The Hydra-Headed-Monster and the Trapeze Artist…

This monster just refuses to be tamed! With a devilish grin it seems to say “Heads I win; tails you lose”. Faced with such a formidable opponent called Inflation, the Union Finance Minister seems like a precariously perched trapeze artist gingerly trying to juggle multiple rings, even as the expectant public waits with bated breath… 

Well, as the Indian FM, Mr. Pranab Mukherjee presented the Union Budget for fiscal 2010- 11 on February 26, 2010, no applause was forthcoming…only groans of dismay.

The moot point is could it have been otherwise?

The Budget is the prime instrument through which any Government steers the economy, as it walks the tight-rope, between economic growth on one hand and social justice on the other. Even when the Indian economy looked rosy with GDP near-touching double digits (2007-08)  there was clamour decrying  lack of ‘inclusive growth’. In all fairness, there is no denying that the last budget and the current one have tried to correct this. Aiming at equitable and inclusive growth the current budget also provides impetus to rural and agricultural growth.

Presenting the Budget the FM said:

“The fiscal year 2009-10 was a challenging year for the Indian economy. The significant deceleration in the second half of 2008-09, brought the real GDP growth down to 6.7 per cent, from an average of over 9 per cent in the preceding three years. We were among the first few countries in the world to implement a broad-based counter-cyclic policy package to respond to the negative fallout of the global slowdown. It included a substantial fiscal expansion along with liberal monetary policy support.”

“The effectiveness of these policy measures became evident with fast paced recovery. The economy stabilised in the first quarter of 2009-10 itself, when it clocked a GDP growth of 6.1 per cent, as against 5.8 per cent in the fourth quarter of the preceding year. It registered a strong rebound in the second quarter, when the growth rate rose to 7.9 per cent. With the Advance Estimates placing the likely growth for 2009-10 at 7.2 per cent, we are indeed vindicated in our policy stand.”

The Finance Minister after referring to the global crisis and certain domestic problems further said:

 “…… I can say with confidence that we have weathered these crises well. Indian economy now is in a far better position than it was a year ago. That is not to say that the challenges today are any less than what they were nine months ago… ”

Clearly there are no easy answers. Even though the official figures and the economic logic cannot be faulted, it is equally evident and troublesome that the runaway inflation- particularly food inflation - has thrown even middle class kitchens into a tizzy. The plight of the poor can well be imagined.  

Mr Finance Minister – even a 10% growth is not good enough where a substantial portion of population is below poverty line !!!!

‘Destination India’ Made More Accessible… Easing the entry of BO/LO

In consonance with the avowed objectives of attracting Foreign Direct Investment (FDI), into the country, the Reserve Bank of India (RBI) has broadened the eligibility criteria/procedural guidelines for establishment of Branch/Liaison offices in India by foreign companies.

In terms of the new guidelines, such approvals would be based on certain parameters e.g. stipulated net worth and the profit-making track record in the home country. Eligibility criteria of a parent company can be availed by a subsidiary through filing of a ‘Letter of Comfort’ from the parent company.

In the same vein, where a proposal pertains to activities falling under the ambit of the automatic route (where 100% FDI is permissible under, as per the Policy) there such proposals will be dealt with by RBI itself. Where proposals fall outside the automatic route, there RBI will process it in consultation with the Government of India.

Recent RBI Circulars also provide:

Ø  Certain changes in the routing of applications for approval.

Ø  Allotment of a Unique Identification Number (UIN) both to the existing as well as new BO/LO.

Ø  Filing of the Annual Activity Certificate.

Ø  Permitted activities.

Ø  Applications for additional offices or undertaking additional activities.

Ø  Extension of validity of the approval of LO.

Ø  Winding up of BO/LO.

Well if good intentions (as evident from new policy guidelines) are backed by concrete action on the ground, by way of FDI friendly functioning of officialdom; it should certainly bring in a bevy of new investments into the country. Amen!

“Catch Me If You Can” They Say. “Of Course We Will!” Says the Government Plugging the tax loop holes…

Cognizant of the many devious shenanigans of some foreign entities to avoid tax in India, the Government has tightened the screws by making the provisions of the Income Tax Act more stringent, with retrospective effect.

In a landmark case of Ishikawajima, the Supreme Court had earlier held that only if the fees for technical services were rendered in India as well as utilized in India, it could be chargeable to tax in the hands of a non-resident entity. In actual practice this was being used as an escape route by foreign entities.

To plug this loophole an amendment, to the Income-Tax Act, has been proposed in the current Finance Bill, covering those non-resident foreign entities which earn fees for technical services delivered to an Indian entity.

As per the revised Section 9 of the Income Tax Act (to be operational with retrospective effect from 1976) such fees to a non-resident will be taxable, whether or not the non-resident has rendered services in India.

The retrospective application can lead to opening of assessments of projects completed years ago, causing   harassment and financial implications to assesses. 

“Welcome to My Parlour…But Don’t Overstay Please!” Tourist Visa on Arrival Scheme

The Government of India has announced a scheme for granting Tourist Visa-on-Arrival for citizens of Finland, Japan, Luxembourg, New Zealand and Singapore (subject to certain exceptions) planning to visit India on single entry, where such entry is strictly for the purpose of tourism, and for a short period viz. maximum of 30 days.

This Visa is non-extendable and non-convertible and will be issued at arrival only at the designated international airports of Delhi, Mumbai, Chennai and Kolkata. Only two visits on a Tourist Visa-on-Arrival shall be permissible in a calendar year and there shall be a gap of at least two months between each visit.

Indian hospitality lives up to its name!

Towards a Better ‘Win-Win’… Expats can breathe easier…

Something to cheer-up for those who are working in India and falling into the following categories, viz.,

Ø  a citizen of a foreign state, resident in India, who is an employee of a foreign company or

Ø  a citizen of India, employed by a foreign company outside India, either of who is on deputation to the office /branch/subsidiary/joint venture in India of such foreign company,

may now open, hold and maintain a foreign currency account with a bank outside India and receive the whole salary payable to him/her for the services rendered in such capacity in India, by credit to such account, provided that the income-tax chargeable under the Income-tax Act,1961 is paid on the entire salary as accrued in India.

Similarly, a citizen of a foreign state resident in India, who is in employment with a company incorporated in India may open, hold and maintain a foreign currency account with a bank outside India and remit the whole salary received in India in Indian Rupees, to such account, for the services rendered to the Indian company, provided that the income-tax chargeable under the Income-tax Act, 1961 is paid on the entire salary accrued in India.

This marks a major change from the earlier regulations restricting such remittances to 75% of the salary accrued to or received by such persons in India.

PAN or Pain? The Choice is Yours!

As per the new provision effective April 1, 2010 governing  tax deduction at source/withholding tax (TDS) under the Income Tax Act, 1961,  tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available.

It is also clarified that no certificate shall be given by the assessing officer under section 197, for deduction at lower rate or ‘no deduction’. Similarly, no declaration for non-deduction of TDS on payments, by an individual shall be valid, unless the application bears PAN of the applicant / deductee. 

Sense and Simplicity… Simplifying ECB procedure …

Supporting the ‘Pillars’ That Support the Economy…

A leg up to Infrastructure & IFCs…

Taking another progressive step forward, the RBI has widened the category of Non-Banking Finance Companies (NBFCs). In addition to the three categories viz., Asset Finance Companies, Loan companies and Investment Companies, a fourth category of "Infrastructure Finance Companies"(IFCs) has been added.

An IFC is defined as an NBFC which deploys at least 75 per cent of its total assets in infrastructure loans and which shall:

Ø  not accept deposits from the public;

Ø  have net owned funds of Rs. 300 crore or above;

Ø  have a minimum credit rating 'A' or equivalent of CRISIL/ FITCH/ CARE/ ICRA or equivalent rating by any other accredited rating agencies; and

Ø  have a CRAR of 15 percent (with a minimum Tier I capital of 10 percent).

A company which fulfils the said criteria can approach the Regional Office in the jurisdiction of which its Registered Office is located, along with the original Certificate of Registration (CoR) issued by the Bank for classification as IFC.

Definition of ‘Infrastructure’ & ECBs…

Pursuant to the announcement in the Union Budget for the Year 2010-11, the RBI has expanded the definition of infrastructure sector, for the purpose of availing of External Commercial Borrowings, to include “cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat”.

Accordingly, ECB can be availed by the players in new sector, subject to the other stipulations in the extant ECB Policy, such as limit per company per financial year under the automatic route; eligible borrower, recognised lender, end-use, average maturity period, prepayment etc.

Sense and Simplicity…

Simplifying ECB procedure for IFCs…

Going further down the lane of facilitating IFCs, new guidelines provide that their proposals for ECBs may now be considered under the approval route subject to their complying with certain conditions.

RBI is delegating powers to designated AD category-I banks to approve requests from ECB borrowers for:

Ø  Changes/modifications in the draw down/ repayment schedule of ECBs already availed; both under approval and automatic routes.

Ø  Changes in the currency of borrowing.

Ø  Change of AD bank by Borrower Company.

Ø  Changes in name of Borrower Company.   

No Drop Too Small… Relief for telecom Sector

Keeping in view the large outlay of funds required to be paid directly to the Government for the impending 3G spectrum allocation, within a limited period of time, the RBI has decided to make a one-time relaxation in the end-use conditions of the ECB policy.

This ‘ODI’ Gets Interesting Too! Online reporting…

RBI has decided to operationalise the on-line reporting system for Overseas Direct Investment (ODI) by Indian parties in a phased manner, with effect from March 2, 2010,

The new system would enable on-line generation of the Unique Identification Number (UIN); acknowledgment of remittances; filing of Annual Performance Reports (APRs) and easy accessibility to data at the AD level for reference purposes. Transactions in respect of Mutual Funds, Portfolio Investment Scheme (PIS) and Employees Stock Options Scheme (ESOPS) are also required to be reported on-line in the Overseas Investment Application.

However,

Ø  Application for overseas investment under the approval route would continue to be submitted to the RBI in physical form as before, in addition to the on-line reporting of Part I of form ODI, for approval purposes.

Ø  Transactions relating to closure / disinvestment/ winding up/ voluntary liquidation of overseas Joint Ventures/Wholly Owned Subsidiaries (JV/WOS) under the automatic and approval routes (Part IV of form ODI) would continue to be submitted to the Reserve Bank in physical form as before.

Few More Pennies for the Travel Wallet…

To facilitate resident Indians travelling abroad on a temporary visit, (other than to Nepal and Bhutan), the Government of India has enhanced the existing limits on the amount of currency that can be taken out/brought in during such travel  from INR 5000 to INR7,500 per person.

Little ‘Genie’ Gets More Muscle… Mobile Banking caps raised

Subject to modifications in the guidelines for mobile banking transaction, banks are now permitted to offer this service to their customers subject to a daily cap of INR 50,000 per customer for both funds transfer and transactions involving purchase of goods/services. Presently, such transactions are subject to separate caps of INR5000 and INR 10000 respectively.

Furthermore, to facilitate cash remittance, banks are permitted to provide fund transfer services which enable transfer of funds from the accounts of their customers for delivery in cash to the recipients. The disbursal of funds to recipients of such services can be availed at ATMs or through any agent(s) appointed by the bank as business correspondents. Such fund transfers are of course subject to certain stipulations. 

EEFC Accounts – Clarification

Answering queries of different types of Forex earners including SEZ developers, about their eligibility to open, hold and maintain Exchange Earner’s Foreign Currency (EEFC) accounts, RBI has clarified that all such earners are allowed to credit up to 100 per cent of their Forex earnings, to their EEFC Account.

Hence the Authorised Dealers can now allow SEZ developers to open, hold and maintain EEFC Accounts and credit up to 100 per cent of their foreign exchange earnings therein.

Check Your Cheque…Carefully!

As per “the Standardisation and Enhancement of Security Features in Cheque Forms” issued by RBI, no changes / corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers. This is intended to help banks to identify and control fraudulent alterations.

So no more cuttings please!

Arbitration Clause Not A ‘Single-Usage’ Ticket…

In a case before the Supreme Court of India, it was held that an arbitration clause cannot be said to be a one time measure and the court turned down an argument that the words “all disputes” occurring in the agreement must be understood to mean “all disputes under the agreement” that might arise between the parties throughout the period of its subsistence.

The words can only refer to disputes that might be in existence when the arbitration clause is invoked and one of the parties to the agreement gives the arbitration notice to the other. They cannot be deemed to refer to disputes that may arise after that.

The court said it cannot be held that once any arbitration clause is invoked the remedy of arbitration is no longer available in regard to other disputes that might arise in future.

On the argument that multiple arbitrations in a contract will cause financial burden to the parties, it was held that this problem can only be remedied by suitably amending the arbitration clause, postponing arbitration till the end of the contract of course keeping in mind the law of limitation.

Not Such Raw Nerves Please! Stigma and termination of service…

 The right to terminate the services of an employee during probation through an order of termination simpliciter is permitted by law, subject of course, to the terms and conditions of the contract of employment.

However, if such termination is ‘stigmatic’ it can fall foul with law and can lead to termination being declared illegal with consequence on the employer.

The moot point here is what constitutes stigma? This question was considered by the Supreme Court of India in a recent case which held that if an order of termination refers to unsatisfactory service of the person concerned, the same cannot be said to be stigmatic.

Even intimating another employer, on receiving a specific query, that the service of the probationer was terminated due to unsuitability, which is a fact, cannot be used to impute any mala-fides or vindictiveness on the part of the employer.

Minds Must Meet…Not Pen And Paper…

Primarily it is the ‘offer and acceptance’ that decide the existence of a contract. An acceptance must be absolute and unconditional. Unless an inference can be drawn from the facts that the parties intended to be bound only when a formal agreement had been executed, the validity of the agreement would not be affected by its lack of formality. Once the contract is concluded orally or in writing, the mere fact that a formal contract has to be prepared and initialled by the parties would not affect either the acceptance of the contract so entered into or implementation thereof, even if the formal contract has never been initialled.

The Supreme Court further held that in the absence of a signed agreement between the parties, the existence of a contract can be inferred from various documents duly approved and signed by the parties e.g. exchange of e-mails, letter, telex, telegrams and other means of telecommunication.

Printed Arbitration Clause on the Invoice

Section 7 of the Arbitration and Conciliation Act provides that the arbitration agreement must be in writing and needs to be contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement, or statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

Throwing light on whether the printed arbitration clause on the invoice, constituted an arbitration agreement within the parameters of Section 7 of the Act, the Bombay High court in a recent case observed that letters, telegrams or other means of telecommunication could also contain an arbitration agreement, but that requires proof that such letters, telex, telegrams, etc., were exchanged by the parties i.e. mutually delivered and actually received by each other. An arbitration agreement need not be in a particular form, but the parties must have an 'intention' to submit to arbitration.

In the absence of proof that the other party had received the invoice containing arbitration clause, it was held that there is no arbitration agreement between the parties.

Speaking Award

In a case where, on the one side, respondent in arbitration failed to produce relevant records before the arbitrator and, on the other side the claimant had filed affidavits in support of the claim and the deponents were available for cross-examination, but they were not cross-examined by the respondent, therefore award was given without  detailed reasons.

The Supreme Court held that the lack of detailed reasons cannot be claimed as an infirmity and the award can be accepted, despite the fact that the Court had specifically directed earlier that the award should be a reasoned one.

Transparency or Privacy? No easy answers…

In a decision by the Central Information Commission, it was held that the information provided by a tax assessee to meet his legal/statutory obligations is a public activity and therefore, information provided to the Department for purposes of income tax assessment is information disclosed in relation to a public activity and not eligible for exemption under Sections 8(1) or 9 of RTI Act. The disclosure of the same to another person cannot be construed as being an unwarranted invasion of the privacy of an individual.

This decision will certainly have far reaching consequences especially because the Applicant was an informer of the Department. Now, an assessee will be under scrutiny not only by the Department but also by those who undertake fishing and rowing enquiry with not very honourable intentions.

What this entails, only time will tell!

Let the Stethoscope Not Become a Noose! Decoding medical ‘negligence’…

Medicine is not an exact science; nor is there complete precision. Every surgical operation involves uncalculated risks and merely because a complication had ensued, it does not mean that the hospital or the doctor was guilty of negligence.

The Supreme Court has laid down principles which must be kept in view when deciding whether a medical professional is guilty of medical negligence or not. The Court held that it would not be conducive to the efficiency of the medical profession if no Doctor could administer medicine without a halter round his neck.

The medical professional is expected to bring a reasonable degree of skill and knowledge and must exercise a reasonable degree of care. A medical practitioner would be liable only where his conduct fell below that of the standards of a reasonably competent practitioner in his field. 

In the realm of diagnosis and treatment there is scope for genuine difference of opinion and merely because one doctor disagrees with another he cannot be called negligent.

A medical professional is often called upon to adopt a procedure which involves higher element of risk, but which he may honestly believe to afford greater chances of success for the patient rather than a procedure involving lesser risk but beset by higher chances of failure. Given this situation, merely because a doctor looking to the gravity of illness took a higher element of risk to redeem the patient out of his/her suffering, but which unfortunately did not yield the desired result, it does not tantamount to negligence.

The Court also held that the medical professionals are entitled to get protection so long as they perform their duties with reasonable skill and competence and in the interest of the patients. The interest and welfare of the patients have to be paramount for the medical professionals.

It is imperative that the doctors must be able to perform their professional duties with a free mind.

Wielding the Big Stick… SEBI steps in to keep Smart Alecs out

The Supreme Court has upheld the power of the Securities Exchange Board of India (SEBI) to bar executives of a company from accessing the security market and prohibiting them from buying, selling or dealing in securities. SEBI had enquired into certain allegations of violations of SEBI guidelines on disclosure for investor protection and found them to be true. The matter related to Public Issue of a company. An important aspect of the capital structure of the company was not disclosed in the prospectus, as a result of which investors were misguided.

In the course of investigation by SEBI, it was found that the company's directors had pledged their personal holding of shares with a Bank, and had given non-disposal undertaking to the Bank who were lead manager to the issue, which was not disclosed in the prospectus.

Removing Salt from Wounds -Writing off bad debts…

Prior to April 01, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable.

However, amendment to Section 36(1)(vii) of the Income Tax Act, 1961, changed this position. The Supreme Court has very clearly stated in a recent case, that after April 01, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

The logic is clear-if you can’t help them; at least don’t harass them!

India - Mauritius Treaty

When a subsidiary of a US company in Mauritius disposes of the shares held in an Indian company which Double Taxation Avoidance Agreement (DTAA) will be applied to ascertain the taxability of capital gains?

The Authority of Advance Rulings (AAR) negatived the contention of the Revenue that the US DTAA and not the Mauritius DTAA will be applicable. The AAR held that the facts that the source of funds for the purchase of shares is traceable to the US company or that the US company had played a role in suggesting or negotiating the sale or that the consideration received ultimately goes to the parent company in the form of dividends or the diminution of capital, do not lead to a legal inference that the US company in reality owned the shares and/ or the recipient of capital gains arising from transfer of shares is the US company but not the subsidiary. 

The fact that (i) the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked (ii) the holding company exercises acts of control over its subsidiary does not in the absence of compelling reasons dilute the separate legal identity of the subsidiary and that (iii) the attempted distinction between legal and beneficial ownership cannot be sustained on any reasonable basis. Consequently, the gains made by the Applicant were not chargeable to capital gains tax in India by virtue of the India-Mauritius DTAA.

Serious Fraud? Enter Court. Exit Arbitrator

In a recent case the Supreme Court observed that where a case relates to allegations of fraud and serious malpractices on the part of the respondents, then the matter can be settled in only in a court through furtherance of detailed evidence by either party. It is not a fit situation for an Arbitrator to address.

100% can be less than 100%

S. 47 (v) of the Income Tax Act provides that a transfer of a capital asset by a subsidiary company to its holding company shall not be regarded as a “transfer” if the whole of the share capital of the subsidiary company is held by the holding company. The Companies Act stipulates that a private company should have a minimum of two shareholders. Accordingly, two shares of the said subsidiary were held by a director of the assessee and not by the assessee itself. The Bombay High Court negated the argument of the Tax Department  that the assessee is not entitled to the benefit of the section. The Court held that a strict or mechanical interpretation making the statutory provision redundant should not be adopted, otherwise there will not be any situation in which s. 47(v) can apply, which cannot be the intention of the legislature.