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Monday, April 23, 2012

China factory activity also contracts.

 HSBC's flash estimate of China's PMI edged up to 49.1 from last month's 48.3, and while it's the strongest preliminary reading in the last four months, it's still below the 50 level that indicates contraction. (Reuters)

Spain continues to slump.

Spain's economy shrank 0.4% in Q1 from the previous quarter in a setting of "high financial tension," while it also fell 0.5% from the year earlier period. Yields on 10-year bonds were slightly higher midday in Europe but below 6%.  

Eurozone looks to be sinking deeper into recesson

Eurozone factory activity continued to contract in April as PMI fell to a preliminary 46 in April from 47.7 in March and vs. expectations of 48.1. The region is "extending what appears to be a double-dip recession into a third consecutive quarter...Germany saw growth weaken to near-stagnation, while France saw a worryingly steep downturn,".

Transfer Pricing: TPO cannot examine the necessity of, or rewrite, the transaction

CIT vs. EKL Applicances Ltd (Delhi High Court)
 The assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, HELD dismissing the appeal

Thursday, April 19, 2012

Uncertainty and concern loom over Spain

The Spanish bond debt auction was a key focus point in the markets today. Spanish concerns remain though and the Euro lost some ground. The Yen was lower on the day, after the Bank of Japan (BoJ) announced a commitment to monetary easing.
The Euro retreated today from a session high against the Dollar. Spain had auctioned its 2 and 10 year bonds with good bid to cover ratios however, the auction failed to alleviate concerns about Spain's long term fiscal outlook.
The auction was seen as a test of investor confidence in troubled peripheral debt markets, after worries persist about the sustainability of Spain's public finances.
Spain sold more than its maximum target at the debt sale. 2.54 billion Euros of 2 year and 10 year bonds were sold, compared with a maximum target of 2.5 billion Euros.
Demand for the 10 year debt was 2.42 times the amount sold. This was higher when compared with 2.17 at the sale on 19th of January.
Spanish 10-year bond yields had jumped above 6% earlier in days leading up to the auction and there were, and remain, concerns that Spain will pay dearly for raising longer term debt.
The Euro edged higher against the Dollar ahead of the bond sale, but soon pared gains to trade almost flat on the day at $1.3129.
Many analysts are of the view that any escalation of concerns about Spain's high level of debt, at a time when the economy is considered as faltering, will put the Euro back under pressure.
The Euro has been under pressure against riskier currencies. In particularly Sterling and the Swedish crown. These currencies have been buoyed after less dovish central bank statements from the Bank of England and Riksbank yesterday.
Many analysts do expect that the Euro will trade lower against the Dollar in the medium term. They cited reasons as being the risks that budget and debt problems in Spain will worsen and uncertainty over the outcome of the French presidential election.

Spain Takes Center Stage, Yen Remains Pressured

The Euro edged up against against the US Dollar and other currencies on Thursday ahead of Spanish bond sales scheduled for later today.
The Japanese Yen inched lower in early trading on Thursday. The Yen remains under pressure after the Bank of Japan's Governor stressed the central bank's commitment to further monetary easing

Wednesday, April 18, 2012

S. 50C is a deeming provision which does not apply to “rights in land & building”

ITO vs. Yasin Moosa Godil (ITAT Ahmedabad)

The assessee booked a flat in a building which was under construction for which he had paid Rs. 16.12 lakhs. The builder had not handed over possession of the flat to the assessee nor had he executed any registered sale deed in favour of the assessee. The assessee entered into an agreement pursuant to which he transferred his rights, title and interest in the said flat in consideration of the amount paid by him to the builder. The AO took the view that as the flat was valued at Rs. 57.57 lakhs for stamp duty purposes, capital gains had to be computed on that basis u/s 50C. This was reversed by the CIT (A). On appeal by the department, HELD dismissing the appeal:
S.50C applies “where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty …” S. 50C is a deeming provision and extends to only to land or building or both. A deeming provision can be applied only in respect of the situation specifically given and cannot go beyond the explicit mandate of the section. If the capital asset under transfer cannot be described as “land or building or both”, s. 50C will cease to apply. As the assessee had transferred booking rights and received back the booking advance, the booking advance cannot be equated with the capital asset and therefore s. 50C cannot be invoked

S. 50B: “Slump Sale” Need Not Be A “Sale”. All Slump Transfers Are Covered

SREI Infrastructure Finance Ltd vs. ITSC (Delhi High Court)

The assessee entered into a scheme of arrangement u/s 391-394 of the Companies Act, 1956 pursuant to which it transferred its project finance business and assets based financing business to another company for a lumpsum consideration of Rs. 375 lakhs. The assessee filed a settlement application in which it claimed that the said consideration on transfer of the project finance business was not chargeable to tax as it was not by way of “sale” and there was no cost of acquisition for the same. However, the Settlement Commission that the said transfer, though effected through an order of the Court was a “slump sale” and was chargeable to tax u/s 50B. The assessee filed a Writ Petition to challenge the Settlement Commission’s order. HELD by the High Court dismissing the Petition:

Euro & Japanese Yen Under Pressure.

The Japanese Yen dropped across the board in early trading today, after reaching a 7-week high against the US Dollar and other major currencies earlier this week.
The Yen was also hindered by expectations that the Bank of Japan will likely take fresh easing steps next week.
The Euro also dipped against the major currencies on Wednesday and with investors still wary of Spain's fiscal problems it looks set to stay under pressure.

Spanish debt concerns affect global risk appetite

  Euro reaches fresh session peak to the Dollar although  Spanish debt costs remain firmly in focus, while the  German ZEW survey is set to test sentiment.

 The Euro cut earlier losses today, to rise to a  session high above $1.3100 against the Dollar.
  Investors had reversed earlier bearish bets on the  Euro, following more talk of steady demand for the  Euro to meet IMF related payments and assisted also  at the margins, by higher European stock markets.
  Prior to that, the Euro had lost ground slightly and  German government bond prices edged away from record  highs, as investors were waiting to see if concerns  over Spain's budget deficit and banking sector would  push up borrowing costs at a debt sale.
  The Spanish 10-year bond yields had traded above the  key 6% level, with investors increasingly concerned  that Spain's economic woes will reignite the Euro zone  debt crisis.
  It was at the 7% level that Greece, Ireland and  Portugal were pushed into international rescues.
  Spanish Prime Minister, Mariano Rajoy, has said that  should Spain fail to reduce its deficit, the nation  won't be able to fund its debt and meet its commitments.  They have to slash the Spanish budget deficit in order  to maintain access to financing.
  Spain has the Euro area's fourth largest economy and  the Spanish government forecasts that the economy will  contract by 1.7% in 2012, this as the deepest budget  cuts in more than 30 years are to be implemented. They  plan to shrink the deficit to 5.3% of GDP in 2012 from  8.5% in 2011.
  Today, Madrid will auction 12 and 18 month Treasury  bills. The auction is seen as a key test of investor  sentiment, before the more challenging sale on Thursday,  of 2 year and 10 year bonds due in 2014 and 2022.
  Risk appetite around the globe has been affected by  concerns over Spain. In fact major markets have seen  shares weaker, the gold price lower and oil prices  slipping.
  The situation in Spain, today's bill auction and  concerns over the economy and debt, will likely be  the main focus in the markets today, and as a result  the Euro is expected to still remain under pressure.

Euro Jittery, Yen Remains Steady

 The Euro took back some ground that was lost over the  last few days, but most analysts see this as       only a  short respite ahead of the Spanish bond auction.
 There's a lot uncertainty about Spanish yields so the  Euro may come under pressure again later today.
 The Japanese Yen remains steady amidst concerns that  the Bank of Japan has further monetary easing policy  changes due later this month.

Eurozone inflation revised up.

 Eurozone inflation came in at 2.7% in March, unchanged from February but above a preliminary estimate of 2.6%. (Source - Eurostat)

Spanish borrowing costs surge in debt auction.

 Spain has sold €3.2B of 12- and 18-month bills, with the 12-month priced to yield 2.62% vs. 1.4% one month ago and the 18-month 3.11% from 1.71%. The auction beat hopes for €3B in sales - as good an excuse as any to buy sharply sold-off Spanish shares, which were +0.8% midday in Europe. Yields on 10-year bonds were -17 bps at 5.90% at midday in Europe in the secondary market. (Source - Reuters)    

RBI announced a rate cut after three years of tightening

The Reserve Bank of India (RBI) finally succumbed to pressure from the economy and has announced a rate cut after three years of tightening. Inflation has seen moderation over the previous year; but it still remains sticky on account of global commodity prices and supply side constraints. However, growth in the Indian economy has been the major letdown, falling to 6.1% in 3QFY12. This forced the central bank's hand and in the first monetary policy review of FY13, the RBI decided to reduce the rates at which it lends to banks (repo rate) by 0.50%. Thus the repo rate now stands at 8% from 8.5% previously. The rate at which RBI borrows from banks (reverse repo) now stands 7% post the review. The central bank left the cash reserve ratio (CRR) unchanged at 4.75. The central bank's growth forecast for FY13 now stands at 7.3%, moderately higher than that seen in FY12. The RBI has however indicated that the scope for further rate cuts is remote.

Monday, April 16, 2012

More Euro Debt Worries, Yen On The Up

The Euro dropped in early trading on Monday, hitting a 1-month low against the US Dollar and the British Pound as rising bond yields in Spain reignited worry about the state of the Euro Zone economy.
The Euro extended its losses against the Japanese Yen, reaching a new low over the the last month of trading.

Germany helps eurozone return to surplus.

The eurozone swung to a trade surplus of €2.8B in February after a revised €7.9B deficit in January. The data is broadly in line with expectations. Eurozone trade was supported by continued strong exports from Germany. (Source: Eurostat)  

Spanish 10-year bond yields surged.

Fears of Spanish bailout rise as bond yields top 6%. Spanish 10-year bond yields surged past 6% for the first time since December, and the first time since the ECB's two three-year liquidity operations, raising fears the country might need a bailout. EU officials are due to travel to Washington this week looking for a larger IMF war chest, although while Japan might offer $60B, the U.S. has until now insisted that the EU can use its own resources.

S. 50C does not apply to land & building held as ‘stock-in-trade’

CIT vs. Kan Construction And Colonizers (P) Ltd (Allahabad High Court)

The assessee sold a plot of land for Rs. 79 lakhs. The AO held that the said plot was a capital asset and that the gains had to be computed in accordance with s. 50C. The CIT (A) & Tribunal upheld the assessee’s claim that as the said plot was held as stock-in-trade, s. 50C did not apply. On appeal by the department to the High Court, HELD dismissing the appeal:

Sunday, April 15, 2012

The number of cases referred to the CDR has witnessed an eight-fold increase since 2008

 A total of 84 loan applications went to the cell against just 10 in 2008. Of the 84, 44 cases worth around Rs 390 bn were approved in FY12. What is more, loan applications of Rs 227 bn are coming up for restructuring approval in the April to June quarter. The Air India bailout itself may have come as a relief to many bankers. For that too would have dealt a heavy blow in the event of non restructuring. Having said that, even with interest rates cooling off a bit we do not see India Inc's debt woes going off in a hurry.

Weak demand in China means trouble for Aussie

The Aussie fell today on disappointing Chinese data  while the Euro dipped, remaining vulnerable to Spanish  bond pressure.
Disappointing Chinese GDP data saw the Euro and  the Australian Dollar dip today. The Euro remained  vulnerable to Euro zone debt concerns, however it  is not expected to break out of its recent trading  range as against the Dollar.
  Australia's economy is commodity driven and as such  is also reliant on Chinese demand. Chinese data  exerts a strong influence on the Aussie, which came  under pressure, after data showed that China's economy  grew below forecasts of 8.3% at 8.1% in the first  quarter of 2012. This represents the slowest expansion  in almost three years for China's economy, the world's  second-largest.
  China has been affected by a drop in demand in key  markets including Europe and the US. Simultaneously,  domestic demand has proved difficult to stimulate.
  Yesterday, the World Bank had warned that China's  economy may slow further in the coming months. It  cautioned key risks to growth in the future are  a slowdown in Beijing's key export markets and  an ongoing correction in China's property markets.
  Earlier today, the Australian Dollar had fallen 0.4%  to US$1.0391
  Speculation of another round of quantitative easing  (QE) from the U.S. Federal Reserve, which is likely  to support riskier assets, has left many analysts  with the view that the Aussie's fall may be temporary.
  The Euro remains vulnerable to any sudden blowouts in  Spanish bond yields. The yields have climbed in recent  weeks on concerns over Spain's fiscal position. Many  economists predict that the European Central Bank  (ECB) will be forced to resume its so called Securities  Markets Program to contain bond yields.
  Some analysts are of the view that the ECB buying  bonds is a way of pulling markets back from severe  stress, however the risk of this is that the market  sees it as more negative than positive.
  Concerns over Euro zone debt issues receded slightly  on Thursday, when Italy cleared its latest round of  bond auctions, however the Spanish 10-year yields  continued to trade just below 6%.
  Markets remain wary about the Euro, with a sense that  the old issues are returning to the Euro-region.  The Euro was down 0.2% to the Dollar earlier today,  at $1.3156.
  The major currencies today have shown no reaction to  news that North Korea's much hyped long-range rocket,  launched earlier in the day, had crashed into the sea  shortly after launch.
  The Dollar remained steady against the Yen at 80.90,  having extending gains since Wednesday's 6 week low  of 80.57 Yen.
  The markets were also waiting on U.S.CPI inflation  data due at 12:30 GMT. In the opinion of many analysts,  any sign of stronger inflation might limit the Fed's  scope to ease policy further.

Euro & Yen Struggling To Hold On To Gains

The Euro tracked 2 straight sessions of gains against  the Japanese Yen and the US Dollar but then slipped  off a 1-week high on Friday after data out of Asia  proved disappointing.
 The Yen showed no reaction to a failed rocket launch  by North Korea and most analysts believe it would have  few implications for the region's economic outlook.

Bank borrowing in Spain pops.

 Spanish banks' borrowings from the ECB jumped nearly 50% in March to €227.6B, as they took up 29% of the central bank's late-February LTRO. "A consequence of the (LTRO) is that the correlation between sovereign risk and banking risk increased all over Europe." . (Source: Bloomberg BusinessWeek)

growth engine China too has reported slowest growth rate in 3 years

 Chinese Q1 GDP grows 8.1% Y/Y vs. expectations for 8.3% and 8.9% growth in 2011 Q4. Industrial production: +11.9% Y/Y vs. estimates of 11.4%, and retail sales +15.2% vs. 15.1%. The weaker-than-expected measure could prompt the Chinese central bank to ease policy action further, possibly by lowering bank reserve requirements

Thursday, April 12, 2012

Yen Off Highs, Euro Steps Up

The Japanese Yen moved away from its recent highs on  Thursday against the major currencies, while the Euro  staged a small recovery of its own.
The European Central Bank (ECB) seems to have done  enough to qualm fears over Spain for the time being,  but analysts are warning that debt worries in Spain  and Portugal still have the potential to negatively  impact the currency over the coming days.

 ECB declares that a bond buying programme is still an  option, Australia's jobs report sparks a jump in Aussie  while the Italian debt auction today is the markets  next focal point.
The Euro zone debt concerns moved back in focus  with Spanish bond yields still close to a four month  high and the crucial 6% level.

An ECB board member had suggested that they could  reactivate the SMP (Securities Markets Programme)  facility, which helped to bring calm to a feverish  Spanish bond market.
The Euro will be tested again later in the day with  another sign that investors' concerns about Spain are  spreading to other Euro zone countries hit by  recession, when its 5 billion Euro bond auction is held  and Italian 3 year borrowing costs are then set to jump  by a percentage point from a month ago.

The rate at which Italy pays for one-year money more  than doubled at an auction on Wednesday.
Should the Italian auction disappoint, analysts expect  that the Euro will reverse some of its recent gains.

Nevertheless, with the Dollar funding rates in Europe  remaining stable, the Euro has been fairly resilient.  It reached a 1 week high of $1.3158 earlier today.
The Dollar climbed to 80.90 Yen, up from a six-week  low of 80.57 while the Euro rose to 106.30 Yen.

Wednesday, April 11, 2012

Yen Holds Firm, Euro Zone Under Renewed Pressure

  The Japanese Yen hovered at its most recent highs  against the major currencies during the Asian session  on Wednesday, after a fall on Wall Street pushed the  single currency higher.
  Meanwhlie, the Euro fell to a seven-week trough when  concerns over Spain and Italy came the to the fore,  further highlighting the fragility of peripheral Euro  Zone economies.

Tuesday, April 10, 2012

Though Expl. 10 to s. 43(1) does not apply to loan waiver, treatment in books of reducing amount waived from asset cost means that WDV has to be reduced

Steel Authority of India Ltd vs. CIT (Delhi High Court)
The assessee received a loan of Rs. 5,277 crores from the Steel Development Fund in earlier years. In AY 2000-01, a substantial part of the loan was waived. In its books of account, the assessee reduced the cost of the assets by the amount of loan waived and claimed depreciation on the reduced figure. However, the assessee claimed that for income-tax purposes, the waiver did not impact the WDV of the assets and that depreciation had to be allowed on the original figure. The AO, CIT (A) & Tribunal (included in file) decided the issue against the assessee by relying on Explanation 10 to s. 43(1) inserted by the F (No. 2) Act 1998 w.e.f. 1.4.1999. On further appeal to the Tribunal, HELD reframing the question:

Explanation 10 to s. 43(1) does not cover the case of waiver of the loan. It covers only the grant of a subsidy or reimbursement by whatever name called. Though the assessee’s case may not fall under Explanation 10, the waiver of the loan amounted to the meeting of a portion of the cost of the assets under the main provision of s. 43(1) because of the treatment given by the assessee in its books of account in reducing the cost/WDV of the assets by the amount of the loans waived. The real nature of a transaction can be understood by reference to the contemporaneous act of the parties, which throws considerable light on their true intention and their understanding of the transaction. The assessee understood the receipt of the loans as having been given towards meeting a part of the cost of the assets and the waiver cannot have a different effect on such intention. PJ Chemicals Ltd 210 ITR 830 (SC), which holds, (pre Explanation 10) that a subsidy given as an incentive for industrial growth cannot be reduced from the cost of the assets under s. 43(1), does not apply to the facts.

Commission to CMD for personal guarantee may be treated as “ploy to divert funds”

CIT vs. United Breweries Ltd (Karnataka High Court)

The assessee claimed a deduction for the “guarantee commission” of Rs1.15 crores that it paid  to its Chairman Shri. Vijay Mallya. The AO & CIT (A) disallowed the claim on the ground that the so-called guarantee was a mere signature on a document, not backed by specific assets and that as the commission payment exceeded Mr. Mallya’s net wealth of Rs. 70 lakhs, it was an “innovative method of diverting income from the company” and an “unwarranted benefit” to Vijay Mallya. However, the Tribunal allowed the claim. On appeal by the department, HELD reversing the Tribunal:

None of the bankers had obtained details of the assets & liabilities of Vijay Mallya in India or abroad. He stood guarantor in respect of total borrowings of Rs. 115 crores and received commission of Rs. 1.15 crores even though his net worth was hardly Rs. 70.47 lakhs. Also, as he was a NRI, the permission of the RBI ought to have been taken which was not done. The assessee paid the MD commission “on the pretext” of paying guarantee commission and it is a “clear case” of “a ploy to divert the income of the companies under his management”. The payment was characterized as commission to overcome the RBI’s directions, the provisions of s. 309 of the Companies Act and was not a lawful payment and could not be allowed as a deduction u/s 37(1).

Yen Stronger After BOJ, Euro Losing Ground

The Japanese Yen strenghthened against the major  currencies in early trading on Tuesday, after the  Bank of Japan press conference revealed no further  monetary easing policies.
Meanwhile, the Euro was stronger since the open of  trading this week but has since lost ground in early  trading during the Asian session.

Sunday, April 8, 2012

S. 14A does no apply to shares held as stock-in-trade. Disallowance on notional basis is invalid

CCI Ltd vs. JCIT (Karnataka High Court)

The assessee availed of an interest-free loan of Rs.14 crores and paid brokerage of Rs.28 lakhs for purchasing shares. The shares were held as stock-in-trade and the assessee earned dividend of Rs. 46.67 lakhs thereon. The assessee claimed that no expenditure had been incurred to earn the dividend though the AO made a disallowance of Rs. 27.34 lakhs u/s 14A & Rule 8D. The Tribunal held that the brokerage on the loan, though incidental to the trading of shares, was indirectly incurred to earn dividend and had to be disallowed u/s 14A. On appeal by the assessee, HELD by the High Court allowing the appeal:

When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. The assessee had not retained shares with the intention of earning dividend. The dividend income was incidental to the business of sale of shares, which remained unsold by the assessee. It cannot be said that the expenditure incurred in acquiring the shares had to be apportioned to the extent of dividend income and that should be a disallowance u/s 14A.

Renewed concerns about Euro

The Euro dropped to a new three week low versus the Japanese Yen and US Dollar early on Thursday, on the back of a lacklustre Spanish bond auction which has renewed worries about the Euro debt crisis.
The Yen continued to rise on Thursday as traders look for a safe-haven, prompting further buying of the Japanese currency.

Wednesday, April 4, 2012

Euro Drops As US Dollar Dominates

The Euro took a dive in early trading on Wednesday after the US Dollar strengthened across the board.
The Dollar's strength comes on the back of minutes from the U.S. Federal Reserve's policy meeting that reduced expectations for further monetary stimulus.
Analysts now wait for the results of a Spanish bond auction and a European Central Bank press conference due to be held later today.
Earlier today the Dollar hit a week high, as much as 79.586, when compared with a basket of currencies. The Dollar had climbed on Tuesday when markets interpreted comments from the U.S. Federal Reserve as lessening the chances of more Fed monetary stimulus.
This was its highest level since March 26th, and was also well above a 1 month low of 78.664 touched on Tuesday.
This rise occurred after the release of the minutes of the Fed's March policy meeting, which had let down those hoping for a step toward further quantitative easing.
The release caused heavy selling in U.S. Treasuries and the 10-year yield jumped more than 11 basis points on the day to around 2.3%.

Spanish, Italian yields surge after disappointing bond auction.

 Spanish and Italian bond yields were surging midday in Europe after Spain moved just €2.6B in paper at an auction, having hoped to raise €3.5B. It was Spain's first bond sale since laying out a 2012 budget that showed public debt soaring to a record. Spanish 10-year yields were +22 bps to 5.67%, and Italian 10-years were +19 bps to 5.34%.

India's Global Integration

The extent to which global economic risks can impact the Indian economy is evident from the extent of global economic integration. As per data from the Reserve Bank of India (RBI), both India's trade balance and balance of payment (capital and current account) has increased manifold as a percentage of GDP over the past 4 decades. Since this is likely to increase, India will stand more exposed to global uncertainties.

Selective buy-back of shares in lieu of dividend is a “colourable transaction”

In re A Mauritus (AAR)
The Applicant’s shares were held 48.87 % by a US company & 25.06% by a Mauritius company. The rest was held by a Singapore company and the public. The Mauritius company was ultimately held by another US company. Since 1.4.2003, when s. 115-O was introduced, the Applicant did not (to avoid DDT) distribute dividend. Instead, it let its reserves grow and offered a buy-back in the year 2008. The buy-back was accepted only by the Mauritius company, in whose hands the capital gains u/s 46A, were not assessable under the India-Mauritius DTAA. The other shareholders did not accept the offer. A second offer was proposed which also was accepted only by the Mauritius company and not by the other shareholders. The Applicant sought a ruling on whether the gains as a result of the buy-back would be capital gains u/s 46A in the hands of the Mauritius company and exempt under Article 13 of the India-Mauritius DTAA. HELD by the AAR;

Tuesday, April 3, 2012

Trend for weakening Yen remains intact

The Yen was firmer today, moving to strong start in the second Quarter as shorts were unwound. The Aussie was softer as the Reserve Bank of Australia held rates and the Euro recouped some losses following disappointing data. The Dollar remained lower in anticipation of U.S. Factory Orders data.

Yen Hits 3-Week High, Euro Range-Bound

The Japanese Yen went on to hit a fresh 3-week high in early trading this morning after investors took profits on short positions built up over the last few weeks.
The Euro reached a new low for this week and remains range-bound over the short term after disappointing manufacturing and jobs data.

Monday, April 2, 2012

Yen Retreats, Euro Halts At Resistance

The Japanese Yen beat a hasty retreat from its most recent low in early trading on Monday, but analysts believe that the Yen may continue down as Japan's fiscal year-end is now out of the way.
The Euro traded lower this morning after finishing on a high late last week but latest manufacturing and unemployment data due out in the Euro Zone later today may change the tone.

Eurozone unemployment hits 15-year high, PMI contracts again.

 The Eurozone jobless rate edged up to 10.8% in February - the highest in 15 years - from 10.7% in January, with 17M people out of work. There was further gloom in the final manufacturing PMI reading, which fell to 47.7 in March from 49 in February. That was the eighth consecutive month of contraction, with the malaise spreading to Germany and France as well

S. 32(1)(ii): Business information, contracts, records etc are “intangible assets” & eligible for depreciation

Areva T&D India Ltd vs. DCIT (Delhi High Court)

The assessee, vide slump sale agreement, acquired a transmission and distribution business as a going concern for a lump sum consideration of Rs.44.7 crores. The net tangible assets were valued at Rs.28.11 crores and the balance Rs. 16.58 crores was allocated by the transferee towards acquisition of bundle of “business and commercial rights” being business information; business records; contracts; employees etc, compendiously termed as “goodwill”. The assessee claimed that the said “business and commercial rights” were an “intangible asset” and eligible for depreciation u/s 32(1)(ii). The assessee’s claim was rejected by the AO, CIT(A) & Tribunal on the ground that depreciation was not allowable on “goodwill”. On appeal by the assessee, HELD reversing the lower authorities:

 S. 32(1)(ii) allows depreciation on “intangible assets” which are defined to mean “know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature”. Applying the principle of ejusdem generis, the expression “business or commercial rights of similar nature” need not answer the description of “knowhow, patents, trademarks, licenses or franchises” but must be of similar nature as the specified assets. The specified intangible assets are not of the same kind and are clearly distinct from one another. The nature of “business or commercial rights” cannot be restricted to only the aforesaid six categories of assets but can be of the same genus in which all the aforesaid six assets fall and form part of the tool of trade of an assessee facilitating smooth carrying on of the business. The intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee without any interruption. These intangible assets are comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. Accordingly, the intangible assets acquired under slump sale agreement were in the nature of “business or commercial rights of similar nature” and eligible for depreciation u/s 32(1)(ii) (Techno Shares 327 ITR 323 (SC) followed) (Q whether goodwill per se is eligible for depreciation u/s 32(1)(ii) left open).

While interest paid by PE of foreign bank to H.O. is deductible in hands of PE, same interest is not taxable in hands of H.O.

Sumitomo Mitsui Banking Corporation vs. DDIT (ITAT Special Bench) (5 Member)

 The assessee, a Japanese bank, carrying on business through a PE in India, paid interest of Rs. 5 crores to its H.O. & other branches. The assessee, in computing the profits assessable to tax in India, claimed that while the interest received by the H.O. & other branches from the PE was not chargeable to tax in India on the principle that the PE & H.O. were one & the same entity, the PE was entitled to claim a deduction under Article 7 of the DTAA. The AO held that the PE & the H.O. were deemed to be separate entities and that while the interest received by the H.O. from the PE was taxable under Article 11, deduction for that interest could not be allowed to the PE u/s 40(a)(i) as it had failed to deduct TDS. The CIT (A) followed the verdict of the Special Bench in ABN Amro Bank 98 TTJ 295 (Kol) (partly affirmed in ABN AMRO 198 TM 376) and held that the interest was neither chargeable to tax nor allowable as a deduction. On appeal to the Tribunal, the matter was referred to a 5 Member Special Bench. HELD by the Special Bench:

Sunday, April 1, 2012

Issue to tax P-notes clarification required

 The Indian stock markets were left agitated over the issue that foreign investors could be subject to new taxes proposed in the recent budget. However, the Finance minister has clarified that it will examine the tax liability of FIIs and not participatory note (P-note) holders. It is important to note here that while FIIs are registered with SEBIs and can directly invest in the Indian markets, P notes are instruments  (issued by FIIs) to let foreign investors  test the markets.
The latter avoids the huge registration costs in case the investments are not heavy. The markets welcomed the news. But the issue is far from being settled. This is because FIIs are still under the scanner for tax liabilities. If these convert into actual taxes, there are strong chances that FIIs will pass it to end clients - P note holders. Post this clarification, we hope such a scan will filter out speculative investments and curb volatility. But having said that, the Government needs to articulate its policies better. The lack of clarity and resulting panic can cause us to lose genuine investors as well as disturb the markets.

India plays risky game with $2B Vodafone tax threat.

Vodafone (VOD) is urgently reviewing its options in India and overseas as the country moves toward a law that would retroactively apply a tax of over $2B on Vodafone's 2007 purchase of Hutchison Whampoa's Indian telecom venture. The law would come despite a recent ruling by India's top court that Vodafone wasn't liable for back-taxes. It might also give other foreign companies pause for thought about investing in the country

Spain's Rajoy to stay the course despite unrest.

 While eurozone finance ministers decide about the firewall, Spanish PM Mariano Rajoy will today show how he will attempt to prevent Spain - whose bond yields have been rising lately - from needing to use it. Rajoy is expected to announce the country's most severe budget since before it became a democracy in 1978, even though the measures risk deepening its recession and despite a general strike yesterday.

Will the US housing market go Japanese way?

The current mockery in the US housing market is a byproduct of the subprime crisis. The crisis laid its roots in early 2000 when property prices started increasing. But once the bubble burst, home prices crashed substantially. In fact, property prices in the US have been declining since the past five years. Looking at this price trend, noted economist Robert Shiller has expressed concerns that US could experience a Japanese-style housing slump which could last for years. It may be noted that after the asset bubble burst in Japan, the country lost almost two decades to recession and deflation. Asset prices hardly moved during that time and the economy went into a perennial slump. Shiller points out that since many young people in US are now opting to live with their parents while others are going for rental apartments, property prices may experience a perpetual down trend.