Taxation in India 2010-11

A compilation of our published thought leadership

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Corporate tax

Contents
Feature articles
Corporate tax
/ t Af\mkljq [Yf dggc ^gjoYj\ lg Yf ]^Ô[a]fl lYp j]_ae]
?Yf]k` JYb dggck ^gjoYj\ lg Yf ]^Õ[a]fl lYp j]_ae] af Af\aY Yk `] \ak[mkk]k l`] j]nak]\ discussion paper on DTC.

)( t 9jj]klaf_ jak] af lYp dala_Ylagf
L`] kaf_d] egkl ka_faÕ[Yfl [`Ydd]f_] Z]^gj] l`] ?gn]jfe]fl$ af l`] j]Yde g^ lYpYlagf$ is to arrest the increase in tax litigation, says Prashant Khatore.

12 | Need for re-look at GAAR and CFC
Instead of removing ambiguity in the tax structure, the GAAR and CFC have created uncertainty amongst the business community. Ajit Krishnan writes about the need for a reassessment of these provisions.

), t :m\_]l *())%)*2 kl]Y\q gn]jYdd
Budget 2011-12 is perhaps, just the “holding” policy statement that India needs right now, writes Srinivasa Rao.

Employment tax
)1 t L`] fallq%_jallq g^ ko]Yl ]imalq
Amitabh Singh provides answers and detailed explanations to all possible questions and queries on sweat equity.

*) t <gfËl bmkl ÕYk` qgmj _j]]f [Yj\$ alËk lYpaf_
Amitabh Singh lists down some of the tax implications of holding a US green card, and helps with some timely damage control.

*, t @go lg j]\m[] l`] dYZgmj hYaf g^ [gfljY[l ogjc]jk
Who is responsible for contract labour — the contractor or the principal employer? Amitabh Singh answers this pertinent question in this article.

*/ t :m\_]l *())2 `alk Yf\ eakk]k
Budget 2011 didn’t introduce key provisions of the DTC to bring cheer for the common man. Sonu Iyer lists some of the hits and misses of the Budget for the aam aadmi.

Indirect tax
+) t K][lgjYd [gn]jY_] g^ ?KL2 akkm]k Yf\ [`Ydd]f_]k
Harishanker Subramaniam provides a sectoral analysis of the application of GST in India.

++ t ?KL gj fgl$ YZgdak` []fljYd kYd]k lYp
Satya Poddar insists on getting rid of the CST — the tiny but unjust tax — the root of many distortions and ineffeciencies in our current tax system.

1

+0 t . Sanjay L Kapadia discusses how MNCs are “managing” their management fees.gfklalmlagfYd ?KL Zadd _]lk l`] Mfagf . 2010..1 t Oaf\k g^ [`Yf_] The Finance Act. but cautions companies about costlier M&A deals.>]Ylmj] Yjla[d]k +.( t Hgafl g^ lYpYlagf jmd]$ *()) Adoption of Point of Taxation Rules for services is a step to prepare the ground for GST. management fees are one of the important tax planning tools at an MNC’s disposal. /* t <jY^l Y[imakalagf fgjek [gflafm] lg \jYo Yll]flagf Amrish Shah highlights opportunities of raising more money from PE now. -1 t LjYfk^gjeaf_ l`] Af\aY ljYfk^]j hja[af_ dYf\k[Yh] With 2011 heralding a decade since transfer pricing provisions were introduced in India.gfklalmlagf 9e]f\e]fl :add ak \]Õfal]dq Y hgkalan] kl]h lgoYj\k bringing in the much awaited indirect tax reform by implementation of GST in 2012. International tax .+ t EYmjalamk lj]Ylq Ç kmfk`af] Y_Yaf7 This treaty has witnessed some bad weather in the past.t :m\_]l *())2 lYp ]p]ehlagfk k`gmd\ fgo ]fl]j l`]aj loada_`l q]Yjk Bipin Sapra hopes to see more changes in the Indian indirect tax system especially the much needed phasing out of tax exemptions. -.YZaf]l YhhjgnYd 9hhjgnYd g^ l`] . . t LjYfk^]j hja[af_ eYfY_]e]fl ^]]k2 Yj] qgm \gaf_ al ja_`l7 If used properly. 2 . . Srinivasa Rao and Rajendra Nayak explain how recent landmark decisions Yj] dac]dq lg `Yn] Y ka_faÕ[Yfl aehY[l gf l`] f]pl )( q]Yjk g^ ljYfk^]j hja[af_ af the country. Bipin Sapra discusses the impact of these Rules on your business. . as well as recent circulars issued by the RBI regarding pricing of share transfers between residents and non-residents is bound to `Yn] ka_faÕ[Yfl aehY[l gf E9 afngdnaf_ mfdakl]\ [gehYfa]kÌ k`Yj]k af Af\aY& Amrish Shah analyses these legislative changes and assesses their implications on transactions. Heetesh Veera explains the current status quo of the biggest indirect tax reform. however. Transaction tax . Srinivasa Rao and Rajendra Nayak analyse the implications.0 t LYphYq]jk emkl dggc Yl eYjc]laf_ aflYf_aZd]k Y_Yaf The Delhi High Court ruling has confounded the opinion of companies with subsidiaries conducting marketing in India. t GmloYj\ Zgmf\$ lg Kaf_Yhgj] Nico Derksen and Sushant Nayak shed some light on the comprehensive economic cooperation agreement signed between India and Singapore. do the recent developments indicate a brighter future? Sudhir Kapadia discusses the Indo-Mauritius trade treaty.

01 t :]qgf\ [Yk` Yf\ [Yjjq eg\]dk FDI in multi-brand retail is per se prohibited and is permitted only in surrogate forms of the wholesale cash and carry model. 1) t F]o ><A fgjek lg _an] Ôddah lg F:>.t Af\aY Yk Y [gn]l]\ lYp \]klafYlagf Sudhir Kapadia aims to turn the perspective of India as a “complex tax destination” on its head and seek the silver lining in the Indian tax system. t AfZgmf\ Y[lanalq ZmgqYfl oal` _dgZYd [gehYfa]k k[gmlaf_ ^gj E9k India is the second most targeted nation among the BRIC nations for M&A activities. Tax and regulatory policy 87 t <]^]fkan] lgoYj\k ><A af \]^]f[] With FDI permitted up to 26%. Prashant Khatore provides the different viewpoints on the opening of this sector. Narendra Rohira and Tejas Mody discuss the trends indicating Indian companies going shopping abroad and global companies scouting for M&As in the country. /. 1. 3 . Albert Lee and Sameer Gupta elaborate key trends that have propelled a shift in the role of the tax head.Corporate tax /+ t Aehda[Ylagfk g^ Ng\Y^gf] jmdaf_ Sudhir Kapadia discusses the implications of Vodafone ruling and the degree of uncertainity it will create with respect to past transactions of a similar nature. Hiresh Wadhwani discusses the consolidated FDI policy (Circular 2) on few long-standing open issues. Specials 11 t C]q \]n]dghe]flk Yf\ dYf\eYjc bm\_]e]flk af *()( A compilation of direct and indirect tax and regulatory developments in the year 2010. year-end special edition 2010. )*( t =ngdmlagf g^ l`] lYp ^mf[lagf Due to globalization. /0 t L`] jgd] g^ lYpYlagf g^ E9 af Af\aY Amrish Shah outlines the increasing role that tax is playing in M&A and how recent developments in India will impact future corporate transactions in the country. technological progress and the risk-based approach by tax authorities the role of the tax function in the corporate sector has changed dramatically. relevant for NBFCs operating in India. the country continues to rely heavily on imports for its defence requirements. Ganesh Raj discusses how India’s defence sector has not been able to exploit opportunities offered by the liberalization of the economy.k The Government has been recently consulting public to further aid in advancing the FDI policy and enhancing its lucidity. previously published in the Ernst & Young Tax Focus.

Assistant Publisher Jerin Verghese.com/in/TaxServices ey. Design Tripti Panda.>]Ylmj] Yjla[d]k Foreword Editorial board Sudhir Kapadia Rajendra Nayak Prashant Khatore Assistant editors Rahul Kashikar Gajendra Maheshwari Ganesh Pai Tejas Mody Shalini Mathur Production team Nikhil Pradhan. Corporate Communications Purnopoma Debnath. Publisher Pallavi Thakur.taxupdate@in.ey.com/in/BudgetPLUS2011 E-mail ey. Logistics Websites ey.com 4 .

the Government has announced many changes in the indirect tax structure to prepare the ground for GST. the tremors of l`] ÕfYf[aYd [jak]k [gflafm] lg pose new and serious challenges before countries. On GST. the proposed model is yet to gain acceptability among the stakeholders. the dYkl Õk[Yd q]Yj `Yk Z]]f Yf afl]j]klaf_ gf] oal` kge] ka_faÕ[Yfl moves by the Government to bring in legislative and administrative tax reforms along with some landmark judiciary decisions. broad based growth although [g]pakl]fl oal` Ékla[cqÊ afÖYlagf& 9[`a]naf_ Õk[Yd [gfkgda\Ylagf$ enhancing the tax-GDP ratio and strengthening tax administration are today a part of the Government’s priority list. It is a select compilation of opinions and analysis that our thought leaders and experts shared with the market in some of the leading tax and business publications on the developments between April 2010 and March 2011. though the tabling of the Constitutional Amendment Bill in the Parliament is a step forward to its implementation. This issue deals with the Government’s two key proposed reforms – Direct Tax Code (DTC) and Goods and Service Tax (GST). including the adoption of Point of Taxation rules for services to harmonize the basis for tax collection (accrual) with Central Excise duty. continues to have robust. which are under active discussion. despite the dismal global environment. Strengthening of double taxation avoidance treaties and checking the rampant tax litigation are the other dimensions. Concurrently. To enable a deeper understanding of some noteworthy tax and regulatory developments in the year gone by. we are glad to bring forth to you Taxation in India 2010-11. helps you j]Ö][l gf l`]k] \]n]dghe]flk Yf\ prepare for the dynamic future ahead of us. The Government remains committed to implementing the DTC from April 2012. Policy issues such as FDI in defense and multi-brand retail sectors. certain proposals in the DTC continue to be contentious.Corporate tax A cross the globe. we hope this publication stimulates your thoughts. Governments are increasingly focusing on [gfkgda\Ylaf_ l`]aj hmZda[ ÕfYf[]k and designing tax structures that are growth oriented. and the bar on withdrawal of provident fund proceeds by an international worker until he reaches the age of 58 years. Srinivasa Rao National Tax Leader Ernst & Young India Sudhir Kapadia Tax Markets Leader Ernst & Young India 5 . India. The landmark Court decisions on transfer pricing provisions and the much discussed Vodafone [Yk] ogmd\ `Yn] ka_faÕ[Yfl aehY[l gf the contours of international taxation in India. Towards this end. With the scale of the changes that are underway. have also prompted active debate. for instance provisions relating to GAAR and CFC. However.

One of the key features of the DTC.>]Ylmj] Yjla[d]k Corporate tax The Indian corporate tax arena has witnessed several developments in l`] dYkl Õk[Yd q]Yj& @go]n]j$ af da_`l g^ ]ph][l]\ hgda[q j]^gjek$ l`] Mfagf Budget 2011-12 was considered only a ‘middling’ budget.e. the progress of which is discussed in the following section. the Controlled Foreign Company and the General Anti-Avoidance Rules. The revised DTC was placed before the Parliament on 30 August 2010 and is now expected to be effective 1 April 2012. which is under deliberation. Stakeholders have enjoyed a steady budget and wait patiently for the expected policy reforms. one that did not see any substantial changes or introductions. Insights on protracted litigation in India and possible solutions to the same are also discussed here. is the anti-avoidance rules i. In this section / t Af\mkljq [Yf dggc ^gjoYj\ lg Yf ]^Õ[a]fl lYp j]_ae] 10 | Arresting rise in tax litigation 12 | Need for re-look at GAAR and CFC 14 | Budget 2011-12: steady overall 6 .

whereby “every foreign company” shall be liable to pay a BPT of 15%.50%. The change had been much anticipated on account of restoration of the Minimum Alternate Tax on companies ^jge l`]aj Ykk]l ZYk] lg Zggc hjgÕlk and on account of dropping the contentious proposal for taxing longterm savings such as provident funds at the time of withdrawal. The deadline shift is a relief for investors because it would allow more time for evaluating the tax cost of doing business in the DTC regime. While DDT is payable at the time of distribution of dividends. At the same time. The proposal had attracted maximum resistance as it was not dafc]\ lg hjgÕlk Yf\ [gmd\ `Yn] resulted in taxation of loss-making companies.Corporate tax Industry can look forward to an ]^Õ[a]fl lYp j]_ae] Ganesh Raj Mint. 9 f]o [gf[]hl g^ ZjYf[` hjgÕlk lYp (BPT). the corporate tax rates are proposed at 30% for all taxpayers. has been retained in the bill. The Bill proposed a northward revision of tax rates vis-à-vis the original proposals in the DTC. 7 .93% (20. Thanks to the aggressive representations against the GAT proposal. which seems imperative because the select committee will f]]\ lae] lg dggc aflg l`] Õf]j aspects of smooth transition to the new regime. including Indian Yf\ ^gj]a_f Õjek Yf\ hYjlf]jk`ahk$ against the original proposal of 25%. the MAT regime has been dafc]\ lg hjgÕlk af l`] <L. 31 August 2010 T he Direct Taxes Code (DTC) bill has been tabled in Parliament and straightaway referred to a parliamentary standing committee on ÕfYf[] ^gj j]na]o& L`] \]Y\daf] ^gj replacing the archaic income tax act has been shifted from 1 April 2011 to 1 April 2012. BPT is not linked to j]eallYf[] g^ hjgÕlk lg l`] `]Y\ g^Õ[]& L`mk$ ]^^][lan]dq$ l`] [gjhgjYl] tax liability imposed on a foreign company would be 40. against an effective tax rate of 19. which was introduced in the original DTC. The original code had proposed the levy of a gross asset tax (GAT) gf Õjek Yl l`] jYl] g^ * g^ _jgkk assets. BPT on total income is comparable to the dividend distribution tax (DDT) hYqYZd] Zq Af\aYf \ge]kla[ Õjek Yl the rate of 15% on the amount of dividends distributed. :add Yf\ has been kept at 20%.01% as per Finance Act 2011) under the current act.

This additional levy is likely to increase the tax costs and equity-oriented mutual funds may be less lucrative now. 10% or 15% on such gains. a graded taxation for listed securities has been introduced depending upon the period of holding. The proposed DTC has introduced the concept of controlled foreign corporations (CFCs). Lastly. For example.61% (16. All other kind of capital gains shall be taxable as any other income. 50% of the effective tax rate would be applicable on capital gains. at the same time. and.>. If the period of holding of listed securities is more than a year and STT is paid.>]Ylmj] Yjla[d]k Industry can look forward to an ]^Õ[a]fl lYp j]_ae] The capital gains tax regime seems to be a sandwiched version of the [mjj]fl hjgnakagfk Yf\ l`] Õjkl \jY^l of the DTC. the securities transaction tax (STT) shall continue. which seek to give wide powers to authorities to declare any transaction as impermissible or reclassify a transaction which is deemed to have been entered for tax avoidance. While the Indian tax system for tomorrow would look at a tax-GDP (gross domestic product) ratio in the range of around 25% with a higher share of direct taxes to ensure a more progressive tax structure. which inter alia provides that the total income of a j]ka\]fl Ykk]kk]] ^gj Y Õk[Yd q]Yj shall include an income attributable lg Y . the much debated general anti-avoidance rules (GAAR) have been retained. d]kk Yfq Yegmfl j][]an]\ \mjaf_ l`] Õk[Yd year as a dividend from such an entity. While there is no concept of long-term or short-term gains. A detailed guideline on GAAR provisions would be prescribed for implementation of the provisions in the right spirit. except for a marginal reduction from 16. which under the current tax laws is exempt from distribution tax. there will be no capital gains tax.& L`] e][`Yfake kh][aÕ]\ in the DTC purports to capture the income earned by the CFC during l`] Õk[Yd Yhhgjlagf]\ lg l`] Af\aYf stakeholder to the extent of its k`Yj] af l`] hjgÕlk g^ Y . this can only be achieved through a broader base and improved administration and compliance. While the DDT scheme is largely unchanged.22% as per Finance Act 2011) to 15%. individuals shall be subject to effective slabs of 5%. The direction of the government’s tax reforms and the stated objective in the original discussion paper — to establish an ][gfgea[Yddq ]^Õ[a]fl$ ]^^][lan] Yf\ 8 .>. the DTC bill proposes to levy tax at the rate of 5% on income distributed by a mutual fund to the unitholders of equity-oriented funds or a life insurer to policyholders of an approved equity-oriented insurance scheme. For holdings of less than a year.

Ganesh Raj is a partner at Ernst & Young Af\aY Yf\ `]Y\k l`] ÕjeÌk LYp Hgda[q Advisory Group* as one of his multiple leadership roles.ey. Reprinted with the permission of Mint © 2010. 9 . as the new system settles. He is based in our Fga\Y g^Õ[]& You can write to Ganesh at: ganesh. All rights reserved throughout the world. The dilution of provisions has led the potential tax base to shrink and affected the transition to a lower tax regime.com *Ernst & Young India’s Tax Policy Advisory Group houses a specialized team of experienced resources including senior retired bureaucrats from the Government of India that advises clients across industries. and joint venture negotiations. and governments on diverse policy issues focusing on taxation.raj@in. However. His functional experience includes corporate tax planning.Corporate tax Industry can look forward to an ]^Õ[a]fl lYp j]_ae] equitable direct tax system — is only partially achieved for the time being. the industry can look forward lg Y klYZd] Yf\ ]^Õ[a]fl lYp j]_ae] that also provides it a competitive edge in the international arena. structuring cross-border investments and transactions.

lack of clarity in the language of the This only results in a heightened provisions to meet various situation sense of uncertainty. Inadequate number of very successful on account of certain appellate benches exacerbates this inherent limitations. the lawmaker. problem. and traditional route. but the it is within the powers of the Z]f]Õl [Yf Z] YnYad]\ g^ gfdq Zq fgf% Government to proactively amend the resident and public sector companies statute to bring it in sync with judicial and the ruling is binding only on the interpretations.>]Ylmj] Yjla[d]k Arresting rise in tax litigation Prashant Khatore Hindu Business Line. the tax compliance cost of becoming sunk. litigation continues mfYZYl]\& Ogjkl$ a^ l`] ÕfYd gml[ge] goes against the Revenue. the n]j\a[l ak kgm_`l lg Z] fmddaÕ]\ Zq Though there are several reasons retrospectively amending the statute for the rise in tax litigation. The Authority for Advance Rulings . litigation costs Another reason Today. A tax Although alternative dispute dispute may take anywhere up to 20 redressal mechanisms exist. the in the garb of bringing the provision primary reason appears to be the in line with the legislative intention. for protracted Indian companies is huge. it takes pricing cases and those relating time to happen.gfÖa[laf_ ghafagfk ^jge \a^^]j]fl 99J! jgml] `Yk l`] Z]f]Õl g^ kh]]\q appellate forums across the country disposal and a ruling in advance lends also add to the uncertainty. The Wouldn’t existence of greatest casualty of tax litigation is Ydl]jfYlan] multiple appellate certainty in tax-related matters and \akhml] levels through lYphYq]j [gfÕ\]f[]& j]kgdmlagf Z] which a disputed g^ `]dh7 issue has to pass before attaining certainty. `Yl `Yn] Z]]f l`] ^Y[lgjk Z]`af\ l`] jak] af lYp dala_Ylagf7 10 . as the alternative this is much beyond the international mechanisms have not proved to be standards. apart from huge and issues. much litigation is the of which goes into litigation. 14 February 2011 W Mostly. most years to attain certainty depending on tax disputes are dealt with under the the level to which it is escalated. and thereby clarify The Dispute Resolution Panel – set the legal position and put to rest any up with in 2009 to resolve transfer pending and future litigation. Though certainty to the tax angle. or the intention of applicant and the tax authority.

the Mutual Agreement Procedure. FDI and regulatory matters besides specialized tax litigation advisory services. Any legislative process should be thrown open for public feedback before the law is enacted. clear and kh][aÕ[& . The language of the provisions should be simple. who constitute the majority of litigants (around 66%).khatore@in. have been substantially curtailed through amendments in recent years. corporate and allied laws. The scope and powers of the Settlement Commission.ey. Yet another mechanism to resolve international tax disputes through the competent authorities of respective jurisdictions. Another possible measure could be the constitution of specialised benches of appellate authorities to \]Yd oal` kh][aÕ[ kmZb][lk& The CAG of India has recently suggested the setting up of a separate dispute settlement mechanism for small taxpayers. He also actively contributes to thought leadership in the areas of direct lYpYlagf& @] ak ZYk]\ af gmj ?mj_Ygf g^Õ[]& You can write to Prashant at: prashant.com *Our Corporate Tax practice provides integrated solutions across income and wealth taxes. exchange control.dYjaÕ[Ylagf Yf\ _ma\Yf[] gf ambiguous matters should come as a matter of routine as and when the issues come to light. viz. another dispute resolution body dealing with complex and protracted tax cases. envisaged in the tax dYo af *((1$ k`gmd\ Z] fglaÕ]\ Yl the earliest. A possible reduction in the number of appellate levels along with an increase in the number of appellate Reprinted with the permission of The Hindu Business Line © 2011. It is suggested that differentiating corporate tax disputes from smaller ones will help in faster disposal of pending cases and speedy release of locked-up funds. All rights reserved throughout the world. A Corporate Tax* specialist. he has extensive experience in tax planning and structuring. the general perception of competent authorities lacking adequate authority and conviction to negotiate and conclude issues. Prashant Khatore is a partner at Ernst & Young India. so that dggk] ]f\k Yj] a\]flaÕ]\ Yf\ hdm__]\ right away. 11 . benches can go a long way in reducing the number of pending tax disputes and the time for disposal. O`Yl [Yf Z] l`] hgkkaZd] e]Ykmj]k lg j]\m[] dala_Ylagf7 L`] Õjkl Yf\ l`] ^gj]egkl e]Ykmj] to reduce litigation is to free the statute from ambiguities as far as possible.Corporate tax Arresting rise in tax litigation to foreign companies – appears to be now riddled with independence issues along with the perception of being biased towards the Revenue and limited as regards the eligibility criteria. has resulted in very few takers because of factors including the absence of a time limitation. Safe Harbour rules for transfer pricing issues.

The CFC rules are designed to prevent tax deferral and tax avoidance by residents. proof against contrived tax avoidance. 12 . in low-tax jurisdictions. GAAR have the effect of invalidating an arrangement entered into by the taxpayer (domestic or international) with the objective of obtaining a tax Z]f]Õl& Af kalmYlagfk o`]j] ?99J is invoked. the need for GAAR stands diluted. It could damage commercial activities of many companies who wish to conduct commercial ljYfkY[lagfk af Y lYp%]^Õ[a]fl oYq& Since current IT law and code provide ^gj nYjagmk kh][aÕ[ Yfla%Ynga\Yf[] rules. there are few expectations from an income tax perspective given the sweeping changes proposed by the Direct Tax Code 2010. scheduled to be implemented from 1 April 2012. 23 February 2011 W ith the budget round the corner. GAAR itself cannot become a revenue-raising measure. And keeping in mind the adverse implications described above. the Commissioner of Income Tax gets wide discretionary powers to declare such arrangement as an impermissible avoidance arrangement. it’s important to reduce its rigour by writing in clear language ensuring that its purpose is readily apparent. Another proposal which has created uncertainty amongst Indian MNCs is the concept of Controlled Foreign Company (CFC). if passed by the Parliament and receives President’s assent. It should state how the tax authority would treat a scheme caught up by the GAAR. However. There is no dispute that it is the government’s duty to protect the interests of the exchequer by ensuring that tax legislation is. CFC rules seek to target the income earned and accumulated in nonj]ka\]fl ]flala]k mf\]j l`] afÖm]f[] or control of its own tax resident. The authority’s power to re-characterise transactions should be clear. Gf] g^ l`] ka_faÕ[Yfl Ye]f\e]flk proposed is General Anti-Avoidance Rules (GAAR). which would be a deterrent against tax avoidance and tax evasion. While the Code attempts to improve ]^Õ[a]f[q Zq j]egnaf_ YeZa_malq Yf\ distortions in tax structure. it is strongly recommended l`Yl ?99J k`gmd\ fgl Z] [g\aÕ]\& However. if GAAR is to be introduced.>]Ylmj] Yjla[d]k Need for relook at GAAR and CFC Ajit Krishnan Financial Express. as far as possible. some provisions have created uncertainty amongst the business community. by establishing foreign entities/ subsidiaries.

@] ak ZYk]\ af gmj ?mj_Ygf g^Õ[]& You can write to Ajit at: ajit. Ajit specializes in direct tax issues. All rights reserved throughout the world. 13 . It is presumed that in such kalmYlagfk$ l`]q [Yf afÖm]f[] l`] hjgÕl \akljaZmlagf gj j]hYljaYlagf policies as shareholders. Double tax Avoidance Agreements and in investment and transaction structuring. **The Japan Business Services desk is based in Delhi and as part of a Global Business Network adds dual area expertise to industry and domain specializations.Corporate tax Need for relook at GAAR and CFC who are subject to worldwide taxation. provide stability and provide for best international practices. While the introduction of the code is welcome given the intent to simplify tax laws. Reprinted with the permission of The Indian Express Limited © 2009. outbound investment is still not comparable to the levels in countries with a free foreign exchange regime. it is extremely important to address some of these concerns which could dampen the spirit of the business community as a whole. CFC rules pose a hindrance to free capital movement and will hinder international investment and result in a competitive disadvantage for Indian MNCs. 9bal Cjak`fYf is a partner at Ernst & Young India and leads the Infrastructure and Real Estate Industry hjY[la[]" ^gj l`] Õje& @] Ydkg Yf[`gjk our Japan Business Services Desk** in India. Once a ^gj]a_f [gehYfq imYdaÕ]k Yk Y . Therefore.000 real estate. wherever their operations are based. Also. in the absence of capital account convertibility and exchange control regulations still inhibit outbound investment.com *Our 7.000-strong real estate practice operates as a global team delivering high-quality service to more than 4. a CFC regime is not appropriate especially when Indian MNCs strive to become global players. entire income of the CFC is taxed in the hands of the resident-controlling shareholder on a proportionate basis. Our experienced global network of project teams provide multinationals with the real-time advice they need on tax issues. In India.krishnan@in.ey. hospitality and leisure. Improving international competitiveness of our economy should be a major policy goal. construction and infrastructure clients across the world. This can be improved if Indian businesses headquartered here and operating abroad are able to effectively compete abroad. (and none of the exemptions apply).>.

There was some element of expectation that the Union Budget 2011 will hold pointers on India’s commitment to market. The Minimum Alternate Tax (MAT) rate is proposed to be increased marginally from 18% to 18.5% to 2%. Direct tax On the direct tax front. nor has it hurt sentiment in any way. tax. 1 March 2011 T ax policy is emerging as a key lever globally. resulting in an effective tax rate of 32.4% and 42%.>]Ylmj] Yjla[d]k Budget 2011-12: steady overall Srinivasa Rao CFO Connect. While India did not suffer as acutely as many other countries. it has marginally reduced the surcharge applicable on domestic companies from 7.2%. In this regard the Budget has neither enormously helped. tax. In this regard the budget has neither enormously helped.5% to 5%. and regulatory reform. there was still some element of expectation that the Union Budget 2011 will hold pointers on India’s commitment to market. and perhaps the kind of “holding” Policy statement one needs at this stage as the dark clouds gradually lift away from the global economy.5% of Y\bmkl]\ Zggc hjgÕlk j]kmdlaf_ af Yf effective tax rate of 20%. dividends received by an Indian company from its foreign subsidiaries are proposed to be taxed at a reduced gross rate of 16. as countries across the world try and resuscitate and re-set their economies on a muchneeded growth trajectory. the availability of weighted deductions for contributions made for approved k[a]flaÕ[ j]k]Yj[` hjg_jYee]k `Yk been increased from 175% to 200%. It is typically a “middling” budget. Perhaps as a one-time initiative on the lines of a recent US tax policy initiative. 14 . respectively. after three painful years of economic carnage. and regulatory reform. and on foreign companies from 2. nor has it hurt sentiment in any way. In line with the emerging global policy axis of stimulating and incentivising innovation.

5% of its adjusted total income. The AMT provisions are similar to MAT provisions applicable to companies. 2011 (Bill). The due date for maintenance of transfer pricing documentation as well as furnishing the accountant’s report. and are quite a logical plug to what might have otherwise emerged as some kind of an unintended loophole. Af[ge] LYp `gda\Yq Z]f]Õlk mf\]j the STPI scheme have not been extended. and the due \Yl] ^gj Õdaf_ g^ Y lYp j]lmjfk Zq km[` corporates has been extended to 30 November of each year. The availability of exemption from payment of dividend distribution tax (DDT) for dividends distributed by SEZ developers has also been done away with. The Finance Bill. The credit in respect of tax paid under the AMT provisions is available for a 10year period. but which may not have been necessarily referred to them by the Assessing G^Õ[]j& L`] \a^Õ[mdla]k ^Y[]\ Zq lYphYq]jk in accessing contemporaneous comparable data. and furnishing the accountant’s report in respect of international transactions before the kh][aÕ]\ \m] \Yl] g^ +( K]hl]eZ]j$ has been recognized. Any dividends distributed by SEZ developers on. and Special Economic Zone (SEZ) developers and units will now also have to reckon with a tax. With this. or after 1 June 2011 will attract DDT at the rate of 16. and the provisions have been amended to provide for a variation up to such percentage as the central government may notify. The transfer hja[af_ g^Õ[]jk LHGk! `Yn] Ydkg Z]]f granted powers of survey to conduct gf%l`]%khgl ]fimajq Yf\ n]jaÕ[Ylagf$ as well as to determine the arm’s length price in respect of international transactions which are uncovered by them in the course of proceedings. linked to 15 . has been done away with. some of the income tax policy advantages that SEZs enjoy stand more-or-less neutralized. where such tax is less than regular Income Tax payable under normal provisions.Corporate tax Budget 2011-12: steady overall Much against popular expectations. The exemption from MAT which was hitherto available for developers and units in a SEZ.2%. has proposed a number of changes relating to transfer pricing regulations o`a[` j]eYaf gf] g^ l`] egkl Õ]j[]dq disputed and litigated pages of our af[ge] lYp d]_akdYlagf& L`] Ö]paZadalq of a 5% variation has been done away with. Limited Liability Partnerships (LLPs) will now be subject to an alternate minimum tax (AMT) at the rate of 18.

>]Ylmj] Yjla[d]k Budget 2011-12: steady overall l`] lYp j]lmjf Õdaf_ \m] \Yl]$ Ydkg accordingly stands extended to 30 November. Indirect tax On the indirect tax front. The one area that might have Z]f]Õl]\ ^jge kge] Yll]flagf af l`] Budgetary Policy Statement is the FDI policy. date of billing or receipt of payment. On the service tax front. Under these rules. Further. the tax base has been expanded by including certain additional services in the tax net to achieve some broad alignment between the current legislation and GST. transactions with such h]jkgfk af km[` fglaÕ]\ bmjak\a[lagfk will attract the application of transfer pricing provisions and a higher withholding tax. Among others. In order to seek regular information from non-residents regarding the Y[lanala]k g^ l`]aj daYakgf g^Õ[]k af Af\aY$ l`] :add `Yk eYf\Yl]\ Õdaf_ g^ annual information in the prescribed format within 60 days from the end g^ l`] ÕfYf[aYd q]Yj& Al Ydkg hjghgk]k to introduce certain anti-avoidance measures to review and enquire into transactions by resident taxpayers with persons located in any country or jurisdiction which does not have effective information exchange arrangements with India. whichever is ]Yjda]j& O`ad] Y kaehdaÕ]\ hjg[]\mj] for service tax refunds for SEZ units and a new scheme for exporter of _gg\k `Yk Z]]f fglaÕ]\$ kge] g^ l`] challenges currently being faced by IT service exporters do not appear to have been fully addressed. channels. 16 . while certain changes in the central excise rate structure have been proposed to align it with the GST regime. while the standard rate of service tax is retained at 10%. While there are obviously several avenues. the Point of Taxation Rules are proposed to be made effective 1 April 2011. Also. and timing opportunities for announcing reforms It also proposes to introduce certain anti-avoidance measures to review and enquire into transactions by resident taxpayers with persons located in any country or jurisdiction which does not have effective information exchange arrangements with India. point of taxation will be determined based on provision of service. the central excise duty has been maintained at 10%. the demand for clarity on taxation of packaged software has only been partially dealt with by providing an exemption from excise and customs duty on the value of licences for packaged software without MRP.

rao@in. He now specializes in cross-border structuring and transfer pricing/supply chain planning. All rights reserved throughout the world. He is based af gmj :]f_Ydmjm g^Õ[]& You can write to Srini at: srinivasa.com *Ernst & Young India’s Tax & Regulatory services practice comprises 60+ tax partners and 1. Consecutively rated the past 8 years as India’s La]j%A lYp Õje Zq =mjgegf]qÌk Afl]jfYlagfYd LYp Review. December 2010. has been approved by the Parliament and obtained Presidential assent. platform to signal such Y^ÕjeYlan] Y[lagf$ hYjla[mdYjdq af the much-watched sectors such as insurance and retail. the annual Budgetary platform does serve as a grand. Union Budget proposals i.400+ tax professionals in 9 cities across India.Corporate tax Budget 2011-12: steady overall or intended reforms to the FDI policy. it has also emerged as the Most Reputed Tax Firm in India for the second consecutive year in the TNS Global Tax Monitor Survey.e. Reprinted with the permission of CFO Connect © 2010. even if partly ceremonial. this is a steady and solid Budget. as we round the corner towards the more comprehensive DTC and GST policy and legislative reforms that will come through in the coming months. KjafanYkY Kjafa! JYg is a partner at Ernst & Young India and the National Director of our Tax & Regulatory Services practice*. In recent years. All in all. Srini has worked with some of the world’s leading multinational companies across a range of Direct Tax specializations. the Finance Bill 2011. he has been serially rated as amongst the leading tax and transfer pricing advisors in the country by Euromoney and the Legal Media Group. and is now the law.ey. 17 .

the implications of holding a US green card from a tax perspective and how to ensure timely damage control. the Indian Government has taken multiple measures to liberalize the tax laws thereby ensuring greater compliance and hence an increase in the tax revenue. Our personal tax experts have opinioned regularly on some of the critical aspects of employment and personal taxation in the country.7% of the GDP in 2010. obligations of a company employing contract workers. In this section 19 | The nitty-gritty of sweat equity *) t <gfÌl bmkl ÖYk` qgmj _j]]f [Yj\$ alÌk lYpaf_ 24 | How to reduce the labour pain of contract workers 27 | Budget 2011: hits and misses 18 . In the recent past. where income is taxed on the basis of residence of the taxpayer and source of income. In this section you can read about sweat equity shares. Tax revenue (both direct taxes and indirect taxes) in India accounted for 17. The k][lagf Ydkg Zja]Öq Yhhjak]k qgm oal` l`] [`Yf_]k afljg\m[]\ Zq l`] Mfagf Budget 2011 in the area of employment and personal taxation.>]Ylmj] Yjla[d]k Employment tax India follows a progressive system of taxation for individuals.

Lg o`ge [Yf ko]Yl ]imalq Z] akkm]\7 Cognisant of the inherent differences between the two. are real shares allotted to individuals upfront. on the other hand. That is are equity shares that the the reason startcompany issues to an individual up companies in consideration of his services. sweat equity shares can be issued only to employees or directors. These guidelines are applicable to all Indian listed companies. However. Sweat equity is governed by Section 79A of the Companies Act. To regulate sweat equity in case of unlisted companies. use sweat equity knowhow or any other value as currency to addition that the company has pay for services Z]f]Õl]\ ^jge& L`]k] ]imalq k`Yj]k that they cannot can be issued free of charge or at a pay for in “hard” concession to their prevailing value. is merely a right given to the individual to acquire shares of the company at a future date at a pre-agreed price. as per SEBI and DCA regulations. the Department In a broader sense. 9j] l`]j] Yfq _ma\]daf]k ^gj ko]Yl ]imalq k`Yj]k af [Yk] g^ mfdakl]\ [gehYfa]k7 Yes. consultant or a Sweat equity. They are similar to the extent that both are means of providing non-cash incentive or compensation to individuals. Sweat equity can be issued to an employee. the Securities and Exchange Board of India (SEBI) has issued separate guidelines for sweat equity and stock options. in India. vendor. 2003”. very literally put. sweat equity can be issued to anyone who has rendered services to the company. Employees and vendors joined together to build an ecosystem that 19 . cash. as widely understood. However. O`q ogmd\ Yf ]ehdgq]] gj Yfq gl`]j h]jkgf Y[[]hl k`Yj]k afkl]Y\ g^ [Yk`$ ]kh][aYddq ^jge Y klYjl%mh [gehYfq o`gk] ^mlmj] hjgkh][lk Yj] mf[]jlYaf7 The whole concept of using company shares as remuneration or reward has its origins in the famous Silicon Valley. sweat equity.Employment tax The nitty-gritty of sweat equity Amitabh Singh Hindu Business Line. of Company Affairs (DCA) has issued the “Unlisted Companies (Issue of Sweat Equity Shares) Rules. Stock options. 26 April 2010 A j] Èko]Yl ]imalqÉ l`] kYe] Yk Èklg[c ghlagfkÉ7 Not exactly.

payroll outsourcing.com *Our Human Capital Global Mobility services practice includes 100+ dedicated professionals located across India who assist our clients on end-to-end employment tax matters. At the same time. His functional expertise includes tax effective compensation structuring. All rights reserved throughout the world. Many of these start-ups are Fortune 100 companies and many of these employees who took stock instead of cash are millionaires. if not billionaires. the stocks are worthless and that is the riskreward judgment an individual has to grapple with. design and implementation of stock based incentive plans. 9ealYZ` Kaf_` is a partner at Ernst & Young India and the leader for our Human Capital Global Mobility Services practice*. If the company fails. as well as exchange control related advisory and litigation. 20 .singh@in. He is based in our FGA<9 g^Õ[]& You can write to Amitabh at: amitabh.ey. Reprinted with the permission of the Hindu Business Line © 2011. all start-ups do not go on to become a Microsoft or HP.>]Ylmj] Yjla[d]k The nitty-gritty of sweat equity allowed technology start-ups to access talented resources and high quality services in return for company stock.

He has to report his income and pay taxes to the US authorities on his worldwide income. have you taken an expert’s guidance?” “Don’t worry my friend. my dream has been ^mdÕd]\3 eq _j]]f [Yj\ h]lalagf `Yk ÕfYddq Z]]f Yhhjgn]\&Ê My tax practitioner alarm immediately started ringing. 23 May 2010 I had never seen Chiradeep. You have so many investments in India. Seeing him so happy. as we called him due to his intense demeanour. “Deep.” Deep said. But have you thought about the tax implications? I am not a US tax expert. I do not see any major issues. Based on whatever little I knew. the same as US rates.” he said. “Since Indian tax rates are over 30%. I have done my homework. and without professing to be an expert on US tax norms. It does not matter that the individual holding a green card lives outside the US and earns all his income outside the US. “Congratulations. a dividend distributed by an Indian company is tax free in the hands of the shareholder. For example.” Deep’s casual approach got me so worried that I had to suspend my walk and insist that he come home with me. Deep spent time pursuing his philanthropic interests and making astute investments in stocks. as happy and excited as he was the other day.  21 . Deep. “Deep”. had taken early retirement. his savings and stock options having generated enough wealth to allow him to take this step.Employment tax <gfÌl bmkl ÖYk` qgmj _j]]f [Yj\$ it’s taxing Amitabh Singh Economic Times. my next door neighbour. He was beaming with joy and looked 10 years younger than his actual age of 52. I outlined the implications of holding a green card:  A US green card holder is considered a US tax resident and is subject to taxation in USA on his worldwide income. I said. I could not resist asking. Many incomes in India are exempt from tax or taxed at lower rates. bonds and mutual funds. “At last. but will get taxed at normal rates in the US. what’s up? Have you hit a jackpot or something?” “You could say that my friend. but I know that the US taxes its residents on a global basis. However.

even with similar tax rates. Investing in PFICs by US taxpayers can be quite costly as PFICs are subject to onerous taxation rules. they could be subject to very ka_faÕ[Yfl h]fYdla]k& Af Y\\alagf$ for anyone who acquires a green card. If you have substantial dividend income.>]Ylmj] Yjla[d]k <gfÌl bmkl ÖYk` qgmj green card. differences in rules for arriving at taxable income could d]Y\ lg ka_faÕ[Yfl nYjaYlagfk af tax liabilities. your child would have to pay a succession tax of up to 55%! 22 . you could end up paying special exit or expatriation taxes on a deemed basis assuming that you sold all your assets at fair market value on the date of surrender of green card. A similar situation could arise on long-term capital gains from sale of Indian listed equity shares that are tax exempt in India. And if that isn’t enough.  If your wife or children are US–permanent residents by virtue of citizenship or a green card. there is a risk that the US will consider them to be domiciled in the US. if securities transaction tax has been paid on them. they could be required to pay tax when they give gifts or leave inheritances to other family members-even if the property was situated in India! If you have held your green card for eight taxable years (which could even be six years) and then decide to surrender it. it’s taxing this dividend is subject to tax in the US. According to the US tax laws. and if they fail to do so. your effective tax rate will suddenly shoot up from zero to something as high as 15% or even 35%. most Indian emlmYd ^mf\k [gmd\ _]l [dYkkaÕ]\ as passive foreign investment companies or PFICs. if you expatriated and then wanted to give a gift or leave an inheritance to one of your children who has a US green card. Hence. Hence. they could under certain circumstances be required to report any gift or inheritance received from you to the US IRS. and if so. one may need to actively review one’s portfolio and consider divesting from all PFICs.  Investments in Indian MFs can become potential tax traps for a green card holder.

singh@in. Reprinted with the permission of The Economic Times © 2011. However. maybe there are a few things you can do with your assets and property to legitimately protect them from US taxes. as well as exchange control related advisory and litigation.” I said. If nothing works. Let me think over this and not act in haste.Employment tax <gfÌl bmkl ÖYk` qgmj green card. disappointed. but at the same time relieved that not much damage had been done. where the tax consequences are not so devastating.” “You have given me enough to chew upon. a lot of rigour can be mitigated.com *Our Human Capital Global Mobility services practice includes 100+ dedicated professionals located across India who assist our clients on end-to-end employment tax matters. payroll outsourcing. 23 . it’s taxing Deep was looking distinctly morose with all his ebullience having disappeared by now. “Does it mean that I cannot hold a green card unless I also pay taxes through my nose?” “Well. 9ealYZ` Kaf_` is a partner at Ernst & Young India and the leader for our Human Capital Global Mobility Services practice*. All rights reserved throughout the world.” Deep said and slowly started walking towards his home.ey. before you accept your green card. With some amount of planning and professional advice. He is based in our FGA<9 g^Õ[]& You can write to Amitabh at: amitabh. “the privilege of having US permanent residency has its costs. say Canada. trying to be comforting. you could look at permanent residency of another country. design and implementation of stock based incentive plans. His functional expertise includes tax effective compensation structuring.

housekeeping. then to a great extent you are liable for any omissions that 24 .>]Ylmj] Yjla[d]k How to reduce the labour pain of contract workers Amitabh Singh Economic Times. “Only if you have violated any of the labour laws. It carried a news item of the recent travails of the head of a renowned business group due to some alleged violation of provident fund laws. then I am a sitting duck!” Anand said. “Yes. However. I had to admit. drivers. 19 September 2010 A s I came home from my Sunday morning walk-cum-milk errand. A oYk kmjhjak]\ lg Õf\ 9fYf\$ who runs a technology company. “Well. if the rich and famous can be hounded like this. but on the principal employer as well. I put on my reading glasses and peered at the cutting. It was now commonplace and convenient for companies to outsource many of the non-core functions to contractors who used their own employees to provide the said set of services. sitting on the porch. “Of course it worries me. I am aware of this. waving a newspaper cutting. the short answer is-Yes. “Have you not been complying?” Anand said nervously. but why does it worry you?” I said. We Yj] [gfkljm[laf_ Y f]o g^Õ[] Yf\ l`] builder has his own set of workers and sub-contractors. as I took the chair next to him. If you engage vendors that provide services to your company through their employees. “Have you read this?” He said. I have so many vendors whose ]ehdgq]]k ogjc af eq g^Õ[]%AL `]dh\]kc$ ljYn]d \]kc$ g^Õ[] k][mjalq$ canteen. how can I keep track of all of them? Moreover. but there are so many laws. was true for so many companies today. “Well. the labour laws in India have generally been designed with a view to protect contract workers from exploitation and this has led to regulations that fasten the liability for many contract labour related violations not just on the contractor. I have tried to be as compliant as possible for my employees.” I said. sipping eq hj][agmk lmdka ÖYngmj]\ l]Y& He looked quite worried. Am I responsible for their compliance as well?” What Anand was stating.

Copies of all such documents should be retained by you. Any lapses will make you. In case the principle employer has to make good any shortfall due to the contractor’s non-compliance. doing skilled. Make sure that the full salary. the law permits him to recover the same from the contractor. In other words. However. ÉQgm f]]\ lg Õjkl mf\]jklYf\ who is a contract worker. as due to the contract worker. as the principle employer. unskilled or manual work. “To start with. the devil in me thought. “How am I to ensure all this?” “Anand. your employees should verify the PF and ESI calculations and also verify the original deposit receipts. if employed by a contractor or sub-contractor to provide services to you at your premises would be a contract worker.” counter-signed by your employee and a copy kept for your records. you should ensure that the contractor is deducting as well as making his part of the contributions accurately and depositing the same with the government on or before the due date. I am not a labour law expert. Many companies do not release the contractor’s payments unless and until he has furnished all supporting documentation along with an undertaking of full compliance to all applicable labour laws. secretly enjoying `ak \ak[geÕlmj]& Gf] d]kk h]jkgf lg share my tulsi-chai with if he goes to jail. Hence.” I said. any worker.Employment tax How to reduce the labour pain of contract workers the vendor may commit in respect of his employees. The pay sheet should be 25 . but I will give you some pointers. is paid and his receipt obtained. semi-skilled.” “This is terrible!” Anand wailed. this excludes workers performing managerial or supervisory activities. Any shortfall in the payment of salaries to the contract workers is liable to be made good by the principle employer. you need to ensure that the full payment of salary is made to the contract workers on the due date. it’s the people at the very bottom of the chain. Since the workers are eligible for eYfq Z]f]Õlk km[` Yk H> Yf\ =KA$ among others. to all punitive measures as are applicable to the contractor and you cannot plead ignorance as an excuse. One of your employees should be personally present whenever salary is being distributed in cash. I continued. In a broad sense.

payroll outsourcing. said. as well as exchange control related advisory and litigation. For example.000 to `15. but not the least. Make sure that there is proper death and accident insurance for your contract workers and that they have access to facilities such as rest rooms. one should avoid contract employees for work that are carried out throughout the year and are intrinsic to your business. do carry out an annual compliance audit to ensure that you have not missed anything.000 per month.” I continued. 26 . these tips I would not hesitate to give even to my enemy. design and implementation of stock based incentive plans. Also. He is based in our FGA<9 g^Õ[]& You can write to Amitabh at: amitabh. 9ealYZ` Kaf_` is a partner at Ernst & Young India and the leader for our Human Capital Global Mobility Services practice*. pray to God daily for His protection! Reprinted with the permission of The Economic Times © 2011. the exemption threshold for ESI has been increased from `10.>]Ylmj] Yjla[d]k How to reduce the labour pain of contract workers The last one year has seen many changes to labour laws and you should make sure that not only are they being applied for your employees. drinking water. who had been taking notes. All rights reserved throughout the world. if you have a large number of contractors. Generally. His functional expertise includes tax effective compensation structuring. but for your contract workers as well.com *Our Human Capital Global Mobility services practice includes 100+ dedicated professionals located across India who assist our clients on end-to-end employment tax matters. canteen. Last. “These are most helpful.” Anand. The amount of compensation under the Workmen’s Compensation Act has also been increased. In other words. The wages paid to your contract workers should be similar to what your employees get for the same kind of work. et al. Any other tips you would give to a dear friend?” “Considering the dreadful consequences.ey. treat them no less than your employees.singh@in. while they are present at your premises.

just a revision in exemption slab to Rs.2 lakh for personal tax. a major cricket enthusiast decided to summarise for me the ‘Hits’ and ‘Misses’ very much in the passionate style of Cricket Commentators visible on TV channels as the World Cup crescendo builds up. Not only the basic tax exemption limit has been hiked from Rs. but the age for qualifying as a senior citizen has been brought down to 60 years from 65 years.Employment tax Budget 2011: hits and misses Sonu Iyer Economic Times .8 lakh has been disappointing for masses given that the relief involved is minor. especially for individuals who contribute to New Pension Scheme (NPS).5 lakh. my next door neighbour. Currently. but some extra deduction may bring cheer. “Senior citizen” — the man of the match! Throughout our lives.2. provided they have completed the age of 80 years on 31 March of the j]d]nYfl ÕfYf[aYd q]Yj& Broadly. 2.4 lakh to Rs. as proposed in DTC should be implemented. Further. Unfortunately. it was expected that some of the key provisions will Õf\ kge] khY[] af :m\_]l *())& One such key expectation was that the basic tax exemption limit of Rs. changes announced in the budget for the senior citizens. tax saving for an individual will fall in either of the categories mentioned below: Dropped again Oal` afÖYlagf lYcaf_ l`] hja[]k g^ basic commodity like onion to new heights. 3 January 2011 M r Das. we get to hear that ‘old is gold’.1. common man was looking to Budget 2011 for some respite. both the employee’s and employer’s contribution to NPS are considered for overall ceiling of deduction of `100.5 lakh. The budget proposes that employer’s contribution to NPS will no longer be a part of the ceiling. Further. in the backdrop of Direct Tax Code (DTC) becoming effective from 1 April 2012. but I realized it better after I heard the special 27 . Wide ball! Though basic exemptions may have scored less. separate category of ‘very senior citizens’ has been provided under the income tax law who will be eligible for exemption of Rs.000 under Sections 80C/CCC/CCD for tax saving instruments.Wealth.

will come as a relief to the lower income group.000 250.180 1.000 250. Such positive moves hjgna\]\ af l`] dYkl ÕfYf[] Zm\_]l gf will not only encourage investment in investment in infrastructure bonds will housing. new services have been added to the list of taxable services where one needs to shell out more.000 500. salaried be entitled to interest rate subsidy of 1% and therefore.000 Proposed (`) 180. Therefore. the interest subvention of one per cent on home loans up to Rs 15 lakh. 28 .3%. Finance Minister in his Budget addressed this issue and raised the priority sector home loan limit from `20 lakh to `25 lakh.5 lakh on home loans can breathe easy as Additionally.030 26.000 190. Clean bold! Service tax is another juicy fruit.000 240.000 250. deduction of `20. up from the previous limit of `10 lakh.780 Additionally. the employer can claim tax deduction for the contribution up to 10% of employee’s salary.000 this continues.a. Mr Das seeking a house form prescribed by the authorities loan of up to `15 lakh on a house Yf\ Õd] l`]aj lYp j]lmjf& A^ Ydd _g]k costing not more than `25 lakh.000 190. No return-caught behind Every year many others like Mr Das have to decipher the new tax return Accordingly. Though the service tax has been retained at 10. Also.>]Ylmj] Yjla[d]k Budget 2011: hits and misses Category Individual < 60 years Resident women< 60 years Senior citizens (men) 60–64 years Senior citizens (women) 60–64 years Senior citizens 65–79 years Very senior citizens =>80 years Current (`) 160. larger contribution by the ]ehdgq]j ogmd\ Z]f]Õl l`] ]ehdgq]j with higher tax deduction and the employee with tax saving.a on a loan of `15 l`]aj lYp j]lmjf ^jge f]pl ÕfYf[aYd year onwards. However.000 190. which Finance Ministry is harvesting q]Yj%gf%q]Yj lg [gn]j l`] \]Õ[a]f[q in the budgeted revenue. House that! With many fold rise in real estate prices.270 6.000 p. but also brings down their [gflafm] ^gj l`] f]pl ÕfYf[aYd q]Yj personal tax liability. the above provision may not ease the pain in the metropolitan cities. will well. as well. >mjl`]j$ h]ghd] [dYaeaf_ lYp Z]f]Õlk on interest payment up to `1. then as per the budget.060 Nil 9. This will make life of lakh (at 10% rate of interest). buying a house still remains dream for millions of people like Mr Das.000 Savings (p.000 240. where real estate prices and demand for affordable housing is the highest.000 160. will have a potential lYp hYq]jk oadd fgl Z] j]imaj]\ lg Õd] saving of `15.) (`) 2.

which is generally a complicated process for many.000 At the composition rate of 1. sees the light of the day.100 Proposed (`) On 50% of value Savings (p. which is taxable.100+55=1. in practice.258 25.000 per day) Air-conditioned restaurants cum bar Air-conditioned hospitals (with more than 25 beds) Regular health check-up ULIP premium Current (`) 1. if not better off. Sonu Iyer is a partner at Ernst & Young India and part of our Human Capital Global Mobility Services practice*.1. if the rules provide that an employee should have no other taxable income to be eligible.155 7.000+309=6. She is ZYk]\ af gmj F]o <]d`a g^Õ[]& You can write to Sonu at: sonu.00 6. For instance. to track resolution of refunds and credit for prepaid taxes. However. 29 .375 millions of tax payers easy as they oadd Z] ^j]] ^jge Õdaf_ l`]aj tax return.000+258=5.a.309 5. By the time I and Mr Das completed our last round. Reprinted with the permission of Money Today © 2011. She has over 15 years of experience in the area of Human Capital-Global Mobility covering Employee Taxation and Advisory with key focus on Global Mobility Risk Advisory Services and Accidental Expatriates.000+375=25.5% 5. I realised life after budget was similar to match between India vs.) (`) 1. one need wait and watch how soon the system is implemented and the tax authorities are equipped with skills to use them effectively. All rights reserved throughout the world. England where one is neither worse off.com *Our Human Capital Global Mobility services practice includes 100+ dedicated professionals located across India who assist our clients on end-to-end employment tax matters.Employment tax Budget 2011: hits and misses Category Hotel accommodation (with rent above Rs.iyer@in. It’s a six! Soon the days of chasing tax authority tirelessly for your tax refunds will be over.ey. no employee may actually imYda^q ^gj l`ak ]p]ehlagf ^jge Õdaf_$ as most of them will earning at least some amount of interest on their savings bank account. the practical implementation of the amendment is required to be looked at as the same may become unworkable. However. an interface with the income tax department. if web based facility.000 On 50% of value 25.000 On 30% of value On 50% of value 700+22=722 6.

abolish central sales tax 35 | Budget 2011: tax exemptions should now enter their twilight years 38 | Constitutional GST bill gets the Union Cabinet approval 40 | Point of taxation rule. and keep a close vigil on the likely structure to ensure a smooth shift to GST when it is implemented. 2011 30 . The Government is rightly attempting to make the current laws GST friendly. with the introduction of the Point of Taxation Rules in the Service tax law being a step in this direction. This section provides a detailed analysis of the issues being deliberated in the purview of GST. In this section 31 | Sectoral coverage of GST: issues and challenges 33 | GST or not.>]Ylmj] Yjla[d]k Indirect tax L`] af\aj][l lYp kqkl]e af Af\aY ak [mjj]fldq mf\]j_gaf_ Y ka_faÕ[Yfl transition from a multiple tax regime to a common GST. The foundation for the same has already been laid by the introduction of the Constitution Amendment Bill in the Parliament. Stakeholders understand the need to carefully implement changes in the current laws. among other developments that may impact your business. These Rules change the liability to deposit service tax from payment to accrual method and align the Service tax law with the other indirect tax laws such as VAT and CENVAT.

As there are no compelling economic or social policy reasons for exempting ÕfYf[aYd k]jna[]k$ al ogmd\ Z] appropriate to continue this approach under GST. applying GST to a few k][lgjk km[` Yk j]Yd ]klYl]$ ÕfYf[aYd k]jna[]k$ fgf%hjgÕl gj_YfarYlagfk and public bodies has been complex. Currently. The exemption is mainly because of l`] \a^Õ[mdla]k af lYpaf_ ljYfkY[lagfk where the consideration for service is not an explicit amount but a margin. there are restrictions on availing credit of taxes paid on fuels. Traditionally. However. treatment of sectors like petroleum as well as alcohol under GST is controversial. It has been proposed by 31 . It would be wise to follow the modern VAT approach. This is planned to be done by subsuming the stamp duty levied by the states to facilitate input credit and eliminate cascading. Further. KaeadYjdq$ ÕfYf[aYd k]jna[]k af the European Union have been conventionally exempted from VAT. New Zealand and South Africa). Additionally in India.geeall]] g^ klYl] ÕfYf[] eafakl]jk (EC) is silent on the inclusion of real property within the ambit of GST. taxation of this sector is complicated as certain products enjoy subsidies. Australia. the report released by the Empowered . real estate transactions are within the purview of GST. However. as exclusion of real estate leads to tax cascading through blockage of input taxes on construction materials and services. real property transactions have been exempted from VAT (as under the European Union) on the grounds that land did not constitute value added and real property are already subject to stamp duties and/or registration charges. The Report of the Task Force of the Thirteenth Finance Commission (Task Force) proposes integration of the real estate sector into the GST framework.Indirect tax Sectoral coverage of GST: issues and challenges Harishanker Subramaniam Financial Express. Another sector that is knotty is the petroleum sector. under modern VAT/GST systems (such as that in Canada. 9 April 2010 I nternationally. the application of GST on a vast majority of sectors has been without any substantive hurdles. But. while others are subject to multiple taxes at both the Central and the state level.

On the aspect of determination of taxable goods and services under GST. 9 imYdaÕ]\ da[]fk]\ [mklgek Zjgc]j$ `] has 25 years of experience in industry and consulting. GST should be levied on all goods and services at a single rate to achieve simplicity and neutrality. crude. GST/VAT applies generally to all supplies of crude oil and other petroleum products barring a few deviations. The Task Force has recommended a dual levy of GST and excise on tobacco and alcohol with restrictions on credit. it is bound to experience various challenges. The EC is aligned with the Task Force on tobacco. administration. however.com *Our Indirect Tax services practice is the largest in the country with 300 dedicated professionals who assist clients across India with their indirect tax policies. so that it is easier to monitor and administer. motor spirit (including aviation turbine fuel) and high speed diesel should be kept outside GST as is the prevailing practice.e. As a result input tax credit is available for set off against the output GST liability. while VAT and excise duty should be continued. 32 . products may be levied to dual levy of GST and excise duty with restricted credit and GST gf af\mkljaYd ^m]dk oal` l`] Z]f]Õl g^ input credit like any other good. deviations occur as there are concerns regarding the distribution of tax burden. compliance and litigations. while deciding upon the taxation of the diverse sectors under the GST system. the GST regime in India may have a positive list for services and a negative list for goods.. He is based in our ?mj_Ygf g^Õ[]& You can write to Hari at: harishanker1. @Yjak`Yfc]j KmZjYeYfaYe is a partner at Ernst & Young India and our Northern region leader for Indirect tax services*. He is also currently involved in assisting companies for the impending introduction of Goods and Services Tax in India.subramaniam@in. internationally the practice has been to maintain a negative list of goods and services. We trust the Government shall consider various pros and cons. Such a move would perpetuate existing [gehd]pala]k j]_Yj\af_ [dYkkaÕ[Ylagf& While the government treads towards implementation of GST by April 2011. Canada and Singapore. However. However. which is avoidable. in case of alcohol they suggested that it should be out of the ambit of GST. i. Reprinted with the permission of The Indian Express Limited © 2010. All rights reserved throughout the world. It is imperative that the Centre and State governments develop consensus on coverage of petroleum under GST. VAT and excise duty.>]Ylmj] Yjla[d]k Sectoral coverage of GST: issues and challenges the EC that the basket of petroleum products. and service tax.ey. Such a move is likely to result in cascading of taxes. His areas of expertise are customs and international trade. In countries like Australia. In an ideal world. The Task Force has recommended that emission fuels.

KL ak YZgdak`]\& enforce and prone to evasion. To avoid the tax. However. But The Central Sales Tax (CST) is the root that makes the supply chain complex g^ eYfq \aklgjlagfk Yf\ af]^Õ[a]f[a]k and expensive. the states want to hang states pour vast sums of money in on to the CST only for the revenue setting up inter-state checkposts to consideration. reporting and monitoring of inter-state eYfm^Y[lmj]jk Õjkl klg[c ljYfk^]j transactions and for collection of tax The tiny.Indirect tax GST or not.g. CST violates the principle of states (e. broadening the tax base and those manning them. Delhi) shot up by more interjurisdictional equity. market of India. It is a tiny an electrical manufacturer had set up lYp$ Zml afÖa[lk hYaf dac] Y [`jgfa[ 26 distribution centres. abolish central sales tax Satya Poddar Economic Times. Such activities can be controlled tax paid on inter-state purchase of through IT-enabled mechanisms inputs. The barriers enhanced compliance. The enhanced costs create like Trade Information Exchange a competitive disadvantage for the System (TINXYS) that allow proper Indian suppliers. The Despite this. 16 February 2011 the goods to their own depots in other states and then make a local sale. in the current tax system. they create are a blot on the common when CST was reduced from 4% to 2%. In one recent study. Being an origin-based the reported inter-state sales in some tax. It is also a major contributor to show intra-state sales (taxable at 4% to tax cascading as no credit is to 15%) as inter-state sales (taxable at allowed by any government for the 2%). but unjust tax must go 33 . which could ea_jYaf]& Al ak mfbmkl$ \a^Õ[mdl lg Z] j]\m[]\ lg Õn] a^ .. To illustrate. It is an extrathan 100%! Some states have argued territorial tax by the producing states that reduced CST creates much larger on the residents of the consuming arbitrage opportunities for the dealers states. the loss enforce the tax. which are a useless in CST revenues can be more than Õplmj]$ Yf\ k]jn] dalld] hmjhgk] gl`]j offset by a suitable adjustment in VAT than to supplement the incomes of rates.

and is a noted international thought leader on Goods & Services Tax and VAT. Satya Poddar is a partner at Ernst & Young India and a core member of our Tax Policy Advisory Group*.>]Ylmj] Yjla[d]k GST or not.poddar@in. Ministry of Finance in India and multiple Af\aYf klYl]k gf Y nYja]lq g^ lYp Yf\ Õk[Yd j]^gje& @] ak ZYk]\ af gmj ?mj_Ygf g^Õ[]& You can write to Satya at: satya. abolish central sales tax on them. TINXYS has already been developed. Reprinted with the permission of The Economic Times © 2011. for the adoption of such technologies. World Bank. but it’s accumulating dust on the shelf for want of attention from state bureaucracies. VAT and international taxes. and governments on diverse policy issues focusing on taxation. All rights reserved throughout the world. but is not essential.com *Ernst & Young India’s Tax Policy Advisory Group houses a specialized team of experienced resources including senior retired bureaucrats from the government of India that advises clients across industries. He has advised the European Commission. GST can provide an impetus. He has over 30 years of experience in advising clients on tax policies.ey. 34 .

24 February 2011 T he indirect tax system in the country has seen far-reaching changes during the last decade. they `Yeh]j l`] ^j]] Ögo g^ [j]\alk \gof the supply chain. The existing exemption schemes are based on the type of goods and services. these exemptions have grown disproportionately. the exemptions prescribe that the assessee is not required to pay tax on the procurement or supply of goods and services. Tax exemptions have been the chosen method of providing tax incentives in the country and. which results in the cascading effect on taxes. export-oriented mfalk Yf\ \]ka_fYl]\ kh][aÕ]\ Yj]Yk$ which have concessional or no excise duties. more than 350 exemptions exist in central excise and more in customs and service tax.Indirect tax Budget 2011: tax exemptions should now enter their twilight years Bipin Sapra Economic Times. In the last few years. The basic model of these exemptions is such that by exempting l`] ÕfYd hjg\m[lk oal`gml ]p]ehlaf_ the inputs and input services. today. A major roadblock to minimising the cascading effect on taxes is the manner in which these tax exemptions are granted. there are numerous exemptions that allow the manufacturer and the service hjgna\]j fgl lg hYq lYp gf l`] ÕfYd product or the output service. industry sectors. over a period. This result in inclusion of these taxes in the ÕfYd hja[] Yf\ l`] lYp]k Yj] hYkk]\ to the end-customer. The key objective of these tax reforms has been to minimize the cascading effect on taxes. value of clearances and are also available in the form of tax-free zones such as special economic zones. efforts have been made to streamline and reduce the list of exemptions. Even then. For instance. at the central level. The credit rules do not allow the manufacturer of the exempted goods and the provider of exempted services to take credit of the inputs and input services used. This is clearly 35 . In most cases.

hence. whereas in VAT law. the threshold limit prescribed under the excise law is `1. It is expected that zero rating. Last year. was also brought partially under the tax net by taxing the services provided by the hospitals to corporates and insurance companies. As a step towards the GST. hopefully.>]Ylmj] Yjla[d]k Budget 2011: Tax exemptions should now enter their twilight years against the spirit of the goods and services tax (GST).5 crore. which had enjoyed the exemption till then. It is expected that the exemptions would be limited to the present list of exemptions available in value added tax (VAT). so as to identify the ones that have achieved their purpose and the ones that are still essential. which does not exceed 100. The GST envisages a broader and uniform tax base across states and. In the present regime. say. transition to a small negative list of exempted services in future. given l`] afÖYlagfYjq lj]f\$ al ak unlikely that goods. ice-cream and so on are being considered for removal of exemptions. the health sector. 1% of the turnover. would be touched. Currently. it is `10 lakh. 36 . the present exemptions need to be rationalised. more than 100 services are being taxed and more may be taxed with this budget. which have an impact on the common man. If an industry \]k]jn]k Y Z]f]Õl$ ^mdd gj hYjlaYd$ zero-rating of goods is allowed. Though this may not be the ideal from a tax ]^Õ[a]f[q h]jkh][lan]$ q]l$ al oadd Yda_f the present system of exemption to the proposed system in GST. footwear. The small units may be given an option of paying duty under a composition scheme of. It is expected that the threshold limit may be rationalised to a lower number to ultimately reach the expected result. The service sector has also witnessed rationalisation of exemptions in the last few years. exemptions are not the most preferred method of granting incentives. the government is reviewing the status of existing exemptions. Services that have been exempted or were nontaxable have been brought under the tax net. The aim is to broaden the tax base and. which is limited to export Budget 2011 is seen as a starting point for the phasing out of certain exemptions. A number of items such as processed food. Many exemptions are still expected lg Õf\ Y hdY[] af l`] ?KL j]_ae]& The threshold-based exemption is one such exemption. However. as most of these goods are being taxed by states under the VAT regime. Worldwide. the calibration of the threshold limit in the GST is a topic of debate. Zerorating allows recovery of taxes used in these goods or services by way of refunds or rebates. Currently.

37 . compliance and litigations.sapra@in. An ex. may be extended to some goods and services in the GST regime. Additional Commissioner with the Department of Revenue. Budget 2011 may be a small step in jYlagfYdakaf_ l`]k] fglaÕ[Ylagfk& Reprinted with the permission of The Economic Times © 2011. Communications and Entertainment industry practice for the national capital region. Ministry of Finance in India. This is only possible if the number of exempted goods and services is small.com *Our Indirect Tax services practice is the largest in the country with 300 dedicated professionals who assist clients across India with their indirect tax policies. @] ak ZYk]\ af gmj ?mj_Ygf g^Õ[]& You can write to Bipin at: bipin. administration. he has been part of various committees in the Indian Government for drafting legislations on Indirect tax policy in India. :ahaf KYhjY is a partner at Ernst & Young India and anchors Indirect Tax for our Technology. All rights reserved throughout the world.Indirect tax Budget 2011: Tax exemptions should now enter their twilight years goods.ey.

States state level also subsuming some other does not have the power to levy tax local levies also. the introduction of Goods and Service Tax (GST) has been the dream of the Central Government. the Centre can impose GST seeks to subsume indirect taxes taxes on goods (at the factory gate) like central excise duty and service and on services while states can only tax at the Central level and VAT at the tax goods on sale. Pranab Mukherjee had announced in the Budget 2011 that the Constitutional Amendment Bill would be introduced in the Parliament in the ongoing Session. implying that both will need to have concurrent powers to tax a goods or service. At present. The same has been tabled before the Parliament today. Petroleum products and alcohol are likely to be outside the ambit of GST. the Finance Minister (FM) Mr. chaired by Prime Minister Manmohan Singh. power to increase or decrease taxes with the Centre exemption list etc. Further. approved the Constitution Amendment Bill (‘Bill’). The next crucial step ogmd\ Z] jYlaÕ[Ylagf g^ :add Zq -( g^ the states.>]Ylmj] Yjla[d]k Constitutional GST bill gets the Union Cabinet approval Heetesh Veera DNA Money. This was one of the major hurdles/ bottleneck due to disagreement from the States. A step forward has been taken in this direction on Thursday when the Union Cabinet. It was therefore required 38 .e. Inspite of the disagreement from the States. Presently. 23 March 2011 I nspite of various hurdles and opposition faced by the Central Government. Central Excise and Service tax) and the other levied by the States (ie Value Added Tax). States have been disapproving to the road map of GST by displaying their disagreement on account of revenue sharing. The present regime of indirect tax has two components — one levied by the Centre (i. Till now. L`ak ak \]Õfal]dq Y hgkalan] kl]h towards bringing in the much awaited indirect tax reform by implementation of GST in 2012. GST is expected on services. lg j]kmdl af Y kaehdaÕ]\ lYp kqkl]e$ uniform pricing of products across the country. 22 March 2011 by the FM. the District Councils and Regional Councils are empowered to levy entertainment tax on entertainment and amusement.

Further. though FM has showed a substantial progress towards implementation of GST in 2012. @]]l]k` N]]jY is a partner at Ernst & Young India and our Western region leader for Indirect Tax services*. GST Council would be the main body for taking \][akagfk gf c]q akkm]k dac] ÕpYlagf of tax rates.veera@in. it would be interesting to watch whether the fourth draft Bill attains the requisite political consensus from the States thereby enabling FM to meet its deadline for GST implementation. threshold limit. given the past rejections of the States to the earlier three drafts of the Bills fearing dgkk g^ \ak[j]lagfYjq Õk[Yd hgo]jk& Finally. In addition. will be decided by the Parliament. composition of the GST Dispute Resolution Authority. 39 . The Centre has not discussed the fourth draft with the Empowered Committee of State Finance Ministers Yk al ogmd\ Z] Õjkl [gfka\]j]\ Zq l`] Standing Committee of Parliament. the Bill would have to be cleared by not less than half of state assemblies and legislations. administration. citing autonomy issues. customs. The Bill has proposed that a GST Council be formed through a presidential order for taking decisions on all important matters. The three earlier drafts were rejected by States. each state has to approve the Bill with two-third majority. exemption list. He is based af gmj EmeZYa g^Õ[]& You can write to Heetesh at: heetesh. All rights reserved throughout the world.com *Our Indirect Tax services practice is the largest in the country with 300 dedicated professionals who assist clients across India with their indirect tax policies.ey. excise. paving the way for rolling out of GST. FM has worked on l`] ^gmjl` Yf\ ÕfYd \jY^l g^ l`] Constitutional Amendment Bill. The Bill empowers the Parliament to levy GST on interstate trade and imports. This would be a crucial step as well as a hurdle. After its passage in Parliament. In view of the objections raised by many States.Indirect tax Constitutional GST bill gets the Union Cabinet approval lg lYc] l`] Õjkl kl]h Zq ^Y[adalYlaf_ a Constitutional Amendment Bill and allow the Centre and States to levy tax simultaneously on goods and services. entry tax. service tax and also in SEZ and FTP rules and regulations across India. and any other matter related to GST. He has over 20 years of consulting and corporate work experience in Indian indirect taxation and specializes in VAT laws/sales tax. Reprinted with the permission of DNA Money © 2011. compliance and litigations. The fourth draft of the Constitutional Amendment Bill which is a hybrid of the second and third draft has been approved by the Union Cabinet on Tuesday. proposed to be a part of the Constitution Amendment Bill. which comprises members of many political parties.

The above relaxation is available only in cases. the date of completion g^ k]jna[] `Yk Z]]f kh][aÕ[Yddq \]Õf]\ Yk l`] \Yl] gf o`a[` l`] service receiver is liable to make payment on milestone/ periodic basis. then the date of completion of service. Continuous supply of services ak \]Õf]\ Yk k]jna[] afngdnaf_ contracts exceeding three months and there too the liability to deposit tax is prescribed as the earlier of issue of invoice or receipt of consideration or completion of service. L`] HGL Jmd]k Õp l`] hgafl g^ taxation for export and import of service on the date of payment. Accordingly. for continuous services involving milestone payments. the POT Rules have now been amended lg Y\\j]kk kh][aÕ[ af\mkljq [gf[]jfk and crystallize the implementation of the Rules in tandem with the existing Cenvat Credit Rules and Service tax Rules. The general rule of taxation in the HGL Jmd]k `Yk Z]]f fglaÕ]\ Yk the earlier of the date of invoice or receipt of payment and if the invoice is not issued within 14 days from the date of completion of service. Heeding certain objections voiced by the industry. export will Z] ^mdÕdd]\ gf l`] j][]ahl g^ l`] foreign exchange and import of services would attract Service tax only on payment basis. 4 April 2011 T he Government introduced the Point of Taxation Rules (POT Rules) in the Union Budget tabled last month to replace the traditional method of payment of Service tax on receipt basis. 2011 Bipin Sapra CNBC The Firm website. This is in line with the implementation of GST to bring parity in the way goods and services are taxed. The concept of completion of service is ambiguous and subject to interpretation. where the export remittances are j][]an]\ oal`af Y lae] kh][aÕ]\ Zq RBI or when payment for import of 40 . @go \g l`] ÕfYd HGL Jmd]k k`Yh] mh7 The concept of payment of Service tax has been changed from payment basis to an accrual methodology. However. Using contractual milestones as point of taxation has its own pitfalls for the Industry as all past and future contracts need to be carefully evaluated. as it existed in the erstwhile regime.>]Ylmj] Yjla[d]k Point of taxation rule.

However. the excess tax paid on accrual would be available as credit for future payments. An ex. In the event the YZgn] [gf\alagfk Yj] fgl ^mdÕdd]\$ l`] trigger shifts to the general rule i. Credit of input services has now been allowed on the date of receipt of invoice from vendor instead of payment date. for reverse charge payments of input services.ey. All rights reserved throughout the world of the contract. However.com *Our Indirect Tax services practice is the largest in the country with 300 dedicated professionals who assist clients across India with their indirect tax policies. the credit will be allowed on the date of payment. Thus. A major relief provided to the taxpayers in the recent changes includes the amendment of Service tax Rules to provide adjustment of Service tax in case the value of service Reprinted with the permission of ak j]f]_glaYl]\ \m] lg \]Õ[a]f[q af provision of service or any other terms CNBC The Firm. The POT Rules and parallel changes in the existing legislation are steps to smoothly transition to the proposed GST regime. if payment is not made to the vendor within three months of receipt of services. However. earlier of date of invoice or receipt of payment. administration. 41 . compliance and litigations. a robust mechanism will have to be implemented to track invoice payments. 2011 services is made within six months to the overseas vendor. Additional Commissioner with the Department of Revenue. He is based in our ?mj_Ygf g^Õ[]& You can write to Bipin at: bipin. Ministry of Finance in India. these would have been a harbinger of a simple and ]^Õ[a]fl ?KL& :ahaf KYhjY is a partner at Ernst & Young India and anchors Indirect Tax for our Technology. Accordingly. If only these rules had been kept simple. he has been part of various committees in the Indian Government for drafting legislations on Indirect tax policy in India. no provisions for bad debt has been made. identify unpaid invoices existing beyond three months and reverse the credit accordingly.sapra@in. the amount of credit will have to be reversed. Communications and Entertainment industry practice for the national capital region. if an amount is renegotiated and a credit note issued.Indirect tax Point of taxation rule. The Cenvat Credit Rules have also been amended to facilitate their working with the POT Rules.e.

assumes a key challenge as the Indian tax authorities ramp up their enforcement efforts on the Transfer Pricing front. Matters such as arriving at the correct arm’s length price on cross-border payments between associated enterprises. While the Organization for Economic Co-operation and Development (OECD). it is interesting to see how Indian courts have relied on the same while adjudicating on these issues. In this section 43 | Mauritius treaty — sunshine again? 46 | Outward bound. Also discussed is the evolving scope of the Indian Transfer Pricing regulations. to Singapore 48 | Taxpayers must look at marketing intangibles again 56 | Transfer Pricing Management Fees: are you doing it right? 59 | Transforming the India transfer pricing landscape 42 . Indian companies are increasingly seeking to organize their business structures in a manner that will help l`]e Z]f]Õl ^jge l`] Y\nYflY_]k Ykkg[aYl]\ oal` []jlYaf bmjak\a[lagfk Yf\ minimize the downsides associated with others.>]Ylmj] Yjla[d]k International tax With economic growth and globalization. Notably. the Transfer Pricing issues relating to the taxation of marketing intangibles. are addressed. This section on International Tax covers the business and tax advantages available for Indian multinationals wishing to structure their outbound investments through Singapore. since its introduction in 2001. has provided guidance on treatment of such transactions. intra-group management fees and IT services.

The purchase price was funded by the US parent and the sale consideration received by the Mauritian company was remitted back to the US company by way of dividends. however. This judgment.S.International tax Mauritius treaty — sunshine again? Sudhir Kapadia Hindu Business Line. E*Trade approached the tax authority for a nil withholding tax order. On the insistence of the purchaser. The tax g^Õ[]j afkakl]\ gf ^mdd oal``gd\af_ lYp of 20% and E*Trade challenged this order before the Bombay High Court. US Co 2 100% US Co 1 Dividends and capital reduction Mauritius 100% E*Trade Sale consideration Sale of shares in Ind Co to Mauritus Co Mauritius Co India Ind Co 43 . does not prevent tax authorities lg im]klagf kh][aÕ[ ljYfkY[lagfk o`]j] lj]Ylq Z]f]Õlk Yj] kgm_`l to be denied. It was widely believed that ÕfYddq []jlYaflq oYk j]Y[`]\ oal` l`] Supreme Court decision in the Azadi Bachao Andolan case where the court concluded that a valid tax resident of EYmjalamk ak ]flald]\ lg lj]Ylq Z]f]Õlk regardless of the fact that the entity concerned could arguably be a “conduit” company and the motive behind the transaction could be tax avoidance. the transaction structure is depicted in the chart. 10 April 2010 T he Mauritius treaty with India has had a chequered journey through good and bad weather as if mirroring the climatic patterns of both the countries. E*Trade case One of the well known cases post Azadi Bachao is the E*Trade case where the Mauritius subsidiary of a US company sold shares of an Indian company to another Mauritius company. U.

the Director of International Tax (DIT). The AAR relied on the fact that the shares were registered in the name of E*Trade Mauritius and dividends received from shares were also credited in the accounts of E*Trade Mauritius. Since the pattern of each transaction would be different. The AAR also pondered whether the policy considerations underlining crucial Treaty provisions and the spirit of the circular issued by the CBDT would still be relevant and expedient af l`] [mjj]fl Õk[Yd kalmYlagf ak Y debatable point and it was not for the AAR to express any view in this behalf. It categorically concluded that merely because the source of funds for the purchase of shares was traceable to the holding company or that the holding company had played a role in negotiating the sale of shares or that the consideration received ultimately went to the parent company in the form of dividends did not lead to a legal inference that the holding company in reality owned the shares and/or the recipient of capital gains arising from transfer of shares is the holding company and not E*Trade Mauritius. The AAR relied on the Supreme Court judgment in Azadi Bachao and upheld the application of Mauritius Treaty for capital gains exemption. the tax authority eYq o]dd Õf\ ]fgm_` \a^^]j]flaYlaf_ facts to continue to refrain from issuing the nil withholding tax order. that treaty shopping through conduit companies is not against law and the lifting of corporate veil is not permissible to \]fq l`] Z]f]Õlk g^ Lj]Ylq& Interestingly. The AAR also categorically ruled that in view of the binding pronouncement of the Supreme Court. technically speaking. 44 . The bad news is that this may yet not happen as. that is. Circular 789 issued by CBDT and the law laid down by Supreme Court in the Azadi Bachao case. a ruling by the AAR is only binding on the applicant and the tax authority in respect of that case and does not have general application. the motive of tax avoidance is not relevant so long as the act is done within the framework of law. which took the same view as the tax g^Õ[]j ]Yjda]j& At this stage.>]Ylmj] Yjla[d]k Mauritius treaty — sunshine again? The court declined to go into the merits but referred the matter back to the higher tax authority. Practical implications The moot point for foreign investors routing their investments in India through Mauritius is whether the prospective purchaser of their Indian shares would be able to remit sale proceeds without any deduction of tax at source. the AAR concluded by noting that it looks odd that the Indian tax authorities are not in a position to levy capital gains tax on the transfer of shares in an Indian company but this is an inevitable fact of the peculiar provisions in the Treaty. E*Trade approached the AAR to determine treatment of capital gains under the Treaty.

it is quite likely that. it’s now sunshine again over the Mauritius treaty but as all experienced travellers know. All rights reserved throughout the world. Even if hopefully these proposals _]l kmalYZdq \adml]\ af l`] ÕfYd version of the DTC. In the light of this. practical aspects like convening board meetings in Mauritius. Km\`aj CYhY\aY is a partner at Ernst & Young India and our Tax Markets Leader. Thus. He has functional specialization in International Tax and has over 20 years of varied experience in advising companies. documentary evidence of decision making in Mauritius. a prospective buyer may still insist on the seller obtaining a nil withholding tax order from a tax authority.com The tax department has challenged the order of the AAR in the case of E*Trade before the Supreme Court under a Special Leave Petition. it’s always good to have a protective umbrella k`gmd\ l`] o]Yl`]j lmjf Õ[cd] Yf\ al starts raining taxes again. therefore.International tax Mauritius treaty — sunshine again? In practice. presence of independent directors on the board of the Mauritian company.kapadia@in. like other countries. He is based af gmj EmeZYa g^Õ[]& You can write to Sudhir at: sudhir. etc. are of paramount ka_faÕ[Yf[]& Reprinted with the permission of the Hindu Business Line © 2011.ey. Sudhir leads the client relationship management agenda for our tax practice and is the senior tax advisory partner ^gj Y fmeZ]j g^ l`] ÕjeÌk dYj_]kl [da]flk& He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation. treaty override and general anti-avoidance rules. The good news is that with a clarion ruling in E*Trade. Another important aspect is the direction of tax policy in India as evidenced by the proposals in the Direct Taxes Code (DTC) in respect of tax residency rules. Indian law may also contain enabling provisions for the Revenue to question tax avoidance motives behind such transactions routed through intermediary jurisdictions.. 45 . To conclude. the opportunity for a foreign investor to approach the AAR to get greater certainty has now become more realistic. the need to maintain hygiene and ensure control and management of the Mauritian company still continues to be relevant.

Currently. The PIC will hjgna\] ka_faÕ[Yfl lYp YddgoYf[]k for investments in a range of six activities: R&D. to Singapore Nico Derksen and Sushant Nayak Financial Express.000 Indian companies are located. R&D tax measures and productivity and innovation credit (PIC). Under this incentive. it does not want to be viewed as a place for basing companies merely to make use of its treaty network. the IndiaSingapore relationship has come a long way since 1934.>]Ylmj] Yjla[d]k Outward bound. The strong trade relationship between the two countries is evident from l`] ^Y[l l`Yl Af\aY ka_f]\ alk Õjkl comprehensive economic cooperation agreement with Singapore. design activities. 46 . etc. In addition to a stable political and economic environment. or maybe because of the business friendly environment in Singapore. Singapore offers a very investorfriendly tax regime. R&D and IP. Indian companies like TCS and HCL have set up regional headquarters in Singapore where more than 4. 22 May 2010 O wing to its excellent infrastructure and pro-business regulatory framework. Some of the key tax incentives for global businesses include a headquarters programme. Singapore holding companies can enjoy the treaty Z]f]Õlk gfdq a^ l`]q Yj] Y Kaf_Yhgj] tax resident. Overall. Singapore accounts for over 30% of outbound investments from India. automation through technology or software and training of employees. putting it in the top spot. registration of IP rights. businesses that incur expenditure on R&D conducted in Singapore enjoy up to 150% deduction. The headquarters programme awards lYp af[]flan]k lg ]f[gmjY_] Õjek lg use Singapore as a base. it appears that Singapore’s schemes include assistance in manpower development and technological upgrading. companies can claim a 250% tax \]\m[lagf ^gj l`] Õjkl MK<+(($((( of qualifying expenditure on each of the activities covered by the PIC for Õn] q]Yjk& In spite of. In fact. acquisition of IP rights. making it the largest foreign business community in the country.

Cross-border tax planning and Tax Effective Supply Chain Planning solutions and services to the largest multinationals operating in the country.(( g^ ]ph]f\almj] mh ^jge l`] *-( [mjj]fldq!$ ^gj l`] Õjkl K?<. the PIC scheme has been broadened in the 2011 Singapore Budget to include R&D done abroad (where it is related to the taxpayer’s Singapore trade or business).000 currently — note that there was a typo in the original article that it should be SGD300. he has extensive experience in advising companies on cross-border transactions.nayak@in.(($((( spent on each qualifying activity (up from the SGD300. among which were that of ruling inspector. 47 .ey. and that of chiefinspector responsible for new investments in the shipping industry. The PIC scheme has been enhanced in the 2011 Singapore Budget to increase the quantum of tax \]\m[lagf gj YddgoYf[] lg . You can write to Nico at: nico. All rights reserved throughout the world. He has worked in the International Tax Services practice of Ernst & Young in Netherlands (Rotterdam).ey. In addition. not just R&D done in Singapore as is currently the case The above enhancements are effective immediately from tax assessment year 2011 to 2015. transfer pricing planning and international tax planning. to Singapore Singapore is perfectly poised to remain a top outbound investment destination from India for times to come. Fa[g <]jck]f started his career in tax at the Dutch tax authorities (Belastingdienst/ Grote ondernemingen Rotterdam) in different roles.000 and not USD300. India and is currently in Singapore. 1. Reprinted with the permission of The Indian Express Limited © 2009.com Sushant Nayak is an associate director at Ernst & Young India.000) 2. United States (Chicago).International tax Outward bound. An international tax* specialist.derksen@sg. He is based in our EmeZYa g^Õ[]& You can write to Sushant at: sushant.com *Our International tax services practice in India comprises 500 professionals who provide Transfer Pricing Documentation & Advisory (including Litigation).

could l`Yl ]fbgq Y d]n]d g^ hjgÕlYZadalq incur substantial that cannot advertising. such as the appropriate or the supplier of the trademark royalty to be charged to a licensee of unique intangibles or the appropriate products. >H!$ gj lg l`] eYjc]laf_ Y^ÕdaYl] l`Yl developed the trademark’s economic value. (Ind Co. and the entities of the rules do not provide guidance. performed in expenditure for manufacturing successfully and selling them. A are identifying the intangibles that fundamental issue posed by this case. while the legal The issues may arise in several owner of the trademark is the licensor contexts.) An issue that commonly arises is when the promotional efforts of Y eYjc]laf_ Y^ÕdaYl] ka_faÕ[Yfldq enhance the value of a trademark 48 . the key issues distributing the products. inter-company transfer price for A typical situation could involve a goods manufactured and sold to foreign parent (FP) distributing its a controlled distributor when the trademark products in India. of trademark products. Ind Co. September 2010 O ne of the most challenging issues that is legally owned by another Y^ÕdaYl]& L`] eYjc]laf_ Y^ÕdaYl] eYq Z] in transfer pricing is the taxation a trademark licensee or a distributor of income from intangible property. The Delhi High Court ruling in the be explained marketing and Maruti Suzuki case has confounded the merely by promotional opinion of companies with subsidiaries the functions (AMP) conducting marketing in India.>]Ylmj] Yjla[d]k Taxpayers must look at marketing intangibles again Srinivasa Rao and Rajendra Nayak International Tax Review.) to ^gj l`] Õfak`]\ _gg\k& >gj hjg\m[lk distribute the products. produce the extraordinary economic on which the Indian transfer pricing success. FP could manufacturer owns the trademark set up an Indian subsidiary (Ind Co. the trademark should be allocated to the legal owner of the trademark. is corporate group that own these whether the income attributable to intangibles for tax purposes.

which included promotion of the Suzuki trademark. in the case of AEs. in order to develop a market for the vehicles. According to the tax authority. sale and after sale service of the Suzuki products and parts. The test is to determine what a comparable 49 . The taxpayer entered into a license agreement with Suzuki for the manufacture and sale of certain models of Suzuki motor vehicles. With regard to the payment of royalty by the taxpayer to Suzuki. The taxpayer was required to pay a recurring royalty as well as a onetime lump sum payment for use of the intangible property. feels that the use of a foreign trademark is likely to Z] Z]f]Õ[aYd lg al$ l`]j] [Yf Z] fg dispute about the business decision to use the foreign trademark on payment of a royalty. Under the terms of the agreement. an Indian joint venture company of Suzuki. k`gmd\ [geh]fkYl] Y da[]fk]\ Y^ÕdaYl] for its promotional efforts that has the effect of enhancing the value of the intangible. Accordingly. Japan (Suzuki). such royalty should satisfy the arm’s length test. the court ruled that if a domestic entity irrespective of whether it is an independent entity or an AE of a foreign entity. the taxpayer incurred huge AMP expenditure. the Delhi High Court in the case of Maruti Suzuki Ltd. Suzuki agreed to provide the technical collaboration and license necessary for manufacture. such as a trademark or a brand name. Suzuki also granted the taxpayer exclusive right to use its trademarks. Suzuki should have compensated the taxpayer for the assistance provided in developing the marketing intangibles.International tax Taxpayers must look at marketing intangibles again In a recent ruling. Suzuki Motor Corporation. However. non-routine AMP expenditure was adjusted as being the value of the marketing intangibles accruing to the Z]f]Õl g^ Kmrmca& The taxpayer challenged the proposed adjustment by the tax authority by way of a writ petition in the high court. The Delhi High Court ruling The taxpayer. has ruled on the transfer pricing aspects of marketing intangibles in respect of a licensing arrangement between the Indian company and its associated enterprise (AE). the court provided guidance on the circumstances under which a legal owner of a marketing intangible. In its ruling. The tax authority proposed to make a transfer pricing adjustment by disallowing the royalty paid to Suzuki for use of trademark and by disallowing the AMP expenses incurred in promoting Suzuki intangibles. was engaged in the business of manufacture and sale of automobiles.

Marketing intangibles Transfer pricing aspects of marketing intangibles has been the focus of the Indian tax authority in transfer pricing audits over the last couple of years. by itself. Further. but is to promote the products of the domestic enterprise mkaf_ l`Yl ljY\]eYjc& L`] Z]f]Õl$ if any. to assert their positions. The high court also held that use of a trademark belonging to a foreign AE of a domestic enterprise. it would be necessary to identify appropriate comparables for the purpose of comparison. In such a situation the arm’s length price for the arrangement would need to be determined taking into consideration all the rights obtained and obligations incurred by the AE. so long as Z]f]Õl g^ km[` ZjYf\ fYe] Y[[jm]k to the Indian enterprise alone. the court set aside the order of the tax authority and directed that a fresh assessment be made based on the principles laid down in its ruling. settlement between the US Internal Revenue Service and GlaxoSmithKline @gd\af_k$ l`] 9mkljYdaYf LYp G^Õ[]Ìk interpretative guidance and so on. With regard to the AMP expenditure. such as the OECD Transfer Pricing Guidelines. US Tax Court decision in the case of DHL Inc and Subsidiaries vs. US Treasury Regulations issued under section 482 of the Internal Revenue Code (including the so called cheese examples contained in the 1994 regulations). Under the facts of the case. 50 . to determine whether the AMP expenses incurred are more than what a similarly situated and comparable enterprise would have incurred.>]Ylmj] Yjla[d]k Taxpayers must look at marketing intangibles again entity placed in the position of the taxpayer would have done. A review of some recent transfer pricing adjustments reveals that a strong reliance is placed by the Indian tax authority on a number of international practices and precedents. Only then can it be determined whether Suzuki had given any subsidy to the taxpayer in the payment of royalty or it got more than what it ought to have. The intention in such a case is not to Z]f]Õl l`] ^gj]a_f 9= gof]j g^ l`] trademark. the owner of the intangible needs to suitably compensate the licensed user for the advantage obtained by it in the form of brand building and increased awareness of the intangible. the high court held that if the AMP expenses incurred by the Af\aYf Y^ÕdaYl] mkaf_ l`] ljY\]eYjc are more than what a similarly situated and comparable enterprise would have incurred. accruing to the foreign enterprise in such cases is only incidental for which no payment is warranted by the foreign AE to the domestic enterprise. Commissioner (TCM 1998-461). would not necessarily entail any payment from the foreign AE to the domestic enterprise.

In such cases. the analysis requires an assessment of the obligations and rights between the parties. while a licensee or a distributor is expected to incur a certain amount of cost to exploit the intangible property which it is provided. According to this test. L`] Zja_`l daf] l]kl The US Tax Court decision in the case of DHL has often been relied upon by the Indian tax authority. a distributor may have l`] YZadalq lg gZlYaf Z]f]Õlk ^jge alk investments in developing the value of a trademark from its turnover and market share where it has a longterm contract of sole distribution rights for the trademarked product. in arm’s length dealings the ability of a party that is not the legal owner of a marketing intangible to gZlYaf l`] ^mlmj] Z]f]Õlk of marketing activities that increase the value of that intangible will depend principally on the nature of the rights of that party. An independent distributor in such a case might obtain an additional return from the owner of the trademark. The guidelines recognise that in a number of situations the return on marketing Y[lanala]k eYq Z] km^Õ[a]fl Yf\ appropriate. it would be necessary to determine how the marketer should be compensated for those activities.International tax Taxpayers must look at marketing intangibles again G=. In some cases.< ljYfk^]j hja[af_ _ma\]daf]k The OECD guidelines recognise that \a^Õ[mdl ljYfk^]j hja[af_ hjgZd]ek [Yf arise when marketing activities are undertaken by enterprises that do not own the trademarks that they are promoting. For example. the distributor actually bears the cost of its marketing activities (where there is no arrangement for the owner to reimburse the expenditures). Where. a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for l`] Z]f]Õl g^ alk gof \akljaZmlagf activities. that economic ownership. perhaps through a decrease in the purchase price of the product or a reduction in royalty rate. however. the issue is the extent to which the distributor should share in l`] hgl]flaYd Z]f]Õlk ^jge l`gk] activities. In such a case. it is when the investment crosses the bright line of routine expenditure into the realm of non-routine. According to the OECD. the distributor’s share of Z]f]Õlk k`gmd\ Z] \]l]jeaf]\ ZYk]\ on what an independent distributor would obtain in comparable circumstances. likely in the form of In general. 51 . The court in this case espoused the so called bright line test.

is created. which can be important to maintain the value of the trademark. the foreign AE needs to suitably compensate the domestic enterprise in respect of the advantage obtained by it in the form of marketing intangible development the ruling also seems to recognise the bright line test. It is also possible that a new trademark or one newly introduced into a particular market 52 . Practical challenges Going by the above principles. the compensation for such contribution may be embedded in the royalty or tangible product pricing terms or may be covered by a separate service arrangement. The high court ruling in the case of Maruti Suzuki appears to be broadly consistent with the OECD approach to these issues. even though the ruling does not make an explicit reference to the guidelines for reaching its conclusions.>]Ylmj] Yjla[d]k Taxpayers must look at marketing intangibles again marketing intangibles. The essential point is to determine under what circumstances such a distributor or licensee can be deemed to have developed a marketing intangible af Af\aY& Kh][aÕ[Yddq$ l`] im]klagf ak whether the distributor or licensee is performing the normal functions of a distributor or licensee or is providing assistance (services) to the foreign parent for the development of the parent’s marketing intangible or is the developer of marketing intangibles. though there are a number of open akkm]k l`Yl Ögo ^jge l`] ]d]e]flk g^ the paradigm. By holding that if the AMP expenses incurred is more. The key question which arises is identifying the return attributable to marketing activities or to the contributions for intangible development or enhancement. income from the marketing intangible generally would need to be allocated among related parties in accordance with each party’s ka_faÕ[Yfl [gfljaZmlagfk lg l`] development or enhancement of the intangible’s value. A reference to this case law and to the bright line test can be found in the decision of the high court in the Maruti Suzuki case as well. al [Yf Z] \a^Õ[mdl lg \]l]jeaf] whether these expenditures have contributed to the success of a product. The ruling therefore provides a useful paradigm for the evaluation of transfer pricing issues in the context of marketing intangibles. A marketing intangible may obtain value as a consequence of advertising and other promotional expenditures. The critical issue concerns the determination of when a distributor or a licensee will be deemed to be performing routine distribution or marketing functions. as opposed to providing services to a foreign owner of intangible property. However. Depending upon the contractual terms.

and the timing g^ hjg\m[l dYmf[`]k& L`] Z]f]Õlk g^ AMP spend may also be realised over a period of time. such as management policies. transfer pricing issues pertaining lg aflYf_aZd]k o]j] a\]flaÕ]\ Yk Y key area of concern to governments Yf\ lYphYq]jk$ \m] lg afkm^Õ[a]fl international guidance in particular gf l`] \]Õfalagf$ a\]flaÕ[Ylagf Yf\ valuation of intangibles for transfer pricing purposes. In these two projects. even though from an accounting perspective the amounts are expensed in the year in which they are incurred. market characteristics. market share. In many cases higher returns derived from the sale of trademarked products may be due as much to the unique characteristics of the product or its high quality as to the success of advertising and other promotional expenditures. Intangibles are also addressed in the July 2008 j]hgjl gf l`] YlljaZmlagf g^ hjgÕlk lg permanent establishments. The level and nature of AMP spending can also be affected by a variety of business factors. Further. Considering the importance of transfer pricing aspects of intangibles. 53 . OECD guidance on the transfer pricing aspects of intangibles is found in the guidelines. the OECD is now considering starting a new project on this issue which could result in a revision of chapters VI and VIII of the guidelines. the brightline between routine and non-routine AMP expenses could vary for each industry and even within the same industry it could be quite company kh][aÕ[& L`]k] akkm]k [gmd\ eYc] ][gfgea[ Z]f[`eYjcaf_ \a^Õ[mdl& OECD considers intangibles The OECD has recently completed its work on two transfer pricing projects which has resulted in the revisions to the transfer pricing guidelines. especially in chapters VI and VIII.International tax Taxpayers must look at marketing intangibles again may have no value or little value in that market and its value may change over the years as it makes an impression on the market (or perhaps loses its impact). These revisions cover issues relating to [gehYjYZadalq Yf\ hjgÕl e]l`g\k Yf\ transfer pricing aspects of business restructuring.

These issues can create ka_faÕ[Yfl lYp ]phgkmj] Yf\ [Yf disrupt a taxpayer’s transfer pricing policy and planning. For the MAP to work effectively. Multinational enterprises (MNEs) in India are likely to face disputes on these issues. disputes could arise in application of the principles to the factual matrix of taxpayers as well as on account of the practical challenges in economic benchmarking. resolution through the MAP may need to be given due consideration. especially on these issues. discussed earlier. Therefore. economic double taxation cannot be avoided. If a complete win is not obtained.>]Ylmj] Yjla[d]k Taxpayers must look at marketing intangibles again In the context of India’s nascent transfer pricing rules. The key matters that would need to be examined include:  The contractual arrangements between the trademark or brand name owner and the Indian Y^ÕdaYl]$ af hYjla[mdYj \mjYlagf of the agreement. In light of the ruling. taxpayers may need to consider resolution of the dispute either by way of litigation or by way of mutual agreement procedure (MAP). answers to a number of challenges posed by intangibles are likely to evolve only gradually. the competent authorities should have common ground for transfer pricing 54 . is not always certain. it would be useful for MNEs with Indian Y^ÕdaYl]k lg j]na]o l`]aj afljY%_jgmh arrangements for India relating to trademarks and brand names. Litigation can be costly and time consuming procedure. The ability to foresee winning in litigation. nature of the rights obtained and who bears the costs and risks of the marketing activities  Whether the level of marketing activities performed by the Af\aYf Y^ÕdaYl] ]p[]]\k l`Yl performed by comparable uncontrolled enterprises The extent to which the marketing activities would be expected lg Z]f]Õl l`] gof]j g^ l`] trademark or brand name and/or l`] Af\aYf Y^ÕdaYl] O`]l`]j l`] Af\aYf Y^ÕdaYl] is properly compensated for its marketing efforts or activities that result in development or enhancement of the intangible property   In the absence of a mechanism for advanced pricing agreements in the law for achieving upfront certainty on these issues. even though the high court decision in the case of Maruti Suzuki has started the evolution process. Even though the high court decision could provide a broad analytical framework for examining the issues.

He now specializes in cross-border structuring and transfer pricing/supply chain planning. he has been serially rated as amongst the leading tax and transfer pricing advisors in the country by Euromoney and the Legal Media Group. With Indian transfer pricing jmd]k fgl `Ynaf_ kh][aÕ[ jmd]k j]dYlaf_ lg aflYf_aZd] hjgh]jlq al ak \a^Õ[mdl to see how a common ground could emerge.ey. ideation and tax solutions for the India tax practice.400+ tax professionals in 9 cities across India. He is an international tax specialist and a member of the Tax Knowledge & Solutions Group**. transfer pricing planning. the project may also help in narrowing the disparity that may exist between countries that have substantial experience on these issues and countries such as India with limited experience. Srini has worked with some of the world’s leading multinational companies across a range of Direct Tax specializations. Reprinted with the permission of Euromoney PLC © 2011. In recent years. All rights reserved throughout the world.com *Ernst & Young India’s Tax & Regulatory services practice comprises 60+ tax partners and 1.ey. 55 . December 2010. In addition. A widely respected tax professional.International tax Taxpayers must look at marketing intangibles again rules.nayak@in. JYb]f\jY JYb]f! FYqYc is a director at Ernst & Young India. innovation. Rajen has considerable experience in advising companies on cross-border transactions. Consecutively rated the past 8 years as India’s La]j%A lYp Õje Zq =mjgegf]qÌk Afl]jfYlagfYd LYp Review. it has also emerged as the Most Reputed Tax Firm in India for the second consecutive year in the TNS Global Tax Monitor Survey. KjafanYkY Kjafa! JYg is a partner at Ernst & Young India and the National Director of our Tax & Regulatory Services practice*. especially if the negotiations involve a jurisdiction which has more detailed guidance. controversy management and international tax planning. He is based in our :]f_Ydmjm g^Õ[]& You can write to Rajen at: rajendra. He is based af gmj :]f_Ydmjm g^Õ[]& You can write to Srini at: srinivasa.com **The Tax Knowledge & Solutions Group houses senior tax technical specialists focused around research.rao@in. The proposed project of the OECD could help in establishing this common ground on transfer pricing aspects of intangibles.

rather than hjgna\] Z]f]Õlk lg l`] j][aha]fl& By sourcing services from within the group. tax authorities are concerned that this issue may be open to be used by companies through an aggressive tax planning approach. since the objective of performing such activities is more to safeguard its vested ownership interest and protect the investment. ÕfYf[]$ kYd]k'eYjc]laf_$ ]l[&! Km[` shared services would typically not include within their ambit. as with any other intra-group transaction. activities performed by the MNC in the nature of “shareholder activities”. such intra-group service transactions also attract Transfer Pricing (TP) provisions. 56 . Understandably.>]Ylmj] Yjla[d]k Transfer pricing management fees: are you doing it right? Sanjay L Kapadia CNBC The Firm website. 25 November 2010 I t is a common practice among group entities of a multinational corporation (MNC) where one entity (not necessarily the ultimate parent) renders group shared services (in the nature of legal. the MNC ensures that the skills/efforts that are required for performing the service are not necessarily acquired by each ]flalq3 afkl]Y\ l`] EF. Z]f]Õlk Zq one entity specializing in providing the services and the other entities Z]f]Õlaf_ ^jge l`] kYe]$ l`]j]Zq also reducing to a group extent (if not eliminating altogether) the duplication of skills/efforts. human resources. If used properly. information technology. administrative. Tax authorities’ approach One of the important issues that draw the attention of the tax authorities worldwide is the arms length nature of the compensation paid for intragroup services to related entities by way of management or intra-group fees. management fees are one of the important tax planning tools. Thus. while such intra-group services undoubtedly create a win-win situation for both the provider/ recipient of the service.

In addition. Tax authorities have not appreciated lYphYq]jkÌ Yj_me]flk l`Yl Z]f]Õlk$ at times. In this regard. through appropriate documentation. the Hon’ble Tribunal upheld the approach of the LH g^Õ[]j g^ \]fqaf_ Y lYp \]\m[lagf in respect of management fees paid lg _jgmh Y^ÕdaYl] kaf[] l`] j][aha]fl taxpayer was unable to prove that it had indeed received economic/ commercial value from such intragroup services. L`] ÉZ]f]Õl l]klÊ For the purpose of justifying the arm’s length nature of a management fee. it would be essential to bring out the distinction between and quality and standard of the services that would have been obtained from the third parties vis-à-vis those gZlYaf]\ ^jge Y _jgmh Y^ÕdaYl]& It is essential to note that broad and general explanations offered by Indian service recipients relating to l`] k]jna[]k'Z]f]Õlk j][]an]\ Yf\ allocation methodologies have not kYlakÕ]\ l`] Yml`gjala]k o`g afkakl on detailed back-up calculations. had such services not been availed ^jge alk _jgmh Y^ÕdaYl]& . and that it has derived Z]f]Õl ^jge km[` k]jna[]k& Af gl`]j words. How to defend in a tax/TP audit A service agreement and the charge out methodology would be something which the tax authorities would want to examine.d]Yjdq$ the entire onus to substantiate the payment and avail the tax break is on the tax payer. The authorities may question the reasons for not availing the services from third parties. the service recipient would need to establish. workings and related documentation `a_`da_`laf_ l`] kh][aÕ[ Z]f]Õlk derived by the Indian entity.International tax Transfer pricing management fees: are you doing it right? A recent judgment of the Bangalore Bench of the Income tax Tribunal has brought into limelight the importance of this issue in the context of Indian TP scenario. and that it would have either sourced such services from a third-party service provider or would have developed such capabilities internally. the authorities may also want to verify the authenticity of the cost base of the service provider so as to ensure that only those costs are pooled in (both direct and indirect costs) which have been actually incurred in providing the services. actual receipt of services. could be intangible and may not be always documented objectively. it needs to be demonstrated that the service recipient has received economic value from the services. In this case. 57 .

All rights reserved throughout the world KYfbYq D CYhY\aY is a partner at Ernst & Young India. Cross-border tax planning and Tax Effective Supply Chain Planning solutions and services to the largest multinationals operating in the country. Telecommunications and Entertainment sectors. It would therefore be useful for MNCs not only to relook at intra-group services their transfer pricing models but also assess the need to strengthen the related \g[me]flYlagf l`Yl ogmd\ ^mdÕd the legislative requirements of the respective tax jurisdictions. He has co-authored BCAS’s Transfer Pricing Manual and actively contributes articles to International Tax Review.kapadia@in.>]Ylmj] Yjla[d]k Transfer pricing management fees: are you doing it right? To summarize. he focuses on Technology.com *Our International tax services practice in India comprises 500 professionals who provide Transfer Pricing Documentation & Advisory (including Litigation). the same may be looked upon with some measure of skepticism by the tax authorities as a planning tool. An international tax* specialist. while intra-group management services are common to MNC business models. 58 .ey. He is based in our EmeZYa g^Õ[]& You can write to Sanjay at: sanjay1. Reprinted with the permission of CNBC The Firm. BNA etc.

A related issue is when the trademarks. the transfer pricing enhance the value of the trademark environment in India has moved on l`Yl ak gof]\ Zq Yfgl`]j Y^ÕdaYl] af rapidly. the last 18 months another country. the Indian government introducing or proposing aspects of marketing intangibles for a licensing ka_faÕ[Yfl arrangement changes to the With 2011 heralding a decade since between transfer pricing transfer pricing provisions were the Indian laws. `Yk k]]f ka_faÕ[Yfl ljYfk^gjeYlagf g^ In a recent ruling. entered into a activity. Srinivasa Rao company and multinational and Rajendra Nayak of Ernst & Young its associated enterprises explain how recent landmark enterprise (MNEs) decisions are likely to have a (AE). One of the most challenging issues sale and after sale service of Suzuki in transfer pricing pertains to the products and parts. India joint increase in venture the audit company of Suzuki. and the introduced in India. Since its Y^ÕdaYl] af gf] [gmfljq ka_faÕ[Yfldq introduction. Notably. The experiencing ka_faÕ[Yfl aehY[l gf l`] f]pl l]f taxpayer. an ka_faÕ[Yfl years of transfer pricing in the country. This article provides an license agreement with Suzuki under overview of these developments. the terms of which Suzuki agreed to provide technical collaboration and Marketing intangibles license necessary for manufacture.International tax Transforming India’s transfer pricing landscape Srinivasa Rao and Rajendra Nayak International Tax Review. Suzuki also creation and use of intangible granted exclusive right to use its property. November 2010 I ndia’s transfer pricing provisions promotional efforts of a marketing were introduced in 2001. the Delhi High the Indian transfer pricing landscape Court in the case of Maruti Suzuki with the courts pronouncing some Ltd has ruled on the transfer pricing landmark judgments. The taxpayer was 59 .

On an appeal to the high court by the taxpayer. the taxpayer had incurred huge AMP expenditure to develop the Suzuki brand in India and Suzuki should have compensated the taxpayer for the assistance provided in developing the marketing intangibles. In such a situation the arm’s length price for the arrangement would need to be determined taking into consideration all the rights obtained and obligations incurred by the associated enterprises. Accordingly. The test is to determine what a comparable entity placed in the position of the taxpayer would have done. non-routine AMP expenditure was adjusted as being the value of the marketing aflYf_aZd]k Y[[jmaf_ lg l`] Z]f]Õl of Suzuki. would not entail a payment from the foreign AE to the domestic entity so long as the Z]f]Õl g^ km[` ZjYf\ fYe] Y[[jm]k to the Indian enterprise alone. The court also held that use of a trademark belonging to a foreign AE. to determine whether the AMP expenses incurred are more than what a similarly situated and comparable enterprise would have incurred it would be necessary to identify appropriate comparables for the purpose of comparison. According to the tax authority. Further. With regard to the AMP expenditure. payment of royalty should satisfy the arm’s length test. The ruling therefore provides a useful paradigm for the evaluation of transfer pricing 60 . the owner of the intangible needs to suitable compensate the licensed user for the advantage obtained by it in the form of brand building and increased awareness of the intangible. the court held that in the case of AEs.>]Ylmj] Yjla[d]k Transforming India’s transfer pricing landscape required to pay a royalty for the use of the intangible property. the court held that if AMP expenses af[mjj]\ Zq l`] Af\aYf Y^ÕdaYl] mkaf_ the trademark are more than what a similarly situated and comparable enterprise would have incurred. marketing and promotional (AMP) expenses incurred in promoting Suzuki intangibles in India. by itself. The tax authority proposed to make an adjustment by disallowing the royalty paid for the use of trademarks and by disallowing the advertising. The above ruling appears to be broadly consistent with the OECD approach to intangibles even though the ruling does not make an explicit reference to the guidelines in reaching the conclusion.

The approach adopted by the tax authorities to justify these 61 . though there are a fmeZ]j g^ gh]f akkm]k l`Yl Ögo ^jge the elements of the paradigm.gmjl af j]khgfk] lg Y h]lalagf Õd]\ Zq Maruti. The taxpayer. During the audit proceedings. the tax authority included companies having super hjgÕlk Zq fgjeYdakaf_ l`]aj hjgÕlk3 excluded foreign exchange gain earned by the taxpayer in order to Intra-group IT services Globalization has led many MNEs lg ]klYZdak` ZY[c%g^Õ[] Yf\ k`Yj]k services operations in India to take advantage of savings inherent in low-cost labour markets such as Af\aY& ?]f]jYddq$ l`]k] Af\aYf Y^ÕdaYl]k operate as captive service providers insulated from all kinds of business risks. In a recent development. the Supreme Court does not seem to have commented or annulled the principles laid down by the high court on marketing intangibles. the tax authority rejected the set of comparables that were selected by the taxpayer and undertook a fresh search for the comparable data and determined the arm’s length price to be at 22. In a recent ruling. While undertaking such an assessment. the Bangalore Tribunal in the case of SAP Labs India Pvt Ltd has adjudicated on the determination of the arm’s length price with respect to the software development services rendered by the taxpayer to its AE.International tax Transforming India’s transfer pricing landscape issues in the context of marketing intangibles. ordered the transfer pricing g^Õ[]j lg hYkk `ak gj\]j gf l`ak akkm] without considering the directions or observations of the high court. The taxpayer applied the transactional net margin method as the most appropriate method E9E! Yf\ \]l]jeaf]\ alk f]l hjgÕl margin to be within the arm’s length range. the Supreme . a wholly-owned subsidiary of a German MNE is engaged in the business of software development and related services to the MNE at a cost plus 6% mark up basis. margins is by adopting a different approach to accepting/rejecting comparable data as compared to that adopted by the taxpayer.24%. However. Recent audit experience indicates that tax authorities expect the service providers to earn a margin in the range of 25% to 30% on operating costs as compared to the margins determined by the taxpayers which are in the range of 10%-15% on costs.

Legislative developments The last 18 months has seen ka_faÕ[Yfl [`Yf_]k Z]af_ afljg\m[]\' proposed to the country’s transfer pricing law through the Finance (No 2) Act. comparable companies that have margins less than the taxpayer’s mark-up should be excluded. 2009 (FA 2009) and the Direct Taxes Code 2010 (DTC). taxpayers would argue that the adjustment should be made upto the lower end of the 5% range of the proposed transfer pricing adjustment. 62 .57% on [gkl Yf\ Yddgo]\ l`] Z]f]Õl g^ l`] - range under the erstwhile provisions of the income tax law. In cases where the revenue authorities proposed an adjustment to the transfer price. While this ruling provides guidance on some transfer pricing issues faced by taxpayers. The interpretation of the 5% range has been subject to disputes between taxpayers and the revenue authorities. the arm’s length price shall be taken to be the arithmetic mean of such prices. Under the erstwhile provisions.>]Ylmj] Yjla[d]k Transforming India’s transfer pricing landscape [gehml] l`] f]l hjgÕl eYj_af Yf\ made an adjustment without giving l`] Z]f]Õl g^ l`] - jYf_]& The tribunal having regard to the ^mf[lagfYd hjgÕd] g^ l`] lYphYq]j `]d\ that comparables having extreme results should neither be considered nor can their results be normalised for inclusion. The tribunal also held that as the taxpayer’s transfer pricing policy was cost plus 6%. the taxpayers were given the option to adopt a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. 9hhda[Ylagf g^ l`] - jYf_] The provisions on the computation of the arm’s length price under the tax law provide that where more than one price is determined by the MAM. especially rejecting potentially comparable companies merely because they have margins lower than the tested party’s markup. thereby creating bias in favour of comparables with higher eYj_afk g^ hjgÕlYZadalq& L`] ljaZmfYd also ruled that foreign exchange gain arising from ordinary business activities should be considered as an operating item. The tribunal determined the margins at 20. it also raises some questions on the approach to dealing with comparables that have extreme results.

L`] eYaf Z]f]Õlk g^ YhhjgY[`af_ the DRP are that the tax demand proposed by a tax authority is kept in abeyance until disposal of the matter by the DRP. 9dl]jfYl] \akhml] j]kgdmlagf e][`Yfake The law was amended by the FA 2009 to provide for an ADR mechanism. However. if the transfer price is USD100 and if the arm’s length price is determined as USD110. the new provisions would result in adjustment of USD10 (110-100). Under the new provisions introduced in the FA 2009. under the previous provision that the revenue authorities would determine the adjustment at USD10 (110-100) while the taxpayer could have limited the adjustment to USD4. However. Thus in the example above. the revenue authorities ogmd\ Yj_m] l`Yl l`] Z]f]Õl g^ jYf_] was not available where variance between the proposed adjustment and the taxpayer’s transfer price exceeded 5%. the taxpayer would not get l`] Z]f]Õl g^ l`] - jYf_] Yf\ l`] arithmetic mean computed shall be deemed to be the arm’s length price. Under the ADR mechanism. the transfer price would be accepted as the arm’s length price. a subsequent administrative circular issued by the tax administration suggests that the provisions would apply for the assessment year 2009-10 onwards.International tax Transforming India’s transfer pricing landscape However. if such difference is greater than 5%. The DRP now exists in eight cities with Mumbai and Delhi having two panels. The memorandum introducing the FA 2009 suggests that the amended provision would apply for orders passed after 1 October 2009. However. the <JH j]hdY[]k l`] Õjkl%d]n]d Yhh]ddYl] 63 . To illustrate. a dispute resolution panel (DRP) comprising of three commissioners of income tax was constituted in various cities. The taxpayer’s position was supported by various tribunal judgments. The ADR mechanism provides a fast track to dispute resolution as the DRP is under an obligation to dispose the matter within nine months. An administrative instruction issued by the tax administration also [dYjaÕ]k l`Yl mk] g^ l`] 9<J mechanism is optional for the taxpayer. there appears to be some ambiguity on the effective date of this amended provision. L`] Ye]f\e]fl k]]ck lg [gfÕje l`] position of the revenue authorities.5 (95% of (110-100)). if the variation between the arithmetic mean of the comparable prices and the taxpayer’s transfer price is not more than 5% of the latter. Further.

safe harbour rules were proposed to be introduced under the transfer pricing regulations by the FA 2009. To further provide administrative simplicity for small taxpayers and allocate more resources to the examination of larger transactions and taxpayers. The Central Board of Direct Taxes (CBDT). including the mutual agreement procedure of an applicable tax treaty. especially on selection of comparable data by the tax authority. the panel may be reluctant to disturb any substantive or legal issues of dispute. L`]k] jmd]k Yj] q]l lg Z] fglaÕ]\ and it will be interesting to see the form and the manner in which these regulations are introduced. Safe harbours The Indian transfer pricing legislation already incorporates some administrative safe harbours such as the alleviation of documentation requirements and examination/ scrutiny procedures for small taxpayers. Suggestions have also been made to the government to introduce some structural changes in the ADR mechanism such as having independent and full time members as well as empowering the DRP to engage in a negotiated settlement of the dispute. Advance pricing agreement To date. the apex authority for policy and administration of direct taxes in India has been empowered to notify the safe harbour rules in this regard. Initial experiences before the DRP suggest that while taxpayers may be getting an additional opportunity to present their factual positions. while the taxpayer has right of further appeal in case of an adverse order. need to consider evaluating alternative approaches to controversy management in case of adverse orders from the panel at an early stage. In case the DRP’s order is in favour of the taxpayer. the tax authority is bound by the order and is precluded from further appeal. therefore.>]Ylmj] Yjla[d]k Transforming India’s transfer pricing landscape authority under the hierarchy of appeals under the tax law as the DRP orders are appealable before the tribunal. to provide for circumstances under which the income tax authorities will accept the transfer price declared by the taxpayer. an APA programme has not been implemented in India and the taxpayer has to go through the normal compliance machinery available to him under the law. Taxpayers may. 64 .

However. which was tabled in parliament on 30 August 2010 and is proposed to come into effect from 1 April 2012. Under the India-US tax treaty. 9H9k ogmd\ Z] nYda\ ^gj Y kh][aÕ]\ h]jag\$ kmZb][l lg Y eYpaeme g^ Õn] years provided there are no changes on law on the basis of which the APA was entered into. a transfer pricing adjustment in the `Yf\k g^ l`] Af\aYf Y^ÕdaYl] [gmd\ potentially result in economic double taxation for the MNE. if the MNE is not able to obtain a correlative relief. the dispute is expected to be resolved within a period of two years and also provides for obtaining a stay on collection of the disputed taxes during the pendency of the MAP proceedings. The APA provisions also seem to provide a fair degree of Ö]paZadalq lg l`] lYp Y\eafakljYlagf af making adjustments to arrive at an acceptable transfer price. the APA would be binding only on the taxpayer and the transaction to which the agreement has been entered into. has empowered the CBDT to formulate a scheme for introducing APAs where the taxpayer can approach the CBDT for determination of the arm’s length price in relation to an international transaction which may be entered into by the taxpayer. It has been reported in the media that pursuant to a MAP. transfer pricing being a valuation issue. A MAP is an alternate dispute resolution mechanism where the competent authorities (CA) of both countries endeavour by mutual agreement to resolve any issue. The proposed resolution covers nearly 35-40 taxpayers relating to FY 2003-04 and 2004-05 65 . One expects the CBDT to give due consideration to all the aspects associated with the APA program before notifying the applicable rules to ensure successful implementation in India as well. These factors have made MNEs take the mutual agreement procedure (MAP) route. the provisions seem to envisage only a unilateral APA. the US and Indian CAs have proposed to resolve transfer pricing disputes involving provisions of intra-group information technology k]jna[]k Zq Yf Af\aYf Y^ÕdaYl]k lg Y US MNE. Under the DTC. Administrative developments Af\aY%MK [geh]l]fl Yml`gjala]k The transfer pricing adjustments eY\] Zq lYp g^Õ[]jk af Af\aY \mjaf_ audit proceedings is often coupled with a time consuming dispute resolution mechanism for the taxpayer to seek any redress. Further. The DTC. at this stage. The rules and scheme for APAs are q]l lg Z] ^gjemdYl]\ Yf\ fglaÕ]\ af India. is excluded from its scope.International tax Transforming India’s transfer pricing landscape Although a mechanism exists in India for advance rulings.

approved the revision to the 1995 Transfer Pricing Guidelines. This is particularly true for issues pertaining to comparability. especially. as against their transfer pricing policy of 10% to 15% on operating costs. with some deviations. It has been reported that the proposal involves the CAs agreeing to accept a markup on costs of in the range of 17% to 24%. application of transaction net margin e]l`g\ Yf\ hjgÕl khdal e]l`g\ Yf\ \]l]jeafYlagf g^ l`] f]l hjgÕl margin indicator. it will have effect only for the kh][aÕ[ lYphYq]j ^gj l`Yl j]d]nYfl tax year and for that particular issue. Taxpayers should review their transfer pricing practices in light of the revised guidelines and assess impact. Indian transfer pricing rules are broadly based on the OECD standard. Nevertheless. One would also hope that the government could give due consideration to the revisions and look at aligning some aspects of the Indian rules with OECD thinking. hjgÕl%ZYk]\ e]l`g\k& 9 f]o [`Yhl]j providing detailed guidance on the transfer pricing aspects of business restructurings has also been included. on 22 July 2010. Recent trends in India indicate that transfer pricing will continue to be a contentious 66 . comparability analysis and application of transactional Pragmatic risk Transfer pricing audits today go beyond pricing of products and include complex issues like services and intangibles. The OECD has issued revisions to the transfer pricing guidelines relating to hierarchy of transfer pricing methods. OECD revisions The OECD council. Where a MAP resolution has been arrived at and accepted for a particular issue for a relevant tax year. The revisions introduce Y fmeZ]j g^ ka_faÕ[Yfl [dYjaÕ[Ylagfk and should help in providing clarity to taxpayers as well as to the Indian tax authority on a number of issues where the Indian rules are silent or do not contain adequate detail/ guidance. Some of the guidance contained in the revisions has already been endorsed by recent case laws in India. depending upon the year and nature of activity. and over the years.>]Ylmj] Yjla[d]k Transforming India’s transfer pricing landscape who were subject to transfer pricing adjustments in the range of 25% to 30% on operating costs. A MAP resolution does not typically set a binding precedent for either the taxpayers or the tax authority for adjustments or issues relating to subsequent years or for CA discussions on the same issues for other taxpayers. courts in India have acknowledged the relevance of the OECD guidelines while interpreting Indian rules. The taxpayers involved have the option to either accept the MAP resolution or follow the course of appeal prescribed under the country’s tax law. in a similar fact pattern. it does provide an indication of settlements that could be expected from MAP proceedings.

Rajen has considerable experience in advising companies on cross-border transactions. In recognition of this. 67 . JYb]f\jY JYb]f! FYqYc is a director at Ernst & Young India. provision for safe harbours and proposals to introduce APAs have been welcomed by taxpayers as this will help in reducing controversies and disputes and also provide for a resolution in a manner that is fair and impartial to both the tax administrators and the taxpayers. the steps taken by the government to set up an ADR mechanism. According to the OECD it is a good practice for taxpayers to set up a process to establish. He is an international tax specialist and a member of the Tax Knowledge & Solutions Group**. transfer pricing planning. innovation. ideation and tax solutions for the India tax practice. controversy management and international tax planning.ey. You can write to Rajen at: rajendra.International tax Transforming India’s transfer pricing landscape issue for taxpayers. their complexity. Srini has worked with some of the world’s leading multinational companies across a range of Direct Tax specializations. taking into account the size of the transactions. level of risk involved.com *Ernst & Young India’s Tax & Regulatory services practice comprises 60+ tax partners and 1. it has also emerged as the Most Reputed Tax Firm in India for the second consecutive year in the TNS Global Tax Monitor Survey. he has been serially rated as amongst the leading tax and transfer pricing advisors in the country by Euromoney and the Legal Media Group. Such an approach would conform to a pragmatic risk management strategy. He is based af gmj :]f_Ydmjm g^Õ[]& You can write to Srini at: srinivasa.ey. and whether they are performed in a stable or changing environment.nayak@in. He now specializes in cross-border structuring and transfer pricing/supply chain planning. KjafanYkY Kjafa! JYg is a partner at Ernst & Young India and the National Director of our Tax & Regulatory Services practice*.rao@in. Taxpayers are also concerned about the dispute resolution process. Reprinted with the permission of International Tax Review. December 2010. monitor and review their transfer prices. Consecutively rated the past 8 years as India’s La]j%A lYp Õje Zq =mjgegf]qÌk Afl]jfYlagfYd LYp Review. In recent years. All rights reserved throughout the world. A widely respected tax professional.com **The Tax Knowledge & Solutions Group houses senior tax technical specialists focused around research.400+ tax professionals in 9 cities across India. It would also be advisable for taxpayers to consider OECD’s risk management recommendation contained in the 2010 revision to the transfer pricing guidelines.

various new set of regulations impacting M&A are also under discussions. etc is proposed to replace the existing Income tax Act. SEBI takeover regulations governing transactions in shares of listed companies are all set for a change with proposals like increasing the threshold limit for mandatory open offer from 15% to 25%. This includes changes to tax law which brings transfers of shares for inadequate consideration within the ambit of taxation for the recipient.>]Ylmj] Yjla[d]k Transaction tax This new phase of economic and corporate revival has arrived with a lot of changes in the regulations governing M&A. The progress in the Vodafone case is making indirect transfer of assets in India an ‘eye-catcher’ for the multinationals having or proposing to do such transactions. In this section 69 | Winds of change 72 | Draft acquisition norms continue to draw attention 73 | Implications of Vodafone Ruling 76 | Inbound activity buoyant with global companies scouting for M&As 78 | The role of taxation of M&A in India 68 . For instance. Also. Further. All this and more is discussed in the section on Transaction tax. new pricing guidelines have been issued by RBI which governs prices for transactions involving transfer of shares between non residents and residents. the Direct Taxes Code having far reaching consequences in the form of general anti-avoidance rules taxation of indirect transfer of capital asset in India.

the difference between “aggregate fair market value” of shares of a closely held company and the consideration paid would be taxed in the hands of “recipient” of such shares. post 1 June. 2010. While the Explanatory Memorandum to The Finance Act. Earlier. Central Board of Direct Taxes (CBDT) `Yk Ydkg fglaÕ]\ l`] e]l`g\gdg_q ^gj determination of “fair market value” of shares of closely held companies. 13 June 2010 T he Finance Act.Transaction tax Winds of change Amrish Shah Financial Express. 2010 The Finance Act. These provisions have come into effect from 1 June this year. the manner in which the relevant sections introduced in the Income Anti-abusive provisions of The Finance Act. does mention the intention behind introduction of these provisions. have become effective from 1 June and the RBI pricing guidelines have become operative since May. At the same time. has introduced anti-abuse provisions to include within its ambit transactions involving the transfer of shares of a closely held company where Y Õje af[dm\af_ Y daeal]\ daYZadalq partnership (LLP) or closely held company is a recipient. 9k h]j l`] fglaÕ[Ylagf$ l`] nYdmYlagf for equity shares shall be determined as per the “net asset value” method whereas. unlisted shares at prices much below their fair market value — for no or inadequate consideration. 2010. it shall be at such price as may be fetched in the open market on the valuation date. Given that the relevant provisions of The Finance Act. The provisions have been introduced to prevent the practice of transferring 69 . Simply stated. as well as recent circulars issued by the Reserve Bank of India (RBI) regarding pricing of share transfers between residents and non-residents is bound lg `Yn] ka_faÕ[Yfl aehY[l gf e]j_]jk and acquisitions (M&A) involving unlisted companies’ shares in India. 2010. 2010. it is worthwhile to study these legislative changes and attempt to assess their implications on transactions. amalgamations and demergers. the anti-abuse provisions were applicable only if an individual or a Hindu undivided family (HUF) was a recipient. for other shares/securities. exceptions have been carved out in respect of share transfers through transactions like business reorganizations.

  However. Impact of change in pricing guidelines by RBI A certain amount of ambiguity has arisen with respect to valuing transfers of shares of closely held companies between residents and non-residents with the recent amendment to the pricing guidelines issued by the RBI. 1961. namely. This has given rise to considerable debate as to applicability of these provisions to following types of transactions:  Transactions involving bonus issues. where percentage shareholding of all shareholders remains same pre and post the transaction. it is hoped that the provisions shall be weighed in the background of the objects for which they were introduced. preferential allotments. the price at  70 . capital reductions.  Buy-backs. but not the company itself). 1961 (gift. The revised RBI pricing guidelines provide that.:<L$ Yk l`] same may bind the tax authorities. Transactions which are exempt from tax (in the hands of transferor) under the current provisions of Income tax Act. it is also hoped that the interpretation may be relaxed in cases where the transaction is commercial and ZgfY Õ\] Z]lo]]f log h]jkgfk Yl arms’ length. to restrict taxability to cases where there is a deliberate attempt to evade/ avoid tax and/or to accomplish value transfer from one person to another through transfer of shares. put/call options. at less than “fair market value”.. etc. etc. etc. Transfer of shares of investee closely held companies by an amalgamating company to an amalgamated company as a part of the amalgamation (the present exceptions carved out from these anti-abuse provisions exempt only the shareholders of the amalgamating company. etc.) Transactions where a partner contributes shares of a closely held company to a partnership Õje Yk `ak [YhalYd hj]k]fldq$ the value at which such shares are recorded in the books of hYjlf]jk`ah Õje ak \]]e]\ lg be the transaction value for the purpose of computing capital gains tax in the hands of the contributing partner). inter-alia. It would only help if the legislative afl]flagf ak fglaÕ]\ Zq . Further. rights issues.>]Ylmj] Yjla[d]k Winds of change tax Act. seems to indicate that these anti-abuse provisions would be triggered in any situation where Y Õje gj Y [dgk]dq `]d\ [gehYfq “receives for less than fair market value” shares of a closely held [gehYfq ZYjjaf_ []jlYaf \]Õf]\ exceptions). transfer of capital asset (including shares) between parent companies and their 100% subsidiaries.

9ejak` K`Y` is a partner at Ernst & Young India and leads our Transaction Tax practice*. He is based in our EmeZYa g^Õ[]& You can write to Amrish at: amrish. developing corporate re-organization plans. In light of the above. mergers. Over the past 17 years he has advised clients in the areas of acquisitions.:<L ^gj l`] Z]f]Õl g^ l`] Ykk]kk]]k Yf\ ^gj the sake of clarity. supporting post-deal integrations. 71 . to curb bogus capital building and money laundering. re-organizations.ey. keeping in mind the paradigm shift in the governing legislations.shah@in. conducting tax due diligence and regulatory reviews.Transaction tax Winds of change which the shares of Indian unlisted companies can to be transferred by a non-resident to a resident shall not be more than the fair value determined by SEBI-registered merchant banker or a chartered accountant as per the É\ak[gmfl]\ [Yk` ÖgoÊ e]l`g\& L`mk$ \a^Õ[mdlq eYq l`mk Yjak] af cases where the pricing as per the . demergers. At the same time. there is currently no recourse available to settle the ambiguity. it can only be hoped that the authorities would adopt a view that is likely to lean in favour of an interpretation which supports the object behind introduction of the anti-abuse provisions—which is to act as a counter-evasion mechanism to prevent laundering of unaccounted income. However.:<L fglaÕ[Ylagf f]l Ykk]l nYdm]! is higher than the pricing as per the RBI circular (“discounted cash ÖgoÊ e]l`g\! Yk af km[` [Yk]k$ l`] resident Indian purchaser will not be able to buy shares at the price e]flagf]\ af l`] . corporate restructuring. until such issues are not kh][aÕ[Yddq [dYjaÕ]\ Zq l`] . and establishment of joint ventures. it shall continue to be a wait and watch syndrome! Reprinted with the permission of The Indian Express Limited © 2009. etc. it is but imperative that the transactions involving closely held companies shares be structured carefully. All rights reserved throughout the world. Services include structuring transactions. international/corporate tax and business reorganization.com *Our Transaction tax practice comprises 100 specialists who assist clients across the transaction life cycle. divestments.:<L fglaÕ[Ylagf and may hence end up being unfairly taxed on the difference. and managing implementations and documentation. foreign investment consulting. Again.

>]Ylmj] Yjla[d]k Draft acquisition norms continue to draw attention Amrish Shah Economic Times. the removal of noncompete payments as an additional consideration to promoters would hjgna\] Y d]n]d hdYqaf_ Õ]d\ ^gj minority shareholders and upholds the principle of equity and fairness. Secondly. conducting tax due diligence and regulatory reviews. foreign investment consulting. All rights reserved throughout the world. 25 July 2010 Two major positive takeways The proposed increase in threshold limit for mandatory open offer from 15% to 25% gives a huge opportunity to corporates to raise money from private equity or other investor groups who did not want control.99% to avoid open offer. Two major concerns The proposed requirement of mandatory open offer for 100% from minimum 20% could place Indian acquirers in a disadvantageous position compared to foreign acquirers. international/corporate tax and business reorganization.com *Our Transaction Tax practice comprises 100 specialists who assist clients across the transaction life cycle. mergers. and establishment of joint ventures.ey. in case of change in control an open offer would not be required if the shareholders of the target company pass a special resolution. supporting post-deal integrations. demergers. corporate restructuring. developing corporate re-organization plans. the proposed draft has done away with the existing exemption in respect to “white wash” 9ejak` K`Y` is a partner at Ernst & Young India and leads our Transaction Tax practice*. Reprinted with the permission of The Economic Times © 2011. The mandatory open offer of 100% would require large capital outlay by the acquirers and in the absence of availability of bank ÕfYf[af_ af Af\aY ^gj km[` lYc]gn]jk$ al ogmd\ Z][ge] \a^Õ[mdl ^gj l`]e& Secondly. He is based in our EmeZYa g^Õ[]& You can write to Amrish at: amrish. provisions i.e. divestments. 72 .shah@in. but had to restrict their investment to 14. Services include structuring transactions. and managing implementations and documentation. Over the past 17 years he has advised clients in the areas of acquisitions. re-organizations.

many of which seem to have found acceptances with the Bombay High Court. The main argument of the Indian Revenue has been that the share purchase agreement (SPA) and other transaction In this case. The DTC will need to of shares of of which the factor in the court’s ruling on taxing the Cayman business cross–border transactions. 11 September 2010 T he much-awaited Bombay High Court judgement in the case of Vodafones purchase of Hutchisons erstwhile telecom business interest in India has been pronounced. is captured in the sale price of the shares and the gain made by the sale is a capital gain in the jurisdiction where the share is situated. consistently been that this is a case The Revenue also contended that in of transfer of shares of a foreign this case the transfer of share was company. A number of interesting and rather novel issues were raised by Revenue. a In the Vodafone case. Vodafone argued that the value of the business enterprise 73 . Accordingly.Transaction tax Implications of Vodafone ruling Sudhir Kapadia Economic Times. company but interest of includes transfer Hutchison in of the composite rights in Indian joint its joint venture telecom company in venture.which clearly gives rise to a India got transferred to Vodafone. assets situated in India. the HC agreed clearly establish Dutch company with the Revenues contention that that the subject acquired this is not a case of simpliciter matter of the shareholding transfer of shares. source of income arising in India and Vodafones contention has therefore is subject to tax in India. The ruling will transaction of a Cayman create a degree of uncertainty in is not merely company in respect of past transactions of a the transfer consequence similar nature. This being a case of transfer of shares of a Cayman company. documents Vodafone BV. the question of taxation in India should not arise.which under current Indian merely a mode or vehicle to transfer law cannot be taxed in India as the the bundle of business rights and location of the share is outside India.

>]Ylmj] Yjla[d]k Implications of Vodafone ruling Court’s decision The Bombay High Court observed that the controlling interest does not constitute a distinct capital asset for the purpose of the Indian tax law. Impact on cross-border transactions This ruling seems to suggest a fundamentally different approach to taxation of transactions where there is a transfer of controlling interest in India regardless of the fact that such transfer is effected by way of sale of shares of an overseas company.. the court has considered the commercial and business understanding between the parties and the various legal documents. sale of a foreign company not being subject to tax in India. the court agreed with Revenues contention that this is not a case of simpliciter transfer of shares but the transaction involves a variety of business rights and interest which are all located in India. However. which have already taken place and where the revenue department will make an attempt to take support of the Bombay High Court judgement to tax those transactions. The controlling interest is therefore not Yf a\]flaÕYZd] gj \aklaf[l [YhalYd Ykk]l independent of the shareholding.e. 74 . In other words. This will create a degree of uncertainty in respect of similar transactions. where there is not an outright sale of business in India but a large interest in the Indian company is indirectly transferred through shares of a foreign company. For example. In arriving at this conclusion. the high court seems to imply that part of sale consideration which relates to the value of the share of the Cayman company including controlling interest should not be subject to tax in India as the share is located outside of India. the earlier position should prevail i. in cases which can be distinguished on facts and especially in those situations where there is no transfer of business or other valuable commercial rights in India it will still be possible to argue against taxation arising in India.controlling interest arises ^jge l`] Y[imakalagf g^ Y km^Õ[a]fl number of shares in a company as would enable the shareholder to ]p]j[ak] ka_faÕ[Yfl nglaf_ hgo]j which would result in the control of the management of the company. Accordingly. Having said this. The high court has left it for the lYp g^Õ[]j lg Yhhgjlagf l`] af[ge] between what is attributable to these business rights in India and what is attributable to the shareholding outside of India. which were entered into to consummate transfer of business af Af\aY& L`] [gmjl `Yk kh][aÕ[Yddq held these bundle of rights and entitlements as capital assets and hence consideration attributable to such rights and entitlements situated in India would be subject to tax in India.

amongst other countries. India has thus joined China. Km\`aj CYhY\aY is a partner at Ernst & Young India and our Tax Markets Leader.com 75 . in attempting to tax indirect transfers and to this extent cross-border transactions will need to factor in the current view of Revenue as well as proposed changes in the DTC so as not to be caught by surprise at a later stage.kapadia@in. the DTC which will come into effect on 1 April 2012 kh][aÕ[Yddq kh]ddk gml l`] [gf\alagfk under which indirect transfer will be subject to tax in India.Transaction tax Implications of Vodafone ruling Direct Taxes Code 2010 (DTC) Interestingly. He has functional specialization in International Tax and has over 20 years of varied experience in advising companies.ey. All rights reserved throughout the world. Sudhir leads the client relationship management agenda for our tax practice and is the senior tax advisory partner ^gj Y fmeZ]j g^ l`] ÕjeÌk dYj_]kl [da]flk& He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international taxation. The tax policy direction seems to be to tax only those transactions where there is sale of substantial business interests in the Indian company and not where there is either portfolio sale or a sale of a block of shares not resulting in outright sale of the business in India. Reprinted with the permission of The Economic Times © 2011. He is based af gmj EmeZYa g^Õ[]& You can write to Sudhir at: sudhir.

it seems the exemptions may not be available to merger/demerger of foreign company into an Indian company. Taking clue from some of the recent transactions. but extend to service sector companies as well. currently. for M&A activities. For a closely held company. even if commercially not viable. in case of demerger. at least 51% of the Z]f]Õ[aYddq `]d\ nglaf_ hgo]j$ Yk Yl the end of immediately preceding ÕfYf[aYd q]Yj$ [gflafm]k lg Z] `]d\ Yl l`] ]f\ g^ ÕfYf[aYd q]Yj& L`ak k]]ek to permit the carry forward and set off. after China. as carry forward of losses will not be restricted only to companies having industrial undertakings. 22 September 2010 I ndia is the second most targeted nation among the BRIC nations. This means demerged business may need to be continued. Further. Technically. including [gflafmYf[] g^ Zmkaf]kk ^gj Õn] years. The business continuity test. The nature of business carried out by predecessor is now immaterial in an amalgamation. DTC seeks to introduce the concept of “business reorganization” as one between “residents”. on M&A activity. applicable only to amalgamation is now extended to demerger. even if there is a substantial change in shareholding compared to the year of incurrence of loss. which is expected to be effective from April 2012. it is proposed to cover 76 . Currently. certain exemptions (ensuring tax neutrality) are available in relation to merger/demergers and l`] na]o ak l`Yl l`ak Z]f]Õl ]pl]f\k even to merger/demerger of foreign company into an Indian company.>]Ylmj] Yjla[d]k Inbound activity buoyant with global companies scouting for M&As Narendra Rohira Financial Express. it shall be allowed if. The trend indicates that while investment bankers are upbeat about Indian companies going shopping abroad. Some changes are proposed on conditions for carry forward of losses. In this backdrop. the inbound activity is also expected to be buoyant with a lot of global companies scouting for acquisitions. it is pivotal to analyse the impact of the direct taxes code (DTC) 2010. the consideration now needs to be discharged in the form equity shares to shareholders of demerged company for tax neutrality.

which seems to go against the avowed objective of reducing litigation. supporting post-deal integrations. while planning their M&A. DTC. Indian companies. and managing implementations and documentation. if at any time in preceding 12 months.ey. has also sought to make taxation aspects of M&A wider and more transparent. Current law provides for considering cost as “nil” only for certain kh][aÕ]\ Ykk]lk& <]\m[lagf ^gj fgf% compete fees. Cost of acquisition of any asset. All rights reserved throughout the world.rohira@in. General anti-avoidance rule (GAAR) has been introduced to curb erosion of tax base on account of tax avoidance arrangements. Similarly. Thus. if cannot be determined. Reprinted with the permission of The Indian Express Limited © 2009. accordingly take necessary and timely steps to avoid unnecessary tax burden.Transaction tax Inbound activity buoyant with global companies scouting for M&As indirect transfers under the Indian tax ambit. Services include structuring transactions. This may cause considerable uncertainty and controversy. structuring and implementation of M&As. He has assisted various Private Equity players with acquisitions in India involving cross border structuring. controlled foreign company (CFC) aims to provide for taxation of passive income earned by a foreign company that is directly or indirectly controlled by a resident in India. The income not distributed to the shareholders by such foreign company is deemed to be distributed and consequently. 77 . FYj]f\jY Jg`ajY is a partner at Ernst & Young India and a member of our Transaction Tax practice*. conducting tax due diligence and regulatory reviews. taxable as dividend in India in the hands of resident shareholders.com *Our Transaction Tax practice comprises 100 specialists who assist clients across the transaction life cycle. developing corporate re-organization plans. funding and corporate tax ghlaearYlagf& @] ak ZYk]\ af gmj EmeZYa g^Õ[]& You can write to Narendra at: narendra. The taxpayer needs to be careful in documentation to enable him to demonstrate commercial substance. This gives an objective guidance and will reduce uncertainties and litigation around the controversy relating to indirect transfers. will now be available over a period of six years starting from the year of actual payment. which have subsidiaries abroad need to revisit their structures. will now be considered as “nil” for computing capital gains. fair market value (FMV) of the Indian assets owned by the foreign company represents at least 50% of the FMV of all assets owned. Thus. He focuses on conceptualizing. which is currently based on facts and principles provided by judicial precedents. while providing certain reliefs. The provision stating that domestic tax law or tax lj]Ylq$ o`a[`]n]j ak Z]f]Õ[aYd lg taxpayer is to be applied is surely a sign of relief in-spite of exceptions — ?99J$ :jYf[` HjgÕl LYp Yf\ CFC rules. companies would now need to analyze the impact on their current structures as well as business models.

>]Ylmj] Yjla[d]k The role of taxation of M&A in India Amrish Shah International Mergers & Acquisitions Review 2011. 17 February 2011 T This is as important (if not more he downturn in the transactions important) for exits as it is for market created an environment acquisitions. this is no and intensify. M&A activity is by heightened returning. for cross-border addressed. all scrutiny by these trends are likely to continue global tax authorities. While this is clearly a deals. In particular. sellers still need to devote deeper and earlier evaluation of the more time and attention to tax issues tax function. Nonetheless. If left until an exit is in which companies were forced already imminent or underway. which E9 Yf\ egj] Zq \]Õfalagf l`Yf leading to an in recent times by design) the increasing role that eventual exit. we have been witness or business as India and lg ka_faÕ[Yfl [`Yf_]k af _dgZYd restructuring China. Of course. It is therefore essential easy matter. tax to squeeze greater value from issues cannot always be adequately deals. with the increasing complexity of cross-border well in advance of the launch of any sale. have become tax has played therein. In this the hotbed of context it has become relevant to 9k [gfÕ\]f[] cross-border Õf\ gml$ Yk l`] eYjc]l j][gn]jk$ in the market transaction how widespread this phenomenon is recovering activity is and what it might mean for and global accompanied future corporate transactions. clear articulation relevant market. carve-out or tax legislation for that matter. we lg mf\]jklYf\ bmjak\a[lagf%kh][aÕ[ believe that for a majority of such tax issues before doing M&As in the transactions. of how tax can enhance the deal valuation and early involvement of The Indian M&A environment the tax function in the process of transaction planning is well worth the As one may be aware. investment into most emerging markets will effort and offers companies the best `Yn] kh][aÕ[ [`Ydd]f_]k o`a[` ghhgjlmfalq lg j]Ydar] lYp ]^Õ[a]f[q& 78 . especially Through the roller coaster a corporate in emerging ride since 2007 in the global reorganization markets such economy. there is a realization for reality.

last year the Government announced that safe harbor rules will be prescribed for determining arms length price for international transactions.  Current tax laws provide for certain area and sector based incentives which can be available on the set up of new businesses. Indian Government has been taking measures for dealing with uncertainties to foreign taxpayers from an income-tax perspective and reduction in disputes. thresholds on foreign investment into certain sectors. Therefore. joint venture. Key considerations could be cost step up of assets for tax depreciation. etc apart from commercial objectives. stamp duty cost. Forms of business in India are 100% subsidiary. transferability of tax attributes (such as tax losses. a detailed tax due diligence prior to making investment decision is very important. Acquisitions of businesses may be through share deals or asset deals. limited liability partnerships (‘LLP’) have also been introduced in India. Thus from an Indian standpoint. liaison g^Õ[]$ hjgb][l g^Õ[]$ ZjYf[` g^Õ[]$ l][`fa[Yd [gddYZgjYlagf& Recently. transfer of a business undertaking for a lump sum consideration) are taxed as capital gains at 21.e. unlimited partnership. if the business is held for three years or more. possibility of debt push down.63%. In order to understand the extent of potential liabilities and approach to tax compliance. Option of obtaining advance rulings for international transactions has always been available. the Government also announced creation of a dispute resolution panel to deal with disputes pertaining to transfer pricing and taxation of foreign companies for faster resolution. the Indian currency is not fully convertible. the following key aspects and recent developments (both tax and non-tax) could be of relevance:  As of now. availability and permissibility of using debt to ÕfYf[] Y[imakalagfk$ ]l[& L`]j]^gj] forming a broad understanding of l`] E9 ]fnajgfe]fl af l`] kh][aÕ[ jurisdiction is of the essence. foreign investors need to study and factor in prevailing exchange control regulations and Foreign Direct Investment (‘FDI’) Guidelines at the time of investing. capital market related compliances. For the purpose of  79 .Transaction tax The role of taxation of mergers and acquisitions in India may be driven by various factors other than taxation such as currency convertibility.45%. However. there is currently no clarity on the allowability of FDI in a LLP. time frame. minimum alternate tax credit). Accordingly. continuity of tax holidays.   Typical modes of M&A in India Typically tax implications in Indian M&A ljYfkY[lagfk [Yf Z] [dYkkaÕ]\ ZYk]\ gf the type of transaction: (i) Business acquisition The gains on transfer of an a\]flaÕ]\ Zmkaf]kk hmjkmYfl lg “slump sale” (i. else they are taxed at 32. Further.

63%7 Not applicable 1. While there are differing views and judicial precedents with regard to the rate of tax.12% Not applicable Sale by a domestic company5 Off market Through market4 32. Non-applicability of minimum alternate tax (‘MAT’) under certain circumstances 3.82%/ 21.56%/ 21. “tax” net worth of the business is treated as cost and deducted from the slump sale consideration.23% 15.56%. sale of shares through stock market would attract Securities Transaction Tax at 0. E9L d]naYZd] gf ËZggc hjgÕlkÌ 8 *(&() 6.63%6 32. The taxation would then be linked to the individual assets i. if the subscription price is below the net asset value per share. Additionally. Indexation available 80 . capital gains (long-term/short-term) or business income.45% 16.23% Not applicable 21.125% each in the hands of the buyer and seller 5. Except possible income-tax issues for the subscriber of the shares. This has been discussed separately. 4. which typically has no incometax consequence either to the existing shareholders or the target company1 or by way of purchase of shares from existing shareholders of the target company (normally referred to as secondary acquisition) in which case.84% Nil 10.45% Not applicable 21.63% with indexation at the option of the tax payer 7.e. the selling shareholders are subject to capital gains tax as under: Unlisted shares held for < 12 months > 12 months > 12 months Sale by a foreign company2 Off market Through market4 42.22% Nil 10. 2.12% 3 42. 10. a preferred view would be that the rate of tax should be 10. A business acquisition could alternatively be structured as an “itemized sale” which basically e]Yfk ljYfk^]j g^ a\]flaÕ]\ Ykk]lk and liabilities with value being assigned to individual items of assets and liabilities. Mode of Transfer Listed shares held for < 12 months (ii) Stock acquisition Stock acquisition can be effected through infusion of cash into the target company (normally referred to as primary acquisition).>]Ylmj] Yjla[d]k The role of taxation of mergers and acquisitions in India computing capital gains.82% without indexation or 21.

and eventually of the High Court. the transferor company stands automatically dissolved. get transferred to the transferee company. while hmjkmYfl lg \]e]j_]j Yf a\]flaÕ]\ business of the transferor company is transferred to the transferee company. issues shares to the shareholders of the transferor company. In case of merger. However. pursuant to a merger. In the case of mergers. Under the tax law. In India. entire accumulated tax losses of the transferor company get transferred to the transferee [gehYfq kmZb][l lg ^mdÕde]fl g^ necessary conditions). a e]j_]j'\]e]j_]j l`Yl ^mdÕdk []jlYaf stipulated conditions is regarded as tax neutral from the following perspectives:  Transferor company: transfer of assets is exempt from capital gains tax. Further. While in some cases. the transferee company. tax incentives/ Z]f]Õlk YnYadYZd] lg l`] 81 . acquisition of a more than 49% stake in a closely held company could result in accumulated tax business losses of such company getting lapsed. accumulated tax losses of.Transaction tax The role of taxation of mergers and acquisitions in India Further. whereas in case of demergers. creditors.  Shareholders of transferor company: cancellation of shares of the transferor company (in the case of mergers) and receipt of shares of the transferee company is exempt from capital gains tax. the entire business of the transferor company gets transferred to the transferee company. stock exchanges (in case of listed companies). in consideration thereof. In either case. corporate regulatory authorities. whereas in the case of demergers.  Transferee company: cost basis for tax depreciation purposes in the hands of the transferee company would be the same as it was in the hands of the transferor company. Typically. unabsorbed tax depreciation would remain unaffected. or attributable to. the business of the transferor company that is transferred on demerger. in the case of mergers. the cost of acquisition of the shares of the transferor company would get split between the shares of the transferor company and the shares of the transferee company based on a stipulated formula. the cost of acquisition of the shares of the transferee company would be regarded to be the same as that of the cost of shares of the transferor company. unlike demerger. (iii) Mergers and demergers Mergers and demergers could be of various kinds and the mechanics of consummating such merger/ demerger could vary depending on the commercial objectives of parties concerned. mergers and demergers are carried out under supervision of the High Court and require due approval of shareholders.

in the case of demerger in order to claim set off of carry forward losses of the transferor company there is no condition of continuing the business of the transferor company by the transferee company. While the DTC is presently a draft for public comments it proposes several new additions to the Indian tax legislation such as controlled foreign corporation (‘CFC’) jmd]k Yf\ ZjYf[` hjgÕl lYp& L`]j] Yj] also provisions which aim to look at the substance of transactions over their form such as the General AntiAvoidance Rule (‘GAAR’). viz.  Recent tax updates The Central Board of Direct Taxes . On a plain reading the tax exemptions may not be explicitly available to amalgamation/demerger of a foreign company into an Indian company which was hitherto the case. The <L. Provisions of restricting transition of capital and speculations losses to the transferee in case of amalgamation/demerger are proposed to be liberalized.  “Capital assets” have been subdivided into two classes.:<L! j][]fldq [dYjaÕ]\ af Y hj]kk release that they are currently scrutinizing a handful of cases related to takeovers. `Yk \]Õf]\ Zmkaf]kk reorganization to mean reorganization of business of two or more residents involving an amalgamation/demerger. “investment assets” and “business capital assets”. certain key changes have been proposed. in certain other cases the law is not as clear and the issue could be potentially litigative. The CBDT has however [dYjaÕ]\ l`Yl l`] e]j] af[a\]f[] g^ takeovers. mergers and acquisitions based on a selection process that is risk-based and nonintrusive. The current tax law does not specify the nature of shares to be issued in discharge of consideration for demerger which makes it is possible to issue even preference shares. It is proposed to exempt gains arising only on transfer of “investment asset” by a company to its 100% subsidiary. Even purely from an M&A taxation standpoint. This disparity is proposed to be removed by imposing the condition of carrying on the business of transferor for Õn] q]Yjk gf \]e]j_]jk lgg&  The direct taxes code A new law. Direct Tax Code (‘DTC’) is proposed to be enacted with effect from 1 April 2012. Some of these are as under:  L`] <L. `Yk fgo kh][aÕ]\ l`Yl gfdq equity shares may be issued as a consideration for demerger.>]Ylmj] Yjla[d]k The role of taxation of mergers and acquisitions in India transferor company may be continued in the hands of the transferee company in case of both mergers and demergers. Unlike in amalgamation. mergers and acquisitions does not qualify as a case for tax scrutiny and that overall scrutiny level by tax authorities has never exceeded 1.5% in the last decade. One such case that has attracted greater scrutiny by the High Court (HC) of Gujarat has been the issue of whether a scheme of demerger of  82 .

Ltd. (327 ITR 456). these provisions were interpreted to mean that any payment to a NR will be subject to withholding tax under the tax laws. had subsequently attempted to clarify that there should be no withholding tax obligation when the underlying payment was not taxable in India. Under the Indian tax laws. The SC in a batch of cases. The Delhi HC. value added tax and to defraud the tax authorities for their legitimate right to recover dues out of the assets of the demerged company and its other group companies. The HC concurred with the objections placed before it by the tax authorities and rejected the scheme of demerger which was viewed as an attempt to evade taxes including income-tax. A number of taxpayers (GE Technology. etc. However. While the ruling enables the demerged company to approach a higher appellate authority. the case is one of its kinds and the conclusions drawn thereon by the HC with respect to tax abusive transactions in general [gmd\ `Yn] oa\] jYeaÕ[Ylagfk ^gj Y number of taxpayers. with the lead case being that of GE India Technology Centre Pvt. is that of withholding taxes.Transaction tax The role of taxation of mergers and acquisitions in India infrastructure assets between group companies for “NIL” consideration could be sanctioned under the provisions of the Indian tax and company laws. @H$ KgfYlY$ KYekmf_! l`]j]^gj] Õd]\ a special leave petition before the Supreme Court of India (SC) against the Karnataka HC decision. 2010 for taxation (in the hands of the recipient) on receipt of shares of a company in which the public are not substantially interested for NIL or inadequate consideration. the applicability of these provisions has been the subject matter of extreme controversy in recent times. 83 . However. In an earlier decision by the Karnataka HC in case of Samsung Electronics (320 ITR 209). the controversy continued to remain. which seek to treat “net asset value” as “fair market value”. regardless of its chargeability to tax in India. any person responsible for making a payment to a non-resident (NR) which is chargeable to tax in India is required to withhold tax on such sums. Perhaps the biggest practical tax issue plaguing Indian M&As in recent times however. stamp duty. Separate jmd]k `Yn] Ydkg Z]]f fglaÕ]\ lg determine “fair market value” in such transactions.) would need to be borne in mind. Another attempt by the tax authorities to plug potentially abusive transactions is the provision introduced by the Finance Act. at the applicable tax rates. in view of the adverse Karnataka HC decision. in the case of Van Oord (323 ITR 130) and the special bench of the Chennai Tribunal in the case of Prasad Production (3 ITR Trib 58 SB). Potential tax impact on applicability of these provisions to various kinds of commercially driven transactions (such as exercise of put/call options. The HC also went on to agree with the tax authorities and state that the assets were being demerged to a paper/ conduit company for a subsequent tax neutral transfer to another infrastructure company.

>]Ylmj] Yjla[d]k
The role of taxation of mergers and acquisitions in India

reversed the decision of the HC by holding that any sum remitted to a NR, which is not chargeable to tax under the tax laws, does not require the payer to apply the withholding tax provisions. Further, the SC held that no nil/lower withholding application ak j]imaj]\ lg Z] Õd]\ Z]^gj] l`] lYp authority to determine the amount chargeable, if the payer is not in doubt that the payment is not taxable in India. The SC thereafter remanded the matter back to the Karnataka HC to determine the taxability of the payment, which in the present case pertained to software payments. The SC decision has thus settled this controversy and should provide relief to many taxpayers and clarity in case of others to determine withholding tax obligations in respect of payments to NRs. Exit taxation too has been a subject matter of major controversy in India. O`ad] l`] YnYadYZadalq g^ Z]f]Õlk under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) to a Mauritian company directly selling shares of an Indian company has been upheld, the Bombay HC held in the case of Vodafone International Holdings BV (311 ITR 46) that tax authorities have the jurisdiction to tax transactions involving an indirect transfer of shares in an Indian company and look at the substance of the transaction as opposed to its form. As one would be aware, capital gains arising to a Mauritian tax resident on alienation of shares of an Indian

company are taxable only in Mauritius under the India-Mauritius DTAA. L`ak hgkalagf `Yk Z]]f [gfÕje]\ by an administrative circular as well as by a previous decision of the SC. However, there has been reluctance on part of the Indian tax authorities lg _jYfl <L99 Z]f]Õlk Yl l`] klY_] of withholding of taxes even where the Mauritian tax resident has a tax j]ka\]f[q []jlaÕ[Yl]& The Authority of Advance Rulings (AAR) in the recent case of E*Trade EYmjalamk j]Y^Õje]\ l`ak hgkalagf g^ non taxability of capital gains in India in such cases. The AAR did not accept the tax authorities’ contention that, the taxpayer was merely a façade used to avoid capital gains tax, and l`Yl l`] j]Yd Yf\ Z]f]Õ[aYd gof]j of the capital gains is its US holding company. The fact that the source of funds for the purchase of shares was traceable to the US holding company or that the latter had played a role in suggesting or negotiating the sale or that the consideration received ultimately went to the US holding company in the form of dividends or the diminution of capital, do not lead to a legal inference that the US holding company, in reality, owned the shares. The AAR made extensive references to the observations in the SC’s decision to infer that the motive to set up conduit companies and doing Zmkaf]kk af Y Z]f]Õ[aYd lYp lj]Ylq jurisdiction will not be material to judge the legality or validity of the transactions. The SC had held that

84

Transaction tax
The role of taxation of mergers and acquisitions in India

the design of tax avoidance itself is not objectionable if it is within the framework of law and is not prohibited by law. However, with regard to colorable device and sham arrangements, there is still scope to ignore such dubious methods. The obstacles to a transaction created by the uncertainty surrounding such tax issues has prompted []jlYaf ÕfYf[aYd k]jna[] hjgna\]jk to introduce tax risk management solutions such as insurance which transfers the risk where parties to a transaction do not wish to take long term tax risk.

Parties to an M&A transaction must be mindful of the tax consequences of the transaction and also of the various tax issues surrounding it that may be mfj]kgdn]\& Kh][aÕ[ lg l`] Af\aYf [gfl]pl heightened scrutiny by tax authorities and forging an understanding of recent tax developments appear to be key considerations.
All rates are based on those proposed in the Finance Bill, 2011 introduced in the Parliament. Once the bill is passed and assented to by the President, the same would become effective from 1 April 2011.

Conclusion
The above discussions reveal quite clearly that whether in the global or Indian context, tax issues, especially those that are unresolved, lead to uncertainty around the tax treatment which result in litigation between the taxpayers and tax authorities.

Reprinted with the permission of Euromoney Trading Ltd, England. All rights reserved through out the world. This article was originally published within the International Mergers & Acquisitions Review 2011. Please visit www.euromoney-yearbooks.com for further information.

9ejak` K`Y` is a partner at Ernst & Young India and leads our Transaction Tax practice*. Over the past 17 years he has advised clients in the areas of acquisitions, divestments, mergers, demergers, corporate restructuring, re-organizations, foreign investment consulting, and establishment of joint ventures, international/corporate tax and business reorganization. He is based in our EmeZYa g^Õ[]& You can write to Amrish at: amrish.shah@in.ey.com
*Our Transaction tax practice comprises 100 specialists who assist clients across the transaction life cycle. Services include structuring transactions, developing corporate re-organization plans, conducting tax due diligence and regulatory reviews, supporting post-deal integrations, and managing implementations and documentation.

85

>]Ylmj] Yjla[d]k

Tax and regulatory policy
9l Y lae] o`]f l`] ^gj]a_f \aj][l afn]kle]fl ><A! Ögok lg 9kaYf [gmflja]k Yj] jakaf_$ Af\aY `Yk oalf]kk]\ Y kmZklYflaYd kdgo\gof af l`] ><A afÖgok af l`] dYkl log q]Yjk& Lg Zggkl l`] afn]klgj [gfÕ\]f[] Yf\ YlljY[l _j]Yl]j FDI, issues concerning the policy environment and the current sectoral restrictions have been under the lens of the policymakers. A consolidated FDI Policy by the government has been a progressive step towards bringing [dYjalq Yf\ []jlYaflq gf nYjagmk Ykh][lk& Gf l`] k][lgj%kh][aÕ[ afn]kle]fl front, however, the government continues to be cautious about permitting FDI in multi-brand retail and raising the FDI cap in strategic and sensitive sectors like defence. That the government is committed to strengthen the administrative kljm[lmj]k Yf\ \akhml] j]kgdmlagf e][`Yfake ak j]Ö][l]\ af l`] j][]fl budget announcements and the strategy plan outlined by the income tax department. However, the announcements must be given a concrete shape at the earliest. L`] Yjla[d]k af l`ak k][lagf Zjaf_ lg l`] ^gj] l`] ka_faÕ[Yfl \ae]fkagfk g^ ><A and tax policy environment in India.

In this section
87 | Defensive towards FDI in defence 89 | Beyond cash and carry models 1) t F]o ><A fgjek lg _an] Õddah lg F:>;k 95 | India as a coveted tax destination

86

Tax and regulatory policy

Defensive towards FDI in defence
Ganesh Raj
Economic Times, 15 June 2010

T

he country’s defence sector, despite its potential and increasing budgetary allocation by the Centre, has not been able to keep pace with other sectors and exploit opportunities offered by liberalization of the economy. With foreign direct investment (FDI) permitted up to 26%, the country continues to rely heavily on imports for its defence requirements and FDI in the sector is languishing at a cumulative USD0.15 million, as per latest FDI statistics published by the ministry of commerce and industry. Though it is often argued that revision of the FDI policy by raising the limit on FDI would provide the requisite momentum to the defence sector, along with enabling the country to achieve its target of 70% selfkm^Õ[a]f[q af \]^]f[] hjg[mj]e]flk$ but this has always been a debatable issue and repeated discussions have not yielded a result given the sensitivity of the sector. Going beyond the government corridors, the commerce ministry recently issued a discussion paper inviting comments from industry associations with regard to raising

FDI in defence up to 74%. The debate always brings us at the fore of deciding on “how much FDI is desirable for the defence sector and why”? There is no denying that raising FDI limit in the defence sector is essential as most defence products involve use of advanced and state-of-the-art technology, which India lacks and can get transferred only when a foreign partner has a long-term stake in the company. However, the FDI cap of 26% does not provide enough motivation to original equipment manufacturers (OEMs) to bring in proprietary technology to Indian joint venture partners. It needs to be understood that a foreign company will not like to bring investments in the form of capital, people, skills and technology unless regulations allow it appropriate economic return and reasonable say in decision-making. Further, with growth of the sector, the country’s reliance on import of defence equipment could also reduce, which would result in noteworthy savings in foreign exchange, besides strengthening the export potential.

87

It is apprehended that allowing foreign companies exercise control over the Indian defence companies would compromise with the country’s defence and security apparatus. So. Reprinted with the permission of The Economic Times © 2011. which makes increasing FDI in defence sector a \a^Õ[mdl \][akagf& L`] Õjkl j]Ykgf ak related to national security and how the increase in FDI limit would impact the same. He is based in our Fga\Y g^Õ[]& You can write to Ganesh at: ganesh. the defence offset policy provides an alternative for infusion of funds to meet the offset requirement.ey. and governments on diverse policy issues focusing on taxation. as the commerce ministry has highlighted in its discussion paper. 88 . l`]j] ak Y Öah ka\] lg Yddgoaf_ `a_`]j FDI in defence sector. Consequently. All rights reserved throughout the world. and joint venture negotiations. Ganesh Raj is a partner at Ernst & Young Af\aY Yf\ `]Y\k l`] ÕjeÌk LYp Hgda[q Advisory Group* as one of his multiple leadership roles. Also.>]Ylmj] Yjla[d]k Defensive towards FDI in defence Further.com *Ernst & Young India’s Tax Policy Advisory Group houses a specialized team of experienced resources including senior retired bureaucrats from the Government of India that advises clients across industries.raj@in. His functional experience includes corporate tax planning. structuring cross-border investments and transactions. an increase in FDI in the defence sector would create synergies with the offset policy. there are several reasons for the government to contemplate an increase in FDI ceiling.

growth of their agro-processing industry and an increase in employment. In China. the experience of opening up of retail in countries such as China. In the same period. Instead. technological upgrades. employment in retail and wholesale trade increased from 4% in 1992 to 7% in 2001. Hence. Some of the concerns expressed are that the opening up of this sector would result in the large-scale exit of domestic family-managed outlets. the unorganized sector has not suffered. Further. while expressing concern over rising food prices. the number of traditional retailers increased by approximately 30%.Tax and regulatory policy Beyond cash and carry models Prashant Khatore Financial Express. there is a need for consolidation in the domestic industry before FDI can be permitted. Thailand and Indonesia have demonstrated that there has been an increase in GDP. Russia. 23 July 2010 F DI in the retail sector is and has been one of the most sensitive areas with respect to liberalization of the Indian economy. In fact. FDI in multibrand retail is per se prohibited and is permitted only in surrogate forms of the wholesale cash and carry model or single-brand retail model (albeit with an equity cap of 51%). greater availability of funds for modernisation of the farm sector and so on. greater sourcing by foreign retailers from such countries. Recently. PM Manmohan Singh. unorganized retailers have improved their business practices and incorporated technological upgrades. Another argument put forth by those opposing liberalization is that the retail sector is currently unorganized and at a nascent stage. It is interesting to note that studies by various industry associations and economic think tanks have stated that the opening up of retail would act as a catalyst for supply chain improvements. stated that the gap between the price paid by the consumer 89 . has emphasised that due to organised retail. thereby resulting in the loss of employment. the Icrier study on the Impact of Organised Retailing on the Unorganized Sector in 2008.

corporate and allied laws. He also actively contributes to thought leadership in the areas of direct lYpYlagf& @] ak ZYk]\ af gmj ?mj_Ygf g^Õ[]& You can write to Prashant at: prashant. The paper further states that liberalization could lead to the improvement in yield through contract farming and dissemination of superior technology and direct marketing. In conclusion. All rights reserved throughout the world. the Department of Industrial Policy and Promotion (DIPP) has released a discussion paper for public comment. Prashant Khatore is a partner at Ernst & Young India. One of the key rationales put forth by the DIPP is that such a move would lead to the development of post-harvest and cold chain infrastructure in [dgk] hjgpaealq lg l`] Õ]d\k$ l`]j]Zq [j]Ylaf_ ]^Õ[a]f[q af l`] eYjc]laf_ systems. as the age old axiom goes “too much and too little spoils everything. exchange control. which will result in more predictable farm gate prices and steadier incomes. the economy needs greater competition. this should not be so onerous as to make it impractical for the foreign investors. as it will allow the industry to assess its impact in a gradual manner.khatore@in. 90 . Further. A Corporate Tax* specialist. The DIPP must be complimented for releasing this paper and it is now for the industry and other stakeholders to express their views and comment on the various highlighted areas. FDI and regulatory matters besides specialized tax litigation advisory services.” the government should ensure that there are enough incentives along with adequate safeguards. The government should continue to keep FDI in single-brand retail under the approval route. Reprinted with the permission of The Indian Express Limited © 2010. as is the case currently.ey. it should consider incorporating conditions to protect the interest of small retailers.com *Our Corporate Tax practice provides integrated solutions across income and wealth taxes. to keep track of the afn]kle]fl afÖgok Yk o]dd Yk lg bm\_] investor appetite. instead of setting up an exclusive regulatory framework. rather than rolling it out across India. he has extensive experience in tax planning and structuring. Although it would be prudent for the government to put in place measures and precautions while permitting FDI in retail. Subsequent to this.>]Ylmj] Yjla[d]k Beyond cash and carry models and the farm gate price must be reduced and to achieve this. The government may consider opening up FDI in the retail sector in tranches. The government may also initially put restrictions on opening up organised retail in selective cities.

Government has now released Consolidated FDI Policy – Circular 2 of 2010 (effective 1 October 2010) (Circular 2). updation was 1999 and press introduced as an notes. the Keeping in line with the Government’s intent to promote FDI in activities through a policy framework which is transparent. the DIPP Industrial Policy `Y\ j]d]Yk]\ Õn] and Promotion discussion papers on various aspects (DIPP). Keeping to its commitment. predictable. the Government had indicated that the policy would not be static and would be replaced every six months after Prior to 1 April 2010. At the time of the release of Circular 1. the DIPP. FDI into India incorporating the changes effected. press The Government had indicated investor friendly releases and that the policy would not be static measure. effective 1 April 2010. lack of clarity and transparency with regard to Government policy on FDI. is a single comprehensive document containing all the policies relating to FDI in India. This rules and guidelines contained in the system of periodic consolidation and Foreign Exchange Management Act. However. [dYjaÕ[Ylagfk and would be replaced every six after the issue issued by the months after incorporating the of Circular 1 of Department of changes effected. The policy circular is usefully accompanied by a Press Release explaining the key [`Yf_]k& O`ad] l`]j] Yj] fg ka_faÕ[Yfl 91 . simple and clear and reduces regulatory burden. six months after the release of Circular 1.Tax and regulatory policy F]o ><A fgjek lg _an] Õddah to NBFCs Hiresh Wadhwani CFO Connect. The Government’s initiative of public consultation will Yf\ eg\aÕ[Ylagf g^ ]paklaf_ hj]kk further aid in advancing the FDI policy notes by issue of new ones. Further. led to a and enhancing its lucidity. Press notes on foreign investment spread over various years of the FDI policy. released the Consolidated FDI Policy – Circular 1 of 2010 (Circular 1) on 31 March 2010. 2010. November 2010 F oreign direct investment (FDI) Ögok aflg Af\aY `Yn] Z]]f quite robust in the past two years. Circular 1. was administered primarily through during the intervening period. a fairly complicated FDI policy framework in the past has l]f\]\ lg eYj l`] afn]klgj [gfÕ\]f[] in the Indian regulatory system.

Thus. lgoYj\k ^mdÕddaf_ l`] eafaeme In the past. down subsidiaries without l`]j] o]j] []jlYaf kh][aÕ[ YhhjgnYdk bringing in additional capital given to NBFC applicants clarifying towards minimum capitalization that premium infused into an Indian Another ambiguous issue was the ÕfYf[aYd k]jna[]k [gehYfq Zq Y permissibility of set up of subsidiaries foreign investor should be counted by foreign owned Indian NBFCs. while Circular 2 provides much-required clarity on the issue of circumstances where share premium can be counted towards minimum capitalisation. thus potentially having to lockview had been expressed (though up capital in India.dYjaÕ[Ylagf gf k]l%mh g^ kl]h requirement. which may not in respect of the real estate sector) be needed. however. . Subsequently. whether share shareholders. Inclusion of share premium received along with the face value of the shares in calculating the “minimum capitalization” The extant FDI guidelines for NBFCs. 92 .>]Ylmj] Yjla[d]k New FDI norms to _an] Õddah lg F:>. given the non inclusion of premium paid by a non-resident to acquire the existing shares of an Indian NBFC from the present In this context. the same could require premium was to be included while computing the minimum capitalisation a substantial investment by the non-resident into a target company requirements was the subject matter in addition to the amount paid to the g^ ka_faÕ[Yfl \]ZYl]& Af l`] hYkl$ Y seller. it j]kmdl$ [gfÖa[laf_ hjY[la[]k o]j] was understood that the FIPB always being adopted.k changes in the direction of the policy. though there was no capitalisation norms.e. the percentage of foreign ownership).aj[mdYj * `Yn] [dYjaÕ]\ Y ^]o dgf_% standing open issues.e. Any amount paid by a transferee post the issue of shares over and above the issue price of the shares cannot be taken into account for calculation of the minimum capitalization requirement. relevant for Non-Banking Finance Companies (NBFCs) operating in India. As a documented policy to this effect. Circular 2 seeks to address some of the open issues and ambiguities. the amount of foreign investment required to be made by the foreign investor) that is linked to the sectoral cap on equity (i. that premium on issue of shares to a non-resident would not count towards the minimum capitalisation . stipulate a minimum capitalisation norm (i. .aj[mdYj * [dYjaÕ]k l`Yl Ë[YhalYdÌ for the purposes of ‘minimum capitalisation’ includes share premium received along with face value of the shares only when it is received by the company upon issue of the shares to the non-resident investors.

limited liability partnerships. on introduction of press note 2 and 4 of 2009. Informal discussions from a policy standpoint were inconclusive. thereby reiterating the Government’s intention to promote India as an attractive investment destination. offering respite to k]n]jYd hjgÕl eYcaf_ ^gj]a_f gof]\ Indian companies proposing to set-up subsidiaries in India.Tax and regulatory policy New FDI norms to _an] Õddah lg F:>. Thus. in response to requests for an explicit view. operating cum investing companies and investing companies would have to bring in requisite funds from abroad and not leverage funds from the domestic market for such 93 . Thus. investments. The consolidated FDI policy and the h]jag\a[ [dYjaÕ[Ylagfk Yf\ mh\Ylagf thereof is a step in the right direction to simplify the policy framework. etc would lead to the framing of an evolved policy which should largely be free of ambiguities. the explicit removal of doubts as regards the funding aspects of foreign owned Indian NBFCs. On account on this ambiguity. The consolidated FDI policy and the initiative of stakeholder consultations on opening up sectors of defence. [Yf k]l mh kmZka\aYja]k ^gj kh][aÕ[ NBFC activities. multi-brand retail. seemed to suggest that the operating company in which downstream investments were made would need to comply with relevant sectoral conditions and other conditionalities. without bringing additional capital towards minimum capitalization. Circular * `Yk [dYjaÕ]\ l`Yl )(( ^gj]a_f owned NBFCs. Downstream investment through internal accruals Circular 1 stated that the ‘guiding principle’ is that downstream investments by companies ‘owned’ or ‘controlled’ by non-resident entities would require to follow the same norms as direct foreign investment. brings an end to the uncertainty and potential consequences of a change in the thought process of the regulators. A question that arose was whether internal accruals of a foreign owned Indian company could be used for this purpose. It also stated that for the purpose of downstream investment. several companies had started accessing the Government approval route for downstream investments though internal accruals. Circular 2 now ]phda[aldq [dYjaÕ]k l`Yl \gofklj]Ye investments using internal accruals is not precluded. with a minimum capitalisation of USD 50 million. However. which on a plain reading. there was lack of clarity as regards foreign investment into Indian operating subsidiaries made by a pure holding company.k permitted downstream investment without minimum capitalisation norms applying to the individual operating subsidiaries.

so as to ]f`Yf[] l`] [gfÕ\]f[] Yf\ contribution of the global investing community in the India growth story.ey. Financial Services group*. Reprinted with the permission of CFO Connect © 2010. asset management companies and PE ^mf\k& @] ak ZYk]\ af gmj EmeZYa g^Õ[]& You can write to Hiresh at: hiresh.k Conclusion The Government should intensify its efforts to make the FDI regime comprehensible to foreign investors. heads the Zmkaf]kk mfal ^gj l`] Õje& @ak ]ph]ja]f[] in tax. @aj]k` OY\`oYfa is a partner at Ernst & Young India and as Director. regulatory and inbound structuring projects spans over 20 years and he has worked with variety of international ÕfYf[aYd afklalmlagfk$ af[dm\af_ ZYfck$ brokerage houses.>]Ylmj] Yjla[d]k New FDI norms to _an] Õddah lg F:>. compliance services as well as litigation advisory services to our clients from l`] ÕfYf[aYd k]jna[]k af\mkljq& 94 . investment banks.com *Our Financial Services group comprises over 100 tax professionals specialising in providing tax advisory. All rights reserved throughout the world.wadhwani@in.

It should also be borne in mind that long-term capital gains on listed securities — held for more than a year — is tax exempt and only a nominal securities transaction tax (STT) is leviable. 24 January 2011 A s the title of this article suggests. 95 . Also. Of course. Tax system with individuals: with the progressive reduction of personal tax rates in India — now down to a maximum rate of just 31% — the country boasts of one of the most moderate personal tax rates in the world. This again is a tremendous wealth-building incentive for Indian tax residents as in most parts of the world. Indian shareholders have certainly grown richer on an after-tax basis. This seems to indicate greater voluntary compliance and higher disposable income with the growth in the economy. L`ak `Yk Z]f]Õl]\ af\ana\mYdk af l`] higher tax bracket as the peak DDT rate has never exceeded 18% against the maximum marginal income tax rate of over 30%. India has got a dividend distribution tax (DDT) on companies distributing dividend to their shareholders and. personal tax rate collections in the country have progressively increased in quantum despite the lower trajectory of tax rates. dividend in the hands of shareholders is tax-exempt.Tax and regulatory policy India as a coveted tax destination Sudhir Kapadia Economic Times. Coupled with the growth in equity markets over the last few years. correspondingly. Interestingly. there is merit in asking for a sizeable increase in the taxation threshold and at lower rates of tax oal` afÖYlagf jY_af_ o]dd aflg \gmZd] digits. capital gains are moderately taxed and not tax-exempt. for the last few years. we need to turn the general perspective of India as a “complex tax destination” on its head and seek the silver lining in our tax system. There is scope for considerable improvement in the tax administration to make India an attractive tax destination.

allowing a lower headline tax jYl] oal`gml kY[jaÕ[af_ j]n]fm]k& What. faster disposal of appeals and prompt redressal of grievances in a consistent manner. It is noteworthy that even the income tax department has recognized this in its Vision 2020 strategy plan and has made its intent known to come out with a comprehensive proposal for reducing unwarranted litigation with taxpayers. shares are exempt — a high net-worth individual (HNI) residing in India has far superior personal wealth-building opportunity without worrying about asset-based wealth tax or estate duties or inheritance tax being fastened on his or her progeny who may be successors to the wealth. the rates have progressively been on the decline though the corporate surcharges have notoriously stuck out after having been introduced temporarily.>]Ylmj] Yjla[d]k India as a coveted tax destination Like many other countries. This contrasts sharply to the relatively higher rates of estate duties prevalent in developed nations around the world. With the move towards investment-linked incentives instead g^ hjgÕl%dafc]\ af[]flan]k af l`] <L.$ there should be an increase in the effective tax rate for the corporate sector. India does not have any form of estate duty or inheritance tax. Even for the so-called most Y^Öm]fl Af\aYf j]ka\]flk o`g eYq Z] investing through equity in mutual funds instead of directly in the stock market. Some of the action points listed in the Vision document need to be implemented with alacrity. The government has a great opportunity to make a bold move and reduce corporate tax rate further to 25% — China and Russia notably among the Bric countries have headline corporate tax rate in this range. trusts or close relatives are generally exempt from any kind of deemed income tax as well. for several years now. Even the gift tax law has been done away with for several years now and gifts to family. would spoil the party for the coveted favoured tax destination tag as regards corporate taxation is concerned. however. Tax system for corporates: even on the corporate tax front. There is merit in seriously considering extension of similar long-term capital _Yafk lYp Z]f]Õl lg afn]kle]flk in unlisted securities to encourage investment in entrepreneurial startup companies either directly by individuals or through the venture capital or private equity route. Coupled with the fact that wealth tax is very lightly levied on few assets — notably. the complete tax exemption pass through mechanism has meant that neither the mutual fund pays tax nor the individual unit-holder on dividend received from the mutual fund or capital gains from transfer of units. such as 96 . is the unusually high level of unproductive litigation and uncertain basis by businesses broadly in the areas of transfer pricing and international tax. Even the direct taxes code (DTC) happily leaves the long-term capital gains exemption on listed securities unaltered while bringing parity in capital gains taxation with business income on all other asset classes.

gf[dmkagf2 To summarize. Going forward. by exempting from tax. al k`gmd\ fgl Z] \a^Õ[mdl ^gj India to make a corporate tax system also a very attractive proposition for doing business in India. ÕfYdar] Y\nYf[] hja[af_ e][`Yfake procedure for transfer pricing and issue revenue rulings on important legal issues having oa\]j jYeaÕ[Ylagfk& . He has functional specialization in International Tax and has over 20 years of varied experience in advising companies. Sudhir leads the client relationship management agenda for our tax practice and is the senior tax advisory partner ^gj Y fmeZ]j g^ l`] ÕjeÌk dYj_]kl [da]flk& He is a regular speaker at key national and international events and actively contributes to thought leadership in the areas of international lYpYlagf& @] ak ZYk]\ af gmj EmeZYa g^Õ[]& You can write to Sudhir at: sudhir. particularly in the context of stringent residency rules criteria for foreign place of effective management and current taxation of these kinds of income earned by a controlled foreign company (CFC) provisions. Km\`aj CYhY\aY is a partner at Ernst & Young India and our Tax Markets Leader.com 97 . Switzerland and many other countries. a bold approach is required to introduce CFC along with provisions for tax credits for taxes paid in the overseas jurisdictions. India should seriously consider introducing a “participation exemption” on the lines of the UK. India has arguably become a very attractive tax destination certainly for Indian citizens as well as non-resident Indians as far as individual taxation is concerned.kapadia@in. dividends and capital gains earned in respect of their overseas holding instead of Indian companies trying to achieve tax optimization by setting up such companies abroad. India-headquartered multinationals Ironically. whereby Indian companies are actively encouraged to set up a company in India itself. this broad sector seems to be the most disadvantaged under the proposed DTC provisions. a lot more in the area of administrative reform is required to make India an attractive tax destination as far as corporate tax systems is concerned. All rights reserved throughout the world. the Netherlands. Reprinted with the permission of The Economic Times © 2011. make dispute resolution work ]^Õ[a]fldq Yf\ ]^^][lan]dq oal` proper administrative support and consider expansion of its scope.ey. after implementation in the earnest.Tax and regulatory policy India as a coveted tax destination quicker disposal of disputes through mutual agreement procedure (MAP). Here again. Going by the Vision 2020 document. However.

Kh][aYdk Specials In this section 99 | Key developments and landmark judgments in 2010 120 | Evolution of the tax function 98 .

DTC *()( hjghgk]k Y d]nq g^ ZjYf[` hjgÕl tax and also introduces Controlled Foreign Company rules apart from widening of source rules.Kh][aYdk Key developments and landmark judgements in 2010 Ernst & Young Tax Focus. if properly implemented. These are some of the substantial changes that are likely to have ka_faÕ[Yfl aehY[l gf lYpYlagf g^ cross-border transactions in India. could help in reducing transfer pricing uncertainty in India. and has presently been referred to the Standing Committee on Finance of Parliament for a detailed examination. some proposals such as the introduction of general anti-avoidance rule (GAAR) continue to remain. Though a lot of concerns expressed on the earlier draft DTC have been addressed in the DTC 2010. A draft DTC. LYpYlagf g^ ljYfk^]j g^ k`Yj]k ^gj fad gj afY\]imYl] [gfka\]jYlagf af l`] `Yf\k g^ j][aha]fl Finance Act 2010 (FA 2010) has also introduced a new provision in section 56(2) of the ITA wherein if Y Õje gj Y [gehYfq j][]an]k Yfq 99 . The DTC 2010 also proposes to introduce an Advance Pricing Agreement (APA) regime. 1957 with effect from 1 April 2012. The proposed DTC 2010 is envisaged to replace the existing direct tax legislations constituted by the Income Tax Act. was thereafter placed before the Indian parliament on 30 August 2010. which. 22 December 2010 Direct tax Direct taxes code 2010 The DTC marks a new era in the Indian tax regime after more than 50 years of operation of the current income tax law in India and is being viewed as the most awaited change in the Indian tax system. year-end special edition. In addition. Based on feedback from various stakeholders. 1961 (ITA) and the Wealth Tax Act. Taxpayers will likely do well to assess its impact on their current structures and business models. along with a \ak[mkkagf hYh]j$ oYk Õjkl j]d]Yk]\ on 12 August 2009 for public comments. a revised discussion paper was released on 15 June 2010 addressing 11 of the eYbgj a\]flaÕ]\ akkm]k& The DTC 2010.

Kh][aYdk Key developments and landmark judgements in 2010 shares of a company (in which public are not substantially interested) for inadequate or nil consideration. for FTS to be taxable in India. This amendment is effective retrospectively with effect from 1 June 1976 (i. the Mumbai Tribunal. demerger. in case of Ashapura Minichem Ltd.gfljgn]jkq gn]j [jgkk Zgj\]j kg^loYj] hYqe]flk The controversy over software payments has principally focused on characterizing transactions as generating either “royalty”or “sales” income. has reiterated that the law as amended and held that the legal proposition stated by the SC is no longer good in law. ADIT [131 TTJ 291] [Refer EY Alert dated 31 May 2010] Jmd]k `Yn] Ydkg Z]]f fglaÕ]\ to determine the FMV in such transactions. when these kgmj[] jmd]k o]j] Õjkl afljg\m[]\ af the ITA). the services should not only be utilized in India but should also be rendered in India. If transfer of shares is for inadequate consideration and the difference between the FMV and the consideration exceeds `50.. have 100 .  introduced as an explanation to Section 9 in 2007 did not appear to have the desired result with many subsequent decisions continuing to rely on the SC decision to conclude on non-taxability of the transaction. the FMV is in excess of the consideration paid. Post this amendment. In the case of Ashapura Minichem Ltd. It is therefore not necessary that in order to attract taxability as FTS.000. An exclusion from taxation is provided in case of such transactions on amalgamation.. A number of judicial precedents. any income by way of fees for technical services (FTS) is taxable in India based on the residential status of the payer of income. FTS `Yk Y ZjgY\ \]Õfalagf Yf\ ak \]Õf]\ as consideration for rendering any managerial. The FA 2010 has substituted this explanation to clarify that FTS will be taxable in India irrespective of the place from where such services are rendered. it will be taxed at the FMV of such shares. vs.000. technical or consultancy services.e. J]ljgkh][lan] Ye]f\e]fl oal` j]_Yj\ lg g^^k`gj] k]jna[]k Under the source rule (Section 9) in the ITA. and the fair market value (FMV) of such shares exceed `50. it will be taxed in the hands of the recipient in the following manner:  If transfer of shares is for nil consideration. with regard to the nature and extent of rights granted in a typical software transaction involving an end-user or a distributor. An amendment Software controversy . services must also be rendered in India. The SC in the case of Ishikawajima Harima [(2004) 288 ITR 408] held that.

The Delhi HC. at the applicable tax rates. Where the payment is to obtain rights limited to enabling effective operation of the software and not for the end-user to commercially exploit the underlying rights in the software. Microsoft Corporation and Gracemac Corporation vs. in view of 101 . Geoquest Systems BVI 327 ITR 1].DDIT vs. with regard to the nature and extent of rights granted to the purchaser. any person responsible for making a payment to a nonresident (NR) which is chargeable to tax in India is required to withhold tax on such sums. 29 October 2010 and 10 November 2010] Withholding tax obligation Oal``gd\af_ lYp gZda_Ylagf gf hYqe]flk eY\] lg fgf%j]ka\]flk Under the ITA. A subsequent ruling of the Mumbai Tribunal in the case of Reliance Industries has reinforced the position taken in the earlier decisions that such characterization should be determined.Kh][aYdk Key developments and landmark judgements in 2010 characterized such transactions Yk _]f]jYlaf_ ÊZmkaf]kk hjgÕlkÊ$ not taxable in the absence of a permanent establishment (PE) or any other taxable presence in India. the applicability of these provisions has been the subject matter of controversy. With similar issue expected to be decided by high courts in the near future. However. the controversy appears to be far from settled. In an earlier decision by the Karnataka HC in case of Samsung Electronics. For example. had subsequently attempted to clarify that there should be no withholding tax obligation when the underlying payment was not taxable in India. these provisions were interpreted to mean that any payment to a NR will be subject to withholding tax under the ITA. on the basis that such distinction is not apparent from the plain language g^ l`] jgqYdlq \]Õfalagf af l`] AL9 or the Double Taxation Avoidance Agreement (DTAA) between India and the US. in the case of Van Oord and the special bench of the Chennai Tribunal in the case of Prasad Production. 10 August 2010. ADIT [(2010) 47 DTR (Del) (Trib) 65] . regardless of its chargeability to tax in India. In the cases of Dassault Systems [322 ITR 125]. a recent ruling of the Delhi Tribunal in the case of Microsoft did not accept the distinction between “copyright right” and “copyrighted article”. Reliance Industries [2010-TII-154-ITAT-MUM-INTL] [Refer EY Tax Alerts dated 2 February 2010. However. it held that a right granted to use the computer software will be royalty. Accordingly. will not amount to royalty. Authority for Advance Ruling (AAR) in the case of Geoquest Systems and Dassault Systems distinguished between transfer of “rights in copyrighted software” and transfer of a “copyrighted software” and held that mere transfer of computer software de-hors any copyright associated with it. it will be inappropriate to classify the payment as royalty. However.

Vodafone has been asked to make a part payment of the tax demand that was computed by the Tax Authority. the SC held that no nil/lower withholding application ak j]imaj]\ lg Z] Õd]\ Z]^gj] l`] Tax Authority to determine the amount chargeable. reversed the decision of the HC by holding that any sum remitted to a NR. KmZk]im]fldq$ Ng\Y^gf] FD Õd]\ Yf SLP before the SC and the matter is now pending before the SC. which is not chargeable to tax under the ITA. considered whether the Tax Authority had jurisdiction under the ITA to tax the gains arising from the transfer of shares in a foreign holding company. Meanwhile. Samsung).. Õd]\ Y kh][aYd d]Yn] h]lalagf Z]^gj] the SC against the Karnataka HC decision. GE India Technology Centre vs. In the cases of CIT vs. if the payer is not in doubt that the payment is not taxable in India. 102 . The HC. ITO vs. A number of taxpayers (GE Technology. the Bombay HC.P. with the lead case being that of GE India Technology Centre Pvt. Samsung & Others [320 ITR 209]. which indirectly resulted in the acquisition of controlling interest in an Indian entity. which were transferred to the acquirer. The HC also observed that a controlling interest in a company is a not a capital asset independent of shares in the company and that taxation of gains from share transfers is likely to arise where the situs of shares is situated. CIT [323 ITR 130]. HP. The SC also explained its earlier decision in the case of Transmission Corporation of A.Kh][aYdk Key developments and landmark judgements in 2010 the adverse Karnataka HC decision. Van Oord ACZ India vs. does not require the payer to apply the withholding tax provisions. factored in and recognized independently the rights and entitlements to the Indian entity. In view of the special characteristics of the transaction. Further. Prasad Production Ltd. Ltd. The SC in a batch of cases. which in the present case pertained to software payments. 25 March 2010. [129 TTJ 641]. which has often been quoted out of context (including by the Karnataka HC). while accepting that the Tax Authority has jurisdiction to tax such a transaction. CIT [327 ITR 456] [Refer EY Tax Alerts dated 18 November 2009. the arrangement has an Indian nexus and accordingly the jurisdiction of the Tax Authority cannot be faulted with. in the case of Vodafone NL (acquirer). observed that the acquisition price and transaction documents. The SC decision has thus settled this controversy and should provide relief to many taxpayers and clarity in case of others to determine withholding tax obligations in respect of payments to NRs. the controversy continued to remain. 12 April 2010 and 13 September 2010] Cross-border M&A transactions In September 2010. Sonata. The SC thereafter remanded the matter back to the Karnataka HC to determine the taxability of the payment. Ltd..

Kh][aYdk
Key developments and landmark judgements in 2010

While it does not appear that the Bombay HC’s decision assumes a general principle for taxing all offshore share transactions, which indirectly involve Indian assets, multi-national enterprises (MNEs) will however, need to consider the implications arising from these developments while structuring their cross-border M&A transactions involving India. With the SC expected to decide the matter in 2011, this may arguably be India’s most awaited judicial decision in the coming year.
In the case of Vodafone International Holdings B.V. vs. Union of India [329 ITR 126] [Refer EY Tax Alert dated 9 September 2010]

the stage of withholding of taxes even where the Mauritian tax resident has a lYp j]ka\]f[q []jlaÕ[Yl]& The AAR in the case of E*Trade EYmjalamk j]Y^Õje]\ l`ak hgkalagf g^ non taxability of capital gains in India in such cases. The AAR did not accept the Tax Authority’s contention that, the taxpayer was merely a façade used to avoid capital gains tax, and that l`] j]Yd Yf\ Z]f]Õ[aYd gof]j g^ l`] capital gains is its US holding company (US Co). The fact that the source of funds for the purchase of shares was traceable to the US Co or that the US Co had played a role in suggesting or negotiating the sale or that the consideration received ultimately went to the US Co in the form of dividends or the diminution of capital, do not lead to a legal inference that the US holding company, in reality, owned the shares. The AAR made extensive references to the observations in the SC’s decision to infer that the motive to set up conduit companies and doing business in a Z]f]Õ[aYd lYp lj]Ylq bmjak\a[lagf oadd not be material to judge the legality or validity of the transactions. The SC had held that the design of tax avoidance itself is not objectionable if it is within the framework of law and is not prohibited by law. However, with regard to colorable device and sham arrangements, there is still scope to ignore such dubious methods.
In the case of E*Trade Mauritius [324 ITR 1] [Refer EY Tax Alert dated 23 March 2010]

Anti abuse
9fla YZmk]$ j]Yd Yf\ _]fmaf] ljYfkY[lagfk [Yffgl Z] aeh]Y[`]\ Tax planning techniques have often come under the Revenue Authority’s scanner wherein the Tax Authority has alleged that such techniques are colorable devices used to evade taxes. Sale of Indian shares by Mauritius company not taxable in India capital gains arising to a Mauritian tax resident on alienation of shares of an Indian company are taxable only in Mauritius under the IndiaMauritius DTAA. This position has Z]]f [gfÕje]\ Zq Yf Y\eafakljYlan] circular (Circular No. 789) as well as by the decision of the SC in the case of Azadi Bachao Andolan (263 ITR 706). However, there has been reluctance on part of the Indian Tax 9ml`gjalq lg _jYfl <L99 Z]f]Õlk Yl

103

Kh][aYdk
Key developments and landmark judgements in 2010

GZlYafaf_ Y lYp Y\nYflY_] ak fgl Yf abuse of law “Dividend stripping” was one tax planning technique, where the transaction of purchase of shares is undertaken just before the dividend is paid (record date). These shares are thereafter sold after encashing the dividend, when the share prices are reduced to the extent of dividends paid. While the dividend received is exempt from tax, short-term capital loss from this transaction can be utilized to set-off other gains resulting in a tax advantage. A question, which came up for consideration before the SC, was whether such transactions are permitted under the tax laws. The SC, in the case of Walfort, held that the loss incurred by a taxpayer in such transaction cannot be disallowed as the use of a provision of the ITA to obtain a tax advantage, was not an abuse of the law. Hence, the loss arising was admissible, as the transaction of purchase and sale was real. It may be noted that the ITA has since been amended in 2001 to include an anti-abuse provision to regulate the admissibility of loss in such cases.
In the case of CIT vs. Walfort Share & Stock Brokers [326 ITR 1] [Refer EY Tax Alert dated 7 July 2010]

DTAA related issues
=da_aZadalq g^ <L99 Z]f]Ôlk lg Ôk[Yddq ljYfkhYj]fl ]flala]k Yf\ Yhhda[Ylagf g^ ^gj[] g^ YlljY[lagf jmd] The taxpayer was a UK-based limited liability partnership rendering legal services to certain clients whose operations extend to India. The EmeZYa LjaZmfYd `]d\ l`Yl l`ak Õk[Yddq transparent entity can be regarded as “liable to tax” and, accordingly, ]da_aZd] ^gj <L99 Z]f]Õlk Yk dgf_ Yk the income is taxed in the hands of its members/partners. Since the taxpayer’s personnel were present in India for a longer period l`Yf l`] kh][aÕ]\ lae] l`j]k`gd\ af the India UK DTAA, the Tribunal held that the taxpayer created a services permanent establishment (PE) in Af\aY& >mjl`]j$ Yk l`] Zmkaf]kk hjgÕlk article of the DTAA provided for a PE KlYl] lg Ydkg lYp hjgÕlk Éaf\aj][ldq attributable” to a PE, the Tribunal considered it as incorporating a wide force of attraction rule in the DTAA. Accordingly, it held that any income with respect to the services rendered to Indian projects, which were similar or relatable to the services rendered by the PE was also taxable in India, even if they were not provided or furnished in India.
In the case of Linklaters LLP vs. ITO [132 TTJ 20] [Refer EY Tax Alert dated 19 July 2010]

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Kh][aYdk
Key developments and landmark judgements in 2010

;gfklalmlagf g^ H= Yf\ hjgÔlk YlljaZmlagf af [Yk] g^ gmlkgmj[af_ g^ k]jna[]k Existence of a taxable presence in case of outsourcing of business process/IT services to an Indian kmZka\aYjq Yf\ YlljaZmlagf g^ hjgÕlk thereon has been a contentious issue in India. Also, a subsidiary company is generally treated as a separate taxable entity and is distinct from its parent, which owns it. In the case of eFunds Corporation and eFunds Solutions Inc., US (taxpayers), the Delhi Tribunal held that the relationship of the taxpayers with their Indian subsidiary to whom the Taxpayers had sub contracted/ assigned provision of software development and call center services, resulted in a PE of the taxpayers in India under the India US DTAA. A PE was constituted on account of activities of the subsidiary, which effectively resulted in the taxpayers carrying on their business in India. The ruling however, does not throw much light on the factors the Tribunal considered decisive to determine that the place of business was regarded as being at the disposal of the foreign enterprise. The Tribunal, subject to some adjustments, broadly upheld the approach adopted by the Tax 9ml`gjalq g^ YlljaZmlaf_ hjgÕlk lg l`] H= Zq Yddg[Ylaf_ l`] _dgZYd hjgÕlk based on a proportion of Indian assets to global assets. It also held that the conclusions reached in a Mutual Agreement Procedure (MAP) ^gj Y hYjla[mdYj ÕfYf[aYd q]Yj [gmd\

form the basis for the Tax Authority to reach a conclusion for other years, if there are no differences in facts for the years.
In the case of eFunds Corporation vs. ADIT [2010-TII-165-ITATDEL-INTL] [Refer EY Tax Alert dated 26 November 2010]

Afl]j]kl \]\m[lagf YddgoYZd] gf \]Zl Zgjjgo]\ ^jge k`Yj]`gd\]jk ]n]f af [Yk] g^ `a_` \]Zl ]imalq jYlag The Mumbai Tribunal, in the case of Besix Kier Dabhol, SA, ruled on whether interest paid directly to shareholders by a permanent establishment (PE) of the taxpayer in India is allowable as deduction o`ad] [gehmlaf_ lYpYZd] hjgÕlk g^ the PE in India under the provisions of the ITA and the India-Belgium DTAA. The Tribunal ruled that the DTAA only prohibits deduction of notional internal charge of interest Z]lo]]f l`] `]Y\ g^Õ[] Yf\ H= and/not interest actually paid by a PE to the shareholder or another enterprise. The Tribunal further held that since neither the DTAA nor the ITA presently has any antiabuse provisions in relation to thin capitalization, no such provision could be considered to restrict the amount of interest deduction. The Tribunal also considered the anti-abuse provisions under the proposed DTC 2010 and held that in the absence of such provisions in the ITA, debt from shareholder cannot be recharacterized as equity.

105

by itself. Use of a trademark belonging to a foreign AE. to determine whether the AMP expenses incurred are more than what a similarly situated and comparable enterprise is likely to have incurred. provides guidance on the circumstances under which a legal owner of a marketing intangible. In the case of Maruti Suzuki Ltd.” It however does not appear that the SC has annulled the principles laid down by the Delhi HC on the TP aspects of marketing intangibles. A related issue is when the promotional efforts of Y eYjc]laf_ Y^ÕdaYl] af gf] [gmfljq ka_faÕ[Yfldq ]f`Yf[] l`] nYdm] g^ the trademark that is owned by Yfgl`]j Y^ÕdaYl] af Yfgl`]j [gmfljq& The Delhi HC. payment of royalty should satisfy the arm’s length test. In such a situation the arm’s length price (ALP) for the arrangement need to be determined taking into consideration all the rights obtained and obligations incurred by the AE. will not entail a payment from the foreign AE to the domestic entity kg dgf_ Yk l`] Z]f]Õl g^ km[` ZjYf\ name accrues to the Indian enterprise alone. k`gmd\ [geh]fkYl] Y da[]fk]\ Y^ÕdaYl] for its promotional efforts that has the effect of enhancing the value of the intangible. in the case of Maruti Suzuki India Ltd. The HC held that in the case of associated enterprises (AEs). Further. the owner of the intangible needs to suitably compensate the licensed user for the advantage it obtained by in the form of brand building and increased awareness of the intangible. marketing and promotion (AMP) expenses incurred by the licensed Y^ÕdaYl] mkaf_ l`] ljY\]eYjc'ZjYf\ name are more than what a similarly situated and comparable enterprise is likely to have incurred. if the advertising. vs. the SC has directed the matter to be proceeded “in accordance oal` dYo mfafÖm]f[]\ Zq l`] observations/directions given by the HC in the impugned judgment. Gf Yf KDH Õd]\ Zq EYjmla Kmrmca against the order of the Delhi HC. ACIT [192 Taxman 317] [Refer EY Tax Alert dated 5 July 2010] India–US competent authorities’ resolution on TP matters TP disputes `Yn] ]e]j_]\ Yk Y ka_faÕ[Yfl challenge faced by MNEs doing Zmkaf]kk af Af\aY$ \m] lg ka_faÕ[Yfl TP adjustments made by the tax g^Õ[]jk \mjaf_ Ym\al hjg[]]\af_k& Af a situation where income is subject to taxation not in accordance with the provisions of a DTAA. a taxpayer may seek to get the issue redressed under 106 . DDIT [(2010) 47 DTR (Mumbai)(Trib) 450] [Refer EY Tax Alert dated 15 November 2010] Transfer pricing (TP) updates <][akagf gf LH Ykh][lk g^ eYjc]laf_ aflYf_aZd]k One of the most challenging issues in TP pertains to creation and use of intangible property. such as a trademark or a brand name. it will be necessary to identify appropriate comparables for the purpose of comparison. Further.Kh][aYdk Key developments and landmark judgements in 2010 In the case of Besix Kier Dabhol vs.

Subsequently. [Refer EY Tax Alert dated 15 April 2010 titled India on tax transparency and exchange of information] Af\aY ka_fk alk Õjkl LA=9 Af\aY ka_fk alk Ôjkl LYp Af^gjeYlagf =p[`Yf_] 9_j]]e]fl oal` :]jem\Y The OECD. which may be considered as tax havens and will also promote mutual exchange of information on matters relating to banking and ownership.Kh][aYdk Key developments and landmark judgements in 2010 a mutual agreement procedure (MAP) route. pursuant to a MAP involving a number of US MNEs. Cayman Islands and Isle of Man. represents the standard of effective exchange of information for the purposes of curbing harmful tax 107 . the ITA was amended in 2009 to enable India lg ]fl]j Y_j]]e]flk oal` kh][aÕ]\ non-sovereign jurisdictions to promote transparency and exchange of information. the GoI. on 7 October 2010. through its legal instrument of Tax Information Exchange Agreements (TIEAs). In this backdrop. [Refer EY Tax Alert dated 13 May 2010 on India-US Competent Authorities’ negotiations on TP matters] practices. It has been reported that. signed its Õjkl LA=9 oal` :]jem\Y& Al `Yk Z]]f reported that negotiations for similar TIEAs have been concluded with Monaco. which is a member of OECD’s Global Forum on Transparency and Exchange of Information. The TIEA is expected to allow the Indian Tax Authority to be better equipped to tackle tax evasion. has been playing an active role to ensure that high standards of transparency and exchange of information are in place throughout the world. Argentina. the US and Indian CAs have agreed to resolve a TP dispute involving provision of intra-group information technology and business process outsourcing services by the Af\aYf Y^ÕdaYl]k lg MK EF=k& L`] resolution involves the CAs agreeing to accept a mark-up on costs in the range of 18% to 24% as the arm’s length price as compared to an adjustment in the range of 25%–30% made by the Indian Tax Authority. British Virgin Islands. especially with jurisdictions. A MAP is an alternate dispute resolution mechanism whereby the competent authority (CA) of both countries shall endeavor by mutual agreement to resolve such issue. India.

The 2010 update contains additional positions of India on the amendments introduced in the 2008 update. the OECD MC and its commentary have been acknowledged by the Indian judiciary as a useful aid to interpret India’s tax treaties. In most of its positions in the current update relating to PE. The OECD council also approved the 2010 version of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (TP Guidelines). Even though India is not yet a member of the OECD. An important aspect of the 2010 update is the replacement of Article / Zmkaf]kk hjgÕlk!$ o`a[` gmldaf]k l`] YhhjgY[` lg YlljaZml] hjgÕlk lg Y PE. and its commentary were included for the Õjkl lae] af l`] *((0 mh\Yl] lg l`] OECD MC.” India’s position. The 2010 version ak l`] Õjkl eYbgj j]nakagf lg l`] document since the TP Guidelines were released in 1995. Kh][aÕ[Yddq$ Af\aY \g]k fgl Y_j]] oal` the approach to the attribution of hjgÕlk lg H=k l`Yl ak j]Ö][l]\ af l`] revised article and its commentary and in the consequential changes to the commentary on other articles. YlljaZmlagf g^ hjgÕlk Yf\ jgqYdlq taxation. the OECD Council on 22 July 2010 approved the text of a new update (2010 update). It also includes new guidance on how to select the most appropriate TP method. serve as a guide to taxpayers on the likely approach of the Indian Tax Authority. The revision also includes a new chapter providing detailed guidance on the TP aspects in business restructurings. with a view of possible membership. One may also recall that India was granted an “observer status” by the OECD in July 2006 and offered enhanced engagement in May 2007. The 2010 update has also made amendments to the existing OECD Commentary under Articles 5 (PE) and 12 (Royalty) to clarify PE and af[ge] [dYkkaÕ[Ylagf akkm]k Yjakaf_ from certain “telecommunication transactions. It contains new and more detailed guidance on comparability issues.Kh][aYdk Key developments and landmark judgements in 2010 India perspective of OECD developments As part of the ongoing process of revising and updating the OECD MC and Commentary. India’s positions contained in the OECD MC will therefore. as a non-member economy on the OECD MC. India appears to have a disagreement with the OECD view. which India has expressed on the OECD MC could be a cause for concern for taxpayers and could potentially expose the taxpayers to double taxation and the risk of litigation. 108 . Some of the disagreements.

[Refer EY HR alert dated 24 November 2010 Indian authorities Yffgmf[] ka_faÕ[Yfl [`Yf_]k lg l`] social security rules for IWs] 109 . These amendments appear to ka_faÕ[Yfldq \ak[jaeafYl] Y_Yafkl l`] IWs as compared to the law applicable lg Af\aYf fYlagfYdk& EF=k eYq Õf\ it hard to mitigate an additional 24% charge through an equalization policy. The revisions introduce Y fmeZ]j g^ ka_faÕ[Yfl [dYjaÕ[Ylagfk and should help in providing clarity to taxpayers as well as to the Indian Tax Authority on a number of issues where the Indian TP rules are currently silent or do not contain adequate detail. the GoI Yffgmf[]\ ka_faÕ[Yfl Ye]f\e]flk to the rules in relation to both employees provident fund (EPF) and employees pension scheme (EPS) involving International Workers (IW). Hungary. Denmark. Refer EY Tax Alert titled An Indian perspective of recent OECD developments on international taxation dated 26 July 2010 Social security contribution Oal`\jYoYd g^ Af\aYf kg[aYd k][mjalq [gfljaZmlagf gfdq gf j]laj]e]fl ^gj afl]jfYlagfYd ogjc]jk On 11 September 2010. It is therefore important that all employers with cross-border workers involving India immediately review the impact of these changes and communicate the implications to their IW employee population in India. An IW can now withdraw the full amount standing in his EPF only when he retires or reaches the age of 58 years. not holding an India passport. However. and working for an establishment in India to which the EPF provisions apply. Norway and Germany. Republic of Korea. France. Previously. Netherland. AO `Yn] Z]]f \]Õf]\ lg af[dm\] non-Indian employees. with some deviations.Kh][aYdk Key developments and landmark judgements in 2010 The Indian TP rules are broadly-based on the TP Guidelines. the Czech Republic. Thus negotiating such an SSA Z][ge]k ka_faÕ[Yfl& Af\aY hj]k]fldq has signed SSAs with Belgium. able to withdraw the money from the EPF two months after leaving their Indian employment/following their departure from India. in respect of members covered under a social security agreement (SSA). Switzerland. withdrawal may be made on such _jgmf\k Yk eYq Z] kh][aÕ]\ af l`] SSA. or on account of permanent and total incapacity. IWs were. whichever is later. Luxembourg.

& Anr. supply and commission the plant according to the contract and thus the sale was not in the course of import. Held. M/s Sanjiv Fabrics [2010-VIL-13-SC] Refer to EY Tax Focus for October 2010 Kmhj]e] . the same will imYda^q ^gj l`] Z]f]Õl g^ kYd] af l`] course of import. to deliver the goods to the lessee. In the case of CCE. U.gmjl To examine whether mens rea is an essential element of offence under a taxing statute. In the case of The Indure Ltd. The question before the court was whether the lease constituted Further. in favor of assessee The assessee purchased goods for supply to the buyer under a lease agreement. 1956. 1948. held that on the basis of the above and according to the language of section 10A of the Act. that in order to determine whether mens rea is an essential element for an offence under a taxing statute. that since the goods were imported on account of the contract and were used exclusively for the purpose as stated in the contract. regard must be had to the object of the statute Central Sales Tax Act. it was evident that mens rea is an essential condition precedent for levying penalty under this Section. Disallowing l`] Z]f]Õl$ l`] j]n]fm] [gfl]f\]\ that under the contract it was not obligatory for the assessee to import the goods to erect. The assessee gave instructions to a manufacturer of goods located outside the state.Kh][aYdk Key developments and landmark judgements in 2010 Indirect tax Value added tax Kmhj]e] . the following factors should be considered: a) Object and scheme of the act b) c) Language of the section laying down the offence Nature of penalty L`] Ykk]kk]] [dYae]\ Z]f]Õl g^ section 5(2) of the Act wherein an exemption is granted to sale incurred in the course of import. design. Held. nk& .gee]j[aYd LYp G^Õ[]j Yf\ Gjk& [2010-TIOL-79-SC-CT] Refer to EY Tax Focus for November 2010 Service tax MllYjYc`Yf\ @a_` . in favor of assessee 110 . in favor of assessee The question of law before the Court was whether mens rea (guilty mind) is an essential element for the levy of penalty under the Act.P. Thus the ”movement of goods” originated from the manufacturer of the goods located outside the state.gmjl Sale to be a valid ”sale in the course of import.gmjl Entry Tax is not akin to Sales Tax: exemption from sales tax does not automatically qualify for exemption from entry tax Uttar Pradesh Trade Tax Act. 1956. vs.” if goods imported exclusively pursuant to contract Central Sales Tax Act.

The taxable services received from abroad by a person belonging to India are liable to service tax in the hands of the Indian resident only from 18 April 2006. Kalayana Mandapam Association. 1994. Gujarat Ambuja Cements Ltd. In the case of Union of India & Ors vs. in favor of revenue L`] Ykk]kk]]$ Y d]Ykaf_ Yf\ ÕfYf[aYd company. in favor of assessee L`] kh][aYd d]Yn] h]lalagf Õd]\ Zq l`] authorities against the Bombay HC judgment has been dismissed by the SC. Held that the movement of goods originated due to the purchase order and not the lease. Thus. and All India Federation of Tax Practitioners. opposed the imposition g^ k]jna[] lYp gf ÕfYf[aYd d]Ykaf_ services on the ground that it is beyond the legislative competence g^ l`] HYjdaYe]fl$ Yk al imYdaÕ]k Yk Y deemed sale as per Article 366(29A) of the Constitution. In the case of Telecommunication Consultants India Ltd. as the same was within the meaning g^ ÊÕfYf[aYd d]Ykaf_ k]jna[]kÊ mf\]j l`] \]Õfalagf g^ ÊZYfcaf_ Yf\ gl`]j ÕfYf[aYd k]jna[]k&Ê >mjl`]j `]d\ l`Yl$ the levy of service tax falls within Entry 97 of List I and therefore is within the legislative competence of the parliament. Indian National Ship Owner [2009-TIOL129-SC-ST] Refer to EY Tax Focus January 2010 111 . Union of India [Civil appeal no.gmjl SLP dismissed on taxation of services abroad Finance Tax Act. the levy of sales tax by the GoI under the Act will not be correct. Uttarakhand [2010-VI-18-HC-UTR] Refer to EY Tax Focus for April 2010 Kmhj]e] . In the case of Association of Leasing and Financial Services Companies vs. The same has been upheld in the case of T. 1994. UOI. vs.gmjl K]jna[] lYp d]naYZd] gf ÕfYf[aYd leasing services including leasing of hire-purchase of equipments Finance Act. 9344 of 2010] Refer to EY Tax Focus for November 201 Service tax Kmhj]e] . because in the absence of the purchase order there would not be any movement of goods. 2009 (13) STR (235)] held that the provision merely describes the services provided by a non-resident Indian to a resident in India as a taxable service and does not create a charge for levy of service tax. It was held that k]jna[] lYp [Yf Z] d]na]\ gf ÕfYf[aYd leasing and equipment leasing. The Bombay HC in its judgment [Indian National Ship Owners Association vs. CCE.Kh][aYdk Key developments and landmark judgements in 2010 an inter-state sale.N.

Turbotech Precision Engineering [201018-STR-545 (Kar. 1994. was whether the assessee will be liable to deposit tax under this taxable service category during the period. In the case of CCE. Ltd. in favor of revenue The question before the Larger Bench was whether turnkey contracts can be vivisected and the service aspect can be subjected to service tax. [2010-TIOL-646-DEL-LB] Refer for EY Tax Focus for June 2010 112 . Thus. Raipur vs. that since companies were brought within the purview of the service category of consulting engineer’s services in 2006. Held. In the case of CST Bangalore. that even though the contract will qualify as works contract. The question before the court. as it was introduced as a taxable service category only on 1 June 2007. 1994. Thus held. in favor of assessee The assessee provided services taxable under the category of consulting engineer’s services. being later than the period in question.)] Refer to EY Tax Focus for July 2010 .Kh][aYdk Key developments and landmark judgements in 2010 CYjfYlYcY @a_` . the assessee will not be liable to service tax. Held that turnkey contracts can be vivisected and the discernible service elements involved therein may be segregated Yf\ [dYkkaÕ]\$ Yk o]dd Yk nYdm]\ ^gj the purpose of levy of service tax under the Act.=KL9L$ F]o <]d`a DYj_]j :]f[`! Turnkey Contracts having service elements can be vivisected for the purposes levy of tax by different statutes Finance Act. the assessee could not be made liable to service tax under the same. inter alia.gmjl Services to IT majors held to be manpower recruitment services Finance Act. M/s BSBK Pvt. vs. Article 366 (29-A) (b) that allows severability of composite and turnkey contracts is held to be merely not for the purpose of levy sales tax and has equal application for the levy of service tax for the discernible service elements. under a contract during the period 1997 to 2001. The other question was whether the assessee will be liable to be taxed under the works contract service.

In the case of CCE.=KL9L$ F]o <]d`a DYj_]j :]f[`! Cenvat Credit not allowed on cements and steel items used for laying foundation and for building support structures Central Excise Tariff Act. Raipur [AIT-2010-167-CESTAT] Refer to EY Tax Focus for June 2010 113 . assessee sought refund of the service tax paid on the ground that service tax can be levied on service portion of the works contract after works contract service was made taxable and not earlier. 1985. vs.Kh][aYdk Key developments and landmark judgements in 2010 . commissioning and installation service at that time. Central Excise Act. inter alia. This was to be determined in light of SC decisions. CCE. in favor of assessee Aseesee executed lump sum indivisible turnkey contract prior to when works contract service was introduced and paid service tax on the said contract under erection. 1994. Subsequently.=KL9L Ç EmeZYa Works contract not liable to service tax before the works contract service introduced Finance Act. Further held that goods such as cement and steel used for laying foundation and for building supporting structures cannot be treated as inputs used in manufacture of capital goods or as inputs used in relation to manufacture of ÕfYd hjg\m[lk& L`ak oYk Z][Ymk] foundations and supporting structures are not capital goods or ÕfYd hjg\m[lk& In the case of Vandana Global Ltd. The deeming Õ[lagf \g]k fgl Yhhdq lg k]jna[] tax and works contract will be liable to service tax only after the works contract service was introduced. in favor of revenue The question before the Larger Bench. The court upholding the decision in Daelim held that sales tax on works contract can be levied Zq l`] \]]eaf_ Õ[lagf [j]Yl]\ Zq the 46th Amendment. was whether the term capital goods included plant and structures embedded in Earth. whether a particular plant or structure embedded in earth can be considered as capital goods or not depend on whether it was excisable under the Act. Held that. [2010-18-STR-577-Tri Mumbai] Refer to EY Tax Focus for July 2010 Excise/CENVAT Credit . Indian Oil Tanking Ltd. Raigad vs. 1944 .

11 February 2010 and partly paid-up shares by Indian companies. With the issue of consolidated FDI policy. The FDI policy shall now be revised every six months.dYjaÕ[Ylagfk gf ><A akkm]\ Zq <AHH since 1991 stand rescinded. Press Note 2 (2010) series. as OEMs are reluctant to license their proprietary technology to a company in which their equity is restricted to a minority stake of 26%.aj[mdYj * g^ *()( With the objective of providing comprehensive FDI Policy framework. 10 May 2010 . Raising the 114 . PIB Press Release.gfkgda\Yl]\ >gj]a_f <aj][l Afn]kle]fl hgda[q2 .Kh][aYdk Key developments and landmark judgements in 2010 Regulatory Foreign direct investment policy ?gn]jfe]fl dYmf[`]\ ]%Ôdaf_ kqkl]e ^gj >gj]a_f Afn]kle]fl Hjgeglagf ZgYj\ Yhhda[Ylagfk& Lg kaehda^q l`] hjg[]\mj] g^ Õdaf_ foreign investment applications with the Foreign Investment Promotion board (FIPB). Cabinet Committee of Economic Affairs. cheroots. all fresh and amendment hjghgkYdk [Yf Ydkg Z] Õd]\ gfdaf] through a separate website launched for FIPB. cigarillos and cigarettes. Department of Industrial Policy and Promotion. FDI by way of share swap. The consolidated FDI policy for the Õjkl lae] \]Õf]\ l`] l]je [Yk` and carry wholesale trading and prescribed the conditions for the companies undertaking such activity Yf\ [dYjaÕ]\ aehgjlYfl akkm]k& L`]k] include issue of share warrants ?gn]jfe]fl j]d]Yk]\ k]ja]k g^ \ak[mkkagf hYh]jk afnalaf_ hmZda[ [gee]flk ^gj daZ]jYdarYlagf g^ ><A hgda[q Discussion paper on FDI in defence sector In the discussion paper. This has resulted in India not being able to access the latest high-end technologies available. all earlier Press Notes/Press Release/ . ?gn]jfe]fl hjg`aZal ><A af eYfm^Y[lmjaf_ g^ [a_Yj]ll]k The GoI prohibited FDI in manufacturing of ”cigars.EYj[` *()(& Henceforth. the GoI launched an ]%Õdaf_ kqkl]e o&]&^& ). the GoI has acknowledged that the present FDI cap of 26% discourages original equipment manufacturers (OEMs) from bringing in proprietary technology. \]Õfalagf g^ l]je mf\]j [gfljgdd]\ conditions for agriculture sector. of tobacco or of tobacco substitutes” and accordingly included the same in the list of items prohibited for FDI. the GoI issued Circular 1 of 2010 and Circular 2 of 2010. downstream investment through internal accruals and investment in construction development projects.aj[mdYj ) g^ *()( Yf\ .

Kh][aYdk Key developments and landmark judgements in 2010 ><A [Yh [gmd\ hjgna\] Y ka_faÕ[Yfl incentive for transfer of know-how/ technology. Akkm] g^ k`Yj]k ^gj [gfka\]jYlagf other than cash In a discussion paper the government has acknowledged that the FIPB is receiving a number of cases related to issue of shares against noncash considerations such as trade payables. Discussion paper on FDI in multibrand retail trading sector The discussion paper highlighted the fact that a number of issues needed to be resolved before opening up of retail trading section. import of capital goods/machinery etc. The GoI has noticed that the LLP model may be attractive to professional sectors and small entrepreneurs who are hesitant to use the corporate structure and \g fgl Õf\ l`] hYjlf]jk`ah structure viable. >gj]a_f'l][`fa[Yd [gddYZgjYlagfk af [Yk] g^ ]paklaf_ n]flmj]k'la]%mhk af Af\aY A discussion paper was released to invite views on whether the conditions imposed by the erstwhile Press Note 1 of 2005 series making it mandatory for the foreign investor to obtain prior approval of the Foreign Investment Promotion Board (FIPB) for starting any new venture in the kYe] Õ]d\ Yk Yfq n]flmj] ]paklaf_ af India on or before 12 January 2005 should be completely abolished or substantially relaxed. which should be consistent with the overall FDI policy. The GoI also highlighted concerns related to liberalizing the FDI regime for the defence sector and invited public comments as to whether 74% FDI under the approval route will be km^Õ[a]fl lg _an] j]imakal] Zggkl lg the defence industry. applicability of valuation guidelines. >gj]a_f \aj][l afn]kle]fl af daeal]\ daYZadalq hYjlf]jk`ahk The discussion paper highlights the inherent issues related to FDI in LLPs such as determining ownership and control. 115 . including whether any new legislation will be needed or if a regulator needs to be constituted. treatment of non-cash and downstream investments and has sought comments on whether FDI in LLPs should be permitted up to 100% or restricted to sectors without a cap. leading to higher levels of technological expertise. protecting the public distribution system by ensuring that enough buffer stocks are maintained by the government.. whether LLPs should be treated at par with the companies and whether investment should be permitted through the automatic or government route. conditionality or entry route restrictions. pre-incorporation expenses. and it is necessary to evolve guidelines on this subject.

However.pdf. pdf Press Release. 10 September 2010. Foreign exchange management Act =klYZdak`e]fl g^ ZjYf[` g^Ô[] :G!' daYakgf g^Ô[] DG! af Af\aY Zq ^gj]a_f (ii) ]flala]k af Af\aY With the objective of achieving greater transparency.in/ipr-feedback/DiscussionPaper_ IssueofShares_28September2010. http://dipp. satisfying the minimum net worth and track record criteria. respectively. 30 December 2009 F]o hja[af_ fgjek ^gj akkm] g^ k`Yj]k lg h]jkgfk j]ka\]fl gmlka\] Af\aY As a measure of liberalization. RBI placed the eligibility criteria and the procedural guidelines for establishment of BO and LO in Pricing norms in case of issue India in the public domain.pdf documents. 28 September 2010.dipp. 23. RBI amended the pricing norms for issue of shares by an Indian company to a person resident outside India with effect from 21 April 2010 as follows: Pricing norms in case of rights issue to persons resident outside India (i) In case of a listed company. Ministry of Commerce and Industry. the J]k]jn] :Yfc g^ Af\aY$ []fljYd g^Õ[] and the Insurance Regulatory and Development Authority (IRDA).nic. applications from foreign banks and insurance companies will continue to be directly received and examined by the Department of banking operations and development (DBOD). Henceforth. In case of an unlisted company the issue price will not be less than the price at which the shares are issued to the resident shareholders. Ministry of Commerce and Industry.nic. all applications by foreign of shares to persons resident outside India companies. P. A.in/ipr-feedback/ DiscussionPaper_LimitedLiabilityPartn erships_28September2010. (DIR Series) Circular No. http:// www.Kh][aYdk Key developments and landmark judgements in 2010 The government has sought public comment and suggestions interalia on whether Indian companies should be permitted to issue shares to foreign entities against non-cash contributions. Press Release. to establish BO/LO in India will need to be submitted through AD Category-I banks (AD bank) to the Reserve Bank of India along with the prescribed (i) In case of a listed company: at a price not less than the price calculated in accordance with the Securities and Exchange Board of India (SEBI) guidelines. issue price will be determined by the company. DIPP.in/DiscussionPapers/DP_ FTC_ExistingVenture_10September2010. http:// dipp.nic. 116 . or whether such an approach dilute the objective of the ><A hgda[q Zq \][]d]jYlaf_ l`] Ögo g^ physical capital into the country and what regulatory safeguards should be prescribed to permit issue of shares for consideration other than cash. DIPP.

In case of a private company: At a price not less than the fair value of shares done by a SEBI registered category-I merchant banker or Chartered Accountant as per the discounted free cash Flow (DCF) method.gj] Afn]klaf_ . Henceforth.$ 28 June 2010 FglaÕ[Ylagf Fg& *(-'*()( ÇJ:$ l`] Gazette of India. to set up such companies. Circular No. (ii) .gehYfa]k . Pricing norms in case of issue of shares to person resident outside India on preferential allotment (i) In case of a public company: At a price not less than the price as applicable to the transfer of shares from residents to non-residents according to the RBI guidelines.Kh][aYdk Key developments and landmark judgements in 2010 (ii) In case of an unlisted public company: At a price not less than the fair valuation of shares done by a SEBI registered category-I merchant banker or Chartered Accountant as per l`] \ak[gmfl]\ ^j]] [Yk` Ögw (DCF) method. 12 August 2010. 21 April 2010 J]k]jn] :Yfc g^ Af\aY akkm]k j]_mdYlgjq ^jYe]ogjc ^gj . DNBS (PD) CC. (DIR Series) Circular No. CICs with an asset size of INR10 million and above shall be treated as systemically important core investment for companies and accordingly will require mandatory registration with RBI. The RBI has decided to put in place an updated procedure for compounding of contraventions under FEMA and has issued new directions in this regard. Historically.P.No.gfljYn]flagfk mf\]j >=E9$ )111 This law has the objective of rationalizing and streamlining the process and the procedure for compounding and enhancing transparency and effecting smooth implementation of the compounding process.aj[mdYj Fg& -. for effective monitoring g^ l`] ÕfYf[aYd k]jna[]k k][lgj$ introduced a regulatory framework for core investment companies (CICs).31 dated 1February 2005 9&H& <AJ K]ja]k! .k! The RBI. )1/'(+&)(&(()'*()(%))$ J]k]jn] Bank of India. which supersede the directions contained in the compounding of contravention/s issued vide A. there has been a lack of clarity on the applicability of the RBI Act and the directions requiring NBFCs to register as a NBFC by investment holding companies.A. which provide a framework 117 .gehgmf\af_ g^ .

Kh][aYdk Key developments and landmark judgements in 2010 Securities and Exchange Board of India 9hhda[Ylagfk kmhhgjl]\ Zq Zdg[c]\ Yegmfl 9K:9! ^Y[adalq lg imYdaÔ]\ afklalmlagfYd Zmq]jk The SEBI has extended the ASBA ^Y[adalq lg imYdaÕ]\ afklalmlagfYd buyers (QIBs) in public issues opening on or after 1 May 2010. 6 April 2010 any time. Existing listed companies with less than 25% public holding will reach the minimum 25% level by an annual addition of not less than 5% to public. appellate arbitration. Every listed company is required to maintain public shareholding of at least 25%. Earlier in December 2009. If the public shareholding in a listed company falls below 25% at 118 . which interalia include the aspects related to maintenance of a panel of arbitrators. the company may go to public with 10% public shareholding and comply with the 25% requirement by increasing its public shareholding by at least 5% per annum. place of arbitration and implementation of arbitral award in favor of clients. such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall. SEBI circular no. If the post issue capital of the company calculated at offer price is more than INR40 billion. Under the ASBA facility the bank account of the QIBs will be blocked to the extent of the application money and the application money will get debited from account only if their application is selected for allotment after the ZYkak g^ Yddgle]fl ak ÕfYdar]\& SEBI circular no. Securities Contracts (Regulation) (Amendment) Rules. procedure of arbitration. 11 August 2010 L`j]k`gd\ g^ eYf\Ylgjq hmZda[ k`Yj]`gd\af_ af dakl]\ [gehYfa]k af[j]Yk]\ ^jge )( lg *- Oal` l`] fglaÕ[Ylagf g^ K][mjala]k Contracts (Regulation) (Amendment) rules. the GoI has made it mandatory for all the listed companies to offer a minimum 25% shareholding to the public as opposed to 10% earlier. CIR/CFD/DIL/2/2010. SEBI had extended the ASBA facility to all investor categories except QIBs. 4 June 2010 9jZaljYlagf e][`Yfake af klg[c ]p[`Yf_]k SEBI has issued detailed guidelines for stock exchanges to provide an arbitration mechanism for settlement of disputes between a client and a member through arbitration proceedings. arbitration fees. 2010. code of conduct for arbitrators. Gazette Of India. CIR/MRD/DSA/24/2010. 2010. Ministry Of Finance.

000 million with the concerned regional g^Õ[] g^ l`] K=:A& SEBI circular no. which remains in existence after the merger. as per SEBI Circular NoIIMARP/MF/CIR/01/294/98 dated 4 February1998 remains unchanged. 13 October 2010 Mutual funds should be able to demonstrate that the circumstances merit merger or consolidation of schemes and the interest of the unitholders of surviving scheme is not adversely affected. 5 October 2010 . Merchant bankers have been accordingly Y\nak]\ lg Õd]$ oal` ]^^][l ^jge )+ October 2010.YhalYd Yf\ <ak[dgkmj] J]imaj]e]flk! J]_mdYlagfk$ *((1 The SEBI has revised the monetary daeal ^gj Õdaf_ g^ \jY^l g^^]j \g[me]flk oal` l`] j]_agfYd g^Õ[]k of SEBI under whose jurisdiction l`] j]_akl]j]\ g^Õ[] g^ l`] akkm]j company is situated from INR500 million to INR1. 119 . all the draft offer documents/offer documents having estimated issue size of INR1. Cir/IMD/DF/15/2010. SEBI has decided that merger or consolidation of schemes will not be considered as change in the fundamental attribute of the surviving scheme if the fundamental attributes of the surviving scheme.gfkgda\Ylagf gj e]j_]j g^ emlmYd ^mf\ k[`]e]k In order to facilitate merger of mutual fund schemes. SEBI circular no. CIR/CFD/DIL/9/201.Kh][aYdk Key developments and landmark judgements in 2010 >adaf_ g^^]j \g[me]flk mf\]j K=:A Akkm] g^ .000 million.

with the globalization and these new trends will minimize risks centralization of many tax-related and create value for the business.Kh][aYdk Evolution of the tax function Albert Lee and Sameer Gupta CFO Connect. for example. tax transactions there directors and With the globalization and is demand for a their teams have centralization of many tax-related tax function with to master new processes and transactions there an international skills such as is demand for a tax function outlook and an international with an international outlook a capacity to outlook. a risk-based approach long ago. so must the also needs to be knowledgeable perspectives and skills of a company’s about processes and controls. As businesses and processes globalize. and the view themselves as deep technical \jan] ^gj ]^Õ[a]f[q lg j]\m[] [gklk& experts in their own countries. local tax managers could adopted by tax authorities. each with their the tax function in the corporate own national tax rules. risk and a capacity to coordinate and coordinate management. the tax function in an organization are as follows: Globalization and complexity in cross-border transactions The shift in economic weight from West to East. A tax function that adapts quickly to Nowadays. Not so progress. For one. has put the spotlight on 120 . technological shared service center (SSC). processes and To this end. integrate peculiarities of many and integrate and separate tax jurisdictions peculiarities of differentiated many separate communications with tax authorities. in a due to globalization. due to the impact of some important international trends. and to integrate its work with business functions such as IT. the role of different countries. the number and complexity of tax-relevant international transactions has increased sharply. December 2010 O transactions originating in many ver the last decade. are now often sector has changed dramatically processed centrally. tax function. The tax function tax jurisdictions. What is more. Some key trends that have propelled afl]jfYd Ym\al$ Yf\ ÕfYf[]& a shift in the role of the tax head or Tax professionals have seen the content and context of their jobs change profoundly over the last decade.

corporate entities. In this backdrop.1 billion. during the quarter July to September 2010. the interest in overseas investments will continue to rise. With the global economy showing signs of revival. and increasing. The digital revolution has generated lj]e]f\gmk _Yafk af ]^Õ[a]f[q$ Zml `Yk also increased the risk of inappropriate treatment of tax-related data during its electronic processing. Trivial mistakes in transaction processing 121 . outbound acquisitions by Indiaheadquartered. according to Ernst & Young’s India Transactions’ Quarterly Report. rather it needs to be well integrated with the business needs. The tax director and his team have to be involved in the decision-making process to ensure that acquisitions. in-bound transactions’ activity. proper tax analysis and planning.Kh][aYdk Evolution of the tax function India which has seen increasing M&A and private equity kind of. Increasing use of technology Globalization is closely connected with a second trend impacting the tax function. India’s relative resilience in the face of the global economic downturn. We witnessed in-bound deals which were cumulatively worth USD 10.3 billion. coupled with its expected growth potential make it a very attractive target destination. Today a tax function in an organization cannot be isolated from the operational functions. For instance. Tax decisions need to be backed by substance not only to ensure that these are not treated as a sham by the tax authorities but also to ensure that they truly meet business needs. Overseas investments by India headquartered corporates are also steadily growing and we have in recent years witnessed Foreign Direct Afn]kle]fl ><A! gmlÖgok ^jge Af\aY$ ]p[]]\af_ ><A afÖgok aflg Af\aY& <YlY released by the Reserve Bank of India (RBI) indicates that during the Õk[Yd q]Yj ]f\]\ EYj[` *()($ Y[lmYd outbound FDI totalled approximately USD 10. divestments. A tax director today plays an important role in expansion plans and also in M&A activities. and expansions are all carried out in a tax]^Õ[a]fl eYff]j& Tax savings are no longer relegated to the domestic domain. complexity increases. from a transfer pricing perspective. in such a way that it allows. A global [gehYfq Y[`a]n]k Yf ]^Õ[a]fl$ lYp effective supply chain management (TESCM) by reallocating the functions and risks within the group as a whole. which is technological progress. and a connection with business units emerge as important elements of a tax function. in-bound deal activity was strong as global companies continued to scout for acquisition targets in India. `a_`]j hjgÕl YlljaZmlagf lg dgo]j lYp bmjak\a[lagfk Yf\ daeal]\ hjgÕl attribution to higher tax jurisdictions. Digitalization and the internet revolution enable processing and instant worldwide distribution of vast amounts of tax-related data. As business operations become global. Companies aim to increase their earnings per share =HK!$ Yf\ lYp ]^Õ[a]f[q ak gf] g^ l`] levers to achieve this objective.

they have to adopt a risk-based approach themselves. but this promising development will only prosper if companies can show they have a solid internal tax control framework in place. for example. The modern tax function should be capable of designing and implementing an explicit tax-risk strategy as a basis for work prioritization. It is clear that tax-risk management. Within limited budgets. taxattitude of tax authorities avoidance. A^ [gehYfa]k oYfl lg Z]f]Õl ^jge l`] impending tax law changes. now explicitly take a risk-based approach. tax authorities of many countries including the UK and Australia. the level of compliances mandated by tax laws has substantially increased. Therefore. contain provisions for introducing General Anti-Avoidance Rules (GAAR). the tax function has to make tough choices. with a focus on potential litigation. estimating potential tax 122 These proposals make the introduction of a proper.Kh][aYdk Evolution of the tax function can have grave consequences from a tax perspective. a framework that allows a company to assess potential tax risks. as they now stand. arrangement”. the provisions of the draft Direct Tax Code. for example. In fact. Conclusion Over the last decade. It is becoming more [geegf ^gj Zgl` ÕfYf[aYd j]hgjlaf_ rules and tax regulations to require a company to disclose tax contingencies or uncertain tax positions. New tax regulations and the changing attitude of tax authorities constitute another challenge for the tax function. The likelihood of being handed out a high-pitched assessment by the Indian tax authorities and ensuing protracted litigation (and therefore. and the changing attitude of tax authorities. tax-risk mechanism and documentation procedure even more vital for the Indian corporate sector. Wide discretionary powers have been given to tax commissioners to invoke these provisions. the tax function needs to be aware of IT and should be involved at an early stage in the design and implementation g^ ÕfYf[aYd kqkl]ek& Egj]gn]j$ AL can even be used to improve the effectiveness of the practice of tax by providing faster and more accurate information by which to plan and strategize. and to declare any New tax regulations and changing transaction as an “impermissible. requires skills of the tax function that go beyond the interpretation of tax law and subsequent planning. In the international context. including the measurement and weighing of uncertain tax positions. dedicating time to shortterm . [gkl gmlÖgok Ydgf_ oal` afl]j]kl Yf\ litigation fees). Tax-risk management is becoming a key component of the overall risk management framework with Indian companies now articulating a taxrisk policy. especially since the onset of the recession after the credit crunch. The old days of playing cat and mouse games are gone. Tax professionals also feel the pressure lg Z] egj] [gkl%]^Õ[a]fl$ lg \g egj] with less. is a key input that is considered crucial in planning out business transactions. Tax authorities in countries such as Ireland and the Netherlands are exploring more cooperative relationships with companies. 2010.

You can write to Samir at: samir. For example. KYe]]j ?mhlY is a partner with Ernst & Young India and national leader of our Corporate/ Business Tax Services practice*. 123 .lee@uk. He has 20 years’ experience in international taxation in both industry and consulting and is currently responsible for helping our clients across EMEIA with tax strategy. tax sensitization of source systems.ey. more than ever. process redesign. but also add value. Albert Lee is the leader of Ernst & Young’s Tax Performance Advisory practice* for the EMEIA region (Europe. now. exchange control. Middle East. a modern tax function has evolved from a domestic to an international scope. They now routinely request downloads from accounting systems as part of an audit or enquiry process. these new realities the tax function should have robust systems and processes capable of managing the compliances on time and meet the information and date requests by the tax authorities. corporate and allied laws. >gj j]Ykgfk g^ ]^Õ[a]f[q Yf\ [gkl$ the tax function must integrate and leverage the infrastructure of the business which gives rise to the tax liability. and stay ahead of. and its businesses. and related change management services. solution evaluation and implementation. FDI and regulatory matters besides specialized tax litigation advisory services. process. All rights reserved throughout the world. creating value for the company. the tax function should closely cooperate with other functions such as AL$ ÕfYf[]$ Yf\ afl]jfYd Ym\al& In short. many tax authorities `Yn] ka_faÕ[Yfldq af[j]Yk]\ l`]aj technological skills as well as their demands for information. transfer pricing and tax planning and compliance. risk. In order to adapt to. Over the last decade. it needs lg afl]_jYl] oal` ÕfYf[]$ afl]jfYd audit.ey.com *Our Corporate Tax practice provides integrated solutions across income and wealth taxes. India and Africa). The demands of all these trends on the tax function often reinforce one another. strong systems and processes will not only help the tax function to reduce a company’s tax compliance risk. He focusses on the Financial Services industry and has over 15 years of experience in advising Indian Yf\ afl]jfYlagfYd ÕfYf[aYd k]jna[]k [gehYfa]k including banks and private equity groups in investments and fund structuring. internal controls remediation. Techniques such as data-mining can. You can write to Albert at: albert. and should also be used by the tax function to improve its own tax-planning strategies.gupta@in. it needs to d]n]jY_] l][`fgdg_q3 Yf\$ ÕfYddq$ al should adapt to tax law changes and build a positive relationship with tax authorities. This is the new challenge of a tax function.Kh][aYdk Evolution of the tax function tasks such as preparing returns or to long-term needs such as strategic tax planning. demonstration by the tax function of robust controls is necessary to improve the relationship with tax authorities. data and technology matters. Example services include advisory assistance with tax function reviews.com *Tax Performance Advisory (TPA) services assist business clients with the strategic and operational challenges facing their tax functions. Reprinted with the permission of CFO Connect © 2010. Therefore. What is more.

ey.com/india @Yn] im]klagfk YZgml Y kh][aÕ[ =Q k]jna[]7 Whatever your inquiry. Assurance.Egj] oYqk lg klYq [gff][l]\ lg =jfkl  Qgmf_ Services for you. manage your risk.. Advisory O] hjgna\] k]jna[]k lg `]dh qgm j]lYaf [gfÕ\]f[] of investors..com/thoughtcenter/ The choice is yours! Go to www.ey.. Tax. strengthen your control and achieve your potential.ey.com/industries Subscribe to our. Read more on www.com/subscription-form Webcasts and podcasts http://webcast. we’ll help direct you to the right place.com . Transactions.com/Services Sector knowledge Center of excellence for key sectors We have specialized teams that bring sector knowledge to you..ey. www.ey. Read more on www. Publications — easy to use subscription form www.ey.

Dadar (W) Mumbai — 400028 Tel: +91 022 61920000 Fax: +91 022 61921000 Taxation in India 2010-11 -l` Öggj$ :dg[c :È* Nirlon Knowledge Park Off Western Express Highway Goregaon (E) Mumbai — 400 063 Tel: + 91 22 6749 8000 Fax: + 91 22 6749 8200 A compilation of our published thought leadership NCR Golf View Corporate Tower – B Near DLF Golf Course.l` Öggj$ @L @gmk] 18-20 Kasturba Gandhi Marg New Delhi – 110 001 Tel: + 91 11 4363 3000 Fax: + 91 11 4363 3200 4th & 5th Floor. NOIDA . Sector 42 Gurgaon – 122 002 Tel: + 91 124 464 4000 Fax: + 91 124 464 4050 .l` Öggj! Fax: + 91 22 2287 6401 L]d2 # 1) ** . Plot No 2B.201 304 Gautam Budh Nagar. Abad Nucleus NH-49. Tower 2.((( )*l` Öggj! >Yp2 # 1) 0( ***. Sector 126. (. Maradu PO Kochi.0.P.. Kerala 682304. U. India G^Õ[]2 #1) . 3 Cenotaph Road Teynampet Chennai — 600 018 Tel: + 91 44 6632 8400 Fax: + 91 44 2431 1450 Hyderabad *(-$ *f\ Öggj Ashoka Bhoopal Chambers Sardar Patel Road Secunderabad — 500 003 Tel: + 91 40 6627 4000 Fax: + 91 40 2789 8851 L`] GnYd G^Õ[] 18.()$ .Gmj g^Õ[]k Ahmedabad *f\ Öggj$ K`anYdac Ak`YYf Near CN Vidhyalaya Ambawadi Ahmedabad — 380 015 Tel: + 91 79 6608 3800 Fax: + 91 79 6608 3900 Bengaluru “UB City”.24 Vittal Mallya Road Bengaluru — 560 001 Tel: + 91 80 4027 5000 + 91 80 6727 5000 >Yp2 # 1) 0( **)( . +(.-((( )0l` Öggj! Fax: + 91 22 2282 6000 The Ruby 29 Senapati Bapat Marg.. Canberra Block )*l`  )+l` Öggj No. India Tel: + 91 120 671 7000 Fax: + 91 120 671 7171 Pune .)+l` Öggj! Chennai LHD @gmk]$ *f\ Öggj No.l` Öggj Panchshil Tech Park Yerwada (Near Don Bosco School) Pune — 411 006 Tel: + 91 20 6603 6000 Fax: + 91 20 6601 5900 .È.-/ 1*(( ... iLabs Centre Madhapur Hyderabad — 500081 Tel: + 91 40 6736 2000 Fax: + 91 40 6736 2200 Kochi 9th Floor.l` Öggj  )0l` Öggj$ =phj]kk Lgo]jk Nariman Point Mumbai — 400 021 L]d2 # 1) ** .1.((( Fax: +91 484 2705393 Kolkata 22 Camac Street :dg[c Ë.Ì$ +j\ Öggj Kolkata — 700 016 Tel: + 91 33 6615 3400 Fax: + 91 33 2281 7750 Mumbai ..

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