Stay invested in debt funds, say experts
Fall in bond prices seen as right time to invest in dynamic schemes
BL Research Bureau:
Herd mentality, which has inflicted major losses on investors during times of unexpected developments, returned to haunt the markets last week. Forgetting the good returns delivered over the past year, a large number of bond fund investors, who had started getting jittery since June as the rupee started losing value, suddenly hit the sell button last week. As a result, many debt funds ended up recording massive fund outflows.
The cue was Reserve Bank of India's surprise decision to increase interest rates on short-term credit with a view to tightening liquidity and give a leg-up to the sliding rupee.
However, not all's lost. Industry experts see a window of opportunity in the turmoil that played out in the market last week. They say the fall in bond prices could provide a good entry point for investors, who should refrain from panic selling.
RBI's move
The RBI's move led to fears that policy rates could move back up again. This saw the 10-year G-Sec yields spike to 8 per cent, up over 90 basis points from their May lows. This led to a sharp decline in bond prices, since yields and bond prices move in opposite directions.
Long-term gains
While there was a rush for redemption from bond funds following the central bank's move, this knee-jerk reaction could be unwarranted. Over a one-year period, most bond funds have returned above 5 per cent, despite last week's dip. In fact, funds such as Canara Robeco Dynamic Fund, IDFC Dynamic Bond Fund and SBI Magnum Income have even managed double-digit returns over the past year.
The picture, however, turned bleak over the last one month with all funds delivering negative returns, in the range of 1.5 to 6 per cent.
But debt fund managers see a silver lining in this cloud — they think this may be the right time to invest in dynamic bond schemes. Rahul Goswami, CIO-Fixed Income, ICICI Prudential AMC, said, "The time is ripe to further increase investment allocations into duration funds, including dynamic bond funds. In the near term, volatility will be there but the opportunity is great at this point in time. We have always seen that monetary policy shocks are good periods for investment in debt."
Concurred Dhruv Chatterji, Senior Analyst at Morningstar: "It would be advisable for existing investors, especially those who have got in during the last couple of months, not to panic and sell off in a hurry. Investors, who have a higher risk appetite, can consider this extreme move as a buying opportunity, and take exposure in debt through a dynamic bond fund."
However, investors who cannot digest volatility would be better off putting their money in short-term and ultra-short-term bond funds now, he added.
Looking forward, fund managers are hopeful of rate cuts and term the RBI's present moves as temporary. Santosh Kamath, CIO-Fixed Income, Franklin Templeton Investments, said: "We remain convinced that lower interest rates are inevitable to alleviate the macroeconomic situation. Like in the past, such situations throw up attractive investment opportunities from a medium-to-long-term perspective."
(This article was published on July 21, 2013)
Does taxman know you've moved?
The Hindu Forgetting to update personal details such as address and mobile number at one's bank, financial intermediaries and the tax office, will lead to hardships later in the financial planning and tax compliance.
Some simple steps can go a long way in avoiding hassles at a later stage.
Greener pastures" was the response when Nitin, an IT engineer from Gurgaon, was asked why he relocated to Hyderabad last year. Today, he has to deal with notices from the tax officer in Gurgaon for the income tax returns he filed in the previous years. As the notices were sent to his old address, Nitin did not receive them until it was past the due date for the response. Work commitments prevented him from travelling to Gurgaon to meet the tax officer.
Many, like Nitin, relocate to different cities within India and face similar challenges. A lot of them forget to update personal details (such as address and mobile number) at their bank, financial intermediaries and the tax office, leading to hardships later in their financial planning and tax compliance. Ideally, at the time of relocating, Nitin should have updated his income tax records (through the National Securities Depository Ltd or NSDL) by filing a 'Request for changes or correction in PAN data' on the PAN services Web site (www.tin-nsdl.com), or at the PAN centres managed by NSDL. After verifying the information, NSDL will forward it to the tax office and the tax database will be updated. This would ensure that all future notices arrive at his new address. Nitin can still do this, and ensure he receives all future correspondence on time.
To deal with any tax matters that may resurface after relocation, Nitin should approach his jurisdictional income tax officer, intimate the change in address, and request a jurisdiction change to Hyderabad.
To determine the new tax officer, Nitin could approach the Public Relations Officer at the tax office as the jurisdiction could be based on the source of income, employer jurisdiction, or residential address.
An application for change in jurisdiction should be filed with the Gurgaon tax officer and the new jurisdiction tax officer in Hyderabad, stating the reason for the change (new job).
Besides receiving all communication from the tax office at the current location and responding on time, the updated records would facilitate faster processing of returns/ assessments and, at times, refunds that were delayed due to wrong address.
Nitin can also save time and money by not having to travel to Gurgaon to meet the tax officer.
Additionally, the tax assessment orders issued by the tax office can be used as address proof in certain places (such as passport application).
Where the return is filed online, the taxpayer can update his profile and address at the portal and mention it on the tax return.
Aditya Modani, Senior Tax Professional, contributed to the article
The author is Director — Tax and Regulatory Services, EY
(This article was published on July 21, 2013)
Go with product similarity
The Hindu Even before the amendment, contract manufacture was held to be a sale transaction, and outside section 194C.
Even before the amendment, contract manufacture was held to be a sale transaction, and outside section 194C.
While deciding in favour of the Revenue department, the Ahmedabad Income Tax Appellate Tribunal recently ruled in the case of Pino Bisazza Glass Pvt Ltd that product comparison is an essential element and should be preferred over 'functional similarity' for determining arm's length price under the Transactional Net Margin Method (TNMM). Holding that the transfer pricing officer had rightly rejected the comparables selected by the taxpayer, the tribunal observed that without first establishing the proximity of the products it was difficult to treat the companies as 'comparables'. Interestingly, the Mumbai tribunal in the recent case of Diageo India Pvt Ltd held that product similarity was not relevant, as that criteria would make TNMM impractical. Further, the Organisation for Economic Cooperation and Development's guidelines too hold that while prices are likely to be affected by differences in products, net profit indicators are less adversely affected.
Share premium catches taxman's eye
In the case of Northgate Technologies Ltd, the transfer pricing officer/ first appellate authority had treated the share premium paid by the taxpayer in an investment in an overseas subsidiary as a loan to the subsidiary. The Revenue argued that unless price paid as premium to subsidiaries is justified in an arm's length situation, it should be treated as 'nil' under the Comparable Uncontrolled Price method as no independent party would pay such a huge premium without basis. The adjudicating Hyderabad Income Tax Appellate Tribunal observed that the Revenue's main contention was the taxpayer's failure to furnish analysis supporting the high premium paid. Accordingly, it remanded the matter back to the assessing officer, directing the taxpayer to furnish the supporting evidence. While the question remains whether the re-characterisation of a transaction is appropriate, in the current era of TP with an expanded definition of "international transaction", this ruling reiterates the importance of valuation and robust documentation to support the arm's length nature of capital transactions.
Contract manufacture outside TDS net
The Supreme Court in the case of Silver Oak Laboratories Pvt Ltd recently held that the amendment to section 194C of the Income-Tax Act, 1961 will apply only from October 1, 2009, and not retrospectively. The amendment under Finance Act 2009 excluded "contract in the nature of contract manufacturing arrangement" from the definition of "work" with effect from October 1 that year. Typically, under a contract manufacturing arrangement, the vendor manufactures a product by procuring the raw material according to customer specifications and supplies the product after levying the applicable excise duty or sales tax. On delivery, the property title passes to the customer. It may be noted that even before the amendment the predominant judicial view was that contract manufacture is a sale transaction and not a 'works contract', and hence outside the scope of section 194C.
The correct profit of the branch office
Recently, in the case of Wellinx Inc, the Hyderabad Income Tax Appellate Tribunal ruled on the exclusion of payments received by an Indian branch office from its US head office. Considering Article 7(3) of the India-US tax treaty, the tribunal held that when services by the Indian branch office were outsourced "commercial" activities, they would be included as its profits. However, if it carried out non-commercial activities on specific instructions from the head office, then the payments would be excluded from its profits. While the tribunal's distinction between commercial and non-commercial services does not find specific reference in the treaty or the OECD Report on Profit Attribution, it may have perhaps intended to identify whether there are "dealings" between the branch and head offices.
— EY
(This article was published on July 21, 2013)
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