Monday, December 30, 2013

Deepak Fertilizers and Petrochemicals Corporation Ltd. vs. DDIT (Int. Tax)-I (ITA No.2040/PN/2012) Dated 29th October, 2013




Facts of the case

The assessee, Deepak Fertilizers and Petrochemicals Corporation Ltd., is engaged in the business of manufacture and sale of chemicals, fertilizers. The assessee embarked upon a project to produce Ammonium Nitrate Prill at its factory located at Taloja as a part of its expansion project of its existing business.

For this, the assessee had entered into an agreement with GPN Engineering & Process, France (GPN). The agreement was in two parts and was executed in France on January 1, 2009. Under Part I, GPN agreed to grant to the assessee, non-transferable and non-inclusive licence to use technical information. Whereas, under Part II GPN agreed for process for production of Ammonium Nitrate Prill.

The payment of consideration was agreed to be made on “net of tax” basis. Accordingly, the assessee remitted an amount of € 2,10,000 being 70% of the total € 3,00,000 as stated towards consideration for outright purchase of Process Book Package for Ammonium Nitrate Prill production.

The assessee paid tax of Rs. 15.20 lakhs on April 30, 2009. However, the assessee contended that the amount remitted by it for outright purchase of Process Book Package was not taxable and requested AO to refund the tax already deducted and deposited.

Issue before the Tribunal

Whether the payment had to be recognised as ‘fees for technical services’ and ‘consultancy services’ u/s 9(1)(vii) and is liable to deduction of tax at source in India?

Held

ITAT observed that the facts of the present case and that of the Royal Extrusion were similar. Therefore, following the same ratio, ITAT held that assessee was not liable to deduct tax on the amount remitted to GPN for acquisition of process, design, documentation called Basic Engineering Package on outright purchase basis for Ammonium Nitrate Prill production.


ITAT held that the amount could not be considered as fees for technical services liable to withhold tax in India. ITAT had accepted the assessee’s contention.

Metro & Metro vs. Additional Commissioner of Income Tax (ITA No. 393 Agra 2012) Dated 1st November, 2013


Facts of the case

The assessee is a 100 per cent EOU engaged in the manufacture and export of leather goods. The assessee has made remittances to a Germany based company, in respect of leather testing charges, but did not withhold the applicable taxes from these remittances.

The Assessing Officer was of the view that since the assessee has made the remittances without withholding requisite tax deductions, the payments so made are not allowable as deductions in the hands of the assessee.

Aggrieved, assessee carried the matter in appeal before the learned CIT (A) but without any success.

Issue before the Tribunal

Whether the payment had to be recognised as ‘fees for technical services’ rendered in India u/s 9(1) (vii) and is liable to deduction of tax at source in India?

Held


Tribunal held that, the amount paid to foreign party was not taxable in India in the light of Legal position as it prevailed at that point of time, and it became taxable in India only as result of retrospective amendments in section 9(1), the said payment cannot be disallowed invoking provision of section 40(a) (i).

DIT vs. Alcatel Lucent USA Inc. (ITA 328/2012, ITA 329/2012, ITA 336/2012, ITA 337/2012 & ITA 340/2012) (Delhi HC)


Facts of the case

The taxpayer, a US company and a part of the Alcatel Lucent Group. The taxpayer was having a subsidiary in India, which provided marketing support services to the taxpayer.

The taxpayer was engaged in the business of supplying telecom equipments to customers in India. The payers (i.e., Indian customers) did not deduct tax while making payments to the taxpayer. The income tax authorities conducted a survey in the premises of Indian subsidiary and the Assessing Officer (AO) concluded that the taxpayer was having Permanent Establishment (PE) in India under the India-USA tax treaty and attributed 2.5 per cent of sale proceeds of the hardware as profit attributable to the PE in India. In addition to the aforesaid income, the AO also levied interest under sections 234A, 234B and 234C of the Act.

Initially, before the tax authorities, the taxpayer denied any liability to pay tax in India. However, before the Commissioner of Income Tax (Appeals) [CIT (A)], it did not press the claim that it was not liable to tax in India. However, the taxpayer contended that it is not liable to pay interest under section 234B of the Act.

The taxpayer claimed that it was not liable to pay interest under Section 234B of the Act, since the liability to deduct the tax on its income was on the payer. It was claimed that as per Section 209(1)(d)2 of the Act, the taxpayer was entitled to take credit of tax which was ‘deductible’ while computing its liability for paying advance tax and if the amount of tax so ‘deductible’ by the payer in India is given credit, there was no advance tax payable by the taxpayer.

The CIT(A) and Income Tax Appellate Tribunal (the Tribunal) ruled in favour of the taxpayer.

Issue before the High Court

Whether the taxpayer is liable to pay interest under section 234B of the Act, when the tax was deductible at source, but not deducted by the payer?

Held

In the case of Jacabs, the taxpayer admitted taxable income in the income-tax return. However, in the present case, the taxpayer did not admit any taxable income in the income-tax return. Accordingly, the facts of the present case were different from the facts of the case of Jacabs.

It would be inappropriate to hold that even though the taxpayer did not admit any tax liability in India while filing the income-tax return and correspondingly the payers were also not liable to deduct tax under section 195(1), still it can claim credit for the tax ‘deductible’, though tax was not deducted by the payers from the remittance made to the taxpayer.

The contention of the taxpayer that the liability of the payer under section 201 of the Act is different from the liability of the non-resident taxpayer under section 234B of the Act need not be examined, and in the present case it would not make any difference on account of the peculiar facts of the present case.

The taxpayer denied its tax liability in India while filing income-tax return and therefore, it can be inferred that the taxpayer would have asked its Indian payers not to deduct tax from the remittances made to it. If the taxpayer did not make such a representation, it would only be consistent with the taxpayer’s stand regarding its tax liability in India. Therefore, even though there may not be any evidence to show that the taxpayer has made a representation to payers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed.

It was open to the taxpayer to deny its tax liability in India on whatever grounds it thinks fit and proper. Having denied its tax liability, it seems unfair on the part of the taxpayer to expect the Indian payers to deduct tax from the remittances.

It was open to the taxpayer to change its stand at the first appellate stage and submit the assessment of income. When it does so, all consequences under the Act follow, including its liability to pay interest under section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned.


The High Court observed that it would be inequitable that the taxpayer, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers. Once the liability to tax is accepted by the taxpayer, all consequences follow.

Cenvat Credit


The appellant, extracted oil with associated gases from oil wells and transferred it to offshore “well platforms” (connected to the oil wells through pipelines) and then to offshore “process platforms” (connected to well platforms) for processing. The crude (oil and gas) at this point which was in a semi–stabilized condition was an exempted product which was partly sold to other refineries and partly transferred to its on–shore plant (connected to process platforms) to obtain downstream excisable products. The assessee availed Cenvat credit of input services received in its offshore locations (well heads, well platforms, process platforms, etc.) which was denied by the Revenue on the ground that the input services were exclusively used for manufacture of exempt products viz., crude oil and gas in a semi-stabilised condition. On appeal, the High Court relying on Escorts Ltd. vs. CCE (2004) 171 ELT 145 and CCE vs. Solaris Chemtech Ltd. (2007) 214 ELT 481 (SC) held that –

• Manufacture of dutiable products at the on–shore plant is fundamentally premised on the manufacturing process that commenced at the off–shore plants;

• The input services used at the off–shore plants is used by the appellant manufacturer “directly or indirectly in or in relation to” manufacture of dutiable products at its on–shore plant.

Accordingly, the High Court allowed Cenvat credit on input services but subject to the qualification that it would be required to comply with the discipline and rigour of Rule 6 and would be entitled to take Cenvat Credit only on the quantity of input service which is used in the manufacture of the ultimate dutiable product. [ONGC vs. CST, 2013(32) STR 31 (Bom)]

• Where the appellant had proposed to enter into manufacturing of herbal products, for which they had availed R&D services but due to business exigencies had to abandon the venture it was held that since the definition of “input services” and “final products”, both require the “use” of input services to manufacture of final products, the credit of service tax paid on R&D services which did not materialize into manufacture of excisable products would not be available. Further interest u/s 75 would also be payable for wrong availment of cenvat credit in view of the judgement of the Supreme Court in Ind-Swift Laboratories Ltd. (2011) 265 ELT 3(SC). However penalty u/r 15 was held to be not imposable. [Lyka Labs Ltd. vs. CCE, Surat, 2013(32) STR 79]

• Credit on services of the Mandap Keeper availed to celebrate the ‘Annual Day’ function of the company which was attended by the employees and their families is an integral part of the business activity and hence is admissible. [Endurance Technologies Pvt. Ltd. vs. CCE, Aurangabad, 2013(32) STR 95 (Tri-Mum)]

• Where the air travel was undertaken by the employees in connection with the business of appellant, cenvat credit on air travel agents services was held to be admissible. [Goodluck Steel Tubes Ltd. vs. CCE 2013(32) STR 123 (Tri-Del)]

• Cenvat credit can be utilized for payment of Service Tax under reverse charge basis u/s 66A of the Act. [Kansara Modler Ltd. vs. CCE (2013) 32 STR 209 (Tri.–Del.)]

• Outdoor catering services availed for providing lunch / dinner to customers is a part of business promotion for increasing the sale of manufactured goods. It is an activity relatable to manufacture of goods and hence Cenvat credit thereon is admissible. [Heubach Colour Pvt. Ltd. vs. CCE (2013) 32 STR 225 (Tri. – Ahmd.)]


• Cenvat credit of insurance services availed for insurance of plant, machinery and inventories being an activity in relation to manufacture is admissible [Grasim Industries Ltd. vs. CCE (2013) 32 STR 256 (Tri-Del)].

Franchise services



Where on facts, it was noted that the assessee, (jewellery company) granted a licence to various retail shops (franchises) to sell jewellery of its brand / trademark, and the license to use was not exclusive (i.e. to the exclusion of the assessee who retained the right to licence others also), it was held that the consideration/royalty for transfer of right to use the trademark is not liable for sales tax as a deemed sale under article 366(29A)(d), but was a service liable for service tax under the category of “franchise services” [Malabar Gold Pvt. Ltd. vs. CTO (2013) 32 STR 3 (Ker.)]

The appellants imported technology from a Chinese company for production of cotton in the form of mother seeds containing “Fusion BT” genes, multiplied the same and gave it to its customers with a sublicence for further multiplication of the seeds and onward sale of seeds to farmers in consideration for a royalty. The sub-licencees sold the seeds in packages containing the mark “Fusion BT”. The Revenue contended that the appellants are liable for service tax on the royalty received from the sub-licencees under the category of “franchise services” since they granted the sub-licencees a representational right to sell their products. The Tribunal observed that —

• The appellants did not receive any representational right from the Chinese company and did not grant any such right to the sub licencees;

• The mark “Fusion BT” only denoted technology and did not identify the product with the appellant.

Hence it held that the royalty would not be liable for service tax under the category of “franchise services”. [Global Transgene Ltd. vs. CST 2013(32) STR 86 (Tri-Mum.)]

The assessee in the present case had entered into agreement (termed as joint venture agreements) with distinct entities to establish and manage school and provide quality education in different areas under its brand name. Under the terms of the agreement:

• The other party was granted a right to establish a school representing the assessees name, motto and logo;

• The assessee would provide its established concepts of imparting education, managerial expertise and operational techniques and standards of imparting education to the other party;

• The other party was obliged to pay a fee to the assessee;

• The other party was obligated not to establish or administer an English Medium School identified with any person other than the assessee;

• All assets and liabilities including the entire financial responsibility was that of the other party.

The Revenue sought to levy service tax on fees received by the assessee under the category of franchise services which was challenged by the assessee. On appeal the Tribunal observed as follows:

• The assessee’s contention that it had entered into a Joint Venture agreement with the other party and hence the service provided by the assessee is to itself is not acceptable since under the agreement the entire burden of establishing and maintaining the school, including the liability to fund the entire capital and noncapital expenditure, underwriting the entire financial liability, liability arising out of any obligation was on the other party and not the assessee. Further on determination of the agreements, all available and remaining assets too would revert to the other party alone. Also the inherence of risk and reward is on the franchisee and not the assessee. Hence regardless of the description of the arrangement as a Joint Venture or a collaborative arrangement, the same would not tantamount to a joint venture arrangement. The facts that the assessee was remunerated for services provided to the other party clearly showed that there is a service provided by the assessee to the other party for consideration.

• the agreement in the present case satisfied all the conditions of franchise agreement and hence the services were in the nature of franchise services.

• the contention that the services rendered by the appellants are in the nature of Intellectual Property right services is not acceptable since the assessee apart from merely allowing the use or enjoyment of the assessee’s intangible property (in its name/ motto/ logo) provided several services for management and administration of the schools and considered as a whole, its services more appropriately fall under ‘Franchise Services’ and not under intellectual property right services.


Accordingly the Tribunal held that the appellant would be liable for service tax under the category of franchise services [Delhi Pubic School Society vs. CST (2013) 32 STR 179 (Del.)]

Copyright Services



In a writ petition challenging the vires of the provision of section 65(105) (zzzzt) of the Finance Act, 1994 which defines taxable service in the context of temporary transfer or permitting the use or enjoyment of any copyright as defined under the Copyright Act, 1957, the Hon’ble High Court of Madras after analysing various agreements between producers and distributors and distributors and sub-distributors/exhibitors/theatre owners held that there is only a temporary transfer of copyright or permission to use or enjoy copyright of the film for a consideration and the producer retains the effective control over the film such as the right to deal with and dispose of the rights to any third parties, right to screen the picture over the satellite channels, Doordarshan channels, etc. Such transaction would not amount to “transfer of the right to use the copyright” by the producer to the distributor or distributor to exhibitor so as to amount as “sale” within the meaning of Article 366(29A)(d). It is only the permanent transfer of copyright (by assignment or otherwise) which will not amount to rendering of service and would be excluded from the purview of service tax. Accordingly the High Court held that the temporary transfer of copyrights or the permission to use or enjoy the copyright would not fall either under Entry 54 of List II or Entry 92A of List I but is well within the legislative competence of the Parliament for levying service tax under Entry 97 of List I [AGS Entertainment Pvt. Ltd. vs. Union of India (2013) 32 STR 129 (Mad.)].

S. 192, 201(1), 201(1A) – Medical reimbursement paid every month



The exemption on account of Medical expenditure and leave travel is granted even if the payment precedes the incurrence of expenditure. The interpretation of the word “actually paid” is not relevant while ascertaining the quantum of tax that has to be deducted at source u/s.192 of the Act. As far as the assessee is concerned, his obligation is only to make an “estimate” of the income under the head “Salaries” and such estimate has to be a bona fide estimate. Honest and bona fide estimate of taxable salary is made in the process of deducting tax at source u/s 192. Every effort is made by the assessee to comply with the requirements of section 192. The assessee is not benefited by allowing employees to claim exemption. The order passed by the AO u/ss. 201(1) & 201(1A) is therefore bad in law. ITAT also observed that the liability of the person deducting tax at source cannot be greater than the liability of the person on whose behalf tax at source is deducted - ACIT (TDS) vs. Cisco Systems Asia Services A.Ys. 2008-09 & 2009-10 38 taxmann.com 381 (Bangalore - Trib.)

S. 43(5)(a) – Hedging transaction


Future Contracts (FCs) are “commodities”. However, considering the fact that these FCs are integral part or incidental to the core business of export or the outstanding receivables of export proceeds, in principle, the impugned FCs constitute ‘hedging transaction’ and not the ‘speculative contracts’. As such, the banks do not entertain FCs of speculative nature with the customers like the assessee, the exporter. As such, the extension of FCs, in case of non-receipt of export proceeds on the due dates, is not allowed without cancelling the existing FCs. However, the onus is on the assessee to explain satisfactorily why the assessee resorted to premature cancellation of some FCs. Further, it is not the requirement that there must be 1:1 precise correlation between FC and the corresponding export invoice. So long as the total FCs does not exceed the exports of the year plus outstanding export receivable, the FCs can constitute ‘hedging transaction’. Further also, the ‘premature cancellation of FCs may not alter the above conclusions so long as the assessee has valid and acceptable explanation for such cancellations. It should not be the case, to start with, FC can be a ‘hedging transaction’ but the ending of such FC is ‘speculation’ - London Star Diamond Company (I) (P.) Ltd. vs. DCIT 38 taxmann.com 338 (Mumbai - Trib.)


S. 271(1)(c) Concealment penalty


The AO, should not be carried away by the plea of the assessee like “voluntary disclosure”, “buy peace”, “avoid litigation”, “amicable settlement”, etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to Section 271(1) raises a presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise.

Assessee has only stated that he had surrendered the additional sum of Rs. 40,74,000/- with a view to avoid litigation, buy peace and to channelise the energy and resources towards productive work and to make amicable settlement with the income tax department. Statute does not recognise those types of defences under the Explanation 1 to Section 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the Appellant-assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty. The AO has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the AO is not required to record his satisfaction in a particular manner or reduce it into writing - MAK Data (P.) Ltd. vs. CIT 38 taxmann.com 448 (Supreme Court).


Sunday, December 8, 2013

IS IT RIGHT TIME TO INVEST IN EQUITY ?



There are  various compelling reasons for investing in equities at this juncture. First, if you look at the data for the past 30 years, our equity markets broadly move in five year cycles. Since returns from the stock markets have been disappointing in the past five years, there is every chance of mean reversion. When returns have been poor and the broad swathe of the investing public is shunning equities, that is the best time to buy stocks.

Second, it has been widely commented that the Indian economy has suffered due to the government's policy paralysis and that the India growth story is structurally damaged. I believe this whole "structurally damaged economy" hypothesis is overly pessimistic. Like any other free-market economy, the Indian economy too goes through its cyclical ups and downs. We are probably at the bottom of an economic cycle and will emerge from the trough in the next year or so, hopefully helped by favourable election results. As we emerge, the stock markets will pick up in anticipation of growth.

Is it ever a good time to invest in the stock market? Not really. Looking back at history, there have been plenty of reasons to sit tight with your cash and wait for a better time to put your money in the market.

Consider just a few of the scary events that have shaken even the most experienced investor's confidence in the future of the national and global economies:

1950s: Korean War, creation of the Warsaw Pact, Cuban Revolution

1960s: Cuban missile crisis, Vietnam War escalation, American spy plane shot down over Soviet Union

1970s: Arab oil embargo, Stagflation, Watergate

1980s: Savings and Loan crisis, Latin American debt crisis, failed military attempt to end the Iranian Hostage Crisis

1990s: Asian financial crisis, Persian Gulf War

2000s: September 11 attacks, subprime lending/housing meltdown, Great Recession

2010s: Nuclear threats from North Korea, Greek bailout and eurozone crisis, mortgage delinquencies peak above 14 percent

Still, throughout it all, investors who kept on keeping on throughout the decades wound up making money over time, even with the rough patches that hit every single decade.

Time Heals Many Wounds
The other reason that 20-year time period matters so much is because of Benjamin Graham's famous quote on how the market behaves.

Graham, the man who taught value investing to Warren Buffett, noted that over the short term, the market acted like a "voting machine," but over the long term, it acted like a "weighing machine."


Even as U.S. stock indexes hit all-time highs, Warren Buffett predicts they'll go "far higher" in the long run.Right now, he very much favors equities over bonds, warning some investors could lose a lot of money in long-term fixed-income assets when interest rates eventually start to rise.

What is Commodities Futures Trading in India ? How Do I Do it ? Where do I do it?


Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option.

Till some months ago, this wouldn't have made sense. However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks!
Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitragers and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.

With the introduction of futures trading, the size of the commodities market grow many folds here on.
Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities. In the process, they make the underlying market more liquid.

Here's how a retail investor can get started:
Where do I need to go to trade in commodity futures?
You have three options - the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. All three have electronic trading and settlement systems and a national presence.

How do I choose my broker?
Several already-established equity brokers have sought membership with NCDEX and MCX. The likes of Motilal Oswal, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect), and IIFL ( India Infoline ) are already offering commodity futures services. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from.

What is the minimum investment needed?
You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract.

Do I have to give delivery or settle in cash?
You can do both. All the exchanges have both systems - cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don't intend to deliver the item.
If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract.

What do I need to start trading in commodity futures?
As of now you will need only one bank account. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.

What are the other requirements at broker level?
You will have to enter into a normal account agreements with the broker. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. Besides you will need to give you details such as PAN no., bank account no, etc.

What are the brokerage and transaction charges?
The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges.

Where do I look for information on commodities?
Daily financial newspapers carry spot prices and relevant news and articles on most commodities. Besides, there are specialised magazines on agricultural commodities and metals available for subscription. Brokers also provide research and analysis support.
But the information easiest to access is from websites. Though many websites are subscription-based, a few also offer information for free. You can surf the web and narrow down you search.

Who is the regulator?
The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator.
The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially.

Who are the players in commodity derivatives?
The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitragers. Brokers will intermediate, facilitating hedgers and speculators.

Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market.

Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite.
For example, if you are a bullion company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.

In which commodities can I trade?

Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading.

Do I have to pay sales tax on all trades? Is registration mandatory?
No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales tax.
The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number.

What happens if there is any default?
Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges.

Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods?
Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery.

Is stamp duty levied in commodity contracts? What are the stamp duty rates?
As of now, there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.

How much margin is applicable in the commodities market?
As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value.
The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility.

Are there circuit filters?
Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.


TYPES OF DERIVATIVES IN INDIA

TYPES OF DERIVATIVES IN INDIA
At present the Indian market trades in both exchange-traded and over the counter derivatives on various assets including securities, both equity and debt commodities, currencies, etc. the various types of derivatives being traded in India are discussed below:

•           GENERIC DERIVATIVE PRODUCTS
Today, Indian and International financial markets trade innumerable derivative products on all kinds of underlying assets, both tangible and intangible. Before proceeding with the regulatory issues of derivatives trading, it is important to have a detailed understanding of the four generic derivative products in detail.

1. FORWARD CONTRACTS
A forward contract is defined as an agreement, which ‘obligates one counterparty to buy, and the other counterparty to sell, a specific underlying at a specific price, amount and date in the future.
It is more clearly a one-to-one, bipartite/tripartite contract, which is to be performed mutually by the contracting parties, in future, at the term decided upon, on the contract date. In other words, a forward contract is an agreement to buy or sell an asset on a specified future date for a specified price. One of the parties to the contract assumes a long position, i.e. agrees to buy the underlying asset while the other assumes a short position, i.e. agrees to sell the asset. As this contract is traded off the exchange and settled mutually by the contracting parties, it is called an Over-the-counter product. It can be better understood with the help of an illustration.
Assume that there are two parties, Mr. A (buyer) and Mr. B (seller), who enter into a contract to buy and sell 500 units of asset X at Rs 100 per unit, at a predetermined time of two months from the date of contract. In this case, the product(asset X), the quantity (500 unites), the product price (Rs 100 per unit) and the time of delivery (2 months from the date of contract) have been determined and well understood, in advance, by both the contracting parties. Delivery and payment (settlement of transaction) will take place as per the terms of the contract on the designated date and place.
It is pertinent to note that forward contracts are negotiated by the contracting parties on a one-to-one basis and hence offer tremendous flexibility in terms of determining contract terms such as price, quantity, quality(in place of commodities), delivery time and place.
Like other OTC products, forward contracts offer tremendous flexibility to the contracting parties. However, as they are customized, they suffer from poor liquidity. Furthermore, as thee contracts are mutually settled and generally not guaranteed by any third party, the counter party risk/default risk/credit risk is considerable in such contracts.

2. FUTURES CONTRACTS
A futures contract is similar to a forward contract, in that it is an agreement to buy or sell a specified commodity or instrument, at a specified price, at a date in the future. Illiquidity and counter party risk were the two issues concerning forward contracts that offered the exchanges a tremendous business opportunity and they started trading these forward contracts, but with a difference. In order to differentiate between the exchange-traded forwards and the OTC forward, the market renamed the exchange-traded forwards as Futures Contract. Hence, future contracts are essentially standardized forward contracts, which are traded on the exchanges and settled through the clearing agency of the exchanges. The clearing agency also guarantees the settlement of these trades.
Reasons for using futures contracts can be diversified and complicated. First, they attract lower transaction costs. They are normally only a fraction of the costs of trading in the underlying commodity or instrument. Second, counterparty risk is minimal as it is unlikely that the clearinghouse would collapse, as it is usually well-backed financially. In addition, if a participant defaults, the rules of a typical clearinghouse will provide for the allocation of the losses to the surviving participants according to a predetermined formula. Third, futures contracts permit anonymity of participants as most brokers act for undisclosed principals. Fourth, there is no requirement for large capital outlays as initial deposits range between five to fifteen percent only. Fifth, futures markets are more liquid, and therefore, it is easier for the participants to ‘close-out’ or settle their contracts. However, a major disadvantage of using futures contracts is their inflexibility. Any investor using futures contracts for hedging would be exposed to basis risk. ‘Basis risk’ refers to the risk where the futures contract and the instrument that is being hedged may not be perfectly matched.

3. SWAPS
Swaps like forward contracts, are customized over-the-counter transactions. A swap has been described as ‘an agreement between two parties to pay each other a series of cash flows, based on fixed or floating interest rates in the same or different currencies.’
Swap transactions are broadly classified into interest rate, currency, commodity or equity swaps. It is possible to use swaps for a variety of purposes including the reduction of borrowing costs; asset and liability management; and yield enhancement.  The principle of comparative advantage, a concept central to international trade, plays an important role in swap transactions. Each counterparty borrows in the market where it enjoys a comparative advantage, and through the use of swap obtains financing at a more favorable rate than it would otherwise be able to do so. Swap cash flows can be decomposed into equivalent cash flows from a bundle of simple forward contracts. This has implications for the hedging of swap risks. Swaps are now hedged with a variety of derivative products, and no longer only by matching two identical but opposing swaps.
A swap derivative is nothing but barter or an exchange but it plays a critical role in international finance. Currency Swaps help eliminate barriers caused by international capital markets. Interest rate Swaps help eliminate barriers caused by regulatory structure. While Currency rate swaps result in exchange of one currency with another, interst rate swaps help exchange a fixed rate of interest with a variable rate. Swaps are private agreements between two parties and are not traded on exchanges but they do have an informal market and are traded among dealers. Swaptions is an option on swap that gives the party the right, but not the obligation to enter into a swap at a later date.

4. OPTIONS
An option is the ‘right to buy or sell a specific price on or before a specific date in the future’. It is a right that the option seller gives to the option buyer to buy or sell an underlying asset at a predetermined price, within or at the end of a specified period. The party taking a long position, i.e. buying the option is called the buyer/holder of the option and the party taking a short position, i.e. selling the option is called the seller/writer of the option.
The option buyer who is also called long option, or long premium or holder of option, has the right and no obligation with regard to buying or selling the underlying asset while the option seller/ writer who is also called short on option or short on premium, has the obligation but no right, in the contract. In other words, the option buyer may or may not exercise his option but if he decides to exercise it the option seller/writer is legally bound to honor the contract.
The right to buy an asset is a ‘call option’, while the right to sell an asset is a ‘put option’. An option which gives the buyer a right to buy the underlying asset, is called a call option and the option, which gives the buyer a right to sell the underlying asset is called put option.
An American option is one which can be exercise any time until maturity, while a European option is one which can be exercised on maturity date. The buyer of an option is usually called the ‘option holder’, and the seller of the option, the ‘option writer’. The option holder must pay the option writer a price known as the ‘premium’ in order to acquire the rights under the option. Options are available on a wide range of assets including commodities, foreign currencies, shares, bonds and even other derivatives.

•           EQUITY DERIVATIVES
India joined the league of exchange-traded equity derivatives in June 2000, when futures contracts were introduced at its two major exchanges, viz. the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The BSE sensitive index, popularly known as the SENSEX (compromising 30 scrips), and S&P CNX Nifty Index (compromising 50 scrips), commenced trade in futures on June 9, 2000 and June 12, 2000 respectively. Index options and individual stock options on 31 selected stocks were subsequently added to the derivatives basket, in 2001. November 2001 witnessed the introduction of single stock futures in the Indian market. This list of stocks was selected, based on a predefined eligibility criteria linked to the market capitalization of stocks, floating stock, liquidity, etc.

•           COMMODITY DERIVATIVE
The Forward Contract Regulation Act (FCRA) governs commodity derivatives in India. The FCRA specifically prohibits OTC commodity derivatives. Accordingly, at this point in time, we have only exchange-traded commodity derivatives. Furthermore, FCRA does not even allow options on commodities. Therefore, at present, India trades only exchange-traded commodity futures.
Though commodity derivatives in the country have existed for a long time, trading has been regionally concentrated due to the regional nature of the commodity exchanges. Recently however, India began trading in commodity derivatives through two nation-wide, online commodity Exchanges- the National Commodities and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX). They started functioning in the last quarter of 2003 with the introduction of futures contracts on various assets such as gold, silver, rubber, steel, mustard seed, etc.
It is important to note that both these exchanges have been recording a very high rate of growth. But it is interesting to note that the growth in volume of commodity derivatives has been achieved without institutional participation in the market. At present, banks, financial institutions, mutual funds, pension funds, insurance companies and Foreign Institutional investors are not allowed to participate in the commodities market.

•           CURRENCY DERIVATIVES
India has been trading forward contracts in currency, for the last several years. Recently, the RBI has allowed options in the OTC market. The OTC currency market in the country is considerably large and well-developed. However, the business is concentrated with a limited number of market participants.

•           INTEREST RATE DERIVATIVES
An Interest Rate Derivative is a derivative where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. There has also been significant progress in interest rate derivatives in the Indian OTC market. The NSE introduced trading in cash settled interest rate futures in the year 2003.


Thursday, December 5, 2013

Eruditus Education Private Limited (AAR No. 1037 of 2011) (AAR)



Held

The services rendered by the foreign university to the applicant involve expertise in or possession of special skill or knowledge that is ‘technical’ in nature. Thus the payment for the services falls under the definition of FTS, both under the Act and the tax treaty. However, the case of the applicant will fall in the exclusion clause of Article 12(5)(c) of the tax treaty which reads as under - “Notwithstanding paragraph 4, ‘Fees for technical services does not include payment: for teaching in or by educational institutions..”

There is no dispute regarding the fact that the foreign university is an educational institution and services rendered are in the nature of ‘teaching’. Thus the payments are not considered as FTS under the tax treaty.

Further the AAR held that the foreign university does not have a PE in India under Article 5(1) or 5(8) of the tax treaty in relation to the activity of conducting in-class teaching or through tele-presence in India.


Thus the payments were not chargeable to tax in India and there will not be any withholding tax implications.

US Technology Resources Pvt. Ltd. vs. ACIT (ITA No. 222/Coch/2013) (Cochin ITAT)



Held

On reference to the tax treaty, it indicates that the term ‘managerial service’ did not find place in Article 12(4) of the India US tax treaty. However, on a perusal of MOU under the tax treaty, it indicates that if technical or consultancy services make available technical knowledge, experience, skill, etc., then it would be considered as technical or consultancy services.

It was observed that consultancy services which were not of technical nature cannot fall under the ‘included services’. However, as per MOU of the tax treaty, the consultancy services which are technical in nature are to be considered as technical and consultancy services under the tax treaty.

On a perusal of management services agreement, extracted from CIT(A)’s order, it indicates that the US company provides highly technical services which were used by the taxpayer for taking managerial decision, financial decision, risk management decision, etc.

The Tribunal discussed the decisions in the case of De Beers India Minerals Pvt. Ltd., Raymond Ltd., Wokhardt Ltd, Intertek Testing Services India (P) Ltd and Sandvik Australia Pty Ltd and held that they are distinguishable from the facts of the present case.


Therefore, the expertise and technology which was made available by the US company is technical service under Article 12(4)(b) of the tax treaty.

Panel agrees on rescue act for road developers in stressed projects


A panel led by C Rangarajan has, in-principle, agreed on a formula that will allow highway developers in stressed projects to back-end majority of their annual premium payable to the government. Under the prescription being worked out, concessionaires are likely to be allowed to postpone up to 75% of their annual premium bid in the first three years of the restructuring period and 50% after that, a senior official aware of the development told ET. It is also unlikely that any penalty will be imposed on developers opting for this rescue measure as originally suggested by finance ministry.

Source : Economic Times

Getting GST off the ground


The Centre and the states have been discussing the issue of introduction of GST for the last four years. The central government has already missed two deadlines for the rolling out of GST and there have been many ups and downs during this period. From a road block in the first quarter of this year, the GST was again on the right track. It hit a hurdle at the meeting of the Empowered Committee of State Finance Ministers (EC) held in Shillong on May 18. However, such hindrances should not be a matter of disappointment; they should not deter us from furthering the efforts for the introduction of GST. The history of reforms the world over indicates that tax reforms have neither been smooth nor quick in any country. The introduction of GST in India need not be an exception.

Source : Financial Express
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