[aaykarbhavan] Business standard mews iupdates and Legal digest 17-3-2014

I- T softens transfer pricing blow on MNCs

FY14 sees 16% decline in adjustments; department adds only ₹ 59,000 crore to the profits attributed by multinationals, against ₹ 70,000 crore a year ago VRISHTI BENIWAL New Delhi, 16 March The tax department has estimated a 16 per cent drop in the income "under- reported" by Indian subsidiaries of multinational companies this year, signaling areduction in disputes with regard to pricing of cross- border transactions between related parties. It added only ₹ 59,000 crore to the profits attributed by MNCs to their group companies doing business in India, against ₹ 70,000 crore a year ago— the highest ever. The additional income will be taxed at 30 per cent. The adjustment to the income is made when the assessing officer believes the transaction was not done at the price that would have been charged to an unrelated party. The fall this year is due to courts disposing some cases and the tax department's greater experience in assessing cross- border transactions. More importantly, tax officials are wary of such cases after getting flak from industry for being " too aggressive". The department has asked officers to provide detailed reasons to an assessee while passing a tax order. "Most companies that received notices last year have been sent orders this year, too. So, there is no decline in the number of cases, but the adjustment per case has come down," a tax department official told Business Standard seeking anonymity. Shell received a transfer pricing adjustment order of over ₹ 3,000 crore this year, against ₹ 15,000 crore last year. Vodafone also got an order for undervaluing its transaction with its parent company by ₹ 3,000 crore. Both have disputed these claims in court, and more companies that received orders are expected to follow suit. Essar, Bharti, Microsoft, Maruti, Gillette and IBM are among other companies to get adjustment orders. Transfer pricing disputes in India accounted for 70 per cent of the world's total by volume, said a report by the Indian Council for Research on International Economic Relations. It said the US had only six transfer pricing cases in litigation, while Singapore, Germany and Taiwan had none. Of the 3,200- odd transactions audited in 2012- 13, ₹ 70,000 crore was found under- reported in around 1,600. In 2011- 12, the figure was ₹ 44,531 crore in 1,343 deals. According to an expert, fewer cases were scrutinised this year by some assessing officers. He said an assessing officer in Mumbai audited only 18- 19 transactions this year, down from 170- 180 a year ago. " Perhaps, there is a realisation alittle bit of harassment was happening. Many judgments are coming in favour of industry," said Rakesh Nangia, managing partner, Nangia & Co, an accounting firm. Another official said the tax department had grown conscious of its image after last year's spurt in claims. Transfer pricing is a new subject for India and the tax department is short of staff qualified to deal with it. The US has five officers for every audit, in India an assessing officer conducts 60. The department has asked these officers to frame orders based on international best practices.

Set up nodal dept for services: FinMin advisors

BS REPORTER New Delhi, 16 March Economic advisors in the finance ministry have pitched for setting up anodal department to address issues faced by services, the biggest sector of the economy. "Despite having a strong growth potential in various services sub- sectors, there is no single nodal department for services," says a working paper, ' Emerging Global Economic Situation: Opportunities and Policy Issues for Services Sector'. The paper was authored by H A C Prasad, R Sathish and Salam Shyamsunder Singh. The paper says there is an urgent need to have a proper institutional framework to tap the opportunities in the services sector in a coordinated way. It said even the inter- ministerial committee for services set up under the Department of Commerce has not made much headway. The paper says the delay in business approval inhibits services sector growth. " In India, there is a lot of delay in getting clearances. On the other hand, the United States Delivery Centre of MindTree in Florida University could start functioning within three months." The paper also addresses issues related to linkages of services with other sectors. The linkage effect is considered to be high in the services sector. According to estimates, 20 per cent of services' output goes to end- consumers; the rest is used by sectors like manufacturing in B2B mode. So, if manufacturing grows, services would automatically grow. The absence of this linkage is being felt in the hardware sector, as major parts of electronics goods have nil import duty due to the Information Technology Agreement (ITA- 1) entered into force in 1997. While many economies of southeast Asia had developed their semiconductor sector by then, India did not, and now, it is difficult to do so, says the paper. As a result, the benefit of a hardwaresoftware combination linkage could not be reaped. Besides, the paper says, there is a need for greater marketing of services and increasing its visibility abroad. " This could be done by setting up a portal for services, providing all information on the sector in one place, showcasing Indias competence, including non- software services, having regular servicesrelated exhibitions, symposia abroad and using dedicated brand ambassadors and experts in the area of services." The paper raises the issue of a lack of good database for the sector. It refers to the expert committee to render technical advice for development of service price index, technical advisory committee to develop methodology for compilation of the index of services production, and an expert group on the strengthening of institutional mechanisms for regular collection and compilation of data on international trade in services. For full report, visit www. business- standard. com The paper says there is an urgent need to have a proper institutional framework to tap the opportunities in the services sector

'Related party transactions are not evil'  Corporate governance had taken centre stage with Parliament passing the Companies Act, 2013 in August

What are the key challenges in implementation of the Companies Act, 2013? In terms of the actual implementation logistics, the immediate challenge for the government is to set up a responsible tribunal. Today, in the new Act, alot of responsibilities that were earlier with the courts have now shifted to tribunals. It is a super- duper Company Law Board. You do not need to go to the courts for all necessities. A lot of courts' jurisdictions, such as amalgamations, have now shifted to the tribunal. Second, of course, there are some new concepts and there are sometimes not the best of drafts. The problem is, once it is notified as an Act, you have to go to Parliament to change it. I think, the MCA ( Ministry of Corporate Affairs) is trying to make a lot of the changes through rule- making. A lot of debate and a lot of representations are being made. When do you see it settling down? Ithink, in about a year. Do you think, the mandatory spending of two per cent of net profit on corporate social responsibility ( CSR) can be considered as business expenditure? It will depend on how it is spent. If you, as a company, do CSR by giving money to a genuine not- for- profit foundation, that is already allowed deduction in accordance with the Income Tax Act. If you do it internally within the company, such as setting up a school for workers' children, then the fact that you are going to build this brick and mortar, is going to give you a depreciation and to the extent that you are paying for teachers, etc, that will be an expense. I am not a tax expert, but somehow, Ithink, it can be expensed out. Or, it will work towards being expensed out. There is nothing wrong with that concept. Why is it that the government allows me a deduction if I give my money to the institute for the blind? I think, we should work towards that. I do not think that a government can resist that. The new Act allows class action suits. Who do you think will be using it? Ithink, we will first see some activists, NGOs, or we can see minority vested interests using it. We can also see competitors putting up a class of shareholders to start a class- action against acompany. We already have oppression and minority mismanagement under our current laws. You need 100 shareholders for that. What this will do is, save you the trouble of going out to 100 shareholders, maybe, have fewer and demonstrate that there is awider class of interest, which can classify as a public interest action or class action. But what can happen if everything takes 20 years? The class- action ultimately means money, it does not mean an injunction. Two things are important for class action suits to have an effect. First, the time period for a decision is cut down and the law of tort is developed better. In the US when you have class action, it is finished in two years. Sebi recently clamped down on Related Party Transactions (RPTs) by asking for prior approval of audit committee and approval of RPTs by shareholders through special resolution with related parties abstaining from voting. How do you look at it? My own view is that it is going alittle far. They say it is not at arm's length if it is this or that. Ifear that in hindsight Sebi will come back and say it was not at arm's length. Who is going to decide the commercials? The board of the company, or Sebi, or some class action shareholders, or some Public Interest Suite. So, I think, you are creating interference in governance. I felt, it was already done when the audit committee had to sign on related party contracts and independents were heading the audit committee. There is clear liability for doing the job on audit committee. Ithink, this is happening because Sebi feels that despite whatever is in the rule book, the DNA is not in the right place. The circumvention of this is happening. Now, therefore, they are taking it one step further. They are going to make it kind of impossible. But I do not think related party transactions are evil by themselves. So I think, it is taken up to a slightly polarised level. We will have to see how corporate workings pan out. If it proves to be too difficult, there will be some push back. According to Sebi guidelines, about 1,000 women directors posts are to be filled by October 1. What kind of challenges will it have? It will be a step at a time. Maybe, some companies won't find the directors and they will be given more time. Frankly, you do not have to have women as independent directors that was actually a proposal that didn't go through. So you can have women in the family who can become directors. For women, it will be alearning process. It will take time, but personally, that is okay. May be it is a quota, so what? Why is it that she must have the same merit? Every man is not brilliant, so it is a learning process. If you talk to me 10 years later, you will have adifferent scenario. So we are starting, and I am very happy that Sebi has started. ZIA MODY Managing partner, AZB & Partners 2013 and the capital market regulator further tightening norms for listed companies in recent months. In the past six months, about 30,000 representations have been made against the rules for over 355 sections of the new Companies Act that are yet to be notified, and only about 100 sections, which do not have reference to the rules, have been notified. ZIA MODY, managing partner at one of the leading corporate law firms, AZB & Partners, talks to Abhineet Kumar on the challenges this has brought upon the companies and the regulator. Edited excerpts:

 

Corporate guarantee need not be intra- group service VIJAY IYER The issue of commission for provision of corporate guarantees has been one of the most contentious issues in the battleground of transfer pricing litigation. There are conflicting views on whether corporate guarantees can inherently be treated as international transactions, or whether their treatment would depend on the purpose of the corporate guarantee. The Delhi Income Tax Appellate Tribunal ( ITAT) in its recent ruling in the case of Bharti Airtel Limited has provided some much- needed guidance on this issue. In the case, the taxpayer had provided a corporate guarantee and also charged a guarantee commission from its subsidiary. However, the income tax department enhanced the rate of guarantee commission, thus making an adjustment. The Tribunal has addressed the fundamental issue of whether the provision of a corporate guarantee can, in fact, be considered to be an " international transaction" under the Indian transfer- pricing regulations. The Tribunal, after examining all provisions of the law as well as all judicial precedence, is of the view that only transactions that have an impact on a taxpayer's profits, or income, or losses, or assets, would constitute an "international transaction" under the Indian law. Further, the Tribunal has also held that such an impact may be at the time of the transaction, or at a future date, but needs to be a definite impact. A "contingent" impact that may or may not materialise would not be considered to be an " international transaction" under the Indian law. In the instant case, the corporate guarantee provided by the Bharti Airtel to its subsidiary created only a possibility that Bharti Airtel may in future need to pay on behalf of its subsidiary. There was no tangible cost borne by the company that had any demonstrable impact on its income, profit, losses, or assets. Thus, in the absence of a definite impact in the instant case, the Tribunal held that the provision of acorporate guarantee would not constitute an international transaction under the Indian law. Apart from the issue of commission for corporate guarantee, the Tribunal has also deleted transfer pricing additions made by the department in respect of interest on loan and interest on share application money advanced to subsidiaries. On the first issue, the Tribunal has rejected the arm's length price of LIBOR plus 877.60 basis points determined by the department on the grounds that the price was based on an analysis that was ad- hoc and subjective. The Tribunal has reinforced the view expressed in various other rulings that the analysis done to determine an appropriate benchmark price has to be objective and based on sound numerical reasoning and computation. On the second issue of share capital, the Tribunal has rejected the department's approach of treating advance share capital money as an interest free loan simply on the grounds that the issue of share has been delayed. In this instance as well, the Tribunal has re- enforced the general principle laid down by many other courts that the department cannot change the character of a transaction unless it is proved to be a sham. In this issue too, since the Department was not able to substantiate its claim that in a third- party scenario an interest would have been charged, its contentions were rejected. On the issue of corporate guarantee, the Tribunal has drawn a very subtle, but significant difference between an impact that is definite and tangible versus an impact that is contingent and intangible and thus may or may not materialise at some point of time. Here, it needs to be pointed out that the Tribunal's view that in the absence of a tangible impact, the provision of corporate guarantee would not constitute a transaction is contrary to the general accepted transfer pricing principle that explicit corporate guarantees constitute intra- group services. However, the Tribunal has also clearly stated that despite international literature and foreign case laws, its decision has been made within the framework of Indian regulations as they stand today. Intra- group loan transactions are a challenge at the best of times given the multiple factors that affect their pricing. In many cases such transactions are undertaken purely due to a related party relationship with a view on the long term benefits that a multinational group as a whole may enjoy. In such a fuzzy scenario, the Tribunal has attempted to provide clear and explicit guidance on how various financial transactions should be treated. Without doubt, its most important judgment is on the issue of under what circumstances would corporate guarantees constitute international transaction under the Indian transfer pricing regulations. If the interpretation taken by the Delhi Tribunal gets confirmed by higher courts, it will prove to be one of the most significant pieces of guidance that would have been given in the otherwise ever dynamic arena of Indian transfer pricing, which has proved to be a challenge for both, taxpayers and tax authorities. The author is partner and national leader, transfer pricing, EY. The views expressed are personal ITAT ON TRANSFER PRICING ITAT ruling on Bharti Airtel has provided the much- needed guidance on transfer pricing The temptation of justice to breach the rule of law If you hold the belief that what the law provides is irrelevant, so long as someone who has committed a horrible wrong is handed down a severe punishment by the law enforcement system, read no further because this piece is not for you. For, it is about the curious drama the country has witnessed in recent weeks in the complex case of Sahara, the Securities and Exchange Board of India ( Sebi), and the detention of Sahara's founder Subrata Roy in jail. This case is very important, not for what Sahara and Roy have done or are going through, but for what someone not in the same league can face in the future. This piece is about the rule of law. A short recap would be in order. It has been conclusively held that Sahara raised several tens of thousands of crores of money from millions of investors without complying with securities regulations. These regulations require the writing of a prospectus setting out the terms on which the funds would be raised, the purposes for which they would be used, and the manner in which the investors would be serviced. Sebi directed Sahara to refund to the investors all monies wrongly raised, and to prove that the funds had indeed been repaid. The Securities Appellate Tribunal dismissed Sahara's appeal, comprehensively holding in favour of Sebi. The Supreme Court upheld the Tribunal's decision. Therefore, Sahara now had to repay the amounts raised illegally, and demonstrate the repayment. According to Sahara, the tens of thousands of investors who it claims to have raised monies from are not complaining, and they are being repaid only because of Sebi's directions. However, Sahara is just unable to demonstrate who the investors are, where they live, and how they have been repaid. In short, it is quite evident to anyone following the case, that in all likelihood, the investors do not exist. Now, that changes not just the shade or complexion of the case, but even the very basic colour of elements involved. If the investors do not exist, it would point to the inference that the tens of thousands of crores of money in the balance sheets and bank accounts of the Sahara companies are from sources that cannot even be demonstrated. If that were true, it would mean that fantastic amounts of cash are converted into bank balances. In the eyes of law, it would be a case of alleged money laundering. Money laundering is governed by the Prevention of Money Laundering Act — a legislation passed by Parliament after enormous difficulty. It is a special law that statutorily obliges officers of Sebi and the Reserve Bank of India to assist the anti- moneylaundering authorities who draw power under that law. Under that law, accounts can be frozen, assets attached, violators legitimately sent to jail, and properties forfeited. Curiously, based on publicly known information, so far there has not been a single official whisper from any quarter about this law despite this being the statute that has the closest connection to the facts of the case. Sahara has had a curious style of defending itself. It has perhaps engaged the best lawyers in the country, but adopted the worst public relations strategy anyone could adopt. While its lawyers have done the best anyone can do inside the court room, Sahara has done the worst any client can do outside. Full- page advertisements in bad grammar and worse syntax narrate its version of logic, struggling to impress its point of view upon the reader. During the proceedings, Roy threw a party for his grandchild's first birthday, only to be attended by anyone who could hold any public office of consequence — ranging from the Speaker of the Lok Sabha to ministers in the government and opposition leaders, astrong show of strength was displayed. Roy's antics led to the Supreme Court asking him to remain present in court and he kept evading showing up, leading to an arrest ordered by the Supreme Court. The only available law to support such detention is contempt of court. No criminal trial has taken place - for that one would need specificity on what is the amount raised, do the investors at all exist, which law has been breached, and why a citizen should be put behind bars should be clear for history to know. In this case, what is the amount of money raised, who it was raised from, which law enables detention, and what should be the correct law to be enforced, remain unclear. As week after week goes by with the Supreme Court not relenting to release Roy from jail, elections to the Lok Sabha and many a state legislature loom large over the country. The biggest consumer of laundered funds during elections is the political system. The rule of law is about applying designated horses to run designated courses. The law that is indeed applicable is the one that should be applied, the authorities that are empowered to enforce that law should adopt enforcement action, and those who are sent to jail should go in only on very clear and specific terms and grounds. Breach the rule of law while enforcing law, and you victimise the law itself, and not the individual involved. It can have a counter- productive effect, too: in future, cases less deserving of harsh action can be handed down serious injustice, citing precedence. The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own. somasekhar@ jsalaw. com Sahara represents the ultimate test of the conflict between the rule of law and dispensation of justice WITHOUT CONTEMPT SOMASEKHAR SUNDARESAN Sahara is unable to demonstrate who the investors are, where they live, and how they have been repaid   BRIEF CASEN M J ANTONY  A weekly selection of key court orders Half- full win for liquor bars The Kerala government and the threestar hotels there won one point each in their long- drawn litigation. The Supreme Court has struck down a government rule that no new liquor bar should be opened within three km of an existing bar in a panchayat area or within one km in a municipal area. The rule was challenged by three- star hotels, as arbitrary and discriminatory. They had also challenged another rule that no new licence shall be issued to them to serve Indian- made foreign liquor ( IMFL). The Supreme Court upheld that rule. Earlier, the Kerala High Court had struck down both rules, against which the state government moved the Supreme Court. The Abkari policy was tightened in 2011 in view of the rising trend of alcoholism and the consequential social issues arising in the society. The judgment in the appeal, state of Kerala vs B Surendra Das, stated that the rules would help hygiene and discourage drinking habits of youth, which is a serious menace to the state. It quoted a report of the CAG which stated that the bar licences were being issued to hotels with poor hygiene standards, which did not abide by the working hours prescribed for hotels and sold liquor even on dry days. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Tenancy disputes not for arbitration The Supreme Court ruled last week that alandlord- tenant dispute in West Bengal cannot be sent for arbitration even if there is a clause in the agreement recommending it. The tenancy in this case, Ranjit Kumar vs Anannya Chowdhury, was terminated upon which the tenant invoked the arbitration clause before the civil judge. He dismissed the plea to set up an arbitral tribunal, but on appeal the Calcutta High Court approved of arbitration. The landlord appealed to the Supreme Court, which set aside the high court order. It said that when the West Bengal Premises Tenancy Act mandates that the civil judge shall deal with eviction and related tenancy matters, the arbitration route is closed to the tenant. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Failed firm has no claim on plot An industrial development board can take back the land allotted to a firm if it is ordered to be wound up and a liquidator is appointed by the company court. The board cannot be asked to release the industrial plot if the condition to establish a factory was not complied with and it had violated the terms of the lease. The Supreme Court stated so last week while dismissing an appeal case, Phatu Rochiram vs Karnataka Industrial Areas Development Board. The court noted that there was no scheme to rehabilitate the firm. Though there are some " obscure proposals," they cannot be made a " sheet anchor to come in the way of the rights of the board which still remains the owners of the plot," the judgment emphasised. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Mercy for a harassed firm The Supreme Court " felt concerned about the hard luck" of International Conveyors Ltd, manufacturer of PVC coal conveyor belting made from imported nylon yarn, which was dragged into litigation over its imports in 1987. In 1991, the customs tribunal in Delhi had directed the revenue authorities to refund the amount demanded from and paid under protest by the company. Since it did not receive the refund of ₹ 17 lakh, it moved the Bombay High Court, which passed an order to the revenue authorities to return the amount with interest. The revenue authorities instead of repaying, alleged unjust enrichment by the firm by recovering the tax from Coal India and Singarani Collieries. In the convoluted history of the case, the authorities continued to issue show cause notices. Ultimately, the Supreme Court saved the firm from further litigation by awarding costs, " looking at the hardship suffered by it." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Legal brawl over liquor label The Delhi High Court has allowed a Goa firm, Real House Distillery Ltd, to use a modified trade mark for its whisky labelled ' Real', despite the objection of the European company, Pernod Ricard SA, which sells its liquour brands in 110 countries. The foreign company had objected to the colour and design of Real, arguing that it was likely to confuse the consumers. Earlier, the high court had asked the Goa firm to change the design and avoid navy blue on the label. It was done. However, Pernod contended that the navy blue colour was distinctly theirs and the Indian firm must use some other colour. However, in the latest judgment of a division bench, the court did not insist on changing the colour as the new label would not confuse the consumers. Ricardo aperitif was priced at ₹ 2,000 whereas the Goa product was available at ₹ 60. Keeping both products side by side, the court stated that they were neither identical nor likely to deceive those who are likely to buy the alcoholic products. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Helping hand to revive sick firm The Delhi High Court has dismissed the petition of the Union government challenging the order of the Appellate Authority for Industrial and Financial Reconstruction ( AAIFR) which had asked the Railways to provide certain concessions to Cimmco Birla Ltd, in terms of the sanctioned scheme for rehabilitation of the firm. The company was declared sick by the BIFR and a revival scheme was proposed. Under the scheme, the company was entitled to get certain concession in the tenders floated by the Railways for supply of wagons, the business in which the company was engaged. The Railways did not adhere to it for various reasons. The high court stated that the concessions should be mandatorily followed. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Foreign order not always enforceable The Bombay High Court has dismissed the petition of Marine Geotechnics LLC of Houston, US, against the Mumbai- based Coastal Marine Construction & Engineering Ltd stating that an ex- parte summary judgment obtained in a foreign country against an Indian company could not be termed a ' debt' due and payable by it in a winding up petition under the Companies Act. The Indian company was not represented before the Houston court when the US firm obtained a decree against it. It was not made order of the court in India. In such circumstances, it could not be said that the debt became payable, the high court said.

 

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CS A Rengarajan

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