Transfer Pricing: Comparables cannot be ignored on ground of abnormal profits/losses if they are functionally comparable

Trilogy E-Business Software India vs. DCIT (ITAT Bangalore)

The assessee provided software research & development services to its’ USA based AE and was remunerated on a ‘cost plus’ basis. The assessee claimed that applying the TNMM and using operating profits to cost as the Profit Level Indicator (“PLI”), its PLI of 9.98% was at arms length. The TPO & DRP rejected the assessee’s claim and computed the ALP at 24.35% and made an adjustment of Rs. 6.20 crores. The Tribunal had to consider the following issues: (i) whether in selecting a comparable, a turnover filter has to be adopted, (ii) whether companies with abnormal margins can be regarded as comparable, (iii) whether a filter can be applied to distinguish between companies earning revenue from rendering “onsite services” as compared to those rendering “offshore services” even though there is no functional difference between the two activities& (iv) whether the TPO is confined to information in public domain or he can collect information u/s 133(6). HELD by the Tribunal:

 

(i) S. 92C & Rule 10B(2) clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables because significant differences in size of the companies would impact comparability even there is no functional difference in their activities. Size matters in business because a big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. As the assessee’s turnover is Rs. 47 crores, only companies with a turnover between Rs. 1 to Rs. 200 crore should be considered for comparability (Quark Systems 38 SOT 207 (SB), Genesis Integrating Systems &OECD TP Guidelines, 2010, ICAI TP Guidelines followed);

 

(ii) U/s 92C & Rule 10B(2), there is no bar to considering companies with either abnormal profits or abnormal losses as comparable to the tested party, as long as they are functionally comparable. This issue does not arise in the OECD guidelines and the US TP regulations because they advocate the quartile method for determining ALP under which companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartiles are reckoned for comparability. Cases of either abnormal profits or losses (referred to as outliners) get automatically excluded. However, Indian regulations specifically deviate from OECD guidelines and provide Arithmetic Mean method for determining ALP. In the arithmetic mean method, all companies that are in the sample are considered, without exception and the average of all the companies is considered as the ALP. Hence, while the general rule that companies with abnormal profits should be excluded may be in tune with the OECD guidelines, it is not in tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the Assessee to demonstrate existence of abnormal factors. On facts, as the assessee has not shown any factors for abnormal profits, no comparable can be excluded for that reason (contra view in Quark Systems & Sap Labs noted);

 

(iii) Though the functions performed by offshore service providers and onsite service providers is the same, i.e. development of computer software, under Rule 10B(2)(b) one has to have regard to the functions performed, taking into account assets employed or to be employed and the risks assumed by the respective parties to the transactions. The “market conditions” are different for on-site and offshore work because in onsite development of computer software, the assessee does not employ assets or assume many risks. Even the per hour rate is different. The fact that in TNMM it is only the margins in an uncontrolled transaction that is tested does not mean that the fact that pricing will have an effect on the margins obtained in a transaction can be ignored. Companies which generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the assessee. Since, the entire operations of the assessee took place offshore i.e. in India; it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model;

 

(iv) The TPO is entitled to collect information u/s 133(6) though if it is sought to be used against the assessee, it must be furnished to the assessee and his objections taken into account. If the assessee seeks an opportunity to cross examine the party, that opportunity should be provided so that he can rebut the stand of that particular company. On facts, the assessee had not been able to show that the TPO had used information u/s.133(6).

 

S. 54EC limit of Rs. 50L does not apply to the transaction but financial year. Cheque has to be issued within 6 months. Encashment of Cheque & Allottment of Bonds beyond 6 months is irrelevant

Vivek Jairazbhoy vs. DCIT (ITAT Bangalore) 

In AY 2008-09, the assessee sold land on 14.12.2007 and computed capital gains of Rs. 1.57 crores. He invested Rs.50 lakhs on 3.3.2008 (FY 2007-08) in REC Bonds and Rs. 50 lakhs on 4.6.2008 (FY 2008-09) in NHAI Bonds and claimed a deduction of Rs. 1 crore u/s 54EC. The NHAI Bonds were allotted on 30.6.2008. The AO & CIT(A) restricted the assessee’s claim to Rs. 50 lakhs on the ground that (i) the Proviso to s. 54EC imposed a ceiling of Rs. 50 lakhs for the investment and (ii) the allotment of the NHAI Bonds was made beyond 6 months of the date of transfer. On appeal by the assessee, HELD allowing the appeal:

(i) In Aspi Ginwala (ITAT Ahmedabad) it was held that the Proviso to s. 54EC merely restricted the investment that can be made in one FY to Rs. 50 Lkahs but it did not restrict the exemption to Rs.50 lakhs. However, a contrary view was taken in Raj Kumar Jain & Sons (ITAT Jaipur) that the exemption u/s 54EC had to be restricted to Rs.50 lakhs. However, Circular no.3/2008 dated 12.3.2008 issued by the CBDT makes it clear that the Proviso only intended to restrict the investment in a particular financial year and did not intend to restrict the maximum amount of exemption permissible u/s 54EC. The fact that the Proviso uses the words “in a financial year” fortifies this interpretation. Accordingly, it has to be held that the assessee is entitled to total deduction of Rs. 1 crores in respect of the investment of Rs. 50 lakhs made in each financial year;

(ii) The cheque was issued to NHAI before the expiry of 6 months from the date of transfer. The fact that the allotment of the Bonds was made after 6 months is irrelevant. A payment by cheque which is encashed subsequently relates back to the date of receipt of the cheque. The date of payment is the date of delivery of the cheque and not the date of its encashment (Kumarpal Amrutlal Doshi (ITAT Mumbai) followed).

S. 2(22)(a): Occupancy rights to shareholder taxable as “deemed dividend”

Shantikumar D Majithia vs. DCIT (ITAT Mumbai)

 The assessee was the substantial shareholder of a closely held company which owned a building. The Articles of the company provided that each shareholder would have occupancy rights to a flat on the condition that an interest-free refundable deposit be paid. The occupancy rights were transferable. The AO held that the grant of occupancy rights by the company amounted to a “distribution of assets” and that the same was assessable as “deemed dividend” in the hands of the assessee u/s 2(22)(a) to the extent of the accumulated profits. On appeal, the CIT(A) held that as the occupancy rights were given against payment of a refundable deposit, there was no “distribution of assets” and so no deemed dividend. Instead, he held that the occupancy rights conferred a “benefit/perquisite” on the assessee which was assessable u/s 2(24)(iv). On cross appeals before the Tribunal, HELD:

 

(i) U/s 2(22)(a), any distribution by a company of accumulated profits, whether capitalized or not, constitutes “dividend” if such distribution entails the release by the company to its shareholders of all or any part of the assets. As the assessee received the occupancy rights to the flat in perpetuity and could transfer them, it effectively meant that he had full ownership over the flat. Accordingly, the value of the flats was assessable as deemed dividend u/s 2(22)(a);

 

(ii) However, as the said occupancy rights were given in lieu of holding shares and an interest-free refundable deposit towards proportionate land cost and development cost and were transferable, there is no “benefit or perquisite” which is assessable u/s 2(24)(iv).

 

Taxability of royalty under retrospective law & reimbursement of expenses

WNS North America Inc vs. ADIT (ITAT Mumbai)

 The assessee, a USA company, received Rs. 6.41 crores towards reimbursement of international telecom connectivity charges. The assessee claimed that the said amount did not fall within the definition of “royalty” in Article 12 of the India-USA DTAA apart from the fact that as it was a “reimbursement of expenses“, it was not income. The department claimed that irrespective of the position under the DTAA, in view of the retrospective insertion of Explanation 5 to s. 9(1)(vi) by the FA 2012 w.r.e.f. 1.6.1976, the said amount had to be assessed as “royalty“. On appeal by the assessee to the Tribunal, HELD allowing the appeal:

 

(i) A retrospective amendment to the Act has no bearing on the DTAA because s. 90(2) makes it clear that the provisions of the Act shall apply only to the extent that it is favourable to the assessee. While a retrospective amendment will alter the provisions of the Act, it will not per se have the effect of automatically altering the analogous provision of the Treaty. Further, though the DTAA provides that the laws in force in India shall govern the taxation of income, this is subject to the exception that there is nothing to the contrary in the DTAA. Similarly, under Article 3(2), as the term “royalty” is defined in Article 12, the definition in s. 9(1)(vi) will have no application;

 

(ii) On merits, even if the retrospective amendment applied, the amount would not constitute “royalty” because it was not received “for the use or right to use any industrial, commercial or scientific equipment” owned by the assessee. The equipment was owned by the telecom operators and the amount could be considered as royalty in their hands but not in the hands of an intermediary like the assessee who merely made the payment and got the reimbursement;

 

(iii) Further, the said amount, being a pure reimbursement of expenses without any mark up cannot be considered as income in the hands of the assessee. However, the onus is on the assessee to show, by leading evidence, that there is no element of profit in such reimbursement and that the contract price has not been bifurcated to show a portion thereof as reimbursement. Mere nomenclature of “reimbursement” is not relevant. On facts, as the assessee established that there was no mark up, the amount was not assessable.

 

S. 14A does not apply to shares held as stock-in-trade

Ethio Plastics Pvt. Ltd vs. DCIT (ITAT Ahmedabad)

 The assesse received Rs. 59 lakhs as tax-free dividend. It claimed that no disallowance u/s 14A could be made as it was a dealer in shares and the shares were held as stock-in-trade. The AO & CIT(A) relied on Daga Capital Management Services 119 TTJ (SB) 289 (Mum) where it was held that s. 14A applied also to shares held as stock-in-trade and made a disallowance of Rs. 37 lakhs. On appeal by the assesse to the Tribunal, HELD allowing the appeal:

 

As the assesse is engaged in the business of dealing in shares and the shares were held as stock-in-trade, the intention of the assesse was not to earn dividend income. As the dividend received was incidental to the business of sale of shares, no notional expenditure could be disallowed by invoking s. 14A (CCI Ltd 71 DTR 141 (Kar) & Apoorva Patni (ITAT Pune) (included in file) followed

India is set to overtake the UK by 2017.

India's GDP is expected to grow by leaps and bounds in by 2017. According to the Centre for Economics and Business Research (CEBR), India is set to overtake the UK by 2017. Thus, it is to become the largest economy in the Commonwealth. The fact that Britain will no longer be able to hold on to its spot is not really surprising. With the debt crisis worsening in the US and Europe, most of these countries are either in recession or facing the prospect of one. Britain has been no exception. In contrast, how has India been faring? The Indian economy has also been battling slowing economic growth, high inflation and firm interest rates. That said, the country's growth rate has been higher than that of its developed counterparts. And by that measure alone be able to overtake Britain. But what will firmly seal India's dominance is more initiative from the government to implement reforms and ramp up infrastructure. Only then can the country's growth move to the next level. In the meanwhile, Britain can take solace from the fact that its economy is expected to be larger than that of France by 2022.

What do you think of a firm that grows sales after taking on debt? Well, as long as the debt remains within permissible limits, we should be fine with it, right? But if debt increases at a faster rate than sales, then alarm bells should certainly start ringing. In the same vein, if a country's GDP is growing but needs more and more money to make the growth happen, it is not a healthy sign. As today's chart of the day points out, while India's nominal GDP has grown at a fast clip over the past couple of decades, the money supply in the economy has grown even faster and this is something we should watch out for. Although the situation is not as alarming as in say US, we need to take steps to ensure that our productivity does not suffer. In other words, we should continue to increase our GDP at either the same rate of growth in money supply or higher. Otherwise, there will be inflation to deal with.

RBI has been liberal with CRR

The Reserve Bank of India (RBI) has adopted a hawkish stance when it comes to the key interest rates. This stance has been unchanged given the country's high inflation rates. But it has been a little more liberal when it comes to liquidity levels. These are essentially regulated by the Cash Reserve Ratio or the CRR which is the amount of funds that the banks have to keep with RBI. As a result, any cut in the rate results in more funds available to the banks that they can lend out. The RBI has cut the CRR rate 3 times this year. This has injected liquidity in the monetary system. However, till such time as the headline inflation comes within RBI's acceptable limits, it is unlikely that it will touch the repo rate or the benchmark interest rates in the country.

Japan's Abe turns up the heat.

Shinzo Abe increases pressure on the central bank to adopt a 2% inflation target with a veiled threat to knock away the independence of the BOJ if his demand isn't met. Though Abe is still a few days off from becoming the prime minister, his rhetoric has already had an effect on the role of the central bank in the nation.

Which is the ubiquitous Indian brand? Something that is home grown but yet known all over the world? Well, according to top CEOs across the globe, the Tatas is India's best known global brand. The US$ 100 bn salt to airlines manufacturer has really carved a name for itself in the global market. The group was started in 1868 by Jamsetji N Tata and has now become one of the biggest success stories from India Inc. The group has interests in diverse sectors such as steel, auto motives, chemicals, telecommunication, information technology, beverages, hospitality, etc. Ratan Tata has been responsible for making this family owned business into a professionally managed conglomerate. He is finally stepping down at the end of this year after a 21 year reign at the helm. Cyrus Mistry will now take over the ropes. One of the biggest challenges for him will be ensuring that all the group companies successfully steer through the economic slowdown globally. We wish him all the very best. But since most of the horses in his stable are winners, we don't think he will face too much trouble.

China currently is one of the fastest growing countries globally. But when it comes to performance of CEOs, the dragon nation still has a long way to go. As per rankings by the Harvard Business Review (HBR), only three chief executives from mainland China have made the top 100. This is in the latest ranking of corporate leaders' long-term performance. The ranking is based on growth in shareholder returns and market capitalisation achieved during the tenure of chief executives appointed since 1995. In contrast, 6 of the top 10 spots were held by CEOs of US companies. This is despite the fact that the US is plagued with massive debt and recession. The key here has been innovation. This is one area where the US has dominated till now leading to the establishment of some world class companies. China so far has been renowned for its manufacturing prowess and low-cost advantage. But once its companies become more innovation-focused there is no reason why they will not move up the ladder.

Problems plaguing India's Power sector.

One of the biggest roadblocks facing the Indian economy has been the poor state of infrastructure in the country. It is said that lack of proper infrastructure shaves off about 2% of India's GDP growth every year. The power sector, which is the engine for growth in any economy, is facing a myriad of challenges and setbacks in India. As per an article in Livemint, new orders in the power sector stood at Rs 79 bn in the September quarter, down 91% from the corresponding period of the previous year. In fact, this is the lowest since 2005.

Moreover, about 64,000 megawatts (MW) of projects have been stalled. Today's chart of the day shows the major reasons for delay in the 64,000 MW of power projects. It is clear that the biggest problem plaguing the power sector has been shortage of fuel, mainly coal. It is worrying that despite that fact that India has one of the largest coal deposits in the world, coal supply continues to be a big
challenge.

 

The Federal Reserve keeps buying.

The Federal Reserve's balance sheet expanded over the last week to $2.922T with an increase in mortgage-backed securities holdings offsetting a slight decline in U.S. Treasury holdings. Borrowing at the discount lending window was $864M, up $37M from the previous week.

U.K. GDP estimate lowered.

The Office of National Statistics lowered its reading on economic growth in the U.K. for Q3 to 0.9%, down from the previous estimate of 1.0% for the period. Output of the production industries and manufacturing output were both estimated to be 0.7%.

Yen Continues Losing Ground, Euro Taking Advantage

The Japanese Yen dropped to a 16-month low against the Euro, dragged down by expectations that the Bank of Japan will resort to more monetary stimulus on Thursday after a much anticipated policy meeting.

The Euro has been on the rise having reached its strongest levels against the Yen since August last year. The single currency was also stronger against the US Dollar hitting a 7-month high.

So focus shifts to the BOJ meeting and with the new Japanese government keeping pressure on the BOJ to ease policy, we could be in for a bumpy ride over the next few days.

China may be at risk of severe credit crunch.

China could face a severe credit crunch because of Wealth Management Products, which are mostly short-term securities that promise high yields and have become massively popular. The underlying assets are often undisclosed but can include speculative real-estate developments. The fear is that a recent default of a WMP could cause a run on the products and hence the credit crunch, or expose banks to massive liabilities.

German business confidence increases.

Germany's Ifo Business Climate index has improved for the second consecutive month, rising to a greater-than-expected 102.4 in December from 101.4 in November. "There is a certain calming down at the end of the year," Ifo economist Klaus Wohlrabe says. "Export expectations have risen. Companies are growing confident again

Congress agrees on $640.7B defense budget.

House and Senate negotiators yesterday reached a deal over a $640.7B defense budget for the current fiscal year, including $88.5B for operations in Afghanistan. However, the spending doesn't account for the automatic cuts that are due to take place if the fiscal cliff is not averted. The measures now need to be approved by the House and Senate before going to President Obama for his signature.

Japan's export decline slows.

Japan's exports fell 4.1% on year in November after dropping 6.5% in October, with overseas sales continuing to be pressured by the strong yen and weak global growth. Exports to China declined 14.5% while shipments to Europe slumped 19.9%. With imports edging up 0.8%, the trade deficit widened to ¥953.4B from ¥549.0B.

Michigan appoints review team for Detroit.

Michigan Governor Rick Snyder has appointed a financial review team for Detroit after a preliminary study found that the city had "a serious financial problem." The team will carry out a new review that could lead to the appointment of an emergency manager who would have the authority to allow Detroit to file for what would be the largest ever U.S. municipal bankruptcy.

Fitch threatens downgrade if U.S. falls off cliff.

Fitch has warned that a failure to avert the fiscal cliff will increase the likelihood that it will strip the U.S. of its AAA rating. Falling over the edge "would exacerbate rather than diminish the uncertainty over fiscal policy, and tip the U.S. into an avoidable and unnecessary recession," Fitch said in its 2013 global outlook

UBS to pay $1.5B to settle rate-rigging charges.

 Largely as expected, UBS (UBS) has agreed to pay $1.5B to U.S., U.K. and Swiss authorities to settle charges that it rigged inter-bank interest rates, including Libor. The large size of the penalty - it's more than triple that of Barclays (BCS) - reflects the centrality of UBS to the scandal. The bank's Japanese unit, which was responsible for much of the attempted manipulation, has pleaded guilty to one count of fraud.

The Indian stock markets have risen by almost 25% this year. So, who is investing in these stock markets? As per Wall Street Journal, it is not the Indian domestic investors. In fact, they have mostly stayed away from investing. Most of this rise in stocks has been on account of global money managers. So far this year, foreign investors have invested US$ 22.5 bn into Indian stocks. They have been investing huge sums of money into the initial public offerings too.

The reason for such renewed interest in the Indian economy lies in the series of recently announced policy reforms by the government. Fund managers feel that allowing foreign direct investment in retail and aviation would help these industries in the future. Industry players would earn better profits and they expect stock prices too to move higher. Investors are also pinning hopes on finance minister's objective to reduce budget deficit by lowering fuel subsidies. Not to mention the hope of a more liberal monetary policy from the RBI.

A much awaited Bill was passed by the Lok Sabha yesterday. This one was on banking laws. The Bill did three things and that were to give Reserve Bank of India (RBI) more power to regulate banks. Second was to raise the voting power of investors in banks. And third was to allow the state owned banks to raise capital through bonus and rights issue. But a crucial thing that this Bill has done is to clear the path for RBI to issue new banking licenses. This is something several private sector companies and NBFCs have been keenly waiting for. Once the Bill is cleared by the Rajya Sabha, the RBI can sit down and think over how it would go about issuing these licenses.

This move is naturally a cause for celebration and has sent the stocks of most of the banking license hopefuls into a frenzy. The only thing we hope for is that the RBI maintains its conservative stance in this area as well. This means that the licenses are issued with thought and care and not to everyone and anyone. However, given RBI's history of remaining conservative, the possibility of this is bleak.

The RBI's reluctance to tweak the key lending rates during the Monetary Policy review left the repo rate at a stiff 8%. In fact as the chart shows, the repo rate at which the central bank lends to commercial banks has been stiff for nearly 30 months now. Although the government has been prodding the RBI to adopt a more liberal approach to interest rates in order to boost GDP growth, the RBI has refused to do so citing sticky inflation numbers.

Fiscal cliff. These two words have come to symbolize America's fall from grace. The fiscal profligacy of the world's most powerful economy has threatened its position in the pecking order. However, a potential energy resource in abundance could offer it riddance from the fund shortage. The resource goes by the name of shale gas. And as the supplies of oil and natural gas from the Gulf get more expensive, America will increasingly rely on its own resources. At some point of time, shale gas supplies from the US are expected to even meet the energy needs of other economies. Thus shale gas is expected to bring an energy renaissance of sorts to the US .

The International Energy Agency (IEA) believes that yet another energy resource could rival oil by 2017. And if that were to be indeed proven true, even India might find her place under the sun. For the resource being talked about is none other than coal.

Now despite India having one of the largest coal deposits in the world, the mineral has not been mined enough. Corruption, wrongful allocation of mines, environmental concerns and inefficient procedures have been the key stumbling blocks. Monopolistic position of state owned miner Coal India has also ensured that coal output grossly lags the demand for mineral. It was only in 2012 that a potential blackout of the power sector forced the government to hold Coal India more responsible. Even then, private sector power, steel and cement producers are banking on imported coal or captive coal mines. They would rather pay a higher price than rely on Coal India's bumpy track record.

The IEA, however, expects Coal India to share some glory along with the likes of Shenhua Group of China and Peabody Energy of the US in coming years. The significant lead time needed to ramp up coal supplies to catch up with demand will keep the prices of the mineral firm. Coal consumption is expected to grow faster than any other fossil fuel, except gas, upto 2017. Nevertheless, the commodity faces strong head winds. Not just from green policies and competition but also from cheap natural gas. Australia and Indonesian coal supplies will also be the key determinant of the prices of the mineral.

Thus coal can bring to India the kind of energy independence that shale gas promises for the US. However, it is left to industries and policy makers to ensure that we do not lose the opportunity.

Spanish bank loans continue to sour at record rates.

Spanish banks' bad loans rose to yet another record high in October, climbing to 11.23% of their outstanding portfolios from 10.7% in September. Debt that turned sour increased by €7.4B to €189.6B.

China to settle for reduced growth.

 China is reportedly targeting GDP growth of 7.5% in 2013, the same as the goal for this year, and inflation of 3.5% vs the 2012 aim of 4% and November CPI of 2%. The GDP target is well below the 10% average growth that China has enjoyed over the past decade but reflects the new government's desire to seek a higher "quality" expansion.

A tale of two coal markets.

U.S. coal consumption will drop 14% from 2011-2017, the International Energy Agency forecasts, due to the shale gas revolution prompting power companies to abandon coal. Overseas, the picture is totally different, with demand booming in China, India and other emerging markets. The problem for U.S. producers is that international prices are low. The IEA predicts restructuring for the sector and possible job losses.

Obama offers concessions over tax hikes.

The haggling to avert a fiscal cliff has brought more movement, with President Obama offering to limit tax increases to those earning over $400,000 - up from his long-held desire of $250,000 but well below John Boehner's proposal of $1M. The latter's aides say the offer represents "a step in the right direction" but is too heavy on the tax revenues and too light on the spending cuts.

The US politicians have been huddled up in working out a deal to avert the fiscal cliff. All parties are trying to reach a common ground. But in the opinion of Mr El-Erian, CEO of PIMCO, even if US avoids a fiscal cliff, it is still looking at sluggish economic growth. As per him US would be looking at an economic growth in the region of 1.5% to 2% even if the deal goes through. The proposed tax hikes would help avert the disaster of a fiscal cliff. If this is not averted, the US would definitely head into a recession. However, economic growth would largely depend on recovery in the housing as well as the labor market. For this, the US government still needs to take action. As per Mr Erian, decisions on issues such as debt ceiling, annual budget, hou sing finance and labour markets are still pending. These would be the decisions that would ultimately drive future economic growth. The discussion on fiscal cliff is just a short term one. It is to avert an economic disaster which is definitely a priority.

victim of illicit black money outflows-India ranks high.

We love to pose as victims for all things gone wrong. The latest tag is 'victim of illicit black money outflows' going into billions. As per a recent report quoted by Firstpost, the illicit outflows for 2010 alone is US$ 1.6 bn. For the decade ending 2010, the black money losses amount to US$ 123 bn! The report by Global Financial Integrity, a US based organization ranks India 8th largest victim of illicit capital flight. We are fortunate to be ranked behind China, Mexico, Malaysia, Saudi Arabia, Russia, the Philippines, and Nigeria. Together, emerging economies lost around US$ 858 bn in 2010 to illicit outflows. The irony is that despite such statistics coming out year after year, very little has been done to curb suc h outflows. Or for that matter to curb the generation of black money. Indian banking and tax laws have long been attempting to make black money transactions punishable. However, very little success has been achieved so far. And as long as policymakers keep taking a socialist view on taxation related matters, it may continue to remain so.

RBI keeps Repo rate at 8% with steady CRR at 4.25%

Maintaining the status quo is something the Reserve Bank of India (RBI) knows all too well. The Indian central bank kept key policy rates unchanged during the latest monetary policy review. The repo rate was maintained at 8%, Cash Reserve Ratio (CRR) stood steady at 4.25%. Headline inflation came down to 7.2% in November, but this wasn't enough to impress the governor, D Subbarao. He maintains that risks to inflation still remain and emphasised the need to shift increasingly towards growth. The RBI has been facing pressure from the government and the industry to cut rates. A monetary cut at this rate would help improve sentiments and help revive g rowth. However, all hope is not lost. There is an indication that rates may get cut January onwards. The slowdown may have bottomed out and inflation is moderating. A rate cut in early 2013 will just be the icing on the cake. 

LDP Victory Forces The Yen Lower, Euro and Dollar Capitalize

The Japanese Yen dropped to its lowest in more than a year and a half against the US Dollar on Monday, after a landslide election victory for the Liberal Democratic Party in the Japanese elections.

The LDP victory is expected to usher in aggressive monetary easing but most analysts expect that the prospect of loose monetary policy could cause the Yen to lose further ground in coming weeks. It all depends on the how soon policy makers start to make changes.

Meanwhile, the Euro also rose higher against the Yen getting close to levels not seen since March earlier this year

 

The Yen earlier hit 84.48 per Dollar, the weakest since April 12, 2011, and fell 0.5% to 110.55 per Euro, the weakest since March 21st..

The Dollar was little changed at $1.3154 per Euro.

The Euro gained late last week against all of its major peers, after European Union finance ministers agreed to put the European Central Bank in charge of the area's lenders.

The Dollar earlier climbed against higher yielding currencies as U.S. budget negotiations continued. House Speaker John Boehner, in an effort to cut a deal with President Barack Obama in order to reduce the deficit, offered to raise income tax rates on households earning more than $1 million a year in exchange for containing federal entitlement programs.

The U.S. faces a fiscal cliff of $607 billion in automatic spending cuts and tax raises, set to begin on the 1st of January 2013, unless lawmakers can reach agreement. If no such agreement is reached, the result could be that the U.S. economy will contract by 0.5% next year according to the Congressional Budget Office.

India slashes growth forecasts.

India's government has cut its fiscal-year GDP growth forecast to 5.7-5.9% from a prior outlook of 7.6% but expects inflation to ease from 7.2% in November to 6.8-7% by the end of March, when the FY ends. Along with "benign global commodity prices," the lower inflation will "facilitate a softening of the monetary policy stance of the RBI," the government said.

Detroit has "serious financial problem."

A preliminary review by Michigan has found that Detroit has a "serious financial problem," with reporting problems causing cash-flow projections to significantly oscillate on a monthly basis. The review could lead to the declaration of a fiscal emergency and prompt the appointment of an emergency financial manager. A municipal filing for bankruptcy protection, the biggest in U.S. history, could ultimately ensue

U.S. approaching $16.4T debt ceiling.

While much attention has focused on averting the fiscal cliff, the U.S. is just $66B below its $16.4T debt ceiling, which it's due to hit towards the end of the month. The Treasury would then embark on some fiscal maneuvering that could buy it another 6-10 weeks. As with the fiscal cliff, Republicans want cuts to entitlement programs before agreeing to increase the debt limit again.

Japanese stocks rise after LDP wins landslide.

The Nikkei 225 ended 0.9% higher after Shinzo Abe's LDP won a landslide victory in Japan's election yesterday. Abe immediately set out to fulfill his promise to make the Bank of Japan print more money that the new government can throw at the moribund economy. As such, he plans to put together a "large scale" supplementary budget to stimulate the economy and will set the BOJ a 2% inflation target.

The US Federal Reserve has decided to open yet another printing press. Earlier this week it has stated that the central bank will buy US$ 45 bn of Treasury securities per month. This round is expected to start in January. This will expand its asset purchase program. The general idea is still the same that this would lead to a flux of money in the system, thereby boosting economic growth. This has led to severe criticism from many including PIMCO's Bill Gross. He has stated that the Fed's latest move allows it to issue debt for no cost whatsoever. This is true given the near zero interest rates that exist in the US economy. Issuing debt for free has its own repercussions. This move makes it virtually costless for US to finance its fiscal deficit which will keep on growing. Eventually the flood of money will start to stoke inflation in US as well. This would eventually kill economic growth in the country rather than helping the same. From what we have seen in the previous rounds of monetary easing, this approach has not really been too successful. Therefore it would not be wrong to say that this round will not produce any spectacular result either.

The Reserve Bank of India (RBI) has regularly cited under penetration of loans and deposits in the country as reasons for issuing more bank licenses. However, as the data published by the central bank shows, as a share of GDP, the loans and deposits in Indian banks is 52% and 68% respectively. The same is fairly competitive to that in US, Brazil and France. Hence instead of issuing new bank licenses in a hurry, the RBI should vouch for the Indian banking sector's consolidation.

Japanese businesses get gloomier.

Japan's business sentiment continued to worsen in Q4, the Tankan Index shows, with the large manufacturing index plunging to -12 from the -3 in Q3 and missing consensus of -10. Meanwhile, the large non-manufacturers diffusion index fell to four from eight in Q3.

Fitch affirms France's rating at AAA.

Fitch has maintained France's rating at AAA, thereby remaining the only one of the Big Three agencies not to downgrade the country's debt. However, Fitch has kept France's outlook at negative and said the chance of a future cut is over 50%. The firm raised its forecast for France's 2014 debt-GDP ratio to 94% from 92% and warned that the new number is "at the limit" for a country with the highest rating

UBS to admit criminal guilt in $1B+ Libor settlement.

UBS (UBS) will reportedly become the first bank in over a decade to admit criminal wrongdoing as part of a deal with U.S., U.K. and Swiss regulators to settle allegations that it manipulated Libor and other inter-bank rates. UBS will also face fines of over $1B, which would be the largest amount levied so far in the Libor scandal and well above the $450M Barclays (BCS) agreed to pay.

S. 23(1)(a): Annual Letting Value has to be determined as per market rent & not municipal rateable value if property is not subject to “bona fide” rent control

Woodland Associates Pvt. Ltd vs. ITO (ITAT Mumbai)

 

The assessee let out two flats, one to its director andS. 23(1)(a): Annual Letting Value has to be determined as per market rent & not municipal the other to its shareholder, for an aggregate rent of Rs. 4.52 lakhs. The assessee claimed that the rental income was assessable as business profits as the properties were held as a business asset. In the alternative, it was claimed that as the property was subject to rent control law, the rent received from the tenants had to be treated as the Annual Letting Value (ALV) and not the market rent of the properties. The AO & CIT(A) rejected the claim and held that the market rent of the properties, which was computed at Rs. 78 lakhs, was the ALV assessable as “Income from house property“. The Tribunal had to consider (i) whether the rent was assessable as“business profits” or as“Income from house property” and (ii) whether for purposes of s. 23(1)(a), the AO was entitled to treat the market rent as the ALV or he had to confine himself to the standard rent/ municipal valuation of the property. HELD by the Tribunal:

(i) Rental income has to be assessed as “Income from house property” even if the business of the assessee is to let out property. However, property let out to the director for her residence has to be treated as business user of the property and the rental income from such user has to be treated as business income (East India Housing 42 ITR 49 (SC),Vazir Sultan Tobacco 173 ITR 290 (AP) &New India Maritime 253 ITR 732 (Mad) followed);

(ii) As regards the determination of ALV in respect of income assessable as house property, it has been held by the Third Member in Baker Technical Services 126 TTJ 455 (Mum)(TM) that the ALV in respect of property which is not covered by the Rent Control Act has to be determined on the basis of the market rent. The municipal rateable value determined under the municipal law is not binding on the AO if he is able to show that the said rateable value does not represent the correct fair rent. In Reclamation Reality, the view of the Third Member inBaker Technical Services was not followed on the ground that it was contrary to the judgement of the Bombay High Court in M. V. Sonavala 177 ITR 246 and it was held that the municipal ratable value has to be considered as the ALV. The decision of the Third Member has the same binding force as that of the Special Bench and was required to be followed by the Division Bench in Reclamation Reality. It wrongly relied on M.V. Sonavala, which was a case dealing with property covered under the Rent Control Act. Also, the issue as to whether, if the Municipal Rateable Value does not give the correct fair rent, should still be taken as the ALV for properties not covered under the Rent Control Act was not an issue in M. V. Sonavala. This aspect has been considered in Baker Technical Services & Moni Kumar Subba 333 ITR 38 (Del) (FB) and it was held that if the municipal rateable value was not the fair rent, it was not binding on the AO;

(iii) The assessee’s argument that the property, having been let out to an individual, is subject to rent control law is not acceptable because the tenant is the daughter of a director and substantial shareholder of the assessee. The Rent Control Act applies only to bona fide letting out of properties and not to a colourable transaction which is only an arrangement to reduce tax liability. Accordingly the ALV has to be determined based on the fair rent in the market charged in comparable cases.

Note: The difference in opinion between this decision (& Tivoli Invstment 130 ITD 521 (Mum)) and Reclamation Realty (which was followed in Monisha Jaising 51 SOT 182 (Mum) & Gagan Trading) on whether the municipal rateable value has to be taken as the ALV u/s 23(1)(a) deserves to be referred to a Special Bench. The controversy was earlier referred to the Special Bench and withdrawn owing to pendency of the appeal in the High Court.

Euro Gains On Fed Action, Yen Struggling Ahead Of Elections

The US Dollar fell against the Euro on Wednesday compounding recent losses after the Federal Reserve left benchmark US interest rates unchanged stating that it looks to extend its bond-buying economic stimulus program.

The Fed's plan includes a commitment to purchase $45 billion monthly in long-term US Treasuries together with buying $40 billion a month in agency mortgage- backed securities.

While the Dollar fell against the Euro it managed to maintain its assault on the Japanese yen with most investors backing the BOJ to implement aggressive monetary easing of it's own after elections due to take place on Sunday.

Greece finally to get some more aid money.

 The Eurogroup has finally agreed to release the long-delayed latest tranche of Greece's bailout. The country will receive €49.1B between now and March, including €34.3B in the coming days. The money will help Greece finance a bond buyback that retired $41.5B worth of government debt, and which, along with other measures, should cut Greece's debt burden to a mere 124% of GDP by 2020

EU finmins agree on banking supervisor.

EU finance ministers last night finally agreed to a deal in which the ECB will become the banking supervisor for the eurozone, a move that's a first step towards a banking union. From 2014, the ECB will oversee at least 150 of the bloc's largest institutions and intervene in smaller banks if problems arise. It's now up to EU leaders to approve the deal at a parley today and tomorrow

How do you bring an economy from the brink of disaster back to life? Central banks across the world are trying various measures in order to revive their economies post the financial crisis and the subsequent recession. The US Federal Reserve has now announced its own unorthodox measure to help revive the economy. Fed Chairman, Ben Bernanke announced that interest rates would be kept at near zero levels until unemployment falls to at least 6.5%.

The Fed expects rates to hold steady until unemployment figures improve. This is as long as inflation doesn't break the 2.5% barrier. The central bank also replaced an expiring stimulus programme with a fresh round of Treasury purchases. While earlier goals were more timeline driven, these action oriented goals will make monetary policy more transparent and predictable to the public. But, despite all these efforts, GDP growth in the US remains lukewarm. The upcoming fiscal cliff is also a matter of concern. Well, we just hope that new job creation will provide some respite to this ravaged economy.

Eurozone industrial output declines again.

Eurozone industrial output fell a monthly 1.4% in October, and while that represented a deceleration from a 2.3% drop in September, the number badly missed consensus of -0.2%. The October decline was led by an alarming 2.6% drop in Germany, although Spain's output grew 1.2%.

Fed tells top banks to avoid major acquisitions.

The Fed is reportedly discouraging top U.S. banks from making large acquisitions as it informally uses powers it received under the Dodd-Frank Law and attempts to limit the ability of banks to threaten the stability of the financial system should they fail. Those told not to make major purchases include Capital One Financial (COF) after its $9B acquisition of ING's (ING) U.S. online business

India's estimated coal reserves are expected to last over century.

India is the third-largest producer of coal in the world. However, the country's domestic consumption is large. As a result, India net imports coal to meet the needs of power companies, steel mills and cement producers. India's coal demand is expected to increase multifold within the next 5 to 10 years. This is due to the completion of ongoing power projects, and demand from metallurgical and other industries. The government has said that India's estimated proven coal reserves of 118 bn tonnes are expected to last the country for over 100 years.

This will be enough to meet the growing demand. Government-controlled Coal India Limited (CIL) dominates the domestic coal supply market with an 80% market share. Although there have been delays in raising coal production in the past, the government has said that most of the issues regarding delays in obtaining environment clearances and land acquisition issues are being taken care of.

Euro Recovers Amidst Italian Concerns and Fed Action

The Euro staged a resilient recovery from a 2-week low during trading on Tuesday as investors seemed to settle down amidst Italian political turmoil while further Federal Reserve stimulus kept the Dollar pinned down.

The Euro appeared to find solid support after the Italian Prime Minister, Mario Monti, played down market fears over his decision to resign. He went on to state that there was no danger of a vacuum ahead of any elections in the spring.

Meanwhile, analysts expect the Fed will replace its expiring 'Operation Twist' programme with another Treasury bond-buying plan at its Dec. 11-12 policy meeting which is another factor keeping the Euro away from its recent lows.

 

The Euro earlier stood at $1.2938 while the Dollar earlier bought 82.37 Yen and remained near to an eight month high of 82.84 Yen set in November.

High yielding currencies will I think be well bid in the next few days, as the prospect of fresh stimulus from the Fed and growing expectations persist that the Bank of Japan (BOJ) could expand its asset buying and lending programme at a meeting to be held soon.

Special Bench verdict that s. 40(a)(ia) applies only to “amounts payable” stayed

CIT vs. M/s. Merilyn Shipping & Transports (Andhra Pradesh High Court)

In Merilyn Shipping & Transports v. ACIT 146 TTJ 1 (Vizag), the Special Bench held by a majority that as s. 40(a)(ia) refers to “amount payable“, only the outstanding amount or the provision for expense as of 31st March (and not the amount already paid during the year) is liable for disallowance if TDS is not deducted. It was held that this interpretation was necessary as the Finance Bill proposed the disallowance to apply to any “amount credited or paid” but this was changed to “amount payable” in the Finance Act. On the department’s appeal to the High Court, the High Court has vide order dated 8.10.2012 directed “interim suspension” of the Special Bench’s verdict.

No s. 40(a)(ia) disallowance for short-deduction TDS default

CIT vs. M/s. S. K. Tekriwal (Calcutta High Court)

The assessee paid machinery hire charges on which it deducted TDS at 1% u/s 194C. The AO claimed that the amount was in the nature of “rent” and TDS at 10% ought to have deducted u/s 194-I. A proportionate disallowance u/s 40(a)(ia) was made on the ground that there was a “failure” to deduct TDS on the payment. The Tribunal upheld the assessee’s plea that s. 40(a)(ia) disallowance could not be made when there was a shortfall in TDS deduction. On appeal by the department to the High Court, HELD dismissing the appeal:

S. 40(a)(ia) can be invoked only when the two conditions, namely, that tax is deductible at source and such tax has not been deducted is satisfied. Where tax is deducted by the assessee under a wrong provisions of TDS and there is a shortfall, s. 40(a)(ia) disallowance cannot be made.

After several rounds of financial bailouts, the national carrier is showing signs of getting airborne! At least the newspapers claim so. The government has offered not one or two but several rounds of funding to Air India. Banks too have restructured its loans several times. The airline company has finally started repaying some loans and cutting losses. As per Mint, the state-run carrier could cut net losses to Rs 42.7 bn this year from Rs 78.5 bn in FY12. This has been on the back of cost rationalisation. To cut staff costs, the airline restricted its hiring to pilots and engineers last year. It also did not fill vacancies created by the retirement of employees. These steps have effectively reduced the staff count to 28,500 from 35,000 in 2011. But do these effectively mean a tunaround for Air India? Apparently not! The carrier is still making losses on several routes. Also, a suitable turnaround plan would need good governance for a prolonged period. That too with minimal political interference. Meanwhile, at least the bankers to the airline are relieved.

German exports surprisingly rise.

German exports grew 0.3% in October on month to a seasonally adjusted €92.8B, beating a 2.4% fall in September and consensus of -0.3%. Imports rose 2.5% and the trade surplus narrowed to €15.2B. Meanwhile, French industrial production slipped 0.7%, missing consensus for a rise of 0.2% but improving on a drop of 2.7% in September.

Greece extends deadline for bond buyback.

Greece has extended its offer to buy back debt from private creditors to midday tomorrow from Friday as it reportedly looks to get bondholders to tender another €3-4B. This is despite speculation that creditors had already offered €26-30B worth of debt, or almost half the amount that Greece owes to the private sector. The government is spending up to €10B on the plan, so its debt burden would fall €20B.

China's export growth slows sharply.

China had a bit of a long-weekend data dump that provided a mixed picture, with the most notable figure a big fall in export growth in November to 2.9% on year from 11.6% in October. Consensus was for a 9.6% rise. Inflation rose to 2% from a 33-month low of 1.7%, while industrial production grew 10.1% from 9.6% and topped forecasts.

Japan slips back into recession.

Japan's Q3 GDP fell an annualized 3.5%, worse than a forecast of -3.3%. With the government revising Q2 from growth to slight contraction, the country technically slipped into a recession. The current account surplus dropped to ¥376.9B in October, a bit better than the expected ¥218B, but off 25% from a year ago.

Euro Zone Woes Weighing Heavily On The Euro

The Euro found itself under pressure during the Asian session on Monday with the prospect of a recession in Germany taking centre stage.

Growing concerns about also Italy weighed on on the Euro forcing the single currency to slip to near a 2- week low achieved on Friday.

On Friday, Germany's central bank warned that the largest ecomony in Europe could soon enter recession. The Italian Prime Minister also stated on Saturday that he intended to resign early adding to the Euro uncertainty.

The Union Budget that is presented on the last day of February every year may soon earn the title of 'national joke'. Throughout the year, the Finance Ministry keeps revising its budget plans and deficit estimates. This year is no exception. Rather, frequent revisions of estimates and targets have become the norm.

As per an article in Business Standard, the government is likely to spend additional Rs 308.4 bn to meets its revised fiscal deficit estimate of 5.3%. But do not be surprised if the Finance Ministry revises its deficit estimate still higher. It is not just higher government expenditure that is the culprit. Failure on the revenue front is also to blame. The 2G spectrum auction was a damp squib. The divestment of stake in PSUs has not worked out as per plan. This is the reason why most experts are of the view that the fiscal deficit could go as high as 5.6-5.8% by fiscal end. This, in turn, would result in additional borrowing of Rs 300-500 bn. Will this result in a rating downgrade for th e Indian economy? The warnings h ave already started pouring in.

Employment growth seen slowing.

Employment data for November is due out this morning, with economists expecting that the rise in nonfarm payrolls slowed to 85,000 from 171,000 in October, while the jobless rate is estimated to have stayed unchanged at 7.9%. Superstorm Sandy was likely to be have been a key factor that held back hiring, although the uncertainty engendered by the U.S. meandering its merry way towards the fiscal cliff is probably also not helping.

Bundesbank: Germany faces possible recession.

The Bundesbank has warned that Germany may be entering recession, saying that the economy could contract in FQ4 and FQ1. The bank also cut its 2012 and 2013 GDP predictions to +0.7% and +0.4% respectively from prior forecasts of 1% and 1.6%. In addition, it lifted its 2013 unemployment outlook to 7.2% vs 6.8% this year, but said the labor market "will come through the economic slowdown in good shape."

Disappointing Spanish Bond Auction Forces The Euro Lower

The Euro dropped from a 7-week high against the US Dollar during trading on Wednesday after poor Spanish bond auction and weak Euro Zone economic data pushed investors to take profit on their recent gains.

The Euro had been buoyed by optimism that Greece will continue to receive money from international lenders over the last week but it all fell apart when worries about Spain resurfaced.

The Euro area's GDP has likely dropped 0.1% in the third quarter from the previous three-month period, which would then confirm data from November, that showed that the Euro bloc fell into a recession for the second time in four years.

The Euro was down 0.1% to $1.3055 earlier today and traded at 107.71 Yen. The Yen was at 82.51 per Dollar.

The Yen remained lower versus the Dollar as Japan's government has been pressuring the Bank of Japan (BOJ) for more monetary stimulus.

Meanwhile, analysts expect that an upcoming change of government in Japan later this month and prospects of unlimited monetary easing will only weaken the Yen, and it may go on to feel these effects well into the new year.

BOE holds policy unchanged.

 The Bank of England has left its benchmark interest rate at 0.5%, while its £375B QE program expired at the end of October and has thus far not been replaced. Next up very soon is the ECB.

German factory orders trounce estimates.

The calender says December, but Europe will take good economic news where it can find it: German factory orders rose 3.9% in October, far ahead of forecasts for a 1% increase, and the biggest jump in nearly two years. At least part of the gain was probably the result of a punk September, for which orders were revised to -3.3% from the initial report of -2.4%.

Value assets at cost or market price whichever is lower. Create contingency reserves for rise in liabilities or unexpected losses. These are the hallmarks of good accounting laws that Indian entities are supposed to adhere to. Many do so. But when it comes to compromising on conservative accounting for want of book profits, companies readily bend rules. Not the Reserve Bank of India(RBI) The Indian central bank is a true example of an entity that has its core values in the right place. An article in Economic Times recounts the conservative nature of RBI's accounting.

The recently published RBI annual report clearly shows the conservative policies in asset valuation. Particularly its gold and foreign currency holdings. The RBI does take the unrealized gains on such assets. On the other hand it creates reserve for fall in value of securities based on their market value. Such policies ensure that the fundamentals of the central bank remain solid. However, less profit get transferred to the government's coffers every year. We do not advocate any change in the RBI's conservative accounting policies. Doing so to aid government revenue growth will not help any purpose. At least the RBI is one PSU that government has chosen not to milk. We hope that remains the case.

U.S. not seen as anywhere near the most clean.

The U.S. is ranked 19th out of 176 countries in the 2012 Corruption Perceptions Index, which is put together by non-profit organization Transparency International. The U.S. achieved a score of 74 out of 100, with zero being "highly corrupt" and 100 "very clean." Denmark, Finland and New Zealand are tied for the title of the "cleanest" countries, while Somalia, North Korea and Afghanistan are the most corrupt

Euro On The Rise Again, No Relief For Dollar And Yen

The Euro took off and landed on a fresh 6-week high against the US Dollar on Tuesday, having extended it's gains on the back of better-than-expected terms for a Greek debt buyback and falling borrowing costs for other Euro Zone nations.

Most analysts believe that the Euro could also go on to post further gains if yields on Spanish and Italian bonds continue to fall further.

Another factor casting a damp shadow on the Dollar is growing concern that US budget talks may be stalling on the Dollar.

Japan showing earliest signs of green shoots.

Japanese capital spending excluding software rose 2.4% on year in Q3, beating consensus of +1%, although growth was slower than Q1's 6.6%. The data adds to the unexpected 1.8% increase in industrial production in October and indicates that Japan's contraction could be a short one, although economists at RBS and Daiichi Life still believe the economy will shrink in Q4.

Greek bond yields plummet on details of debt buyback.

Greek 10-year bond yields have plummeted 1.44 percentage points to 14.6% after the government said it would spend up to €10B buying back bonds through a modified Dutch auction. Greece will pay a minimum of 30.2-38.1% of the face value of the debt it's acquiring and a maximum of 32.2-40.1%. The repurchase program is part of measures that the Troika agreed last week to reduce Greece's debt burden.

Eurozone manufacturing remains firmly in the doldrums.

 Eurozone manufacturing PMI rose to an eight-month high of 46.2 in November from 45.4 in October, although the downturn in activity remained severe. While the picture is "starting to brighten" and manufacturing activity may have "bottomed out" says Markit, official data lags PMI. That means that "the rate of GDP decline is likely to have gathered pace markedly on the surprisingly modest 0.1% decline seen in the third quarter."

China PMI breaks year-long contraction streak...

China's HSBC manufacturing PMI moved into expansion territory for the first time in 13 months in November, rising to 50.5 from 49.5 in October. The official PMI increased to 50.6 from 50.2, marking a seven-month high for the index. "We expect GDP growth to rebound modestly to around 8% in Q4 as the easing measures continue to filter through," says HSBC. Despite the improved numbers, Chinese and Hong Kong shares closed lower.

S. 153C search assessment is void if AO’s satisfaction not recorded

ACIT vs. M/s. Global Estate (ITAT Agra)

Search & seizure operations u/s 132 were conducted at the premises of P.C. Wadhwa. Pursuant thereto, a notice u/s 153C was issued on the assessee requiring it to file its return. The assessee asked the AO for a copy of the reasons which resulted in satisfaction for issue of the s. 153C notice. The said reasons were not furnished by the AO on the ground that there was no requirement in the Act which required such reasons to be furnished. The CIT(A) struck down the s. 153C assessment on the ground that the AO had not recorded any satisfaction before issue of the notice. On appeal by the department to the Tribunal, HELD dismissing the appeal:

S. 153C is analogous to s. 158BD. In the context of s. 158BD, the Supreme Court held in Manish Maheshwari 289 ITR 341 that the recording of satisfaction by the AO that undisclosed income belongs to any person, other than the person who was searched, is a condition precedent. This principle applies to s. 153C as well. The burden is on the Revenue to show that the necessary ingredients of s. 153C have been complied with. On facts, there is material to show the AO in the case of the person searched was satisfied that any money, bullion, jewellery or other valuable articles or things or books accounts or documents seized or requisitioned belongs to someone else. There is nothing to show that such satisfaction was recorded by the AO. Even in the assessment order, no seized document or material has been referred to by the AO. Consequently, the conditions of s. 153C are not satisfied and the assessment order had to be quashed (Vijaybhai N. Chandrani 333 ITR 436 (Guj) and other judgements followed).

S. 143(1) assessment cannot be reopened u/s 147 in absence of “new material”

Delta Air Lines Inc vs. ITO (ITAT Mumbai)

The assessee filed a ROI in which it claimed exemption under Article 8 of the DTAA (“airline profits”) even in respect of interest earned on fixed deposits. The AO accepted the ROI u/s 143(1). Subsequently, he issued a notice u/s 148 seeking to make a reassessment and bring the interest to tax. The assessee claimed that as there was no new material that had come to the possession of the AO, the reassessment proceedings were not valid. The AO & CIT(A) relied on Rajesh Jhaveri Stock Brokers 291 ITR 500 (SC) and rejected the claim. On appeal by the assessee to the Tribunal, HELD allowing the appeal:

The assessee had made a clear disclosure in the ROI that it was claiming exemption under Article 11 for the interest income. This was accepted u/s 143(1). The assessment was sought to be reopened without there being any new material on record. In Telco Dadajee Dhackjee it was held by the Third Member that even in a case where only an intimation had been issued u/s 143(1)(a), it is essential that the AO should have before him tangible material justifying his reason to believe that income had escaped assessment. In the absence of such tangible material, the reassessment proceedings are invalid. Though in Praful Chunilal Patel 236 ITR 832 (Guj),, it was held that there is no necessity for the AO to have fresh facts coming to his notice subsequent to the original assessment to justify the reopening this view has not been subscribed to by the Full Bench in Kelvinator of India 256 ITR 1 (Del) which has been affirmed by the Supreme Court (320 ITR 561).

For how long can the US dollar hold on to its reputation as a safe haven? For the past sometime now we have been witnessing a paradoxical situation with respect to the world's reserve currency. Considering that the US has accumulated massive debt and the government is printing money at the drop of the hat, the dollar should be losing value. But that has not been happening. Indeed, the dollar has gained against currencies such as the Euro. The only reason for this is that the Eurozone has been in a worse shape than the US. The dollar by itself does not seem to have much merit. And at some point in time, investors are going to realise this and look to invest in non-dollar denominated assets. The fast approaching fiscal cliff- combination of tax hikes and spending cuts is not helping matters either. All of this means that the US government needs to urgently come up with a solution that will reduce spending if the longer term prospects of the dollar are to stay intact. 

The Eurozone was dealt a fresh blow as Moody's Investors Service downgraded the region's rescue funds and unemployment hit a new record high. Moody's has cut its top ratings on the two euro rescue funds - the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) - by one notch. It has also continued to maintain a negative outlook. Earlier, France lost its triple-A debt rating due to risk to economic growth posed by the country's continued structural economic challenges. France is the second largest contributor to the two entities' financial resources. It acts as a provider of callable capital for the ESM and as a guarantor country for the EFSF. Germany is the la rgest backer of the schemes, and its credit rating remains at Aaa, despite a recent review by Moody's. The ESM and EFSF are crucial mechanisms for the rescue plan for the Eurozone, routing aid from Europe's wealthy countries to the crisis-stricken governments and banks of Greece, Spain, Portugal and Ireland.

Japan needs is a long term plan for sustenance.

Fearing that Japan maybe on the brink of its fifth recession in a decade and a half, its government approved a US$ 10.7 bn stimulus on Friday. This is its second package in over a month. The country would be tapping into its reserves to spend towards rebuilding areas hit by last year's earthquake. It would also be spending towards supporting employment and small-businesses. A key factor that has called for this development seems to be the 0.9% contraction in GDP between July and September this year. As for the rest of the calendar year, a similar situation is expected. The IIP data released on Friday showed a few signs of encouragement. There was a 1.8% rise in industrial production during the period September to October. However, parameters such as job losses in sectors and industries that depend on exports to the developed nations indicate a bleak outlook. This is what necessitated the stimulus. But one has to remember that stimuli are nothing but short term boosts. 

Taxation Of Gifts U/s 56(2): CBDT Modifies Rule For Valuation Of Unquoted Shares

 

U/s 56(2)(vii)(c), (viia) & (viib), the receipt of shares of a company for a consideration which is less than the aggregate fair market value of the shares is deemed to be “income” to the extent that the fair market value of the shares exceeds the consideration. The formula for determining the “fair market of the shares” is set out in Rule 11UA. Vide Notification No. 52/2012 [f.no. 142/19/2012-so (tpl)]/so 2805(e), dated 29-11-2012, Rule 11UA has been amended to provide, in respect of unquoted shares, a revised method of determining the FMV and to give the assessee the choice of valuing the shares as per the Discounted Free Cash Flow method.

Indian FQ2 GDP slows to three-year low.

India's GDP growth declined to a three-year low of 5.3% on year in FQ2 vs +5.5% in Q2 and consensus of +5.2%. The slowing growth comes as the government battles to implement economic reform that it sees as vital to reviving the economy. These include allowing foreign companies to control supermarkets, and easing limits on non-Indian investments in the insurance, pensions and aviation sectors.

Eurozone inflation drops to 2.2%.

Helped by a sharp slide in energy prices, eurozone inflation fell to the lowest level in almost two years in November, declining to 2.2% from 2.5% in October and vs consensus of 2.4%. Still, inflation remains above the ECB's target of just under 2%.

German retail sales suffer biggest fall in two years.

German retail sales dropped a monthly 2.8% in October, with the fall the sharpest in almost two years. The decline was worse than the decline of 0.1% that was expected and the rise of 0.5% in September.

Bundestag OKs latest Greek debt deal.

Germany's Bundestag has approved by 473-100 the latest Greek debt deal, which the Troika agreed to earlier this week. The vote is a further step towards the country receiving €44B in bailout cash and staving off eurogeddon, for now. The overwhelming approval comes despite the lack of details provided and concerns that eurozone countries will be forced to take losses on their Greek debt.

Japanese industrial output unexpectedly rises.

Japanese industrial production figures for October have provided a bit of unexpected cheer, rising a monthly 1.8% vs consensus of -2%. On year, output fell 4.3%, but that still wasn't as bad as the -8% that was forecast. Meanwhile, unemployment came in an expected 4.2%, although Japan remains in deflation, with core CPI flat on year and non-core inflation down 0.4%.

Detroit staring at bankruptcy.

With 2-3 weeks to receive $30M of state aid from Michigan in order not to run out of cash, Detroit is again teetering on the brink of bankruptcy. The aid is contingent on the city implementing the provisions of a deal in April, when Michigan agreed to provide $137M, but those measures haven't been enacted. Financial mismanagement, political corruption, and a massive population hemorrhage are among the causes of Detroit's woe.

Eurozone unemployment keeps marching higher.

Eurozone unemployment climbed to a fresh record high of 11.7% in October from 11.6% in September. Another 173,000 people are without a job, taking the total to 18.7M. The north-south divide remains as stark as ever, with Austria's jobless rate 4.3% while Spain's is 26.2%. "It's a measure of just how bad things have got in the eurozone that market sentiment is still irrationally upbeat," says forex specialist Jason Conibear.

The country's IPO (Initial Public Offering) market is about to heat up soon.

India's largest telecom operator, Bharti Airtel, has announced the IPO for its tower arm Bharti Infratel. Expected to amount to Rs 40 bn, the issue is the largest to hit the markets in two years. But the question to ask is why does Bharti need to come out with an IPO at this time? The reason is simple. The incumbent operator needs funds for expanding and updating its network. The next question would be why did it not need funds before? Why now? The answer to this one is the government .

The government's policies on spectrum fee, spectrum charges, spectrum auction have all been targeted at one thing. To raise more money for the government itself. As a result the operator has had to resort to listing its tower arm for much needed funds. The parent company's funds would be used to pay the one time spectrum fees and fund the spectrum re-farming charges and auction money. But would the listing really help the operator? It is unlikely to help it in any way except for providing momentary relief. At least for a while it need not try and dig up more money for network expansion. The long term prospects of the company are still very much dependant on the government's policies. If the government continues with its humongous expectations of funds from the telecom sector, the need for funds by the operators would just keep growing. However if the government has learnt a lesson from the flop show of its recently held auction, then the telecom operators may see their fortunes reviving. Either ways it's not the listing that will decide the company's fortunes. But the government will.

02:40

The adoption of Basle II norms required banks globally to recapitalize their balance sheets. This saw most banks approaching capital markets to raise Tier I and Tier II capital. Indian banks, both from the PSU and private sector have over the years equipped their capital adequacy ratios (CARs) to meet the Basel II threshold. As a result, most banks saw an improvement in CAR over the past 5 years. As data from Reserve Bank of India (RBI) Trends and Progress in Banking (2012) shows, banks globally, including those in the US and Europe, have CAR in excess of 12% in 2012.

Euro Eases Up Against The Dollar, Fiscal Policy Now Main Focus For The US

The Euro eased up against the US Dollar during early trading on Thursday, but losses were limited after statements from US policy makers re-ignited hopes that a deal could be struck to help avoid sharp fiscal tightening which may hurt the global economy.

For the time being, the US fiscal cliff issue seems to be the dominant theme with a lot of politicians and policy makers trying to broker a deal with the White House to avoid a crisis.

Even President Barack Obama went on to state on Wednesday that he hoped an agreement with Congress could be reached well before Christmas. Only time will tell how this one plays out.

Fed set for additional QE in 2013.

 Frustrated with the lack of substantial job gains, many Fed officials want the bank to continue buying long-term Treasurys even after Operation Twist expires. The purchases would be in addition to the $40B a month of mortgage-backed securities that the Fed's been scooping up. Under Twist, the bank's been paying for the long-term Treasurys with short-term paper, but as the latter is running out, the Fed will have to print money to keep the program going.

S&P affirms China's rating at "AA-."

 S&P has reiterated China's sovereign long-term rating at "AA-" and its outlook at stable, citing "strong economic growth potential, (a) robust external position, and the government's relatively healthy fiscal position." Despite the conservative nature of China's new Politburo Standing Committee, S&P reckons that "efforts toward deepening structural and fiscal reforms are likely to continue."

Italian 10-year yields fall to two-year low in auction.

Italy has sold €2.98B of 10 year bonds at a yield of 4.45%, down from 4.92% in a previous auction and the lowest in two years. The government also issued €3B of five-year paper at 3.23%, down from 3.8%. The total sale of €5.98B was at the top end of the government's target of €4-6B. In the secondary market, 10-year yields were -7 bps at 4.53% midday in Europe.

India to hold vote on foreign supermarket stake.

The Indian government has buckled to intense pressure and agreed to votes in both chambers of parliament over its controversial proposal to allow foreign retailers to own up to 51% of domestic supermarkets. While the votes will be symbolic, a loss for the government will be a setback in its attempts to reform the economy and spark growth, while the likes of Wal-Mart (WMT) also have a lot riding on the outcome.

Euro Steps Away From Highs, Focus Shift To The US

The Euro backed off the previous session's 1-month high against the US Dollar during the Asian session on Wednesday when relief about a new debt deal for Greece transformed into widespread unease about the looming US fiscal crisis.

While a plan to cut Greek debt and allow the nation to secure more financial aid in order to avoid a chaotic default has been approved, skepticism grew over the lack of details on how the Greeks plan to implement the reforms needed to meet these targets.

Meanwhile, The US Congress pushed toward compromise on Tuesday on a deal to avoid looming tax increases and spending cuts coming up next year. No agreement has been reached just yet, despite growing pressure less talk and more action.

Greek deal could see countries take losses.

The measures that the Troika has agreed to in the deal to release a long-delayed €34.4B tranche of Greece's bailout will reportedly only bring the country's debt-GDP down to 126.6% by 2020 and 115% by 2022, not the respective 120% and 110% that was advertised. Officials are studying further ways to reduce Greece's loans, but it could mean that eurozone nations will have to take losses on the debt they hold.

Steel industry unable to adjust to economic realities.

The steel industry is suffering from chronic overcapacity, with production ability of 1.8B tons but expected 2012 orders of just 1.5B tons. And instead of cutting back, the sector is building more mills, often supported by governments. Major problems include the fragmentation in the industry and the political difficulties of closing plants - witness ArcelorMittal's (MT) travails in eastern France, where the government has threatened to nationalize one of the company's mills

French unemployment hits 14-year high.

The number of job seekers in France rose 1.5% in October to 3.1M, the highest since April 1998, with the increase the 18th in a row. The Labor Ministry said that because of the struggling economy, the figures could get even worse. The government hopes that corporate tax rebates and other measures that are due to come in next year will kick-start the economy and bring unemployment down.

Outlook for Indian gold demand jumps.

Demand for gold in India, one of the world's largest markets for the metal, is forecast to rise to 800 metric tons in 2012, well above a prior prediction of 650-750 tons. The increase in the outlook follows a pick-up in purchases during the festive season and comes despite government efforts to restrict gold sales amid concerns about India's current account deficit.

OECD takes axe to world growth forecasts.

 The OECD has cut its prediction for global growth to 2.9% this year from a previous forecast of 3.4%. In its twice-yearly report, the organization also said growth in 2013 will increase to 3.4% rather than 4.2%. The OECD cut its estimates for the U.S. as well - predictably warning about the fiscal cliff - and said the eurozone will shrink in 2012 and 2013 before recovering in 2014.

Greece is one of the most indebted countries in Eurozone. So much so, that it is almost on the verge of bankruptcy. In the past, many options have been explored to reduce the country's debt. And in the latest move, both Eurozone and International Monetary Fund (IMF) have taken the matter in their hands. Both these institutions have clinched an agreement to reduce Greece's debt by 40 bn Euros to approximately 124% of the Gross Domestic Product (GDP) by 2020. To reduce the debt, interest rate will be cut on the loans given to Greece. For some loans maturity will be extended with the option to defer the interest payments. It has also been agreed that Greece will be given some financial assistance to fulfill its debt obligations provided it meets certain conditions. This is likely to reduce the uncertainty in Eurozone and strengthen the Euro.

While these steps will reduce the debt burden on Greece, it would be interesting to see whether Eurozone members will write off some of the loans as a part of debt reduction program. If that is done, the member nations who have lent to Greece may incur a huge loss. Hence, that possibility appears remote as of now. But if Greece diligently implements its austerity plans, a haircut on the existing debt is not ruled out completely. 

Moody's has said that it is maintaining its stable outlook on India's rating.

In some good news to the Indian government which has been facing flak on economic front, credit rating agency Moody's has said that it is maintaining its stable outlook on India's rating. However, it has warned that several challenges still remain. The most important being the country's fiscal deficit. Economic growth has slowed in India in recent months, and the country has suffered mild erosion in its economic profile, with widening trade and current-account deficits.

The central government's fiscal deficit exceeded official projections for the year ended March 31, 2012, reaching 5.9% of GDP. In addition, inflation remains stubbornly high despite the Reserve Bank of India's (RBI) tightening policies. The government in-order to raise revenues has tried several methods but has found little success in that. The government must find ways to reduce the fiscal deficit that threatens to undermine the country's credit standing and possibly trigger a downgrade to junk status.

Finance Ministers Secure Greek Deal, Euro On The Up

After a brief retreat from recent highs against the US Dollar, the Euro once again found itself within reach of these highs as Euro zone finance ministers and the International Monetary Fund finally came to an agreement on how to reduce Greece's debt.

The breakthrough came after 12 hours of talks in a third meeting where the outcome was to go ahead and release urgently needed loans to keep the near- bankrupt Greek economy afloat.

As a result, the Euro appeared to strengthen against the US Dollar directly after news and details of the new deal was first released to the press.

S&P applauds French reform proposals as it maintains its rating.

S&P has reiterated France's AA+ rating and its negative outlook, and warned that the government is likely to miss its 2013 deficit target of 3%, forecasting that the gap is likely to be 3.5%. However, S&P applauded the government's reform proposals, saying they will "improve the country's growth potential." S&P's action - or lack thereof - follows this week's downgrade from Moody's, which is more skeptical about France

The Cabinet Committee on Economic Affairs (CCEA) may just have a solution to India's fuel import bill problem.  The CCEA has made it mandatory for oil marketing companies, namely Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd  (HPCL) and Indian Oil Corporation (IOC) to blend 5% ethanol with petrol. Since ethanol is cheaper than petrol this can help reduce our fossil fuel dependence. While the blending of fuels has been going on for the past 2 years, a clear policy directive was absent. This new directive makes blending compulsory. Ethanol gives better mileage, lowers pollution emissions and is cost effective. A litre of petrol costs around Rs 70 while ethanol costs Rs 40 a litre. Over a billion litres of ethanol will be needed for this blending program. However, India has no supply shortage since the country produced over 2.2 bn litres in FY11. It may be a drop in the ocean, but this will help India's fiscal deficit.

FDI inflow in India is rising but not enough.

There has been a significant growth in foreign capital in India. From 1.1% of capital investments in FY05, foreign capital accounted for 8% in FY11. But is this likely to continue? Foreign inflows have been pouring into the country from foreign institutional investors (FIIs) and FDI (foreign direct investment). But what India really needs is the latter if it wants to take GDP growth to the next level. As today's chart of the day shows, FDI inflow in India has grown over the years but is still a small quantum. In fact, in the first half of 2012 (1HFY13) FDI has contracted 42.8% to US$ 10.4 bn, according to figures by the United Nations Conference on Trade and Development. The reasons are not hard to find. Lack of meaningful reforms and scandals rocked the government and compelled rating agencie s to downgrade India. Once this happens, cost of borrowings goes up making many projects unviable for foreign investors. Regulatory hurdles are also plenty. But all is not so bleak. One has seen investments shoot up in the Indian auto space in recent times. And it is hoped that FDI in retail should also pick up. But it goes without saying that the government will have to be more aggressive if the steady flow of FDI has to keep up in the coming years.

Yen Takes A Hammering Against The US Dollar & Euro

The Euro took off and posted a 6-month high against a floundering Japanese Yen on Wednesday and also recouped some losses against the US Dollar in the process.

The strong movement on the Euro came after Euro Zone politicians beefed up efforts to reach a deal over aid for debt troubled Greece.

The Japanese Yen has been losing ground against its major rivals for weeks and also fell against the US Dollar yesterday, as further speculation that the Bank of Japan would come under political pressure to ease its already loose monetary policy further once again came to the fore.

 

What do you think India's GDP per capita would look like in the year 2060? This is certainly an extremely long term projection but the one that is majorly driven by demographic and economic factors we believe and not influenced that much by debt concerns plaguing most of the developed world. Thus, as today's chart of the day highlights, while aggregate GDP in Asian nations of China and India will increase a great deal, India will still have GDP per capita that is one fourth that of the US in 2060. The study has been done by OECD and it has inferred that India's economy will become a bit bigger than America's by 2060 and China's a lot. But due to India's huge population, the per capita number may not look that large.