‘R’ for ‘Recession’? “No way!” says India…

That the Great Indian Growth story is not just a flash-in-the-pan or a nine-day-wonder stands validated yet again and clearly there is no need for misplaced modesty! In fact, while many economies the world over hit serious roadblocks last September and continue to reel under debilitating recession, India has not only managed to insulate itself to a significant extent but, with an industrial output growth rate of 6.8% (July 09), it is actually springing back, sure and secure, in its growth trajectory!

Little wonder then that ‘R’ calls to the Indian mind, words like ‘Resilience’ ‘Recovery’ & ‘Revival’!

Even more heart-warming is the current accent on that much-needed and very laudable objective of ‘inclusive’ growth/development. Equitable sharing of economic gains – to embrace the deprived and disadvantaged – would, in fact, be the litmus test of enduring economic success. Albeit late by decades, we finally seem headed in that direction. Reasons for the overall resurgent mood include:

 July 2009 witnessed a 56% increase in FDI

 FDI equity inflows reached US$ 3,516 billion (Against US$ 2,247 billion during July’08 and US$ 705 billion in July’07).

Clearly the constant vigil/monitoring by the Government of India and the Reserve Bank have shown positive results. Efforts are on to reach the pre slowdown growth rate of +9% and beyond. Tax relief and increased expenditure on public projects are some other steps being taken towards maintaining this momentum

However the Finance Minister stated, in no uncertain terms, that there is absolutely no room for complacency and accordingly the Budget (2009-10) reflects this tone.

The need for revival and re-energising got further impetus at the recently concluded two-day Ministerial meeting of more than 30 Ministers of WTO Member countries, chaired by India. “Re-Energising Doha – A Commitment to Development” saw a unanimous affirmation, by all participants, of the need to expeditiously conclude the Doha Round.

Infrastructure gets the Go-Ahead in Budget 2009-10…

The ‘corner-stone’ comes centre-stage!

Recognizing that good Infrastructure is an absolute pre-requisite to a strong nation, the Budget 2009-10 has proposed giving more teeth to the Indian Infrastructure Finance Company Limited (IIFCL) which could support infrastructure projects and also refinance 60 % of commercial bank loans for Public Private Partnership (PPP) in critical sectors over the next fifteen to eighteen months.

Acknowledging the criticality of urban infrastructure development, the Government has increased allocation of funds by 87% over the previous year. Housing and provision of basic amenities to urban poor has been substantially enhanced, which includes new schemes intended to make the country slum-free in 5 years.

Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) has been increased by 23 % over the previous year’s budget. There is also a very substantial increase in the allocation for Railways.

Further, the outlay under Accelerated Power Development and Reform Programme (APDRP) has been increased by 160% over the previous year’s budget.

The Government also proposes to develop a blueprint for long distance gas pipelines leading to a National Gas Grid to facilitate nationwide transportation of gas.

Clearly the paramount importance of good Infrastructure as a vital growth engine has moved beyond policy level platitudes.

Indian Exports Picking-up

Responding to the worldwide demand for smaller, fuel-efficient cars Motor Majors the world over (Suzuki, Hyundai, Nissan and others) are making India a hub for overseas sales of these ‘tiny-titans’. Helped by cheap labour and input costs, India this year has actually overtaken China in auto exports; and is well on its way to challenging Thailand and South Korea as an alternative production centre in Asia. Talk about legendary David and Goliath!

In other segments also, the export story is picking up. The diamond industry has bounced back, reemploying its retrenched employees. 50,000 additional job opportunities are expected in this industry.

However, sectors like textiles and IT/ITES continue to be affected due to slackness in demand from developed economies, still reeling under the downturn. To mitigate such hardships, the Indian Government has pledged support /incentives e.g. extension of Adjustment Assistance Scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95% to badly hit sectors up to March 2010; enhancement of allocation for Market Development Assistance Scheme by 148% over the previous year’s Budget.

Foreign Direct Investment - Micro and Small Enterprises (MSEs)

Reaching down to hoist them up… MSEs get special attention.

The Finance Minister in the Budget has announced allocation of INR 40,000 million as special fund to Small Industries Development Bank of India (SIDBI) to facilitate flow of credit at reasonable rates to Micro and Small Enterprises (MSEs) by Banks and State Finance Corporations (SFCs) who in turn get refinanced up to 50 % of incremental lending to MSEs.

In the meanwhile, the Ministry of Commerce & Industry issued clarification to Press Note 18 of 1997, through press note 6 of 2009, wherein it has removed the current 24% ceiling on foreign holding in Medium and Small Enterprises (MSEs). MSEs will now be guided like other large enterprises as far as FDI is concerned, subject only to sectoral caps and other relevant sectoral regulations.

However, if non-medium and small enterprises manufacture any of the 21 items reserved for small scale sector, any FDI above 24% will require the Foreign Investment Promotion Board's approval.

Fair enough…we’d say.

Divestment

Divestment not a Dirty word... any more

Yet another indication of the growing maturity of Indian economy is the Government’s recognition of the feasibility of increased disinvestment in the Public Sector behemoths…while of course retaining 51% equity therein. Participation of private players is actually being encouraged as proposals are afoot to disinvest a small portion of equity in entities like RITES (Rail India Technical and Economic Services Ltd), Cochin Shipyard Ltd., Telecommunications Consultants India Ltd, Manganese Ore India Ltd, Rashtriya Ispat Nigam Ltd and Satluj Jal Vidyut Nigam Ltd.

Clearly the thinking behind the move is as progressive as it is professional…less State interference in the day to day functioning of these PSUs certainly bodes well for their financial health as well.

Stepping on the gas!

Accelerated impetus to PNG production…

Cairn India (domestic subsidiary of Edinburgh-based oil explorer Cairn Energy) and State-owned ONGC will jointly invest $4 billion to scale up the production capacity of their oil fields at Barmer in Rajasthan by 25,000 barrels of oil per day (bopd) to 200,000 bopd.

Reliance Petroleum has successfully started production of gas in G-6 Gas Block of Krishna Godavari Basin (KG Basin).

The country’s huge petroleum and natural gas deposits located in its land mass, territorial waters and continental shelf is like a dead asset unless exploited effectively and made accessible for productive purposes. Of course efforts have been on towards this but clearly the potential far exceeds the performance shown thus far.

To give a serious fillip to these efforts, certain concrete steps have been taken:

 The long standing demand for treating production of natural gas at par with mineral oil has been acceded to by the Finance Minister by extending tax holiday to profits from commercial production of natural gas from exploration blocks licensed under New Exploration Licensing Policy (NELP)-VIII.

 India's eighth round of New Exploration Licensing Policy (NELP-VIII) is offering the highest ever number of 70 exploration blocks covering an area of about 1,63,535 Sq. Km.

 Simultaneous offer of 10 blocks has been made under the fourth round of Coal Bed Methane Policy (CBM-IV) for exploration and production of Coal Bed Methane. The blocks offered under CBM-IV cover an area of about 5000 Sq.Km. and are spread over seven States.

However, enlargement of the service tax territorial extent by extending the applicability of Service Tax provisions to installations, structures and vessels in the entire Continental Shelf of India and Exclusive Economic Zones of India, may have an impact on Service Tax liability in case of oil & gas sector.

Housing sector - stimulation

The rude Reality of Realty…

To stimulate demand in the realty sector, the Union Cabinet has approved a Scheme of interest subvention on housing loans. Under this, support is being provided to individual borrowers by way of interest subvention of 1% on all housing loans up to INR 1 million, provided the cost of the house does not exceed INR 2 million. An allocation of a sum of INR 10,000 million has been made for the Scheme. The Scheme will be implemented through Scheduled Commercial Banks (SCBs) and Housing Finance Companies (HFCs) registered with the National Housing Bank (NHB).

Well let’s hope this puts pillars under the common man’s ‘castles in the air’.

Service Tax on legal services…

As per the new budget, legal service provided to a business entity, by a law firm, in relation to advice, consultancy or assistance in any branch of law, in any manner would attract service tax.

This will entail an addition of 10.3% in the fee.

However, Service Tax will not apply to individuals and for litigation.

Competition Commission of India

Put your best foot forward…but don’t tread on others’ toes!

To ensure a level playing field and obviate difficulties arising out of unfair competition, the Indian Government has established Competition Commission of India (CCI), an autonomous regulatory body ‘to prevent practices having an adverse effect on competition’. A Competition Appellate Tribunal headed by a retired judge of Supreme Court has also been constituted, to deal with appeals against the decisions of the CCI and also adjudicate on compensation claims.

Entry fee for Mutual Funds? “Exit” says Government!

Effective August 01, 2009, the Securities and Exchange Board of India (SEBI), abolished the ‘entry load’ viz. fee deductable, from the amount of money one invests in a mutual fund schemes. Till now, a fee of 2.25% was being charged by mutual funds (and asset management companies) under the pretext of expenses incurred in marketing and selling of the mutual funds. What remains permissible is an exit fee of up to 1% of the redemption amount which the funds can levy for paying commissions to distributors and for marketing and selling expenses.

Foreign Trade Policy 2009-2014

Blueprint for BIGGER footprints!

Giving further impetus to Foreign Trade is clearly a high priority. The newly announced Foreign Trade Policy for the next 5 years is a step in the direction of achieving an annual export growth of 15% by March 2011 and 25% by 2014 and also with a long term objective of doubling India’s share in global trade by 2020, the salient features include:

 Continuance of Duty Entitlement Pass Book Scheme up to December 2010

 IT benefits under Section 10(A) of the Income Tax Act for IT industry till 31st March 2011;

 IT under Section 10(B) of the Income Tax Act for 100% export oriented units for one additional year till 31st March 2011.

 Enhanced insurance coverage and exposure for exports through Export Credit Guarantee Corporation (ECGC) Schemes till 31st March 2010.

 Technology upgradation for Indian exporters through import of capital goods for certain sectors under EPCG made easier at 0 % duty.

 For Agriculture and Village Industry, capital goods imported under EPCG will be permitted to be installed anywhere in AEZ and import of inputs such as pesticides will be permitted under Advance Authorisation for agro exports etc.

 Indian exports insulated from decline in demand from developed countries through encouraging diversification to other markets e.g. Latin America, Africa, parts of Asia and Oceania.

 Towards making India a hub for production and export of green products and technologies, special initiatives planned to promote development and manufacture of items relating to transportation, solar and wind power generation.

 Improvement in infrastructure related to exports; bringing down transaction costs and providing full refund of all indirect taxes and levies envisaged as the three vital pillars to support Policy targets.

Exemption/refund of Stamp Duty to Special Economic Zones (SEZ)

The Stamp duty exemption to SEZs had become a contentious issue with States with the latter demanding for exemption to be restricted to processing area of the SEZ.

It may be recalled that an exemption was provided from Stamp duty on any instruments executed for purposes of SEZ in favour of an SEZ Developer or Unit by an amendment to the Indian Stamp Act, 1899 through Section 57 of the Special Economic Zones Act, 2005 (‘SEZ Act’). Consequent upon this amendment to the Stamp Act, States had sought clarification from the Ministry of Commerce and Industry (MoC) in relation to treatment of certain transactions related to SEZ for the purpose of application of Stamp duty. 

Taking into consideration the concerns raised by the States, MoC has issued clarifications that the exemption/ refund of Stamp duty in respect of purchase of land by the SEZ Developer will depend on the stage of the SEZ Approval at the time of such purchase.

In all cases, if the SEZ is not actually commissioned within the time indicated in the approval, or if the SEZ notification is cancelled, the State Governments will be entitled to withdraw the concession of Stamp duty and recover the same from the Developer. The facility of exemption from Stamp duty on purchase of land by the SEZ developer for activities like housing, hostel, recreation, entertainment, golf etc. would be available only with respect to the land which falls within the SEZ area. The concession of Stamp duty is available only on conveyance of land, buildings, premises, etc. by lease or otherwise (but not by sale) in an SEZ to the units/entities permitted to carry out operations therein. The facility of exemption of Stamp duty to a Developer will not be available for purchase or sale of any land or building at a place outside the notified SEZ. The clarification in the Instruction will clearly provide a much awaited breather to the SEZs!

Of course LPG is full of ‘power’!

In a recent case, the Supreme Court ruled that establishments using LPG by employer in the manufacturing process will be sufficient to attract the stipulation in the Employees State Insurance (ESI) Act for coverage. According to the Act, establishments using power for manufacturing process are included in the scope of the Act and must contribute to the ESI fund. It was argued that ‘power’ in the context of the Act meant electric power, and not LPG. Making a liberal interpretation, considering the social implication of the Act, the Supreme Court held that the use of LPG satisfied the definition of ‘power’.

Battle of the ‘Rings’-Consumer Courts don’t answer that doorbell!

Giving relief to telecom operators being dragged to consumer courts for deficiency in services, the Supreme Court has held that consumer courts cannot entertain disputes relating to telecom services. The Court stated that, when there is a special remedy of statutory Arbitration of disputes provided by the Indian Telegraph Act, 1885 in respect of telephone bills, and then other remedies are, by implication, barred. The arbitration shall be conclusive between the parties to the dispute and shall not be questioned in any court.

Tax credit on the Service Tax…

In a recent judgment, the Bombay High Court ruled that a beverages’ major could avail of tax credit on the service tax it pays for advertising and promotions. They can avail of the service tax rebate as Cenvat credit, against their excise duty liability on concentrates which they supply to their contract manufacturers. The ruling, passed by a division bench, stands to benefit companies in other sectors, too, like cosmetics and pharmaceuticals, since they too follow the contract manufacturing model and advertise and promote the end-products.

RTI Act given more teeth…

The National Consumer Disputes Redressal Commission (NCDRC) has held that when information is not made available to an applicant under the Right to Information Act, he can approach consumer court for a deficiency of service under the Consumer Protection Act (CPA).

Your Court or mine…the choice is yours!

The Supreme Court reiterated in a recent case that where there may be two or more courts of competent jurisdiction, if the parties to the contract agree to vest jurisdiction in one such court, to the exclusion of others, to try any dispute which might arise, such agreement would be valid and binding on the parties.

Foreign firms not taxable for carrying calls abroad…

In a recent ruling, the Authority for Advance Ruling (AAR) said that the foreign telecom firms operating without a permanent establishment in India are no more required to pay any tax on income from carrying international calls and data services in pacts with domestic operators. It was also made clear that since this income is not chargeable to tax under the (Income Tax) Act, there is no question of making any deduction at source.

The Arbitration and Conciliation Act 1996 - What is an Arbitration Agreement

It’s the intent that matters!

The Supreme Court in a recent case clarified that an arbitration agreement is not required to be in any particular form as per the Arbitration and Conciliation Act 1996. The intention of the parties is to be gathered from the correspondence exchanged between them and the surrounding circumstances. Such correspondence can be used to determine the existence, validity and enforceability of an arbitration agreement.

The Court further held that when an application is filed to refer disputes to arbitration, the court has to decide the following:

•  Its own jurisdiction, in the sense whether the party making the motion has approached the right Court. 
•  Whether there is an arbitration agreement, as defined in the Act and
•  Whether the person who has made the request before him, is a party to such an agreement.

The Court observed that it can further look into:

• whether the claim was a dead one; or a long-barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. 
• Whether the applicant has satisfied the conditions for appointing an arbitrator under the Act and can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary.

However, the decision whether a live claim made, is one which comes within the purview of the arbitration clause has to be left to be decided by the Arbitral Tribunal.

A sunny patch …. in an over-cast sky!

After sustained and dogged efforts by the Government in conjunction with Apex institutions like the Reserve Bank viz. economic stimulus by way of interest cuts and other measures, the Indian economy is slowly but surely looking up. The badly mauled Indian stock market, after having bottomed out is showing an upturn too. Has it survived the bear attack? Only time will tell! But there is reason for cautious optimism!

The inflation fell to a record 7 year low to 2.43 per cent; the lowest in over seven years. Prices of many food items and select manufactured products such as metals and transport equipment also fell sharply. So was the case with iron and steel, textiles, chemicals and batteries.

Incredible as it may sound, inflation actually touched zero!! Not so long ago, the inflation number of 0.44 percent would have sounded implausible, even absurd. But today, it’s a reality. Inflation has touched a record 32-year low. What are we looking at?

And now after month-long General Elections the country has actually voted for stability. Time has actually come to take actions to make these wildly optimistic views a reality. Another five years have been vested in the Congress party, with a do or die situation, to improve the lot of the “aam aadmi”- the average Indian.

Well, the Prime Minister, an eminent economist, has been given back his job. He has appointed a veteran politician Mr. Pranab Mukherjee as the Finance Minister.

The Prime Minister is convinced that the bad times are over and substantial positives will emerge by September 2009 and a full recovery is predicted by December 2009.

No more hamstrung by the Left parties, it is hoped that the new Government would push forward growth-oriented reforms to put the economy on a higher trajectory of growth through further pro-liberalisation and other concerted efforts.

Revised reporting norms for FDI

The Reserve Bank of India (RBI) has finally revised the procedure for reporting the transfer of shares and convertible debentures by way of sale from resident to non resident and vice versa under the Foreign Direct Investment (FDI) scheme.

To capture the details of investment in a more comprehensive manner, it has come up with few modifications in the reporting mechanism, like - The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a KYC check.

The form FC-TRS should be submitted to the AD Category – I bank, within 60 days from the date of receipt of the amount of consideration.

Prior RBI approval will be required in case of transfer of equity instruments where the non-resident acquirer proposes deferment of payment of the amount of consideration, etc.

Foreign Direct Investment (FDI) - new norms

The red carpet remains … but the frisking gets more stringent!

The recently issued Press Notes (PN) of the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce, contain new guidelines for calculation of FDI in Indian companies and transfer of ownership/control of companies from resident Indian citizens to non-resident entities.

An Indian company would be deemed controlled by non-resident, if foreign entities have the power to appoint directors on the Board or it has a majority foreign holding in it. Downstream investments by such an entity would also be deemed foreign. The only exception will be where a JV company creates a wholly-owned subsidiary in India. The foreign holding in the downstream company will be treated as equal to the level of FDI in the parent company.

According to PN-2 of 2009, a company will be considered as Indian-controlled if the foreign holding is less than 50% and foreigners have no other ‘beneficial interest’ therein.

PN 3 of 2009 has laid down guidelines for transfer of ownership and control, making it mandatory for Indian company to seek nod from Foreign Investment Promotion Board (FIPB), if it intends to transfer ownership or control to a foreign company in restricted sectors (telecom, defence production, air transport services and broadcasting). It also states that FII holdings, ADRs/GDRs, NRI investments and foreign investment through Foreign Currency Convertible Bonds (FCCBs) would now be included while calculating FDI levels of Indian companies. Their inclusion in FDI calculation never happened earlier.

PN-4 of 2009 was issued to clarify guidelines on downstream investment by Indian companies owned or controlled by non-resident entities. Such companies would have to comply with the relevant sectoral conditions on entry route and would also require prior approval from Government/FIPB where the investment is in investing companies.

Recognising the difficulty in immediate switch-over to new guidelines, the government plans to provide a six-month amnesty for Indian companies with foreign investment to comply with the new FDI rules. After the deadline however holding patterns of companies would come under strict scrutiny towards total compliance with the new rules.

On the first look, these PNs seem relevant for sectors which have sectoral caps/limits in Foreign Investment and not to sectors in which 100% Foreign Investment is permitted.

Rationalising Service Tax on residential property

The ‘burden of bricks’ gets little lighter…

Imposition of service tax on construction and sale of residential property has been a matter of concern for long. Relying on various court decisions, the Central Board of Excise and Customs (CBEC) has periodically clarified issues and moving along same lines it has recently issued a Circular elucidating its views on the subject.

Doubts were a plenty regarding applicability of service tax in cases where the developer / builder / promoter enters into an agreement, with the ultimate owner, for selling a dwelling unit, in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. It has been unambiguously stated that any service provided by a seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.

Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, there also such activity would not be subjected to service tax. However, in both these situations, if services of any person e.g. contractor, designer or similar service-provider are availed, then such a person would be liable to pay service tax.

The Circular concludes by stating that any decision of the Advance Ruling Authority which is contrary to the foregoing view, could only be implicitly based on different facts and hence applicable to that case only.

Clearly the clarification has helped in removing confusion. Further more due relief from the service tax would become available to the construction industry as well as the buyers of immovable property.

Life-span of bank guarantee goes up…

Acceding to the long-standing request of banks, The RBI has allowed banks to extend bank guarantee beyond the current limit of 10 years. However, by way of caution banks have been advised to be judicious and take into account the impact of long-term guarantees. They are also required to formulate a comprehensive policy on issuance of such guarantees.

ECB Policy – more liberal than before

In furtherance to the liberalization brought through A. P. (DIR Series) Circular No.01 dated July 11, 2008 and in reference to A. P. (DIR Series) Circular No. 24 dated March 1, 2002, AD Banks are now permitted to convey ‘no objection’ under FEMA, 1999 to the Indian importer for issue of corporate guarantee in favour of the overseas lessee, for operating lease in respect of import of aircraft / aircraft engine / helicopter.

However there is a caveat. Before issuing ‘no objection’ Banks must obtain Board Resolution from the company for issue of corporate guarantee. It also needs to be ensured that the period of such corporate guarantee is co-terminus with the lease period.

Securitization Company/Reconstruction Company (SC/RC) is neither a ‘bank’ nor ‘financial institution’

Neither fish nor fowl!!

It has been made clear by the RBI that a SC/RC is neither a ‘bank’ in terms of provisions of Section 2(1)(c) of SARFAESI Act, 2002 nor a ‘financial institution’ in terms of provisions of Section 2(1)(m) of the said Act. Hence, acquisition of financial assets by one SC/RC from another SC/RC will not be required to be in conformity with the provisions of SARFAESI Act, 2002.

Further it is stated that, there is no bar on SC/RCs deploying their funds for restructuring of acquired loan account with the sole purpose of realizing their dues.

Exemption of Service Tax for SEZ

Oasis ‘SEZ’ gets more comfortable

Superseding its earlier Notification No. 4/2004, the Government of India has recently, issued Notification No. 9/2009 which deals with exemption from service tax on services provided in relation to authorized operations in SEZ and received by a developer or a unit, whether inside the zone or outside. The erstwhile complete exemption from the tax that was available to supplies of services to SEZs has been replaced with a modified scheme of exemption by way of a refund. Under the new provision, Service Tax has to be paid, which can later be refunded.

The refund has to be claimed within 6 months or the extended period as may be granted by Assistant Commissioner/Deputy Commissioner.

The Not-so-Secured Creditors

A well-settled principle under common law, the ‘Doctrine of Priority of State debts’ holds that the government (‘State’) has first charge over the priority of debts. However, recent past has witnessed conflicts between the ‘State’ on the one hand and secured creditors who initiated credit recovery proceedings under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“DRT Act”) or SARFAESI Act. Litigations of this nature where Banks and financial institutions seek priority in debt-recovery makes things pretty difficult for the Supreme Court, in its appellate capacity. The situation is fairly similar to an unruly crowd struggling to move ahead in a Queue!

Recently in the matter of Central Bank of India v. State of Kerala and Ors, the SC came to the conclusion that the primacy of statutory first charges will prevail even in case of recovery under the DRT Act and SAEFAESI Act.

Though, the SC has recognized the fact that the two enactments were meant to benefit banks, financial institutions and other secured creditors, it has been clarified that these two Central legislations do not per se create first charge in favour of the banks, financial institutions and other secured creditors. Thus, it can be concluded that the State would have priority of claim if there is a specific provision giving priority to the State dues.

MNCs liable to deduct taxes on expat employee salaries

Got your Pay check on foreign soil? You still pay tax back home!

It has been made clear by the Supreme Court that foreign companies operating in India through JVs are required to deduct tax at source (TDS) from home salary or special allowances, paid abroad to their employees working in India. This is an obligation of the tax deducting companies under Section 192(1) of the Income Tax Act.

If the payments of home salary abroad by the foreign company to the expatriate has any connection or nexus with his rendition of service in India, then such payment would constitute income which is deemed to accrue or arise to the recipient in India as salary earned in India in terms of Section 9(1)(ii).

Well what you can’t do with your right hand you can’t do with your left as well!

Trading in debts is not “banking”

The Gujarat High Court has given a big jolt to the Indian banking industry by declaring buying and selling of loan portfolios, illegal. In a nutshell, the division bench has ruled that assignment of loans by one bank to another is illegal. It held that such activity is not part of ‘banking activity’ contemplated in the Banking Regulation Act, 1949.

According to the Court, such activity cannot be a policy for sound economic growth. Consequently, it has effectively held that the RBI’s guidelines on buying and selling of NPAs could never be regarded as ‘banking policy’ envisaged in the Act.

An apprentice is not an employee

In common parlance, an apprentice is a trainee and not an employee. Even if he is given a stipend, it does not mean that there is a relationship of master and servant between the firm and the apprentice.

Quoting the above lines Kerala High Court in a decision made it clear that an apprentice cannot be an employee. The court was of the view that the definition of employee in various enactments such as Kerala Shops and Establishments Act or Employee States Insurance Act or any other enactment, which include an apprentice within the ambit of the definition, is only a deeming provision and a legal fiction by which the meaning of the word ‘employee’ has been extended. That, however, does not mean that in common parlance an apprentice is an employee.

Hence, in a case which is solely based on a contract and the contract does not define employee, the term will not hold same meaning as that in any enactment. The apprentice was accordingly held to be not an ‘employee.’

No Service tax on renting of immovable property

Levy of service tax on renting of immovable property has been held ‘unconstitutional’ in a recent landmark judgment of Delhi High Court.

According to the Court "renting of immovable property service" introduced by the Finance Act of 2007 which brought renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of furtherance of business and commerce, within the service tax net, is ultra-vires the provisions of the said Act.

Throwing light on this issue Court held that service tax is a tax on the value addition provided by some service provider and on the contrary renting of immovable property for use in the course or furtherance of business or commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service.

SC quashes Maharashtra law on unregistered partnership

The Supreme Court has quashed the Maharashtra State law, which debarred a partner of an unregistered firm from filing a suit for dissolution of such a firm, as being violative of Articles 14, 19(1)(g) and 300A of the Constitution.

It was reiterated that “a partnership firm, whether registered or unregistered, is not a distinct legal entity, and hence the property of the firm really belongs to the partners of the firm.”

The court further said that the law was clearly unreasonable and arbitrary since by prohibiting suits for dissolution of an unregistered firm, for accounts and for realization of the properties of the firm, it creates a situation where businessmen will be very reluctant to enter into an unregistered partnership out of fear that they will not be able to recover the money they have invested in the firm or to get out of the firm if they wish to do so.

Leaving no scope for ambiguity-Delhi HC steps in to clear the air

Fraud renders void all judicial acts, ecclesiastical or temporal. Hence, a party seeking discretionary relief has to approach the court with clean hands and is required to disclose all material facts which may, one way or the other, affect the decision.

It is a settled proposition of law that a judgment or decree obtained by playing fraud on the court is a nullity and ‘non est’ in the eyes of law. Recently, Delhi High Court dealt with this issue and, citing the decisions of various courts, re-affirmed certain principles-

· A litigant approaching a Court must disclose all relevant facts and documents - failure to do so amounts to playing a fraud on the Court and the opposing party.

· It is of no consequence which way the facts or documents may impact - they should be disclosed if they are likely to affect the decision one way or another.

· Playing a fraud upon the Court would vitiate the proceedings and if a decision is obtained by playing a fraud upon any Court (including a superior Court), it can be set aside by any Court (including an inferior Court).

Plain good sense that! It could hardly be otherwise!!

Further liberalisation of External Commercial Borrowing (ECB) regulations

Infrastructure and Hospitality sectors continue being regarded as very significant bedrocks of the Indian economy. For giving additional boost to these sectors, the RBI has further liberalised the External Commercial Borrowing (ECB) Regulations, effective from January 02, 2008.

(i) Integrated township

Under the new Regulations Indian corporates engaged in the development of integrated townships are permitted to avail of ECB under the Approval Route.

Integrated township includes housing, commercial premises, hotels, resorts, city & regional level urban infrastructure facilities such as roads and bridges, mass-rapid-transit-systems and manufacture of building materials. Land Development and provision of allied infrastructure also comes within the ambit of Integrated Township.

To avail of the benefits it is necessary that the minimum area sought to be developed is at least 100 acres; norms and standards are to be followed as per local bye-laws / rules. In the absence of such bye-laws/ rules, a minimum of 2000 dwelling units for about 10,000 population will need to be developed.

This position will be reviewed in June 2009.

(ii) Non-Banking Financial Companies (NBFCs) financing infrastructure projects

NBFCs involved exclusively in financing of infrastructure sector, can now avail of ECBs, under the Approval route, from multilateral / regional financial institutions and Government-owned development financial institutions for onward lending to the borrowers in the infrastructure sector. This move is expected to ease the financial crunch in the infrastructure sector.
This facility too will be reviewed in June 2009.

(iii) Services sector

Services sector entities i.e. Hotels, Hospitals and Software establishments are now allowed to avail of ECB to the tune of USD 100 million per financial year, under the Automatic Route. They can avail this benefit for foreign currency and / or Rupee capital expenditure for permissible end-use. However, there is a stipulation that the proceeds of the ECBs should not be used for acquisition of land. Earlier, ECB up to USD 100 million per financial year was permitted under the approval route only for import of capital goods.
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Appointment and Qualifications of Secretary

The Central Government has amended the Companies (Appointment and Qualifications of Secretary) Rules, 1988. The amendments will be applicable from March 15, 2009. The amendment seeks to increase the threshold limit, for a company to compulsorily have a whole time secretary from the existing INR 20 million to INR 50 Million of paid-up capital. If a company having upto INR 50 million paid up capital has appointed a whole-time company secretary having membership of the Institute of Company Secretaries of India, it is not required to obtain a certificate from a secretary in whole-time practice

Infrastructure Lending

RBI proposes to classify lending by banks for purchase of land and development thereof (for setting up Special Economic Zones or SEZs) as Infrastructure Lending. Draft Guidelines on ‘Classification of Exposures as Commercial Real Estate Exposures’ were posted on the RBI’s website for public comments on January 7, 2009.

Coming to the rescue of the export-sector, badly hit by recession in the US and several European economies, the government has asked RBI to grant infrastructure status to SEZs. The rationale is that this special status will entail tax benifits and import duty reliefs. Hopefully, this long-standing demand of the export sector will afford the much needed relief in these particularly hard-times.

Power projects to share captive coal

The government has relaxed captive coal mining norms to allow power companies to divert surplus coal from one of their projects to another.

Permission will be given on a case-to-case basis to coal-surplus companies that approach the coal ministry, said a senior government official who asked not to be named.

The company’s claim will be verified by the coal ministry before the diversion plan is approved. Permission will be given to only those power projects that are awarded on the basis of tariff-based bidding.

However, the regulations bar power companies from selling surplus coal to other companies as only government-owned entities are allowed to trade in coal. Allowing private sector companies in trading will need an amendment to the Coal Mines (Nationalisation) Act, 1973.

The current norms require captive coal mines to hand over excess coal to the central government, which disburses it through Government held Coal India. In some special cases, the coal ministry permits sale of excess coal on a temporary basis.

Till now, 198 captive coal blocks have been allocated by the coal ministry. Only 21 of these blocks are operational so far. Captive mining was allowed to give a fillip to coal production in the country as the government expects a demand-supply mismatch. Planning Commission has estimated a shortfall of 60 million tonnes by 2012.

FDI in Print Media

Iconic Brands of print media e.g. The New York Times, Washington Post, Chicago Tribune, The Sun and others in the league of International biggies have, till now, been little more than formidable names for most Indians…only heard or read about…not actually read…except of course by the well-heeled select few…and that too on foreign soil!

Well that is about to become history…or more appropriately stale news! Because the Government of India vide its recent Press Note has permitted foreign investment in publication of facsimile edition of foreign newspapers as well as Indian edition of foreign magazines dealing with news and current affairs. Of course this enabling provision has some in-built checks and restrictions. For instance, publication of facsimile edition of foreign newspapers is permissible (under FDI up to 100%) only with prior Government approval and only by an entity incorporated/registered in India under the provisions of the Indian Companies Act, 1956.

Similarly publication of Indian editions of foreign magazines/periodicals which are brought out on ‘non-daily’ basis, and which deal with news and current affairs is covered under an FDI limit of 26%; of course with prior approval. Additionally the Press Note states that such publications need to adhere to certain guidelines issued by the Indian Ministry of Information & Broadcasting.

Seems like the doors which, till now, were tightly shut are actually ajar! And by the look of things it may not be long before you wake up to find …and feel… the rustle of an International Daily right at your doorstep every morning!

“It's only a show cause notice” says the Supreme Court

The Supreme Court of India (SC) refused to interfere with the Bombay High Court’s Judgment in Vodafone case. The challenge by Vodafone of the Constitutional validity of the show cause notice issued by the authorities under Income Tax Act, 1961 stumbled over the well settled principles of law.

Vodafone had acquired 50% of the shareholding in a major Indian mobile phone company, by acquiring 100% shares in a Cayman Islands Company, through an agreement with erstwhile shareholders. The revenue authorities issued show cause notice to Vodafone for failing to deduct tax at source before paying consideration for the purchase of shares, and asked Vodafone to show cause why it should not be treated as an assessee in default.

Vodafone challenged the show cause notice before the Bombay High Court on various grounds, including that the transaction being purchase of shares in a Cayman Island company between two non residents and that contended that since there was no transfer of any capital assets in India, therefore there could be no question of any tax liability under the Indian Income Tax Act on capital gains. The Bombay High Court through a very detailed order dismissed the writ petition, which the SC refused to upset in appeal.

Though the Supreme Court ended the 1st innings of the litigation, further innings will certainly continue pursuant to the show cause notice and Vodafone prima-facie seems to be on a weak wicket.

We understand that the revenue authorities have issued about 400 similar show cause notices to various entities involved in similar transactions involving approximately US$ 5 billion in taxes, penalties, interest etc.

Bypass the Arbitration Agreement and run to Court? Sorry you can’t!!

In a recent case a Shareholders Agreement stipulated that if a party’s shareholding falls below 15% the party would not have any rights left with it under the Agreement. Where the shareholding actually fell below the stipulated figure and the issue was whether the Arbitration Agreement could be invoked.

The Supreme Court held the Law is well-settled in the matter that even if the whole Agreement is terminated, the Arbitration Agreement would still remain since the Arbitration Agreement stands independent of the Shareholders Agreement.

Joint Venture-Not by words alone!

In a recent matter the Supreme Court pronounced that the mere use of expressions like 'joint venture' or 'collaboration' in the title of an agreement or even in the body of the agreement itself will not make the transaction a JV. A JV comes about only where there are clear provisions for shared control of interest or enterprise and shared liability for losses.

Part-time employee cannot be thrown out without complying with law

A part-time employee would be covered within the definition of “workman” in Section 2(s) of the Industrial Disputes Act, 1947 and he would be entitled to the benefit of continuous service under section 25B and the benefit of Section 25F. As such, the Supreme Court has held that a part-time employee cannot be retrenched without following the procedure and paying the compensation.

Adjudication or Arbitration

The Supreme Court has recently held that though the word ‘arbitration’ is not used specifically - an agreement to settle all disputes or differences through ‘adjudication’ - will nevertheless is an arbitration agreement.