Archive for the ‘Corporate Laws’ Category

Legal Updates - May and June 2011

Sunday, July 24th, 2011

This is post by CMA V.S.Datey.

Legal Resume May and June 2011

.Service Tax

Stay on service tax on legal consultancy

Hon. Madras High Court has granted interim stay on 24-6-2011, for recovery of service tax on legal consultancy services from members of Revenue Bar Association, Chennai.

Sub-Contractor not liable when he is providing construction service which is not taxable

Sub-contractor is liable even if main contractor is exempt from service tax – CBE&C circular No. 138/7/2011-ST dated 6-5-2011.

This circular gives an impression that all sub-contractors are liable to pay service tax. This is indeed not so.

The departmental circular is valid if the sub-contractor provides as service which falls under a different head and is not an exempt service. For examples, if the sub-contractor provides service like Architect, Consulting Engineer, Design Service, Manpower Recruitment and Supply Service, such service will be taxable even if the services provided by main contractor is not taxable.

However, if the sub-contractor provides a service which is exempt, it will continue to be exempt. For example, a contractor has received contract for construction of dam, road, tunnel or bridge which is exempt from service tax. Now, instead of doing the work himself, if he gives the work of construction of dam, road, tunnel of bridge to a sub-contractor, the service of sub-contractor will be exempt since he is himself providing service of construction of dam, road, tunnel or bridge.  

In fact, para 4 of the CBE&C circular No. 138/7/2011-ST dated 6-5-2011 specifically states that service provided by the sub-contractors/consultants and other service providers are classifiable as per section 65A of the Finance Act under respective clause of sub-clause (105) of section 65 of Finance Act, 1994.

If the construction is not commercial or is relating to road, bridges etc., or is for personal residential use of customer, the main person (builder or developer or main contractor) is not liable. The definition of ‘construction service’ refers to type of construction and not to type of contract. The exemption/exclusion depends upon type of construction. Thus, even if the work is done by contractor/sub-contractor, the nature of construction does not change and hence it would not be subjected to service tax.  Moreover, an exemption notification cannot be interpreted in a way which will defeat its very purpose

[One argument is that relation between the main person (builder/developer) and the contractor/sub-contractor is on commercial basis and hence it is commercial construction. In my view, this is not correct for the reasons stated above.].

On the same analogy, services provided by sub-contractor to contractor in SEZ should also be exempt, since ultimately the service is received by the SEZ Unit or SEZ Developer.

If the issue goes to Court, it will be interesting to know final outcome. Of course, if someone intends to take aforesaid view, it is advisable to make full disclosure to department in advance to avoid charge of suppression of facts.

Consulting Engineers to pay service tax on receipt basis

Service tax is payable on accrual basis and not on cash basis, w.e.f. 1-4-2011. Relaxation has been given to professionals like CA, ICWA, Architect, Advocates etc. can pay on receipt basis. This relaxation has also been extended to consulting engineers w.e.f. 1-7-2011.

Service tax on transport of goods by rail again deferred

Proposed service tax on transport of goods by rail (other than container) has been defereed once again upto 1-1-2012.

Central Excise

Inputs can be cleared for export on payment of duty and rebate claimed

In CCE v. Micro Inks (2011) 31 STT 144 = 10 166 (Bom HC DB), assessee had obtained inputs and capital goods from domestic suppliers. These were exported on payment of duty by reversing the Cenvat credit. It was held that assessee can be treated as ‘deemed manufacturer’ and is eligible to get refund.

Putting brand of school, security agency, company, hotel, on readymade garments is not ‘branding’ of readymade garment

Uniforms (Ready-made garments) are supplied to schools, private security guards, companies, hotels, airlines etc. with their logo printed, embroidered or etched on them. Similarly, made ups like linens, quilt, blankets, towels are supplied to companies, hotels, airlines, security agencies etc., bearing their logo. In addition, name of tailor or manufacturer is affixed on such garments (for identification). Similarly, blankets are supplied to armed force, police force etc. with name of manufacturer., as per requirement of tender.

Such garments are not ‘branded garments’ and these will be eligible for SSI exemption – MF(DR) circular No. 947/8/2011-CX dated 21-6-2011.

(This is correct since there is no trade in the goods by such school, hotel, airline, armed force, police force etc. The principle should apply to other goods also, though there are some contrary decisions, even of Supreme Court, on similar issues).

Cenvat Credit

Furniture and stationary used in factory eligible for Cenvat

Goods such as furniture and stationary used in an office within the factory are goods used in the factory and are used in relation to the manufacturing business and hence the credit of same is allowed.- Para 3 of MF(DR) TRU(I) letter D.O.F. No. B-1/3/2011-TRU dated 25-3-2011.

Foreign Trade Policy

DEPB scheme extended for three months

DEPB scheme has been extended upto 30-9-2011. DEPB scheme has been in ICU and on oxygen for a very long time. No one can predict how long it will live.

Companies Act

MCA going ahead with implementing Companies Act, 2011 even though the Bill is not even tabled before Parliament

Ministry of Corporate Affairs have introduced many welcome radical reforms in implementation of Companies Act, without waiting for even presentation of new Companies Bill before Parliament.

Under the banner ‘GO GREEN’, sweeping reforms are being introduced through circulars and notifications. If so much can be done through circulars, there may not be need for new Company Law! The circulars and notifications are issued so fast that in almost all the cases, a corrigendum or amendment has to be issued later.

Major changes are summarised below.

bullet Balance sheet and Notices to members can be sent through e-mail [This has saved tons and tons of paper, as almost 80% of the balance sheets to in waste paper basket even without being opened!] (Of course, paper industry, printers, mailers and couriers are highly unhappy).
bullet Participation of members in general meeting through video conferencing allowed (Welcome step but making it compulsory to all listed companies from year 2012 is not very practical).
bullet Provision for electronic voting by members in postal ballot, if done through approved Agency (NSDL and CDSL) [This should be helpful in voting in postal ballot as presently, except promoters and their friends, hardly anyone else bothers to post the ballot papers].

bullet Directors can attend meeting through video conferencing provided they attend at least one meeting physically every year
bullet Payment of all fees to MCA only through electronic mode w.e.f. 1-10-2011.
bullet ROC will issue only certificates digitally signed. No physical certificate will be issued.

Liberilasion and Procedural simplifications in Company Law matters

bullet DIN Application to be filed electronically only. Application duly certified by practicing CA/VWA/CS will be approved by system immediately, except in case of potentially duplicate applications.
bullet Forms 2, 3, 18 and 32 will be approved automatically (Straight Through Process).
bullet LLP of CA can be appointed as Auditors
bullet Sections 108A to 108I of Companies Act no more applicable as MRTP Act abolished.
bullet All work to be attended by officers on FIFO basis, without giving any priority to any work.
bullet Section 25 companies (licensed company) to be approved by ROC and not Regional Director).
bullet Approval of Government for appointment of relative of director to office of profit required only if remuneration exceeds ` 2.50 lakhs per month.

bullet Disclosures of salaries of employees required only when salary exceeds ` 5 lakhs per month.
bullet Large companies to file balance sheet in XBRL format.

PAN must be incorporated in DIN before 30-9-2011

Quoting PAN in DIN is must now (earlier the application form did not require PAN number). Those who had filed DIN application earlier and had already obtained DIN must submit their PAN number before 30-9-2011. If they do not do so, heavy penalty will be imposed on them – MCA circular No. 32/2011 dated 31-5-2011.

Extra judicial means to ensure compliance with law

Many companies only file event based information (like appointment of directors, issue of securities, registration of charges) but do not file balance sheet and annual reports. In case of such companies, e-filing of such event based information will not be accepted by the system, except the forms 32, 20B, 21A, DIN-3, 21, 23B and 66 – MCA circular no. 33/2011 dated 1-6-2011.

Government or BIFR approval to managerial remuneration only in case of listed companies

Minimum remuneration even higher than the prescribed  limits can be paid. The company has to comply with all the five conditions specified i.e. remuneration committee, no default in debt repayment and interest, special resolution for three years and disclosure in Corporate Governance Section of Directors’ Report.

In addition, Central Government approval will be required, if the company is a listed company or subsidiary of a listed company, except where the remuneration is approved by BIFR [Amendment w.e.f. 8-2-2011 and 23-5-2011. Till 8-2-2011, Government approval was required in all the cases].

In case of subsidiary of a listed company, such Government approval is not required if (a) the remuneration committee and Board of Directors of holding company give their consent for the amount of remuneration (b) Remuneration is approved in general meeting of holding company (c) The remuneration of applicant is deemed to be remuneration paid by holding company and (d) all members of the subsidiary are bodies corporate – Fifth proviso to section 2(C) in part II Schedule XIII inserted w.e.f. 23-5-2011.

Cost Accounting and Cost Audit

Vast expansion in scope of cost accounting record Rules

Companies (Cost Accounting Records) Rules, 2011 have been notified. These rules shall apply to every company, including a foreign company as defined under section 591 of the Act, which is engaged in the production, processing, manufacturing, or mining activities. Even service sector has been covered. The definition of ‘manufacture’ and ‘product’ are so wide that practically, except trading activity, the Rules will apply to all activities.

These Rules apply where (a) the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or (b) wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or (c) wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.

However, these rules shall not apply to a company which is a body corporate governed by any special Act (e.g. Banking and Insurance).

Industry-wise Cost Audit Ordered

So far, Cost Audit orders were issued to individual companies. Now, industry-wise orders have been issued for the first time. General orders have been issued as follows –

(a) Order No. 52/26/CAB-2010 dated 2-5-2011 in respect of specified products where net-worth of company is more than ` five crores or turnover of company is more than ` 20 crore or where the equity or debt instrument of company is listed on stock exchange. The order covers Bulk Drugs, Electricity Industry, Fertilizers, Formulations, Industrial Alcohol, Petroleum Industry, Sugar and Telecommunications.

(b) Order No. 52/26/CAB-2010 dated 3-5-2011 in respect of specified products where turnover of company is more than ` 100 crore or where the equity or debt instrument of company is listed on stock exchange. The order covers Cement, Tyres and Tubes, Steel Plant, Steel Tubes and Pipes, Paper and insecticides.

Simplified procedure for appointment of Cost Auditor

The procedure as applicable w.e.f. 1-4-2011 is as follows –

Audit Committee of Board of Directors of company shall consider appointment of cost auditor. It will ensure that cost auditor is not disqualified and does not exceed prescribed limit under section 224(1B) of the 1956 Act. It will obtain certificate from cost auditor about his/its independence and arm’s length relationship with the company. Then appointment will be confirmed by Board of company.

The company will file application electronically in form 23C within 90 days from commencement of each financial year, along with prescribed fees with copy of Board resolution and copy of certificate from cost auditor regarding compliance of section 224(1B) of Companies Act.

On filing application, the same shall be deemed to have been approved by Central Government, unless contrary is heard within 30 days of filing such application. If within 30 days, Central Government directs the company to re-submit application with additional information, the 30 days period shall be deemed to be from date of re-submission by the company.

After 30 days, company shall formally appoint Cost Auditor by a formal letter. Then, the cost auditor shall inform Central Government of his appointment in e-form.

Full particulars of cost auditor, along with due date and actual filing of cost audit report by cost auditor shall be disclosed by company in its annual report – MCA circular No. 15/2011 dated 11-4-2011.

Labour Laws

Fresh charge sheet to be issued in case of de novo proceedings

Disciplinary proceedings commence only when a Charge sheet is issued the delinquent employee - Valuation rules to be applied sequentially –- Chairman, Coal India  v. Anitha Saha  (2011) 5 SCC 142 (In this case, it was held that if High Court had ordered de novo enquiry, fresh charge sheet is required to be served).

Back wages not automatic even if workman is reinstated

Even after punishment is quashed by the Court or Tribunal, the payment of back wages still remains discretionary, No straight jacket formula can be evolved, nor a rule of universal application can be laid for such cases. Approach of Court or Tribunal should not be rigid or mechanical but flexible and realistic - Chairman, Coal India  v. Ananta Saha  (2011) 5 SCC 142.

Other Corporate Laws

Competition Act made fully operational

Provisions in Competition Act relating to ‘combinations’ have been made effective from 1-6-2011.

The value of assets and turnover as indicated in section 5 of the Competition Act for purpose of combination stand enhanced by 50% - Notification No. S.O. 480(E) dated 4-3-2011.

Following transactions have been exempted from provisions relating to Combination for a period of five years –

* Group exercising less than 50% of voting rights in other enterprise [S O No. 481(E) dated 4-3-2011].

* Acquiring control, shares, voting rights or asset of an enterprise which either has assets not more than ` 250 crores in India or has turnover not more that ` 750 crores in India [S O No. 482(E) dated 4-3-2011 as amended].

FCRA notified and made effective

Foreign Contribution (Regulation) Act, 2010 have been notified and made effective from 1-5-2011.

The Act has been notified and has been made effective from 1-5-2011.

Foreign Contribution (Regulation) Rules, 2011 have been notified prescribing forms and other provisions.

Limitations of Arbitral Tribunals

In Booz Allen and Hamilton INC v. SBI Home Finance Ltd. (2011) 5 SCC 532, it has been held as follows – (a) All rights relating to rights in rem are required to be adjudicated by Courts and public Tribunals as these are not suited for private arbitration. Private arbitration can decide rights in personam. (b) Criminal offenses, matrimonial disputes, guardianship matters, insolvency and winding up, testamentary matters (grant of probate, letter of administration, succession matters), tenancy matters governed by special statutes.

In this case, it was held that a suit for sale, foreclosure or redemption of a mortgaged property should only be tried by Court and not by Arbitral Tribunal. However, specific performance of right like agreement to sale or mortgage does not involve any transfer of rights in rem. It creates only personal obligation and hence is arbitrable.

DTC - Impact on IT/ITES sector

Wednesday, November 24th, 2010

This is a guest post by Mr.Indraneel Sengupta. Indraneel is a CMA student. He is a finance and economics writer and a financial analyst.



In an attempt to simplify the direct tax provisions, the Government released the Direct Taxes Code Bill, 2009 in August 2009 for public comments. The provisions of the DTC, especially those relating to Minimum Alternate Tax çMAT’) on gross assets, withdrawal of tax holiday to SEZ units, etc. met with vociferous protests from various stakeholders. Several representations were made by NASSCOM and numerous industry groups, based on which, the Government identified some major issues and released the Revised Discussion Paper on DTC in June 2010. As a logical step post the Revised Discussion Paper, the Government has now presented the Direct Taxes Code Bill, 2010 (‘DTC’) before the Parliament. The provisions of DTC are intended to come into effect from April 1, 2012 onwards. An analysis of the proposals in the DTC that are likely to impact the Information Technology çIT’) / Information Technology Enabled Services (‘ITES’) sectors is set out below.



 Tax holiday to SEZ units and SEZ developers

 Current situation: Under the existing provisions of the Income-tax Act, 1961 (‘the Act’), tax holiday is available to IT/ITES units operating from Software Technology Parks (‘STP’), Export Oriented Units (‘EOUs’) and Special Economic Zones çSEZ’). While the tax holiday in respect of the STP and EOU units has a sunset clause of 31 March 2011, SEZ units can avail tax exemption for a period of 15 years (which may extend beyond 31 March 2011) subject to fulfillment of certain conditions. Further, even SEZ developers are eligible to claim tax exemption in respect of their profits for a period of 10 years.


DTC Proposals: The DTC proposals seek to end the profit-linked incentive regime for SEZ units operational after 31 March 2014 and SEZ developers notified after 31 March 2012. Further, it has provided for grandfathering of tax holiday available to SEZ developers / SEZ units for the unexpired period.


Grandfathering of Tax Holiday for SEZ units

·                           Tax Holiday under section 1 0AA of the present Act would continue to beavailed by all existing SEZ units for the balance unexpired period out of the prescribed 15 years. Such benefit would also be available to new SEZ units which commence operations on or before March 31, 2014.

·                           For the purpose of computing profits eligible for the aforesaid Tax Holiday, the methodology prescribed under Schedule 12 of the DTC shall be applicable. However, capital expenditure as well as expenditure incurred prior to commence of businessshall not be allowed as a deduction for such purposes.

·                           The conditions specified under section 10AA for availing Tax Holiday shall continue to be applicable.


Grandfathering of Tax Holiday for SEZ Developers

·                           Tax Holiday under section 80-IAB of the present Act would continue to be availed by all existing SEZ Developers for the balance unexpired period out of the prescribed 10 years. Such benefit would also be available in respect of new SEZs which are notified on or before March 31, 2012 under the SEZ Act.

·                           For the purpose of computing profits eligible for the aforesaid Tax Holiday, the methodology prescribed under Schedule 12 of the DTC shall be applicable. However, capital expenditure as well as expenditure incurred prior to commence of businessshall not be allowed as a deduction for such purposes.

·                           The conditions specified under section 80-IAB for availing Tax Holiday shall continue to be applicable.

Comments: The IT/ITES sector has been a key driver to India’s economic growthtrajectory. The tax incentives offered to companies operating in this sector have provided them an edge in today’s fiercely competitive market.

 As such, continuation of these tax incentives to new SEZ units under the DTC, though under a restrictive grandfathering clause, is still a positive step. The grandfathering provisions would provide some relief to the SEZ developers, not just vis-à-vis the tax benefit availed by such developers, but also vis-à-vis the business case for setting up a unit in SEZ, which is so integrally linked to the tax benefit bestowed on the unit.


Minimum Alternate Tax (MAT)


Current situation:In light of the tax holiday available to the IT/ITES sector, MAT is a keyprovision impacting the sector. Currently, MAT is applicable at the rate of 18% (effective 19.93% considering surcharge & cess) of the book-profits computed after making specified adjustments to the net profit of the company. Further, the companies are allowed to carry forward the MAT credit (which is the excess of MAT tax paid over the tax computed in accordance with normal corporate tax provisions) to future years. Presently, MAT provisions are not applicable to SEZ units and SEZ developers. 

DTC Proposals: Under DTC, the concept and computation methodology of MAT have been retained broadly. However, MAT rate has been increased to 20% of book profits. Further, there is no exemption for SEZ developers and SEZ units from MAT.

 Comments: This is a negative development for the IT/ITES sector. Absence of MATexemption under the DTC would mean that SEZ Developers and SEZ units would need to pay a minimum tax of 20% on book profits. This provision would lead to additional tax outflow for the SEZ units/ developers in this sector. Further, DTC does not specifically provide for availing credit of MAT paid under the Act (relevant for STP / EOU units).



Corporate tax provisions – Key provisions


Tax rates

 Current Situation: Currently, the domestic companies are subject to corporate tax of 30% (plus surcharge and education cess) on their taxable income.

 DTC Proposals: While the Direct Tax Code Bill, 2009 stipulated the corporate tax rateas 25%, the Revised Discussion Paper had hinted that tax rates could be reviewed and suitably calibrated considering the reduction in the tax base due to certain tax benefitsspelt out in the said paper.

The DTC now has retained the existing corporate tax rate of 30%. 

Comments: Maintaining the corporate tax rate at 30% is not a positive development, inas much as other levies such as DDT of 15% and branch profit tax of 15% make the effective tax rate quite high.


Test of Residency

 Current Situation: Under the provisions of the Act, a company is resident in India in anyprevious year, if the control and management of its affairs is situated ‘wholly’ in India. 

DTC Proposals: Under DTC, it is proposed to shift the test of residence of a company from ‘control and management’ to ‘place of effective management’ in line withinternational practice.

Accordingly, a company incorporated outside India will be resident in India, if its place of effective management’ is situated in India.

 Place of effective management of the company would mean:

·                                       Place where the board of directors or its executive directors make their decisions

·                                       In cases where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.


Comments: Although the concept of ‘place of effective management’ proposed underDTC is in line with international practice, it is important that this provision isadministered in a fair and pragmatic manner. The new residency definition could impact businesses where key decisions are taken by Indian management / executives and merely adopted by the board overseas.


Treaty Override

Current Situation: Under the Act, the provisions of the tax treaties prevail over the domestic law to the extent they are more beneficial to the taxpayer.

 DTC Proposals: The initial draft of the Direct Tax Code Bill, 2009 provided that in the case of conflict between the provisions of a treaty and the provisions of the Code, the one that is later in point of time shall prevail. This led to apprehensions whether the proposal would lead to treaty override and render the existing treaties otiose. Post the Revised Discussion Paper, the DTC seeks to restore the beneficial treatment between the Act and the Tax Treaty except in specified cases-

·                                       where GAAR is invoked or

·                                       when CFC provisions are invoked or

·                                       when Branch Profits Tax is levied


Comments: The proposals seem to be in line with international practice.


Controlled Foreign Corporation (CFC) Provisions

 Current Situation: Under the Act, there are no CFC provisions.

 DTC Proposals: The introduction of the CFC provisions has come as a major surprise for India Inc. The CFC provisions have been brought in as an anti-avoidance measure. Under this, passive income earned by a foreign company controlled directly or indirectly by a resident in India, and where such income is not distributed to the shareholders, resulting in deferral of taxes shall be deemed to have been distributed to the shareholders in India. The CFC provisions are broadly summarized as under:

·     The total income of a Resident taxpayer to include income attributable to a CFC which means a foreign company:

§       that is a resident of a territory with lower rate of taxation (i.e. where taxes paid are less than 50 percent of taxes on such profits as computed under the DTC)

§     whose shares are not listed on any stock exchange recognised by such Territory

§   individually or collectively controlled by persons resident in India (through capital, voting power, income, assets, dominant influence, decisive influence, etc.)

§      that is not engaged in active trade or business (i.e. it is not engaged in commercial / industrial / financial undertakings through employees / personnel or less than 50 percent of its income is of the nature of dividend, interest income, income from house property, capital gains, royalty, sale of goods/services to related parties, income from management, holding or investment in securities/shareholdings, any other income under the head income from residuary sources, etc.)

§    has specified income of such company exceeds INR 2.5 million

·      Tie breaker tests have been provided to determine the place of residence of a controlled foreign company.

·    Scope of passive income also covers supply of goods / services to associated enterprises.

·      Specific formula prescribed for computing income attributable to a CFC. Income attributable to the CFC to be based on specified income. Specified income to be based on the net profit as per the profit and loss account of the CFC, subject to prescribed adjustments.


Comments: CFC provisions are likely to bring additional complexity in the tax legislationand could significantly impact Indian companies having outbound investmentstructures. Specifically, CFC provisions could create cash flow problems for Indian companies since they would be subject to tax without corresponding receipt of actual dividends. This may necessitate a review of the existing overseas investment structure.


Exempt-Exempt-Taxable (EET) vs. Exempt-Exempt-Exempt (EEE) Regime for Saving Schemes

Current Situation: Under the Act, long-term saving schemes like Government Provident Fund (GPF), Recognized Provident Fund (RPF), Public Provident Fund (PPF), LifeInsurance etc. are covered under the EEE method, wherein the contributions, accumulations / accretions thereto and the withdrawals are exempt from tax. 

DTC Proposals :All long-term retiral savings schemes moved to EEE regime as against EET proposed earlier. Deduction in respect of investment in approved funds such as Provident Fund, Superannuation Fund or Pension fund reduced to INR 100,000 from INR 300,000. Receipts under a life insurance policy on death/maturity would be exempt from tax. 

Comments: The continuation of EEE regime is a welcome step as it will provide a tax free lumpsum amount to individuals to meet their post-retirement financial requirements and would benefit the people driven IT/ITES space.


Withholding tax provisions Bandwidth and Software payments

Significant components of cost for companies in the IT/ITES space include bandwidth charges and standardized software costs paid to overseas service providers / vendors. 

Current Situation: Based on various judicial precedents, the payments are not subjected to tax withholding on the basis that payment for bandwidth to overseas service providers is not ‘royalty’ and payments towards shrink-wrap software are akin to payments for purchase of goods and not ‘royalty’ or ‘Fees for technical services’. 

DTC Proposal: Under DTC, the definition of ‘royalty’ has been amended to specifically include consideration for use or right to use of transmission by satellite, cable, optic fiber or similar technology. Also, the definition of the term ‘Fees for technical services’ is redefined to include “development and transfer of a design, drawing, plan or software or similar services”. 

Comments: These amendments cast a doubt whether the definition of royalty wouldcover charges for bandwidth which is merely a ‘facility’ availed by the IT/ITES companies and whether the term fees for technical services would also cover payments for standardized software which are essentially akin to payments for purchase of goods. 

Typically, tax burden is passed on to the Indian service recipients and results in the increase in the overall cost of operations.


Withholding tax provisions – Others 

Current Situation: The withholding tax rate on royalty and fees for technical services payable to non-residents is 10% (excluding surcharge and education cess).

 DTC Proposals: The withholding tax rate in respect of payment of royalties and FTS to nonresidents is proposed to be increased to 20%.

 Comments: The higher withholding tax rates would increase the overall cost of the Indian companies in case of payments to tax residents of the country with whom Indiadoes not have a Tax Treaty.


Transfer Pricing

 Current Situation: Currently, there are no provisions under the Act in respect of Advance Pricing Arrangement (‘APA’). 

DTC Proposals: It is proposed to introduce APA for upfront determination of pricingmethodology of an international transaction. 

Comments: Whilst the scheme specifying the procedure of APA has not yet been released, the industry would expect that the same is in line with the international practice.


Leased Assets

 Current Situation: In the absence of any specific provision under the Act, there is a lack of clarity surrounding the treatment of assets obtained on finance lease by IT/ITES entities. In certain cases, companies are facing litigation from revenue authorities on the question of whether they are eligible to claim depreciation on such assets. 

DTC Proposals: Under DTC, the lessee would be treated as the owner of assets obtained on finance lease and therefore, eligible to claim depreciation on the same. 

Comments: This is an important provision for the companies in IT/ ITES space and it willhelp to end the long drawn litigation regarding ‘ownership’ of such assets &depreciation eligibility with the Revenue authorities.


General Anti Avoidance Rule (‘GAAR’)

 Current Situation: Under the Act, there are limited specific anti-abuse provisions. 

DTC Proposals

·       The Code seeks to introduce GAAR which provides sweeping powers to the Revenue authorities. The same is applicable to domestic as well as international arrangements.

·               GAAR provisions empower the Commissioner of Income-tax (“CIT”) to declare any arrangement as “impermissible avoidance arrangement” provided the same has been entered into with the objective of obtaining tax benefit and satisfies any one of the following conditions :

§      It is not at arm’s length

§      It represents misuse or abuse of the provisions of the DTC

§      It lacks commercial substance

§       It is carried out in a manner not normally employed for bona fide business purposes

·   An arrangement would be presumed to be for obtaining tax benefit unless the tax payer demonstrates that obtaining tax benefit was not the main objective of the arrangement.

· CIT to determine the tax consequences on invoking GAAR by reallocating the income or disregarding/recharacterising the arrangement.

·   Meaning of ‘tax benefit’ widened to include any reduction in tax bases including increase in loss.

·  GAAR provisions to be applicable as per the guidelines to be framed by the Central Government.

·     GAAR shall override Tax Treaty provisions.

·     Forum of DRP available in a scenario where GAAR is invoked.


Comments: The guidelines to be issued by the Central Government would need carefulexamination to assess the scope and impact of these provisions. It is an open question whether GAAR can be invoked for transactions undertaken prior to the enactment of DTC. A suitable clarification may be provided for this purpose.

 Concluding Remarks

It is interesting to note the path of the Direct Tax Code from the 2009 Bill to the 2010 one. The promises of a lower corporate tax rate have not crystallised. However, relief has been given to SEZ developers & SEZ units by way of grandfathering clause, the benefit of which has been partly nullified by the proposed levy of MAT at a high rate of 20%. Introduction of GAAR and CFC signals a tough tax regime for the corporate sector. All in all, DTC seems to be a mixed bag of goodies.

Mandatory offer in takeovers

Tuesday, August 10th, 2010

This is a guest post by Mr.Sacha Singh. Sacha consults on change management, process evaluation and valuation of firms. He also enjoys ghazals and thumris and at times bhajans. You can read Sacha’s posts at

Mandatory offer in takeovers: comparison across ten countries


I am again teaching M&A. Some very important changes in SEBI (Substantial Acquisition of Shares and Takeover) Regulations have been proposed and I thought it appropriate to compare some of the issues about mandatory offers in different jurisdictions. The findings are summarised in this table:

*The provisions relating to India are as per the present SEBI (Substantial Acquisition of Shares and Takeover) Regulations

By squeezing out of minority shareholders I mean, if the acquirer can force the minority shareholders to sell their shares.

I will be grateful to receive these details for some other countries such as Australia, New Zea Land, Canada, Brazil…