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!!