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Index

FOREWORD EXECUTIVE SUMMARY RECENT DEVELOPMENTS


FOREWORD .............................................................................................................. 4 EXECUTIVE SUMMARY ........................................................................................... 6 BACKDROP TO THE BUDGET AND RECENT DEVELOPMENTS ......................... 8

ECONOMY SURVEY
OVERVIEW OF ECONOMIC SURVEY ................................................................... 58

KEY BUDGET PROPOSALS


BUDGET AT A GLANCE ......................................................................................... 65 DOMESTIC TAXATION .......................................................................................... 66 INTERNATIONAL TAXATION ............................................................................... 78 GENERAL ANTI AVOIDANCE RULE (GAAR) ........................................................ 82 SERVICE TAX .......................................................................................................... 84 CUSTOMS ............................................................................................................... 88 EXCISE..................................................................................................................... 89

INDUSTRY SPECIFIC ANALYSIS


INDUSTRY SPECIFIC ANALYSIS .......................................................................... 94

INDIA BUDGET

2012
- An Analysis

foreword executive summary recent developments

Foreword
76 year old advocate, graduate of the University of Kolkata, a prominent leader of the Indian National Congress and the Leader of the House in Lok Sabha, Mr. Pranab Mukherjee, the Honorable Minister of Finance presented the India Budget 2012 (containing the Finance Bill 2012 along with the Budget Statement for the fiscal year 20122013) before the House of Parliament on Friday 16th March 2012. Finance Minister, whose role is to steer the nation out of the difficult economic realities & conflicting economic measures, had to face a balancing act in presenting the nations budget as he had conflicting challenges; like to tame inflation vis--vis sustaining the high growth rates and reining in the deficit. For the Indian economy, recovery was interrupted this year due to intensification of debt crisis in Euro zone, political turmoil in Middle East, rise in crude oil price and earthquake in Japan. GDP is estimated to grow by 6.9 per cent in 2011-12, after having grown at 8.4 per cent in preceding two years. India however remains front runner in economic growth in any cross-country comparison. Monetary and fiscal policy response for better part of past 2 years was aimed at taming domestic inflationary pressure. Growth moderated and fiscal balance deteriorated due to tight monetary policy and expanded outlays. The present economic scenario necessitated in taking few hard decisions to improve macroeconomic environment and strengthen domestic growth drivers. Objectives to be addressed effectively in ensuing fiscal years by Twelfth Five Year Plan (namely, faster, sustainable and more inclusive growth) would persuade Finance Minister in introducing several bold, forward looking & reformist proposals. If India can build on its economic strength, it can be a source of stability for world economy and a safe destination for restless global capital. GDP growth estimated at 6.9 per cent in real terms in 2011-12. Slowdown in comparison to preceding two years is primarily due to deceleration in industrial growth. Current account deficit at 3.6 per cent of GDP for 2011-12 and reduced net capital inflow in the 2nd and 3rd quarters had put pressure on exchange rate. Indias GDP growth in 2012-13 expected to be 7.6 per cent +/- 0.25 per cent. Under this scenario, the Budget 2012 aims to work out a strategy that can meet up with the challenges. The Budget lays down a road map to cater to the needs of the nation and provides for resolving the national economic problems. Finance Bill (under Direct Tax proposals) significantly increases tax costs and alters the dynamics of cross-border transactions and M&As. The proposals are now rightly criticized by several stakeholders as being regressive, retrograde and extraterritorial in nature. The retrospective amendments (sought to be effective from 1 April 1962) attempt to reverse the judicial precedents of Vodafone (Indirect Transfer of Shares) & royalty issue in relation to software payments. Few proposals grants the tax authorities with the discretionary powers which would result into uncertainty. The proposal to tax offshore share transfers and the introduction of General AntiAvoidance Rules (GAAR) will have the most critical impact on foreign investors, making them rethink on their strategy to invest into India. The GAAR provisions have been severely criticized in taxing transactions on the ground of tax avoidance, thus making it a difficult situation even for genuine and legitimate transactions. The well recognized and respected distinction between tax planning v/s tax evasion has been sought to be eliminated in a manner that would empower the tax authorities to levy tax on the transactions regarded by the tax authorities as impermissible avoidance arrangements. The ambiguously worded GAAR provisions shall challenge the most conventional structures for M&As and investments into India. The retrospective imposition of taxes violates the fundamental rights guaranteed under the Indian Constitution, giving rise to onerous compliance challenges for foreign investors. Few of the welcome amendments vide Finance Bill (under Direct Tax proposals) are: introduction of Advance Pricing Arrangements, the reduction to the tax rate from existing 20 per cent to 5 per cent in respect of interest income arising from the lending in foreign currency by non-residents, relief provided to the power sector through additional depreciation at the rate of 20 per cent, increase in the threshold limit with respect to the applicability of the tax audit norms, continuity of the existing tax slab rates, exemption to the senior citizens (under

INDIA BUDGET 2012


- An Analysis

specified circumstances) from payment of advance tax and reduction to the rate for Securities Transaction Tax for specified transaction. With regard to the amendments to service tax, to maintain a healthy fiscal situation, rate has been increased from 10 per cent to 12 per cent, with corresponding changes in rates for individual services. Further, a short negative & exemption list has been introduced to expand the tax net as well as to move to the scheme of taxation perceived as sound economics and prudent fiscal management. Given the imperative for fiscal correction, standard rate of excise duty has been also raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per cent and the lower merit rate from 1 per cent to 2 per cent with few exemptions. This anomaly will doubtless add to the real indirect tax cost of transactions in India. The Budget emphasizes on curbing inflation, fiscal consolidation and Friday, March 16, 2012 Mumbai INDIA

expenditure control and highlighted various initiatives such as FRBM Act implementation Finance Minister realizing the immense possibilities of promising Indian economy on the global stage for the threshold decade has sought to formulate the Budget proposals that could also facilitate and offer necessary & well deserved support towards building a developed India. However, the Budget, on many counts, can be summarized as a missed opportunity of seizing the potential of India. It has failed to establish an investment friendly & conducive economic and regulatory environment. The Budget 2012 shall, perhaps, be remembered more as a statement of the Government of India, run by coalition of political parties having conflicting agenda, that adheres to the form but fails to offer substance for formidable inclusive economic growth and regulatory certainty for investors and stakeholders.

Executive Summary
DIRECT TAXES
Exemption limit for the general category of individual taxpayers proposed to be enhanced from ` 1,80,000 to ` 2,00,000 giving tax relief of ` 2,000 It is proposed to raise the upper limit of 20 per cent income tax slab for individual from ` 8,00,000 to ` 10,00,000. No change in Corporate Income Tax rate and rate of Surcharge applicable to corporate For individual tax payers, a deduction of upto ` 10,000 for interest from savings bank accounts is proposed to be allowed It is proposed to allow deduction of upto ` 5,000 for preventive health check up. However the deduction is available only within the existing ceiling of ` 15,000/- prescribed under this section It is proposed to exempt Senior citizens not having income from business, from payment of advance tax In order to provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs is proposed to be reduced from 20 per cent to 5 per cent for 3 years for certain sectors Restriction on Venture Capital Funds to invest only in 9 specified sectors, proposed to be removed Proposal to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies at a lower tax rate of 15 per cent upto 31st March, 2013 Weighted deduction of 200 per cent for R&D expenditure in an in house facility extended for a further period of 5 years beyond March 31, 2012. It is proposed to provide weighted deduction of 150 per cent on expenditure incurred for agri-extension services It is proposed to extend the sunset date for setting up power sector undertakings by one year for claiming 100 per cent deduction of profits for 10 years Threshhold Turnover limit for compulsory tax audit of accounts and presumptive taxation of Small & Medium Enterprises to be raised from ` 60 lakhs to `1 crores. Sale of residential property exempted from Capital Gains tax if sale consideration used for subscription in equity of a manufacturing SME for purchase of new plant and machinery Security Transaction Tax (STT) reduced to 0.1% on cash delivery transactions as compared to 0.125% in the last year It is proposed to extend the levy of Alternate Minimum Tax to all persons, other than companies, claiming profit linked deductions TDS provisions to apply to transfer of immovable properties above specified value (other than agricultural land) at the rate of 1% TDS provision to apply on remuneration not in the nature of salary to Director at 10% Tax Collection at Source (TCS) made mandatory on cash sales of bullion and jewellery in excess of ` 2 lakhs and on sale of certain minerals at the TCS rate 1% General Anti Avoidance Rule is introduced to counter aggressive tax avoidance mechanisms Section 90 of the IT Act has been amended to provide clarification to any meaning assigned through government notification to a term used in agreement, but not defined in the IT Act or the DTAA Submission of Tax residency certificate made mandatory for claiming relief under DTAA Advance Pricing Agreement (APA) provision has been inserted in the Act to prevent inconsistency in pricing in international transactions Transfer Pricing provisions to also apply to certain domestic transactions between related persons for transactions in excess of ` 5 Crore in a year Various measures are proposed to deter the generation and use of unaccounted money

Indirect TAXES
Service Tax
Service tax rate proposed to be raised to 12 percent from 10 percent w.e.f. 1st April, 2012

INDIA BUDGET 2012


- An Analysis

It is proposed to tax all services except those in the negative list comprising of 17heads Simplified one page EST Return form for Central Excise and Service Tax Assessees to be introduced New scheme announced simplification of refunds for

manufacture for hybrid or electric vehicle and battery packs for such vehicles Reduction in Custom duty on Soya products, Iodine and Probiotics Proposal to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to 6 specified life saving drugs/vaccines Proposal to increase basic customs duty on imports of gold and other precious metals Import of foreign-going vessels to be exempted from CVD of 5 per cent retrospectively

Rules pertaining to point of taxation are being rationalized

Custom Duty Cars to attract ad valorem rate of 27 per cent No change in the peak rate customs duty of 10 per cent on nonagricultural goods Import of equipment for fertilizer plants fully exempt from customs duty for three years Full exemption from basic customs duty on natural gas, LNG, uranium for generation of electricity for 2 years Full exemption from basic customs duty to coal mining project imports. Full exemption from basic customs duty for equipment for road and highway construction Customs duty on import of parts of aircraft, tyres and testing equipment fully exempted Customs duty on warning systems/ track upgrade equipment for railways reduced from 10 per cent to 7.5 per cent Basic customs duty enhanced for certain categories of completely built units of large cars/MUVs/SUVs Concession from basic customs duty and special CVD being extended to certain items imported for

Excise Duty Excise duty raised from 10 to 12 per cent Excise duty on larg cars proposed o be enhanced Levy of excise duty of 1 per cent on branded precious metal jewellery to be extended to include unbranded jewellery Branded silver jewellery fully exempt from excise duty Chassis for building of commercial vehicle bodies to be charged excise duty at an ad valorem rate instead of mixed rate Excise duty rationalised for packaged cement, whether manufactured by mini cement plants or others Reduction in Excise duty on Soya products, Iodine and Probiotics Proposals to increase excise duty on demerit goods such as certain cigarettes, pan masala, gutkha, hand-rolled bidis, chewing tobacco, unmanufactured tobacco and zarda scented tobacco

Backdrop to the budget and recent Developments


INCOME TAX DOMESTIC TAXATION

RECENT CIRCULARS/NOTIFICATIONS
STEAMLINING PROCEDURE FOR SCRUTINY OF INCOME TAX RETURNS Central Board of Direct Taxes (CBDT) has reviewed its scrutiny selection procedure. CBDT has notified that during the financial year 201112, cases of senior citizens and small taxpayers who are filing income-tax returns in ITR-1 and ITR-2 will be subjected to scrutiny only where the Income Tax department is in possession of credible information. For this purpose, it has been further notified that Senior citizens would be those individual taxpayers who are 60 years of age or more and small taxpayers would be those individual and HUF whose gross total income, before availing deductions under Chapter VIA, does not exceed Rupees Ten lakh. EXEMPTION TO SALARIED TAXPAYERS WITH TOTAL INCOME UP TO ` 5 LAKH FROM FILING INCOME TAX RETURN The CBDT has notified the scheme exempting salaried taxpayers with total income up to ` 5 lakh from filing income tax return for Assessment Year 2011-12, which were due on July 31, 2011. Individuals having total income up to ` 5,00,000 for FY 2010-11, after allowable deductions, consisting of salary from a single employer and interest income from deposits in a saving bank account up to ` 10,000 are not required to file their income tax return. Such individuals must report their PAN and the entire income from bank interest to their employer, pay the entire tax by way of deduction of tax at source, and obtain a certificate of tax deduction in Form No. 16. Persons receiving salary from more than one employer, having income from sources other than salary and interest income from a savings bank account, or having refund claims shall not be covered under the scheme. The scheme shall also not be applicable in cases wherein notices are issued for filing the income

tax return under section 142(1) or section 148 or section 153A or section 153C of the Income-tax Act, 1961. COST INFLATION INDEX FOR 2011-2012 In exercise of the powers conferred by clause (v) of the Explanation to Section 48 of the Act, the Central Government has notified the Cost of Inflation for 2011-2012 as 785. LONG TERM INFRASTRUCTURE BONDS The Central Government has specified that only the bonds purchased from the following Corporations/Companies shall be specified as long term infrastructure bonds and will be eligible for deduction u/s 80CCF of Income-tax Act, 1961 for F.Y. 2011-12: Industrial Financial Corporation of India u/s 3 of Industrial Financial Corporation Act, 1948 Life Insurance Corporation of India u/s 3 of Life Insurance Corporation Act,1956 Infrastructure Development Finance Company Limited, a company formed and registered under Companies Act, 1956 India Infrastructure Finance Company Ltd., a company formed and registered under Companies Act, 1956 A Non-Banking Finance Company classified as an infrastructure Finance company by the RBI

The tenure of bond is for 10 years with a lock in period of 5 years. It is mandatory to furnish PAN to the issuer. PFCs TAX FREE BONDS Power Finance Corporation (PFC) has come out with a ` 5,000-crore tax-free bond issue. PFC is a Navratna Government of India undertaking with the Government holding 73.72% stake in it. Allotment will be made on a first-come-first-serve basis and the issue closed on January 16, 2012.

INDIA BUDGET 2012


- An Analysis

Investments below and up to ` 5 lakh will be considered as retail applications, while investments above. ` 5 lakh will be considered for allotment in the HNI category. There are two options under which investors can apply. The first option has a tenure of 10 years, and the interest payable is 8.2% per annum. The second option has a tenure of 15 years, with a higher interest of 8.3% per annum. The interest is tax free and there is no deduction of tax at source. MODIFICATION IN FORMS FOR APPLICATION/CORRECTION OF PAN The Central Board of Direct Taxes (The Board) has updated Form 49A for allotment of Permanent Accountant Number. Accordingly two new forms for allotment of Permanent Accountant Number have been introduced by scrapping old Form 49A. Form 49A in case of Indian Citizens/ Indian Companies/Entities incorporated in India/Unincorporated entities formed in India and Form 49AA in case of Individuals not being a citizen of India/ Entities incorporated outside India/ Unincorporated entities formed outside India. The instruction for filling the forms has been given alongwith. Hence from the date to be notified both the forms will come into force. SPECIAL PROVISION FOR PAYMENT OF TAX BY LLP The Central Board of Direct Taxes (The Board) in exercise of its powers has inserted rule 40BA where a report has to be furnished by assessee for computing adjusted total income and minimum alternate tax of the LLP under sub-section (3) of section 115JC in Form No. 29C. CBDT CIRCULAR ON PROCEDURE FOR REFUND OF EXCESS TDS DEDUCTED In supersession of the circular No. 285, dated 21-10-1980, the CBDT vide

its circular dated 27 April 2011 has prescribed the procedure for regulating refund of amount paid in excess of tax deducted and/or deductible in respect of TDS on residents covered under sections 192 to 194LA of the Income-tax Act, 1961. The excess payment to be refunded would be the difference between: (i) the actual payment made by the deductor to the credit of the Central Government and

(ii) the tax deductible at source. In case such excess payment is discovered by the deductor during the financial year concerned, the present system permits credit of the excess payment in the quarterly statement of TDS of the next quarter during the financial year. In case, the detection of such excess amount is made beyond the financial year concerned, such claim can be made to the Assessing Officer (TDS) concerned. However, no claim of refund can be made after two years from the end of financial year in which tax was deductible at source.

Safeguards to be exercised by Assessing Officer : To avoid double claim of TDS by the deductor as well as by the deductee, the Assessing Officer should examine such claim by exercising certain safeguards. The applicant deductor shall establish before the Assessing Officer that: (i) it is a case of genuine error and that the error had occurred inadvertently; that the TDS certificate for the refund amount requested has not been issued to the deductee(s); and

(i)

(ii) that the credit for the excess amount has not been claimed by the deductee(s) in the return of income or the deductee(s) undertakes not to claim such credit. Prior administrative approval of the Additional Commissioner or the Commissioner (TDS) concerned shall be obtained, depending upon the quantum of refund claimed in excess of Rupees One Lakh and Rupees Ten Lakh respectively. After meeting any existing tax liability of the deductor, the balance amount may be refunded to the deductor.

of 4 years, the A.O. sought to reopen the assessment to make a disallowance u/s 14A. The assessee challenged the reopening which was dismissed by the High Court on the ground that the Proviso to s. 14A bars reassessment but not original assessment on the basis of the retrospective amendment, the object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality. The Supreme Court dismissed the SLP by the assessee and held that re-opening of assessment is fully justified. SECTION 115JA/JB & SECTION 80HHC: DEDUCTION TO BE COMPUTED AS PER P&L PROFITS AND NOT BY NORMAL PROVISIONS In the case of CIT vs. BHARI INFORMATION TECH SYSTEMS (Supreme Court), the assessee had a loss as per the normal computation though it had a profit as per the P&L A/c. In computing the book profits u/s 115JA, the assessee claimed deduction u/s 80HHE, which was rejected by the AO. The Tribunal gave relief following the Special Bench judgement of the Tribunal in DCIT vs. Syncome Formulations 106 ITD 193 which was upheld by the High Court on appeal by the department on observations as under: In DCIT vs. Syncome Formulations 106 ITD 193 the Special Bench held in the context of S. 80HHC that the deduction is to be worked out not on the basis of regular income tax profits but it has to be worked out on the basis of the adjusted book profits in a case where s. 115JA is applicable. In the said judgment, the dichotomy between regular income tax profits and adjusted book profits u/s 115JA was clearly brought out and it was rightly held that in S. 115JA relief has to be computed u/s 80HHC(3)/(3A). It was held that once the law itself declares that the adjusted book profit is amenable for further deductions on specified grounds, in a case where S. 80HHC (80HHE in the present case) is operational, it becomes clear that computation for the deduction under those sections needs to be worked out on the basis of the adjusted book profit.

This circular will not be applicable to TDS on nonresidents falling under sections 192, 194E and 195 which are covered by circular No. 7/2007 issued by CBDT.

SUPREME COURT DECISIONS


SHARE TRANSACTIONS BUSINESS INCOME V. CAPITAL GAINS In case of CIT vs. Gopal Purohit, the Supreme Court dismissed the Departments Special Leave Petition against the judgment of the Bombay High Court in CIT vs. Gopal Purohit 228 CTR 582 (Bom) where it was held that: it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions namely, those by way of investment and those for the purposes of business, that there should be uniformity in treatment and consistency when facts and circumstances are identical particularly in the case of the assessee and that entries in books of account alone are not conclusive in determining the nature of income though they have a bearing.

DESPITE BAR IN PROVISO TO SECTION 14A, SECTION 147 REOPENING FOR EARLIER YEAR VALID The assessee did not make any disallowance u/s. 14A for AY 2000-01, as Sec. 14A was inserted subsequently by FA 2001 (w.r.e.f 1.4.62) and was tabled in Parliament on 28.2.2001. The A.O. did not make disallowance u/s. 143(3) but after the expiry

HIGH COURT DECISIONS


SECTION 37(1): DISTINCTION BETWEEN CAPITAL & REVENUE EXPENDITURE EXPLAINED In the case of Airport Authority of India vs. CIT (Delhi High Court), the expenditure incurred on

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INDIA BUDGET 2012


- An Analysis

removal of encroachments was claimed by the assessee as a revenue deduction on the ground that it was incurred in the normal course of the business. Full bench of the Court held that on facts, the land belonged to the assessee and the amount paid for removal of encroachers was not for acquisition of new assets. The payment was made to facilitate smooth functioning of the business i.e. in relation to carrying on the business in a profitable manner. The Court observed as under: Expenditure incurred for running the business or working it, with a view to produce profits is in the nature of revenue expenditure. The aim and object of the expenditure should be seen to determine its character; the source and manner of its payment or the fact that it is once and for all is not conclusive. Capital expenditure helps in the acquisition of a source of income. Expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period.

allowed it as deferred revenue expenditure. On appeal by the department, the Tribunal reversed the CIT (A) following Tecumesh India 132 TTJ 129 (Del) (SB) though it directed the AO to consider whether the payment was an intangible asset for purposes of depreciation. On appeal by the assessee, the High Court dismissed the appeal and observed that the assessee treated the non-compete expenditure as capital in nature in the books. Warding off competition in business even to a rival dealer will constitute capital expenditure. It is not necessary that the non-compete fee has to be paid to create monopoly rights. The non-compete agreement was to last for 5 years, which period is sufficient to give enduring benefit. SECTION 147: AO CANNOT ASSESS OTHER ESCAPED INCOME IF REASON FOR ISSUE OF SECTION 148 NOTICE DROPPED In the case of ACIT vs. Major Deepak Mehta (Chhattisgarh High Court), the AO reopened the assessment u/s 148 on the ground that certain income had escaped assessment. However, in the reassessment order, the AO did not assess the income which was referred to in the reasons but instead assessed other income which had escaped assessment. The Tribunal quashed the reassessment order on the ground that if the AO did not assess the income for which he had reopened the assessment, he had no jurisdiction to assess other escaped income. The Department challenged the Tribunals order by relying on Explanation 3 to s. 147 & Sun Engineering 198 ITR 297 (SC). The appeal of Department was dismissed by the High Court which decided as under: If the AO does not assess the income in respect of which section 148 notice was issued, it means there was no reason to believe that income had escaped assessment. If so, the AO has no jurisdiction to assess any

AMOUNT PAID FOR NON-COMPETE RIGHTS WHILE ACQUIRING BUSINESS IS CAPITAL EXPENDITURE In the case of Pitney Bowes India Pvt. Ltd. vs. CIT (Delhi High Court), the assessee acquired the mailing business of Kilburn Office as a going concern on a slump sale basis pursuant to a Business Transfer Agreement. The consideration for the transfer included non-compete fee for a period of 5 years. In the accounts, the expenditure was treated as a capital payment though a deduction was claimed in the computation u/s 37(1). The AO disallowed the claim though the CIT (A)

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other escaped income that comes to his notice during the reassessment proceedings. Though in Sun Engineering 198 ITR 297 (SC), it was held that the AO had jurisdiction to assess other income, it was not a case where the AO had not assessed the income in respect of which the S. 148 notice was issued. Explanation 3 to S. 147 also contemplates that the income in respect of which the S. 148 notice is issued is assessed

amount by way of security deposit. These deposits were assessed by the AO as deemed dividend u/s 2(22)(e). The High Court held that as the advance was in lieu of the company being permitted to mortgage the assessees flat, it was not gratuitous and so not assessable as deemed dividend. It observed that: The phrase by way of advance or loan s. 2(22) (e) must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares. If such loan or advance is given to such shareholder as a consequence of any further consideration received from the shareholder, then such advance or loan cannot be said to be deemed dividend u/s 2(22)(e). Thus, while gratuitous loan or advance given by a company to a substantial shareholder comes within the purview of s. 2(22) (e), a case where the loan or advance is given in return to an advantage conferred upon the company by the shareholder does not. SECTION 271(1)(c): DESPITE CONCEDING BAD DEBTS, ASSESSEE CAN RAISE NEW PLEA OF TRADING LOSS In the case of CIT vs. Sumangal Overseas Ltd (Delhi High Court), the assessee gave advances to its suppliers, a part of advance which was written off as bad debts and disallowed by the AO on the ground that the advances had never been treated as income and hence violated the conditions of s. 36(1)(vii) & 36(2). The assessee accepted the disallowance and penalty u/s 271(1)(c) was levied on the ground that when the accounts of a corporate assessee are duly audited by qualified Chartered Accountants, the claim of bona fide mistake is untenable. However, the Tribunal deleted the penalty on the ground that the write off, though not admissible as bad debts was allowable as a trading loss. The High Court confirmed and held that the claim was neither mala fide nor false but was bona fide and made after disclosure of facts. It observed that: In penalty proceedings, it has to be seen whether the claim was bona fide or was bogus and result of falsehood. Here, there was no dispute on the genuineness of the advances. A trading loss has a wider connotation than a bad debt. While a bad debt may also be a trading loss, a trading loss need not necessarily be a bad debt. A bad debt may not fall within the purview of s. 36(1)(vii) but may well be regarded as being eligible for deduction as being a trading loss.

SECTION 153A: ASSESSMENTS PENDING IN APPEAL DO NOT ABATE In the case of CIT vs. Smt. Shaila Agarwal (Allahabad High Court), for AY 2002-03, an addition was made by the AO & confirmed by the CIT (A). During the pendency of the appeal before the Tribunal, a search under s. 132 was conducted and s. 153A proceedings were initiated. The Tribunal held that in view of the s. 153A notice, the assessments of the six preceding assessment years prior to the date of search abated and that assessments pending in appeal would stand merged in the fresh assessment to be made by the AO. The AO was directed to reconsider the additions in the s.153A assessment. On appeal by the department, the decision of ITAT was reversed by Allahabad High Court which held as under: The second proviso to s. 153A provides that assessments relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search u/s 132 shall abate. The words pending on the date of initiation of search has to be assigned simple and plain meaning. If the assessment is finalized, there are no pending proceedings to be abated. The pendency of an appeal does not mean that the assessment proceedings are pending. The word abatement refers to something, which is pending or alive. Proceedings which are complete are not liable for abatement (Circular No. 7 of 2003 dated 5.9.2003) referred.

SECTION 2(22)(e) DOES NOT APPLY TO NONGRATUITOUS ADVANCES TO SUBSTANTIAL SHAREHOLDER In the case of Pradip Kumar Malhotra vs. CIT (Calcutta High Court), the assessee, a substantial shareholder in a closely held company, let out his flat to the company and also permitted it to be placed on mortgage. In consideration, the company passed a resolution authorizing the assessee to obtain from the company an interest-free deposit and he also received an

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INDIA BUDGET 2012


- An Analysis

SECTION 28(iv) WAIVER OF LOAN, WHETHER TAXABLE? In case of Logitronics Pvt. Ltd. v. CIT, the assessee, engaged in manufacture of electronic products, took a loan from SBI. Owing to its inability to repay the amounts due, the assessee entered into a settlement with SBI where a part of the principal amount of the loan was agreed to be repaid. The balance portion of the principal amount and the whole of the interest was waived. The assessee offered the amount of interest waived to tax though it claimed that the principal sum waived was a capital receipt. The Delhi High Court held that the answer to the question whether the waiver of a loan is taxable as income or not depends on the purpose for which the loan was taken. If the loan was taken for acquiring a capital asset, the waiver thereof would not amount to any income exigible to tax under section 28(iv) or 41(1). On the other hand, if the loan was taken for a trading purpose and was treated as such from the very beginning in the books of account, its waiver would result in income. SECTION 80-IB PRODUCTION OF AN INTERMEDIATE PRODUCT ALSO ELIGIBLE FOR DEDUCTION In case of Midas Polymer Compounds (P) Ltd. v. ACIT 237 CTR 401, the Kerala High Court (Full Bench) held that the words production of an article or thing in section. 80-IB doesnt necessitate production of final product in itself. Deduction under section. 80IB can be claimed even if the new industrial unit is producing a material to be used in production of final product. SECTION 154 and SECTION 147 SIMULTANEOUS PROCEEDINGS UNDER BOTH THE SECTIONS NOT VALID In case of CIT v. M/s. India Sea Food, the Kerala High Court held that if an assessment

happens to be an under-assessment or a mistaken order, the course open to the AO is either to rectify the mistake under section 154 or to make a reassessment under section 147. While, it is correct, as held in EID Parry 216 ITR 489(Mad.), that the AO has to choose between the two and cannot initiate both proceedings at the same time, the fact that the AO invoked section 154 and dropped it does not affect the validity of re-assessment under section 147. SECTION 271(1)(c)- NO PENALTY FOR TDS BREACH IF NO MALA FIED INTENTION OR DELIBERATE DEFIANCE OF LAW In case of CIT v. Cadbury India Ltd it was ruled by Delhi High Court that the assessee has not disputed the quantum is not a good ground for imposition of penalty since the findings in the assessment proceedings are not conclusive. It was further decided that to levy the penalty it is required by revenue authority to bring on record that the assessee has deliberately defied the provision of the law (Anwar Ali 76 ITR 696 (SC) referred) and levy of penalty u/s 271(1)(c) is not automatic. Before levying penalty, the AO is required to determine whether the failure was without reasonable cause. On facts, there is no reason to disbelieve the assessee that the deduction u/s 194C was being done on the misconceived professional advice given by a CA. No malafide intention of any kind can be attributed to the assessee for deducting tax under one provision of law than the other. This was neither the case of malafide intention nor that of negligent intention or want of bonafide, but a case of misconceived belief of applicability of one provision of law. SECTION 37 - ERP SOFTWARE PACKAGE ALLOWABLE AS REVENUE EXPENDITURE In case of CIT vs. Raychem RPG Ltd (Bombay High Court) the AO treated the

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expenditure incurred by the assessee on purchase of Enterprises Resources Planning (ERP) package as capital expenditure. Tribunal applied the functional test laid down by the Special Bench (presumably Amway India Enterprise vs. CIT 111 ITD 112 (Del)) and held that the expenditure was allowable as a deduction on the basis that the software facilitated the assessees trading operations or enabling the management to conduct the assessees business more efficiently or more profitably but it is not in the nature of profit making apparatus. Appeal filed by the department before the High Court was dismissed. NO PENALTY U/S 271(1)(C) FOR INCOME SURRENDERED IN SURVEY AND EVENTUALLY DISCLOSED IN THE RETURN OF INCOME In case of CIT v. SAS Pharmaceuticals, a survey was conducted pursuant to which the assessee surrendered a certain sum of money. In the return of income for the financial year of the survey, the assessee declared the said sum as income. The AO levied penalty u/s 271(1)(c). The Delhi High Court held that though it is possible that but for detection in the survey, the assessee might not have offered the income, penalty u/s 271(1)(c) can not be levied as the question of concealment of income or inaccurate particulars has to be determined with reference to the return of income. Since the assessee had offered the detected income in the return, there was neither concealment nor the furnishing of inaccurate particulars. LONG DELAY DUE TO PROCEDURAL REASONS IN FILING DEPARTMENT APPELAS CANNOT BE CONDONED In case of CIT vs. Indian Hotels Co Ltd, the Apex Court dismissed the SLP filed by the department challenging the order of the Bombay High Court declining to condone delay of 656 days in filing the appeal. The delay was explained as having been caused by several facts such as non traceability of case records, procedural formalities involved in the Department and the papers are to be processed through different officers in rank for their comments, approval etc. and then the preparation of the draft of appeal memo, paper book and the administrative difficulties such as shortage of staff. The Apex Court observed that the said explanation does not make out a sufficient cause for condonation of delay in filing the appeal before the High Court.

IF AO HAS ALLOWED SECTION 10A DEDUCTION, DRP CANNOT WITHDRAW IT Karnataka High Court decided that if A.O. had accepted that the assessee was eligible for section 10A deduction and had allowed deduction u/s. 10A for a lower amount than that claimed by the assessee, the DRP had no jurisdiction to hold that the assessee was not at all eligible for s. 10A deduction. It further ruled that if the assessee makes an alternate plea to DRP for deduction u/s. 10A, directions given by DRP to A.O. to consider alternate plea on merits is without jurisdiction. If such orders and directions are permitted to be allowed, it would defeat the object of the alternate dispute resolution. SECTION 14A: - NO S. 14A OR RULE 8D DISALLOWANCE WITHOUT SHOWING HOW ASSESSEES CALCULATION IS WRONG: In case of Maxopp Investments Ltd. Vs. CIT (Delhi High Court) the High Court had to consider whether interest paid on funds borrowed to acquire trading shares is hit by s. 14A given that the profits there from are assessable to tax as business profits and the dividend is incidental. The Court held that : The argument that if the dominant and main objective of the expenditure was not the earning of exempt income then, the expenditure cannot be disallowed u/s 14A is not acceptable. The expression in relation to cannot be given a narrow meaning and simply means in connection with or pertaining to. If the expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the Act; The expression expenditure incurred in s. 14A refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A (Hero Cycles Ltd 323 ITR 518 referred). The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. Rule 8D comes into play only when the AO records a finding that he is not satisfied with the assessees method.

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NO SECTION 14A DISALLOWANCE OF INTEREST ON BORROWED FUNDS IF AO DOES NOT SHOW NEXUS BETWEEN BORROWED FUNDS AND TAX-FREE INVESTMENTS The Tribunal deleted the disallowance made by the A.O. u/s. 14A on the ground that the investments had been made out of the assessees own funds and not out of the borrowed funds. In the appeal filed by Revenue in High Court, the Counsel for the Revenue could not point as to how interest on borrowed funds was attributable to earning dividend income which are exempt u/s 10(33) of the Act. The High court upheld the decision of the Tribunal and ruled that that in the absence of any material or basis to hold that the interest expenditure directly or indirectly was attributable for earning the dividend income, disallowance cannot be made. SECTION 147: RETROSPECTIVE AMENDMENT DOES NOT MEAN FAILURE TO DISCLOSE MATERIAL FACTS In the case of CIT vs. M/s K. MOHAN & Co.(Exports) (Bombay High Court), A.O. had reopened the assessment u/s. 147 by relying on the retrospective amendment to s. 80HHC by the Taxation Laws (Amendment) Act, 2005 w.e.f. 1.4.1998. The CIT (A) and Tribunal struck down the reopening hence, Department was in appeal before High Court. High Court dismissed the appeal and held that if the legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was failure on the part of the assessee to disclose fully and truly all material facts relevant for the purpose of assessment. SECTION 37: - PENALTY/FINE FOR VIOLATION OF PROCEDURAL LAW NOT HIT BY EXPLANATION TO S. 37(1): In case of CIT vs. The Stock and Bond Trading Company (Bombay High Court)

the assessee paid penalty/fine to BSE/ NSE for infringement of procedural rules such as failure to maintain margins, trading beyond exposure limits, late submission of margin certificates, delay in making payment & deliveries etc. The AO disallowed the claim for deduction on the ground that there was an infringement of statutory law laid down by SEBI and the Explanation to s. 37(1) was attracted. This was reversed by the Tribunal. On appeal by the department, the Bombay High Court dismissing the appeal held that as the payments made by the assessee to the Stock Exchange for violation of their regulation was not an account of an offence or which is prohibited by law, the invocation of the Explanation to s. 37 of the Act was not justified.

TRIBUNAL DECISIONS
SECTION 132: CASH SEIZED IN SEARCH HAS TO BE ADJUSTED AGAINST ADVANCE TAX It was held by ITAT, Rajkot in the case of Ram S. Sarda vs. DCIT that pursuant to search u/s 132, cash seized from the assessee and third parties and assessed as the assessees income be treated as payment of advance tax. The Tribunal observed that: S. 246 permits an appeal to be filed when the assessee denies his liability to be assessed which covers not just a total denial of liability but, also partial denial of the liability to pay interest u/s 234A, 234B and 234C which is a part of the assessment; S. 132B (1) provides that the assets seized u/s 132 may be adjusted against the amount of any existing liability and the liability determined on completion of the assessment. Existing liability includes liability to pay advance tax as its meaning is not restricted. Therefore, the cash

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seized ought to have been adjusted against that liability. The cash seized from third parties, and assessed in the assessees hands, retains the same character as cash seized from the assessee. SECTION 153A: ASSESSEE CAN AGITATE CLAIM WHICH WAS GIVEN UP AT SECTION 143(3) STAGE DCIT vs. Eversmile Construction Co. Pvt. Ltd (ITAT, Mumbai) - The AO passed order u/s. 143(3) by which he disallowed interest which was accepted by the assessee and it became final. Subsequently, pursuant to a search u/s 132, the assessee filed a return of income u/s 153A in which it reserved its right to claim deduction for the said interest which was earlier disallowed u/s. 143(3). The department contended that in s. 153A proceedings, the assessee was not entitled to seek relief on additions which were made in the original assessment as s. 153A did not permit assessment at an income lower than the one assessed in original assessment. ITAT, Mumbai held that: S. 153A requires the AO to make the assessment afresh and compute the total income in respect of each of the relevant six assessment years. There is no prohibition on the jurisdiction of the AO on the including of new income and likewise there is no restriction on the assessee to claim any deduction which was not allowed in the original assessment. As it is a fresh exercise of framing assessment of total income, the assessee is not estopped from arguing about the merits of his case as the additions made in the original assessment.

and the benefit derived from an asset. In a transaction of hire/leasing, the possession of the goods and its effective control is given to the customer and the customer has the freedom and choice of how to use the asset. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the owner, the control of the asset remains with the owner and there is no use by the customer. Since the transmission lines were under the possession & control of Power Grid., the assessee was merely enabled to use the services of transmission of electricity and not the use of transmission wires per se. The assessee was not involved in the actual operations of the transmission lines. The transmission wires were also used by other customers of Power Grid. Consequently, the payments were not rent u/s 194-I; Under the Explanation to s. 191, a person can be treated as an assessee in default u/s 201(1) only when, apart from the lapse in deduction of tax at source, the recipient of income has failed to pay such tax directly. S. 201(1) imposes vicarious (and not penal) liability on the payer to make good the shortfall in tax collection. If the tax liability is discharged by the recipient of income, the vicarious liability cannot be invoked.

SECTION 194-I TO BE RENT, PAYEE MUST HAVE CONTROL OVER ASSET Chattisgarh State Electricity Board(SEB) vs. ITO (ITAT, Mumbai)- The assessee, a SEB, entered into an agreement with NTPC for purchase of power and another with Power Grid Corporation for transmission of the power from NTPCs bus bars to the delivery point. The AO & CIT (A) took the view that the transmission charges paid by the assessee to Power Grid was rent for use of plant and tax ought to have been deducted u/s 194-I. It was held by the ITAT, Mumbai that the said payments were not rent u/s. 194-I, it observed as under: For a payment to be construed as rent, it is a condition precedent that the payer should have some control over the asset. There is a distinction between the use of an asset

SECTION 54EC DATE OF ISSUE OF CHEQUE TO BE TAKEN AS DATE OF: The Mumbai ITAT ruled in case of Kumarpal Amrutlal Doshi v. DCIT that Section.54EC relief is available if cheque is issued within 6 months of transfer of long term capital asset even if cheque is cleared and bonds are issued after 6 months. When a payment is made by cheque, the date of payment is the date of the cheque even though the cheque may be encashed subsequently. The law as it stood on the date of transfer of the capital asset has to be applied. The fact NABARD Bonds were specified assets as on the date of the transfer of capital assets but were no longer specified assets on the date of payment is no bar to claim the relief under section 54EC. MAINTAINABILITY OF STAY APPILICATION: In case of Honeywell Automation India Ltd. v. DCIT, the assessee filed a stay application before the AO, ACIT & CIT but none of the authorities

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dealt with it. The assessee also filed a stay application before the Tribunal which was opposed by the Department on the ground that the application was not maintainable without there first being a rejection by the lower authorities. Dismissing the departments objection, the Pune Tribunal held as follows: It is settled law that a Direct Stay Application filed before the Tribunal is maintainable and it is not the requirement of the law that assessee should necessarily approach the CIT before approaching the Tribunal for grant of stay. Further, it does not make any difference whether the assessee filed any application before the Revenue and did not await their decisions before filing application before the Tribunal or directly approached the Tribunal without even filing the applications before the Revenue authorities, when there exists threat of coercive action by the AO.

518 (P&H) where Abhishek Industries was distinguished. Hence, disallowance u/s 14A of interest on borrowed funds was not permissible if the investment in shares was made out of own fund. SECTION 271(1)(C) FAILURE TO VOLUNTARILY APPLY SECTION 50C DOES NOT ATTRACT PENALTY UNDER SECTION 271(1)(C) In case of Renu Hingorani v. ACIT it was held by Mumbai Tribunal that in the given case, A.O. had not questioned the actual consideration received by the assessee but the addition was made purely on the basis of the deeming provisions of section 50C. The A.O. had not doubted the agreement or given any finding that the actual sale consideration was more than the sale consideration stated in the sale agreement. The fact that the assessee agreed to the addition is not conclusive proof that the sale consideration as per agreement was incorrect and wrong. Accordingly, there was no concealment of income or furnishing inaccurate particulars of income. LARGE VOLUME IN SHARE NOT DECIDING FACTOR TO HOLD ASSESSEE TRADER In case of Ramesh Babu Rao v. ACIT, it was ruled by ITAT Mumbai that the assessee, a retired professor, offered gains from sale of shares as short-term capital gains (STCG). The AO assessed the gains as business profits. The Honble ITAT, Mumbai held that the assessee was an investor and the gains are assessable as capital gains on the following criteria: The assessee was a good timer of purchase and sale of shares thereby substantially increasing his gains in the stock market; The large turnover was because of bulk purchases and sales in scrip. There were very few transactions of purchase and sale, as the assessee

SECTION 14A DISALLOWANCE OF INTEREST ON BORROWING ON GROUND THAT ASSESSEE OUGHT TO HAVE REPAID BORROWING INSTEAD OF INVESTING IN TAX-FREE INVESTMENT In case of Godrej Industries Ltd v. DCIT, it was observed by the Mumbai Tribunal that as per the facts of the case, borrowed funds were utilized for business purposes and the investment in shares & units was made out of own funds. It held that the A.Os argument, relying on Abhishek Industries 286 ITR 1 (P&H), that the assessee could have utilized its surplus funds for repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT v. Hero Cycles Ltd 323 ITR

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was purchasing in block of a particular share in large volume. Accordingly, large volume cannot be a deciding factor to hold as a trader; The assessee was not a broker or sub-broker and did not have any office establishment; The assessee did not do any speculative activity nor indulge in any sales without delivery; The shares were shown as capital assets in the books of account; The assessee had not pledged any shares with any financial institutions, nor borrowed any funds.

persons fall in the definition of relative, an HUF is a group of relatives. As a gift from a relative is exempt, a gift from a group of relatives is also exempt since the singular will include the plural; The gift was also exempt u/s 10(2) because the two conditions required to be satisfied for relief viz (1) that the assessee is a member of the HUF and (2) that he receives the sum out of the income of such HUF (may be of an earlier Year) were satisfied.

SECTION 56(2) HUF IS A RELATIVE FOR EXEMPTION U/S 56 In case of Vineetkumar Raghavjibhai Bhalodia vs. ITO, the Rajkot Tribunal ruled that a gift received by the assessee from his HUF is exempt as HUF is covered under the definition of the relative. The Tribunal observed as under: S. 56(2)(v) exempts gifts from a relative. Though the definition of the term relative does not specifically include a Hindu Undivided Family, a HUF constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these

SECTION 40(a)(ia) DISALLOWANCE ON ACCOUNT OF SHORT DEDUCTION OF TAX In case of DCIT vs. M/s. S. K. Tekriwal (ITAT Kolkata), the Tribunal held that Section 40(a)(ia) provides for disallowance if amounts have been paid without deducting tax at source and that it does not apply to a case of short-deduction of tax at source. In the given case the assessee had deducted tax u/s 194C on machine hire charges. The AO was of the view that tax should have been deducted u/s 194J and accordingly disallowed the expenditure u/s 40(a)(ia). The Tribunal held that it was not a case of non-deduction of TDS. If there is a shortfall due to difference of opinion as to which TDS provision would apply, the assessee may be treated as a defaulter u/s 201 but no disallowance can be made u/s 40(a)(ia).

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INTERNATIONAL TAXATION SUPREME COURT


Transfer of shares of an Indian company between two foreign companies does not amount to transfer within the meaning of 4th limb of section 9(1)(i). (Vodafone International Holdings B.V. vs. Union of India) In February 2007, Vodafone International Holdings B.V (Vodafone), a Dutch entity, had acquired 100 percent shares in CGP (Holdings) Limited (CGP), a Cayman Islands company for USD 11.1 billion from Hutchinson Telecommunications International Limited (HTIL). CGP, through various intermediate companies/ contractual arrangements controlled 67 percent of Hutchison Essar Limited (HEL), an Indian company. The acquisition resulted in Vodafone acquiring control over CGP and its downstream subsidiaries including, ultimately, HEL. HEL was a joint venture between the Hutchinson group and the Essar group. It had obtained telecom licenses to provide cellular telephony in different circles in India from November 1994. Controversy In September 2007, the tax department issued a show-cause notice to Vodafone to explain why tax was not withheld on payments made to HTIL in relation to the above transaction. The tax department contended that the transaction of transfer of shares in CGP had the effect of indirect transfer of assets situated in India. Vodafone filed a writ petition in the Bombay High Court, inter alia, challenging the jurisdiction of the tax authorities in the matter. By its order dated 3 December 2008, the Bombay High Court held that the tax authorities had made out a

prima facie case that the transaction was one of transfer of a capital asset situate in India, and accordingly, the Indian income-tax authorities had jurisdiction over the matter. Vodafone challenged the order of the Bombay High Court before the Supreme Court. In its ruling, dated 23 January 2009, the Supreme Court directed the tax authorities to first determine the jurisdictional challenge raised by Vodafone. It also permitted Vodafone to challenge the decision of the tax authorities on the preliminary issue of jurisdiction before the High Court. In May 2010, the tax authorities held that they had jurisdiction to proceed against Vodafone for their alleged failure to withhold tax from payments made under Section 201 of the Income-tax Act, 1961 (the Act). This order of the tax authorities was challenged by Vodafone before the Bombay High Court. By its order dated 8 September 2010, the Bombay High Court dismissed Vodafones challenge to the order passed by the tax authorities. Vodafone filed a Special Leave Petition (SLP) against the High Court order before the Supreme Court. On 26 November 2010, SLP was admitted and the Supreme Court directed Vodafone to deposit a sum of INR 25000 million within three weeks and provide a bank guarantee of INR 85000 million within eight weeks from the date of its order.

After a detailed hearing before a threejudge bench headed by the Chief Justice of India, the Supreme Court delivered its verdict on the case on 20 January 2012. The key highlights of the decision are as under.

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Controversy on Interpretation of Section 9(1)(i) As per the section 9(1)(i), inter alia, income accruing or arising directly or indirectly from the transfer of a capital asset situated in India is deemed to accrue/ arise in India in the hands of a non-resident. In this connection, the Supreme Court made following observations: Charge to capital gains under Section 9(1)(i) of the Act arises on existence of three elements, namely, transfer, existence of a capital asset and situation of such asset in India. The legislature has not used the words indirect transfer in Section 9(1)(i) of the Act. If the word indirect is read into Section 9(1) (i) of the Act, then the phrase capital asset situate in India would be rendered nugatory. Section 9(1)(i) of the Act does not have look through provisions, and it cannot be extended to cover indirect transfers of capital assets/ property situated in India. The proposals contained in the Direct Taxes Code Bill, 2010, on taxation of off-shore share transactions indicate that indirect transfers are not covered by Section 9(1)(i) of the Act. A legal fiction has a limited scope and it cannot be expanded by giving purposive interpretation, particularly if the result of such interpretation is to transform the concept of chargeability which is also there in Section

share and not by virtue of various clauses of SPA. The Supreme Court went on to hold that where a structure has existed for a considerable length of time and where the Court is satisfied that the transaction satisfies all the parameters of participation in investment, then in such a case, the Court need not go into questions such as de facto control vs. legal control, legal rights vs. practical rights, etc in the context of determining taxability.

CGP Situs of Shares? In dealing with the tax authorities contention that CGP was interposed at a late stage in the transaction in order to bring in a tax-free entity and thereby avoid capital gains in India, the Supreme Court observed as follows: Two routes were available, namely, the CGP route and the Mauritius route. It was open to the parties to opt for any of the two routes. The transaction of sale was structured at an appropriate tier (i.e. the CGP route), so that the buyer acquired the same degree of control as was hitherto exercised by HTIL. Under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it was asserted that transfer of CGP shares were recorded in Cayman Island and this was not disputed by the tax authorities. Considering the entirety of the facts of the case, the Supreme Court held that the sole purpose of CGP was not only to hold shares in subsidiary companies but also to enable a smooth transition of business. Therefore, it could not be said that CGP had no business or commercial substance. Additionally, the Supreme Court also rejected the argument of the Revenue that since CGP was a mere holding company, the situs of its share was situated in India where its underlying assets were located. The tax authorities had contended that the transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH and that intrinsic to the transaction was a transfer of other rights and entitlements. It was further contended that such rights and entitlements

Relinquishment of HTILs interest The tax authorities argued that the rights of HTIL over the control and management of HEL constituted property in the hands of HTIL. Accordingly, the relinquishment of such rights under the Share Purchase Agreement (SPA) resulted in a taxable transfer of a capital asset situated in India. In this context, the Supreme Court reiterated the look at principle enunciated in Ramsay case, in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs. It is the task of the Revenue/ Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole, and not adopt a dissecting approach. By applying the look at test discussed above, the Supreme Court held that relinquishment took place because of the transfer of the CGP

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constituted capital assets, gains from the transfer of which were liable to tax in India. On this issue, the Supreme Court concluded that: As a general rule, in a case where a transaction involves transfer of shares, such a transaction cannot be broken up into separate individual components, assets or rights. The present transaction was a share sale and not an asset sale and concerned sale of an entire investment. A controlling interest is an incident of ownership of shares in a company, which flows out of the holding of shares and hence is not an identifiable or distinct capital asset independent of the holding of shares. In essence, the Supreme Court concluded that the character of the transaction was an alienation of shares, and that when parties had agreed on a lump sum consideration, there was no question of allocation of such consideration for transfer of any other rights or entitlements.

in tax avoidance or avoidance of withholding tax, then the tax authorities may disregard the form of the arrangement or the impugned action through use of holding companies and may re-characterize the equity transfer according to its economic substance and impose tax. The Supreme Court also went on to conclude that the corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device.

Holding and Subsidiary structures are lawful unless used as a colourable device Adverting to the issue of substance in a subsidiary company, the Supreme Court observed that it is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating companies, such as a Cayman Islands or Mauritius based company for both, tax and business purposes. The Supreme Court further held that if a Non-Resident makes an indirect transfer through abuse of the organization form/ legal form and without a reasonable business purpose, which results

McDowell and Azadi Bachao Andolan Not contradictory to each other In response to the various arguments put forth by the Revenue regarding the conflict between McDowell case and Azadi case, the Supreme Court observed that the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/ saving device, but it should apply the look at test to ascertain true legal nature of the transaction. The authorities may invoke the substance over form principle or piercing the corporate veil test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. Every strategic foreign investment coming into India should be looked at in a holistic manner, bearing in mind factors such as: the concept of participation in investment, the duration of time during which the holding structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; and the continuity of business on such exit.

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Merely because at the time of exit, capital gains tax becomes not payable or exigible to tax would not make the entire share sale (investment) a sham or a tax avoidant. The McDowell decision cannot be read as leading to a conclusion that all tax planning is illegal, illegitimate or impermissible and that there is no conflict between the Supreme Courts decisions in the McDowell and the Azadi Bachao Andolan case. The question of providing look through in the Statute or in the tax treaty is a matter of policy and has to be expressly provided for. Similarly, Limitation of Benefits (LOB) has to be expressly provided for in the tax treaty. Such clauses cannot be read into the Section by interpretation.

Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company. LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the tax department cannot pierce the veil and look at the substance of the transaction. India-Mauritius tax treaty and CBDT Circular No. 789 dated 13 April 2000 would not preclude the Income tax department from denying tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. The tax authorities, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty, are entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to them to discard the device and take into consideration the real transaction between the parties, and subject the transaction to tax. Even though the TRC can be accepted as conclusive evidence for accepting status of residents as well as beneficial ownership for applying the tax treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax. Revenues stand that the ratio laid down in the McDowell case is contrary to what has been laid down in Azadi Bachao Andolan case is unsustainable, and therefore, does not call for any reconsideration by a larger Bench. In trans-national investments, provisions are usually made for exit route to facilitate an exit on account of good business and commercial reasons such as dispute between partners, uncertain political situations, etc. Transfer of shareholding in CGP, on facts, was not the fall out of an artificial tax avoidance scheme or an artificial device, pre-ordained, or pre-conceived with the sole object of tax avoidance, but was a genuine commercial decision to exit from the Indian Telecom Sector.

The Supreme Court held that the question of withholding tax at source would not arise as the subject matter of offshore transfer between the two non-residents was not liable to capital gains tax in India. For the purposes of Section 195 of the Act, tax presence has to be viewed in the context of the transaction that is subjected to tax, and not with reference to an entirely unrelated matter. The Supreme Court further observed that as there was no incidence of capital gains tax in India, the provisions under Section 163 of the Act, for treating Vodafone as a representative assessee of HTIL, were not applicable. Concurring judgment of Justice K S Radhakrishnan - Highlights Justice Radhakrishnan gave a separate judgment, concurring with the views of the Chief Justice on all major issues. Some of the key additional observations of Justice Radhakrishnan in his judgment are summarized below: On incorporation of a company, the corporate property belongs to the company and members have no direct proprietary rights to it, but merely to their shares in the undertaking and these shares constitute items of property which are freely transferrable in the absence of any express provision to the contrary. In the absence of LOB Clause and the presence of CBDT Circular No. 789 of 2000 and Tax Residency Certificate (TRC), on the residence and beneficial interest/ownership, the tax department cannot at the time of sale/ disinvestment/exit from such Foreign Direct Investments (FDI), deny benefits to such

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Section 9 of the Act covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in India. Section 9 of the Act has no look through provision and such a provision cannot be brought through construction or interpretation of a word through in Section 9 of the Act. Shifting of situs can be done only by express legislation. The facts in the instant case can be distinguished from that of Eli Lily case where services were rendered in India and a portion of salary was received in India. Section 195 of the Act would apply only if payments are made from a resident to another non-resident and not between two non-residents situated outside India.

HIGH COURT
Payment for shrink wrapped software/ off-the-shelf software amounts to Royalty (CIT Vs Synopsys International Old Ltd. - Karnataka High Court) The assessee was an Irish Company which is a subsidiary of Synopsys US. The assessee entered into a Technical License Agreement (TLA) with its parent company, wherein, Synopsys US granted a license to the assessee for using and commercially exploiting the intellectual property in the Electronic Design Tool and Software in certain geographies. Synopsys US wanted the assessee to enter into End User License Agreement (EULA) with the customers to protect the right of the product. The assessee received certain payment from its Indian customers for supply of the aforesaid software. The assessing officer treated these receipts as Royalty under Section 9(1)(vi) and Article 12 of the double taxation avoidance agreement

(treaty). The CIT(A) held that if it was use of a copy righted article, there would have been no need for an agreement of licence. He was of the opinion that the payment was for the right to use the software and hence royalty. The assessee filed an appeal to tribunal, the tribunal relying on the ruling of Samsung Electronics, decided that payments were not in the nature of royalty in favor of the assessee. On further appeal by the department before the High Court, it was held that, the decisions relied upon by the assessee dealt with the issue as to whether there was a transfer of a right in a copyrighted article. The High Court held that, if the consideration does not fall within the definition of capital gains or within the second proviso to section 9(1)(vi), then the consideration would be royalty under explanation 2(v) to section 9(1)(vi). The crux of the issue is that whether any consideration was paid for any right or for granting of license in respect of copyright. The Court held that, the words in respect of as given in explanation 2 to section 9(1)(vi) gives a broader meaning and must be used in the sense as being connected with. The High Court going by the definition of Royalty as provided in the Act and in treaty held that, in terms of the tax treaty, the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes Royalty and therefore attracts tax. The consideration is taxable as Royalty both under the treaty and the Act. Assessee did not constitute a Construction PE under the DTAA as the contract carried on by the assessee did not exceed the threshold period provided under the DTAA (CIT, Dehradun v BKI/HAM v.o.f.Uttarakhand High Court) The assessee is a partnership firm consisting of Boskalis International B.V. and Hollansche Aanneming Maatschappij

23

B.V. (BKI/HAM) incorporated under the laws of Netherlands with a limited liability. The assessee entered into a sub-contract for dredging a trench for laying a pipeline and back filling of the trench after laying of the pipeline with Hyundai Heavy Industries. The contract spilled over two assessment years, i.e.1994-95 and 1995-96 and that the entire duration of the work was less than six months. The assessee had an office in Mumbai. First and Second appellate authorities held that there is no PE in favour of the assessee. The Revenue preferred an appeal to the High Court with the contention that the assessee had a permanent establishment in terms of Article 5(2) of the DTAA between India and Netherlands. In view of clause (3) of Article 5 of the treaty, it was held that for a building site or construction, installation or assembly project to be constituted a permanent establishment, such project shall continue for a period of more than six months. Since the dredging activity was covered under Article 5(3) of the treaty and the activity in India under the said contract did not exceed more than six months, as such, the assessee did not have a permanent establishment in India and, therefore, no portion of its income was chargeable in India. The argument that the Mumbai office was a PE under Article 5(2) was not accepted since the Court is of the opinion that Article 5(2) is a general provision whereas Article 5 (3) is a specific provision which prevails over Article 5 (2) of the treaty. Thus, the court held that the assessee did not have any Permanent Establishment in India within the meaning of Article 5 of the Double Taxation Avoidance Agreement entered between India and Netherlands and no part of the revenue earned by the assessee was taxable in India. Profits From offshore Supply of Hardware and Software Not Taxable (DIT vs Ericsson AB - Delhi High Court) The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). The assessee claimed that the income arising from the said activity was not chargeable to tax in India. The AO & CIT (A) held that the assessee had a business connection in India u/s 9(1)(i) & a permanent establishment under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as royalty u/s

9(1)(vi) & Article 13. On appeal, the Special Bench of the Tribunal (Motorola Inc 95 ITD 269 (Del)) held that as the equipment had been transferred by the assessee offshore, the profits there from were not chargeable to tax. It was also further held that the profit from the supply of software was not assessable to tax as royalty. On appeal by the department to the High Court, it was held that profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a turnkey project or works contract was not relevant. The fact that the assessee took overall responsibility was also not material. Though the supply of equipment was subject to the acceptance test performed in India, this was not material because the contract made it clear that the acceptance test was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a business connection in India. The question whether the assessee had a Permanent Establishment was not required to be gone into. Further, it held that argument that the software component of the supply should be assessed as royalty is not acceptable because the software was an integral part of the GSM mobile telephone system and was used by the cellular operator for providing cellular services to its customers. It was embedded in the equipment and could not be independently used. It merely facilTribunaled the functioning of the equipment and was an integral part thereof. The fact that in the supply contract, the lump sum price was bifurcated is not material. There is a distinction between the acquisition of a copyright right and a copyrighted article. Therefore , based on above findings High court dismissed the appeal of the revenue.

INCOME TAX APPELLATE TRIBUNAL


Payment for website hosting shall not be treated as Royalty. (ITO Vs People Interactive India Pvt Ltd - TRIBUNAL Mumbai) The assessee is an owner/host of website Shaadi.

24

INDIA BUDGET 2012


- An Analysis

com, a matrimonial website. The assessee procured advances dedicated hosting solution service from Rackspace Inc, USA, to host and run its matrimonial website. It obtained a certificate from the chartered accountant stating that the payment so made did not attract withholding tax provisions U/s 195, therefore, no income accrue in India for Rackspace Inc as per Art 7 of the India-US DTAA. The assessing officer contented that the payment so made would be taxable as Royalty since it amounts to use of industrial, commercial and scientific equipment. Therefore, the payment made to Rackspace Inc was taxable under explanation (iva) of section 9(1)(vi). On appeal before the tribunal, it was held that, the payment made to Rackspace Inc was of business nature and in the absence of PE in India, it was not taxable. Further, the tribunal held that, since the server was in possession of Rackspace Inc, the assessee could neither operate nor have physical access to the equipment. The tribunal made also observed that in the case of the assessees own case for another assessment year, the CIT(A) and the AO had accepted that the tax was not deductable for hosting charges paid to Rackspace Inc. The Tribunal made reference to the decision of the Delhi High Court in case of Asia Satellite Telecommunications Co. Ltd. and Supreme Court in case of GE India Technology Centre P. Ltd. Reinsurance brokerage income of nonresident will not be taxable as fees for technical service/fee for included service under Indo-UK DTAA (Guy Carpenter & Co. Ltd. vs. ADIT- Delhi Tribunal) A Insurance Company in India, who avails the services of the assessee as a broker in the process of the re-insurance of the risk is left with no technical knowledge, experience, skill, know-how or processes so as to bring the services rendered by the assessee within the ambit of Article 13(4)(c) of the Treaty. Further,

the nature of services rendered by the assessee were also not in the nature of any technical or consultancy services which make available technical knowledge, experience, skill, know-how or processes to the user. On a appeal by assessee before the tribunal, it was held that, the payment received by the assessee in consideration for rendering intermediary or advisory services in the process of selecting reinsurer cannot be qualified to be in the nature of fees for technical services as contemplated under Article 13(4)(c) of the DTAA between India & UK. Further, it well settled law that where the provisions of the DTAA are applicable and are beneficial to the assessee, same would be applicable to the assessee. Since the payment received by the assessee is not qualified to be in the nature of fees for technical services within the meaning of Article 13(4)(c) of the treaty, the payment received by the assessee from the Insurance Company in India, cannot be brought to tax in India as fees for technical services. Further, since it was not the case of the revenue that the assessee has a PE in India so that the amount received by the assessee is otherwise taxable in India under any other Articles of DTAA between India and U.K. Salary paid to foreign resident staff at foreign jurisdiction - whether income will be deemed to accrue or arise in India and tax will be deducted at source. Will deduction be allowed for such amounts as expenses? (DCIT v. Mother Dairy Fruits & Veg (P.) Ltd. - Delhi Tribunal) The assessee, an Indian company, paid salary to staffs at Netherlands, who were residents of Netherlands. The assessee did not deduct tax at source on the salary payments made to staff at Netherlands. Assessing Officer invoked the provisions of 40(a)(iii) and disallowed the payments made on the ground that the tax was not deducted under section 192. The assessee submitted that the salary payments were

25

neither received nor deemed to have been received in India and the salary was also not earned in India as services had been rendered outside India. Since, the salary was not taxable in India, the assessee contended that there was no requirement of deducting tax at source. The Assessing Officer rejected the assessees explanation and disallowed the payments. On appeal, CIT(A) accepted the stand of the assessee. On appeal by the department to the tribunal it was held that for the applicability of provisions of section 40(a)(iii) the payment should be chargeable to tax under the head Salaries. Section 192 provides that any person responsible for paying any income chargeable under the head Salaries shall at the time of payment deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for financial year in which the payment is made. The provisions of clause (ii) of section 9(1) deal with the income under the head Salaries if it is earned in India. Its importance lies in its discarding the test of source in favour of earning test in the imposition of charge of income under the head Salary. The result of this provision is that the place of payment or receipt of salary is immaterial. If the salary is earned in India, that is, by dint of service rendered in India, it is deemed to accrue or arise in India and is taxable where so ever the salary may happen to be paid or stipulated to be paid by the service contract. Since salary paid to non residents for services rendered in Netherlands was not chargeable to tax in India, provisions of section 192 can not be applied hence, provisions of section 40(a)(iii) of the Act will not be applicable and accordingly disallowance under section 40(a) (iii) cannot be made in respect of salary paid to non-residents for the services rendered abroad. Interest on Tax refund not effectively connected with Permanent Establishment (ACIT v Clough Engineering Ltd. - Delhi Tribunal SB) The assessee, an Australian company, had a Permanent Establishment (PE) in India from which it carried on business in India. The assessee entered into contracts with certain Indian companies. The major scope of work was in respect of designing, engineering, procuring, fabricating, installing, laying pipe lines, testing, pre-commissioning of off-shore platforms etc. The income declared by the Assessee Company inter alia included interest on income-tax refund and the assessee claimed that the interest was taxable on gross basis at 15% under Article 11(2) of the DTAA between India and Australia. However, the Assessing Officer came to the conclusion that the interest income was taxable

under article 7 read with paragraph 4 of Article 11 as the indebtedness is effectively connected with the PE because the tax has been deducted at source from the business receipts. The CIT (A) upheld the order of the Assessing Officer. On appeal by the assessee to the TRIBUNAL it was held Under Article 11(4) of the DTAA, interest from indebtedness effectively connected with a PE of the recipient is taxable under Article 7 and not under Article 11. Even if the debt was connected with receipt of the PE, it could not be said to be effectively connected with such receipts because the responsibility to pay the tax lay on the shoulders of the assessee-company from the final profit ascertained as on the last the date of previous year and on closing the books of account. The payment of tax is the responsibility of the non-resident company and not that of the PE. Therefore, the PE is not the creditor of the incometax department. Accordingly, the indebtedness is not effectively connected with the PE. Thus such collection of tax by force of law would not establish effective connection of the indebtedness with the PE as ultimately it was only the appropriation of profit of the assessee company. The interest was not effectively connected with PE either on the basis of asset-test or activity-test. Accordingly, this part of interest was taxable under paragraph 2 of Article 11. Payments to foreign companies for uploading and display of banner ads cannot be Royalty under ITA. (Yahoo India Pvt Ltd v/s DCIT - TRIBUNAL Mumbai) Yahoo India Pvt Ltd, an Indian company, remitted ` 34 lakhs to Yahoo Holdings (Hong Kong) Ltd, a Hong Kong company, for placing banner advertisements on the web portal of Yahoo Hong Kong for Department of Tourism of India. The AO & CIT (A) took the view that the payment was towards Royalty u/s 9(1)(vi) [Expl 2 Clause (iva) for the use or right to use any industrial, commercial or scientific equipment] for use of server of Yahoo Hong Kong and thus disallowed such payment for non-deduction of tax at source. Yahoo India Pvt Ltd appealed before tribunal against the order of CIT(A). On appeal, tribunal held that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If the customer did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment, there was no scope to invoke clause (iva) in such a case because the element of

26

INDIA BUDGET 2012


- An Analysis

service predominated. Payment was not in the nature of Royalty since uploading and display of banner advertisement on its portal was entirely the responsibility of Yahoo Holdings (Hong Kong) Ltd and Yahoo India Pvt Ltd was only required to provide the banner ad to Yahoo Holdings (Hong Kong) Ltd for uploading the same on its portal. Yahoo India Pvt Ltd thus had no right to access the portal of Yahoo Holdings (Hong Kong) Ltd and there is nothing to show any positive act of utilization or employment of the portal of Yahoo Holdings (Hong Kong) Ltd by Yahoo India Pvt Ltd. Payment for data processing charges cannot be said to be made for the use of process. It does not therefore amount to Royalty. (Standard Chartered Bank v/s DDIT - TRIBUNAL Mumbai) Standard Chartered Bank (SCB) is a UK bank carrying on business in India. It entered into an agreement with Sema Group, Singapore (SPL), for the provision of data processing support to the assessee for its business in India. SPL had a Data Centre at Singapore which it agreed to make available for exclusive use by the assessee for a specified period. Broadly, the service rendered was that the raw data relating to branch transactions of the SCB was transmitted to SPLs mainframe computer in Singapore for processing. The raw data was processed by SPLs staff as per the requirements of the SCB using the application software owned by the SCB. The processed data, i.e., the output data was transmitted electronically to the SCB in India using the software provided by the SCB, which was not designed by SPL. The AO & CIT (A) held the payments made by the SCB to SPL to be Royalty u/s 9(1)(vi) & Article 12 of the DTAA on the ground that the provision of the computer facility to process the data was consideration for use of a process. On appeal by SCB to the Tribunal, the Tribunal observed that what was used by

the SCB was only the computer hardware owned by SPL since the application software was owned by SCB. The payment in question was therefore held to be a payment for a facility which was available to any person willing to use the facility for processing of data and that the consideration could not be said to be a consideration paid for use or right to use process as the processing of the data was done by SPL using the system software owned by the SCB.
[Note: The income tax department had also contended that the consideration was for the use or right to use, any industrial, commercial or scientific equipment. Similar to reasoning given by the Tribunal in the case of Yahoo India Pvt Ltd, it held that the payments also did not constitute equipment royalty.]

CA Certificate does not determine taxability of non-resident in India (Dy. CIT v. Rediff.com India Ltd. - TRIBUNAL Mumbai) The assessee was engaged in the business of internet related services and was a prominent online provider of news, information and shopping services. The Assessing Officer (AO) observed that tax was not deducted on payments made to non-residents in respect of legal fees, photography charges and bandwidth charges. The AO held that tax was required to be deducted u/s.195 of the Income Tax Act, 1961 (ITA) also disallowing the payments made to nonresidents u/s. 40(a)(i) of ITA. CIT (A) held that since there was no finding by AO to effect that income embedded in these payments to non-residents was taxable in India, the assessee did not have any obligation to deduct tax at source, and since a certificate from a Chartered Accountant certifying Nil deduction of tax was obtained, disallowance under section 40(a)(i) cannot stand; thus, in effect holding the Chartered Accountants certificate as conclusive to finalize the tax liability of the non-resident recipient.

27

However, the TRIBUNAL, with reference to the decision taken by the Honble Apex Court in the case of GE India Technology Centre (P) Ltd. (2010) 327 ITR 456, held that tax withholding liability arises u/s. 195(1) of ITA only if the payment is chargeable to tax in the hands of the non-resident recipient. Further, it was held that tax withholding liability is a vicarious liability on behalf of the recipient and therefore, when the recipient does not have primary liability to be taxed in respect of the income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. The AO had not demonstrated liability to tax and hence, he was in default for invoking disallowance u/s. 40(a)(i) on grounds of non deduction of tax . The TRIBUNAL further held that, although the assessee can approach an independent Chartered Accountant for determination of his tax withholding liability and make remittance on the basis of the certificate issued by him, such a certificate on the question of taxability of income in the hands of the recipient non-resident is only a prima-facie evidence about the taxability which is at the assessees own risk of consequences which follow the short/non-deduction of tax at source. The Chartered Accountants certificate cannot substitute for adjudication on taxability in the hands of non-resident by the AO and neither can the assessee use it as a shield to thwart any probe by the AO. Thus, in the aforesaid case, the finding of CIT(A) was reversed. Rendering of interior designer consultancy, landscape architectural services in relation to construction administration/conservation were in the nature of advisory services and could not be treated as Fees for Technical Services. (ACIT, Hyderabad v Viceroy Hotels Ltd. TRIBUNAL Hyderabad) The Assessee was engaged in the business of running hotel at Hyderabad which was converted into a Marriot Chain Hotel under a franchise. Assessee undertook an expansion program for the purpose of which it entered into separate agreements with four different non-resident companies in different jurisdictions for the provision of interior designer consultancy, landscape architectural services, etc. Contending the payments under the agreements to be in the nature of professional services, being outside the scope of taxability, the payments were made without deducting tax at source u/s. 195. The assessing officer (AO) held the payments to be in the nature of Fees for included service/Technical Services. Confirming the order passed by CIT (A), the tribunal held that assessee was not eligible to

deduct TDS u/s 195 in view of the following: a) The services did not involve technical expertise, nor did it make available any technical know-how plan, design, etc. What was being done was basically inspection of the hotel, reviewing the facilities, comparing the same with Marriots standards and suggesting improvements/change wherever required to meet the Marriots standard and such services were in the nature of advisory and review services. The non resident entities themselves were not preparing and transferring any drawing, designs, technical plan, but were merely reviewing the facilities. Administration/conservation was not in the nature of fees for technical services, because this part of the job required the contractor only to attend and inspect as well as review periodically work-in-progress. This part of job did not envisage making available any technical knowledge or design, drawings, documents, etc. The services provided were in the nature of advisory services and not of technical services, as there was no transfer of technology but only installation of electrical fittings.

b)

c)

d)

Laying pipelines and related supervisory work constitutes construction or assembly activity and does not elicits permanent establishment if not carried on for more than nine months. (GIL Mauritius Holdings Ltd vs. ADIT TRIBUNAL Delhi) Assessee Company, a tax resident of Mauritius had entered into an agreement to carry out offshore transportation and installation of pipeline with B. G Exploration & Production India Ltd (BG) who is a co-venturer with ONGC Ltd and Reliance Industries Ltd for production sharing agreement in respect of Panna, Muktha and South Tapti contract areas. Assessee contested that the work undertaken by it constituted construction or assembly activity and since the said work was not carried on for more than 9 months, it would not constitute PE in India from a reading of Para 5(2)(i) (India- Mauritius DTAA). However, the AO argued that the assessees case attracted Para 5(1) of the DTAA, holding that the assessee had a PE in India. The DRP upheld AOs views. On appeal before the Tribunal, the question arose a) whether the assessee has PE in India, b) if yes, whether the provisions of section 44B if ITA would apply and c)

28

INDIA BUDGET 2012


- An Analysis

whether the assessee is liable for interest u/s 234B of ITA. On hearing, the Tribunal held assessees work to be in the nature of construction or assembly attracting the provisions of Para 5(2)(i) wherein the assembly project would be treated as PE only if it continues for a period of more than 9 months under India-Mauritius DTAA. Tribunal observed that if PE was to be determined only under Article 5(1) of the treaty then Article 5(2) will become redundant and hence Article 5(1) and Article 5(2) are to be read together. Since question is in favor of the assessee, Tribunal avoided to consider question (b) and (c) and remanded the issue back to AO to ascertain the period of existence of assessee in India so as to determine the existence of PE in India in terms of Artile 5(2) of the DTAA. Payment for live telecast of event is neither royalty nor income arising from business connection and therefore, there is no requirement of deduction of tax at source u/s 195. (ADIT vs. Neo Sports Broadcast Pvt TRIBUNAL Mumbai) The assessee entered into an agreement with Nimbus, a Singapore entity, for receiving and broadcasting matches that were to be played in Bangladesh. The signals to be broadcast were on account of live matches as well as recorded matches. The assessee applied for a certificate u/s 195 of the Act for lower/ nil deduction of tax in which it accepted that the payment on account of recorded matches was in the nature of royalty but claimed that the payment towards live matches was not covered within the definition of royalty and hence not taxable. The Revenue preferred an appeal to the Tribunal, contending that the payment for both, live matches and recorded matches were assessable as royalty. It also contended that since the matches were to be broadcast in Indian territory and the income by way of advertisements

and subscription was to be received by the assessee, there was a business connection of Nimbus in India. On the question of whether payments made for live telecast of an event bears the character of royalty, having regard to the definition given u/s. 9(1)(vi) royalty includes among other things, the transfer of all or any rights in respect of any copyright. However, the Tribunal held that the live telecast of a match/ event cannot be considered as transfer of copyright. Under the Copyright Act, the term copyright means the exclusive right to use the work in the nature of cinematography. The question of granting exclusive right to do any work can arise only when such work has come into existence. The existence of work is a precondition and must precede the granting of exclusive right for doing of such work. The Tribunal also affirmed its opinion after referring to the Direct Tax Code Bill, 2010, where the proposed definition of royalty explicitly includes live coverage of any event thereby signifying that granting of license for live coverage is independent of transfer of copyright. On the question of whether such payments comprise income arising from Business Connection The Tribunal held the departments argument to be incorrect because Nimbus has merely given a license for the live broadcast of the matches and continues to retain the rights in such broadcast. In order to constitute a business connection, it is necessary that some sort of business activity must be done by the nonresident in the taxable territory of India. Where the non-resident only allows some resident to exploit certain right vested in it on a commercial basis, it cannot be said that the non-resident has carried out any business activity in India. Thus, the mere act of allowing the assessee to broadcast the matches

29

for a defined consideration does not constitute a business connection in India. In summary, since the consideration for live broadcasting does not fall within the purview of s 9(1)(i) nor s. 9(1)(vi), such amount is not chargeable to tax under the provisions of this Act in the hands of the non-resident. As such there is no question of deduction of tax at source and the appeal of the Revenue was dismissed. Even though agents acts independently in ordinary course of business, if they devote their activities wholly or mostly wholly on behalf of foreign enterprise, they would be considered as PE of foreign enterprise irrespective of whether they conclude contracts binding on their principal or not. (M/s.Reuters Limited Construction House Vs. JCIT TRIBUNAL Mumbai) The assessee is a tax resident of UK which provides news and financial information products across the world through the Reuters Global Network. It provides Reuters Products to its Indian subsidiary, Reuters India Limited (RIL) who in turn distribute the Reuters products to Indian subscribers. The assessee and RIL entered into certain agreements such as Distributor Agreement (DA), Product Distribution Agreement (PDA) and License Agreement (LA). In consideration for the same, RIL paid the assessee distribution fees of 65% of the subscription for DA, a product distribution fees (ranging from 20 to 55%) for PDA and license fee (i.e. royalty) amounting to 1% of its total subscription for LA derived by RIL from the Indian subscribers. The issue that was considered by the Tribunal in the above appeal relates to taxability of the distribution fee received by the assessee. The AO treated the distribution fee payable under the DA as Fees for Technical Services (FTS) as per Article 13 of the India-UK-Treaty (DTAA). He treated the amounts received under PDA to be in the nature of business income. Further the AO proceeded to hold RIL as a dependent agent of the assessee on the basis that RIL had conducted business solely for the assessee in India. Therefore before CIT (A), the assessee raised two issues : One, whether RIPL could be treated as deemed PE of the assessee in India and two, what was the nature of payments (distribution fee). The CIT(A) held that there was no PE of the assessee in India and distribution fee paid under the DA is business profits. However, the Revenue contended the findings of the CIT(A) on the first issue before the Tribunal. The CIT(A) on this

issue referred to Article 5(4) of the DTAA and held that the RIPL did not fulfill the conditions laid down in the said Article and cannot be considered as a Dependent Agent of the assessee so as to constitute a PE of the assessee in India but acts independently in the ordinary course of its business, if they devote their activities wholly or mostly wholly on behalf of the foreign enterprise, they would be considered independent agents and would be PE of the foreign enterprise irrespective of whether they conclude contracts binding on their principal or not. As a result the miscellaneous application is without merit and the same is liable to be dismissed as the same does not disclose any apparent error in the order of the Tribunal. Hence the miscellaneous application is dismissed.

AUTHORITY FOR THE ADVANCE RULING


Payment for use of equipment id taxable as royalty and its related activities is taxable as FTS. Further, preparatory activities are to be included while determining the permanent establishment in India (Global Industries Asia Pacific Pte Ltd.) The applicant, a Singapore based company entered into contract with Indian Oil Corporation Ltd (IOCL) and Larsen & Toubro (L&T). The contract with the IOCL involves residual offshore construction work in the navigational waters of Paradip Port Trust, Orissa, installation of Single Point Mooring (SPM) including anchor chains, floating and subsea hoses. The applicant was of the view that since his presence in India is only for 41 days during the relevant financial year, no PE is created under the treaty. Further, the contract with L&T involves installation work in the waters of Mumbai High South field. During FY 2008- 09, the applicant was present in India only for 119 days and in FY 2009 - 10 for 49 days. Therefore the applicant was of the view that it does not have PE in India. Alternatively, the applicant is of the view that if t he benefits under the tax treaty are not granted then the receipts are taxable under Section 44BB of the Act. The Assessing Officers (AO) issued orders to withhold tax by treating the payments under the contract with IOCL as royalty under the Act as well as under Article 12 of the tax treaty by grossing up, and, the payments under the contract with L&T under Section 44BB of the Act. On an appeal made to AAR, the AAR ruled that, contract with IOCL is not for installation alone. If during the activities of installation, income in the nature of royalty or FTS or interest or of any other nature arises, then such an income has to be assessed under that head of income. Further, IOCL is paying for each

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INDIA BUDGET 2012


- An Analysis

of the items separately, even though it is a composite contract. The AAR relied on the judgment of Ishikawajima - Harima Heavy Industries Ltd. and Richardson & Cruddas Ltd. and held that, from entire payment the payment for mobilization and de- mobilization is related to use of equipment for undertaking installation work and taxable as royalty under Article 12(3)(b) of the tax treaty. Further, the part of entire payment relates to installation. As installation is ancillary and subsidiary to the use of equipment or enjoyment of the right for such use, the payment for installation is taxable as FTS as per Article 12(4)(a) of the tax treaty. Further, the AAR in case of the applicants contract with L&T held that, the scope of Article 5(5) is wide and deals with provision of services or facilities in connection with the exploration, explo Tribunalion or extraction of mineral oils. As per Article 5(5) of the tax treaty duration for which services or facilities are provided is to be considered to determine the PE. It stated that, while the negotiations prior to 17 March 2008 can be termed as preliminary and can be ignored for the purposes of Article 5(5) of the tax treaty, the rest of the activities of the applicant including surveys, drawing, designs and getting materials ready and transportation are preparatory in nature. The duration of performing these preparatory activities cannot be excluded while calculating the duration of provision of services or facilities to determine the PE under Article 5(5) of the tax treaty. Accordingly, the AAR held that the applicant has provided services or facilities in connection with the exploration, exploTribunalion or extraction of mineral oils for more than 183 days during the FY. Therefore, the applicant has a PE in India under Article 5(5) of the tax treaty and covered by Section 44BB of the Act.

Payments received by owner of copyright in software from distributor for sale of software product to end-users is royalty within meaning of section 9(1)(vi) (Citrix Systems Asia Pacific Pty. Ltd.) In the present case followed that, the decision of the Karnataka High Court in CIT v. M/s. Samsung Electronics Co. Ltd (ITA No. 2808 of 2005) and connected cases that that High Court has held that in that case, the argument that it would be only a sale of copy of the copyright software could not be accepted. It was a payment towards the price of CD, the software and the license to use granted. The payment was royalty as defined in the Income-tax Act and the DTAC involved therein. Some decisions of Income-tax Appellate Tribunals and the decision of the High Court of Delhi in DIT v. Ericssion AB were also brought to the AAR attention where the view has been taken that the payment would not be royalty. The decision of a Delhi Tribunal, taking a contrary view has also been brought to our notice. We are not persuaded to adopt the reasoning of the Bombay Tribunal and that of the High Court of Delhi in the light of the discussion above and that in the Ruling in Millennium. Thereby, it has been ruled that the payments received by the applicant from the distributor for sale of the software product is in the nature of royalty within the meaning of Section 9(1)(vi) of the Income-tax Act. Shares of an Indian public company transferred without consideration by a foreign company to its foreign subsidiary, neither attracts capital gains in the hands of the transferor nor such receipt would be chargeable under income from other sources in the hands of transferee. (Goodyear Tire & Rubber Company, Goodyear Orient Company (Private) Limited) The applicant, Goodyear Tire and Rubber Company (GTRC), is a company

31

incorporated in USA which has a wholly owned subsidiary in Singapore i.e. Goodyear Orient Company (Private) Limited (GOCPL). GTRC holds 74% shares in Goodyear India Limited (GIL), which is a listed Indian Company. GTRC, with a view to re-organize its investment holding in GIL proposed to transfer its entire shareholding of 74% in GIL to GOCPL without consideration (i.e. by way of gift) by entering into a Share Contribution Deed (SCD). In this context, GTRC and GOCPL filed an application before Authority of Advance Ruling (AAR) seeking ruling for applicability of Indian income tax and determination of taxability in light of above facts. Following questions were raised before AAR(a) Whether GTRC is liable to tax on capital gains as per section 45 of the Act.

of GIL by GTRC, no income will arise and hence, the transfer pricing provisions are not applicable in this case. Notably, as there is no liability to pay tax, transferor (i.e. GRTC) as well as transferee are not liable to deduct tax at source u/s 195 of the Act. Whether the non-resident applicant can be held to have earned any income taxable in India from its activities of execution of four installation projects? (Tiong Woon Project & Contracting Pte. Limited) Applicant is a company formed in Singapore. It had secured two work orders each for the FYs 09-10 and 10-11 respectively for installation and assembly projects (as stated by the applicant) carrying on for not more than 183 days independently in any previous year. The work orders were independent of each other. For the execution of the projects, 2 cranes and 4-5 key personnel from Singapore were deployed in India. The question before the AAR was whether the non-resident applicant can be held to have earned any income taxable in India from its activities of execution of four installation projects. The AAR pronounced its ruling in favour of the applicant, holding no tax liability in India upon consideration of the following: 1. The scope of work under these projects required the applicant to provide ground preparation details for the movement of cranes and obtain approval to the scheme under which erection is to be executed; setting up, fitting, placing, positioning of the fabricated equipments at the site was required to be carried out which constitutes installation or assembly project. Such an activity undertaken by the applicant would not amount to supervisory activities in connection with installation and assembly project nor would it amount to furnishing of services under the deeming provision of Article 5.6 of the DTAA. The nature and purpose of these activities relates to installation and assembly projects and are covered under Article 5.3 of the DTAA. The wholly owned subsidiary of the applicant in India and the mention of a certain person as a contact person in the work orders for the projects would not constitute a PE of the applicant. The duration of each of the four projects executed in FY 2009-10 and 2010-11 does not exceed 183 days. None of the projects are carried out for the same principal. The aggregation of the periods of the contracts cannot be made for these four contracts and

(b) Whether GOCPL is liable to tax, as the shares have been received as gift, under the head income from other sources. (c) Whether GTRC or GOCPL has any obligation to deduct tax at source on the aforesaid contribution of shares in accordance with the provisions of section 195 of the Act?

(d) Whether the proposed contribution of shares by GTRC to GOCPL attracts the transfer pricing provisions of the Act? Based on the above facts and questions raised before AAR, it was held that since no consideration in money or moneys worth would accrue or arise to GTRC, it cannot be said to have derived any profit or gain from the transaction. Since the consideration is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying section 45 read with section 48 of the Act would not arise. Further, as GIL is listed company, any income arising from the transfer of shares (long-term capital asset) would have been otherwise exempt under section 10(38) of the Act and thus, it is proved that the transaction is not designed for avoidance of tax. Since, GIL is a public company, the shares are not a property within the meaning of section 56(viia) of the Act. Hence, GOCPL is not taxable on receipt of such shares even under the head income from other sources even though it is received without consideration. Further, as there is no income liable to tax in the hands of the recipient (GOCPL), the transfer pricing provisions are not applicable. Also, as no consideration will pass on transfer of shares

2.

3.

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- An Analysis

consequently the applicant cannot be said to have a PE in terms of Article 5.3 of the DTAA. Whether capital gains arising from transfer of shares of ShanH, a French company, were changeable to tax in India, either under the Act or under the DTAA? Without prejudice to (i), whether transfer of controlling interest (assuming, while denying that it is a separate asset) is liable to be taxed in France under Article 14(6) of the DTAA? (Groupe Industrial Marcel Dassault (GIMD) & Meraux Alliance) Marieux Alliance (MA) and Groupe Industrial Marcel Dassault (GIMD) are two companies incorporated in France . They formed a wholly owned subsidiary company in France named ShanH.. MA & GIMD acquired shares in an Indian company called Shantha Biotechnics Ltd (Shantha). These shares in Shantha were transferred to ShanH. Subsequently MA & GIMD sold shares in ShanH to another French company called Sanofi Pasteur Holding (Sanofi). MA and GIMD filed an application seeking an advance ruling claiming that since the gains are arising out of sale of shares of a French entity (ShanH) by the applicants being French incorporated entities (MA and GIMD) to a third French entity (Sanofi) can not be brought to tax in India.. The primary and common question raised in these applications is whether the capital gains arising to the applicants from the sale of their shares in ShanH to Sanofi, another company incorporated in France is taxable in France alone or in India. Revenue opposed the application and held that ShanH was only a paper company, having no office and no employee. What was involved in the alleged sale of shares of ShanH by MA and GIMD to Sanofi was the transfer of the assets of an Indian company and certainly the controlling

interest in the Indian company, Shantha attracting capital gains tax in India. AAR held that, on facts of the case, the French companys (ShanH) only asset were the shares in the Indian company & it had no other business. When its shares were sold, what really passes were the underlying assets and the control of the Indian company Shantha. A gain was generated by the transaction. If the transaction is accepted at face value, control over Indian assets and business can pass from hand to hand without incurring any liability to tax in India. Under Article 14(5) of the India-France DTAA, Gains from the alienation of shares other than those mentioned in paragraph 4 representing a participation of atleast 10 per cent in accompany which is a resident of a contracting state may be taxed in that contracting state. AAR adopted a purposive construction of Article 14(5) of India-France DTAA and concluded that the capital gains arising out of such share transfer are taxable in India. So the same was taxable in India.

LANDMARK JUDGMENTS COURTS OUTSIDE INDIA:

BY

In absence of legal right to bind principal, Dependent Agent is not PE. (Dell Products vs. State- SC Norway) The Dell Group manufactures and sells computers and computer equipment worldwide. Dell Computer Corporation (USA) is the ultimate parent company in the entire Dell Group. Dell Products BV (Europe) and Dell Computers Inc. (USA) are wholly owned subsidiaries of the parent company. Dell Products BV manufactures products in Ireland and sells through commissionaires. Dell Products is involved in distribution activities. Dell AS, subsidiary of Dell Computers Inc. is a commissionaire set up in Norway acts as an agent to sell Dell goods consigned by Dell Products.

33

The Norwegian Tax Authorities on the assumption that Dell Products had a Permanent Establishment in Norway through its commissionaire Dell AS drew an order of demand on the entity. Accordingly, 60 percent of Dell Products net profits for fiscal years 2005 and 2006 from sales in Norway were charged to tax. Dell Products initiated proceedings at Oslo City Court for Tax Assessment to be set aside wherein the Tax Authorities were favoured. In pursuance to this Dell Products appealed in the Court of Appeal where the appeal was dismissed. Again the appeal was filed to the Supreme Court. The question lied before the Court was whether Dell AS is a Permanent Establishment of Dell Products or not. The court considered that in order for Dell AS to be considered a permanent establishment for Dell Products, the following two conditions must thus be fulfilled: 1) Dell AS is dependent not independent - of Dell Products, and 2) Dell AS can conclude contracts in the name of Dell Products. Therefore, based on the submissions of both the parties, the tax assessments of Dell Products for the fiscal years 2003 to 2006 were set aside as it did not constitute a Permanent Establishment as per the interpretation of the treaty and high authoritys decisions in similar cases in other countries (except in the so-called Zimmer case in French Court). In determining so, the court held that Article 5(5) of the DTAA provides that when a person, not an independent status to whom paragraph 6 applies, acting on behalf of an enterprise and has and habitually exercises in a Contracting State authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State for any activities which that person undertakes for the enterprise. Since, there is no dispute that Dell AS is not an independent agent. The expressions on behalf and have authority to conclude contracts on behalf of in Article 5(5) mean that the contracts must be legally binding. These expressions must be given their normal meaning as per the Vienna Convention. This is also supported by the Commentary on the OECD Model Convention on which the DTAA is based. It is not possible to adopt the functional approach proposed by the Revenue. Consequently, Dell Products does not have permanent establishment in Norway. It is clear and undisputed that Dell Products will not be legally bound by the agreements Dell AS enters into with customers. There is a commission agreement entered into between Dell Products and Dell AS dated 1 February 1995. The agreement states that the arrangement between

the principal and the commissionaire is governed by the Norwegian Commissions Act from 1916. There is nothing in this case that indicates that the commission agreement include any provisions that deviate from what is considered to be the normal situation under the Commissions Act It should be especially noted that in a decision of 24 November 2010 the tax administration in Sweden found that Dell AB should be taxed for its commission income without raising the issue of permanent establishment. Thus it was held that in absence of legal right to bind principal by a contract, Dependent Agent is not PE.

TRANSFER PRICING
High profit/ loss companies need not per se be excluded (Exonn Mobil Company India Pvt ltd vs. DCIT TRIBUNAL Mumbai) The assessee is a company of the Exxon Mobile Corp. Group of US and is responsible for information dissemination, maintaining customer relationship and market development for its AE Exxon Mobile Chemical Co. USA. It is also providing application research and technical services and back office support services to the AE. The TPO excluded loss making units from the comparables adopted by the assessee for the purpose of preparing the transfer pricing report. As a result of this an issue which arose on adjudication was whether highly profit earning comparables should also be excluded for the same reason. The Tribunal held, as a general principle, both loss making comparable companies and high profit companies cannot be eliminated from the analysis unless, there are specific reasons for eliminating the same. The basis of elimination should be other than the general reason that a company has incurred a loss or made abnormal profits. In the context of rejecting a loss making company, the Tribunal observed that as the assessee is a captive unit that does not bear market risk, a company that has incurred losses on account of level of competition in the market cannot be used as a comparable. +/-5 percent variation as per the amended second proviso to Section 92C (2) of the Incometax Act, 1961 (the Act) shall not be applicable retrospectively. (I Policy Network Pvt Ltd vs. ITO TRIBUNAL Delhi) The assessee is a subsidiary of iPolicy Networks Inc., USA. It operates as an offshore development

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INDIA BUDGET 2012


- An Analysis

centre for application software which is then integrated into the security products marketed by its parent company. During the TP Assessment the TPO applied additional filters and rejected all the comparables selected by the tax payer. The assessee contended that no adjustment should be made since the price of its international transactions was within +/- 5 percent of the arms length price arrived at by the TPO, applying the erstwhile proviso to Section 92C(2) of the Act (before amendment through Finance Act, 2009). Assessee contended that the amended proviso to Section 92C(2) of the Act is a substantive provision, meaning that it imposes rights and liabilities on the assessee and is not merely procedural in nature. Accordingly, it cannot be retrospective in nature. Revenue relied upon CBDT Circular No. F.142/13/2010-SO (TPL) dated 30 September 2010 to contend that the amended proviso to Section 92C(2) is applicable as the TP order was issued post 1st October 2009. Accordingly, the +/- 5 percent variation should be computed on the actual transfer price of the assessee in respect of the international transaction. Since the arms length price falls outside the +/- 5 percent variation of the transfer price, an adjustment to the taxpayers income should be made. Tribunal held that in the absence of anything in the enactment to show that an amended provision is to have retrospective operation and further where the amended provision results into creation of new rights and liabilities, then the said provision should be applied prospectively. Even unrelated parties can be associated enterprises if there is de facto control. High profit/loss companies are not per se un-comparable. (Diageo India Pvt Ltd vs. ACIT - TRIBUNAL Mumbai)

The Tribunal had to consider the following Transfer Pricing issues (i) whether a contract bottling unit (CBU), an unrelated party, manufacturing beverages using the trademarks of the assessee and raw materials purchased from the assessees affiliate entities can be treated as the assessees associated enterprise and the transactions entered into by the CBU with the assessees affiliates was an international transaction warranting ALP adjustment in the hands of the assessee, (ii) whether comparables with exceptionally high & low profit are required to be excluded even though there are no functional differences between the assessee and such comparables, (i) if one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as associated enterprises. Though the expression used in the statute is participation in control or management or capital, essentially all these three ingredients refer to de facto control on decision making. The assessee had de facto control over the CBU as the CBU was wholly dependent on the use of trade-marks in respect of which the assessee had exclusive rights. Further, the entities from which the CBU imported the raw materials were affiliates of the assessee and controlled by the common parent Diageo Plc. Accordingly, the assessee, the CBU and its Diageo group supplier of raw materials were associated enterprises as they were de facto controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. Further, as the costs incurred by the CBU for purchase of the raw materials was borne by the assessee, the transaction was actually between the assessee

35

and the Diageo group concerns supplying the raw material to the CBU and constituted an international transaction. (ii) The argument,that exceptionally high and low profit making comparables are required to be excluded from the list of TNMM comparables is not acceptable. Merely because an assessee has made high profit or high loss is not sufficient ground for exclusion if there is no lack of functional comparability. Excess Earning Method of valuation is not method in itself but supplementary to arrive at arms length price. (Tally Solutions Pvt Ltd vs. DCIT TRIBUNAL Bangalore) The assessee, an Indian company sold its Intellectual Property Rights (IPRs) i.e. patents, copyrights and trade marks) to its associated enterprise (AE). During the assessment the TPO adopted the Excess Earning Method (as prescribed by the International Valuation Standard Council) and determined the value of the IPR. On appeal to DRP, TPOs view was upheld. On appeal before the Tribunal, assessee contended that (a) AO had made a reference to the TPO without forming a considered opinion on the issues under reference; (b) the Excess Earning Method adopted by the TPO was not a prescribed method under the Act or Rules; (c) as there was no appropriate method for determination of ALP of IPR, the value declared by the assessee had to be accepted as ALP; and (d) on merits the TPO had relied on estimates and surmises in projecting the future cash flows while disregarding evidence in the form of audited financial statements. On hearing, tribunal held that it is sufficient if AO forms a prima facie opinion that it is necessary or expedient to make a reference to TPO. The tribunal further clarified that by virtue of CBDTs Instruction No. 3 of 2003 dated 20.05.2003 it is mandatory for the AO to refer cases with aggregate value of international transactions more that ` 5 crores to the TPO. The argument that the Excess Earning Method adopted by the TPO is not a prescribed method is not acceptable. The Excess Earning Method is an established method of valuation which is upheld by the U.S Courts in the context of software products. The Excess Earning Method method supplements the CUP method and is used to arrive at the CUP price i.e. the price at which the assessee would have sold in an uncontrolled condition. Thus, on merits, the Excess Earning Method has to be applied using the projected sales (and not actual sales) because when an intangible is sold, the risk of future income potential lies with the buyer.

Existence of actual cross border transaction and motive to shift profits outside India or evade taxes in India are not a pre-condition for applicability of Transfer pricing (TP) provisions. (ITO v. Tianjin Tianshi India Private Limited TRIBUNAL Delhi) The assessee was engaged in the business of trading and distribution of products manufactured by overseas group companies. One of the group companies had a Permanent Establishment (PE) in India being an associated enterprise (AE) of the taxpayer. The PE purchased the product from the group companies and resold the same to the taxpayer. The Transfer pricing officer (TPO) made an adjustment to the income of the assessee by reducing the purchase price of the products purchased from the PE. On an appeal to CIT(A) the addition was deleted by the CIT(A). On an appeal to the Tribunal, the Revenue contended that the TP Regulations also apply to transactions which are not cross border in nature when they take place in India between two parties, one of whom is a non resident. The purported legislative intent behind enactment of Indian TP regulations viz. to counteract tax avoidance through shifting of profits outside India was irrelevant when the provisions of law were clear. The provisions of law were clear that TP regulations would apply when one of the parties to a transaction was non-resident, even though subject to Indian tax jurisdiction. The assessee argued that there was no cross border transaction as the entity making sale to the assessee (viz. PE of taxpayers associated enterprise) was located in India and was subject to Indian tax jurisdiction with regard to incometax, import duty, sales tax, VAT, etc. Further, the PE was assessed as a foreign company in India and thus was charged at a higher rate of income tax, evidencing the fact that there is absence of motive to shift profits or to evade taxes in India. The Tribunal held that the Commissioner (Appeals) had erred in observing that since no cross border transaction was involved, the TP regulations would not apply. The TP provisions are adequately met when one of the parties to the transaction is non-resident, though the transactions are not cross border in nature. The word implied in section 92(1) is shall which carries a mandate for the taxing authority. Once there is an international transaction, the income arising there from has to be computed in accordance with section 92(1). There is no requirement to prove motive of shifting profits outside India

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INDIA BUDGET 2012


- An Analysis

Internal benchmarking analysis under TNMM in an identical transactions, based on segmental results prepared by using allocation keys is justified and lack of segmental reporting in audited financial statements cannot be a reason for rejecting method of computing ALP (Birlasoft (India) Ltd. vs. DCIT TRIBUNAL Delhi) In the present case, the assessee applied transactional net margin method (TNMM) for determining the arms length price by comparing the net cost plus margin earned from rendering software services to AEs with the net cost plus margin earned from rendering identical software services to unrelated enterprises. The Transfer Pricing Officer (TPO) rejected the internal benchmarking of the assessee on the ground that the assessee had not maintained segmental accounts for the related and un-related transactions, and this was not reflected in the audited financial statements. The TPO computed the arms length price based on an external benchmarking exercise. On an application to Dispute Resolution Panel (DRP), DRP rejected the assessees contention of using an internal benchmarking analysis for computing the arms length price. On an appeal Tribunal held that, the assessee was not required to report segmental financial statements as prescribed in AS17 since identical services were provided by the assessee to both its AEs as well as its unrelated enterprises. Therefore, lack of segmental reporting in the audited financial statements cannot be a reason of rejecting assessees method of computing the arms length price by way of internal comparison made between the transaction with associated enterprise and unrelated enterprise. Thus, the TRIBUNAL ruling has been decided in favour of assessee. Sharing of net revenues equally in a controlled and uncontrolled transaction

by logistic company can be an appropriate CUP in spite of difference in geographic location. (M/s Agility Logistics Pvt. Ltd. vs ADIT - TRIBUNAL Mumbai) The assessee company is a logistics service provider. As the assessee does not have any internal CUP in respect of its transactions with any unrelated parties and hence it had used an internal CUP using transactions between a group company in UK and unrelated companies. Contention of the assessee was it is a corporate policy of the AEs all over the world that after payment of the costs the profits are shared equally between the AEs that have participated in the transaction. TPO rejected application of CUP using contending that data of companies operating in different geographical locations would not provide a realistic measure because of differences in economic conditions and policies of the government which would affect the cost and profitability. However assessee contended that geographic difference is not material so far it applies to the Logistics Industry. Further assessee had carried out FAR of the origin country as well as destination country and established that the operations in this industry are an integrated one where both the parties provide similar functions employs equal assets and assumes the same risk and hence entitled to 50 : 50 gross profit. On an appeal Tribunal held that the profit split information contained in all the agreements is typical to the industry and the geographical difference is not material so far as it applies to the logistics industry. Hence Sharing of net revenues equally in a controlled and uncontrolled transaction by logistic company can be an appropriate CUP TPO need not inform the assessee about the process used by him for issuing the notices u/s 133(6) of the Act nor is he under any obligation to furnish the entire information to the assessee. (M/s Kodiak

37

Networks (India) Private Ltd vs ACIT TRIBUNAL Bangalore) The assessee is engaged in the business of software development service. TPO conducted enquiries from certain companies by exercising powers conferred u/s 133(6) of the Act. The assessee was provided these notices and replies received in a CD. The TPO proposed to accept/ reject these companies as comparables based on the responses received from these companies. In case of variance between reply u/s 133(6) and annual report, reply u/s 133(6) was given preference. Assessee filed an appeal against TPOs action of selecting comparables and completion of the assessment based on replies received u/s 133(6), in preference to Annual Report. Assessee contended that the power of TPO u/s 133(6) is to be exercised to check and confirm the veracity of data used and adopted by a company. The power is not to be used to gather information that comes into public domain after the specified date. Tribunal held that when the TPO is making the search for a relevant comparable, he can issue notices to the parties whom he considers as relevant to gather requisite information and on being satisfied with regard to relevancy of the material which can be used against the assessee only then the assessee has to be given an opportunity of presenting its objections, if any and the TPO need not inform the assessee about the process used by him for issuing the notices u/s 133(6) of the Act nor is he under any obligation to furnish the entire information to the assessee.

Act, 1994 (the Act) are brought into effect from 1 May 2011. Representation by CA, CS or CWA before statutory authority liable to service tax Representation services provided before any statutory authority by a practicing Chartered Accountant or Cost Accountant or Company Secretary which were exempt from the payment of service tax are now taxable services and liable to service tax w.e.f 01/05/2011. Composition scheme for Life insurance Companies W.e.f. from 01/05/2011 an option has been given to a life insurance company to pay service tax either on the gross premium charged to a policy holder after deducting the amount allocated for investment or savings on behalf of the policy holder, if such amount has been intimated to the policy holder; or 1.5 % of the gross premium charged by the life insurance company to the policy holder

The above two options will not be available where the entire premium paid by the policy holder to the life insurance company is towards only risk cover in life insurance. Amendments to Export Rules The taxable service provided by a restaurant having facility of air-conditioning and has license to serve alcoholic beverages and accommodation services provided by a hotel, inn, guest house etc, shall be treated as export in case such restaurant or hotel is situated outside India. Amendment to Import Rules The taxable service provided by a restaurant having facility of air-conditioning and has license to serve alcoholic beverages and accommodation services provided by a hotel, inn, guest house etc, shall be treated as received in India in case the restaurant or hotel is situated in India. Interpretation of used outside India It has been clarified that the words, used outside India should be interpreted to mean that the benefit of the service should accrue outside India. The words accrual or benefit may be interpreted in the context where the effective use and enjoyment of the service has been obtained. Exemption of certain services from service tax net The following taxable services are exempt, with effect from 01.01.2012, from so much of the service tax leviable thereon as is in excess of the service

SERVICE TAX
CIRCULARS AND NOTIFICATIONS
Amendment in Point of Taxation Rules Following services have been specified as Continuous Service for the purpose of POT (point of taxation Rules, 2011) Commercial Service, or Industrial Construction

Construction of Complex Service, Telecommunication Service, Internet Telephony Service and Works contract Service

Finance Act, 2011 brought into force with effect from 1 May 2011 The new taxable services and amendments to existing taxable services defined under section 65 of Finance

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INDIA BUDGET 2012


- An Analysis

tax calculated on a value equivalent to a percentage specified as follows: Mandap and catering services provided by mandap keeper as well as hotel 60% Services other than in relation to package tour provided by a tour operator, who provides package tour 40% Services, provided by a tour operator, solely of arranging or booking accommodation for any person in relation to a tour 10% Renting of a cab 40% Holding of a convention, where service provided includes catering service 60% Erection, commissioning or installation, under a contract for supplying a plant, machinery or

Point of Taxation Point of Taxation (Second Amendment) Rules, 2011 have come into force from 01.07.2011 Amendments in taxability of transport services Rescission of notification, exempting the taxable service, provided to any person in relation to transport of goods by rail, from the whole of the service tax leviable thereon, have come into force from 01.01.2012 The taxable service provided to any person in relation to transport of railway equipments and materials by rail shall be exempt from the whole of service tax leviable thereon with effect from 01.01.2012 Services of Transport of goods in containers by rail in the Notification 09/2010 has been changed to Transport of goods by rail and the said would be effective from 01.01.2012.

Equipment and erection, commissioning or installation of such plant, machinery or equipment 33% Transport of goods by road in a goods carriage 25% Commercial or industrial construction service along with the completion and finishing services in relation to building or civil structure 33% Catering, whether the caterer also provides food 50% Services in relation to pandal or shamiana in any manner, including services rendered as a caterer 70% Construction of complex along with completion and finishing services 33% Transport of goods by rail.

Clarification on Completion of service Clarification had been sought towards determining the date for completion of services as in many situations it is not possible to issue invoices within 14 days of the completion of the service as exact date of completion is difficult to identify as sometimes certain other formalities are required to be completed from the clients end before an invoice can be issued and it has been clarified that service is said to be completed when not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice activities like measurement, quality testing etc which may be essential. However it should not include flimsy or irrelevant grounds for delay in issuance of invoice.

39

The above also applies to determination of the date of completion of provision of service in case of continuous supply of service. Clarification on taxability of consideration earned by the distributors/sub-distributors/area Type of Arrangement

distributors of Indian & Foreign films in the form of revenue share from the exhibitors of the movie, and on revenue retained as percentage by the exhibitors of the movie from the sale of tickets have been highlighted upon and its implication on service tax is as under: Service Tax Implication Service tax under copyright service to be provided by distributor or sub-distributor or area distributor or producer etc, as the case may be Service Tax under Business Support Service/Renting of Immovable Property Service, as the case may be, to be provided by Theatre Owner or Exhibitor

Movie exhibited on whose account Movie being exhibited by theatre owner or exhibitor on his account i.e. The copyrights are temporarily transferred

Principal-to-Principal Basis

Movie being exhibited on behalf of Distributor or Sub-Distributor or Area Distributor or Producer etc. i.e. no copyrights are temporarily transferred

Arrangement under unincorporated partnership/joint/ collaboration basis

Service provided by each of the person i.e. the new entity/ Theater Owner or Exhibitor/Distributor or Sub-Distributor or Area Distributor or Producer etc, as the case may be, is liable to Service Tax under applicable service head IN Issue of Equity Shares against Non-cash consideration In addition to conversion of External Commercial Borrowing [ECB]/lump-sum fee/ royalty into equity shares/fully compulsorily and mandatorily convertible preference shares, permission has now been granted to allow issue of equity shares to persons resident outside India, in following cases, subject to fulfillment of specific conditions, under the Government Route: Import of capital goods/machinery/ equipment (including second hand machinery); and Pre-operative/pre-incorporation expenses (including payment of rent etc.) paid directly to the Indian company by the foreign investor.

INBOUND AND OUTBOUND POLICY


IMPORTANT RECENT DEVELOPMENTS INBOUND INVESTMENTS POLICIES:

FDI AND FII RELATED DEVELOPMENTS:


CONSOLIDATED FDI POLICY The Department of Industrial Policy and Promotion from the Ministry of Commerce and Industry has released the third and fourth editions of Consolidated FDI Policy which became effective from April 1, 2011 and October 1, 2011 respectively with a sunset clause of 6 months: The key changes that have been introduced by the third and forth editions of Consolidated FDI Policy: Pricing Guideline In case of convertible instruments, company will now have the option of prescribing a conversion formula which would help the recipient companies to obtain performance linked valuation subject to minimum fair value worked out at the time of issuances of such instruments in accordance with FEMA/ SEBI Regulation.

Removal of the condition or prior approval in case of existing joint ventures/technical collaboration in the same field FIPB approval was required to be obtained by a person resident outside India who already had

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INDIA BUDGET 2012


- An Analysis

an existing joint ventures/technology transfer/trademark agreement in India, as on January 12, 2005, for new proposal in the same field for investment/technology transfer/ technology collaboration/trademark agreement. This requirement has now been done away with. Development of Seeds In the agriculture and animal husbandry sector, 100% FDI under the automatic route is now allowed in the development and production of seeds and planting material without having to comply with the controlled conditions Issue of Capital Instruments: It was decided that Instruments issued/transferred to non residents having inbuilt options or supported by options sold by third parties would lose their character as equity and not qualify as FDI. Instead it was decided to treat these instruments as ECB and would have to comply with ECB guidelines. However, DIPP vide corrigendum to this Circular deleted this amendment with respect to inbuilt options. Sector specific changes: Agriculture: The agricultural activities now include apiculture, under controlled conditions, in which 100% FDI is permitted under the automatic route. Terrestrial Broadcasting FM (FM Radio): Foreign investment limit for FM radio has been increased to 26% from 20% under approval route. Construction Development: Construction development activities in education sector and in respect of old age homes are exempted from conditions applicable to construction development sector in general in

terms of the minimum built area, minimum capitalization and the lock-in period of three years from the date of completion of minimum capitalization. Industrial Parks: the definition of Industrial Activity has been expanded to include the activities related to basic and applied R&D on bio-technology and pharmaceutical science/life services. Single brand product retail trading: This Circular is inserted an additional condition related to foreign investor being the owner of the brand. This implies that brand licenses or assignees can no longer make investments into retailing under this channel. Financial Services: It is clarified the that foreign investment in financial services apart from those specifically permitted in the FDI policy would require prior approval of the FIPB and would not automatically fall under the residuary clause which permits 100% foreign investment under automatic route. FDI IN LIMITED LIABILITY PARTNERSHIPS It has been decided to permit FDI in Limited Liability Partnership (LLP) which are formed under the Limited Liability Partnership Act, 2008 [LLP Act]. The key policies for such investments are given below: FDI in LLPs is allowed under the approval route in those sectors/ activities only where 100% FDI is allowed under the automatic route and no FDI-linked performance related conditions are attached. LLPs with FDI will not be eligible to make any downstream investments. FDI in LLPs will not be allowed in agricultural/plantation activity, print media or real estate business.

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An Indian company having FDI, will be permitted to make downstream investment in LLPs only if, both the company as well as the LLP are operating in sectors where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions. Foreign Capital participation in the LLPs shall be permitted only in cash. Flls and FVCIs are not permitted to invest in LLPs. LLPs are not be permitted to avail ECBs. Existing company with FDI can be converted into LLP with the prior approval of FIPB/ Government.

Where SEBI guidelines are attracted subject to the adherence with the pricing guidelines and document requirements as specified by the RBI Where the pricing guidelines under the FEMA are not met provided that the resultant FDI is in compliance with the extant FDI policy and the pricing for the transaction is compliant with the specific/SEBI regulations and a Chartered Accountants Certificate to the effect that compliance with the above SEBI regulations, is attached to the form FCTRS. Where the investee company is in the financial sector provided that NOCs are obtained from the respective financial sector regulators of the investee company as well as transferor and transferee entities and filed along with the form FCTRS

REVISION OF FDI POLICY FOR PHARMACEUTICAL SECTOR FDI in pharmaceutical sector will now be permitted as follows: Greenfield investments in the pharmaceuticals sector: 100% FDI under automatic route. Brownfield investments (i.e., investments in existing companies), in the pharmaceuticals sector: 100% FDI under the GoI route, i.e., with the prior approval of FIPB.

FOREIGN DIRECT INVESTMENT - TRANSFER OF SHARES As a measure to further liberalize and rationalize the procedures and policies governing FDI in India, the RBI has decided to permit the following transactions under the general permission route: In case of transfer of shares from a non-resident to resident where the pricing guidelines under FEMA are not met, provided that the original and resultant investment are in line with the extant FDI policy and the pricing for the transaction is compliant with the specific SEBI regulations and a Chartered Accountants Certificate to the effect that compliance with the above SEBI regulations, is attached to the form FC-TRS. In case of transfer of shares from resident to non-resident: Where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy, provided that the requisite approval of the FIPB has been obtained and the transfer of share adheres with the pricing guidelines and documentation requirements as specified by the RBI.

FDI - REPORTING OF ISSUE/TRANSFER OF PARTICIPATING INTEREST/RIGHT TO NON RESIDENT IN OIL FIELDS AS A FDI TRANSACTION The RBI has decided that, henceforth, issue/transfer of participating interest/rights to a non-resident in oil fields will be treated as FDI transaction. Accordingly, these transactions have to be reported as under the category other in the form FC-TRS/ FC-GPR respectively. PLEDGE OF SHARES FOR FDI RELATED TRANSACTIONS: The RBI has permitted AD Banks to approve pledge of shares of an Indian company held by non-resident investors in accordance with the FDI Policy in the following cases subject to compliance with certain conditions: Shares of an Indian company held by the nonresident investor can be pledged in favour of an Indian bank to secure the credit facilities being extended to the resident investee company for bonafide business purposes Shares of an Indian company held by the nonresident investor can be pledged in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor/ non-resident promoter of the Indian company or its overseas group company

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INDIA BUDGET 2012


- An Analysis

ANNUAL REPORTING BY INDIAN COMPANIES ON FOREIGN LIABILITIES AND ASSETS Every Indian Company which has either received or made Foreign Investment is currently required to submit Part B to Form FC GPR on June 30 every year. The RBI has replaced this existing Part B with an Annual Return on Foreign Liabilities and Assets (ARF) which is required to be filed by July 15th every year. The ARF Form gives specific guidelines for valuation of foreign liabilities and assets. In case of group companies, a consolidated return covering all the branches/offices in India is to be furnished. Balance sheet for the reporting year of the entity is to be enclosed along with the return. OPENING OF ESCROW ACCOUNTS FOR FDI TRANSACTIONS RBI has permitted AD banks/SEBI registered Depository Participants to open and maintain, without prior approval of RBI, a non-interest bearing Indian rupee escrow account in India on behalf of residents and/or non-residents, toward payment of share purchase consideration and/or provide escrow facilities to keep securities to facilitate FDI transactions for a maximum period of six months subject to certain terms and condition. This facilities will be available for both issue of fresh shares to the non-residents as well as transfer of shares from/to the non-residents. FOREIGN INVESTMENT IN INDIA BY SEBI REGISTERED FIIS In order to liberalize the policy related to investments by SEBI registered FIIs in other securities, the RBI has decided as under: FIIs will also be allowed to invest in non-convertible debentures/ bonds issued by non-banking financial companies categorized as Infrastructure Finance

Companies (lFCs) by the RBI within the overall limit of US$25 billion. The lock-in-period of three years for FIII investment stands reduced to one year up to an amount of US$5billion within the overall limit of US$25 billion. This lock-in-period shall be computed from the time of first purchase by FIIs. The residual maturity of five years and above stipulated would, now onwards; refer to the original maturity of the instrument at the time of first purchase by an FII. The above will also apply for QFI investment in units of Mutual Fund debt schemes within the limit of US$3 billion.

In accordance with the FEMA regulations on transfer or issue of security by a Person Resident outside India, SEBI registered FIIs are permitted to purchase, on repatriation basis, listed nonconvertible debentures (NCDs)/ bonds issued by an Indian company. The present limits for such investments is US$15 billion for FII investment in corporate debt with an additional limit of US$5 billion for FII investment in bonds with a residual maturity of more than five years, issued by Indian companies, which are in the infrastructure sector, where infrastructure is defined in terms of the extant guidelines on ECB. RBI has decided to enhance the aforesaid FII investment limit in bonds with a residual maturity of more than five years, issued by Indian companies, which are in the infrastructure sector, by an additional

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US$20 billion taking this limit from US$5 billion to US$25 billion. With the current liberalization, the total limit available to FIIs for investment in listed NCDs/bonds will be US$40 billion with a sub limit of US$25 billion for investment in listed NCDs/bonds issued by companies in the infrastructure sector. Such investment will be subject to a minimum lock-in period of three years. However, FIIs will be permitted to trade such investment among themselves during the lock-in period. SEBI registered FIIs will also be permitted to invest in unlisted NCDs issued by corporate entities in the infrastructure sector, provided that such investment is in accordance with the aforementioned terms and conditions. FIIs/sub-accounts of FIIs are now permitted to invest in to be listed non-convertible debentures (NCDs)/bonds issued by Indian Companies. To be listed debt securities means those securities the listing of which is committed to be done within 15 days of such investment. In case the NCDs/bonds issued to the FIIs/sub-accounts of FIIs are not listed within 15 days of issuance, for any reason, then the FII/sub-account of FII will have to immediately dispose of these bonds/NCDs either by way of sale to a third party or to the issuer. The terms of offer to FIIs/sub-accounts should contain a clause to redeem/buyback the said securities from the FIIs/sub-accounts of FIIs in such an eventuality.

Indirect Route - Unit Confirmation Receipt (UCR) route

These investments would be subject to the following terms and conditions, some of the important conditions are as follows: General conditions Investments by the QFIs would be subject to a ceiling of USD 10 billion under both the routes. For the purpose of this ceiling of USD 10 billion, total amount invested for the purchase of domestic MFs units by all QFIs and the money lying in the single rupee pool bank accounts of DPs would be added. SEBI will monitor the ceiling of USD 10 billion on daily basis through the concerned domestic MFs and DPs. The investment under both the routes by the QFIs will be in the units which are directly issued by the domestic MFs and no secondary market purchases would be allowed. Units and UCRs issued under this scheme to QFIs, would be non-tradable and nontransferable.

Direct Route The DP route will be operated through separate single rupee pool bank account to be maintained by the DP with a AD Category I Bank in India. The funds received from the QFIs into this account shall be remitted to the domestic MF within five working days The redemption proceeds of the units will also be received from the domestic MF into this account and shall be repatriated to the overseas bank account of the QFI within five working days of the same having being received in the rupee pool account of the DP. Within these five working days the redemption proceeds can also be utilized for further investment by the QFI under this scheme. QFIs would not be allowed to open a bank account in India.

INVESTMENT BY QUALIFIED FOREIGN INVESTORS IN THE UNITS OF DOMESTIC MUTUAL FUNDS RBI has allowed non- resident investors (other than SEBI registered FIIs and SEBI registered FVCIs) who meet the KYC requirements of SEBI, hereinafter called Qualified Foreign Investors (QFIs), to purchase on repatriation basis rupee denominated units of equity schemes of domestic MFs issued by SEBI registered domestic MFs in accordance with the terms and conditions as stipulated by the SEBI and the RBI from time to time in this regard. The QFIs may invest in rupee denominated units of equity schemes of domestic MFs issued by the SEBI registered domestic MFs under the two routes, namely: Direct Route SEBI registered Depository Participant (DP) route

Indirect Route Domestic MFs would be allowed to open foreign currency accounts outside India for the limited purpose of receiving subscriptions from the QFIs as well as for redeeming the UCRs.

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INDIA BUDGET 2012


- An Analysis

The UCR will be issued against units of domestic MF equity schemes.

designated overseas bank account of the QFI within five working days Limits - The individual and aggregate investment limits for the QFIs shall be 5% and 10% respectively of the paid up capital of an Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for foreign investment in India. Further, wherever there are composite sectoral caps under the extant FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps. The onus of monitoring and compliance of these limits shall remain jointly and severally with the respective QFIs, DPs and the respective Indian companies (receiving such investment).

RBI has also allowed QFIs to invest (under both the routes Direct and Indirect, subject to the terms and conditions) up to an additional amount of USD 3 billion in units of domestic MF debt schemes which invest in infrastructure (Infrastructure as defined under the extant ECB guidelines) debt of minimum residual maturity of 5 years, within the existing ceiling of USD 25 billion for FII investment in corporate bonds issued by infrastructure companies. INVESTMENT BY QUALIFIED FOREIGN INVESTORS IN EQUITY SHARES RBI has allowed QFIs to purchase on repatriation basis equity shares of Indian companies subject certain conditions. Some of the important conditions are as follows: Eligible instruments and eligible transactions QFIs shall be permitted to invest through SEBI registered Depository Participants (DPs) only in equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India as well as in equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations. Mode of payment/repatriation For QFI investments under this scheme a separate single rupee pool bank account would be maintained by the DP with an AD Category- I bank in India for QFI investments under this scheme. The DP will purchase equity at the instruction of the respective QFIs within five working days The sale proceeds of the equity shares will also be received in this single rupee pool bank account of the DP and shall be repatriated to the

FOREIGN INVESTMENTS IN INDIA TRANSFER OF SECURITY BY WAY OF GIFT LIBERALISATION The RBI has enhanced the value of security to be transferred by a person resident in India, as gift, to a person resident outside India from USD 25,000 to USD 50,000 per financial year However, as hitherto, a person resident in India who proposes to transfer, by way of gift, to a person resident outside India any security including shares/convertible debentures is now required to obtain prior approval of the RBI. RELATED TO EXTERNAL COMMERCIAL BORROWINGS: BUYBACK/PREPAYMENT OF FOREIGN CURRENCY CONVERTIBLE BONDS In 2008, in light of the global financial crisis, the RBI amended the Guidelines for External Commercial Borrowings (ECB Guidelines) to provide that issuing companies

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to buy the FCCBs back subject to certain conditions. The time limit for completing the buyback procedures has been extended to 31 March 2012. After review of the said policy for premature buyback, RBI has now decided to extend this time limit and liberalize the procedure in this regard. The details of the same are as under: Conditions for Automatic route - the buyback value of the FCCB shall be at a minimum discount of 8 percent (as against 15 percent) on the book value; the funds used for the buyback shall be out of existing foreign currency funds held either in India (including funds held in the EEFC account) or abroad and/ or out of fresh ECB raised in conformity with the current ECB norms; and where the fresh ECB is co-terminus with the outstanding maturity of the original FCCB and is for less than three years the all-in-cost ceiling should not exceed 6 months Libor plus 200 basis points as applicable to short term borrowings. In other cases, the all-in-cost for the relevant maturity of the ECB shall be as per prevailing ECB Guidelines.

the automatic route to facilitate their refinancing by Indian companies. Accordingly, AD banks may allow Indian companies to refinance outstanding FCCBs, subject to certain conditions. Some of the important conditions are as follows: The amount of fresh ECB/FCCB shall not exceed the outstanding redemption value at maturity of the outstanding FCCBs; The fresh ECB/FCCB shall not be raised six months prior to the maturity date of the outstanding FCCBs ; ECB/FCCB beyond USD 500 million for the purpose of redemption of the existing FCCB will be considered under the approval route; and ECB/FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 500 million available under the automatic route as per the extant norms

The RBI has also clarified that restructuring of FCCBs, involving a change in existing conversion prices, is not permissible. However, proposals for restructuring FCCBs that do not involve a change in their conversion price will be considered under the approval route. EXTERNAL COMMERCIAL BORROWINGS (ECB) LIBERALIZATION AND SIMPLIFICATION Reserve Bank of India (RBI) has issued a series of circulars for liberalization/rationalization/ simplification of the existing ECB guidelines. Policy amendments as introduced by the RBI are as under: Utilization of ECB proceeds for refinancing of existing rupee loan for infrastructure sector As per the existing guidelines, repayment of existing Rupee loans is not a permissible end-use for ECB. Considering the specific needs of the infrastructure sector, the RBI has permitted Indian companies engaged in the infrastructure sector to utilize 25% of the fresh ECB to refinance the rupee loans availed by them from the domestic banks, under the approval route vide application filed through the AD Bank, subject to compliance with certain conditions, some important conditions are as follows: At least 75% of the fresh ECB proposed to be raised will be utilized for capital expenditure towards a new infrastructure project(s).

Conditions for Approval route - Indian companies may be permitted to buyback FCCBs up to USD 100 million of the redemption value per company, out of their internal accruals with the prior approval of the RBI, subject to the following: minimum discount of 10 percent (as against 25 percent) of book value for redemption value up to USD 50 million; minimum discount of 15 percent (as against 25 percent) of book value for the redemption value over USD 50 million and up to USD 75 million; and minimum discount of 20 percent (as against 50 percent) of book value for the redemption value of over USD 75 million and up to USD 100 million.

REDEMPTION OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBS) The RBI has decided to consider applications for refinancing of FCCBs by Indian companies under

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INDIA BUDGET 2012


- An Analysis

Remaining 25% shall be utilized only for repayment of the rupee loan availed of for capital expenditure of earlier completed infrastructure project(s); and Refinance will be utilized only for the rupee loans which are outstanding in the books of the financing ban concerned.

ECB above US$ 20 million and up to US$ 750 million or equivalent with minimum average maturity of five years.

Accordingly, the existing requirement of average maturity period, prepayment and call/put options for additional amount of US$ 250 million has been dispensed with. Corporate organizations engaged in specified service sectors such as hotel, hospital and software, can avail of ECB up to US$200 million or equivalent during a financial ear as against the present limit of US$100 million subject to the condition that the proceeds of the ECBs should not be used for acquisition of land. ECBs designated in INR All eligible borrowers can avail of ECBs designated in INR from foreign equity holders under the automatic/approval route, as the case may be, as per the extant ECB guidelines. ECB for interest during construction (IDC) The RBI has decided to consider IDC as a permissible end-use for the Indian companies, which are in the infrastructure sector, where infrastructure is defined in terms of the extant guidelines on ECB under the automatic/approval route, as the case may be, subject to the condition that IDC is capitalized and is a part of the project cost. ECB from the foreign equity holders According to the extant ECB policy, a foreign equity holder, to be eligible as recognized lender under the automatic route, will require minimum holding of paid-up equity in the borrower company as set out below: For ECB up to US$5 million minimum paid-up equity of 25% held directly by the lender,

Bridge finance for infrastructure sector The RBI has permitted Indian companies engaged in the infrastructure sector to import capital goods by availing of shortterm credit (including buyers/suppliers credit) in the nature of bridge finance, under the approval route, subject to compliance with the following conditions: Bridge finance will be replaced with a long-term ECB Long-term ECB will comply with all the extant ECB norms Prior approval will be sought from the RBI to replace the bridge finance with a long-term ECB AD banks will monitor the end-use of funds and evidence the import of capital goods by verifying the Bill of Entry. Indian banks will not be permitted to provide any form of guarantees.

Enhancement of ECB limit under the automatic route Eligible borrowers in real estate-industrialinfrastructure sector can avail of ECB up to US$750 million or equivalent per financial ear under the automatic route as against the present limit of US$500 million. Consequent to the enhancement in limits, the revised average maturity guidelines under the automatic route are as follows: ECB up to US$ 20 million or equivalent in a financial year with minimum average maturity of three years; and

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For ECB more than US$5 million minimum paid-up equity of 25% held directly by the lender and debt equity ratio not exceeding 4:1 (i.e., the proposed ECB does not exceed four times the direct foreign equity holding).

To further rationalize the ECB policy, the RBI has decided that, henceforth: The term debt in the debt-equity ratio will be replaced with ECB liability and the ratio will be known as ECB liability-equity ratio; Besides the paid-up capital, free reserves (including the share premium received in foreign currency) according to the latest audited balance sheet shall be reckoned for the purpose of calculating the equity of the foreign equity holder. Where there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned shall only be considered for calculating the ECB liability-equity ratio to reckon quantum of permissible ECB. For calculating the ECB liability, not only the proposed borrowing but also the outstanding ECB from the same foreign equity holder lender should be reckoned. Service sector units, in addition to those in hotels, hospitals and software, could also be considered as eligible borrowers if the loan is obtained from foreign equity holders. This will facilitate borrowing by training institutions, R&D, miscellaneous service companies, etc. ECB from indirect equity holders may be considered provided the indirect equity holding by the lender in the Indian company is at least 51%. ECB from a group company may also be permitted provided both the borrower and the foreign lender are subsidiaries of the same parent.

RBI has allowed non-residents to hedge their currency risk in respect of ECBs denominated in Indian Rupees, with AD Category I banks in India. Hedging is permitted in the form of Forward foreign exchange contracts with rupee as one of the currencies, foreign currency-INR options and foreign currency-INR swaps. Following are the important operational guidelines, terms and conditions of the permitted hedging: The foreign equity holder/overseas organization or individual approaches the AD bank in India with a request for forward cover in respect of underlying transaction for which he needs to furnish appropriate documentation (scanned copies would be acceptable), on a pre-deal basis to enable the AD bank in India to satisfy itself that there is an underlying ECB transaction, and details of his overseas banker, address, etc. The following undertakings also need to be taken from the customer That the same underlying exposure has not been hedged with any other AD Category- I bank/s in India. If the underlying exposure is cancelled, the customer will cancel the hedge contract immediately. The amount and tenor of the hedge should not exceed that of the underlying transaction and should be in consonance with the extant regulations regarding tenor of payment/realization of the proceeds.

The contracts, once cancelled, cannot be rebooked. The contracts may, however, be rolled over on or before maturity subject to maturity of the underlying exposure.

While submitting these proposals, it may be ensured that total outstanding stock of ECBs (including the proposed ECBs) from a foreign equity lender does not exceed 7 times the equity holding, either directly or indirectly of the lender (in case of lending by a group company, equity holdings by the common parent would be reckoned). ECB denominated in Indian Rupees (INR) hedging facilities for Non-Resident entities

ECBs to NIMZs as Eligible Borrowers: It has now been provided that Developers of National Manufacturing Investment Zones (NMIZs) are also permitted to avail ECBs under the approval route for providing infrastructure facilities within the NMIZs subject to the existing guidelines. Liberalization in approval of Changes/ Modification in terms and conditions of ECBs availed: As per the extant ECB procedures, the certain changes in the terms and conditions of the ECB

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INDIA BUDGET 2012


- An Analysis

after obtaining the Loan Registration Number (LRN), require the prior approval of the RBI. As a measure of simplification of the existing procedures, it has been decided to delegate the powers to the AD -I banks to approve the following requests from the ECB borrowers in addition to the existing delegated powers, subject to specified conditions. Source of conditions are as follows: Change in the recognized lender when the original lender is an international bank or a multilateral financial institution or a regional financial institution or a Government owned development financial institution or an export credit agency or supplier of equipment and the new lender also belongs to any one of the above mentioned categories, subject to fulfillment of certain conditions. Reduction in loan amount in respect of ECBs availed both under automatic route if the consent of the lender has been obtained, the average maturity period has been maintained and there are no other changes in the terms and conditions of the ECB; Changes/modifications in the drawdown schedule of the ECBs already availed, both under the approval and the automatic routes, where the average maturity period under goes a change, as declared while obtaining the LRN, subject certain conditions. However changes/ modifications in the repayment schedule of the ECBs and any elongation/rollover in the repayment on expiry of the original maturity of the ECB would continue to require the prior approval of the RBI; Reduction in all-in-cost, in respect of ECBs availed both under automatic and approval route if the consent of the lender has been obtained and

there are no other changes in the terms and conditions of the ECB.

IMPORTANT RECENT DEVELOPMENTS IN OUTBOUND INVESTMENTS POLICIES:


OVERSEAS DIRECT INVESTMENT LIBERALIZATION With a view to provide more operational flexibility to Indian companies with investments abroad, the RBI has liberalized/rationalized the following aspects of the regulations relating to overseas direct investment: Performance Guarantees issued by the Indian party Henceforth only 50% of the amount of the performance guarantees issue to or on behalf of Joint Venture/wholly owned subsidiary (JV/WOS) abroad, as compared to 100% at present, will be reckoned for the purpose of computing total financial commitment of 400% net worth of the Indian party. Prior approval of the RBI will be required to remit funds from India in cases where invocation of the performance guarantees breach the limit of 400% net worth of the Indian party.

Restructuring of the balance sheet of the overseas entity involving writeoff of capital and receivables Indian promoters who have set up WOS abroad or have at least a 51% stake in an overseas JV, will be permitted to write off capital (equity/preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV/WOS in

49

accordance with the following limit and compliance with reporting requirements, even while such JV/WOS continue to function: Listed Indian companies will be permitted to write off capital and other receivables up to 25% of the equity investment in the JV/WOS under the automatic route. Unlisted companies will be permitted to write off capital and other receivables up to 25% of the equity investment in the JV/WOS under the approval route.

One Indian party may transfer by way of sale to another Indian party or to a person who is resident outside India, any share or security held by it in a JV or WOS outside India under the automatic route, subject to compliance with certain prescribed conditions, some important conditions are as follows: (i) the sale does not result in any write off of the investment made.

(ii) the sale is to be effected through a stock exchange where the shares of the overseas JV/WOS are listed; (iii) if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant/Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV/WOS; RELATED TO LIASION/BRANCH OFFICE: It has been specifically clarified that the transfer of assets of LO/BO to subsidiaries or other LO/BO or any other entity is permitted only with the specific approval of RBI.

Disinvestment by the Indian parties of their stake in an overseas JV/WOS involving writeoff Disinvestment by listed Indian promoter companies with net worth of less than INR1000 million and investment in an overseas JV/WOS not exceeding US$10 million will be permitted under the automatic route, subject to compliance with the reporting requirements. All cases where the amount repatriated after disinvestment is less than the original amount invested will be permitted under the automatic route, provided that the Indian party falls under the permitted categories of corporate organizations mentioned therein.

OTHER IMPORTANT RECENT DEVELOPMENTS:


IN RELATION TO EXPORTS: The requirement of prior approval of RBI by an exporter, who receives advance for export of goods which would take more than one year to manufacture and ship under an export agreement which provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment has been done away with in the certain cases, some of them are as follows: the KYC and due diligence exercise of the overseas buyer has been done by the AD I bank; the AD-I bank should ensure that export advance received by the exporter should be utilized to execute export and not for any other purpose i.e., the transaction is a bonafide transaction; progress payment, if any, should be received directly from the overseas buyer strictly in terms of the contract;

Issue of guarantee by an Indian party to step down subsidiary of JV/WOS under general permission Indian promoter entity will be permitted to extend corporate guarantee on behalf of the first generation step down operating company irrespective of whether the direct subsidiary is an operating company or a Special Purpose Vehicle (SPV), within the prevailing limit of making overseas direct investment. Corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered by RBI under the approval route subject to the condition that the Indian party directly or indirectly holds 51% or more stake in the overseas subsidiary for which such guarantee is intended to be issued.

Transfer by way of sale of shares of a JV or WOS

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INDIA BUDGET 2012


- An Analysis

the rate of interest, if any, payable on the advance payment shall not exceed LIBOR + 100 basis points;

IN RELATION TO IMPORTS: The limit for imports without any documentation formalities has been increased from USD 500 to USD 5,000. Accordingly, no document, including Form A-1, except a simple letter from the applicant containing the basic information viz., the name and the address of the applicant, name and address of the beneficiary, amount to be remitted and the purpose of remittance is required to be submitted by the importer, as long as the exchange being purchased is for a current account transaction and is not included in the Schedules I and II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and the payment is made by a cheque drawn on the applicants bank account or by a Demand Draft. IN RELATION TO COMPUNDING OF OFFENCES The RBI has delegated powers to its certain Regional Offices (keeping limit of INR 0.1 million for some cities) to compound the non compliances in relation to FDI contraventions of FEMA involving (i) delay in reporting of inward remittance, (ii) delay in filing of form FC-GPR after allotment of shares and (iii) delay in issue of shares beyond 180 days. IN RELATION TO INDIVIDUALS : LIBERALISED REMITTANCE SCHEME The RBI has deregulated interest rates on NRE Rupee Deposits and NRO Accounts. Accordingly, banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under the NRE deposit

accounts and savings deposits under NRO accounts with immediate effect. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits. RBI has permitted individuals resident in India to include nonresident close relative(s) (relatives as defined in Section 6 of the Companies Act, 1956) as a joint holder(s) in their resident savings bank accounts/ Exchange Earner Foreign Currency (EEFC) account/Resident Foreign Currency (RFC) account on former or survivor basis. However, such non- resident Indian close relatives shall not be eligible to operate the account during the life time of the resident account holder. RBI has permitted Non-Resident Indian (NRI)/Person of Indian Origin (PIO) to open NRE/FCNR(B) account with their resident close relative (relative as defined in Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close relative shall be eligible to operate the account as a Power of Attorney holder in accordance with extant instructions during the life time of the NRI/PIO account holder. RBI has permitted resident Individuals to pay for the medical expenses of NRIs close relative (relative as defined in Section 6 of the Companies Act, 1956). RBI has permitted a resident individual to make a rupee gift to a NRI/PIO who is a close relative of the resident individual [close relative as defined in Section 6 of the Companies Act, 1956] by way of crossed cheque/electronic transfer subject to the following:

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The amount should be credited to the Non-Resident (Ordinary) Rupee Account (NRO) a/c of the NRI/PIO and credit of such gift amount may be treated as an eligible credit to NRO a/c. The gift amount would be within the overall limit of USD 200,000 per financial year as permitted under the Liberalised Remittance Scheme (LRS) for a resident individual. It would be the responsibility of the resident donor to ensure that the gift amount being remitted is under the LRS and all the remittances under the LRS during the financial year including the gift amount have not exceeded the limit prescribed under the LRS.

Scheme limit of USD 200,000 during the financial year; the loan amount shall not be remitted outside India

RBI has accorded a general permission to resident close relative (relative as defined in Section 6 of the Companies Act, 1956) of the NRIs to repay any loan availed by such NRI through AD Banks as per the FEMA Regulations. FACILITATING RUPEE TRADE HEDGING FACILITIES FOR NON-RESIDENT ENTITIES The RBI, in order to facilitate greater use of Indian Rupee in trade transactions, as announced in the Monetary Policy Statement for the year 201112 (para 85), has decided to allow non-resident importers and exporters to hedge their currency risk in respect of exports from and imports to India, invoiced in Indian Rupees as per Model I or Model II and the operational guidelines: Model I - Non-resident exporter/importer dealing through their overseas bank (including overseas branches of AD banks in India) Model II - Non-resident exporter/importer dealing directly with the AD bank in India The RBI has delegated its power to AD Category - I banks to deal with the cases of set-off of export receivables against import payables, subject to certain terms and conditions.

The following clarifications have been made with regards to the existing LRS Scheme for resident individuals: The facility is available to resident minors as well. The LRS Declaration form has been amended to enable the declaration to be counter signed by the minors natural guardian; Remittances under the facility can be consolidated in respect of family members subject to individual family members complying with the terms and conditions of the scheme; Remittances under the scheme can be used for purchasing objects of art subject to the provisions of other applicable laws

ACCOUNTS AND AUDIT


IMPORTANT RECENT DEVELOPMENTS Revision of Schedule VI of the Companies Act, 1956 The Ministry of Corporate Affairs has issued revised Schedule VI, which prescribes the format of financial statements and disclosure requirements for corporate entities. Schedule VI of the Companies Act, 1956, prescribes the format of financial statements and disclosure requirements for corporate entities in India. Considering the economic and regulatory changes that have taken place globally, and being an old Act (1956), Schedule VI had completely outlived its utility. Therefore, it is essential to harmonize and synchronize the general disclosure requirements under Schedule VI with those prescribed in the Accounting Standards.

RBI has permitted resident individual to lend to a Non resident Indian (NRI)/Person of Indian Origin (PIO) close relative (means relative as defined in Section 6 of the Companies Act, 1956) by way of crossed cheque/electronic transfer, subject to the following conditions, some important conditions are as follows: the loan is free of interest and the minimum maturity of the loan is one year; the loan amount should be within the overall limit under the Liberalised Remittance Scheme of USD 200,000 per financial year available for a resident individual. It would be the responsibility of the lender to ensure that the amount of loan is within the Liberalised Remittance

52

INDIA BUDGET 2012


- An Analysis

Revised Schedule VI has been framed as per the existing non-converged Indian Accounting Standards notified under the Companies (Accounting Standards), Rules, 2006. This will apply to all the companies uniformly for the financial statements to be prepared for the financial year commencing on or after 1.4.2011. Major changes related to the Balance sheet The Revised Schedule VI prescribes only the vertical format for presentation of financial statements. Thus, a company will now not have an option to use horizontal format for the presentation of financial statements as prescribed in Old Schedule VI. Current and non-current classification has been introduced for presentation of assets and liabilities in the Balance Sheet. The application of this classification will require assets and liabilities to be segregated into their current and non-current portions. For instance, current maturities of a long term borrowing will have to be classified under the head Other current liabilities. Number of shares held by each shareholder holding more than 5 percent shares in the company now needs to be disclosed. In the absence of any specific indication of the date of holding, such information should be based on shares held as on the Balance Sheet date. Details pertaining to aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will need to be disclosed only for a period of five years immediately preceding the Balance Sheet date. Any debit balance in the Statement of Profit and Loss will be disclosed

under the head Reserves and surplus. Earlier, any debit balance in Profit and Loss Account carried forward after deduction from uncommitted reserves was required to be shown as the last item on the asset side of the Balance Sheet. Specific disclosures are prescribed for Share Application money. The application money not exceeding the capital offered for issuance and to the extent not refundable will be shown separately on the face of the Balance Sheet. The amount in excess of subscription or if the requirements of minimum subscription are not met will be shown under Other current liabilities. The term sundry debtors has been replaced with the term trade receivables. Trade receivables are defined as dues arising only from goods sold or services rendered in the normal course of business. Hence, amounts due on account of other contractual obligations can no longer be included in the trade receivables. The Old Schedule VI required separate presentation of debtors outstanding for a period exceeding six months based on date on which the bill/invoice was raised whereas, the Revised Schedule VI requires separate disclosure of trade receivables outstanding for a period exceeding six months from the date the bill/invoice is due for payment. Capital advances are specifically required to be presented separately under the head Loans & advances rather than including elsewhere. Tangible assets under lease are required to be separately specified under each class of asset. In the absence of any further clarification, the term under lease should be taken to mean assets given on

53

operating lease in the case of lessor and assets held under finance lease in the case of lessee. In the Old Schedule VI, details of only capital commitments were required to be disclosed. Under the Revised Schedule VI, other commitments also need to be disclosed. The Revised Schedule VI requires disclosure of all defaults in repayment of loans and interest to be specified in each case. Earlier, no such disclosure was required in the financial statements. However, disclosures pertaining to defaults in repayment of dues to a financial institution, bank and debenture holders continue to be required in the report under Companies Auditors Report Order, 2003 (CARO).

sale of products, (b) sale of services and (c) other operating revenues. Net exchange gain/loss on foreign currency borrowings to the extent considered as an adjustment to interest cost needs to be disclosed separately as finance cost. Break-up in terms of quantitative disclosures for significant items of Statement of Profit and Loss, such as raw material consumption, stocks, purchases and sales have been simplified and replaced with the disclosure of broad heads only. The broad heads need to be decided based on materiality and presentation of true and fair view of the financial statements.

Main changes related to Statement of Profit and Loss The name has been changed to Statement of Profit and Loss as against Profit and Loss Account as contained in the Old Schedule VI. Unlike the Old Schedule VI, the Revised Schedule VI lays down a format for the presentation of Statement of Profit and Loss. This format of Statement of Profit and Loss does not mention any appropriation item on its face. Further, the Revised Schedule VI format prescribes such below the line adjustments to be presented under Reserves and Surplus in the Balance Sheet. In addition to specific disclosures prescribed in the Statement of Profit and Loss, any item of income or expense which exceeds one percent of the revenue from operations or ` 100,000 (earlier 1% of total revenue or ` 5,000), whichever is higher, needs to be disclosed separately. The Old Schedule VI required the parent company to recognize dividends declared by subsidiary companies even after the date of the Balance Sheet if they were pertaining to the period ending on or before the Balance Sheet date. Such requirement no longer exists in the Revised Schedule VI. Accordingly, as per AS-9 Revenue Recognition, dividends should be recognized as income only when the right to receive dividends is established as on the Balance Sheet date. In respect of companies other than finance companies, revenue from operations need to be disclosed separately as revenue from (a)

Disclosures no longer required The Revised Schedule VI has removed a number of disclosure requirements that were not considered relevant in the present day context. Examples include: Disclosures relating to managerial remuneration and computation of net profits for calculation of commission; Information relating to licensed capacity, installed capacity and actual production; Information on investments purchased and sold during the year; Investments, sundry debtors and loans & advances pertaining to companies under the same management; Maximum amounts due on account of loans and advances from directors or officers of the company; Commission, brokerage and non-trade discounts However, there are certain disclosures such as value of imports calculated on CIF basis and expenditure in foreign currency, etc. that still continue in the Revised Schedule VI.

Guidance Note on Accounting for Real Estate Transactions (Revised 2012) The Institute of Chartered Accountants of India (ICAI) has issued a Guidance Note on Accounting for Real Estate Transactions on February 11, 2012, which supersedes the existing Guidance Note on Recognition of Revenue by Real Estate Developers which was issued by the ICAI in June 2006.

54

INDIA BUDGET 2012


- An Analysis

The objective of this Guidance Note (GN) is to recommend the accounting treatment by enterprises dealing in real estate as sellers or developers. This Guidance Note covers all forms of transactions such as: sale of property in different ways land parcel, plotted land and constructed property. sale of development rights joint development arrangements

Accounting Standard (AS) 11 The Effects of changes in Foreign Exchange Rates In the Companies (Accounting Standard) Rules, 2006, (hereafter referred to as said rules), in the Annexure, under the heading B. ACCOUNTING STANDARDS, in sub-heading Accounting Standard (AS) 11 relating to the Effect of changes in Foreign Exchange Rates . After paragraph 46, the following paragraph shall be inserted, namely. 46A. (1) In respect of Accounting Period commencing on or after the 1st April, 2011, for an enterprise which had earlier exercise the option under paragraph 46 and at option any other enterprise (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange difference arising on Reporting of long term foreign currency monetary item at rates different from those at which they were initially recorded during the period , or reported in previous financial statements , in so far as they relate to the acquisition of a depreciable capital assets , can be added to or deducted from the cost of assets and shall be Depreciated over the balance life of Assets, and in other cases , can be accumulated in Foreign currency Monetary Item Translation Difference Account in the enterprises financial statements and amortised over the balance period of such long term asset or liabilities, by recognition as income or expense in each of such period, with the exception of exchange difference dealt with in Accordance with the

This Guidance Note should be applied to all projects in real estate which have commenced on or after 1 April 2012, and also to projects which have already commenced but where revenue is being recognised for the first time on or after 1 April 2012. An enterprise may choose to apply this GN from an earlier date provided it applies this Guidance Note to all transactions which commenced or were entered into on or after such earlier date. Appointment of Cost Auditors by companies MCA has revised the procedure to be followed by companies to appoint cost auditors under section 233B of the Companies Act 1956. As per the revised procedure, the audit committee will be the first point of reference for appointment of the cost auditors. The company will electronically file an application with the central government for approval and the same will deemed to be approved, unless the contrary is heard within 30 days. Withdrawal of draft of Dematerialization of Certificates Rules, 2011 Vide notification 17/143/2011 CL.V dated 28th October 2011, the Ministry of Corporate affairs in consultation of Law ministry has been decided to withdrawal of draft of Dematerialization of Certificates Rules, 2011.

55

provision of paragraph 15 of the said rules. To exercise the option referred to in sub-paragraph (1), an assets or liability shall be designated as a long term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of twelve months or more at the date of origination of the asset or liability: Provided that the option exercised by the enterprise shall disclose the fact of such option and of the amount remaining to be amortised in the financial statement of the period in

which such option is exercised and in every subsequent period so long as any exchange difference remains unamortised. Accounting Standard (AS) 11 relating to The Effects of Changes in Foreign Exchange Rates in paragraph 46, in respect of accounting period commencing on or after 7th December, 2006 and ending on or before 31st March 2011, shall be substituted by in respect of accountin g period commencing on or after 7th December, 2006 and ending on or before 31st March 2020. nnn

56

INDIA BUDGET 2012


- An Analysis

57

OVERVIEW OF ECONOMIC SURVEY

In 2011-12, India found itself in the heart of the conflicting demands of managing growth and price stability which were the major challenges of macroeconomic policymaking. At the same time, sight must not be lost of the fact that, by any cross country comparison, India remains among the front-runners with Countrys sovereign credit rating rising by a substantial 2.98 percent in 200712. The global economic environment, which has been tenuous at best throughout the year, turned sharply adverse in September 2011 owing to the turmoil in the euro zone, and questions about the outlook on the US economy provoked by rating agencies. The Indian economy is estimated to grow by 6.9 percent in 2011-12, after having grown at the rate of 8.4 percent in each of the two preceding years. This indicates a slowdown compared not just to the previous two years but 2003 to 2011 (except 20089). However, for the Indian economy, the outlook for growth and price stability at this juncture looks more promising. There are signs from some high frequency indicators that the weakness in economic activity has bottomed out and a gradual upswing is imminent. Outlook for growth and stability is looked to be promising with real GDP growth expected to pick up to 7.6 percent in 2012-13 and 8.6 percent in 2013-14. With agriculture and services continuing to perform well, Indias slowdown can be attributed almost entirely to weakening industrial growth. Services sector grew by 9.4 percent raising its share in GDP to 59 percent. The manufacturing sector grew by 2.7 percent and 0.4 percent in the second and third quarters of 2011-12. Inflation as measured by the wholesale price index (WPI) was high during most of the current fiscal year, though by the years end there was a clear slowdown which is likely to spur investment activities which may lead to positive impact on growth. Food inflation, in particular, has come down to around zero, with most of the remaining WPI inflation being driven by non-food manufacturing products. Exports grew by 40.5 percent in the first half of this fiscal and imports grew by 30.4 percent.

Foreign trade performance to remain a key driver of growth. Forex reserves enhanced - covering nearly the entire external debt stock. GDP GROWTH For the Indian economy this was a year of disappointing growth performance. During each of the previous two years, 2009-10 and 2010-11, Indias gross domestic product GDP (at factor cost) grew by 8.4 percent per annum. Further, in 201011, the GDP at market price grew by a remarkable 9.6 percent. This performance, coming in the wake of one of the biggest global recessions in history, was outstanding. It fed expectations that Indias short economic downturn in 2008-9, when the GDP grew by 6.7 percent, was behind and the economy was on its way to full-fledged recovery which did not happen.

GDP GROWTH
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0
as a per cent of GDP Fiscal as a per cent of GDP Revenue as a per cent of GDP Primary

The Index of Industrial Production (IIP) dropped sharply in April 2011 and it has, thereafter, been seven months of indifferent performance. The services sector continued to do well and agriculture recovered but the mood in the economy was increasingly being set by the industrial sector and, in particular, manufacturing, which constitutes 75.5 percent of industrial value added. Overall GDP growth declined to 7.7 percent in the first

58

INDIA BUDGET 2012


- An Analysis

GDP
Rs. in crores
Rs. in crores

6000000

5000000

4000000

3000000

percent as against 8.1 percent in the corresponding period last year. The industry and agriculture sectors slowed down to 3.6 percent and 3.2 percent respectively, while the services sector has improved its growth to 9.4 percent. The growth rate of GDP at constant market prices in the first three quarters of the current year has been 7.1 percent.

2000000

INDUSTRIAL GROWTH Industrial growth, measured in 0 terms of the Index of Industrial PY 1786525 1864773 1972912 2047733 2222591 2389660 3249130 3564364 3896636 4158676 4507637 4885954 Production (IIP), shows fluctuating per cent 4.4 5.8 3.8 8.5 7.5 9.5 9.6 9.3 6.7 8.4 8.4 6.9 year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009- 2010- 2011trends. Growth had reached 15.5 10(PE) 11(QE) 12(AE) percent in 2007-8 and then started decelerating. Initial deceleration in quarter (Q1) and then to 6.9 percent in Q2 industrial growth was largely on account of 2011-12. The advance estimates of the of the global economic meltdown. There Central Statistics Office (CSO) has placed was, however, a recovery from 2.5 percent growth in real GDP at 6.9 percent in in 2008-9 to 5.3 percent in 2009-10 and 2011-12. Given the global despondency, 8.2 percent in 2010-11. Fragile economic and steadily deteriorating global growth recovery in the US and Europe and scenario, these numbers look good rather moderately subdued expectations at home than bad, especially if ones perch were to affected the growth of the industrial sector be in Europe. However, compared to how in the current year. Overall growth during India has fared since 2003 and, especially, April-December 2011 reached 3.6 percent since 2005, they are disappointing. INDUSTRIAL GROWTH
1000000

Quarterly Trend The growth rate in the third quarter of the current year in terms of GDP at factor cost has been 6.1 percent. The growth of agriculture, industry, and services sectors works out to be 2.7 percent, 2.6 percent, and 8.9 percent respectively as against 11.0 percent, 7.6 percent, and 7.7 percent respectively in the preceding year 2010-11. It may be seen that growth in each of the successive quarters of the current year has been lower than in the preceding one. Growth in the first three quarters put together in the current year works out to 6.9

18 16 14 12 10 8 6 4 2 0

in %
in %

59

compared to 8.3 percent in the corresponding period of the previous year. INFLATION Inflation as measured by the wholesale price index (WPI) was high during most of the current fiscal year, though by the years end there was a clear slowdown. Food inflation, in particular, has come down to around zero, with most of the remaining WPI inflation being driven by non-food manufacturing products. To control inflation and curb inflationary expectations, RBI has tightened the monetary policy. Reflecting the weak manufacturing activity and rising costs, revenue of the centre has remained less than anticipated and with higher than budgeted expenditure outgo. Headline WPI inflation remained persistently high and relatively sticky at around 9 percent during 2011. Though inflation remained high throughout the year, it has shown signs of moderation lately. The financial year 2011-12 started with a headline inflation of 9.7 percent, which briefly touched double digits in September 2011 before declining to 6.6 percent in January 2012. On the other hand Consumer Price Index(CPI) inflation for the major indices declined to below 7 percent in December 2011. The year-on-year inflation released recently by the CSO for CPI (urban), CPI (rural), and CPI (combined) was 8.25 percent, 7.38 percent, and 7.65 percent respectively in January 2012. While a strict comparison is not possible, the inflation INFLATION
in %
in %

rate for CPI (rural) (7.38 percent) released by the CSO for January 2012 is reported to be higher than CPI (rural labour) (5.27 percent) released by the Labour Bureau, Chandigarh due to differences in coverage and weighting (consumption) patterns. FINANCIAL INTERMEDIATION AND MARKETS Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial system with the global economy. Weak global economic prospects and continuing uncertainties in the international financial markets therefore, have had their impact on the emerging market economies. Sovereign risk concerns, particularly in the euro area, affected financial markets for the greater part of the year, with the contagion of Greeces sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility. The funding constraints in international financial markets could impact both the availability and cost of foreign funding for banks and corporate. Since the Indian financial system is bank dominated, banks ability to withstand stress is critical to overall financial stability. Indian banks, however, remain robust, notwithstanding a decline in capital to riskweighted assets ratio and a rise in non-performing asset levels in the recent past. The Capital to riskweighted assets ratio (CRAR) of all bank groups both under Basel I and II remained well above the stipulated regulatory norm of 9 percent in 2010-11. The financial market infrastructure continues to function without any major disruption. During financial year 2011-12, growth in bank credit extended by scheduled commercial banks (SCBs) stood at 8.2 percent as on 16 December 2011 (12.3 percent in the corresponding period of previous year). The year-on-year growth was at 17.1 percent as on 16 December 2011 (23.9 percent in the corresponding period of the previous year). With further globalization, consolidation, deregulation, and diversification of the financial system, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skill therefore assume greater significance.

8 7 6 5 4 3 2 1 0

Fuel 8.9 5.5 6.4 10.1 13.5 6.5 0 11.6 -2.1 Primary 3.6 3.3 4.3 3.7 4.3 9.6 8.3 11 12.7 All comm3.4 5.5 6.5 4.3 6.5 4.8 8 3.6 3.6 odities Period 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

12.24 18.41

13.67 9.91

9.4
201011*

9.11
201112*(P)

60

INDIA BUDGET 2012


- An Analysis

FOREIGN EXCHANGE Foreign exchange reserves are an important component of the Balance of Payment (BOP) and an essential element in the analysis of an economys external position. Indias foreign exchange reserves comprise foreign currency assets (FCAs), gold, special drawing rights (SDRs) and reserve tranche position (RTP) in the International Monetary Fund (IMF). In the current fiscal 2011-12, on monthon-month basis, the foreign exchange reserves have shown twin trends. The reserves reached an all time high level of US$ 322.0 billion at end August 2011. However, they declined to US$ 311.5 billion at the end of September 2011 before increasing to US$316.2 billion at end October 2011. In the months of November and December 2011, reserves again showed a declining trend. At end December 2011, they stood at US$ 296.7 billion, indicating a decline of US$ 8.1 billion from US$ 304.8 billion at end March 2011. The decline in reserves is partly due to intervention by the RBI to stem the slide of the rupee against the US dollar. This level of reserves provides FOREIGN EXCHANGE

about eight months of import cover. India continues to be one of the largest holders of foreign exchange reserves. Country-wise details of foreign exchange reserves reveal that India is the sixth largest foreign exchange reserves holder in the world, after China, Japan, Russia, Brazil, and Switzerland at end December 2011. EXCHANGE RATE The exchange rate policy is guided by the broad principle of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine exchange rate movements over a period in an orderly manner. In the current fiscal, there are two distinct phases in the exchange rate of the rupee. The rupee continued exhibiting a twoway movement with an appreciating trend till about July 2011, after which the trend reversed and it started declining sharply from September 2011 onwards, due to factors relating to the uncertain global economy. On month-to-month basis the rupee depreciated by 14.6 per cent from the level of ` 44.97 per US dollar in March 2011 to ` 52.68 per US dollar in December 2011. The rupee reached a peak of ` 43.94 per US dollar on 27 July 2011 and a low of ` 54.23 per US dollar on 15 December 2011 indicating depreciation of 19.0 per cent. Similarly, the monthly average exchange rate of the rupee depreciated by 11.5 per cent against the pound sterling, 9.1 per cent against the euro, and 18.7 per cent against the Japanese yen between March 2011 and December 2011 EXPORT & IMPORTS The total share of imports and exports accounts for close to 50

in US$ bn
350 300 250 200 150 100 50 0
in US$ bn

61

EXCHANGE RATE

in Rs.
60 50 40 30 20 10 0
in Rs.

in November 2011. However, in December 2011 and January 2012, it again accelerated and became positive but was low at 6.7 percent and 10.1 percent respectively. Imports in 2011-12 (April-January) at US$391.5 billion registered a growth of 29.4 percent with estimated growth in 2011-12 (April-December) of the important sectors at 40.4 percent for POL; 53.8 percent for gold and silver; 27.7 percent for machinery; 24 percent for electronics; 35 percent for fertilizer and 62 percent for coal.

EXPORT & IMPORTS


300000

(in million)
(in million)

percent of GDP while that of capital inflows and outflows measures up to 54 percent of GDP. Export growth has decelerated in the third quarter of fiscal 2011-12, while imports have remained high, partly because of continued high international oil prices. Exports registered a high growth of 61.1 percent in July 2011 decelerating to negative () 0.5 percent

250000

200000

150000

100000

50000

0 Import 50536 51413 61412 78150 111518 149166 185735 251654 303696 288373 369769 350936 Year 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 201101 02 03 04 05 06 07 08 09 10 11 12(P)*

62

INDIA BUDGET 2012


- An Analysis

INDIA BUDGET

2012
- An Analysis

Key Budget proposals

63

Blank

64

INDIA BUDGET 2012


- An Analysis

Budget at a Glance
INR in crores 2010-2011 Actuals Revenue Receipts 788471 Tax Revenue (net to centre) 569869 Non-Tax Revenue 218602 Capital Receipts (5+6+7)$ 408857 Recoveries of Loans 12420 Other Receipts 22846 Borrowings and other liabilities * 373591 Total Receipts (1+4)$ 1197328 Non-Plan Expenditure 818299 On Revenue Account of which 726491 Interest Payments 234022 On Capital Account 91808 Plan Expenditure 379029 On Revenue Account 314232 On Capital Account 64797 Total Expenditure (9+13) 1197328 Revenue Expenditure (10+14) 1040723 Of Which, Grants for creation of Capital Assets 87487 Capital Expenditure (12+15) 156605 Revenue Deficit (17-1) 252252 (3.3) Effective Revenue Deficit (20-18) 164765 (2.1) Fiscal Deficit {16-(1+5+6)} 373591 (4.9) Primary Deficit (22-11) 139569 (1.8) 2011-2012 2011-2012 Budget Estimates Revised Estimates 789892 766989 664457 642252 125435 124737 467837 551730 15020 14258 40000 15493 412817 521980 1257729 1318720 816182 892116 733558 815740 267986 275618 82624 76376 441547 426604 363604 346201 77943 80404 1257729 1318720 1097162 1161940 146853 160567 307270 (3.4) 160417 (1.8) 412817 (4.6) 144831 (1.6) 137505 156780 394951 (4.4) 257446 (2.9) 521980 (5.9) 246362 (2.8) 2012-2013 Budget Estimates 935685 771071 164614 555241 11650 30000 513590 1490925 969900 865596 319759 104304 521025 420513 100512 1490925 1286109 164672 204816 350424 (3.4) 185752 (1.8) 513590 (5.1) 193831 (1.9)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Actuals for 2010-11 in this document are provisional $ * Notes: 1. 2. GDP for BE 2012-2013 has been projected at ` 10159884 crore assuming 14% growth over the Advance Estimates of 2011-2012 (` 8912179 crore) released by CSO. Individual items in this document may not sum up to the totals due to rounding off. Excluding receipts under Market Stabilisation Scheme, Includes draw-down of Cash Balance.

65

DOMESTIC TAXATION
Direct taxes
INCOME TAX
The proposals in the Finance Bill shall become applicable from Assessment Year 2013 2014 (i.e. the financial year to end on March 31, 2013), unless otherwise specifically stated.

TAX RATES: INCOME TAX RATES


FOR INDIVIDUALS, HINDU UNDIVIDED FAMILY, ASSOCIATION OF PERSONS AND BODY OF INDIVIDUALS
Income Tax ` 1,80,001 to ` 2,00,000 (Individuals other than covered under Note 1 below) ` 2,00,001 to ` 5,00,000 ` 5,00,001 to ` 8,00,000 ` 8,00,001 to ` 10,00,000 ` 10,00,001 and above 10 Existing rates Surcharge Education Total Cess % 0.30 10.30 Tax Proposed rates Surcharge Education Cess Total % -

10 20 30 30

0.30 0.60 0.90 0.90

10.30 20.60 30.90 30.90

10 20 20 30

0.30 0.60 0.60 0.90

10.30 20.60 20.60 30.90

1)

In the case of a resident woman below the age of sixty years, the basic exemption limit has being enhanced from ` 1, 90,000/- to `2,00,000/-. For income upto Rs 5,00,000 tax @ 10.30 % shall be applicable. In the case of a resident individual of the age of sixty years or above but less than eighty years, the basic exemption limit is ` 2,50,000/-. For income upto Rs 5,00,000 tax @ 10.30 % shall be applicable. In the case of a resident individual of the age of eighty years or above, the basic exemption limit is ` 5,00,000/-. For income upto Rs 10,00,000 tax @ 20.60 % shall be applicable.

2) 3)

FOR CO-OPERATIVE SOCIETIES Income Up to ` 10,000 ` 10,001 to 20,000 ` 20,001 and above Tax Rates 10 per cent 20 per cent 30 per cent

On the above, surcharge is not applicable. Education Cess is applicable at the rate of 3 per cent. FOR LOCAL AUTHORITIES Local Authorities are taxable at the rate of 30 per cent. Surcharge is not applicable. Education Cess is applicable at the rate of 3 per cent.

66

INDIA BUDGET 2012


- An Analysis

FOR PARTNERSHIP FIRM Partnership Firms are taxable @ 30 per cent. No surcharge shall be levied in the case of a firm. Education Cess is applicable @ 3 per cent on income tax (inclusive of Surcharge, if any).

than section 80P) included in Chapter VI-A under the heading C Deductions in respect of certain incomes or under section 10AA. The rate of Alternate Minimum Tax (AMT) is 18.50%. For persons other than Limited Liability Partnerships (LLPs), the above provision shall not be applicable if the adjusted total income of such persons does not exceed `20 Lakhs. Other provisions related to Alternate Minimum Tax (AMT) shall continue to remain same as were applicable for Assessment year 2012-13.

FOR DOMESTIC COMPANIES Domestic companies are taxable @ 30 per cent. Surcharge is applicable @ 5 per cent if income is in excess of ` 1,00,00,000. Education Cess is applicable @ 3 per cent on income tax (inclusive of surcharge, if any). The rate of tax on profits from life insurance business is 12.5 per cent plus surcharge and Education Cess. Minimum Alternate Tax is applicable @ 18.5 per cent of book profit

FOR FOREIGN COMPANIES Foreign companies are taxable @ 40 per cent. Surcharge is applicable @ 2 per cent if income is in excess of ` 1,00,00,000. Education Cess is applicable @ 3 per cent on income tax (inclusive of surcharge, if any).

Clarification in the Definition of property u/s 2(14) The definition of property is clarified to include any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever, retrospectively from 1st April, 1962. Clarification in the Definition of transfer u/s 2(47) The definition of transfer is clarified to retrospectively from 1st April, 1962 to always include transactions of disposing of or parting with an asset or any interest or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

ALTERNATE MINIMUM TAX (AMT) ON ALL PERSONS OTHER THAN COMPANIES Upto Assessment year 2012-13, Alternate Minimum Tax (AMT) was applicable on Limited Liability Partnerships (LLPs) only. From Assessment year 2013-14, it shall be applicable on all persons other than Companies, who has claimed deduction under any section (other

67

Additional Depreciation to companies engaged in business of Power Generation It is proposed to amend Section 32(1)(iia) to extend the benefit of initial depreciation at the rate of 20% on actual cost of new plant and machinery (other than ships and aircrafts) to assessee engaged in the business of generation or generation and distribution of power from 1st April 2013 (Assessment year 2013-14). Weighted deduction for expenditure incurred on agricultural extension project It is proposed to introduce new section 35CCC w.e.f. 1st April, 2013 (Assessment year 201314) to allow weighted deduction of 150% of the expenditure incurred on agricultural extension project in order to incentivize the business entities to provide better and effective agriculture extensive services. Weighted deduction for expenditure for skill development It is proposed to introduce new section 35CCD w.e.f. 1st April, 2013 (Assessment year 201314) to allow weighted deduction of 150% of the expenditure incurred on skill development project in order to incentivize companies to invest on skill development projects in the manufacturing sector. Extension of weighted deduction for scientific research and development It is proposed to amend Section 35(2AB) to extend the benefit of weighted deduction incurred on approved in-house research and development facilities for further period of five years i.e. up to 31st March, 2017. This amendment will take effect from 1st April, 2013 (Assessment year 2013-14). Disallowance of business expenditure on account of non-deduction of tax on payment to resident payee It is proposed to insert proviso to section 40(a) (ia) w.e.f. 1st April, 2013 (Assessment year 2013-14) to provide that when an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on

the date of furnishing of return of income by the resident payee. Turnover or gross receipts for audit of accounts of persons carrying on business or profession It is proposed to increase the threshold limit for applicability of tax audit under section 44AB from ` 60 lakh to ` 1 Crore for business and from ` 15 Lakh to ` 25 Lakh for profession w.e.f 1st April, 2013 (Assessment year 201314). Presumptive taxation S.44AD It is proposed to increase the turnover limit for the purpose of presumptive taxation of businesses from Rs 60 lakh to ` 1 Crore. Further, it is clarified that section 44AD is not applicable to a person carrying on profession or is earning income in the nature of commission or brokerage or carrying on agency business. Exemption from long-term capital gains tax on transfer of residential property if invested in a manufacturing small or medium enterprise It is proposed to introduce new section 54GB to exempt tax on long term capital gains arising to an individual or an HUF on sale of a residential property (house or plot of land) subject to the fulfillment of conditions that the sale consideration is re-invested in the equity of a new start-up SME company in the manufacturing sector, in which such individual or HUF holds more than 50 percent share capital or voting rights, before due date of filing of return of income. Further, such consideration is to be utilized by the SME company for the purchase of new plant and machinery within the period of one year from the date of subscription of equity shares. Minimum Alternate Tax (MAT) It is proposed to amend the Explanation to section 115JB w.e.f. 1st April, 2013 (Assessment year 2013-14) so as to provide that the book profit shall be increased by the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, if the same is not credited to the profit and loss account. It is proposed to amend section 115JB to provide that the companies which are not required under section 211 of the Companies Act to prepare their profit and loss account in accordance with the Schedule VI of the

68

INDIA BUDGET 2012


- An Analysis

Companies Act, 1956, profit and loss account prepared in accordance with the provisions of the Acts governing such company, shall be taken as a basis for computing the book profit under section 115JB. Liability to pay advance tax in case of non-deduction of tax It is proposed to insert a proviso to section 209(1)(d) w.e.f. 1st April, 2013 (Assessment year 2013-14) so as to provide that where a person has received any income without deduction or collection of tax, he shall while computing his advance tax liability shall not reduce the amount so required to be deducted or collected from the income tax liability computed under clause (a),(b) or (c) of section 209. In other words he will be liable to pay advance tax in respect of such income. Cost of Acquisition in case of certain transfer It is proposed to amend the provisions of section 49 to provide that in case of conversion of sole proprietorship or firm into a company which is not regarded as a transfer, the cost of acquisition of asset in the hands of the company would be the same as that in the hand of the sole proprietary concern or the firm, as the case may be. This amendment will take effect retrospectively from 1st day of April, 1999.

Family. Thus, if an assessee being an individual or his parent, or a Hindu Undivided Family transfers agricultural land which, was being used by the individual or his parent or a HUF for agricultural purposes in the two years immediately preceding the date on which the transfer took place and such transfer gives rise to capital gain then the capital gains is exempt to the extent of such gain being utilized for purchase of any agricultural land within two years after the date of such transfer. Fair Market Value to be full value of consideration in certain cases It is proposed to insert a new section 50D w.e.f. 1st April, 2013 (Assessment year 2013-14) so as to provide that where in the case of a transfer, consideration received or accruing as a result of the transfer of a capital asset is not ascertainable or cannot be determined, then the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration for the purpose of capital gains. Reference to Valuation Officer It is proposed to amend section 55A w.e.f. 1st July, 2012 so as to provide that reference may be made to the Valuation Officer for ascertaining the fair market value of a capital asset in case such value is at variance with its fair market value instead of making a reference only when such value is less than its fair market value. Therefore, in case where the Assessing Officer is of the opinion that the value taken by the assessee as on 1.4.1981 is higher than the fair market value of the asset as on that date, the Assessing Officer would be enabled to make a reference to the Valuation Officer for determining the fair market value of the property.

Capital gains tax from sale of agricultural land by a Hindu undivided family It is proposed to amend section 54B w.e.f. 1st April, 2013 (Assessment year 2013-14) so as to extend the benefit of exemption under the said section also to a Hindu Undivided

69

Capital Gains in cases of amalgamation and demerger It is proposed to amend section 47(vii) (a) w.e.f. 1st April, 2013 (Assessment year 2013-14) relating to amalgamation so as to provide where in case of amalgamation, the amalgamated company itself is the shareholder in the amalgamating company then to that extent it shall not be necessary for the amalgamated company to issue share or shares. It is also proposed to amend section 2(19AA) (iv) relating to demerger so as to exclude the requirement of issue of shares to the shareholders of the demerged company where resulting company itself in a scheme of demerger is a shareholder of the demerged company.

It is further proposed to provide an opportunity to the company receiving such consideration to substantiate its claim regarding fair market value of the shares. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value (i) as may be determined in accordance with the method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Increase of time limit for reopening an assessment in relation to any asset located outside India It is proposed to insert a new clause to section 149 so as to increase the time limit from 6 years to 16 years for issue of notice for reopening an assessment in case of income in relation to any asset (including financial interest in any entity) located outside India which is chargeable to tax and has escaped assessment. The provisions of sections 149 are procedural in nature and will take effect from 1st July, 2012 for enabling reopening of proceedings for and assessment year commencing prior to this date i.e. for any assessment year beginning on or before the 1st day of April, 2012. Similar provisions have been introduced in Wealth Tax Act related to reopening of an assessment in relation to any asset (including financial interest in any entity) located outside India.

Compulsory filing of income tax return in relation to assets located outside India It is proposed to insert a proviso to section 139 to provide that it is mandatory for every resident having an asset (including financial interest in any entity) located outside India or signing authority in any account located outside India to file a return of income under section 139. The furnishing of return by such a resident would be mandatory irrespective of the fact whether the resident taxpayer has taxable income or not. This amendment will take effect retrospectively from the 1st day of April, 2012 and will accordingly apply to assessment year 2012-13 and subsequent assessment years. Share premium in excess of the fair market value to be treated as income It is proposed to insert a new clause in section 56(2) w.e.f. 1st April, 2013 (Assessment year 2013-14) so as to provide that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from a resident, any consideration for issue of shares which exceeds the face value of such shares, the difference between the aggregate consideration received for such shares and the fair market value shall be chargeable to income-tax under the head Income from Other Sources. However, the above provisions shall not apply in case of consideration for issue of shares received by a venture capital undertaking form a venture capital company or a venture capital fund.

Deduction for expenditure on Preventive Health check-up It is proposed to amend section 80D to include payments made for preventive health checkup of self, spouse, dependant children or parents(s) in addition to Medical insurance of amounts not exceeding ` 5,000 (whether paid by cheque or in cash). However, the deduction for preventive health check up is available only within the existing ceiling of ` 15,000 prescribed under this section. Deduction for interest on savings accounts from banks or co-operative society and post office. It is proposed to introduce new section 80TTA to provide deduction of interest

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INDIA BUDGET 2012


- An Analysis

earned on saving deposits (other than time deposits) from banks or co-operative society or from certain type of deposits with post office to individuals and HUF to the extent of Rs 10,000. Removal of cascading effect of Dividend Distribution Tax It is proposed to amend section 115-O w.e.f. 1st July, 2012 to provide that if holding company declares dividend from the dividends received from its subsidiary company on which dividend distribution tax has been paid by the subsidiary company provided the holding company distributes dividend to the extent received by its subsidiary company in the same year. Extension of applicability of Section 115BBD with respect to taxation of dividends received from foreign company The benefit of concessional rate of tax at the rate of 15% provided under section 115BBD on dividends received by an Indian company holding shareholding of 26% or more from a foreign company is proposed to be extended for the one more year i.e. for the assessment year 2013-14. Alternate Minimum Tax (AMT) applicable on all persons other than companies It is proposed to widen the scope of provisions of Chapter XII-BA relating to applicability of Alternate Minimum Tax (AMT) w.e.f. 1st April, 2013 (Assessment year 201314) to cover all persons other than a Company. It is further proposed that the Chapter XII-BA shall not apply to an individual or a HUF or an AOP or a body of individuals (whether incorporated or not) or an artificial juridical person referred to in section 2(31)(vii) if the adjusted total income

of such person does not exceed twenty lakh rupees. TDS on remuneration to a director: It is proposed to insert clause (ba) under section 194J (1) to provide that the person responsible for paying any sum by way of any remuneration or fees or commission to a director of a company, not being in the nature of salary, shall deduct tax at source at the rate of 10% of such sum w.e.f 1st July,.2012. TDS on payment of compensation on acquisition of certain immovable property It is proposed to amend section 194 LA to increase the threshold limit for non-deduction of TDS from rupees One lakh to rupees Two lakh for payment of compensation or consideration for compulsory acquisition with effect from 1st July, 2012. TDS on Interest on Debentures It is proposed to amend Section 194LA w.e.f 1st July 2012 to increase the basic threshold limit of Rs 2,500/- to ` 5,000/- in respect of TDS on interest on Debentures (Listed or unlisted) issued by a company in which public are substantially interested to residential Individual or HUF. Tax Deduction at Source on transfer of any immovable properties (other than agricultural land) It is proposed to introduce new section 194LAA w.e.f 1st October, 2012 to provide that every transferee, at the time of making payment or crediting any sum by way of consideration for transfer of immovable property (other than agricultural land), shall

71

deduct tax, at the rate of 1% of such sum, if the consideration paid or payable for the transfer of such property exceeds ` 50 lakh in case such property is situated in a specified urban agglomeration or ` 20 lakh in case such property is situated in any other area. It is further proposed that where the consideration paid or payable for the transfer of such property is less than the value adopted or assessed or assessable by any authority of a State Government for the purposes of payment of stamp duty, the value so adopted or assessed or assessable shall be deemed as consideration paid or payable for the transfer of such immovable property. Further, a Registering officer appointed under the Indian Registration Act, 1908 (Registrar) shall not register the transfer of any immovable property where taxes are required to be deducted under this provision unless the transferee furnishes proof of deduction and payment of TDS. However, the provision of section 203A shall not apply to this provision i.e. the transferee would not be required to obtain any Tax Deduction and Collection Account Number (TAN).

be an assessee in default if the buyer furnishes return of income u/s 139, considers such amount in return of income, has paid the tax shown in his return of income and furnishes the certificate to this effect from an accountant in prescribed form. It is proposed to insert a new proviso to S. 206C(7) to provide that where a seller is not an assessee in default by reason of aforesaid proviso to S. 206C(6A), he shall pay interest from the date on which such tax was collectible to the date of furnishing of return of income by buyer.

Daily Tonnage income of shipping company: It is proposed to amend section 115VG relating to taxability of shipping companies who have opted for tonnage tax scheme to revise the rate of daily tonnage income w.e.f 1st April, 2013 as under:
Qualifying ship having net tonnage (1) Up to 1,000 Existing amount of daily tonnage income (2) `46 for each 100 tons Proposed amount of daily tonnage income (3) `70 for each 100 tons `700 plus `53 for each 100 tons exceeding 1,000 tons `5,470 plus `42 for each 100 tons exceeding 10,000 tons `11,770 plus `29 for each 100 tons exceeding 25,000 tons

TCS on sale of certain minerals and cash sale of bullion and jewellery: It is proposed to insert the following to provide for collection of tax at source by every seller of following goods w.e.f 1st July, 2012:
Sr. Section to be No. inserted 1. Serial no. 7 in S. 206C(1) Nature of Goods Minerals being coal or lignite or iron ore Rate of TCS 1% of sale consideration

exceeding 1,000 `460 plus `35 but not more for each 100 tons than 10,000 exceeding 1,000 tons exceeding 10,000 `3,610 plus `28 but not more for each 100 tons than 25,000 exceeding 10,000 tons exceeding 25,000 `7,810 plus `19 for each 100 tons exceeding 25,000 tons

2.

Sub- section Bullion and (1D) in S. 206C jewellery

1% of sale consideration if it exceeds two lakh rupees and the sale is in cash

Exception to Sr. no. 1 above is the minerals being used by the buyer for personal consumption or if the buyer declares that minerals are to be utilized for manufacturing, processing or producing articles or things. It is proposed to insert proviso to S. 206C(6A) which provides that the seller [other than seller u/s 206C(1D)] who fails to collect whole or any part of the tax shall not be deemed to

Consequences if the person fails to deduct tax or pay to the government It is proposed to insert proviso to section 201(1) w.e.f 1st July, 2012 to provide that if any person fails to deduct the whole or any part of the tax in accordance with the provisions relating to TDS, on the payment made to a resident payee, then such assessee shall not be deemed to be an assessee in default in respect of such tax if the payee has taken into account such sum while computing the return of income and paid the taxes on the income declared by resident payee and has

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INDIA BUDGET 2012


- An Analysis

also furnished the return of income u/s. 139. However, the assessee has to furnish a certificate to this effect from an accountant in such form as may be prescribed. It is further proposed to insert proviso to section 201(1A) to provide that a person, who fails to deduct tax and is not deemed to be an assessee in default on account of payment of taxes by resident payee then the person is liable to pay interest from the date on which such tax was deductible to the date of furnishing of return of income by a resident payee.

ii) Appealable u/s 246A and iii) shall be deemed as notice of demand u/s 156 w.e.f. effect from 1st July 2012. Senior Citizens not required to pay Advance Tax It is proposed that a resident senior citizen, having income other than income form Business and profession, are not required to pay advance tax for the financial year 2012-13 and subsequent financial years. Penalty on undisclosed income found during the course of search It is proposed to repeal section 271AAA w.e.f 1st July, 2012 and to introduce section 271AAB for levy of penalty in a case where search has been initiated on or after 1st July, 2012. The quantum of penalty shall be as under in respective scenario (i) If undisclosed income is admitted during the course of search, the taxpayer will be liable for penalty at the rate of 10% of undisclosed income subject to the fulfillment of certain conditions.

Late fees for delay in furnishing of TDS statement (return) It is proposed to introduce a new section 234E to levy a late fee to `200 per day on delay in filing of quarterly TDS statement for the period starting from the due date of furnishing of TDS statement to actual date of filing such statement. Penalty for delay in furnishing of TDS statement (return) It is proposed to introduce a new section 271H w.e.f. 1st July, 2012 to levy a penalty ranging from `10,000 to `1,00,000 for not furnishing TDS statement before the expiry of one year from the prescribed time limit. It is further proposed to levy penalty ranging from `10,000 to `1,00,000 for furnishing of incorrect particulars in the TDS statement unless if the deductor proves that there was reasonable cause for such failure. Sanctity to intimation issued on processing of TDS statement It is proposed that intimation on processing of TDS statement can now be i) subject to Rectification u/s 154,

(ii) If undisclosed income is not admitted during the course of search but disclosed in the return of income filed after the search, the taxpayer will be liable for penalty at the rate of 20% of undisclosed income subject to the fulfillment of certain conditions. (iii) In a case not covered under (i) and (ii) above, the taxpayer will be liable for penalty at the rate ranging from 30% to 90% of undisclosed income. Expediting prosecution proceedings It is proposed to strengthen the prosecution mechanism by

73

introducing new sections 280A, 280B, 280C and 280D by (i) Providing for constitution of Special Courts for trial of offences.

This amendment will take effect retrospectively from 1st June, 2003.

(ii) Application of summons trial for offences under the Act to expedite prosecution proceedings as the procedures in a summons trial are simpler and less time consuming. (iii) Providing for appointment of public prosecutors. Processing of return of income where scrutiny notice issued Under the existing provisions, every return of income is to be processed under sub-section (1) of section 143 and refund, if any; due is to be issued to the taxpayer. It is proposed to insert a new sub-section (1D) in the aforesaid section to provide that processing of return will not be necessary in a case where notice under subsection (2) of section 143 has already been issued for scrutiny of the return. Notification of a class of search cases where compulsory reopening of past six years not required It is proposed to insert a third proviso to subsection (1) Section 153A and a second proviso to sub-section (1) of Section 153C relating to assessment in case of search or requisition and assessment of income of any other person respectively so as to empower the Central Government to notify cases or class of cases in which the Assessing Officer shall not issue notice for initiation of proceedings for preceding 6 assessment years. These amendments will apply w.e.f 1st July, 2012. Charging of interest on recovery of refund granted earlier It is proposed to insert a new Explanation to section 234D so as to clarify that the provisions of the aforesaid section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date. Therefore the provisions of section 234D would be applicable to any proceeding which is completed on or after 1st June, 2003, irrespective of the assessment year to which it pertains.

Related person for the purpose of making an application before Settlement Commission It is proposed to amend section 245C relating to application for settlement of cases to introduce an explanation to clause (ia) of the proviso to clarify that a person shall be deemed to have a substantial interest in a business or profession if such person is a beneficial owner of not less than 20% of shares or of 20% share in profits on the date of search. This amendment is w.e.f. 1st July, 2012. Wealth Tax Exemption of residential house allotted to employee of a company whose gross annual salary is less than 10 lakhs It is proposed that, now exemption from Wealth Tax for a residential house allotted by a company to employee having salary less than ten lakh can avail this exemption from Wealth Tax. Earlier this exemption was available to company only when such residential house property was allotted to employee having salary less than five Lakhs. Amendment in provisions relating to cash credits It is proposed to insert provisos to section 68 providing that if any sum is credited in the books of a closely held company and sums so credited consist of Share Application money, share capital, share premium or in any other nomenclature then the source of funds in the hands of the resident in whose name such credit is recorded shall be explained by the company and if such explanation is found to be satisfactory by the assessing officer then the explanation provided by the company shall be deemed to be satisfactory for the purpose of this section. However, the above proviso will not apply to amounts credited in the name of any venture capital fund or a venture capital company as referred to in clause 23(FB) of section 10. This amendment is proposed to take effect from 1st April, 2013(Assessment Year 201314). Taxation of cash credits, unexplained money, investments etc. It is proposed to insert new section 115BBE w.e.f. 1st April, 2013 to tax the unexplained credits, money, investment, expenditure, etc.,

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INDIA BUDGET 2012


- An Analysis

which has been deemed as income under section 68, section 69, section 69A, section 69B, section 69C or section 69D, at a flat rate of 30% (plus surcharge and cess as applicable) without providing for basic exemption limits. It is also proposed to provide that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Act in computing deemed income under the said sections. Increase in Time Limits for completion of assessment and reassessment. It is proposed to amend section 153 and section 153B w.e.f 1st July, 2012 so as to provide that the time limits for completion of assessments and reassessments shall respectively be increased by three months. The existing period and the new extended period for completion of pending proceedings and subsequent proceedings under these provisions is given below: Limitation of time
ProceeCurrent time allowed dings under section 143 21 months from the end of the A.Y. 143 and 33 months from the 92CA end of the A.Y. 148 9 months from the end of the F.Y. in which notice issued 148 and 21 months from the end 92CA of the F.Y. in which notice issued 250 or 254 9 months from the end or 263 of the F.Y. in which order received 250 254 or 21 months from the end 263, and of the F.Y. in which order 92CA received Proposed Period 24 months 36 months 12 months

Section 17A of the Wealth-tax Act has also been amended for increasing the time limit by three months for completion of assessment/ reassessment proceedings.

Assessments of charitable organization It is proposed to amend section 10(23C), section 13 and section 143 to ensure that trust or institution does not get benefit of tax exemption in the year in which its receipts from commercial activities exceed the threshold as specified under section 2(15), whether or not the registration or approval granted or notification issued is cancelled, withdrawn or rescinded. These amendments will take effect retrospectively from 1st April, 2009.

Amendment in provisions relating to Income escaping Assessment Under the existing provision, the first proviso to section 147 provides that if an assessment is made under section 143(3) or 147, the assessment could not be reopened after the expiry of four years from the end of the relevant assessment year, unless the income has escaped assessment due to failure on the part of the assessee to file a return or to disclose fully and truly all material facts necessary for his assessment. It is proposed to insert a proviso to section 147 so as to provide that in case of income in relation to any asset (including financial interest in any entity) located outside India which is chargeable to tax and has escaped assessment for any assessment year, nothing contained in the first proviso shall apply. It is further proposed to insert a new clause (d) to Explanation 2 which states that income shall be deemed to have escaped assessment where a person is found to have

24 months

12 months

24 months

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any asset (including financial interest in any entity) located outside India. These amendments will take effect from 1st July, 2012. It is also clarified that these provisions being of procedural nature shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012. Similar provisions have been introduced in Wealth Tax Act related to wealth escaping assessment

Authorization or requisition and subsequent assessment in search cases It is proposed to insert a new section 292CC to provide that it shall not be necessary to issue an authorization under section 132 or make a requisition under section 132A separately in the name of each person. Even if an authorization under section 132 has been issued or requisition under section 132A has been made mentioning therein the name of more than one person then such authorization or requisition shall not be deemed to construe that it was issued in the name of an association of persons or body of individuals consisting of such persons. Further, the assessment or reassessment shall be made separately in the name of each of the persons mentioned in such authorization or requisition. The aforesaid amendment will take effect retrospectively from 1st April 1976 (i.e. AY 1976 - 1977). Deduction in respect of capital expenditure on specified business It is proposed to enhance the scope of section 35AD by addition of three new businesses such as (a) setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962 (52 of 1962), (b) Bee-keeping and production of honey and beeswax; and (c) Setting up and operating a warehousing facility for storage of sugar, as specified business for the purposes of the investmentlinked deduction, under said section. It is proposed that the date of commencement of operations for availing aforesaid investment linked deduction in respect of these three new specified businesses shall be on or after 1st April, 2012. It is also proposed that certain specified businesses such as setting up and operating a cold chain facility, setting up and operating a

warehousing facility for storage of agricultural produce, building and operating, anywhere in India, a hospital with at least one hundred beds for patients, developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed; and production of fertilizer in India, commencing operations on or after the 1st of April, 2012 shall be allowed a deduction of 150% of the capital expenditure. The aforesaid amendments will take effect from 1st April, 2013 (i.e. AY 2013-14). It is further proposed to insert a new subsection (1A) in section 35AD to provide where the assessee builds a hotel of two-star or above category as classified by the Central Government , the assessee shall be deemed to be carrying on the specified business of building and operating hotel even if while continuing to own the hotel, assessee transfers the operation thereof to another person,. The aforesaid amendment will take effect from 1st April, 2011 (i.e. AY 2011-12).

Extension of sunset date for tax holiday for power sector It is proposed to amend section 80-IA (4) (iv) to extend the terminal date for a further period of one year, i.e., up to 31st March, 2013. The aforesaid amendment will take effect from 1st April, 2013 (i.e. AY 2013-14). Reduction of the eligible age for senior citizens for certain tax reliefs It is proposed to amend the effective age of a senior citizen being an Indian resident from sixty-five years of age to sixty years for all the provisions of income tax act. The aforesaid amendments to section 80D and section 80DDB will take effect from 1st April, 2013 (i.e. 2013-14) and the amendment to section 197A will take effect from 1st July, 2012.

Any sum or property received by an HUF from its members is exempt It is now proposed to amend the definition of relative as given in Section 56(2)(vii) of the Act, so as to widen the definition to provide that any sum or property received

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INDIA BUDGET 2012


- An Analysis

without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation like individuals. Cash Donations prohibited in excess of ten thousand It is proposed to amend Sec 80G and 80GGA so as to specify therein that any payment made in cash shall only be allowed as a deduction up to rupees ten thousand only w.e.f. Assessment year 2013-14. Eligibility conditions for exempt life insurance policies and for deduction in respect of life insurance policies It is proposed to amend section 10(10D) to reduce the threshold of premium payable, for insurance policies issued on or after 1st April, 2012 to 10% of the actual capital sum assured from 20% of the actual capital sum assured. Correspondingly, it is also proposed to amend Sec 80C to provide that the deduction for life insurance premium as regards insurance policies issued on or after 1st April, 2012 shall be allowed for only so much of the premium payable as does not exceed 10% of the actual capital sum assured. It is further proposed to insert the definition of actual capital sum assured under Sec 10(10D) and 80C so as to provide that the actual capital sum assured under the policy on happening of the insured event at any time during the term of the policy, not taking into account - (i) the value of any premiums agreed to be returned, or (ii) any benefit by way of bonus or otherwise over and above the sum actually assured, which is to be or may be received under the policy by any person. This amendment has been proposed to ensure that the life insurance products are not designed

to circumvent prescribed limits by varying the capital sum assured from year to year.

TRANSFER PRICING
Inclusion of certain domestic transactions in the ambit of transfer pricing It is proposed to include certain domestic transactions under transfer pricing regulations. Therefore, section 92BA is proposed to be inserted to include payment made to a person referred to in section 40A(2)(b), transaction referred to in section 80A, any goods or services referred to in section 80IA(8), any business transacted between the assessee and the other person under section 80IA(10), any other transaction referred to under chapter VI-A or section 10AA, any other transaction as may be prescribed, under the definition of international transaction or specified domestic transaction. The transactions specified above shall be covered under the ambit of international transaction or specified domestic transaction only if the transaction exceed the monetary threshold of ` 5 crores during the financial year. Further, the definition of person specified under section 40A(2)(b) have been amended to cover cases which have same parent company. This amendment shall take effect from 1st April, 2013 and will, accordingly, apply in relation to the Assessment Year 2013-14 and subsequent assessment years.

Determination of Arms length price It is proposed to amend the section 92C so as to provide that the variation between the Arms Length Price determined under section 92C(1) and the actual price at which

77

international transaction has been undertaken shall not exceed 3% of the actual price of international transaction. The amendment will take effect retrospectively from 1st October, 2009. Filing of return of income, definition of international transaction, tolerance band for ALP, penalties and reassessment in transfer pricing cases It is proposed to amend section 139, to provide that in case of assesses who are required to furnish report under section 92E, the due date for filing the return of income shall be 30th November of the assessment year. This amendment will take effect retrospectively from 1st April, 2012 and will, accordingly, apply in relation to the assessment year 201213 and subsequent assessment years. It is proposed to amend the definition of the term International Transaction as provided in section 92B so as to include business restructuring or reorganisation transaction, intangible property transaction within the purview of international transaction. This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 200203 and subsequent assessment years.

Completion of assessment in search cases referred to DRP It is proposed that where the assessee files an objection against draft order of assessments of search and seizure, the time limit specified in Sec 144C will apply notwithstanding anything contained in Sec 153B. It is also proposed to amend the provisions of Sec 246A and 253 of the Act to exclude the orders passed by the Assessing officer in pursuance of directions of the DRP from the appellate jurisdiction of Commissioner (Appeals) and to provide for filing of appeals directly to ITAT against such orders. These amendments are with retrospective effect from 1st October 2009.

INTERNATIONAL TAXATION
Clarification in the Definition of royalty u/s 9(1) (vi) The definition of royalty is clarified to retrospectively mean to include consideration received for transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. It is proposed to retrospectively clarify that the royalty always included consideration in respect of any right, property or information, whether or not a) b) c) the possession or control of such right, property or information is with the payer; such right, property or information is used directly by the payer; the location of such right, property or information is in India.

Assessing Officer empowered to file an appeal in ITAT against the DRP order It is proposed to amend the provisions of Sec 253 and 254 of the Act to empower the Assessing Officer to file an appeal directly before the ITAT against the order passed in pursuance of directions of the DRP. These amendments will take effect from 1st July, 2012.

DRP empowered to enhance the variations It is proposed to insert an explanation in the provisions of section 144C to clarify that the power of the DRP to enhance the variation shall include to consider any matter arising out of the assessment proceedings relating to the draft assessment order whether such matter was raised by the eligible assessee or not. This is with retrospective effect from A.Y. 2009-10

It is further proposed to clarify that the term process always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. These amendments will take retrospectively from 1st June, 1976. effect

Clarification on Source Rule of taxation u/s 9(1)(i) Section 9 (1)(i) provides circumstances in which income accruing or arising, directly or

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indirectly, is taxable in India. One of the limbs of clause (i) is income accruing or arising directly or indirectly through the transfer of a capital asset situate in India. It is proposed to insert a clarificatory explanation retrospectively in Section 9(1)(i) to provide that the expression through u/s 9(1)(i) always meant to be by means of, in consequence of or by reason of. Further, it is also proposed to insert another clarificatory retrospective explanation in Section 9(1)(i) to provide that any capital asset, being any share or interest in a company incorporated outside India, would have meant to be always situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. These amendments will take effect retrospectively from 1st April, 1962

resident did not have a residence or place of business or business connection in India or any other presence in India. Further it is also proposed to insert with effect from 1st July, 2012 a new sub-section so as to provide that Board may notify a class of persons or cases, who while making any payments to a non-resident (not being a company, or to a foreign company), would be required to make an application to the Assessing Officer to determine the taxability on such payments and thereby deduct tax on that proportion of the sum which is so chargeable. It would be irrelevant whether the sum so paid, is chargeable or not under the provisions of this Act

Time Limit for notice u/s 149 It is proposed to extend time limit for issue of notice in case of a person who is treated as agent of a non-resident, from the prescribed period of two years be extended to six years. It is also clarified that these provisions being of procedural nature shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012. Amendment in provisions of Section 195 It is proposed to insert a clarification retrospectively from 1st April, 1962 that the obligation to comply with the provisions of Section 195(1) and to withhold tax on the payments made to non residents was always extended to all persons, resident and non-resident, even if the non-

Validation of demand Clause It is proposed to provide for validation of demand etc., under Income-tax Act, 1961 in certain cases in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of transfer of a share or shares of a company registered or incorporated outside India or in consequence of any agreement or otherwise outside India. It is proposed to provide through this validation clause that any notice sent or purporting to have been sent, taxes levied, demanded, assessed, imposed or collected or recovered during any period prior to coming into force of the validating clause shall be deemed to have been validly made and such notice or levy of tax shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India. This validating

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clause shall operate despite of any judgment, decree or order of any Court or Tribunal or any Authority. This validation shall take effect from coming into force of the Finance Act, 2012. Taxation of a non-resident entertainer, sports person etc It is proposed to insert a new clause is Section 115BBA(1) whereby any income arising to a non-citizen, non-resident entertainer from his performance in India shall be taxable at the rate of 20% of gross receipts. It is proposed to also increase the tax on income earned by non-resident, noncitizen sportspersons and non-resident sports associations from 10% to 20% of gross receipts. This amendment will take effect from 1st April, 2013 Consequential amendment is proposed in section 194E to provide for withholding of tax at the rate of 20% from income payable to non-resident, non-citizen, entertainer, or sportsmen or sports association or institution. This amendment will take effect from 1st July, 2012.

Advance pricing agreement Amidst the hues and cries for clarity and certainty in the transfer pricing laws and the draconian application of the same, the Honble Finance Minister has proposed to introduce the much awaited Advance Pricing Agreement (APA) which is expected to bring in better assurance on transfer pricing methods and to provide certainty and unanimity of approach. For this purpose, insertion of two new sections 92CC and 92CD have been proposed to provide a framework for APA under the Act. The provisions of the section 92CC empower the CBDT to enter into an APA with any person, with the approval of the Central Government, to determine the Arms Length Price (ALP) of an international transaction (or specify the manner in which ALP is to be determined) to be entered into by that person in accordance with the methods provided in the Act or by any other method, with necessary adjustments or variations. The validity of the APA would be not more than 5 consecutive previous years and shall be binding only on the person and the Commissioner (including income-tax authorities subordinate to him) in respect of the transaction in relation to which the agreement has been entered into. The CBDT is also empowered to declare the APA to be void-ab-initio, with the approval of the Central Government if the CBDT finds that the APA has been obtained by the person by fraud or misrepresentation of facts. In such an event, all the provisions of the Act shall apply as if such APA was never entered into. The provisions of Section 92CD of the Act provide that where a person has filed a return u/s 139 of the Act for any assessment year relevant to the previous year to which an APA applies, then such person shall submit a modified return, in accordance with and limited to the APA, within a period of 3 months from the end of the month in which the APA was entered into. The Assessing Officer shall assess, reassess or recomputed the total income of any assessment year having regard to such APA and the period of limitation for completion of such assessment or reassessment is one year from the end of the financial year in which the modified return is furnished.

Meaning assigned to a term used in Double Taxation Avoidance Agreement (DTAA) It is proposed to insert an Explanation in section 90(3) and section 90A(3) to provide that where any term is not defined in the agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force. This amendment will take effect retrospectively from 1st October, 2009.

Exemption of income received by certain foreign companies It is proposed to insert new clause 48 in section 10 w.e.f 1st April, 2012 and accordingly from assessment year 2012-13, to exempt income earned in Indian currency towards import of crude oil received by foreign companies in India and where no other activity is carried on by such company in India. However, the receipt of such money shall be under an arrangement or agreement either entered into or approved and notified by the central government

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These amendments will take effect from 1st July, 2012.

Powers of transfer pricing officer It is proposed to amend Section 92CA with the insertion of two more subsections 2B and 2C. Sub-section 2B, to be applicable with retrospective effect from 1st June 2002, empowers the Transfer Pricing Officer (TPO) to determine ALP of an international transaction that comes to his notice during the course of proceeding before him where the assessee has not reported such international transaction in the Transfer Pricing Audit Report. Such international transaction shall be deemed to have been referred by the Assessing Officer to the TPO u/s 92CA(1) of the Act. Sub-section 2C provides that the retrospective application of Subsection 2B of Section 92CA of the Act shall not empower the Assessing Officer to reopen any assessment u/s 147 or to rectify any order u/s 154 in case of proceedings completed before 1st July 2012.

provisions on income credited or paid by VCF/VCC to the investors. These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the Assessment Year 2013-14 and subsequent assessment years. Revision of fee for filing application before the AAR It is proposed to increase the fee for filing application for advance ruling from ` 2,500/- to ` 10,000/-. This amendment will take effect from the 1st July, 2012 and will accordingly apply to any application for advance ruling filed on or after the 1st July, 2012. Tax incentive for funding of certain infrastructure sectors It is proposed to amend Section 115A of the Act to provide that any interest paid by a specified company in the infrastructure sector to a nonresident in respect of borrowing made in foreign currency from sources outside India between 1st July, 2012 and 1st July, 2015, under an agreement, including rate of the interest payable, approved by the Central Government, shall be taxable at the rate of 5% (plus applicable surcharge and cess) instead of 20%. It is further proposed to insert a new section 194LC to provide that interest income paid by such specified company to a non-resident shall be subjected to tax deduction at source at the rate of 5% (plus applicable surcharge and cess). This amendment will take effect from 1st July, 2012.

Amendments relating to venture capital funds/companies/undertakings It is proposed to amend the definition of a venture capital undertaking given in clause (c) of Explanation 1 to Section 10(23FB) to mean the venture capital undertaking referred to in the SEBI (Venture Capital Funds) Regulations, 1996 made under the SEBI Act, 1992. It is also proposed to amend Section 115U to provide that the income of a venture capital fund/company/undertaking would be taxable in the hands of the investor on accrual basis. It is also proposed to withdraw the exemption of applicability of TDS

Tax Residency Certificate (TRC) for claiming relief under DTAA It is proposed to insert a new subsection (4) in the aforesaid section

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Section 90 and also a new sub-section (4) in Section 90A to make submission of Tax Residency Certificate containing prescribed particulars, as a necessary but not sufficient condition for availing benefits of the agreements referred to in these Sections. This amendment will take effect retrospectively from 1st October 2009 for Section 90 and from 1st June 2006 for Section 90A. Extension of time limit for completion of assessment or reassessment where information is sought under a DTAA It is proposed to amend Section 153 and 153B so as to revise the time limits wherever specified for completion of assessments and reassessments. The revised time limits shall be the time limits specified under the aforesaid section, as respectively increased by three months. The existing provisions contained in Explanation 1 to the aforesaid section 153 and Explanation to Section 153B provide that certain periods specified therein are to be excluded while computing the period of limitation laid down in the said sections for completion of assessments and reassessments. It is proposed to amend clause (viii) of the Explanations in the respective Section 153 and 153B so as to extend the period of exclusion specified therein for obtaining information from foreign tax authorities from six months to one year. These amendments will take effect from 1st July, 2012. It is further proposed to insert a new clause (ix) in Explanation 1 of the aforesaid section 153 and Explanation to Section 153B so as to provide for exclusion of time period starting from receipt of reference by the Commissioner under sub-section (1) of newly inserted section 144BA (GAAR) and ending on date on which a direction under sub-section (3) or sub-section (6) or an order under sub-section (5) of newly inserted section144BA (GAAR) is received by the Assessing Officer or one year whichever is less. Thus the aforesaid period of exclusion shall not extend one year. This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-2014 and subsequent assessment years.

GENERAL ANTI AVOIDANCE RULE (GAAR)

It is proposed to introduce Chapter X-A comprising of sections 95 to 102 in the Income Tax Act as an anti avoidance measure to deal with aggressive tax planning. The main feature of such a regime (i) An arrangement whose main purpose or one of the main purposes is to obtain a tax benefit and which also satisfies at least one of the four tests, can be declared as an impermissible avoidance arrangements. (ii) The four tests referred laid down to declare a transaction to be an impermissible avoidance arrangements are (a) The arrangement creates rights and obligations, which are not normally created between parties dealing at arms length. (b) It results in misuse or abuse of provisions of tax laws. (c) It lacks commercial substance or is deemed to lack commercial substance. (d) Is carried out in a manner, which is normally not employed for bonafide purpose. (iii) The onus to prove that the main purpose of an arrangement is not to obtain tax benefit is cast on tax payer failing which. (iv) Further, an arrangement will be deemed to lack commercial substance if (a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes round trip financing; an accommodating party ; elements that have effect of offsetting or cancelling each other; or a transaction which is conducted through one or more persons

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and disguises the value, location, source, ownership or control of fund which is subject matter of such transaction; or (c) it involves the location of an asset or of a transaction or of the place of residence of any party which would not have been so located for any substantial commercial purpose other than obtaining tax benefit for a party. (v) It is also provided that certain circumstances like period of existence of arrangement, taxes arising from arrangement, exit route, shall not be taken into account while determining lack of commercial substance test for an arrangement. (vi) Once the arrangement is held to be an impermissible avoidance arrangement then the consequences of the arrangement in relation to tax or benefit under a tax treaty can be determined by keeping in view the circumstances of the case, however, some of the illustrative steps are:(a) Disregarding or combining any step of the arrangement. (b) Ignoring the arrangement for the purpose of taxation law. (c) Disregarding or combining any party to the arrangement. (d) Reallocating expenses and income between the parties to the arrangement. (e) Relocating place of residence of a party, or location of a transaction or situs of an asset to a place other than provided in the arrangement. (f) Considering or looking through the arrangement by disregarding any corporate structure.

(g) Re-characterizing equity into debt, capital into revenue etc. (vii) These provisions can be used in addition to or in conjunction with other anti avoidance provisions or provisions for determination of tax liability, which are provided in the taxation law. (viii) For effective application in cross border transaction and to prevent treaty abuse a limited treaty override is also provided. The procedure for invoking GAAR is proposed as under (i) It is proposed that the Assessing Officer shall make a reference to the Commissioner for invoking GAAR and on receipt of reference the Commissioner shall hear the taxpayer and if he is not satisfied by the reply of taxpayer and is of the opinion that GAAR provisions are to be invoked, he shall refer the matter to an Approving Panel. In case the assessee does not object or reply, the Commissioner shall make determination as to whether the arrangement is an impermissible avoidance arrangement or not. (ii) The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner (iii) The Approving Panel shall either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. (iv) The Assessing Officer (AO) will determine consequences of such a positive declaration of arrangement as impermissible avoidance arrangement.

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(v) The final order in case any consequence of GAAR is determined shall be passed by AO only after approval by Commissioner and, thereafter, first appeal against such order shall lie to the Appellate Tribunal. (vi) The period taken by the proceedings before Commissioner and Approving Panel shall be excluded from time limitation for completion of assessment. Approving Panel for GAAR The Approving Panel shall be set up by the Board and would comprise of officers of rank of Commissioner and above. The panel will have a minimum of three members. The procedure and working of Panel shall be administered through subordinate legislation. In addition to the above, it is provided that the Board shall prescribe a scheme for regulating the condition and manner of application of these provisions. These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.

The word service has been now defined in clause (44) of the new section 65B. The ambit of taxable services further includes certain activities that have been defined as declared services in section 66E. Most of these declared services are presently taxed as positive list. On coming into force, the new provisions will replace the earlier provisions contained in sections 65, 65A, 66, 66A will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions. Rate changes: Given the imperative for fiscal correction, the rate of service tax has been proposed to be raised from 10 per cent to 12 per cent effective from April 1, 2012. Consequent changes have also been made in composition rates as follows: For life insurance: 3% for the first year premiums while retaining the rate @1.5% for the subsequent years (simultaneously restoring full Cenvat credit); Service in relation to purchase and sale of foreign currency including money changing: Raising the existing rates proportionately by 20%; Distributor or selling agent of lotteries: Raising the specified amounts proportionately and suitably rounded off to Rs 7,000 and 11,000; For works contracts from 4% to 4.8%.

SERVICE TAX
INTRODUCTION OF NEW NEGATIVE LIST OF SERVICES & Changes in rates: Taxation of services: Clauses 143 to 145 introduced in the Finance Bill, 2012 cover the legislative changes relating to Service Tax. Changes have also been made in the rules as well as exemptions. There is paradigm shift in the way services are proposed to be taxed in future. Taxation will be based on what is popularly known as Negative List of Services. Under the proposed amendment if an activity meets the characteristics of a service and is taxable if provided or agreed to be provided in the taxable territory by one person to another unless specified in the Negative list, comprising 17 heads listed in proposed new section 66D, or otherwise exempted by a notification issued under section 93 of the Act. Most of the 88 exemptions at present will be either rescinded, being no more needed, or modified in some manner, or merged in a mega notification, leaving the final tally of exemptions to just 10.

The rate for Cenvat reversal for exempt services has been revised likewise from 5% to 6% in Rule 6(3) of Cenvat Credit Rules (CCR), 2004. The dual tax structure for air transportation: partly specific, partly ad valorem - is being replaced with a uniform ad-valorem levy at standard rate with an abatement of 60% on all sectors and all classes. All these changes will be effective April 1, 2012.

Place of Provision of Services Rules, 2012: To support the negative list approach to taxation of services, draft Place of Provision of Services Rules, 2012 is being proposed. The draft Place of Provision of Services Rules contains principles on the basis of which

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taxing jurisdiction of a service can be determined. The Place of Provision of Services Rules, 2012 will be notified after (Section 66C) the Finance Bill, 2012 receives the assent of the President. When the Place of Provision of Services Rules comes into effect, existing Export of Services Rules, 2005 and Taxation of Services (Provided from outside India and received in India) Rules, 2006 will be rescinded. A draft Guidance Paper-B has also been issued explaining all the various aspects relating to these rules. Consequential Changes: To support the transition to Negative List a number of other changes, in particular, movement away from service-specific provisions in rules and notifications have been proposes. These consequential changes that shall be required are as follows: Service Tax Rules Besides complying with some revised drafting needs due to negative list, the rules will need changes in respect of person liable to pay tax: to provide for recipient persons relating to services provided to business entities by government, advocates or arbitrators, change in services provided from non-taxable territory, some changes to services provided by GTA and the deletion of all those services that are now exempt e.g. mutual funds agents and distributers. Since the Export Rules will cease to apply, the required provisions will be incorporated in Service Tax Rules. A transaction will qualify as export when it meets following requirements: The service provider is located in Taxable territory;

Service recipient outside India;

is

located

Service provided is a service other than in the negative list. The Place of Provision of the service is outside India; and The payment is received in convertible foreign exchange

Valuation Rules

A new valuation rule is being introduced to substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The value of the Works Contract is proposed to be redefined, as follows: As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose; If value of goods is not intimated to State VAT, the assessee can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract; If the value is not so deduced, and not merely as an option, the value shall be specified percentage of the total value as follows: for original works: 40% of the total amount; other contracts: 60% of the total amount; for contracts involving construction of complex or building for sale where any part of the consideration is received before the completion of the building: 25% of the total amount

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Original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable. The total amount will be gross amount plus the value of any material supplied under the same contract or any other contract. The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service, which is totally independent of the deemed sale. However taxes paid on capital goods and input services will be available. Likewise a new Rule 2C is being introduced, for determination of value of taxable service involved in supply of food and drinks in a restaurant or as outdoor catering. The value is being adjusted such that the industry is able to utilize credit on capital goods, specified inputs (other than chapter 1 to 22 i.e. foods and beverages) and input services. Thus the taxable portion is being raised but the move is expected to be business-friendly. The revised taxable portion shall be as follows:
Existing Proposed taxable taxable portion portion 40%

Rule 6 of Valuation Rules prescribes inclusions and exclusions to the taxable value. Following changes are being made here: Sub-rule (1) to include any amount realized as demurrage, or by any other name, for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service. This change will become relevant in the context of negative list where such amounts may be collected in the name of demurrage but will actually be in all respects a service. In sub-rule (2) clause (iv) regarding exclusion of interest on loans is proposed for substitution with interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods). This will keep such amounts outside the value and thus not be relevant for reversal of credits under rule 6(3) of CCR, 2004. Interest on loans will now be an exempt income rather than an exclusion from value. Under the list of exclusions in sub-rule (2) from taxable value accidental damages due to unforeseen actions not relatable to the provision of service is being added. This again is in view of the negative list approach to taxation of services and to confine inclusions of demurrages to those under category I above and not beyond.

Sr. Description of service No. 1.

Service portion in the supply of 30% food or any other article of human consumption or drink at a restaurant S. No.1 provided from a premises elsewhere (outdoor catering) 50%

2.

60%

Further, it is proposed to amend Rule 3 of valuation rules to provide that prescribed manner in Rule 3 will be applicable only in the cases where valuation is not ascertainable. At present Rule 3 has been inadvertently made applicable to situation where consideration received is not wholly or partly consisting of money, which is fully covered by the Act.

Abatements: Certain changes are proposed to be introduced in the abatements along with negative list. The increase in taxable portion of value are accompanied with liberalization in input tax credits following the principle of neutrality of taxes that the burden of taxes should not raise the cost per se but passed on to the point of consumption. It is expected that, though the taxable portion of services may appear a little higher, but the availability of credits will lead to reduction in costs and hence prices for the consumers.

The existing and new abatements shall be as follows: Sr. Service No. 1. 2 Convention center or mandap with catering Pandal or Shamiana with catering. Existing taxable portion 60% 70% Proposed taxable portion 70% 70% Cenvat credits

All credits, except on inputs, of chapter 1 to 22, will now be available.

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Sr. Service No. 3 4. Coastal shipping Accommodation in hotel etc.

Existing taxable portion 75% 50%

Proposed taxable portion 50% 60%

Cenvat credits

No credits as at present Credits on input services allowed All credits will be allowed -do-

5. 6.

Railways: goods Railways: passengers

30% New levy

30% 30%

Cenvat Rules: Cenvat rules will require some changes in the light of negative list. First of all the service-specific references in the rules by clauses will be replaced by broad descriptions retaining the essence of the existing provisions. Interest on loans, advances will now be an exempt service. This will require reversal of credits used for earning such income. For the banking and financial sector, provisions are available to reverse credits up to 50% in rule 6(3D). It is being proposed to change this formula to actual basis, the value of service being net interest i.e. interest earned less interest paid on deposits, subject to a minimum of 50% 0f interest paid on deposits. For the non-financial sector it is being proposed that they may reverse credits on gross interest basis. Rebate of service tax on export of goods: The scheme for electronic refund of service tax paid on taxable services (eighteen different taxable services) used for export of goods at the post-manufacture /postremoval stage has been made operational since 3rd January, 2012, as announced by the Honorable Finance Minister in his last years Budget speech. The scheme is operated at present as a general exemption under section 93(1) of the Finance Act, 1994. To strengthen the

electronic refund further, it is proposed to amend section 93A of Finance Act, 1994. After its enactment, Notification 52 /2011ST dated 30/12/2011 concerning refund service tax paid on export of goods at the post-manufacture/ removal stage, will be placed under this section. This means that in future, service tax refunded will be recoverable, without any time bar from the exporter, against whose shipping bill, sale proceeds have not been received from abroad. Moreover the service-specific exemption will be revisited and suitably altered. SEZ changes: There are no changes at present. However service-specific criterion for determination of services provided exclusively within the SEZ shall be taken care at the time of introducing negative list. Reverse charge provisions: It has been noticed that a number of registrants collect the tax but do not pay the same to the Department leading to a serious loss of the revenue and in order to curb give effect to give effect to this new reverse charge mechanism, some changes are being proposed wherein: firstly, a proviso is being added to sub-section (2) of section 68 and both the service provider and service receiver will be considered as persons liable to pay the tax on notified

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taxable services and to the extent specified against each one of them. The scheme is being introduced for three services
Sl. No. Description of service 1. Hiring of a motor vehicle designed to carry passengers: (a) with abatement (b) without abatement 2. Supply of manpower for any purpose 3. Works contract service

where the service provider is either an individual or a firm or LLP and the recipient is a body corporate. The three services and the portion of tax payable are as follows:
Service recipient Service provider 100% 40% 75% 50% NIL 60% 25% 50%

Even though the above scheme can be given effect on enactment, it is proposed to time it with Negative List approach as a part of the comprehensive reform. Penalty waiver for renting of immovable property service: It is proposed that penalty may be waived for those taxpayers who pay the service tax due on the renting of immovable property service (as on the sixth day of March, 2012), in full along with interest within six months. Point of Taxation Rules, 2011 The time period for issuance of invoice is being increased to 30 days ordinarily and 45 days for banks and financial institutions (to reconcile with the business practice of issuing monthly statement) and within 14 days from the receipt of advance payment.

to whom the instrument such as duty credit scrips was issued. Section 47 is being amended to insert a new proviso therein to provide specify class or classes of importers who shall pay customs duty electronically Section 104 is being amended to provide that all offences under the Act shall be noncognizable and bailable. It also provides that all offences punishable with a term of imprisonment of three years or more under section 135 shall be cognizable. Section 122 is being amended to enhance the monetary limits for adjudication of cases involving confiscation of goods and imposition of penalty from Rupees two lakh to Rupees five lakh for Deputy/ Assistant Commissioners and from 10,000 to 50,000 for Gazetted officer lower in rank to Assistant/ Deputy Commissioner.[Clause 122]. Section 153 is being amended to bring courier services within its ambit for the purpose of serving any order/decision/summons/notice by the Commissioner. [Clause 124].

CUSTOMS
Rate structure: There is no change in the rate of basic customs duty of 10% applicable to nonagricultural goods with few exceptions. Computation of Customs Duties: The method of computation of Education Cess and Secondary & Higher Education cess on imported goods is being simplified. Baggage Allowance: The duty-free Baggage is being increased from ` 25000 to ` 35000 for passengers of Indian origin and from ` 12000 to ` 15000 for children up to 10 years of age. Important Legislatives Amendments Sections 2 and 7 are being amended to include airfreight stations. A new section 28AAA is being inserted to provide for recovery of duties, from the person

Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 is being amended to further liberalize and simplify the procedure. Rate changes on Specific Items: The basic customs duty/CVD is being increased on the following items: From 60% to 75% on Completely Built Units (CBUs) of large cars/ MUVs/ SUVs permitted for import without type approval (value exceeding US$40,000 and engine capacity exceeding 3000cc for petrol and 2500cc for diesel) From 2% to 4% on standard gold bars and platinum bars and from 5% to 10% on nonstandard gold.

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From 1% to 2% on gold ore/ concentrate and dore bars for refining (CVD). Basic customs duty of 2% is being imposed on cut and polished coloured gemstones. From 10% to 30% on bicycles and from 10% to 20%. on parts of bicycles. Six specified life saving drugs/ vaccines and their bulk drugs is being reduced from 10% to 5% with Nil CVD by way of excise duty exemption.

to Section 4(3)(b)(i) which can illustrated by the following example:

be

Illustration: Undertaking B is inter-connected with undertaking A and undertaking C is inter-connected with undertaking B. Undertaking C is inter-connected with undertaking A; if undertaking D is inter-connected with undertaking C, undertaking D will be inter-connected with undertaking B and consequently with undertaking A; and so on Offences & Penalty: The limit towards any offence relating to any excisable goods, the duty leviable thereon for an offence as mentioned under Section 9 of the CEA, 1944 has been proposed to be enhanced from ` 1 lakh to ` 30 Lakh. Sec 9A has been proposed to be revised to provide that, only offences punishable with imprisonment of three years or more shall be cognizable. RULES: In the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001, in Rule 5 and in Annexure II, it has been proposed that the periodicity of returns be changed from monthly to quarterly. Amendments in Cenvat Credit Rules, 2004: It has been proposed to widen the definition of capital goods to include motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis. The credit of tax paid on the supply of such vehicles on rent, insurance and repair shall also be allowed. Rule 3(5) is proposed to be deleted and consequently 3(5A) be amended to prescribe that if the capital goods, on which CENVAT credit has been taken, are removed after being used,

EXCISE
Amendments in Act Tariff Changes Rate structure for goods, other than petroleum The standard rate of Central Excise duty for non-petroleum products has been enhanced from 10% to 12% ad valorem w.e.f 17/03/2012. The merit rate of excise duty for non-petroleum goods that Page 2 of 19 hitherto attracted 5% has been increased to 6%. The rate of duty of 1% imposed on 130 items in the last Budget has been increased to 2%. The exceptions to this increase are: Goods of heading no. 2701, i.e. coal; All goods of Chapter 31, other than those clearly not to be used as fertilizers; Articles of jewellery of heading 7113; and Mobile handsets and cellular phones of heading 8517 inter connected

Definition of undertaking

It proposed to widen the definition of inter connected undertaking to include indirect connections also in Explanation

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whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CEVAT Credit Documentary proof evidencing receipt of input and capital goods shall now become mandatory for the purpose availing input credit. Rule 5 of CCR, 2004 has been replaced and simplified for the purpose of claiming refund and the maximum refund admissible allowed is to be calculated in the manner prescribed by way of ratio. A manufacturer of goods or provider of output service who is providing both taxable and exempted goods/services and

if he does not wish to maintain separate books of accounts is now proposed to pay 6% of the exempted goods or exempted services from earlier 5%. Manner for distribution of credit by input service distributor to its manufacturing units or units providing output service is now proposed to be replaced subject to various conditions. Rule 10A is being inserted to permit transfer of unutilized credit of SAD lying in balance at the end of each quarter to another registered premise of the manufacturer or the producer of final products.

Rule 14 is being amended to substitute the word taken or utilised wrongly with taken and utilised wrongly so that interest is not payable on credit wrongly taken unless the same is utilized.

TDS AND TCS RATES TDS


TDS RATES FOR ASSESSMENT YEAR 2013-14 (FINANCIAL YEAR 2012-13) (A) On payments to residents (subject to notes below)
Sr No Payments to Resident Payee Criteria for Deduction Section Company Partnership Firm Rate (%) 10 10 30 30 2 10 10 10 10 2 10 10 Individual, HUF, AOP, BOI 10 10 30 30 1 10 10 10 10 2 10 10

1 2 3 4 5 6 7 8 9

10 11

12

Interest on Securities Other Interest ( Refer Note 3) Winning From Lotteries Winning From Horse Race Payment to contractors (other than for transport) Insurance Commission Commission on Sale of Lottery Tickets Other Commission / Brokerage Rent for Land or Building/ Furniture and Fixture Rent for Plant & machinery, Equipments Professional Fees/Royalties (Refer Note 5) Consideration for complusory acquistion of Immovable Property (other than agricultural land) Consideration for transfer of Immovable Property (other than agricultural land) (Refer Note 4)

No Threshold Limit (Refer Note 6) Payment in excess of ` 5,000 Payment in excess of ` 10,000 Payment in excess of ` 5,000 Payment in excess of ` 30,000 per transaction or ` 75,000 p.a. Payment in excess of ` 20,000 Payment in excess of ` 1,000 Payment in excess of ` 5,000 p.a. Payment in excess of ` 1,80,000 p.a.

193 194A 194B 194BB 194C 194D 194G 194H 194I

10 10 30 30 2 10 10 10 10 2

Payment in excess of ` 30,000 p.a. Payment in excess of ` 200,000 p.a.

194J 194LA

10 10

Payment in excess of ` 5,000,000 p.a. 194 LAA for immovable property situated in specified urban agglomeration Payment in excess of ` 2,000,000 p.a. 194 LAA for immovable property situated in other areas

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INDIA BUDGET 2012


- An Analysis

Notes 1 2 3 4 5 6 No surcharge or cess shall be applicable while deducting tax at source on payments other than salaries to residents. W.e.f. 1st April, 2010, the rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee. For interest on Bank Deposits and Deposits with Post Office, the threshold limit is Rs 10,000. Where transfer takes place at a value lower than that adopted by the State Government for Stamp Duty, the TDS shall be deducted at the value so adopted by the State Government. Any payments to a director of a company other than those on which TDS is dedutible u/s 192 are specifically covered u/s 194J In case payment of interest on listed debentures to individuals TDS is required to be deducted on payments in excess of ` 2,500/-

(B) On payments to non-residents (subject to notes below)


Sr No Payments to Non-Resident Payee Criteria for Deduction 1 2 Tax on Short Term Capital Gains On sale of shares or units of mutual funds where STT is paid. Tax on Long Term Capital Gains Section 111A Rate (%) 15 20

Not being long term capital gains referred 112 to section 10(33), 10(36) and 10(38) ie. listed shares, units of mutual funds and units of UTI. Payment in excess of ` 10,000 Payment in excess of ` 5,000 194B 194BB 115A(1)(b)/ 115A(1A) 115A(1)(b)/ 115A(1A) 115A(1)(b) 115A(1)(b) 115A(1)(a)

3 4 5

Winning From Lotteries Winning From Horse Race

30 30 20 10 20 10 20

Tax on royalty on copyrights, (a) Agreement made on or after 1st June, matters included in industrial 1997 but before 1st June, 2005 policy or under approved agreements by an Indian concern (b) Agreement made after 1st June, 2005 or by Government of India Tax on fees for technical services matters included in industrial policy or under approved agreements by an Indian concern or by Government of India Tax on Interest (a) Agreement made on or after 1st June, 1997 before 1st June, 2005 (b) Agreement made on or after 1st June,2005 (a) On borrowings in foreign currency by an Indian concern or by Government of India other than interest refered in (b) below (b) On notified infrastructure debt fund (w.e.f 1st June 2011) (c) By Specified Companies (w.e.f 1st July 2012)

194LB 194LC

5 5

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Sr No Payments to Non-Resident Payee Criteria for Deduction 8 Payments to Non-Resident Sportsmen/Entertainer/Sports Association Other income Other than to a non-resident being an Indian citizen (a) In case of non-resident companies (b) In case of non-residents other than non-resident companies Notes: 1 2 3 4 5

Section 194E

Rate (%) 20

40 30

NRIs opting to be taxed under chapter XII-A, tax shall be deductible at the rate of ten percent on long term capital gains refered to in section 115E and twenty percent on investment income. The above rates will be increased by a surcharge at the rate of two percent in the case of foreign company where the income or the aggregate of such incomes paid or likely to be paid exceeds one crore rupees. Education cess and higher education cess shall be levied at the rate of two percent and one percent respectively W.e.f. 1st April, 2010, the rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee. Treaty rates will differ from Country to Country.

TCS
TCS RATES FOR ASSESSMENT YEAR 2013-14 (FINANCIAL YEAR 2012-13)
Sr No 1 2 3 4 5 6 7 8 9 Nature of Goods/Contract/Licence /Lease Alcoholic Liqour for Human Consumption (Refer Note 2) Tendu Leaves (Refer Note 2) Timber obtained under a Forest Lease (Refer Note 2) Timber obtained by any mode other than under a Forest Lease (Refer Note 2) Any other Forest produce (Refer Note 2) Scrap (Refer Note 2) Minerals, being Coal or Lignite or irone ore (Refer Note 2) Cash Sale of Bullion or Jewellery Transfer of right or interest in any Parking Lot or Toll Plaza or Mining and Quarrying (other than of mineral oil) under any contract, licence and lease Criteria for Collection No Threshold Limit No Threshold Limit No Threshold Limit No Threshold Limit No Threshold Limit No Threshold Limit No Threshold Limit Payment in excess of ` 200,000/No Threshold Limit Percentage 1 5 2.5 2.5 2.5 1 1 1 2

Note: 1 Seller includes Central Government, State Government, Local Authoirty, Corportaion, Authority Established by Central, State or Provincial Act, Company, Firm, Co-operative Society, and only those Indiviuals and HUFs who are liable to Tax Audit u/s 44AB Sale to buyers who utilizes these goods for the purpose of manufacturing, processing or producing articles or things but not for trading purposes are not covered by the provisions of TCS

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INDIA BUDGET 2012


- An Analysis

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INDUSTRY SPECIFIC ANALYSIS

AUTOMOBILE & FORGING


The Indian automobile industry, sixth largest in the world, accounting for five percent of the total global production, speaks volumes of growth and grit. The industry, which recently overtook Brazil to climb one spot up, has witnessed a six-fold increase in turnover in the last 10 years. And as per a Deloitte study, car sales have grown at around 14.5% CAGR as against the global average of 4% in the decade to 2010. High interest rates and pinching fuel prices, at a time of uncertain economic outlook, hit the car industry badly this fiscal, forcing companies to increase customer offerings for reviving demand. The scale of the downturn has been sharp as it comes after a blistering 30% growth last fiscal. After two years of zooming growth, the story show a reverse trend in 2011-12 with sales moderating and demand lowering. The decrease in sales came in the wake of rising input costs and increasing interest rates thus creating a dent on the industry margins. The RBI too in an attempt to tame inflation sacrificed the growth momentum, raising the repo and reverse repo rates since March 2010, resulted in increase in interest rate. This move from the RBI resulted in auto loans getting more expensive, putting buyers on the back-foot. Further firm steel price resulted in moderate demand during the year 2011. The cautious and apprehensive consumer class deferred their decision of a four- and twowheeler purchase. These signs of weakening demand almost immediately mirrored on the industry numbers. Auto sales began its downward journey. In July, after 30 months of upside, domestic car sales fell approx 15.76% and in October, sales further fell to its worst in over a decade, diving down approx 24%. While auto makers had no choice but to pass on the rising costs to consumers, customers on the other hand postponed their buying decisions on account of costlier loans. According to Society of Indian Automobile Manufacturers (SIAM) in April- November 2011 - production of passenger vehicles increased by 2.90% and production of commercial vehicles increased by 25.90% as compared to the same period in previous year. Overall automotivesector output increased by 15.50% during April-

November 2011, while domestic sale of passenger vehicles declined by 0.50%, whereas the sales of commercial vehicles increased 20%. The two-wheeler segment, meanwhile, posted double-digit growth in January sales when scooter sales grew 25% to 2.24 lakh units and motorcycle sales grew 10.5% to 8.25 lakh units. SIAM reduced its prediction for the industry from the initial forecast of 16-18% growth rate to 11-13% for 2011-12. Yet, the end of the calendar year 2011 bought some reasons for the industry to cheer. After four consecutive downward dots on the graph, car sales grew 7% in November 2011 and 8.5% in December 2011 owing to festive discounts offered by major players. Industry is echoing some positive sentiments and going big on investments. Tata Motors and Maruti Suzuki have each planned ` 3,000 crore investment for capacity expansion, product development and new launches. M&M will invest ` 800 crore to develop products with SsangYong over the next 3-4 years, while Bosch has set aside ` 2,200 crore over the next two years for R&D and other activities. Petrol-diesel price difference has sharply boosted diesel car sales its share has risen from 30% to 40% of total cars in the past one year. But volume of diesel cars is under 7% of the total cars. Further price of compressed natural gas (CNG) for automobiles in Delhi has been raised by 5% in March 2011 and oil marketing firms plans to raise petrol rates in a few days as the completion of assembly elections has removed political obstacles for companies. Last year, the diesel factor decided the winners and losers in the automobile industry. This year too, diesel continues to hog mind space. Indirect Tax Proposals:1. Increase in Basic Customs duty on steel products may impact forging industry leading to increased cost of Inputs for automobile industry. 2. Exemption from Special CVD on some steel products may result in reducing the cost of inputs for automobile industry.

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INDIA BUDGET 2012


- An Analysis

3.

Decrease in Basic, additional and special additional duty of customs on Lithium ion automotive battery for manufacture of Li ion battery will reduced the cost of inputs for hybrid/ electric vehicle manufacturer. Increase in Basic customs duty on some specified CBUs of motor vehicles (cars) for petrol-run vehicles and for diesel-run vehicles and Increase in Excise duty on Motor vehicles will increase the price. Increase in Excise duty on Chassis for automobiles and parts of electric/ hybrid vehicles will increase the input cost.

the major contributors to the exchequer by way of indirect taxes. FACTS OF INDIAN CEMENT INDUSTRY The capacity, which was 29 Mn.t in 1981-82, rose to 219 Mn.t at the end of FY09. While it took 8 decades to reach the 1st 100 Mn.t capacities, the 2 nd 100 Mn.t was added in just 10 years. India ranks second in world cement producing countries. It contributes to environmental cleanliness by consuming hazardous wastes like Fly Ash (around 30 Mn.t) from thermal power plants and the entire 8 Mn.t of slag produced by steel manufacturing units. As a part of Corporate Social Responsibility (CSR), the cement Industry employs around 0.1 million people and takes care of the social needs not only of the employees but also adopts several villages around the factories providing free drinking water, electricity, medical and educational facilities. The cement Industry produces a variety of cement to suit a host of applications matching the worlds best in quality. Exports Cement/Clinker to around 30 countries across the globe and earns precious foreign exchange.

4.

5.

CEMENT
The Indian cement industry is extremely energy intensive and is the third largest user of coal in the country. It is modern and uses latest technology, which is among the best in the world. Also, the industry has tremendous potential for development as limestone of excellent quality is found almost throughout the country. CURRENT SCENARIO The Indian cement industry is the second largest producer of quality cement. Indian Cement Industry is engaged in the production of several varieties of cement such as Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement, etc. They are produced strictly as per the Bureau of Indian Standards (BIS) specifications and their quality is comparable with the best in the world. The industry occupies an important place in the national economy because of its strong linkages to other sectors such as construction, transportation, coal and power. The cement industry is also one of

KEY DRIVERS OF CEMENT INDUSTRY Buoyant real estate market Increase in infrastructure spending Various governmental programmes like National Rural Employment Guarantee Low-cost housing in urban and rural areas under schemes like Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Indira Aawas Yojana

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FUTURE OUTLOOK The annual demand for cement in India is consistently growing at 8-10%. NCAER has estimated after an extensive study that the demand for cement in the country is expected to increase to 244.82 million tonnes by 2012. At the same time, the demand will be at 311.37 million tonnes if the projections of the road and housing segments are met in reality. However, the realization of this capacity might get delayed on account of delay in equipment delivery and construction of plants caused by heavy pending orders in the books of suppliers. The crude oil prices have pronounced a heavy impact on the profits made by cement manufacturers. Once the economic growth passes on this burden to the consumers, this situation will be eased at the manufacturers end. The government has taken measures to increase the availability of indigenous coal for cement manufacturers to bring down production costs. Developments in the domestic environment and a large number of infrastructure projects have created an unforeseen demand for cement consumption in India, which is bound to increase manifold over the coming years. While concrete steps are being taken to bring down, costs, the cement industry is heading towards a very bright future in India. INDUSTRY EXPECTATIONS The tax structure is expected to be revisited. To grant declared goods status for the Description of goods Packaged cement manufactured in a mini-cement plant (i) Of retail sale price not exceeding ` 190 per 50 kg bag or of per tonne RSP not exceeding ` 3800. Of retail sale price not exceeding ` 190 per 50 kg bag or of per tonne RSP not exceeding ` 3800.

industry in order to bring a uniform tariff structure across the country. This will also lower the tax burden on these companies. Some incentive towards the Ready Mix Concrete (RMC) business will lead to bulk supply of cement and consequent reduction in packaging cost. Tax incentive to be provided for promoting blended cement in the larger interest of mineral conservation, waste utilization and bringing down carbon emission. Since cement industry is directly impacted by the fortunes on the infrastructure sector, the further thrust on infrastructure investment in the country is widely expected.

DIRECT TAX PROPOSALS Proposed to extended weighted deduction of 200% for R&D expenditure in and in house facility for the further period of 5 years beyond March 31, 2012. Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.

INDIRECT TAX PROPOSALS Excise duty rationalised for packaged cement, whether manufactured by mini cement plants or others, The details of these changes are as under: Earlier rate 10% ad valorem 6% ad valorem + ` 120 PMT 10% ad valorem + ` 30PMT Revised rate

(ii)

Packaged cement manufactured in a plant other than mini-cement plant (i) Of retail sale price not exceeding ` 190 per 50 kg bag or of per tonne RSP not exceeding ` 3800. Of retail sale price not exceeding ` 190 per 50 kg bag or of per tonne RSP not exceeding ` 3800. 10% ad valorem + ` 80 PMT 12% ad valorem + ` 120 PMT 10% ad valorem + ` 160 PMT 10% ad valorem 10% ad valorem + ` 200 PMT 12% ad valorem 12% ad valorem

(ii)

Cement, not cleared in packaged form Cement clinker

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INDIA BUDGET 2012


- An Analysis

Another important change in respect of Portland cement is that the item is being notified under section 4A of the Central Excise Act. Accordingly, the value for the purpose of charging duty on packaged cement would be determined on the basis of the Retail Sale Price. An abatement of 30% from the RSP is also being notified.

Going by estimate of ` 4,000 crore investment per million tonne of additional capacity, intended steel capacity build up in the country is likely to result in an investment of US$ 173.75 billion by 2020. 222 MoUs have been signed with various states for planned capacity of around 276 million tonnes by 201920. Major investment plans are in the states of Orissa, Jharkhand, Karnataka, Chhattisgarh and West Bengal. The steel sector contributes to nearly 2 per cent of the GDP and employs over 5 lakh people. The per capita steel consumption during the last six years has risen from 38 kg in 2005-06 to 55 kg in 2010-11.

STEEL
Global crude steel production reached 1414 million tonne in the calendar year 2010, a growth of 15 per cent over 2009. India is the 5th largest producer of crude steel in the world With 66.80 million tonnes of crude steel production during April-Dec 2010, recording a growth of 11.3 per cent over 2009. India continues to maintain its lead production as the worlds largest producer of direct reduced iron (DRI) or sponge iron during JanuaryDecember 2010, a rank it has held since 2002. If proposed expansion plans are implemented as per schedule, India may become the second largest crude steel producer in the world by 2015-16. TRENDS AND DEVELOPMENTS IN STEEL SECTOR India became the 4th largest producer of crude steel in the world in 2010 as against the 8th position in 2003 and is expected to become the 2nd largest producer of crude steel in the world by 2015. India also maintained its lead position as the worlds largest producer of direct reduced iron (DRI) or sponge iron. Ministrys National Steel Policy (NSP) 2005 projection of 110 million tonnes of finished steel production per annum by 2019-20 is likely to be exceeded by 2012. The country is likely to achieve a crude steel production capacity of 112 million tonnes by the year 2011-12.

PROJECTIONS FOR THE STEEL SECTOR In the next five years, demand of steel is likely to grow at a higher annual average growth of over 11-12 per cent as compared to the average annual growth of 8 per cent achieved between 1991-92 and 2010-11. Capacity for crude steel production expanded from 51.17 million tonnes per annum (mtpa) in 2005-06 to 78 mtpa in 2010-11. Crude steel production grew at 8 per cent annually (CAGR) from 46.46 million tonnes in 2005-06 to 69.57 million tonnes in 2010-11. Production for sale of finished steel stood at 66.01 million tonnes during 2010-11 as against 46.57 million tonnes in 2005-06, an average annual (CAGR) growth of 7 per cent. Consumption of finished steel has grown at a CAGR of 9.6 per cent during the last six years.

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Export of finished steel during 2010-11 stood at 3.36 million tonnes while imports during 2010-11 stood at 6.54 million tonnes.

PLASTIC
The Indian plastics industry comprises around 55,000 plastic processing units, spread over both the organized and unorganized sectors, employing an estimated 0.4 million people. About 75% of plastic processing units are in the small-scale sector and these account for about 25% of the total production. There are about 2000 fibre processors, of which 80% are in the small-scale sector. But with the recent fall in polymers price from peak level and slowdown in world economy, the plastic industry is grappling with cheap import of the plastic products. Due to slow down in USA, China and Thailand the biggest exporter to US, are trying to push their products in India. The plastic product industry is facing huge imports of plastic goods at a much lower cost. Most of these readymade plastic products are coming via under-invoicing, giving stiff competition to the local converters. In case of under-invoicing, the importers show lower cost of imports in the invoice and try to save customs, excise and other taxes on that. Hence, the resultant tax evasion makes these products cheaper. The demand for plastic products is yet to crawl back to normal levels. The cut in excise duties from 14% to 8% augurs well, especially for players selling to final consumers. But now the plastic products industry faces double-edged sword as on the one side it faces low cost import and other sided the rising polymer prices. After few years of strong double digit growth, India is encountering sluggish trend in polymer consumption in the current fiscal with key user industries like automobile, construction, consumer durables etc witnessing sharp deceleration in growth. The players ability to cushion their margins from the volatility of the polymer prices also remains limited. Only the governments emphasis on infrastructure, special announcements on key sectors like telecom, automobiles, etc in the coming Budget can bring cheer to the plastic industry. INDUSTRY EXPECTATIONS The plastic product industry want the custom duty on commodity plastics polymers which presently is at 5% to be brought down to zero so that the industry have sufficient import at reasonable landed cost to tide over perennial shortages & to meet the target of 120 lakh tonne of plastics production. While on

INDUSTRY EXPECTATIONS The domestic steel industry requested the government to cut down import duty to nil from 5% and levy duty on HR coils to contain inflation. Abolition of export duty on iron ore fines and a reduction in duty on lumps to 5 per cent. Removal of 2.5% import duty on iron ore lumps, fines and pellets.

DIRECT TAX PROPOSALS Proposed to extended weighted deduction of 200% for R&D expenditure in an in house facility for the further period of 5 year beyond March 31, 2012. Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.

INDIRECT TAX PROPOSALS Standard rate of excise duty to be raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per cent and the lower merit rate from 1 per cent to 2 per cent with few exemptions. The existing exemption from special additional duty of customs (SAD) currently available to CRGO steel is being restricted to prime quality of such steel. Basic Custom duty /CVD are being increased from 5% to 7.5% on flat rolled products (HR and CR) of non-alloy steel. Full exemption from Basic Custom duty is being provided Steel tube & wire, cobalt chromium tube, Hayness Alloy-25 and polypropylene mesh for the manufacture of coronary stents/coronary stent systems and artificial heart valves subject to actual user condition. The Second Schedule to the Customs Tariff Act is being amended to enhance the rate of export duty on chromium ore from ` 3000 per tonne to 30% ad valorem. [Clause 128] This change will come into effect immediately owing to a declaration under the Provisional Collection of Taxes Act, 1931.

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other polymers, industry expects custom duty to be brought down from current level of 7.5% to 2.5%. Along with it, the industry also wants withdrawal of 1% landing charges for duty calculations and removal of anti-dumping duty on polymers. Also on Plastic Scrap, duty should be brought down from 7.5% to at least 5%. Poly Amide Resins (Nylons) also should be in parity with other Engineering polymers and the duty brought down from present level of 10% to 5%. The industry wants custom duty on processed goods to be hike from 10% to 20%. One of the important want of the industry was reduction in excise duty from 14% to 8%, which the government has done in its last 2-stimulus package. Now, the industry want concessional rate of excise duty at 60% of applicable duty, be reinstated for small scale industry (SSI) with appropriate lines along with uniform VAT in all states, abolition of central sales tax and removal of FBT on the units with less than ` 50 crore turnover. The industry also expects specific provision in the Cenvat Credit Rules clarifying the duty at the time of clearances is required. The industry is also looking for service tax limit to be raised to turnover from ` 10 lakh to ` 20 lakh so that the concerned department does not harass smaller service providers. The industry also wants ban on applications for Anti Dumping Review on plastics raw materials (Polymers) at least for two financial years. DIRECT TAX PROPOSALS Proposed to extended weighted deduction of 200% for R&D expenditure in an in house facility for the further period of 5 year beyond March 31, 2012

Proposal to provide weighted deduction at 150% of expenditure incurred on skill development in manufacturing sector.

MEDIA AND ENTERTAINMENT


The Media & Entertainment industry landscape is undergoing a significant shift. Cable digitisation, the promise of wireless broadband, increasing DTH penetration, digitisation of film distribution, growing Internet use are all prompting strategic shifts in the way companies work. Traditional business models are evolving for the better as a host of new opportunities emerge. Television continues to be the dominant medium and print will continue to be the second largest medium in the Indian media and entertainment industry. Sectors such as animation, digital advertising and gaming are fast increasing their share in the overall pie. Smart phones, tablets, PCs and gaming devices all form the foundation of a new wave in media usage. This is gradually impacting the way content is being created and distributed as well. Multiple media including TV, films, news, radio, music are being impacted with this change. The continued rise of regional media and the rapidly expanding new media business helped the media and entertainment industry log a 12 percent increase in revenues to ` 729 billion in 2011 and it is estimated to touch ` 1,457 billion by 2016. The overall television industry was estimated to be ` 329 billion in 2011 and is expected to grow at a compounded annual growth rate of 17 percent over 2011-16, to reach ` 735 billion in 2016. The print industry grew by 8.4 percent to ` 209 billion in 2011 - a little below expectations as the sector started feeling the pinch of challenging macroeconomic

99

environment and reduced advertising spends due to the decreasing trend in other sectors. New media businesses also saw an increased uptake largely driven by growth in internet penetration and proliferation of new age devices. Animation, VFX and post production industry achieved estimated revenues of ` 31 billion in 2011, a robust growth of 31 percent over 2010. Growth was achieved on back of increased contract work, higher VFX content in movies, 2D/3D conversion projects,. Owing to increase in listenership in both metros and non-metros, the radio industry grew at 15 percent in 2011 and expected to reach ` 11.5 billion compared to ` 10 billion in 2010. About 42 per cent of advertisement money spent in the country is through the print. Online adspend reached approximately 4 percent of total industry advertising revenue. With the production of over 1,000 films a year, in over 20 languages, the Indian film industry is the largest in the world. During 2011-12, the Ministry has accorded 20 foreign production houses shooting permission. Given the potential of this sunrise sector in Indias growth and trade in services, efforts are needed to relocate the business of the Indian film Industry from foreign countries to India by addressing issues like tax credit which can increase activities in India and also generate employment. The FICCI report cites implementation of recently enactment of regulations on digitisation for cable, implementation of Phase 3 and copyright for Radio and the roll out of 4G as factors that will influence the growth of the industry as a whole. Year 2011 was clearly the year where digital technologies began to deliver on their promise. Digital film distribution has helped wider film releases and helped control costs. Cable digitisation, wireless broadband, increasing DTH penetration, growing internet use are all prompting strategic shifts in the way companies work. The media and entertainment sector needs simplification in cumbersome tax laws. The industry hopes for simplification of the onerous tax laws and resolution of some of the long standing tax controversies impacting this sector. The levy of service tax and value added tax (VAT) on copyright acquired in content is a major pain point for the industry. Huge levy of entertainment tax in excess of 30 to 40 percent on film exhibition is another area of major concern.

Indirect Tax Proposals:1. Proposed duty exemption on waste paper imports will reduce the input cost of Print Media. 2. Proposal to exempt Service Tax on Sale of space of advertisement in Print Media and on internet will reduce the cost of advertisement. Proposal to exempt service tax on copyrights relating to recording of cinematographic films will reduce costs of film Industry.

3.

SUGAR
Indian domestic sugar market is one of the largest markets in the world; in volume terms. It remains a key growth driver for world sugar, growing above the Asian and world consumption growth average. Sugar is one of the most important cash crops in the world and hence there is always a wrestle to control its imports/export. India is presently a dominant player in the global sugar industry along with Brazil in terms of production. Given the growing sugar production and the structural changes witnessed in Indian sugar industry, India is all set continue its domination at the global level. The sugar economy in India, like many other countries, is highly regulated, starting from sugarcane to the end-product sugar. Even the byproducts are subject to government control. The project aims to delve into the issues faced by the industry and its trade prospects. The project would also explore the impact on sugar volumes and prices because of its use as alternative fuel. Supply side and demand side impact would be analyzed for complementary (sugar-free) and supplementary products. INDUSTRY EXPECTATIONS Partial decontrolling: The sugar industry is controlled by the government in terms of the prices, cane prices and levy quota. The sugar industry wants the government to let the market govern the prices of the sweetener, by partially decontrolling the industry and re-introducing sugar futures trading. The government should also do away with the release order mechanism, which may create supply shortages and push up prices, instead of importing high-cost white sugar. Currently, 10% of the sugar produced has to be sold to the government at notified prices for distribution through PDS and the rest is sold through a release order issued by the government

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INDIA BUDGET 2012


- An Analysis

INDIRECT TAX PROPOSALS The basic customs duty is being reduced on the following items: From 7.5% /5% to 2.5%, on Sugarcane planter, root or tuber crop harvesting machine and rotary tiller & weeder, parts & components for their manufacture. At present, project import status is available to installation of Mechanized Handling Systems & Pallet Racking Systems in mandis or warehouses for food grains and sugar, with concessional rate of basic customs duty of 5% with full exemption from additional duty of customs (CVD) and special additional duty of customs (SAD). This exemption is being extended to such systems installed for handling horticultural produce.

TEXTILES
The Textiles sector is the second largest provider of employment after agriculture. Thus, the growth and all round development of this industry has a direct bearing on the improvement of the economy of the nation. During 2009-10, Indian textiles industry is pegged at US$ 55 billion, 64 per cent of which services domestic demand. The textiles industry accounts for 14 per cent of industrial production; employs 35 million people and accounts for nearly 12 per cent share of the countrys total exports basket. The major sub-sectors that comprise the textiles sector include the organized Cotton/ Man-Made Fibre Textiles Mill Industry, the Man-made Fibre/ Filament Yarn Industry, the Wool and Woollen Textiles Industry, the Sericulture and Silk Textiles Industry, Handlooms, Handicrafts, the Jute and Jute Textiles Industry, and Textiles Exports.

PRODUCTION OF CLOTH ALL SECTORS Figures in million sq meters Item Cotton Blended 100 per cent Non Cotton Total 2007-08 27,105 6,888 21,183 55,276 2008-09 26,898 6,766 20,534 54,198 2009-10 28,790 7,769 22,438 58,996 2009-10 (April-Jan) 23,952 6,456 19,016 49,424 2010-11 (April-Jan) 25,648 6,747 18,379 50,774

PRODUCTION OF TEXTILES ITEMS Items Raw Cotton (cotton year) Man made fibre spurn yarn Man made filament yarn Fabrics (including Khadi, wool& silk) Unit Mn.Kg. Mn.Kg. Mn.Kg. Mn.Kg. Mn.Sq. mtr 2009-10 5015 1268 4193 1522 60333 2010-11 (Prov.) 5525* 1281 4649 1550 61811 (April- June) 2011-12 2010-11 -308 1066 346 13540 -309 1129 385 14943

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COTTON INDUSTRY Cotton is one of the principal crops of the country and is the major raw material for the domestic textile industry. It provides sustenance to million of farmers as also the workers involved in cotton industry, right from processing to trading of cotton. The Indian Textile industry consumes a diverse range of cotton and yarn, but is predominantly cotton based. The ratio of the use of cotton to manmade fibres and filament yarns by the domestic industry is about 56:94.The textile industry plays a pivotal role through its contribution to industrial output, employment generation and the export earnings of the country. It contributes about 14 per cent to the industrial production, 4 per cent to the GDP and 14.42 per cent to the countrys export earnings. The textile sector is the second largest provider of employment after agriculture. COTTON PRODUCTION AND PRODUCTIVITY Cotton is produced in India in three zones viz., Northern zone comprising the States of Punjab, Haryana and Rajasthan, Central zone comprising the States of Maharashtra, Madhya Pradesh and Gujarat and Southern zone comprising the States of Andhra Pradesh, Karnataka and Tamil Nadu. Besides these nine States, cotton cultivation has gained momentum in the eastern State of Orissa. With increased acreage and advent of Bt cultivation, the country has achieved cotton production of 5.0 million tons in cotton season 2009-10 as against 4.93 million tons in the previous year. The country has once again retained the position as the second largest cotton producing country in the world, after China. INDUSTRY EXPECTATIONS Roll back of 10% excise duty on branded garments. To promote seed research for cotton, seed companies should be given a status of infrastructure companies and income of seed companies should be treated as agriculture income. Finance extended to seed companies should be treated as priority sector lending in the banks. Price deregulation, particularly in cotton is essential. Right to equality to Small Scale Sector.

development in manufacturing sector. Proposal to extend weighted deduction of 200 per cent for R&D expenditure in an in-house facility for a further period of 5 years beyond March 31, 2012.

INDIRECT TAX PROPOSALS Excise duty applicable to ready-made garments and made-up articles of textiles falling under Chapters 61, 62 and 63 (heading nos.63.01 to 63.08) of the Central Excise Tariff except those falling under heading nos.63.09 and 63.10 when they bear or are sold under a brand name has been increased from 10% to 12% and abatement increased from 55% to 70% on Retail Sale Price. The effective excise duty rate applicable to the textile sector (other than readymade garments and made ups bearing a brand name or sold under a brand name) is currently covered by Notification No. 29/2004-CE dated 9.7.2004. This notification is being superseded by notification no. 7/2012 CE dated 17th March, 2012. Full Basic Customs Duty exemption has been provided to shuttle less looms, parts/ components of shuttle less looms by actual users for manufacture, specified silk machinery viz. Automatic reeling/ dupion reeling machines and their accessories including cocoon assorting machines, cocoon peeling machines, vacuum permeation machine, cocoon cooking machine, reeled silk humidifier, bale press and raw silk testing equipments. The exemption is available only to new machinery. The Concessional of 5% duty available to specified machinery is being restricted only to the new Textile machinery. Consequently second hand machinery would attract 7.5% of basic custom duty.

OTHER PROPOSALS Government has announced a financial package of ` 3,884 crore for waiver of loans of handloom weavers and their cooperative societies. Two more mega handloom clusters, one to cover Prakasam and Guntur districts in Andhra Pradesh and another for Godda and neighbouring districts in Jharkhand to be set up.

DIRECT TAX PROPOSALS Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill

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Three Weavers Service Centers one each in Mizoram, Nagaland and Jharkhand to be set up for providing technical support to poor handloom weavers. ` 500 crore pilot scheme announced for promotion and application of Geo-textiles in the North Eastern Region. A power loom mega cluster to be set up in Ichalkaranji in Maharashtra with a budget allocation of ` 70 crore.

of 4.6 per cent, 7.9 per cent and 0.8per cent, respectively during April-July 201112 as compared to 10.0 per cent 5.2 per cent and 10.1 in same order. The consumer durables sector recorded a growth of 4.2per cent in April-July 201112 as compared to 18.4 per cent in the corresponding period of the year 201011.The Consumer non-durables sector grew at 4.9 per cent dueing 2011-12 as compared to 3.8 per cent in 2010-11. HEAVY ELECTRICAL INDUSTRY Heavy Electrical Industry is an important manufacturing sector, catering to the need of energy sector & other industrial sectors. Major equipments like boilers, turbo generators, turbines, transformers, condensers, switch gears and relays and related accessories are manufactured by Heavy Electrical Equipment manufacturers. The performance of this Industry is closely linked to the power programme of the country. The Government of India has an ambitious mission of Power for all by 2012 and planned power capacity addition of 78,577 MW in the 11th five year plan (2007-12). There is a strong manufacturing base for the manufacture of Heavy Electrical equipments in the country. Manufacturers of Heavy Electrical equipment have absorbed latest technology available in the world up to a unit capacity of 660 MW and gearing up for adopting super-critical technology for unit size of 800 MW and above for thermal sets. Industry is augmenting its installed capacity to meet the ambitious 11th Plan target and future growth of installation of nuclear reactors in the country. Gas turbines upto 260 MW Unit capacity and Transmission and Distribution equipment up to higher voltage class of 765 KV are also being manufactured by Indian Industry.

CAPITAL GOODS & ENGINEERING


Heavy Industry in India comprises of the heavy engineering industry, machine tool industry, heavy electrical industry, industrial machinery and auto-industry. These industries provide goods and services for almost all sectors of the economy, including power, rail and road transport. The machine building industry caters the requirements of equipment for basic industries such as steel, nonferrous metals, fertilizers, refineries, petrochemicals, shipping, paper, cement, sugar, etc. PERFORMANCE OF INDUSTRY Industrial sector registered a growth of 5.8per cent for the period April-July 2011-12 as compared to 9.7per cent in the corresponding period of 2010-11. The growth in the manufacturing, mining and electricity sectors during April-July, 2011-12 over the corresponding period of 2010-11 have been 1.1 per cent, 6.0 per cent and 9.4 per cent respectively, which moved the overall growth in the General Index to 5.8 per cent. Capital goods sector has registered a growth of 7.6 per cent during April-July 2011-12 as compared to the growth of 23.1 per cent during corresponding period of 2010-11.Consumer goods, Basic goods and intermediate goods recorded growth

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Two Development Councils functioning under the Department, relating to Capital Goods & Engineering Industries i.e. Development Council for Machine Tool Industry and Development Council for Textile Machinery have been reconstituted. INDUSTRY EXPECTATIONS Import duty from the current 5.0% may be hiked on power generation equipment for projects above 1,000 MW capacity by levying additional duty of 5.0% and countervailing duty of 4.0% making it a total of 14.0% to ensure level playing field in providing cushion to domestic manufacturers against cheaper imports from China. Entry Tax on material handling equipment is likely to be exempted. Motor vehicles, dumpers & tippers are eligible capital goods under CENVAT credit scheme only for a few service providers. Manufacturers are not entitled to avail CENVAT credit of duty paid on such capital goods. The duty on such capital goods may also be allowed as CENVAT Credit to manufacturer where these capital goods are utilized for the purposes of manufacturing. Current CENVAT credit of 50% on capital goods in the year of receipt to be increased to 100%. Countervailing duty of 5.0% may be levied on the import of goods on which 1.0% duty is imposed under central excise. Mandatory exemption of central sales tax from the current 2.0% and VAT from the current 5.0%14.5% for domestic supplies of power equipments to mega/ultra-mega power projects or exemption of such levies for evaluation of bids is expected. Duty exemption is expected in the import of Cold Rolled Grain Oriented electrical steel which is not manufactured in the domestic market and is a critical raw material in manufacturing of transformers.

INDIRECT TAX PROPOSALS Full exemption from basic customs duty is being provided to certain items as under: 1) Tunnel excavation and specified lining equipment along with Nil CVD and Nil SAD. Tunnel boring machines for hydro and road projects for all infrastructure projects. The exemption is also being provided to parts required for assembly of such machines.

2)

The basic customs duty is being reduced from 7.5%/5% to 2.5%, on Capital goods, plant and equipment imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants

FINANCE
Introduction Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and integration of the Indian economy and its financial system with the global economy. Sovereign risk concerns, particularly in the euro area, affected financial markets for the greater part of the year, with the contagion of Greeces sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility. Since the Indian financial system is bank dominated, banks ability to withstand stress is critical to overall financial stability. Indian banks, however, remain robust, notwithstanding a decline in capital to risk-weighted assets ratio and a rise in non-performing asset levels in the recent past. Banks During 2010-11, credit growth continued its momentum to reach the peak rate of 24.2 per cent by end of December 2010. Since January 2011, credit growth, however, has been decelerating, though it remained above the Reserve Bank of Indias indicative trajectory of 20 per cent for the year. During financial year 2011-12, growth in bank credit extended by scheduled commercial banks (SCBs) stood at 8.2 per cent as on 16 December 2011 (12.3 per cent in the corresponding period of previsous year). The year-on-year growth was at 17.1 per cent as on 16 December 2011 (23.9 per cent in the corresponding period of the previous year). During financial year 2011-12, private-sector banks

DIRECT TAX PROPOSALS Proposed to extended weighted deduction of 200% for R&D expenditure in an in house facility for the further period of 5 year beyond March 31, 2012. Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.

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have been faring better in terms of growth in credit extended as compared to publicsector and foreign banks. During 2011-12 (up to end December 2011), deposit rates of SCBs have increased across various maturities. Micro Finance RBI had issued guidelines to banks for mainstreaming micro-credit and enhancing the outreach of micro credit providers. This has stipulated that micro-credit extended by banks to individual borrowers directly or through any intermediary would henceforth be reckoned as part of their priority sector lending. However, no particular model was prescribed for micro-finance. Banks have been extended freedom to formulate their own model[s] or choose any conduit/ intermediary for extending micro-credit. Though there are different models for purveying micro-finance, the Self-Help Group (SHG) - Bank Linkage Programme has emerged as the major micro-finance programme in the country. Capital Markets Primary Markets During financial year 2011-12 (up to 31 December 2011) resource mobilization through the primary market witnessed a sharp decline over the year 2010-2011. The cumulative amount mobilized as on 31 December 2011 through equity public issues stood at ` 9,683 crores as compared to ` 48,654 crores in 2010-2011. The mean IPO size for the year 2011-2012 was 168 crores as compared to 671 crores in 2010-2011. Further, only 4,791 crores were mobilized through debt issues as compared to ` 9,451 crores during last year. The amount of capital mobilized through private placement in corporate debt in 2011-2012 (April-December) was ` 1,88,530 crores as compared to ` 2,18,785 crores during last period.

Secondary Markets As on 31 December 2011, Indian benchmark indices, BSE Sensex and Nifty, decreased by 20.4 per cent and 20.7 per cent respectively over the closing value of 2010-2011. Nifty Junior and BSE 500 also decreased by 22.6 per cent and 26.1 per cent respectively during the same period. The P/E ratios of Nifty, Sensex, Nifty Junior, and BSE 500 as on 31 December 2011 were 16.8, 16.4, 13.5, and 16.2 respectively. In the capital market segment, during 2011-2012 (up to 31 December 2011), the total turnover of the BSE stood at ` 4,88,133 crore and of the NSE at ` 19,73,730 crore as compared to ` 11,05,027 crore and ` 35,77,410 crore respectively in 2010-2011. Insurance Sector A healthy and developing insurance sector is of vital importance to every modern economy. Since its opening up, the number of participants in the Insurance industry has gone up from 7 insurers in 2000 to 49 insurers as on 30 September 2011 operating in the life, non-life, and re-insurance segments. The life insurers underwrote new business of ` 1,26,381 crores during financial year 2010-2011 as against ` 1,09,894 crores during the year 2009-2010, recording a growth of 15 per cent. The Non-Life Insurance industry reported average annual growth of 15.85 per cent over the period 2001-2002 to 2010-2011. Direct Tax Proposals It is proposed to allow individual tax payers, a deduction of upto ` 10,000 for interest from savings bank accounts. It is proposed to add new sectors for the purposes of investment linked deduction. To provide low cost funds to stressed infrastructure sectors, rate of

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withholding tax on interest payment on ECBs is proposed to be reduced from 20 per cent to 5 per cent for 3 years for certain sectors. It is proposed to reduce Securities Transaction Tax by 20 per cent on cash delivery transactions.

quarter of 2011. The greater availability of personal credit and a growing vehicle population providing improved mobility also contribute to a trend towards annual retail sales growth of 12.2 per cent. Indian retail sector accounts for 22 per cent of the countrys gross domestic product (GDP) and contributes to 8 per cent of the total employment. ORGANISED RETAIL SECTOR Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. The growth in the overall retail market will be driven largely by the explosion in the organised retail sector. Domestic retailers such as Reliance Retail and Pantaloon Retail continue to invest heavily in increasing their store networks and improving instore offerings, and the impact they have on growth will be boosted by the arrival of expansion-orientated multinationals. Organized retail accounts for 7 percent of India s roughly US$ 435 billion retail market and is expected to reach 20 percent by 2020. Big-box retail, in the form of hypermarkets, has gained prominence a refocus from the burgeoning supermarkets and small formats of several years ago. Food accounts for 70 percent of Indian retail, but it remains under-penetrated by organized retail. Organized retail has a 31 percent share in clothing and apparel and continues to see growth in this sector. The home segment shows promise, growing 20 to 30 percent per year. Indias more urban consumer mindset means this sector is poised for growth. UNORGANISED RETAIL SECTOR Indian retail is dominated by a large number of small retailers consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, paan and beedi shops, handcart hawkers, pavement vendors, etc. which together make up the so-called unorganized retail or traditional retail. The last 3-4 years have witnessed the entry of a number of organized retailers opening stores in various modern formats in metros and other important cities. Unorganized retailers normally do not pay taxes and most of them are not even registered for sales tax, VAT, or income tax. FUTURE OUTLOOK There is a huge untapped opportunity in the retail sector, thus having immense scope for new entrants, driving large investments into the country. A good talent pool, huge markets and availability of raw materials at comparatively cheaper costs are expected

Indirect Tax Proposals To take financial services to the door steps in rural areas, services of business facilitators and correspondents to banks and insurance companies have been exempted from Service Tax. To maintain a healthy fiscal situation it is proposed to raise service tax rate from 10 per cent to 12 per cent.

Other Proposals In order to enhance availability of equity to MSME sector, it is proposed to set up a ` 5,000 crore India Opportunities Venture Fund with SIDBI. It is proposed to provide ` 15,888 crore for capitalization of Public Sector Banks, Regional Rural Banks and other financial institutions including NABARD. It is proposed to simplify the IPO process and help companies to reach retail base in small towns by making IPO in electronic form compulsory in certain cases. Setting up of Infrastructure Debt Funds is announced to tap the overseas markets for long tenor pension and insurance funds.

RETAIL
Indian retail market has been ranked fourth in world retail market indicating that the country is one of the most attractive markets for global retailers to enter. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. INDIAN RETAIL- AN OVERVIEW Indias strong growth fundamentals9 percent real GDP growth in 2010; forecasted yearly growth of 8.7 percent through 2016; high saving and investment rates; fast labour force growth; and increased consumer spendingmake for a very favorable retail environment. As has been the case for several years, Indian consumers continue to urbanize, have more money to spend on non-food purchases, and have more exposure to brands. The result is a powerful, more discerning consumer class. Indias population of nearly 1.2 billionforecast eventually to overtake Chinasalso is an attractive target. The total retail sales in India will grow from US$ 395.9 billion in 2011 to US$ 785.1 billion by 2015, according to the BMI India Retail report for the third

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to make India lead one of the worlds best retail economies by 2042. The industry is also slated to be a major employment generator in future. INDUSTRY EXPECTATIONS Opening of FDI in non-food multibrand. Tax holidays/Fiscal Incentives for retailers willing to spend in rural areas. ` 75 cr. budget for promotion of gems and jewellery of the retail trade and exemption for the application of the Lottery Act for ONE national shopping festival yearly across India. Reduction in Minimum Alternate Tax (MAT) Rate to 15.0% from 18.5%. Formulation of a Retail Policy. Establish Public Refrigerated Warehouse Complexes (PRWs) in Backward Districts. Allocate significant resources for Mobile refrigerated vans. To enable the retail sector provide employment to a large mass of local population, simplified labour laws for flexibility in operations is expected. Permission to operate 24x7. Consumer Affairs Weights & Measures Act. Retail and Entertainment Zones (REZ). In order to augment the living standards of people in the city, initiatives to create Retail and Entertainment Zones (REZ) similar to SEZ and IT parks is expected. Retailers in REZ to get benefits like exemption from stamp duty, Octroi, and cheaper power. VAT Refund for making India attractive for shopping tourism. Consumption Incentive: Providing a consumption incentive in the form of personal income tax relief to consumers, who can spend say up

to 25% of their income on consumer goods and services, which can be supported by tax invoices from the retailer/establishment. OTHER PROPOSALS Organised retail helps in reducing cost of intermediation due to economies of scale, benefiting both consumers and producers. At present, FDI in single brand and in cash and carry wholesale trade is permitted to the extent of 100 per cent. The decision in respect of allowing FDI in multi-brand retail trade up to 51 per cent, subject to compliance with specified conditions, has been held in abeyance. Efforts are on to arrive at a broad based consensus in consultation with the State Governments.

POWER & ENERGY


Indias power market is the fifth largest in the world. The power sector is high on Indias priority as it offers tremendous potential for investing companies based on the sheer size of the market and the returns available on investment capital. Almost 55 per cent of capacity is based on coal, about 10 per cent on gas, 26 per cent on hydro, approximately 5 per cent on renewable sources, about 3 per cent on nuclear and 1 per cent on diesel. In the past five years, there has been a much greater emphasis on transmission and distribution reforms. The government aims to provide power to all by 2012. To achieve that promise, it will have to add as much as 1,00,000 MW of generation capacity, cut AT&C losses substantially to below 20 per cent, rationalize tariffs and ensure that average revenue realization is greater than the cost of production. It will have to continue to push the process of reform and restructuring and ensure greater private participation, in every segment. In the past few years, there has been considerable growth in power plants based on renewable sources of energy. The Plant Load Factor (PLF) of generating plants has improved consistently over the last 10

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years. The share of thermal power as a proportion of total power generated has decreased from 71 per cent to 66.3 per cent in the last decade. The share of hydro has increased to 26 per cent from 25.7 per cent. Of the fossil fuel supplies, there is delivery constraint with respect to gas. A number of gas plants today are running at sub-optimal plant load factor (PLF) levels due to shortages. The government has decided not to embark on new projects that rely on gas. It is feared that supply shortages can disturb the capacity addition plans, reduce PLFs, as the rising crude prices have led to firmer naphtha and natural gas prices. Emerging environmental concerns have led to an increasing interest in renewables. Captive Power Plants (CPPs) also make a major contribution, which is more than one-fifth of the total installed capacity. In the last three years, captive capacity has grown at an average of 1,600 MW per year. The introduction of ABTs (Availability Based Tariffs) has changed the thinking of discoms. They have to pay huge prices as they have to source power from the grid during low frequency periods. During this time the CPP power comes in handy at a much lower tariff. The reform process in the power sector continues. Thirteen states have unbundled SEBs into separate entities for transmission, distribution and generation. Two states have privatized distribution. Regulatory authorities have been set up in 24 states. These authorities are applying commercial principles to tariff setting, monitoring the performance of state utilities and paying attention to areas such as demand side management and grid discipline. INDUSTRY EXPECTATIONS Disinvestment of power generation, distribution and transmission PSU companies. Exemption of basic customs duty and countervailing duty implemented on thermal or steam coal. Further reduction of customs duty from the imported coal is important as it discourages power projects based on imported coal. Natural Gas should be included in the list of Goods of special importance under Section 14 of the Central Sales Tax Act for uniform taxation across the country. Moreover, with an aim towards a greener environment, natural gas should be given preference over crude oil. Extension of the eligibility norms of tax holiday incentives for power generation companies from starting their power generation before 1 April 2011 to another five years.

Re-establish tax exemptions of income from investment in power generation projects. One more way is the tax exemption on the interest earned by foreign lenders on overseas loans availed by Indian borrowers as was the position earlier under section 10(15) (f).

DIRECT TAX PROPOSALS Proposal to extend the sunset date for setting up power sector undertakings by one year for claiming 100 per cent deduction of profits for 10 years. INDIRECT TAX PROPOSALS Full exemption from basic customs duty is being provided to certain items as under: o Proposal to extend the sunset date for setting up power sector undertakings by one year for claiming 100 per cent deduction of profits for 10 years. Natural gas/Liquified Natural Gas imported for power generation by a power generation company. Uranium concentrate, sintered natural uranium dioxide, sintered uranium dioxide pellets for generation of nuclear power.

The basic customs duty is being reduced on the following items: From 10%/ 7.5% to 5%, on raw materials for the manufacture of intermediates, parts and sub-parts of blades for rotors for wind energy generators.

Brass scrap, wood in the rough, dredgers and equipments for setting up of solar thermal projects are being fully exempted from SAD. The standard rate of Central Excise duty for non-petroleum products has been enhanced from 10% to 12% ad valorem. The merit rate of excise duty for non-petroleum goods that hitherto attracted 5% has been increased to 6%. Similarly, the rate of duty of 1% imposed on 130 items in the last Budget has been increased to 2%. The exceptions to this increase are: o o o o Goods of heading no. 2701, i.e. coal; All goods of Chapter 31, other than those clearly not to be used as fertilizers; Articles of jewellery of heading 7113; and Mobile handsets and cellular phones of heading 8517.

OTHER PROPOSALS Coal India Limited advised to sign fuel supply agreements with power plants, having long-

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term PPAs with DISCOMs and getting commissioned on or before March 31, 2015. External Commercial Borrowings (ECB) to be allowed to part finance Rupee debt of existing power projects.

now seeking more Abbreviated New Drug Approvals (ANDAs) in USA in specialized segments like anti-infective, cardio vascular and central nervous system groups. GOVERNMENT INITIATIVES 100 per cent Foreign Direct Investment (FDI) is allowed under automatic route in the drugs and pharmaceuticals sector including those involving use of recombinant technology. The Government plans to set up Good Laboratory practices (GLP) Compliant, Chemical Laboratories, Biological Laboratories and Large Animal Facilities in Public Private Partnership Mode. It also proposes to set up a National Centre for R&D in bulk drugs at National Institute of Pharmaceuticals Education and Research (NIPER), Hyderabad and a National Centre for Medical Devices at NIPER, Ahmedabad. KEY STRENGTHS OF PHARMA SECTOR Low cost of innovation/Manufacturing/ Capex costs/expenditure to run a cGMP compliance facility. Low cost scientific pool on shop floor leading to high quality documentation. Proven track record in design of high tech manufacturing facilities. Excellent regulatory compliance capabilities for operating these assets. Recent success track record in circumventing API/formulation patents. About 95 per cent of the domestic requirement being met through domestic production. India is regarded as a high-quality and skilled producer in the world. It is not only an API and formulation manufacturing base, but also as an emerging hub for: Contract research Bio-technology

PHARMACEUTICAL
The Indian Pharmaceutical Industry currently tops the chart amongst Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. The Indian Pharmaceutical Industry ranks very high amongst all third world countries, in terms of technology, quality and the vast range of medicines that are manufactured. The Pharmaceutical industry has grown from mere US$ 0.3 billion turnover in 1980 to about US$ 21.73 billion in 2009-10. The country now ranks 3rd in terms of volume of production (10 per cent of global share) and 14th largest by value (1.5 per cent of global share). One reason for lower value share is the lowest cost of drugs in India ranging from 5 per cent to 50 per cent less as compared to developed countries. Indian pharmaceutical industry growth has been fuelled by exports and its products are exported to a large number of countries with a sizeable share in the advanced regulated markets of the US and Western Europe. Increasing number of Indian pharmaceutical companies have been getting international regulatory approvals for their plants from agencies like USFDA (USA), MHRA (UK), TGA (Australia), MCC (South Africa), Health Canada etc. India has the largest number of USFDA - approved plants for generic manufacture. Considering that the pharmaceutical industry involves sophisticated technology and stringent Good Manufacturing Practice (GMP) requirements, major share of Indian Pharma exports going to highly developed western countries bears testimony to not only the excellent quality of Indian pharmaceuticals but also its price competitiveness. More than 50 per cent share of exports is by way of dosage forms. Indian companies are

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Clinical trials and Clinical data management. The country has the distinction of providing quality healthcare at affordable prices.

accumulated CENVAT credit to reduce tax liability will be beneficial for pharmaceutical companies. Advanced pricing agreement mechanism which can minimize the tax litigation on issues related to import prices of APIs is needed.

FUTURE PROSPECTS The Indian drug companies account for over 25% of the total generic drug applications made to the FDA of USA. Indian pharmaceutical companies are vying for the branded generic drug space to register their global presence and are expected to grow by around 15% in the near future. Business observers predict that the Indian pharmaceutical market will escalate at an increasing mode as compared to the global pharmaceutical market, at a cumulative annual growth rate (CAGR) of 13.2% during the fiscal years 2009-14 to reach an overall worth of $15bn in 2014. With the Union Budget 2012-13 to be announced shortly, various forums/ chambers as in the past representing the Pharma Industry are expected to flood the Ministry with help of suggestions to introduce favourable tax proposals. The importance of R&D highlighted by the Prime Minister recently, the impetus required for the R&D sector and considering the current economic scenario, it is expected that the government will take initiatives in Budget 2012 and provide the required boost to the Pharma Industry by making favourable tax amendments.

DIRECT TAX PROPOSALS Proposed to extended weighted deduction of 200% for R&D expenditure in an in house facility for the further period of 5 year beyond March 31, 2012. Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.

INDIRECT TAX PROPOSALS Proposal to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to 6 specified life saving drugs/ vaccines. Basic customs duty and excise duty reduced on Soya products to address protein deficiency among women and children. The rate of excise duty on Medicinal and Toilet Preparations under the M&TP (Excise Duties) Act has also been increased from 10% to 12% ad valorem. The basic customs duty is being reduced on the following items: From 30%/15% to 10% on,o o Isolated soya protein and soya protein concentrate Probiotics.

INDUSTRY EXPECTATIONS To promote research and development in the pharmaceutical sector, deduction from profits linked to investments to R & D is needed To provide clarity on deductions on R&D expenditure for companies where manufacturing activity is partly or entirely outsourced, specific provision for such companies is needed. Excise duty on Active Pharmaceutical Ingredients (APIs) needs to be lowered from 10.0% to 5.0% so as to be on par with other pharmaceutical goods. Moreover, abatements expected to be increased from 35.0% to 45.0% to cover the trade margins of pharmaceutical companies. All lifesaving drugs need to be exempted from Goods and Service Tax (GST). The existing inverted duty structure in the pharmaceutical industry has resulted to accumulation of CENVAT credit. Lowering the excise duty structure for raw materials or providing a refund mechanism for the

From 10% to 7.5% on,o Titanium Dioxide

From 10%/ 7.5% to 5%, ono Six specified life saving drugs/vaccines and their bulk drugs is being reduced from 10% to 5% with Nil CVD by way of excise duty exemption odine.

From 7.5% /5% to 2.5%, ono Specified raw materials for the manufacture of syringes, needles, catheters, cannulae along with Nil SAD and 6% CVD subject to actual user condition Parts and components for the manufacture of blood pressure monitors and blood glucose monitoring systems (Gluco-meters) along with Nil SAD and 6% CVD.

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OTHER PROPOSALS Relief proposed to be extended to sectors such as steel, textiles, branded readymade garments, low-cost medical devices, labour-intensive sectors producing items of mass consumption and matches produced by semimechanised units.

REAL ESTATE
The real estate sector in India is contributing approx 5% to the GDP and generating largescale jobs across its varied verticals. In line with Global Economic slowdown, Indian economy has also shown signs of decreasing GDP growth rate, during the financial year 2011-12. In the last fiscal year the Indian economy has experienced many fiscal disciplinary actions from the Reserve Bank of India in the form of upward revision in interest rates, increase in CRR, RepoReverse Repo rates, which has tightened the financial liquidity as well as increase in cost of capital. The Indian real estate industry being highly capital intensive, has also faced the heat of the same. The recent increase in home loan interest rates (from around 9.50% in SBI and 9.75% in ICICI during 2010-11 to current rates at 10.75% in SBI and around 10.50% in ICICI) has rendered home loans more costlier and thereby resulted in moderation of demand for newly constructed units. The recent RBIs decision to not to increase the interest rate further and also reduce cash reserve ratio (CRR) in March 2012 has provided a ray of hope for easing of the liquidity in financial market and thereby reduction or at least stabilizing in the interest costs which will provide a much needed support to the real estate demand and may gradually result in revival of demand. The realty body CREDAI has said, the move would enable financial institutions to fund real estate projects. Amidst these macroeconomic conditions, Indian real estate asset classes across the prime cities of India have seen mixed sentiments. The real estate sector has witnessed rapid growth in the recent past. A recent Fitch

study reveals that residential segment sales, which had improved in Q1 of 2011, moderated significantly towards the end of the fiscal and are likely to continue to remain sluggish in the first half of 2012. Oversupply of commercial space as compared to demand continues in some markets and prices of commercial properties have seen some correction during the latter half of 2011 in most markets According to a real estate rating and research agency Liases Foras, home sales in the Mumbai metropolitan region fell by 17% to 112 million square feet since the quarter ended December 2011. Unsold stock climbed to 112 million sq ft while the weighted average price of homes increased to a record 10,559 per sq ft. Despite the drop in sales, prices have increased by approximately by 5% during the past quarter due to the increase in interest, materials & labour cost . A Report by another real estate research firm Prop Equity revealed that nearly 50% of the approximately more than 1,900 projects launched in the three metros suffered due to scarcity of skilled workers and firm cost of raw materials. As per the Economic survey for the year 2011-12 every rupee invested in housing and construction, around ` 0.78 gets added to GDP . However, raising fresh capital continues to be a big constraint. An overall relaxation in FDI and ECB norms for the real estate sector would have provided a breather to the realty sector as a whole. McKinsey estimates suggest that Indian Middle class (household earning between ` 2 lacs to ` 10 lacs) would increase from 13.3 million in 2005 to 60.6 million in 2015 and 128 million in 2025. Average household size in India is 5.3 (Census 2001). Adequate housing requirement for family of this size is a two bedroom house (i.e. nearly 800 to 1000 sq. ft. House). Said family can afford house with costs in the range of ` 15 Lacs to ` 50 Lacs. The total current shortage of affordable housing units in India as of today is estimated to be around 25 million (CII). To promote construction of affordable housing, Section 35AD of Income Tax

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Act was amended w.e.f. 1st April 2012 to provide deduction of whole of expenditure of capital nature for the specified business in the nature of developing and building an approved affordable housing scheme. Direct Tax Proposals :The proposal to enhance the deduction u/s 35AD wef to 1st April 2013 to 150 % of whole of expenditure of capital nature for the specified business in the nature of developing and building an approved affordable housing scheme will compensate to some extent the increase in input costs. The other budget proposal for allowing ECB for the affordable housing projects will also provide a much needed financial support to the real estate industry and will encourage the development of large - affordable housing projects the another proposal to set up Credit Guarantee Trust fund for ensuring better credit flow for housing loans will result in accelerating demand. Indirect Tax Proposals :Proposed increase in indirect taxes in Excise Duty and Service Tax on major raw materials and other input services may adversely impact the cost of the real estate development and thereby may play a spoil sport for easing of prices.

The telecom sector is likely to see tremendous growth in Indias rural and semi-urban areas in the years to come. By 2012, India is likely to have 200 million rural telecom connections at a penetration rate of 25 per cent, accounting for over 60% of the total telecom subscriber base. India is currently adding 8-10 million mobile subscribers every month. This would translate into 800 million mobile subscribers, accounting for a teledensity of around 51 per cent by 2012. The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. Buoyed by the rapid surge in the subscriber base, huge investments are being made into this industry. Simultaneously, Indian telecommunication companies are now set to have a major global footprint. Indias telecom equipment manufacturing sector is also emerging as one of the largest globally. Revenues are estimated to grow at a CAGR of 26.6 per cent from 2006 to 2011, touching US$ 13.6 billion. INDUSTRY EXPECTATIONS To provide infrastructure status to the telecom sector and subsequent tax benefits related to infrastructure. To provide incentives for expanding into remote regions in the form of tax holidays or subsidies. Rationalization of levies and duties for mobile companies including a uniform annual revenue share of 6-8%. Abolition of service tax on internet and broadband services is expected. CENVAT credit for telecom towers is expected. Tax rebates and exemptions (customs duty, excise duty and VAT on any inputs) for companies which set up R&D facilities are expected. Subsidy on capital investment for setting up the R&D facility is likely.

TELECOM
The telecom services have been recognized the world-over as an important tool for socio-economic development for a nation. It is one of the prime support services needed for rapid growth and modernization of various sectors of the economy. Indian telecommunication sector has undergone a major process of transformation through significant policy reforms, particularly beginning with the announcement of NTP 1994 and was subsequently re-emphasized and carried forward under NTP 1999. Driven by various policy initiatives, the Indian telecom sector witnessed a complete transformation in the last decade. It has achieved a phenomenal growth during the last few years and is poised to take a big leap in the future also. The Indian telecommunications industry is one of the fastest growing in the world and India is projected to become the second largest telecom market globally by 2011-2012 with gross revenue exceeding INR 1580 Billion and a growth rate of 45% CAGR1. To put this growth into perspective, the countrys cellular base witnessed close to 50 per cent growth in 2008, with an average 9.5 million customers added every month. Telecom companies expect this pace of growth to continue. The sector has attracted 8 % of the cumulative foreign direct investment (FDI) over the last two years.

DIRECT TAX PROPOSALS Proposed to extended weighted deduction of 200% for R&D expenditure in an in house facility for the further period of 5 year beyond March 31, 2012. Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector.

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