Direct Tax

Tech companies get transfer pricing relief

The Central Board of Direct Taxes (CBDT) has mitigated transfer pricing (TP) litigation for information technology R&D centres operating in India by withdrawing one of the contentious circulars and suitably amending and revising another circular. The earlier circulars were issued on March 26.

The revised circular seeks to put to rest the practical challenges that arose for taxpayers. It recognizes that all R&D centres cannot be painted with the same brush. Such centres will fall into three broad categories�entrepreneurial, centres functioning on a cost sharing arrangement and contract R&Ds.

The basis of transfer pricing is that rewards are linked with functions performed, assets held and risks born. Thus, entrepreneurial centres should have a comparatively higher profit margin in India than a low-risk contract R&D centre which performs insignificant functions. This new revised circular, issued on June 29, replaces the one issued earlier. It provides guidelines to TP officers on arriving at a decision, based on the totality of the facts and circumstances of each case. The circular also adds that the TP officer shall be guided by the conduct of the parties to the transaction and not merely the contractual terms.

India is the hub of R&D centres set up by multinational foreign companies. Litigation arose because in many instances, taxpayers insisted that they were contract R&D service providers bearing insignificant risks, whereas the transfer pricing officers held otherwise and sought to attribute higher profits to the Indian operations. “The earlier circular had prescribed six watertight conditions that needed to be cumulatively met for an R&D centre to be classified as a contract R&D centre. Now there is more leeway,” said Rajendra Nayak, partner, Ernst & Young.

“The revised circular also specifies that it is not just the foreign principal but other overseas affiliate companies that can provide funds and other assets, including intangibles for carrying out R&D activities in India. Further the R&D centre can be compensated for their work by any of these companies. This will give a fillip to Indian R&D operations,” added Hitesh Gajaria, partner, KPMG. Many ambiguous terms existing in the earlier circular such as “low or no tax jurisdiction” have also been defined. Earlier, if the foreign principal was located in a low or no-tax jurisdiction, it was automatically presumed that the risks are borne by the Indian entity – resulting in higher profit attribution and litigation. “Owing to the clarifications in the revised circular, if the principal is located in a treaty country like Singapore where taxes are low, this issue will not arise,” said Nayak.

CBDT has withdrawn another circular which seemed to suggest that only a particular method� the Profit Split Method�was the most appropriate formula for computing arm’s length pricing. “Safe harbour” rules will also be issued shortly, and these will bring further certainty in assessment of R&D centres, a finance ministry release said.

(Times of India)

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In a startling revelation, the CBDT has reported that 97% of Income Tax demand arrears, quantified over Rs 4.66 lakh crore, is “difficult” to be recovered.

The total arrears amount to be recovered, stuck because of a variety of reasons like litigation, companies in liquidation, sick companies and untraceable taxpayers, is Rs 4.82 lakh crore.

Alarmed by the “precarious” situation, the apex body of the I-T department has initiated a slew of measures to collect these taxes including attachment of bank accounts of defaulters and arrest of ‘wilful’ evaders under tax laws.

“Attention is drawn to the precarious situation arising out of comparison of total arrear demand outstanding and demand difficult to recover.

The total arrear demand outstanding as on April 2012 was Rs 4,82,027 crore while the demand difficult to recover as percentoral action plan for March 2013 is Rs 4,66,854 crore (97%).

The situation is alarming and leaves only 3 % of the demand in the recoverable arena.

“Even more alarming is the situation that less than 5 %, Rs 2,39,95 crore, of the total arrear demand outstanding (Rs 4.82 crore) could be collected during the 2012-13 fiscal,” the Central Board of Direct Taxes (CBDT) said in a recent communication to its top officers.

“The situation is surely not pleasant but the board and the I-T department are geared to pursue these cases vigorously.

The Parliamentary Standing Committee on Finance have time and again urged the Finance Ministry to minimise this revenue loss sector and steps are being taken. The results will soon show,” a senior official who did not want to be named said.

(Business Standard)

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In a significant setback to businesses operating in special economic zones (SEZs), the Karnataka High Court (HC) in its recent judgment dismissed writ petitions filed by SEZ developers and operators challenging the constitutional validity of amendments to levy minimum alternate tax (MAT) and dividend distribution tax (DDT), introduced by the Finance Act of 2011.

Before delving into the principles enunciated by the HC, it will be useful to recapitulate the background of the SEZ law. The SEZ scheme was introduced in 2000 with an ambitious and directional change of Foreign Trade Policy to provide an internationally competitive hassle-free environment for foreign exchange earners, promoting FDI and augmenting employment opportunities in line with the successful Chinese experience. To provide impetus and instill confidence on stability of SEZ regime, the Ministry of Commerce proposed enactment of the Special Economic Zone Act, 2005, which saw a safe passage in Parliament, in June 2005.

The SEZ law proposed modifications to direct and indirect tax enactments, including exemptions from the application of MAT and DDT. The law was largely labelled as successful from an FDI and employment generation standpoint, though, criticised for institutionalisation of the land acquisition process and fiscal incentives standpoint. The fiscal giveaways were a constant source of stress between the commerce and finance ministries, given the rising tax revenue foregone leading the latter to mull over withdrawal of exemptions. The proposal to move away from all forms of profit-driven incentives and sunset clause for SEZs was evident in the first draft of the Direct Tax Code (DTC) as early as 2009. In the government, there was a growing suspicion that SEZs were set up solely as a device to exploit tax benefits and were defeating an overarching objective for infrastructure-driven zones. While most believed that government would not backtrack on tax benefits before the DTC sets in, the Finance Bill, 2011, introduced a sunset clause withdrawing exemptions for MAT and DDT.

The writ petitions were filed challenging the constitutional validity of sunset clause as being arbitrary, beyond legislative competence and violative of fundamental rights (Article 14) of the Constitution. The doctrine of promissory estoppel and legitimate expectation were invoked to buttress the petition. It was contended that an express promise for exemption from MAT and DDT incentive prompted investors to opt for the SEZ scheme and its abrupt withdrawal has led to injustice and breach of promise by government.

The HC in exercising its power of judicial review (Article 226) under the Constitution is expected to limit itself to testing the validity of the statute on the touchstone of established principles since strictly speaking, it is not the job of the judiciary to question the wisdom of law makers, unless the law is arbitrary. The HC reiterating that a law made by the Parliament can be struck down solely on grounds of legislative competence and violation of fundamental rights has given its stamp of approval for withdrawal of incentives. Dismissing the writs, the HC reasoned that as a settled principle, there could be no perpetual tax exemption and amendments were aimed at removing discrimination between SEZ and non-SEZ companies. Adverting to the application of doctrine of the promissory estoppel in matters of legislation, the HC reiterated a settled position that there is no promissory estoppel against statute.

In light of the constitutional principles given that Indian courts show restraint in invalidating a legislation, one would find little fault with the reasoning, though the HC’s observation on discriminations seems to have backfired on the SEZ and is surprising.The controversy surrounding tax exemptions to SEZs seems more on stability of policy framework than on legal issues, though the SC will have a final say on legality of the amendment. A valid law made in line with the constitutional mandate cannot be struck down merely by resorting to the doctrine of promissory estoppel. As such legislature can never be precluded from exercising its legislative power by resorting to the doctrine of legitimate expectations. However, as a matter of policy, the legislature should have shown empathy and vision before withdrawal. Investors feel nervous on stability of policy and short-changed in such situations having acted on the promise of tax incentives and committed investments.

Though it’s not appropriate to entirely attribute slowdown of SEZ investments to tax policy change (investments fell from average of Rs 40,000 crore up to 2010 to 176 in the first half of 2011), the timing for change in law could not have been worse. A big question to ponder over is, if fall in SEZ investment can be addressed by partly restoring MAT and DDT.

(Business Standard)

Business Standard Economy Policy News

The Income Tax Department has got some prima facie case against the mobile handset manufacturing firm Nokia India, according to sources from the department. The Department has concluded its survey based on information that the company was not deducting tax on the payments that it makes to the parent company in Finland.

“The survey ended at around 6’o clock today morning and what we expected was right,” said an official from the Department on condition of anonymity. The official confirmed that there is a prima facie case against Nokia, but refused to reveal more on it at this point of time.

The I-T officials are expected to conclude various formalities including quantifying the default payment before coming up with an official statement, which is expected to come out by today evening, added department officials. It is to be noted that the survey started on Tuesday morning and officials said that if its expectations goes right, then it will result in about Rs 2,500-3,000 crore of tax collection for past seven years, 2005 onwards.

Confirming the visit of I-T department officials in its manufacturing unit, Nokia India on Tuesday said that, “Nokia is fully cooperating to ensure they get the necessary information to help in their inquiry.”

Business standard Economy Policy News

Despite the overall gloom in the economy, advance tax collections of the top 100 companies were higher by 10% for the September quarter, according to a senior tax department official.

The country�s largest bank, State Bank of India, led for a consecutive quarter, with advance tax outgo of Rs 1,820 crore compared with Rs 1,650 crore in the same period last year. HDFC Bank and ICICI Bank also paid higher taxes, at Rs 1,100 crore and 815 crore, respectively.

Most leading banks have paid higher taxes, as have the foreign banks. Standard Chartered Bank’s tax outgo was marginally higher at Rs 475 core against Rs 450 crore in the same period last year. HSBC paid Rs 500 crore and Citibank paid advance tax of Rs 400 crore.
Companies are supposed to pay 30% of total advance tax in this quarter. Reliance Industries, the largest company by market capitalisation, paid lower advance tax of Rs 1,530 crore against 1,800 crore last year.

Life Insurance Corporation, the largest in the sector, paid Rs 1,300 crore as advance tax this quarter, compared ton Rs 1,160 crore in the corresponding quarter last year.

�Profits are certainly under pressure,� said Naresh Makhijani, partner at KPMG. �But companies are looking at strategies to cut costs, which have given a boost to their profits. Hence, companies have paid higher advance tax this quarter.�

Housing Development Finance Corporation paid Rs 560 crore as taxes compared with Rs 480 crore in the same period last year. Cement major UltraTech had a tax outflow of Rs 200 crore, up from Rs 100 crore last year. However, Crompton Greaves paid advance tax of Rs 42 crore against Rs 75 crore last year.

Tata Consultancy Services, the country�s largest information technology services provider, paid Rs 812 crore for the July-September quarter, compared with Rs 600 crore last year. In the pharmaceutical space, Lupin paid Rs 99 crore as taxes (Rs 39 crore last year). Glenmark Generics� advance tax outflow was a tad lower at Rs 15 crore (Rs 18 crore). Cipla paid advance tax of Rs 80 crore.

Tata Power�s tax outflow was a tad higher at Rs 75 crore, from Rs 70 crore earlier. Godrej Consumer Products� taxes fell to Rs 32 crore from Rs 40 crore in the same quarter of 2011-12.

Business Standard Economy Policy News

The government will soon come out with new norms to revive Special Economic Zones (SEZs), which have lost sheen after the imposition of certain levies and the proposal to take away tax incentives.

Commerce Secretary S R Rao said his ministry has held a series of meetings with the Revenue department officials on the matter.

“We are on the verge of getting a closure on the issues. I think in maximum 4-5 weeks, you should be seeing the new rules kicking in,” he said.

The government had imposed Minimum Alternative Tax (MAT) and Dividend Distribution Tax (DDT) on SEZs in 2010-11, which were earlier exempted from almost all levies.

Due to imposition of these levies, there has been a visible slowdown in growth of export from SEZs.

The Direct Taxes Codes (DTC) being considered by Parliament proposes to do away with the income tax exemption given to them and instead link tax sops to investments made in them. Profit-linked benefits were the main attraction of the SEZ scheme.

The initial phase of SEZ scheme, launched in 2006, saw developers lining up in big numbers for projects.

To boost investor confidence in the zones, the government is planning incentives for developers who want to set up SEZs in remote and undeveloped areas.

According to sources, the government is considering to relax minimum land area requirement for different categories of SEZs, besides extending the benefits of export schemes to SEZ units, that are already available to entities outside the zone.

Exports from SEZs stood at Rs 3.65 lakh crore in 2011-12. With investment of Rs 2.02 crore, these zones provide employment to over 8.45 lakh.

Overseas shipments from the 153 operational tax-free havens have come down to 12% of the country’s total exports in 2011-12, from about 30% in the previous year.

Business Standard Economy Policy News

In a major benefit to the software sector, the government has decided to do away with complex multi-level system of Tax Deduction at Source (TDS) with effect from July 1.

“The abolition multi-level TDS for software companies will be effective from July 1. The law ministry is vetting the final blueprints of the amendments in the I-T Act,” a finance ministry official told PTI.

Under the current structure, TDS of 10% is levied at every level of software distribution chain — right from master distributor to retailer and then to the final consumer.
Responding to the long-standing demand of the software sector, Finance Minister Pranab Mukherjee had last week said that Section 194 (J) of the Income Tax Act, 1961, would be amended so as to avoid multi-level TDS on information technology sector.

Section 194(J) of the I-T Act deals with fees for professional and technical services and covers royalty and non-compete fees.

Software industry body Nasscom, which has been long lobbying for this, said the move would benefit the IT sector and improve finances.

The TDS model, it had argued, “was leading to an unsustainable model for software distributors who operate on very low margins.”

Business Standard Economy Policy News

Faced with criticism over the proposed amendments to tax laws with retrospective effect, the government may dilute the provisions to allow waiver of penalties on tax demands to be raised on Vodafone-like acquisitions involving domestic assets.

“Adding a clause to allow waiver of penalty for deals which took place before April 1, 2012 is being considered by the government,” a senior Finance Ministry official said.

Once the changes go through, Vodafone could be an immediate beneficiary as it won’t have to pay about Rs 7,900 crore penalty. However, it would still have to pay an interest of about Rs 4,500 crore.

Vodafone, in any case, can approach Income Tax Settlement Commission to seek waiver of penalty, but in that case it would have to deposit the demanded tax along with interest.

The Income Tax Department had raised a Rs 11,000 crore tax demand from Vodafone for its acquisition of Hutchison stake in Hutchison-Essar in 2007 through a deal in Cayman islands. But the Supreme Court struck down the tax claim.

Following the Supreme Court judgement, the government in the Finance Bill, 2012 has proposed amendments in the Income-tax Act, 1961, with retrospective effect to bring in tax net overseas mergers and acquisitions involving Indian assets.

After Parliament’s nod, the amended Income-tax Act, 1961 will become operational from April 1, 2012. The move may fetch Rs 35,000-40,000 crore tax revenue for the government.

The Bill would be taken up for consideration and passage by Parliament next week.

Global business chambers including Confederation of British Industry, US Council for International Business and Japan Foreign Trade Council have sought reconsideration of the amendment proposals saying such a move would impact investments in India.

Worried over the impact of the proposed retrospective amendment on the company, Dutch unit of Vodafone had served a legal notice to the government threatening to drag India to international arbitration on the issue.

Vodafone Group global CEO Vittorio Colao had called on Finance Minister Pranab Mukherjee on Tuesday to present the company’s case to the government.

Business Standard Economy Policy News

The Income Tax department has issued fresh notices to telecom giant Bharti Airtel in connection with taxation of overseas roaming charges for additional two financial years.

The department has issued the notices for financial years 2001-02 and 2006-07 to the company after recently issuing a Rs 1,067-crore tax demand notice for non-payment of TDS dues in the last four financial years in connection with its overseas operations.

Bharti Airtel, which has approached the Delhi High Court against this I-T order, has recently made an interim payment of Rs 236.9 crore in this regard.

An Airtel spokesperson said in a statement to PTI that “this pertains to a matter where the I-T department is trying to treat inter-connect charges being paid by domestic telecom operators to international operators, as fee for technical services and recover withholding tax on that basis.

“The matter is sub-judice and the demand on the company stands stayed. The pre-deposit amount has been paid in compliance of the court order granting stay.”

According to sources in the I-T department, fresh notices were issued to the firm in order to obtain financial documents and revenue collection figures of overseas roaming operations during those financial years and a tax demand will be raised after scrutinising this data.

The Income Tax department, earlier this year, had asked the company to pay a total tax of Rs 1,067.24 crore under Section 201 (consequences of failure to deduct or pay taxes) along with Section 195 (any person responsible for paying to a non-resident) of the I-T Act.

The tax demands raised for the four financial years were- 2007-08 (Rs 202.07 crore), 2008-09 (Rs 329.913), 2009-10 (Rs 313.577 crore) and 2010-11 (Rs 221.681 crore) on payments made by the company to “non-resident mobile service providers”.

The I-T department had held that such payments are in nature of fee for technical services and are subjected to TDS deductions as per section 195 of the I-T Act.

The department, in its notice, had also said that for payments of such taxes, the location of the company’s property or place of conducting the operations is not “relevant”.

Bharti Airtel offers a variety of telecom services both in India as well abroad.

The company claims to have a subscriber base of over 230 million across 19 countries.

Business Standard Economy Policy News

Foreign actors, musicians, sports personalities including Indian Premier League (IPL) players, and even producers may be part of a growing tribe that is attracted to the country�s booming entertainment industry. But now they are set to see a dent in their earnings in India, after the Union government proposed to double their tax to 20 per cent.

�This will have implications on foreign sportspersons taking part in IPL, World Series Hockey and other sports league which have started in the last few years,� said Rakesh Jariwala, partner & tax expert, M&E, Ernst & Young. �Even overseas artists who participate in TV shows, films and advertisement commercials will be burdened with this.�

This Budget proposal, which will come into effect from this July 1, says �income arising to a non-citizen, non-resident entertainer (such as theatre, radio or television artists and musicians) from performance in India shall be taxable at the rate of 20 per cent of gross receipts.�

Globally also, in countries like Germany, Sweden and the UK, similar tax rates exists for both entertainers and sportspersons, ranging from 10-30 per cent or the income being taxed under cultural tax.

According to several IPL team owners, as far as cricketers are concerned it will be up to the respective franchisees on how they pay salaries and how these deductions will be done respect to the tax. Said an IPL team official: �With some players, we have contracts for period of two-three years whose fees have already been fixed and salaries are paid in three to four installments during the year.�

For other sports like football and hockey leagues, the impact may be not high. �The earnings of these hockey players are not that high as of cricket,� said Harish Thawani, founder and CEO of Nimbus.

In the past few years, there has been a flurry of events in India which might have prompted the government to increase the tax rates. In the last three years, several sports events like IPL, Formula Race and WSH have come into the picture.

Also the entertainment industry has provided huge opportunities for foreign celebrities in terms of films, reality shows and music industry. In addition, the country saw the performances of American singer Lady Gaga, Akon, heavy metal band Metallica and house music producer and DJ David Guetta in the past one year.

However, entertainment industry officials feel more than artists and IPL players, harder hit will be the companies, music labels, studios and brands that get the artiste in India.

�Most of these artists and sportsperson have fixed fees or net amounts to be paid for an appearance or a performance,� pointed out Indranil Das Blah, COO at Kwan Entertainment and Marketing Solutions. �It will be up to various brands how they would pay these fees, as they will have to shell out more so the artists earnings do not have any implications.�

According to Devraj Sanyal, managing director (India), Saarc, of the Universal Music Group, most companies will now think twice before getting big international artists here. �The only way to get them here is by paying a higher gross amount,� he said. This would ensure that the net fees is not reduced or that one �just gets an artists who charges less or work with an Indian artist for gigs�. The company�s leading artists includes Lady Gaga, Bryan Adams, Metallica, Bon Jovi, Abba, Queen and Rolling Stones.

Business Standard Economy Policy News

Tightening screws on black money in the realty market, the government has proposed 1% TDS (tax deduction at source) on transfer of immovable property if the sale value exceeds Rs 50 lakh in urban centres and Rs 20 lakh in other areas.

The measure is proposed in the Budget and is being taken to “deter the generation and use of unaccounted money”, Finance Minister Pranab Mukherjee said in his Budget speech. Immovable properties, other than agricultural land would be covered under the new provision.

The application of TDS would be effective from October 1 this year. It has been provided that transfer of property would not be registered unless the buyer furnishes proof of deduction and payment of TDS.
At present, tax is required to be deducted at source by the transferee on transfer of immovable property by a non- resident. But, there is no such requirement on transfer of such property by a resident except in few case, it added.

The new proposal intends to collect tax at the earliest point of time and have a reporting mechanism of transactions in the realty sector.

The provision would apply if the consideration exceeds Rs 50 lakh if property is situated in “specified urban agglomeration” and Rs 20 lakh if property is situated in any other area.

Reacting to the proposal, the apex realty body CREDAI said that this would lead to increase in property prices.

“It looks like that the proposal of TDS would apply on transactions in the secondary market and not on sale of builder’s flat,” Confederation of Real Estate Developers’ Association of India (CREDAI) Chairman Pradeep Jain said.

Business Standard Economy Policy News

Finance Minister Pranab Mukherjee on Friday slashed withholding tax on interest payments on external commercial borrowings (ECB) from 20 per cent to 15 per cent along with other boosters for the fertiliser sector. Industry players and analysts said the move would bring more investments into the sector. However, the Budget has been flayed for not doing anything substantial on the urea deregulation front.

Besides providing relief on withholding tax for three years, the Budget has proposed exempting import of equipment for urea projects from basic customs duty of five per cent for the next three years, abolish customs duty on coal for the next two years and extend 200 per cent relief on research and development (R&D).

The Budget also raised deduction on capital expenditure to 150 per cent from 100 per cent now and proposed to put in place a mobile-based fertiliser management system to track the movement of fertilisers and subsidies.
However, players said lack of supply of natural gas would continue to hinder investments from flowing into the fertiliser sector.

Though the finance minister expressed confidence India would become self-sufficient in urea production in the next five years, he did not touch upon the issue of bringing key fertilisers under the nutrient-based subsidy scheme.

�There is definitely some positive news for the fertiliser sector but we were expecting some more on the urea front,� said Suresh Krishnan, chairman and managing director (CMD), Zuari Industries Limited, referring to the deregulation of urea.

�I am quite optimistic on new investments now, as the government has indicated it desires to attract further investments in this sector,� Tarun Surana of Sunidhi Securities said, adding the only roadblock for investments would be the availability of natural gas.

On withholding tax, R Mukundan, managing director, Tata Chemicals, said,�This is a positive step for the fertiliser sector. This will reduce the cost of borrowings for new investments.�

Surana expects this to have a positive impact on all fertiliser companies along with the proposed investment-linked deduction on capital expenditure incurred at the enhanced rate of 150 per cent.

The government pegged the fertiliser subsidy for the next fiscal at Rs 60,900 crore, compared to Rs 50,000 crore in the current fiscal. However, subsidy for this year is expected to touch Rs 90,000 crore.

Also, players have viewed the announcement of paying subsidy in cash, instead of the earlier practice of bonds, as a forward-looking step.

The Budget however, could not enthuse investors in fertiliser stocks. Tata Chemicals ended 1.20 per cent lower at Rs 354.70 on the BSE, while Chambal Fertilisers fell 0.44 per cent at Rs 79.75 and Zuari Industries settled down 2.63 per cent at Rs 492.45. However, Coromandel International was up 1.70 per cent at Rs 302.75.

Business Standard Economy policy News

Real estate and infrastructure conglomerate, MARG group, has called for exemption of infrastructure firms and units set up in Special Economic zones (SEZ) from the provisions of minimum alternate tax (MAT).

“With a slowing economy, high interest rates and need to speed up decision making towards infra projects, I expect a positive attempt in this budget to push private investment and accelerate infrastructure spending,” said GRK Reddy, Chairman & Managing Director – MARG Group.

* Exempting infrastructure companies and SEZ units from MAT provisions

* Relaxation of norms on long term funds (insurance and pension) to invest in the infrastructure sector

* Permitting banks to issue long term tax-free infrastructure bonds, thereby enhancing the participation of banks, financial institutions and large NBFCs

Marine Infrastructure:

Reddy says the privatisation of ports in the country has begun in the right earnest and it is now imperative that the Government works out a supportive mechanism particularly for:

* Dredging (which is highly capital intensive)

* Connectivity by road & rail

Even though private ports are creating additional capacities, it is critical for the above 2 issues to get adequate representation in the budget. As per the maritime agenda, a 3 billion capacity is required to be created by 2020 with a sizable portion of investment expected from private sector. This can only be possible if this sector gets infrastructure and funding support.

Real Estate:

Reddy states that the real estate sector is in a state of turmoil on account of high interest rates and inflationary pressures among other factors. In this scenario, impetus from the Government in the form of budgetary provisions to spur demand for residential & commercial real estate will augur well for this sector:

* The scope of the 1% interest rate subsidy should be broadened to include housing loans up to Rs. 20 lakh

* Declare housing as infrastructure and bring it under Section 80IA of Income Tax Act

* Incentives to promote affordable housing – Increase allocation to Rajiv Awas Yojana (RAY) for urban housing targeted at the EWS and the LIG sections

* Tax exemption limit to be hiked to Rs. 3 lakh against interest paid on housing loans

* Relax FDI up to 51% in multi-brand retail to create demand for retail space in shopping malls

SEZ:

* Exemption from the MAT levy will certainly be a positive measure to bring relief to the sector

* The implementation of the revised Direct Tax Code (DTC) draft will have strong implications on SEZs as it does not allow tax benefits to new units. The industry requires clarity on the issues that may emerge and how businesses would be promoted in Special Economic Zones.

Business Standard Economy Policy News

Tax authorities here who have attached various bank accounts of Kingfisher Airlines claim they have recovered nearly Rs 60 crore. The airline has not been able to deposit the TDS (tax deducted at source) it has been deducting while paying its vendors.

The action was taken after a series of questions were raised during the Winter Session of Parliament about the status of the airline and how the Centre was addressing it. Finance Minister Pranab Mukherjee subsequently got the respective replies from the tax department. He informed the House that as much as Rs 300 crore was pending from the airline and action would be taken. �If the finance minister tells Parliament action will be taken, we will have to take action,� tax officials told Business Standard.

On how the income tax department would approach this case, a senior officer said the next step would happen at the Central Board of Direct Taxes� chairman level and subsequently with the finance ministry. �Our directive is to recover as much as possible. We are working by assuming the worst case scenario,� a senior Internal Revenue Service officer said. Requests for a statement went unanswered from Kingfisher Airlines� management.

Business Standard Economy Policy news

An association of private and PSU oil companies has demanded a slew of tax incentives, including income tax holiday for natural gas production and extending the same for oil refineries by another five years.

In a pre-Budget memorandum to the government, the Petroleum Federation of India (PetroFed), a body comprising almost all public and private sector oil companies, sought seven-year holiday for payment of income tax to all refineries that are commissioned by March 2017.

Currently, the tax breaks are available only for units beginning production by March this year.

“This would ensure that India becomes the export hub which would put pressure on the product prices and bring down the international prices of sensitive products and would also enable reduction in under recoveries of the oil companies,” it said.

PetroFed said the period of tax holiday for both exploration and refining activities should be extended to 10 years as in case of power sector.

“Government has granted 100 per cent tax holiday in respect of profits derived by undertakings engaged in the generation or generation and distribution of power for a period of any 10 consecutive years out of 15 years beginning with the year in which the undertaking starts generation or distribution of power,” it said, adding hydrocarbon sector should be treated at par with power sector.

“Hydrocarbon sector is quite critical for the speedy and balanced growth of any economy, especially ours in the context of the over-dependence on oil imports to meet our domestic demand which has significantly increased over the recent years in view of the robust growth,” it said.

It also wanted the definition of infrastructure sector be be expanded to include oil and gas pipeline.

PetroFed said the the government had in 2009 extended tax holidays for production of natural gas from areas awarded under New Exploration Licensing Policy’s (NELP) round-VIII.

This “is clearly discriminatory in nature, since it denies the benefit to Production Sharing Contracts (PSCs) signed so far under the NELP/ CBM (Coal Bed Methane) policy, where the government is clearly bound under the doctrine of promissory estoppel to honour its commitment.” Promissory estoppel prevents a person or institution from reneging on a promise.
The association suggested inclusion of natural gas production for the purpose of availing income tax breaks.

It also suggested abolition of the National Calamity Contingent Duty (NCCD) of Rs 50 per ton, saying the levy was imposed on domestic and imported crude oil in Union Budget for 2003-04 for one year but it has not yet been done away with.

Business Standard

The Central Board of Direct Taxes (CBDT) has constituted a “core committee” of officials to study today’s Supreme Court judgement on the Vodafone taxation case.

“The 10-member committee will go through the 275-page order of the Supreme Court and suggest a strategy for the future,” a top official involved in the case told PTI.

The report will soon be submitted to the CBDT, he said.

The Supreme Court today set aside the Bombay High Court ruling asking Vodafone International Holdings to pay Rs 11,000 crore in income tax on acquisition of interests in Hutchson-Essar Limited in 2007 overseas.

It asked the Income Tax department to return Rs 2,500 crore deposited by Vodafone International Holdings within two months along with 4% interest.

Business Standard

The Supreme Court today ruled in favour of Vodafone in the $2 billion tax case saying capital gains tax is not applicable to the telecom major. The apex court also said the Rs 2, 500 crore which Vodafone has already paid should be returned to Vodafone with interest.

The decision, experts said, will be a big boost for cross-border mergers and acquisitions here. The Income tax department�s contention, if upheld, would have rendered standard transaction structures too risky forcing foreign companies to weigh potentially new litigation and insurance costs.

Nearly five years after the Indian taxman issued the first notice to Vodafone international on September 2007 for failure to withhold tax on payments made to Hutchison Telecom, Chief Justice of India SH Kapadia and Justice KS Radhakrishnan pronounced their judgement.

Vodafone had argued India doesn’t have jurisdiction to tax the Hutchison deal because it was structured as a transaction between two overseas entities. The tax department had said it has authority because the underlying asset was Indian.

The verdict would also impact several other companies, including AT&T of the US and Britain’s SABMiller PLC, are fighting similar tax claims and Indian authorities have been handing out tax notices to other companies, deal lawyers say.

In the Vodafone case, the transaction was between Vodafone and Hong Kong-based Hutchison, which sold its shares in the Indian company through a holding company based in an offshore destination. The I-T department has been of the view that it was immaterial whether the transaction took place outside India. (Click here for case timeline)

According to the I-T department, what counts for the purpose of taxation was whether capital gains were generated in India. Therefore, tax has to be paid in India if the overseas sale of shares had resulted in a change of ownership of the Indian company, it has argued.

The Bombay high court had earlier said tax authorities could unbundle different rights conferred through shareholding to tax aspects relevant to India. According to lawyers, this judgement would be difficult to implement as unbundling the value of a company�s assets arising from ownership of shares is bound to be messy.

In May 2007, Vodafone bought Hutchison Telecommunications International Ltd�s 66.98% stake in Indian telecom company Hutch Essar Ltd for $11.2 billion (around Rs.52,300 crore). Hutchison controlled its Indian telecom subsidiary through a Cayman Island company called CGP. CGP�s shares were sold to Vodafone, which consequently became majority owner of the Indian telecom firm.

Tax consultants and lawyers were not sure how tax authorities can unbundle the value of assets of a company arising from shareholding.

The issues that were argued before the SC include the transfer of shares resulting in transfer of underlying assets, the extra-territorial applicability of section 195, income chargeable to tax under section 9, but the crux of the argument was whether the transaction was designed to avoid tax.

The verdict would have implications for cross border M&A activity and similar pending cases before various courts.

Madhu S, Project Associate with ADR Centre, Centre for Policy Research has said the Vodafone tax case threw an interesting question on the taxability of a non resident company acquiring shares of a resident company through an indirect route. This is a landmark case, as it is for the first time that the tax departments had sought to tax a company through a mechanism of tracing the source of acquisition.

The judgment will have direct impact on transactions of major acquisitions like SABMiller-Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are Sesa Goa, AT&T and General Electric. British firm Cairn Energy has already agreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability could range between $868 million and $1.1 billion. The judgment would definitely throw a cautious note to major investors and M&As in India; however, it does not have that great an impact to curtail the investment flow to an emerging destination like India.

Business standard

Satyam Computer Services, now Mahindra Satyam, today said a US court has dismissed a lawsuit filed against the company by Upaid following the settlement between the two.

“In connection with the lawsuit filed by Upaid Systems against the company in the US District Court for the Eastern District of Texas, the court by its order dated January 17, 2012 dismissed the lawsuit with prejudice pursuant to the settlement between the company and Upaid,” Satyam said in a filing to the Bombay Stock Exchange (BSE).

In December 2009, Mahindra Satyam had settled a lawsuit filed by its former client Upaid Systems by paying $70 million.

Upaid had filed the lawsuit in a Texas court seeking damages exceeding $1 billion.

Earlier this month, Mahindra Satyam filed a suit against its former Board of Directors, certain employees and the company’s audit firm Price Waterhouse in a Hyderabad court seeking damages for perpetrating the fraud three years ago.

Though the quantum of damages sought could not be ascertained, Mahindra Satyam Chairman Vineet Nayyar had said the company was seeking compensation for the huge losses it suffered.

“We believe the company suffered incredible loss…. We suffered losses in customers, we suffered reputational loss, specific losses in terms of class action suit, what we had to pay to Upaid and the fines SEC imposed on us,” he said.

Last year, Mahindra Satyam had also agreed to pay $125 million to settle a class action suit filed against it in a US District Court, southern district court of New York.

The company had agreed to pay to the lead plaintiffs 25% of any net recovery it might obtain in future against any of the PricewaterhouseCoopers related entities.

The settlement included taxes, compliance costs, attorney’s fees and expenses and the settlement is exclusively for and on behalf of the company.

After B Ramalinga Raju, the former chairman of Satyam Computer confessed to having fudged the company accounts to the tune of Rs 7,200 crore, the stock of the company nosedived on the New York Stock Exchange, allegedly causing millions of dollars in losses to US investors.

The Indian tax authorities have also made an income tax claim of about Rs 2,500 crore.