Francaise de Developpement in the case of France.

CBDT Notifi cation No. 61 / 2009 dated 12 August,

2009

Time-limit for fi ling of Form ITR-V extended


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India Spectrum*

Case Law

Set-off of business loss

The assessee was a member of the Bombay Stock Exchange. It suffered a loss during the assessment year (“AY”) 2004-05 which was carried forward and set off against the business profi ts of the next fi scal year. The TO disallowed the claim under section 73(1) of the Act, treating the loss as speculation business loss which could be set off only against speculation business profi t.

The Tribunal held that the transactions in which the assessee had suffered losses were in the nature of jobbing and arbitrage to guard against the losses which could have arisen in the ordinary course of the business of the member. Such transactions were not speculative transactions under the provisions of the Act and hence the losses suffered were business losses which can be set off against business profi ts.First Securities Pvt. Ltd. v ACIT [2009-TIOL-443-ITAT-MUM]

Income from sale of units of a mutual fund taxable as business income

The assessee companies were engaged in the trading and sale of shares / mutual fund units. They relied on Circular No. 4 / 2007 dated 15 June, 2007 issued by CBDT and claimed that the units were held as investments.

The Tribunal on the following facts held that the assessee was carrying on the business activity:

• The proportion of the dividend income received was negligible as compared to the quantum of profi t earned out of the purchase and sale of shares / mutual fund units. The dividend income was only incidental to the holding of

Corporate Tax – Financial Servicesthe units.

• No other activity was carried out by the assessee not only in the relevant previous year but also in the preceding previous years; thereby the entire management was concentrating on the business of purchase and sale of shares / mutual fund units during the entire previous year.

• All the expenses of the assessee companies were directed towards carrying on activities to do with the purchase and sale of shares / mutual fund units.Saura Trade Credits Pvt. Ltd. v. ITO [2009-TIOL-

435-ITAT-MAD]

Assessee can deal in shares both as stock-in trade and as investments

The assessee company was dealing in shares both as stock-in-trade and investments and keeping separate accounts in respect of the two portfolios. The TO treated the profi t on the sale of shares out of the investment portfolio as business income. The CIT(A) upheld the addition.

The Tribunal, referring to CBDT Circular No. 4 / 2007 dated 15 June, 2007 and after considering a host of rulings, laid down the following principles for determining whether shares are held as stock-in-trade or investments.

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Profit on sale of shares out of the investment portfolio taxable as capital gain


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Some of the key principles that were laid down were the intention of the assessee at the time of purchasing shares, whether borrowed money was used for purchase of shares, the frequency and magnitude of the purchase / sale transactions, the commercial motive behind the purchases, the valuation of the shares in the books of account, authorisation of purchase / sale by a Memorandum of Association / the Articles of Association, maintenance of separate books of account for the two portfolios, distinction made in the records maintained and legal requisites for dealing as a trader. It was also laid down that the mere credit of sales proceeds from shares in a particular account or infrequent sales and purchases alone would not be suffi cient to determine that the assessee was holding the shares for investment. Further, the cumulative effect of several factors has to be seen to come to a defi nite conclusion.

Applying the above principles in the assessee’s case, the Tribunal treated the profi t on sale of shares out of the investment portfolio as capital gains. Sarnath Infrastructure (P.) Ltd. v. ACIT [2009] 120 TTJ

216 (Lucknow)

Property transfer includes development agreement

The assessee sold inherited residential housing property and the sales proceeds were utilised to purchase two new house properties in the same fi nancial year. The assessee claimed exemption in respect of the capital gains since the total cost of the new properties exceeded the

amount of capital gains. In the same fi nancial year, the assessee entered into a development agreement with a builder to develop the property, gave a power of attorney in favour of the builder and handed over possession of a 50% share in both the properties.

The TO reopened the assessment and withdrew the exemption made under section 54 of the Act and the CIT(A) confi rmed this action. On appeal to the Tribunal, it was held that the development agreement, power of attorney and part possession satisfi ed all the conditions of the Transfer of Property Act, 1882, and hence, this transaction would result in a transfer being made by the assessee. Hence, the exemption granted to assessee was withdrawn.R. Kalanidhi v. ITO [2008] 314 ITR (AT) 266 (Chennai)

Characterisation of income – business income v. income from house property

The assessee was involved in rendering project management services, leasing of commercial premises as business centers and operating commercial complexes. The gross receipts comprised receipts from the operation of commercial complexes and from business centers. The assessee treated the receipts as business income and claimed related expenses and depreciation on the buildings and other assets as allowable business expenditure. The TO concluded that the receipts were assessable as income from house property. The CIT(A) partly allowed the assessee’s claim and held that receipts pertaining

to the hiring of space were taxable as income from house property and the balance as business income.

The Tribunal held that method of ascertaining the consideration for services could not by itself be determinative of the nature of such income. A perusal of the agreement entered into by the assessee proved the commercial character of the relationship between the parties as against that of merely landlord and tenant. The occupation of space was inseparable from the provision of services and amenities. Hence, it was held that the properties in question were business assets of the assessee and were exploited by the assessee for the purpose of business by rendering complex commercial and business services as a property manager.Gesco Corporation Ltd. v. ACIT [2009] 31 SOT 132 (Mumbai)

Income from sub-letting of property taken on long term lease

The assessee took a property on lease under two agreements and sub-let it to two entities. The assessee treated the income derived from such sub-letting as income from house property on the grounds that the landlord had extended the lease period to 12 years from seven and a half years in his case and that under the terms of the lease agreement with the owner, he ought to be treated as the “deemed owner” under section 27(iiib) of the Act. Furthermore, the Department had accepted the treatment given by the assessee in earlier years as well as in later years. The TO treated the income as “income from other sources” on the grounds that there was no clause extending the agreement, and hence, the assessee could not be deemed to be the owner of the property.

Transfer of property includes development agreement


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India Spectrum*

The CIT(A) confi rmed the TO’s order.

The Tribunal observed that the property in question was land with structures and there was no mention of a building thereon. The provisions of section 27(iiib) of the Act applied only when a building was involved and the assessee had a right over the said building or part thereof so as to be considered as deemed owner. The Tribunal restored the matter back to the TO to examine the property in question and determine the issue accordingly. If the property in question was land, the income was to be assessed under the head “income from other sources” and not under the head “income from house property”.TCI Reality P. Ltd v. ITO [2009] 31 SOT 59 (Mumbai)

Regulatory Developments

Exit load parity among all classes of unit holders

The Securities and Exchange Board of India (“SEBI”) has clarifi ed that no distinction amongst unit holders shall be made by Mutual Funds based on the amount of subscription while charging exit loads, i.e. there shall be parity amongst all classes of unit holders in terms of exit loads charged.SEBI / IMD / Cir No. 6 / 172445 / 2009 dated 7 August, 2009

Additional information on applications for registration / renewal of registration of portfolio managers

SEBI has required that information regarding services proposed to be launched, a copy of the draft agreement with the client and a table of net worth in a revised format should be provided as a part of the additional information to be fi led by portfolio managers while submitting their forms for registration / renewal of registration.IMD / DOF I / PMS / Cir-5 / 2009 dated 31 July, 2009

Corporate governance for the insurance sector

The IRDA has issued detailed guidelines for corporate governance, which must be implemented from 1 April, 2010. These guidelines, inter alia, address major structural elements in corporate governance such as Government structure, board of directors, control functions, senior management, disclosures, outsourcing, etcIRDA / F&A / CIR / 025 / 2009-10 dated 5 August, 2009

Unit-linked products – cap on charges

The IRDA has mandated that the overall cap on all charges put together for Unit Linked Insurance Plans (“ULIPs”) shall be the difference between the gross and net yields of any product. For insurance contracts which are of tenors of ten years or less, such a difference shall not exceed 300 basis points, of which fund management charges shall be capped at 150 basis points. For other contracts, the difference shall not exceed 225 basis points, of which fund management charges shall be capped at 125 basis points.

The IRDA has specifi ed the elements to be excluded in the calculation of net yield and those to be included in the certifi cate to be issued by the insurer on maturity. At the time of sale, the insurer may illustrate growth using a 10% growth model and gross and net yield shall be specifi cally mentioned to the buyer. Any modifi cation in charges for ULIPs as fi led under “fi le and use” guidelines as approved by the IRDA shall require prior IRDA approval.Circular No. 20 / IRDA / Act / ULIP / 09-10 dated 22 July, 2009

Audit of investment risk management systems and process audit

The IRDA has advised that:• All companies seeking registration

shall fi le a report certifi ed by a Chartered Accountancy fi rm, describing the level of preparedness of the applicant to comply with various system related requirements and indicating further actions required to be taken.

• All insurers shall have their systems and processes audited at least once every three years by a Chartered Accountancy fi rm who is not their current internal, concurrent or statutory auditor.

• The norms to be satisfi ed by a risk management auditor have been prescribed. The certifi cate shall be fi led as prescribed.

• The minimum scope for an internal / concurrent audit has been separately prescribed.

• Internal / concurrent audit shall cover 100% of transactions of all funds.

• Where an internal audit is done in-house, the report shall be signed by the head of internal audit.

• If the Assets under Management (“AUM”) cross Rs.10,000 million at any time, the insurer shall have a concurrent audit done even if the AUM falls below Rs.10,000 million at later date.

• The report of such an audit shall be fi led with IRDA in prescribed format.

INV / CIR / 023 / 2009-10 dated 4 August, 2009

Corporate Tax – Financial Services


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Case Law

Computation of number of days in determining residential status – fi rst day to be excluded

The assessee, an employee of IBM Global Services India Pvt. Ltd., was assigned to work with IBM Global Services Customers on specifi ed orders on location in Chicago, USA. During the year prior to the relevant AY, 2005-06, the assessee was physically present in India for 78 days which included a visit to India for 19 days before fi nally coming back after the completion of the assignment on 31 January, 2005. The assessee contended that under section 6 of the Act, he was a non-resident, and therefore salary received outside India while rendering services in the USA was not taxable in India. This contention was rejected by the TO as well as by the CIT(A).

On appeal to the Tribunal, the

assessee contended that for the purpose of computing the period of 60 days under section 6(1)(c) of the Act, any period of visiting India, under clause (b) of the explanation to the section was to be ignored. Accordingly, the period of 19 days was to be ignored in determining the stay in India. The Tribunal, after considering the legislative history and the intention of the legislation, agreed with the contentions of the assessee and held that the period of stay in India was not be considered when computing the limit of 60 days under section 6(1)(c) of the Act. Furthermore, it was contended that if the day of the assessee’s arrival in India i.e. 31 January, 2005 was ignored, the total number of days of stay in India worked out to 59, and therefore,

the status of the assessee would be that of a non-resident. The Tribunal, considering the provisions of the General Clauses Act, 1897, held that where one had to compute the period for which an assessee had been in India, one had to start counting from a particular day and end with a specifi c day; however, the fi rst in the series of days was to be excluded. Hence, it was held that the status of the employee was non-resident, excluding the date of his arrival in India. The Tribunal accepted the contentions of the assessee that in cases where the assessee was a resident in India then his income in the USA was taxable, and the asseessee was entitled to a relief, under Article 25 of the India-USA Tax Treaty. However, once his status in India became that of a non-resident, as in the present case, the salary income received by him in the USA, for employment exercised in the USA, would not be taxable in India under the terms of Article 16(2) of the Tax Treaty.Manoj Kumar Reddy Nare v. ITO [2009-TIOL-486-ITAT-DEL]

Compensation for termination of contract not available for restrictive covenants –taxable as profi ts in lieu of salary The assessee worked as a CEO of a non-resident company which became

Personal Taxes

While computing number of days in determining residential status, fi rst day to be excluded

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India Spectrum*

a subsidiary of a US Company. On change of management, the contract for his services was terminated and compensation of USD 1 million was offered for the truncated contract period and also for services that he was to provide to his successor in introducing him to key suppliers and clients. The assessee claimed that the sum received on termination of the contract was compensation for the restrictive covenants such as non-competition, non-soliciting of existing business, etc. which prohibited his future activities, and was therefore in the nature of a capital receipt. The TO treated the compensation as being for continued employment with the company and taxable as normal salary income. It was further observed that the duration of the restrictions was too short to have any signifi cant impact on the assessee. The CIT(A) concurred partly with the assessee and held that on an estimated basis 50% of the amount received (amounting to USD 0.5 million) was attributable to the restrictive covenants and therefore not taxable as revenue.

On appeal the Tribunal, after examining the appointment contract, rejected the contentions of the assessee that part of the receipt of USD 0.5 milliion could be termed as a joining bonus, as this was a case of an employee in continuous employment and there was no reason for an employer to pay such a huge sum for a period of four months under the new appointment letter. Furthermore, on examination of the restrictive covenants in the contract, the Tribunal observed that such covenants did not place any fetters on the capabilities of the assessee to obtain gainful employment in any form. The interests of the employer company

or its subsidiary company had been safeguarded without affecting the income-earning capabilities of the assessee by incorporating general restrictive conditions, which were generally incorporated in agreements with employees holding important positions in organisations.

Accordingly, the Tribunal held that the total payment of USD 1 million was for the termination of services and in view of the specifi c provisions of section 17(3)(i) of the Act, any compensation from an employer or a former employer in connection with the termination or a modifi cation in the terms of employment would be taxable as ‘profi ts in lieu of salary’. It was further held that no part of the compensation could be considered as having been made towards the restrictive covenants.ACIT v. Ravinder Behl [2009-TIOL-467-ITAT-DEL]

Personal Taxes


10

Corporate Law Cases

Scheme of Amalgamation – creditors’ meeting not held – valuation report not obtained

The important issues under consideration while sanctioning a scheme of amalgamation were:

• Whether, in cases where the transferor company did not hold the creditors’ meeting since it had obtained no-objection certifi cates from creditors or otherwise repaid them, and the rights of the creditors were not affected, the objection of the Regional Director (“RD”) and the Offi cial Liquidator (“OL”) that the creditors’ meeting had not been convened was tenable.

• Whether the exchange ratio could be determined on the basis of the book value of shares as shown in the latest audited balance sheet, or it had to be worked out by an independent valuer.

It was held that even if the objection raised by the RD were to be sustained, the Court would have inherent powers under rule 9 of the Companies (Court) Rules, 1959 to dispense with the requirement of giving notice of a meeting to the creditors of the company.

Furthermore, the objection with regard to the exchange ratio for amalgamation was not considered to be a legal or factual impediment to granting sanction to the scheme.

Accordingly, the scheme was approved and sanctioned by the High Court.Shreya’s India P. Ltd v. Samrat Industries P. Ltd. [2009]

150 Comp Cas 103 (Raj)

Regulatory Developments

Amendment to the equity listing agreement – prohibition on issuing shares with superior voting rights

The SEBI had, at its Board meeting

Mergers & Acquisitionsheld on 18 June, 2009, decided to prohibit a listed company from issuing shares with superior voting rights with the aim to avoid possible misuse by the persons in control of the company to the detriment of the public shareholders.

The SEBI, on 21 July, 2009, amended the Equity Listing Agreement by inserting a new clause 28A to give effect to the above decision. This clause reads as follows:

“The company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed.”

The above provision applied only to a proposed future issue of shares with superior rights and had no impact on shares with superior rights issued prior to 21 July, 2009.Press Release No.192/2009 dated 18 June, 2009

issued by SEBI and Circular no. SEBI/CFD/DIL/

LA/2/2009/21/7 dated 21 July, 2009 issued by SEBI

Global depository receipts – status of non-resident holder; – it has been clarifi ed that a holder of global depository receipts cannot be called a member of the company

The question had arisen of whether a non–resident holder of global depository receipts (“GDRs”) is a member of the issuing company within the meaning of sections 41 and 42 of the Indian Companies Act, 1956 (“the Co. Act”).

In this connection, it has been

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India Spectrum*

clarifi ed that a holder of GDRs cannot be called a member of the company since:• A GDR holder is not a subscriber

to the memorandum, nor is his name entered in the register of members.

• Under section 41(3) of the Co. Act, a person holding share capital in the company whose name is entered as a benefi cial owner in the records of the depository, is deemed to be a member of the company. Since the overseas depository bank was not the depository as defi ned in the Co. Act and the Depository Act, 1996 nor did it hold the share capital, it could not be deemed to be a member of the company.

• A holder of GDRs may become a member of the company only on the transfer / redemption of such GDRs into underlying equity shares.

• Since the underlying shares were allotted in the name of the overseas depository bank, the name of the overseas depository bank was to be entered in the register of members of the issuing company. However, until transfer / redemption of such GDRs into underlying shares, the overseas depository bank could not be considered a nominee of the holder of the GDRs for the purposes of section 42, read with section 41, of the Co. Act.

Circular No. 1/2009 No.17/67/2009 CL-V dated 16

June, 2009 issued by Ministry of Corporate Affair,

Government of India

Companies Bill, 2009

The Government of India introduced the Companies Bill, 2009 (“Companies Bill”) in the lower house of parliament (the Lok Sabha) on 3 August, 2009. Due to the dissolution of the Fourteenth Lok Sabha, the Companies Bill, 2008 has lapsed. The Government has decided to re-introduce the Companies Bill, 2008 as the Companies Bill, 2009, without any change except for the bill year and the republic year.Press release dated 3 August, 2009 issued by the

Ministry of Corporate Affairs, Government of India

SEBI Informal Guidance – Bharti Airtel Ltd

In the present case, GDRs of the acquirer, viz. Bharti Airtel Ltd., were proposed to be issued in consideration of the acquisition, which if exchanged for underlying shares would exceed the threshold limits laid down by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“the Takeover Code”).

A query was raised as to whether, in light of the exemption under regulation 3(2) of the Takeover Code, GDR holders would be required to comply with the requirements of Chapter II (disclosure) and Chapter III (open offers) only upon the exchange of GDRs for underlying shares in the acquirer.

The reply to the above query was that in view of regulation 3(2) read with regulation 14(2) of the Takeover

Code, the requirements of Chapter III (open offer) of the Takeover Code would have to be complied with only upon the conversion of the GDRs into equity shares with voting rights. However, this exemption was not applicable for Chapter II (disclosure requirements) of the Takeover Code and the requirements contained therein would have to be complied with. Similarly, the requirements of regulations 13(1) and 13(3) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 would have to be complied with by the GDR holders.CFD/DCR/IG/DMS/167230/09 dated 22 June, 2009

SEBI prohibits a listed company from issuing shares with superior voting rights

Mergers & Acquisitions


12

As promised, the Ministry of Finance, Government of India has just issued for public comment the new Direct Tax Code (“the Code”). The Code brings with it brand new changes and a fresh set of challenges and opportunities for the multinational corporate sector.

From the Transfer Pricing perspective, the Code seeks to bring about far-reaching changes within the Indian Transfer Pricing regime. Some of these changes are; the retention of Safe Harbour Provisions as promulgated during the recent Finance (No.2) Act, 2009, the introduction of the much-awaited APA regime and the introduction of Thin Capitalisation measures. Furthermore, the Code also seeks to introduce certain anti-avoidance measures whereby some types of arrangement, the main purpose of which is to obtain tax benefi ts and which depart from the arm’s length principle, will be considered as “Impermissible Avoidance Arrangements”. Such

arrangements may be amended (wholly or in part), disregarded or re-characterised by the Revenue.

The Code is proposed to be effective from 1 April, 2011. With the increased focus on dispute resolution in the Code by way of the introduction of the APA mechanism and the retention of the Dispute Resolution Panel, it is expected that the burden of uncertainty faced by the multinational corporate sector in their international transactions will recede considerably in the coming years.

Case Law

Mumbai Tribunal judgment on application of CUP method

Recently, the Mumbai Bench of the Tribunal had occasion to adjudicate on a case involving the application of the Comparable Uncontrolled Price (“CUP”) method by the taxpayer in deciding the arm’s length nature of transfer pricing.

Transfer PricingThe international transactions of the taxpayer pertained to the export of peppermint oil to its US parent company. The tax payer applied the CUP in determination of the arm’s length nature of the transaction by considering the spot rate as it existed at the time of entering into the forward contract for the export of peppermint oil to the parent company. The Transfer Pricing Offi cer (“TPO”) scrutinised the transaction and proposed an adjustment to the transfer price of the assessee, contending that the spot market rates of the products as reported by the tax payer at the time of invoicing were higher than the transfer prices in the case of the tax payer.

In defence, the taxpayer argued that the uncontrolled price as it existed at the time of the international transactions / effective date of the forward contract had been considered and that the weighted average of the uncontrolled prices ought to be considered in determination of the arm’s length price to even out business fl uctuations. However, both the TPO and the CIT(A) disagreed with the defence of the taxpayer. Accordingly, they proposed the adjustment.

The Tribunal observed that generally the date of purchase order was to be the date used when considering uncontrolled prices as effective from the date the parties agrees to enter into a contract. However, in the context of a forward contract, the uncontrolled price should be the date of the forward contract and not the date of the purchase order.

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India Spectrum*

Accordingly, the order of the TPO was set aside.A.M. Todd Company India Pvt. Ltd. v. ITO [2009-TIOL-283-ITAT

-MUM]

International Developments

Recent Global Trends in APA

Renovation of APA by the ATO

Recently, the Australian Taxation Offi ce (“ATO”) released PwC’s review comments on the ATO’s APA program together with the ATO’s initial responses to the recommendations in the report. PwC was commissioned by the ATO to improve the effectiveness and effi ciency of the APA Program in recognition of the increasing demand for APAs, the complex transfer pricing issues and the competing priorities within the ATO. The report had a number of recommendations revolving around APA program admission, consistency and certainty issues in APAs, the sharing of information, the establishment of a circuit breaker and clear guidelines regarding the involvement of large businesses, international complex case leadership and the training of ATO personnel in technical transfer pricing issues.

In agreement with the recommendation of PwC, the ATO observed that the implementation of the new Transfer Pricing System (“TPS”), with increased focus on transfer pricing cases, would boost the future development of the APA program. Furthermore, the ATO also set up an APA co-design committee, to focus on areas like identifying the issues qualifying for the APA program, developing a project management program and guidelines for APAs, and establishing a circuit breaker mechanism to provide taxpayers

with a right of review over tax offi ce decisions where a standstill had been reached or the tax offi ce intended to withdraw from the APA process.

With the introduction and implementation of the new TPS, covering all aspects of transfer pricing including APAs and with key recommendations from PwC on the improvement of the APA program, it was observed that the enhanced TPS would provide the ATO with a platform on which to move towards best practice.

Chinese offi cial discusses APA program

China introduced a comprehensive transfer pricing regime in 2009 which also included the fi rst detailed application procedure for APAs. Since then, China has completed nine Bilateral APAs (“BAPAs”) including the recently concluded BAPA with Denmark, in which PwC assisted the taxpayer in all aspects of the BAPA process. In an interview with PwC, the deputy director of the State Administration of Taxation of China (“SAT”) discussed the various aspects of APAs including application, adjustments, transfer pricing methods and the focus of SAT in the coming years. A brief insight into the SAT’s APA program is provided below:

Application: There are no restrictions on tax payers in China applying for the APA program. However, admission to the APA program is generally not considered if applications are from taxpayers who are currently under audit and such taxpayers are not eligible until the audit has been completed; and also in cases where the business has recently been set up or has a short operating history. The SAT typically prefers that the taxpayer

apply for an APA only after it has been operating for several years, so that a good foundation to evaluate the taxpayer’s transfer pricing has been built up.

In the SAT’s experience, it takes about 12 months to conclude a unilateral APA and 18 to 24 months to conclude a BAPA.

Transactions: Though most of the APAs concluded in China in the recent past relate to manufacturers covering the sale of tangible goods to overseas affi liates, cases relating to distribution, services, cost-sharing arrangements, the sale of intangibles and services are also on the rise.

Methods: On the application of most appropriate method in the evaluation process, SAT opined that the application of the method is dependent on the facts and circumstances of each case. However, the Transactional Net Margin Method has been the most frequently applied method by far with the Profi t Split Method being applied in a few cases. In the evaluation process, the use of the inter-quartile range is commonly accepted as a measure of an arm’s length range.

Adjustments: In certain cases where the negotiation results in adjustments to the transfer price of the taxpayer with customs and foreign exchange control issues, the SAT has assured that it will provide all possible assistance in coordinating with the relevant authorities. However, it also observed the existence of this problem in developed nations as well.

Economic downturn: On the compelling issue of the economic downturn and its impact on APA negotiations, SAT stressed the

Transfer Pricing


14

evaluation of the cases on their individual merits and opined that as most Chinese companies are limited risk-bearing entities, they should not be subjected to losses relating to the economic downturn.

In the coming years, the focus of the SAT in audits would be on reviewing the impact of the cost advantage offered by China on the profi tability of Chinese taxpayers. Meanwhile, the SAT has been actively promoting and developing its APA program in recent years and is keen to conclude some good cases at this early stage of the journey in order to set a model for the future.Courtesy Tax Management Transfer Pricing Report by

the Bureau of National Affairs

New service regulations issued in the US

Recently, the Internal Revenue Service (“IRS”) issued fi nal regulations under section 482 of the US Internal Revenue Code, that address the treatment of controlled service transactions and the allocation of income from intangible property, in particular with respect to contributions made by a controlled party to the value of intangible property owned by another controlled party.

Some of the key changes in the fi nal regulation are set forth below:

Service Cost Method : The new regulations make certain clarifying changes to the provisions dealing with the Service Cost Method (“SCM”), which allow certain services to be charged at cost without any markup. As such, the fi nal regulations provide that services may qualify for the SCM only if they are either “specifi ed

covered services” as described in the Revenue Procedure or are services for which the median arm’s length markup is 7% or less. In addition, the services must continue to satisfy the “business judgment”.

Stock-based compensation: On the controversial issue of stock based compensation, on which the IRS has received comments to the effect that they should be considered as total service costs for the purposes of SCM and also contradictory comments on such treatment, the IRS, in the fi nal regulation has deferred consideration of the comments and continued to consider technical issues involving stock-based compensation in the services and other contexts with an intent to address those issues in a subsequent guidance project.

Contributions to the value of intangibles: The fi nal regulations refl ect the continuing view of the IRS that legal ownership provides, unless such ownership is inconsistent with the economic substance of the underlying transactions, the appropriate framework for the determining ownership of intangibles in determining the arm’s length compensation owing to a party that contributes to the value of an intangible owned by another controlled party.

Economic substance, realistic alternatives, and contingent payment for services: The fi nal regulations emphasise that the evaluation of economic substance must be on the transaction and risk allocation actually adopted by the related parties and on the actual conduct of the parties. Further, the IRS clarifi ed that it was not authorised to impute a different agreement

solely because there was a dispute regarding the transfer pricing of the transaction.

Stewardship: The fi nal regulations concerning stewardship expenses have been modifi ed to be consistent with the language relating to controlled service transactions. Stewardship expenses, which are defi ned in the fi nal regulations as resulting from “duplicative activities” or “shareholder activities” are allocable to dividends received from the relevant corporation. The fi nal regulations maintain the narrowed defi nition of “shareholder activities” that includes only those activities whose “sole effect” (rather than “primary effect”) is to benefi t the shareholder.

Furthermore, the permissible methods of apportionment with respect to stewardship expenses may include comparisons of time spent by employees (weighted to take into account differences in compensation) or comparisons of each related corporation’s gross receipts, gross income or unit sales volume. Courtesy: PricewaterhouseCoopers Pricing

Knowledge Network


15

India Spectrum*

VAT / Sales Tax

Case Law

Privity of contract between Indian importer and foreign exporter is not essential to avail sales benefi t in the course of import

The Kerala High Court has held that for a transaction to qualify as a sale in the course of import, privity of contract between the Indian customer and the foreign supplier is not essential as long as an inextricable link between the import and the sale / purchase occasioning the import of such goods into India can be established from the underlying documents.BPL Telecom Ltd. v. State of Kerala [2009] 23 VST 264 (Ker.)

An express covenant or stipulation regarding the inter-state movement of goods is not essential to treat a transaction as an inter-state sale

The Central Sales Tax Appellate

Authority, New Delhi has held that there need not be an express covenant or stipulation in the contract regarding the inter-state movement of goods in order for a related sale to constitute an inter-state sale. Even if the inter-state movement were incidental to the implementation of the contract, the transaction would qualify as an inter-state sale.Commissioner of VAT v. State of Haryana and Another

[2009] 23 VST 10 (Del)


Increase in VAT rate on certain products in Maharashtra

The Value Added Tax (“VAT”) rate has been increased from 4% to 12.50% for certain products such as cordless

Indirect Taxeshandsets, videophones, cellular telephones, still image video cameras and digital cameras.Notifi cation No.VAT-1509/CR-81- E/Taxation - 1 dated

29 June, 2009,

Circular No. 21T of 2009 dated 4 July, 2009

Time limit for fi ling VAT audit reports in the state of Gujarat extended

The time limit for fi ling audit report has been extended from six months to nine months from the end of the relevant year.Gujarat VAT Amendment Bill No. 18 of 2009

CENVAT

Case Law

Repacking of goods from bulk to retail packs does not amount to manufacture

The Supreme Court has held that the repacking of goods from bulk to retail packs, not resulting in a new product, does not amount to manufacture.CCE v. Aero Pack Products [2009] 92 RLT 817 (SC)

CENVAT Credit Rules do not prescribe any time limit on the availment of CENVAT credit

The Bangalore Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”) has held that Central Value Added Tax (“CENVAT”) credit

Privity of contract between Indian importer and foreign exporter not essential to avail sales benefi t

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16

cannot be denied on the grounds that the taxpayer seeks use it three to seven years after the receipt of the inputs, since the CENVAT Credit Rules do not prescribe any time limit on the availment of credit.Coromandel Fertilizers Ltd. v. CCE [2009] 239 ELT 99 (Bang)

Interest is payable on differential duty on upward revisions of prices subsequent to removal of goods from the factory

The Supreme Court has held that the interest is payable on account of differential duty payable because of price revisions made subsequent to the removal of goods from the factory.CCE v. SKF India Ltd. [2009] 239 ELT 385 (SC)

Service Tax

Case Law

Hire purchase and leasing transactions to be considered constitutionally valid

The Madras High Court has upheld the constitutional validity of the levy of service tax on hire purchase and leasing transactions. UOI v. Madras Hire Purchase Association [2009-TIOL-338-HC]

Transfer of technology does not fall under consulting engineer’s services

The New Delhi CESTAT has held that the transfer of technology is not subject to service tax as consulting engineer’s services.CCE v. Indore Composite Pvt. Ltd. [2009] 15 STR 91 (Del)

Credit of service tax on erection and commissioning services rendered by another service provider is available to manufacturer, provided cost of such services is included in transaction value

The Ahmedabad CESTAT has held that a manufacturer is entitled to the credit of service tax paid on erection and commissioning services rendered by another service provider at the customer’s premises, provided that the transaction value includes the cost of such services.CCE v. Alidhara Textool Engineers Pvt. Ltd. [2009] 92

RLT 807 (Ahd)


Management, maintenance and repair services in respect of roads exempt from service tax

Services provided by any person in relation to the management, maintenance and repair of roads have been exempted from service tax. These were previously taxed under the category of ‘management, maintenance and repair services’.Service Tax Notifi cation No. 24 / 2009 (ST) dated 27 July, 2009

Customs / Foreign Trade Policy

Case Law

Goods imported and stored in a bonded warehouse are deemed to be removed on the date of expiry of the warehousing period and are chargeable to duty at the time of removal

The New Delhi CESTAT has held that goods imported and stored in a bonded warehouse are deemed to have been removed on the date of expiry of the warehousing period and would become chargeable to duty at the duty rate in force on the date of removal and not on the date of fi ling of the Bill of Entry.Bisco Limited v. CC [2009] 93 RLT 94 (Del) and Artee

Graphite (P.) Ltd. v. CCE [2009] 92 RLT 1008 (Del)

Principle of unjust enrichment not applicable to duty deposited in pursuance of an adjudication order

The Bangalore CESTAT has held that the principle of unjust enrichment under section 27 of the Customs Act, 1962 has no applicability to claims for refunds of duty deposited by an assessee pursuant to an order passed by an adjudicating authority.CC v. PSI Data Systems [2009] 239 ELT 304 (Bang)

Where import of goods is neither prohibited nor restricted, burden cannot be cast upon importer to show that import is permissible

The Gujarat High Court has held that in the event that the import of goods is are neither prohibited nor restricted, no burden can be cast upon the importer to demonstrate that the imports are permissible.CC v. Filco Trade Centre (P.) Ltd. [2009] 239 ELT 19 (Guj)

Transfer of technology not subject to service tax as consulting engineer’s services


17

India Spectrum*

Indian Depository Receipts

Indian Depository Receipts – Operational Guidelines announced by RBI

In 2004, the Government of India announced the Companies (Issue of Indian Depository Receipts) Rules, 2004 (“the IDR Rules”) to enable foreign corporations to raise funds from Indian capital markets in the form of Indian Depository Receipts (“IDRs”). Subsequently, in 2006, SEBI issued guidelines for the issuance of IDRs and related disclosure requirements - SEBI (Disclosure and Investor Protection) Guidelines, 2000 (“SEBI Guidelines”).

The RBI has now issued a circular to operationalise the IDR Rules, with immediate effect.

Operational guidelines for issuance and redemption of IDRs

Eligible Issuers

i. Listed foreign companies

satisfying the eligibility criteria.ii. Foreign banks and overseas

fi nancial companies operating in India through branches or subsidiaries with the approval of sectoral regulators.

Eligible Investors

i. Persons (individuals, companies, etc.) resident in India (as defi ned under the Foreign Exchange Management Act, 1999).

ii. Foreign Institutional Investors (“FIIs”) (including sub-accounts) and Non-resident Indians (“NRIs”), subject to compliance with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (“Inbound Regulation”). NRIs can invest through funds held in non-resident external rupee / foreign currency non-resident (Bank) accounts.

Issuance of IDRsi. IDRs to be denominated in Indian

Rupees and issued through a

Foreign Exchange Management Actdomestic depository, subject to compliance with the IDR Rules and SEBI Guidelines.

ii. IDR proceeds to be immediately repatriated outside India.

Transfer of IDRs

i. Persons resident in India can freely transfer IDRs through a recognised stock exchange in India.

ii. FIIs (including sub-accounts) and NRIs can transfer IDRs, subject to compliance with the Inbound Regulation.

Holding / selling underlying shares (on redemption / conversion of IDRs)

i. There is no restriction on FIIs (including sub-accounts) or NRIs to hold underlying shares.

ii. Listed Indian companies and Indian mutual funds registered with SEBI can sell or continue to hold underlying shares, subject to compliance with Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004.

iii. Other persons (including resident individuals) need to sell the underlying shares within 30 days of conversion.

Other Conditions

i. Automatic fungibility of IDRs is not permitted.

ii. A minimum lock-in-period of one year (from the issue date) has been prescribed before which IDRs cannot be redeemed as underlying equity shares.

A.P. (DIR Series) Circular No. 5 dated 22 July, 2009

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18

AhmedabadPresident Plaza, 1st Floor, Plot No. 36, Opp Muktidham DerasarThaltej Cross Road, SG HighwayAhmedabad, Gujarat - 380054,Phone +91-79 3091 7000

Bangalore6th Floor, Millenia Tower ‘D’ 1 & 2, Murphy Road, Ulsoor Bangalore - 560 008 Phone +91-80 4079 6000

BhubaneshwarIDCOL House, Sardar Patel BhawanBlock III, Ground Floor, Unit 2Bhubaneswar - 751 009 Phone +91-674-2532 459, 2530 370

ChennaiPwC Center, 2nd Floor32, Khader Nawaz Khan RoadNungambakkam Chennai - 600 006Phone +91-44 4228 5000

Hyderabad# 8-2-293/82/A/1131A Road no. 36, Jubilee Hills Hyderabad - 500 034Andhra Pradesh Phone +91-40 6624 6600 KolkataPlot No.Y-14, 5th Floor Block-EP, Sector-V, Salt Lake Kolkata - 700 091West Bengal Phone +91-33 2357 9100

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specifi c professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PricewaterhouseCoopers, this publication may not be quoted in whole or in part or otherwise referred to in any documents.

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers”, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member fi rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

pwc.com/india

MumbaiPwC House, Plot 18/A, Guru Nanak Road (Station road), Bandra (W), Mumbai - 400 050Phone +91-22 6689 1000

New DelhiSucheta Bhawan (Gate No.2) 11- A Vishnu Digamber Marg New Delhi - 110 002Phone +91-11 2323 2916/2321 0891

PuneMuttha Towers5th Floor, Suite No. 8Off Airport Road, Yerawada Pune - 411 006 Phone +91-20 4100 4444


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