# 10. October, November & December, 2013

Key points

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Direct Taxes Page 2-10 Recent Decisions -

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Payments for software license is not royalty, if no transfer of copyright or right to use copyright Long term capital gains accruing to non-resident on sale of listed securities to be taxed at concessional rate of 10% Hire Charges of ship under time charter and bare boat cum demise agreement amounts to royalty The Apex Court reaffirms the real income theory Provision for Bandwidth/Telecom services provided outside India taxable as royalty

Contact Mr. C.S. Mathur Telephone: +91 11 47 10 22 00 Email: [email protected] Mr. Kunjan Gandhi Telephone: +91 22 61 45 56 00 Email: [email protected] Mr. Harish Motwani Telephone: +91 22 61 45 56 00 Email: [email protected] WTS India Private Limited 1-H, Vandhna 11, Tolstoy Marg New Delhi - 110 001. India www.wts.co.in

Recent Notifications -

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Indirect Tax Page 10-13 -

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Cyprus notified under Section 94A India inks tax treaty with Macedonia CBDT issues a circular to clarify its stand on the contentious issue of Section 40(a)(ia) CBDT issues certain clarification with regard to Safe Harbour Rules

Reduction of threshold limit for e- payment from Rupees ten lakh to Rupees one lakh Exemption of services provided to SEZ authorised operations Clarifications issued on Voluntary Compliance Encouragement Scheme (“VCES Scheme”) The order passed by Revenue under Voluntary Compliance Encouragement Scheme, 2013 is appealable Clarification issued on filling of Audit Report in Form AR1 Furnishing of advance information in respect of functions organised in Banquet halls, Farm Houses, Marriage/ Party Halls, Hotels and Open Grounds etc.

Foreign Exchange Management Act Page 13-16

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Corporate Law Page 16 -

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Third party payments for export/import transactions Foreign Direct Investment in Financial Sector – Transfer of Shares External Commercial Borrowings (‘ECB’) by Holding Companies (‘HCs’)/Core Investment Companies (‘CICs’) for the project use in Special Purpose Vehicles (‘SPVs’)

Clarification with regard to applicability of provision of Section 372A of the Companies Act, 1956

Important dates to remember Page 17

Direct Taxes Recent Decisions I. Payments for software license is not royalty, if no transfer of copyright or right to use copyright In a recent judgment in the case of DIT Vs Infrasoft Ltd [2013] 39 taxmann.com 88, the High court of Delhi has held that the amount received by the assessee under the license agreement for allowing the use of the software would not be taxable as Royalty, in the absence of any transfer of copyright in the software or right to use the copyright in the software. The assessee was a software development and marketing company incorporated in USA and had a branch office in India which admittedly constituted its PE in India. The branch in India imported certain software used for civil engineering work and for design of highways, railways, airports, ports, mines, etc, and delivered the same to customers in India. The assessee also provided installation support, minor customization of software and training for operation of the system. The assessee considered the receipts towards sale of software products to Indian customers as its business income and offered the same to tax in India. However, the AO treated the income as royalty in the assessment order, which order was upheld by the Commissioner (Appeals). The Tribunal (Delhi bench) followed the ruling of the Special Bench of the Delhi Tribunal in the case of Motorola Inc V DCIT and held that the amounts received cannot be considered as royalty as the assessee transferred only a copyrighted article as distinguished from right in the copyright. Page 2 of 17

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Upon appeal before the High Court of Delhi, the Revenue contended that the assessee received payments towards license provided under software license agreement. The right to use of software under the software license agreement resulted in earning of royalty income which was chargeable to tax in the hands of the assessee both under the Act as well as the Tax Treaty. The storing of the software in the hard disk and taking backup would amount to copyright work under section 14 of the Copyrights Act, 1957, which right is provided to the licensee by the assessee. There was no sale of software, whereas the assessee had provided mere license to use the software, and the consideration received towards the same ought to be treated as royalty. The assessee contended that the provisions of section 9(1)(vi) of the Act and the retrospective amendments therein need not be examined since the provisions of Tax Treaty override the provisions of the Act. The assessee neither transferred the copyright in the software nor allowed the use of the copyright in the software, but what was transferred was the right to use the copyrighted material which was clearly distinct from the rights in a copyright. Hence, the provisions of Article 12 of the Tax Treaty dealing with royalty should not apply and the income of the assessee is business income falling under the provisions of Article 7 of the Tax Treaty. The High Court ruled that the provisions of the Tax Treaty will override the provisions of the Act to the extent such provisions are more beneficial to the assessee and as such, has not examined the effect of the subsequent amendment to section 9(1)(vi) of the Act. The High Court observed that as per the DTAA, in order to qualify as royalty payment, it is necessary to establish that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. However, in the present set of facts, the licensee was not provided with any of the rights mentioned in section 14 of the Copyrights Act, 1957. The licensee was prohibited from copying, decompiling, de-assembling, or reverse engineering the software without the written consent of the assessee. It further held that a distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it and does not amount to transfer of all or any right. The High Court observed that the license granted is limited to those necessary to enable the licensee to operate the program. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, right of copying merely enables the effective operation of the program by the user and should be disregarded in analysing the character of the transaction for tax purposes. A non-exclusive and non-transferable license enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of Tax Treaty and hence, the payment for the same is not in the nature of Page 3 of 17

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royalty. Thus, it was held that the instant transaction shall be regarded as sale of goods, which is a business income taxable as per Article 7 of the tax treaty. II. Long term capital gains accruing to non-resident on sale of listed securities to be taxed at concessional rate of 10% In a recent judgment in the case of Cairn UK Holdings Limited v DIT [2013] 38 taxmann.com 179 (Delhi), the High Court of Delhi has held that even a non-resident is eligible for the concessional tax rate of 10% in terms of Section 112(1) of the Income-tax Act, 1961 (“the Act”), with regard to long term capital gains on sale of listed securities. The assessee, a non resident, had transferred its shares held in an Indian company to a Malaysian Company in an off market transaction. The resultant capital gain arising on sale transaction was calculated after giving effect to first proviso to section 48 of the Act, in terms of which the effect of exchange rate fluctuation is neutralized by converting the cost of acquisition and sale proceeds into foreign currency. Furthermore, in terms of the second proviso to Section 48 of the Act, the benefit of indexation was not claimed, as the same is not available to an assessee to whom the first proviso is applicable. Here, it is imperative to mention that in terms of the proviso to Section 112(1) of the Act, if tax on long term capital gains (on specified securities) computed at the usual rate of 20% (after applying the second proviso to Section 48) exceeds the tax computed by applying the rate of 10%, ‘without giving effect to the second proviso of Section 48’, the excess, if any, is ignored. In simpler terms, while computing capital gain tax on specified securities, the assessee has an option to apply, either the tax rate of 20% after considering indexation benefit, or, alternatively, applying a tax rate of 10% without claiming indexation benefit. The issue was whether benefit of concessional rate of 10% is also available to a non-resident claiming benefit of first proviso to section 48 (i.e. conversion into foreign currency). Before the Authority for Advance Ruling (“AAR”), the assessee contended that it is entitled to the concessional tax rate of 10% prescribed in Proviso to Section 112(1) of the Act. However, the AAR, while ruling against the assessee, held that the concessional tax rate of 10% is only available to an assessee which is eligible for indexation benefit under the Second proviso to Section 48 of the Act. On appeal, the High Court of Delhi upholding the contention of the assessee, inter alia held that merely due to the fact that non-resident assessees are not covered by Second Proviso to Section 48, the benefit of concessional rate could not be denied. The High Court went on to observe that if the legislature intended to deny the benefit of the concessional rate of 10% to assessees who had availed the benefit of first proviso to section 48 of the Act, the same would have been explicitly provided for in the statute. While delivering the judgement, the High Court largely relied upon an earlier ruling of the AAR in the case of Timken France SAS [2007] 294 ITR 513 (AAR), wherein it was held that a non-resident is entitled to the concessional rate of 10%. The High Court also

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emphasized that the AAR should follow a consistent approach and should follow its earlier rulings. III. Hire Charges of ship under time charter and bare boat cum demise agreement amounts to royalty In a recent judgement in the case of Poompuhar Shipping Corporation Ltd. vs. Income Tax Officer, International Taxation- II, Chennai [2013] 38 taxmann.com 150 (Madras), the High Court of Madras has held that the payments made by the Indian charterer for taking ship on Time Charter basis under time charter arrangement and under bare-boat-cum-demise agreement (“BBCD”) shall be characterised as ‘royalty’ under clause (iva) of Explanation 2 of section 9(1)(vi) of the Income-tax Act, 1961 (“the Act”), being for the use of equipment. On the facts of this case, Poompuhar Shipping Corporation Ltd. (“PSCL”), a Government undertaking was engaged in the business of moving coal from various ports in India to a particular location within India. For this purpose, PSCL entered into a time charter arrangement with various Foreign Shipping companies (“FSC”) for chartering ships. As per the time charter arrangement, the charterers have the liberty to sub-let the vessel and all the people working on vessels including captain and master are at the disposal of the charterer. Furthermore, all the expenditure unless otherwise agreed is be borne by the charterer. PSCL contended that in terms of the time charter arrangement, FSC provided services through the vessel, which would be taxable as business profits of FSC. However, in absence of any PE/ business connection in India, no incidence of tax would arise in India. At the time of remitting the charter payments to shipping companies, the assessee did not deduct tax at source. The Assessing officer (“the AO”) while rejecting the contention, held that the payment is for the use of vessel and as such, shall be characterised as royalty in terms of clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act, being consideration for the use of equipment. In this regard, the AO relied upon the Supreme Court judgement in case of Gosalia Shipping Company, wherein it was held that consideration paid under time charter arrangement, are not for provision of service but for usage of ship. The AO also observed that even if the income derived by FSC is not royalty, the duration and continuity of its operation in India is suggestive that a business connection in India exists. On appeal before the High Court, the High Court upheld the contention of the revenue. It was held that in terms of the Act and DTAA, Royalty includes, inter alia, consideration paid for the use or right to use any industrial, commercial or scientific equipment. It was observed that by giving possession to transferee who has effective control the condition of transfer of right to use is satisfied. Further, the Court observed that the term equipment is not defined under the Act and DTAA. However, the term ‘plant’ has been defined under Section 43(3) of the Act, where plant includes a ‘ship’. The court observed that presence of the word ‘any’ preceding the word ‘equipment’ in Section 9(1)(vi)(b) of the Act clearly points out the need for construing equipment widely to embrace every article employed by the employer for the purposes of Page 5 of 17

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his business. Therefore, ship is to be treated as a plant – equipment with which the shipowner operated its business and commercially exploited it for earning income from ship chartering. With regard to the existence of permanent establishment of FSC in India, the High Court observed that considering the fact that hiring was for continuous duration and the moving ship has a place of business in the place where the ship is docked and the fact that ship moved from one point to another is the result of the nature of business contract. Also, the ship movement is an integrated one having business and geographical coherence. Accordingly, the FSC has a permanent establishment in India. However, the High Court observed that although a permanent establishment does exist, the royalties received by FSC are not effectively connected to such permanent establishment, and therefore, the provisions of Article 12 and not Article 7 of the DTAA shall apply. IV. The Apex Court reaffirms the real income theory The Supreme Court, in the recent case of CIT v/s Excel Industries Limited [2013] 38 taxmann.com 100 (SC) has held that the benefit of an entitlement to make duty free imports of raw material obtained by the assessee through advance licences and duty entitlement pass book issued against export obligations, can be regarded as income only in the year in which the duty free imports are made, and not in the year in which the exports are made. On the facts of this case, the assessee, who followed the mercantile system of accounting, claimed that the advance licence benefit receivable and duty entitlement pass book benefit receivable are not taxable, as the said amounts were outside the scope of its total income. This contention was based on the rationale that the said benefits couldn't be said to have accrued until the imports were made and the raw material consumed. The aforesaid contention was rejected by the Assessing Officer (“the AO”) on the premise that the assessee obtained the benefit of duty free import of raw material as soon as the exports are made. However, the question was answered in favour of the assessee by higher appellate authorities on subsequent appeal. The Hon’ble Supreme Court, while dismissing the appeal of the revenue, observed that the following three tests have been laid down by various pronouncements of the Supreme Court, for determination of accrual of income:   

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Whether the income is real or hypothetical; Whether there is a corresponding liability of the other party to pay the amount to the Assessee; and The probability or improbability of realisation of the income by the Assessee considered from a realistic and practical point of view.

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While applying the aforesaid principles, the Supreme Court observed that there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee, until the goods are actually imported and made available for clearance, due to which the income could only be regarded as hypothetical. Moreover, from a realistic and practical point of view, no real income does accrue to the assessee in the year of exports. The Supreme Court, inter alia, also stated that the AO is required to be pragmatic and not pedantic. The decision of the Hon’ble Supreme Court once again reaffirms the time tested principle that only ‘real’ income must be taxed, which has been propounded by it in the earlier locus classicus decisions of CIT v Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and State Bank of Travancore v CIT [1986] 158 ITR 102. V. Provision for Bandwidth/Telecom services provided outside India taxable as royalty In a recent decision of the High Court of Madras in the case of Verizon Communications Singapore Pte Ltd (“the Company”), it was held that the consideration received by the non-resident Company from Indian customers for provision of Bandwidth/Telecom Services outside India through equipment installed at customers’ premises in India shall be regarded as ‘use of, or right to use equipment’ or alternatively, ‘use of process’ and therefore, shall be characterised as ‘royalty’ in terms of Section 9(1)(vi) of the Income-tax Act, 1961 (“the Act”). The Company, which was registered under the laws of Singapore, was engaged in the business of provision of international connectivity services in the Asia Pacific region through International Private Lease Circuits (“IPLC”), which is an end-to-end managed dedicated bandwidth service. Whilst the overseas portion of the IPLC connectivity services was provided by the Company itself, the Indian leg of the subject services was requisitioned from an Indian party, i.e. VSNL. However, the Company did enter into a One Stop Shop Agreement (“OSS”) with the customers, to facilitate provision of seamless services. Moreover, certain Customers’ Premises Assets (“CPE”) which were necessary to facilitate the provision of connectivity services were deployed by the Company at the premises of customers. During the course of the assessment proceedings, the Assessing Officer observed that the payment received by the Company for provision of connectivity services leads to economic exploitation of the equipment and may also be regarded as right to use a ‘process’. In view thereof, the Assessing Officer held that the subject payments would be characterised as ‘royalty’ in terms of the Act as well as the provisions of the Agreement for Avoidance of Double Taxation between India and Singapore (“the tax treaty”). On subsequent appeals to higher appellate authorities, the matter was answered against the Company. When the matter travelled to the High Court, it was observed that the contract for provision of connectivity services is not capable of being dissected into independent contracts viz. the Indian portion, which was rendered by VSNL and the overseas portion, Page 7 of 17

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which was executed by the Company. Moreover, it was held that the various contracts entered was in fact, to effectuate the provision of connectivity services to the end customer and therefore, were closely linked to each other. The High Court went on to observe that the terms of the agreement indicate that the customers did have an indefeasible right to use the CPE which were installed by the Company itself. In view thereof, the High Court concluded that there is use of such equipment, and the contention of the Company that the same constitutes a ‘service’ is not sustainable. Furthermore, the High Court also held that the customer did have an economic interest in the leased circuit and the bandwidth which was dedicated to the customer was actually in the possession of the customer rather than the Company. It was also held that even if the aforesaid transaction did not constitute right to use equipment, it would nevertheless, result in right to use a ‘process’ in terms of the provisions of the Act. In light of the aforesaid, the High Court concluded that the subject payments would be characterised as royalty in terms of Section 9(1)(vi) of the Act and therefore, incidence of tax does arise. The High Court, inter alia, also stated that the clarificatory amendments in Section 9(1)(vi) of the Act pursuant to the Finance Act, 2012, have disregarded the necessity of the conditions of ‘possession’ and ‘control’ for a payment to be characterised as ‘royalty’. Accordingly, the decisions cited by the Company which were rendered prior to the said amendments were irrelevant. It also referred to the newly inserted Explanation 6 to Section 9(1)(vi) of the Act, which defines ‘process’ to include, inter alia, transmission by cable, optic fibre, or similar technology, whether or not such process is secret. The High Court also observed that the provisions of Article 12 of the tax treaty are pari materia with the corresponding definition of ‘royalty’ under the Act and therefore, the subject payments constitute royalty even under the provisions of the tax treaty. It may be mentioned that while arriving at its conclusion, the Hon’ble High Court has extensively relied upon the clarificatory Explanations inserted in the Act vide the Finance Act, 2012, even to interpret the provisions of the tax treaty. However, it would be pertinent to mention that the High Court of Delhi in the case of DIT vs. Nokia Networks OY [2012] 25 taxmann.com 225 and the High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SA vs. Department of Revenue [2013] 30 taxmann.com 222 have earlier held that the retrospective amendments in the provisions of the Act cannot be used to interpret the provisions of the tax treaty.

Recent Notifications I. Cyprus notified under Section 94A Recently, the Central Board of Direct Taxes (“CBDT”) issued a notification number 86/2013 dated November 1, 2013, whereby Cyprus has been notified in terms of Section 94A of the Act. Page 8 of 17

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The Government of India has the power to issue a notification under this Section, to notify a country or a territory as a ‘notified jurisdictional area’, owing to the lack of effective exchange of information with such country or territory. The consequences of being notified are multi-fold. Firstly, the provisions of transfer pricing shall be applicable on all transactions with a person in Cyprus. Secondly, payments made to a financial institution in a notified jurisdiction shall be regarded as inadmissible unless the assessee furnishes an authorisation to allow the tax authorities to seek relevant information from such institutions. Thirdly, the recipient of any sum from such jurisdiction shall be required to satisfactorily explain the source of such money, failing which, the same shall be deemed to be the income of the recipient. Lastly, payments made to persons belonging to such jurisdictions shall be subject to a withholding tax rate of 30% or the withholding tax rates prescribed in the Act, whichever is higher. Pursuant to Cyprus being notified in terms of Section 94A of the Act, the Government of both countries have now initiated bilateral discussions on this aspect. II. India inks tax treaty with Macedonia The CBDT has issued a press release on December 17, 2013, informing that India and Republic of Macedonia has signed a new tax treaty at New Delhi, India on December 17, 2013 for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on Income. III. CBDT issues a circular to clarify its stand on the contentious issue of Section 40(a)(ia) In a recent Circular Number 10/DV/2013 dated December 15, 2013, the CBDT has clarified its stand with regard to the application of Section 40(a)(ia) of the Act, pursuant to the controversy created due to diversity of certain recent judicial pronouncements. Earlier, the Special Bench of the Tribunal in Merilyn Shipping and the Allahabad High Court in Vector Shipping has adopted a view that the disallowance in terms of Section 40(a)(ia) shall apply only to amounts which are ‘payable’ at the end of theyear, on which tax has not been deducted, and not to amounts that have already been paid during the year. However, a contrary judgment had been delivered by the Calcutta High Court on this aspect, in the case of Crescent Export Syndicate and Md. Jakir Hossain Mondal as well as by the Gujarat High Court in the case of Sikandarkhan Tunvar. The CBDT has expressed the view that the disallowance in terms of Section 40(a)(ia) would apply even to the amounts that have already been paid during the year. It is also clarified that if the High Court adopts a view contrary to that taken by the CBDT, the CBDT’s view would not apply in that jurisdiction, though steps should be taken to decide whether a SLP should be filed or legislative amendments be made.

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IV. CBDT issues certain clarification with regard to Safe Harbour Rules Subsequent to the issue of Safe Harbour Rules, the CBDT has issued a letter dated December 20, 2013, laying down certain directives and clarifications with regard to the implementation of the Safe Harbour Rules. The same have been summarised hereunder: 

Assessing Officers (“AOs”) should carefully verify and provide to the CBDT in writing, the details of all Form 3CEFA received by them;

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The Safe Harbour option filed in paper format in Form 3CEFA should not be confused with the Form 3CEB (Accountant’s Report) which is filed electronically. The AO is required to examine the form and decide within two months of the end of the month in which the option is filed, as to whether to accept the Safe Harbour option or to make a reference to the Transfer Pricing Officer. If no action is action, the Safe Harbour option will be considered as having been accepted and it will remain valid for 5 years;

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The AO should provide an opportunity to taxpayers to rectify minor defects in Form 3CEFA. However, the statutory time limit of two months provided in Rule 10TE(14)(i) cannot be exceeded;

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The AO has to verify the eligibility of the assessee and the international transactions for availing the Safe Harbour option;

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If a taxpayer has opted for Safe Harbour but has reported rates or margins less than the Safe Harbour rates or margins, the income has to be computed on the basis of the Safe Harbour rates or margins;

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The Safe Harbour rates or margins must not be considered as a benchmark for cases not covered by the Safe Harbour Rules. In such cases, a regular transfer pricing audit should be undertaken without regard to the Safe Harbour rates or margins.

Indirect Tax Service tax Recent Notification I. Reduction of threshold limit for e- payment from Rupees ten lakh to Rupees one lakh The Department vide Notification No. 16/2013 dated November 22, 2013 has amended sub-rule (2) in rule 6 in the Service Tax Rules, 1994 whereby the threshold limit for epayment of service tax has been reduced from rupees ten lakh to rupees one lakh. By this

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amendment, more assesses are covered under ‘e-payment’. This may be taken note of for necessary compliance. This rule shall become applicable from January 1, 2014. II. Exemption of services provided to SEZ authorised operations In furtherance to our Corporate update for the month of August, 2013 clause (d) of sub Para (II) of the Notification No. 12/2013 dated July 1, 2013 has been amended by department vide Notification No. 15/2013 dated November 21, 2013, whereas under the previous notification the SEZ unit or the developer has to furnish to the Jurisdictional Superintendent of Central Excise a quarterly statement, in form A-3 furnishing the details of specified services received by it without payment of service tax. In subsequent notification, the department has in addition to above condition also provides that SEZ Unit or the developer shall furnish the statement by the 30th of the month following the particular quarter. Further it also states that for the quarter July, 2013 to September, 2013 the statement shall be furnished by 15th of December’2013. III. Clarifications issued on Voluntary Compliance Encouragement Scheme (“VCES Scheme”) Since the introduction of VCES Scheme, the department has from time to time issued clarifications with respect to provision, scope & applicability of the scheme through various circulars. Department Vide circular letter No F.No.B1/19/2013-TRU dated December 11, 2013 has issued further clarifications with regard to the provision and scope of the Scheme, which is summarised as under:

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A declaration of tax dues in Form VCES- I include an undertaking that the information provided is complete and correct. Therefore, no separate undertaking or declaration is required to be furnished and the Designated Authority cannot ask for any undertaking which is beyond the scope of the Scheme or Rules made there under.

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The Scheme only prescribes the declarant to pay a minimum amount of 50% of the tax dues by 31.12.2013. Therefore, this 50% of the amount to be paid by 31.12.2013 can be made in more than one installment and there the Designated Authority cannot ask the Declarant to pay this 50% in one installment.

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The Designated Authority cannot investigate into the veracity of the declaration. However, the Designated Authority may cause arithmetical check to verify the correctness of computation of tax dues. If the Commissioner has reason to believe that the declaration filed by the declarant is false he may for reasons in writing, serve notice on the declarant requiring him to show cause why he should not pay the tax dues not paid or short paid.

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Recent Decision I. The order passed by Revenue under Voluntary Compliance Encouragement Scheme, 2013 is appealable Considering that The Department vide Circular 170/5/2013-ST dated 8th August, 2013 had clarified that there was no statutory provision of appeal against the rejection of declaration u/s 106 (2) of the Finance Act, 2013. M/s Barnala Builders and Property Consultants had filed a civil writ petition No. 26929 of 2013 before the Hon’ble Punjab & Haryana High Court against the order passed by the Deputy Commissioner of Central Excise and Service Tax rejecting the declaration filed by them under the VCES scheme. The Hon’ble Punjab & Haryana High Court held that VCES is part and parcel of Finance Act, 1994 by virtue of amendment affected by Finance Act 2013 and therefore, all provisions of the Finance Act are applicable to the Scheme except to the extent specifically excluded. The Court specifically held that the Circular issued by the CBEC is not correct in law and the order passed under the VCES Scheme by the Deputy Commissioner of Central Excise and Service Tax is appealable in accordance with the provision of the Finance Act. [Source: 2013 (12) TMI 568 - PUNJAB AND HARYANA HIGH COURT]

Value Added Tax Recent Notification I. Clarification issued on filling of Audit Report in Form AR1 The Department has vide Notification No.F.7 (420)/Policy/VAT/2011/1203-1213 dated February 11, 2013, has provided that every registered dealer with a gross turnover of Rs.10 crore and above in 2011-12 or in any of the subsequent financial years are liable to get his accounts audited as per section-49 of the Act read with Rule 42-A of the Rules shall furnish the audit report in form AR-1. In furtherance to above Notification, the department has vide Notification No. No.F.3 (384)/Policy/VAT/2013/985-996 dated November 14, 2013 has clarified certain point in regards to filling of form AR-1 as under: 

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The dealers dealing exclusively in commodities listed in First Schedule of the Act need not file the report even if their turnover is ten crores or more, further even if their annual turnover of sale from items incidental to the business is up to Rs five Lakhs a year they need not file Form AR1.

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The dealers who are engaged exclusively in the export of goods outside the country need not also file Form AR1, further if annual sale turnover from items incidental to the business including DEPB licenses, Scrap etc., remains up to Rs five Lakhs in a year they still need not file Form AR1. The part-7 A of the report envisages to file details of inter-state sale/stock transfer made against declaration forms during the year. The dealers eligible to file the report shall have the option to file copy of the information of Block R 10 of the CST return in Form 1 for 2012-13 provided that the information has been filed online prior to filing of the AR 1 report. The turnover criteria demands that the dealers whose turnover is RS.10 crores or more during 2011-12 or 2012-13 are liable to file AR 1 for the year 2012-13. However, in case the turnover during 2012-13 was less than or equal to Rs. 1 crores, such dealers shall be exempt from filing AR 1 report.

II. Furnishing of advance information in respect of functions organised in Banquet halls, Farm Houses, Marriage/ Party Halls, Hotels and Open Grounds etc The department vide Notification No.F.3(393)/Policy/VAT/2013/1086-1096 dated 19th December, 2013 directed that the details of functions/ programmes to be organised in Banquet halls, Farm Houses, Marriage/ Party Halls, Hotels and Open Grounds etc where food and/or liquor are to be supplied / provided and the cost of booking exceeds Rupees One Lakh per function , shall be submitted by the owner/ lessee/custodian of the venue in return in Form BE-2 along with this notification at least 3 days before the start of fortnight . Such persons shall also have to enroll themselves by filing information in Form BE-1. If there is any booking or cancellation after filing of return, the same should be provided by filing revised return within a week of cancellation. The enrolment application in Form BE-1 and fortnightly return in Form BE-2 should be filed by the owner/ lessee/custodian of the venue to the concerned Zonal Additional Commissioner. Any person who failed to comply with this notification shall be liable for penalty in accordance with section 86 of the Delhi Value Added Tax Act , 2004 and other relevant action as per Delhi value Added tax Rules/ Act. This notification shall come into force from the 2nd fortnight of January, 2014.

Foreign Exchange Management Act I. Third party payments for export/import transactions Under the extant provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’), export payments were required to be received from the overseas buyer named by the exporter in the Export Declaration Form (‘EDF’) in a currency appropriate to the place of final destination as mentioned in the EDF, irrespective of the country of residence of the buyer. Similarly, import payments were required to be made to the original overseas seller Page 13 of 17

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and the concerned Authorised Dealer Bank (‘AD Bank’) was required to ensure that the importer furnished evidence of import, to satisfy that the goods have been imported. Reserve Bank of India (‘RBI’) has now effected the following liberalised measures: 

Export Transactions AD Banks have been permitted to allow payments for export of goods/software to be received from a third party (i.e. a party other than the buyer) subject to the following conditions: -

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Firm irrevocable order backed by a tripartite agreement should be in place; Third party payment should come from a Financial Action Task Force (FATF) compliant country and through the banking channel only; The exporter should declare the third party remittance in the EDF; It would be responsibility of the exporter to realize and repatriate the export proceeds from such third party named in the EDF; Reporting of outstandings, if any, in the XOS would continue to be shown against the name of the exporter. However, instead of the name of the overseas buyer from where the proceeds have to be realised, the name of the declared third party should appear in the XOS; In case of shipments being made to a country in Group II of Restricted Cover Countries, (e.g. Sudan, Somalia, etc.), payments for the same may be received from an Open Cover Country.

Import Transactions AD Banks have been permitted to allow payments to a third party for import of goods, subject to inter alia, following conditions: -

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Firm irrevocable purchase order / tripartite agreement should be in place; Third party payment should be made to a Financial Action Task Force (FATF) compliant country and through the banking channel only; The Invoice should contain a narration that the related payment has to be made to the (named) third party; Bill of Entry should mention the name of the shipper as also the narration that the related payment has to be made to the (named) third party; Importer should comply with the related extant instructions relating to imports including those on advance payment being made for import of goods; and The amount of an import transaction eligible for third party payment should not exceed USD 100,000, which limit may be subject to revision, when considered expedient

[Source: A.P. (DIR Series) Circular No. 70 dated November 08, 2013]

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# 10. October, November & December, 2013

II. Foreign Direct Investment in Financial Sector – Transfer of Shares Under the erstwhile provisions of Foreign Exchange Management Act (FEMA), 1999, in case of transfer of shares from residents to non-residents, where the investee company is in the financial services sector, No Objection Certificate (‘NoC’) was required to be obtained from the financial regulator/s of the investee company as well as transferors and transferee entities and such NoC was required to be filed along with the Form FC-TRS with the concerned AD Bank. On a review, RBI has decided to waive off the requirement of obtaining NoC(s) and filing the same along with the Form FC-TRS. However, any 'fit and proper/due diligence' requirement as regards the non-resident investor as stipulated by the respective financial sector regulator is required to be complied with. [Source: A.P. (DIR Series) Circular No. 72 dated November 11, 2013] III. External Commercial Borrowings (‘ECB’) by Holding Companies (‘HCs’)/Core Investment Companies (‘CICs’) for the project use in Special Purpose Vehicles (‘SPVs’) With a view to strengthen flow of resources to infrastructure sector, RBI has permitted HCs/CICs covered under the purview of regulatory framework of RBI, to raise ECB under the automatic/approval route, for project use in SPVs, subject to the following terms and conditions:   

 





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The business activity of the SPV should be in the “infrastructure sector” defined as under the extant ECB guidelines; The infrastructure project is required to be implemented by the SPV established exclusively for implementing the project; The ECB proceeds are utilized either for fresh capital expenditure (‘capex’) or for refinancing of existing Rupee loans (under the approval route) availed of from the domestic banking system for capex as per the extant norms on refinancing; The ECB for SPV can be raised up to 3 years after the Commercial Operations Date of the SPV; The SPV should give an undertaking that no other method of funding, such as, trade credit (if for import of capital goods), etc. will be utilized for that portion of fresh capital expenditure financed through ECB proceeds; The ECB proceeds should be kept in a separate escrow account as per the extant guidelines on parking of ECB proceeds pending utilization for permissible enduses and use of such proceeds should be strictly monitored by the Authorised Dealers for permissible uses; In case of Holding Companies that are covered under the CIC regulatory framework of the RBI, the additional terms and conditions for raising ECB for project use in SPVs will be as under:

# 10. October, November & December, 2013 -

-

The ECB availed is within the ceiling of leverage stipulated for CICs, i.e., their outside liabilities including ECB cannot be more than 2.5 times of their adjusted net worth as on the date of the last audited balance sheet; and In case of CICs with asset size below INR 100 crore, the ECB availed of should be on fully hedged basis.

[Source: A.P. (DIR Series) Circular No. 78 dated December 03, 2013]

Corporate Law I. Clarification with regard to applicability of provision of Section 372A of the Companies Act, 1956 The Ministry of Corporate Affairs, by way of Circular No 18/2013 dated November 19, 2013, has clarified that Section 372A of the Companies Act, 1956 dealing with intercorporate loans and investments shall continue to remain in force till the corresponding Section 186 of the new Companies Act, 2013 is notified. Copy of relevant circular has been enclosed as Annexure I.

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# 10. October, November & December, 2013

Important dates to remember Topics Deposit of TDS for the month January, 2014 Deposit of Service Tax for Companies for the month of January, 2014

Due by February 7, 2014 February 5, 2014 (by e-payment – February 6, 2014)

Publisher WTS India Private Limited www.wts.co.in Author WTS India Private Limited 1-H, Vandhna 11, Tolstoy Marg New Delhi - 110 001. India Disclaimer: This Newsletter is for client circulation only. The contents of this document are for informational purposes only and do not constitute ‘professional advice’. The contents are intended but not guaranteed to be correct and WTS India P Ltd. disclaims all liability to any person for any loss or damage caused by errors/omissions whether arising from negligence, accident or any other cause.

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