Trial by Fire…and emerging unscathed!

Resilience and Recovery…

‘Resilient India’ as a descriptor for the country’s economic strength doesn’t create a buzz anymore…it’s a given!!

However, when seen in the context of the global gloom of the last year and a half, the economy’s tenacity and forward movement has conclusively consolidated India’s position as the world’s fastest growing major economy, second only to our ‘red’ neighbour. That of course is no mean achievement.

Another sign of our progressive outlook is that whereas some countries are looking inward and turning ‘protectionist’ India has recently signed a comprehensive economic partnership agreement with South Korea, a free trade agreement with ASEAN, and is currently working on a similar agreement with Mercosur (Mercado Común del Sur, the South American Regional Trade Agreement) and Mercosur-Sacu (Mercosur free trade agreement with the Southern African Customs Union).

The Organisation for Economic Co-operation and Development (OECD) has, in its latest report, applauded the Indian economy's resilience and has projected a growth rate of 7 per cent in 2010 and 7.5 per cent for 2011. The projection is predicated on:

Ø  India’s six key infrastructure industries rose by 3.5 % in October 2009 on better performance by petroleum refinery products, electricity and finished steel.

Ø  Healthcare allied sectors registered a growth of 9.3 % between 2000 -2009.

Ø  In the aviation industry, the domestic passenger traffic registered a growth of 3.32% in the first ten months of 2009, compared to the corresponding period of 2008.

Ø  The country's total telephone subscriber base has increased 3.26 %from 509.03 million in September 2009 to 525.65 million at the end of October 2009.

Ø  BSE Sensex increased by 1.03 % and surged to pre-recession level of 17,000 points.

Ø  Direct tax collections of the present fiscal up to November, 2009 registered growth of 3.71% as compared to same period last fiscal.

The India Economic Summit at New Delhi in November, 2009, with the theme ‘India’s Next Generation of Growth’, marked the 25th year of the World Economic Forum’s engagement in India. Speaking on ‘Resilient India’, Dr Manmohan Singh said that the focus was strongly on rapid and inclusive growth. He called for increased private investment and more public - private partnerships in both physical and social infrastructure. India welcomed not only more FDI but also portfolio investment in equity in Indian companies.

As we look to the next generation of growth, critical issues like inclusive development, integration, infrastructure, power, climate change and sustainability are poised to take centre stage.

Technology and brand transfer royalty put on automatic route

Of green signals and red carpets…

Great news for those bringing in high end technologies and big brands into the country. The Government of India has reviewed the policy on technology transfer and liberalised the policy on payments.

Henceforth payment of royalty and lump sum fee for transfer of technology and payments, for use of trademark/ brand name will be on the automatic route i.e. without prior approval of the Government. A suitable post-reporting system for technology transfer/collaborations and use of trade mark/ brand name is also being put in place.

Business visas are not work Permits

Right of admission reserved…only bona fide visitors please!

In the last few months, it was noticed by Indian authorities that the country’s liberal Visa regime was being misused by certain country/countries which is/are ‘not very friendly’ with India. Resultantly huge numbers of aliens were being brought in by foreign contractors for execution of projects within India. Not only did this adversely affect the local population’s employment opportunities; much more seriously it compromised the security of the country especially when the influx is from such ‘unfriendly’ geographies. The Indian Government had stepped in to put restrictions to address this potential hazard which unfortunately ended up causing hardship to genuine business travellers as well.

It may be recalled that a foreign national who is already in the country on Business Visa and engaged in executing project/contract had to leave the country by 31.10.2009 and re-enter only with an Employment Visa (“E” Visa). ''B'' Visa cannot be used for employment purposes.

To obviate difficulty to bona fide entrants, the Ministry of Home Affairs (MHA) has come out with clarifications in the form of replies to frequently asked questions (FAQ) for the information, guidance and compliance of all concerned. This is expected to put an end to confusion and ambiguity in the restrictions on the issue of Business Visa (“B” Visa). With the clarification issued by MHA in respect of eligibility criteria for “B” and “E” visas, it is believed that the “B” travellers would not get inconvenienced any more.

Further, misuse of Visas for terrorist activities has prompted the Government to tighten the Tourist Visa Rules as well.

Talk about separating grain from chaff…not an easy task! 

RBI revises ECB Policy

The RBI undertook a review of the prevailing macro-economic scenario in international financial markets and decided to partially modify the external commercial borrowing (ECB) policy w.e.f. January 01, 2009. Accordingly, where Loan Agreements have been signed on or after January1, 2010, the all-in-cost ceilings, under the approval route, for the ECBs will be as newly stipulated. Eligible borrowers proposing to avail of ECB after December 31, 2009, where the Loan Agreement has been signed on or before December 31, 2009 and where the all-in-cost exceed the above ceilings, need to furnish a copy of the Loan Agreement to RBI. In this way, these proposals would continue to be considered under the approval route.

Other changes deal with the following sectors:

Ø  ECB for Integrated townships.

Ø  Buyback of the Foreign Currency Convertible Bonds (FCCBs).

Ø  ECB for NBFC sector financing infrastructure projects.

Ø  ECB for Spectrum in the Telecommunication Sector.

Competition (Amendment) Act, 2009

The Parliament has passed the Competition (Amendment) Act, 2009 to amend the Competition Act, 2002.The impact of the Bill would be that all pending cases on which the Monopolies and Restrictive Trade Practices (MRTP) Commission was to continue jurisdiction for two years after repeal of the MRTP Act (on 1st September, 2009), will be adjudicated by Competition Appellate Tribunal in accordance with the provisions of the repealed MRTP Act as if the Act had not been repealed.

Suspicious money-changing needs reporting

Tightening the net for white collar crime…

The Government of India amended the Prevention of Money Laundering Act, 2002 (PMLA) with effect from June 1, 2009. Continuing with that line of thinking, vide Notification dated November 12, 2009 the Government has also amended Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions; the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (PMLR).

Under the new stipulations banks are advised to furnish Suspicious Transaction Report (STR) to Financial Intelligence Unit-India (FIU-IND) in respect of their money changing activities within 7 days of arriving at a conclusion that a transaction, including attempted transaction, whether or not made in cash, or a series of transaction integrally connected are of suspicious nature. Non-compliance with the guidelines would attract penal provisions under the Foreign Exchange Management Act, 1999, PMLA and PMLR.

Special situations need special responses!  

Trusts/NGOs & money laundering

Wolf in the sheep’s clothing!

It is no secret that under the garb of ‘charity’ some so-called Trusts and NGOs have been carrying on unlawful economic activities and getting away with it. To combat the menace of money laundering and terror financing, the International community had set up an inter-government body, called Financial Action Task Force (FATF).

India too has recognised the need for bringing NGOs under PMLA since earlier entities covered by PMLA included only chit fund companies, banks, financial institutions and housing finance companies. Money laundering in India was rampant through NGOs and other entities functioning as ‘charitable trusts’ that could not be forced to disclose their source of funds, except in specific circumstances. Clearly this loophole was grossly abused by unscrupulous elements for their nefarious activities under the garb of the ‘NGO’ façade.

The Government of India vide its Notification dated November 12, 2009 under PMLA has stipulated that any company registered under section 25 of the Indian Companies Act, 1956, and/or as a trust or society under the Societies Act, 1860, or any similar state legislation, will be brought under the purview of PMLA. Consequently, NGOs and trusts will now have to adhere strictly to know-your-customer (KYC) norms in case of any donations they receive, according to banking standards, and will have to regularly maintain detailed statements of their funds received and investments made.

Better late than never!

Dispute Resolution Panels get constituted

Need for Speed…

It has been decided that DRPs will be constituted in eight Indian cities - Delhi, Mumbai, Ahmedabad, Kolkata, Chennai, Hyderabad, Bengaluru and Pune.  The panel would be collegiums comprising of three Commissioners of Income Tax.

Central Board of Direct Taxes has notified rules to regulate the procedure of DRPs constituted under section 144C of the Income Tax Act, 1961. The rules came into effect from 20th November 2009. Any foreign company, or any domestic company with transfer pricing issues, in whose case, the income-tax assessing officer proposes to make any variation in the income or loss returned, may apply to the DRP within a month of receiving the draft assessment order, for appropriate remedy by way of direction to the assessing officer. The direction will be binding on the assessing officer but the taxpayer will be at liberty to appeal against the assessment order incorporating directions of DRP before the Income Tax Appellate Tribunal.

Step in the right direction, obviously.

Plastics (Manufacture, Usage and Waste Management) Rules, 2009

Logically Ecological!

Recognising the immense hazard of non-biodegradable plastic, the Environment Ministry has proposed putting in place a stricter regulatory regime for plastic manufacturers. A notification S.O. 2400(E), dated 17th September, 2009 [Plastics (Manufacture, Usage and Waste Management) Rules, 2009] has been issued covering the packaging being used by Fast Moving Consumer Goods (FMCG) industry. Among other things it deals with ban on non-recyclable plastic; on colour pigment in packaging material for food items; labelling norms for packaging; registration needs, etc.

As a corrective step to address ongoing environmental degradation, conditions have been imposed on manufacture, sale, stock, distribution and use of plastic carry-bags, containers, pouches and multilayered packaging. Making the rules more stringent, the notification provides that no person shall use carry-bags or containers made of recycled plastics or biodegradable plastics for storing, carrying, dispensing or packaging of food stuffs.

Furthermore, it says that the determination of bio-degradability and the degree of disintegration of plastic material shall be as per the protocol of the Bureau of Indian Standards (BIS).

The rule also requires every unit owner manufacturing or proposing to manufacture carry bags or containers made of virgin plastics or recycled plastics or biodegradable plastics to get his unit registered with the State Pollution Control Board or Pollution Control Committee, as the case may be.

Given the alarming rate at which our planet is being polluted, each step to counter the trend needs to be backed by all right thinking people…even if that means economic hardship/inconvenience in the short run.

Private sector employment to the disabled

Making equality more meaningful…

In consonance with its stance towards ‘Affirmative Action’, it has been decided by the Ministry of Social Justice and Empowerment (Ministry Division) that private sector employers need to be incentivised for providing employment to persons with disabilities.

The scheme covers the employees with disabilities under the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 and the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999 and working in the private sector, with monthly wage up to Rs.25000/- per month. The scheme would be applicable to all the employees with disabilities, who are appointed on or after 1.4.2008.

As per the Scheme the Government will directly provide employer’s contribution for the schemes covered under the Employees Provident Fund & Miscellaneous Provisions Act, 1952 and the Employees State Insurance Act, 1948 for a maximum period of three years. The administrative charges of 1.1% of the wages of the employees covered under the EPF Act will continue to be paid by the respective employers. The Ministry of Social Justice & Empowerment would make available to the Employees Provident Fund Organisation and Employees State Insurance Corporation lump sum funds by way of advance. These would then be used for the purposes of adjustment of individual claims received from the employers under the scheme.

It remains to be seen how far the burgeoning Indian private sector responds to this progressive initiative to truly deserving cases.

Gift in ‘kind’…

Not so kind anymore!

Till now under Indian tax laws, only a cash gift received from non-relative was taxable–if the amount exceeded INR 50, 000. Therefore where the gift was in ‘kind’ e.g. gifts of shares, of land, of house, of units/ mutual funds, jewellery, etc. were not liable to any income tax at all. Not any more!

Effective 1st October 2009, the amended Income Tax Act, 1961 (ITA) makes the recipient liable to taxation for gifts in ‘kind’ received from non-relatives, if its value exceeds INR 50,000.

Well who said the Tax authorities were kind, anywaysJ!

Import Policy on Electric Energy

According to a recent notification issued by the Director General of Foreign Trade, Electrical Energy can be imported subject to a license issued by DGFT in consultation with the Ministry of External Affairs, Ministry of Power and Department of Commerce. However, import from SEZ will be ‘Free’.

Mega Power Policy revisited…

The Union Cabinet has approved modifications in the existing Mega Power Policy with a hope to encourage setting up of mega power plants to take advantage of economies of scale.

In order to rationalise the Mega Power Policy and bring it in consonance with the National Electricity Policy 2005 and Tariff Policy 2006 among others, the modifications deal with replacement of existing condition of privatisation of distribution by power purchasing states; removal of conditions requiring inter-state sale of power for getting mega power status; extension of the benefits of Mega Power Policy to supercritical projects to be awarded through ICB etc.

Moving forward ‘liberally’...

Bank Guarantee for service importers

Towards further liberalising the procedure for import of services, AD Category-I banks are now permitted to issue guarantee for amount not exceeding USD 500,000 or its equivalent, in favour of a non-resident service provider, on behalf of a resident customer who is a service importer. This is allowed where (a) the AD Category-I bank is satisfied about the bona-fides of the transaction; (b) the AD Category-I bank ensures submission of documentary evidence for import of services in the normal course; and (c) the guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident.

In the case of a Public Sector Company or a Department/ Undertaking of the Government of India/ State Governments, approval from the Ministry of Finance, Government of India for issuance of guarantee for an amount exceeding USD 100,000 (USD One hundred thousand) or its equivalent would be required. 

From ‘Workmen's Compensation’ to ’Employee’s compensation’

Widening the safety net…

Recently Parliament has passed Workmen's Compensation (Amendment) Act, 2009 which mainly provides for the following:

Ø  Change of name of the Act to Employees Compensation Act 1923

Ø  Enhancement in minimum compensation payable from INR.80,000 to INR.1,20,000 (in case of death) and from Rs.90,000 to Rs.1,40,000 (in case of permanent disability) and funeral expenses from Rs.2,500 to Rs.5,000.

Ø  Reimbursement of actual medical expenses incurred during treatment of injury caused during course of employment.

Ø  Increase in coverage by omission of restrictive clause in Schedule-II and inclusion of additional hazardous activities

Ø  Disposal of cases of compensation by Commissioner within 3 months

Ø  Empower Central Government to specify monthly wages for the purpose of compensation and enhance minimum rates of compensation from time to time.

Foreign law firms barred from non-litigious practice in India

No foreign lawyers please... a case for a level playing field

The Bombay High Court has ruled that foreign law firms cannot carry on litigation or non-litigious practice in India, which includes drafting of applications, consultancy work or any legal work that does not involve appearing before the courts, unless they abide by the Advocates Act, which governs the conduct of lawyers in India. Otherwise the foreign firms would get an "unfair advantage" over Indian lawyers; as Indian lawyers could be punished for misconduct under the Advocates Act, whereas there was no law to govern the foreign lawyers. 

The Court also held that the Reserve Bank of India’s permissions to certain foreign law firms to open liaison offices in India was not justified as it violated the Advocates Act.

The ruling means that a law firm can function in India only if all the advocates in their offices are enrolled in India under the Advocates Act, 1961 and the Bar Council of India Rules.

Arbitration ... yes … but arbitrary? No way!

Delhi High Court has recently held an arbitrator cannot act arbitrarily, irrationally, capriciously or independent of contract.  An arbitrator, even when he is an expert, cannot be allowed to give an award in a mechanical manner. The determination of quantum of damages has to depend upon the facts and terms of the contract. Where the arbitrator does not apply the terms of the contract for determining damages, such award cannot be upheld. 

Arbitrators- be reasonable and state the reasons…

Section 31(3) Arbitration and Conciliation Act, 1996 mandates that the arbitral award shall state the reasons upon which it is based, unless the parties otherwise agree. The Supreme Court of India refused to accept an argument that this stipulation is merely a formality and further, disagreed with certain views expressed by high courts that summarising the submissions made by the parties is good enough for the compliance of the provisions.

The Supreme Court noted that “reasons are the links between the materials on which certain conclusions are based and the actual conclusions”, and held that “The requirement of reasons in support of the award under Section 31(3) is not an empty formality. It guarantees fair and legitimate consideration of the controversy by the arbitral tribunal. It is true that arbitral tribunal is not expected to write judgment like a court nor it is expected to give elaborate and detailed reasons in support of its finding/s but mere noticing the submissions of the parties or reference to documents is no substitute for reasons which the arbitral tribunal is obliged to give. Howsoever brief these may be, reasons must be indicated in the award as that would reflect thought process leading to a particular conclusion. To satisfy the requirement of Section 31(3), the reasons must be stated by the arbitral tribunal upon which the award is based; want of reasons would make such award legally flawed.”

Satellite fee is ‘Royalty’ under ITA & DTAA

In a recent case, Income Tax Appellate Tribunal, Delhi, clarified that the consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently assessable as ‘royalty’ under ITA and the DTAA. 

Further, it very clearly stated that to constitute ‘royalty’, it is not necessary that the process should be a ’secret process’ or the instruments through which the ’process’ is carried on should be in the control or possession of the payer. The fact that the telecasting companies are enabled to telecast their programmes by up linking and down-linking it with the help of that process shows that they have “use” of the same

Arbitration Clause can be valid even if not stamped…

The Supreme Court held that Section 2(1)(b) read with Section 7 of the Arbitration and Conciliation Act, 1996 does not provide that stamp duty should be paid on arbitration clause incorporated in a contract. Therefore, the plea that the applicant is not entitled to relief of appointment of arbitrator based on an unstamped was rejected.

Consideration for use of copyrighted article does not amount to royalty

The Authority for Advance Ruling ruled that subscription fees received in USA from the customers in India for limited, non-exclusive, non-transferable rights to use its databases, software tools etc.  does not constitute ‘royalty’ or ‘fees for technical services’ either under the provisions of the Income-tax Act, 1961 or the DTAA (Treaty) between India and USA. Moreover, when the US entity does not have permanent establishment (PE) in India, subscription fees cannot be taxed as business income.

Share holders may come and share holders may go…but the company goes on for ever!

Veil not lifted!!

Sec. 170 of Income Tax Act provides that where there is a “succession of business”, the predecessor has to be assessed in respect of the income up to the date of succession and the successor has to be assessed thereafter.

In a recent case, it was held that Sec 170 is not attracted even if there is 100% transfer of shares of a company. It was stated that even if it is accepted that by a transfer of shares under sec. 2(47) of ITA, there is a transfer in the right to use the capital assets of the company, still Sec. 170 is not attracted because there is no “transfer of business”. A company is a juristic person and owns the business. The share holders are not the owners of the assets of the company. Therefore, by a transfer of shares, there is no transfer in so far as the company is concerned.

Yet another reiteration of the unique feature of a ‘company’ as a juristic entity in its own right. 

Hoodwinking the law with impunity… STOP says the apex court!

It’s been an open secret for far too long. However in a recent case the Supreme Court very seriously disapproved the increasing tendency in sale of immovable properties which get transacted using a combination of unregistered and under stamped documents such as general power of attorney (GPA), agreement to sell and Will, without executing and registering a conveyance deed  as stipulated by law.  The Court has directed certain State Governments to inform their views on power of attorney sales before giving final directions.

The Court noted that the illegal and irregular process of `Power of Attorney Sales' spawns several disputes relating to possession and title, and also results in criminal complaints/ cross complaints and extra-legal enforcement and forced settlements by land mafia; and that any process which interferes with regular transfers under deeds of conveyance properly stamped, registered and recorded in the registers of the Registration Department, is to be discouraged and deprecated.

Clearly, that strict stance hasn’t come too early…but now that it has, let’s hope it stays.

The essence of time cannot be wished away!

The Supreme Court held that in the case of sale of immoveable property, there is no presumption as to time being the essence of the contract. However, in order to decide this question, as to whether or not time is of essence of the contract, it would be relevant to look into the clauses in the agreement entered into by the parties. Where a contract states as time being of essence and stipulates time bound performance of various obligations, contention that time was not the essence of the contract cannot be accepted.

Second innings…press notes 1 and 3 (2005 series)

Delhi High Court has refused to interfere with a decision of the Foreign Investment Promotion Board (FIPB) granting permission to a foreign investor with a joint venture existing prior to January 12, 2005 [existing joint venture as per press notes 1 and 3 (2005 series)] with an Indian partner, to establish a wholly owned subsidiary to manufacture, distribute and sell its products in India.

The Court held that the parties would be governed by press note 1, in spite of the fact that the bilateral agreements were cancelled and the shares were transferred. The primary and main concern of the FIPB while deciding whether a foreign investor should be allowed to make investment in India, when they already have a joint venture or technical collaboration agreement with the Indian partner in the same/allied field, is whether the said investment will jeopardize the interest of the existing Indian partner/ shareholders /joint venture.