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Friday, December 27, 2013

French unemployment rises.

Unemployment claims of Class A registered job seekers in France rose 0.5% on month in November to 3.29M after surprisingly falling by 0.6% in October. On year, the figure climbed 5.6% in November. The figures provide further evidence that whatever French recovery appeared to be taking place has petered out. However, the government argued that when taking a longer-term view, unemployment growth has started to reverse in Q4.

Over 1M people set to lose unemployment benefits.

An estimated 1.3M people are set to lose extended unemployment benefits when funding for those benefits runs out tomorrow. Since 2008, the federal government has provided money to those who are without a job for longer than 26 weeks and for up to 99 weeks. Concerned about people falling into poverty, Democrats plan to try to reinstate the provisions in the New Year; however, Republicans are opposed, arguing that the extended payments encourage unemployment.

Japan continues escape from deflation.

Japanese November core inflation rose to a five-year high in November, increasing to 1.2% from 0.9% in October and topping consensus of 1.1%. "Core core" CPI, which excludes volatile fresh food and energy prices, accelerated to +0.6% last month from +0.3% in October, with the November gain the biggest in 15 years. Crucially for Japan's fight against deflation, total cash wages rose for the first time in five months with an increase of 0.5% In addition to encouraging CPI figures, other data appears to show that Japan's economy is in decent shape. Industrial production rose 5% on year in November, although that was down from 5.4% a month earlier. Retail sales climbed 4% vs 2.3% and unemployment held steady at 4%, but overall household spending rose just 0.2% vs +0.9% in October and consensus of +1.7%.

Thursday, December 26, 2013

Muni bond market set for worst year in almost two decades.

Municipal debt is down 2.58% so far this year, putting the asset class on course for its worst annual performance since 1994. In contrast, muni debt provided a return of 6.78% last year. Detroit's fall into bankruptcy protection, as well as problems in Chicago, Illinois and Puerto Rico, have had a major effect. However, municipal debt tied to real-estate development, which is known as "dirt bonds" and is fairly risky, has risen 1.1% amid the recovery in the housing sector.

Nikkei continues march higher.

Japan's Nikkei 225 has climbed 1% to 16,174 today after finishing above 16,000 yesterday for the first time since December 2007. The yen has weakened and touched a five-year low, and the USD-JPY was +0.4% at ¥104.79 at the time of writing after earlier hitting ¥104.84, the weakest yen level since October 2008. A major factor boosting stocks is the start of tax-free investment accounts, which has sparked buying from retail investors.

Wednesday, December 25, 2013

Chinese credit squeeze eases following PBOC move.

China's seven-day repurchase rate has dived 3.44 percentage points to 5.4% after the People's Bank of China injected 29B yuan ($4.8B) into the money markets via regular open-market operations. The benchmark rate had skied to 8.84% over the previous five days due to the PBOC refraining from open-market activity since the start of December as part of its attempt to rein in soaring debt. Emergency liquidity injections last week had failed to ease the credit squeeze, which had hit stocks also.

Monday, December 23, 2013

Municipal debt in China doubles in two years.

Local-government loans in China almost doubled to 19.9T yuan ($3.28T) in 2010-2012, a state think tank estimates. Total central and local government debt was almost 28T yuan at the end of 2012, representing 53% of GDP. In an effort to rein in the ballooning debt, China's central bank refrained from injecting liquidity into the money markets earlier this month, which is what has helped cause the latest spike in short-term interest rate.

Japan unveils ¥95.88T budget.

Japan's government has adopted a record ¥95.88T ($921B) budget for the fiscal year starting in April, which will include increased spending on social security, defense and public works. However, the government is also trying to limit further growth of its massive debt, and it will reduce the issuance of new revenue bonds to ¥41.25T from ¥42.9T this year. Economists are not convinced by the aggressive step taken by the government, as not to forget that they must cut spending to reach the planned target of a surplus in 2020."

Chinese shares end losing streak.

The Shanghai Composite has closed up 0.2% and ended a run of nine consecutive sessions of losses, its longest losing streak since 1994. Shares rose despite another spike in short-term interest rates even though the People's Bank of China provided a further emergency injection of money on Friday, having refrained from providing liquidity earlier this month. Market watchers say that the increase in money market rates is also due to seasonal demand for cash from banks, which might help account for the small recovery in stocks today.

Sunday, December 22, 2013

Money Market rates have shot up in China.

The Fed may have declared its intention of going slow on its quantitative easing which sparked a wave of liquidity around the world, but China seems to be short of cash. Indeed, money market rates have shot up in China. As a result of which there is the possibility of a severe credit crunch for the dragon nation's banking system. Earlier, China's banking system had come under pressure because of the significant rise in credit. Most of this had found its way into the property market raising concerns of a bubble forming there. As a result of this, the Chinese government had taken steps to contain credit growth. But because of this, the interbank rates rose. Obviously, the government's efforts to reduce credit growth do not seem to have worked much. It remains to be seen what it chooses to do next.

S. 2(22)(e): Inter-corporate deposits (“ICDs”) are not “loans and advances” and are not assessable to tax as “deemed dividend”

IFB Agro Industries Ltd vs. JCIT (ITAT Kolkata)

The assessee received an inter-corporate deposit of Rs.11.20 cr from IFB Automotive Pvt. Ltd, a company in which it held 18% of the shares. The AO and CIT(A) held that the said ICD constituted “loans and advances” and was assessable as “deemed dividend” in the assessee’s hands u/s 2(22)(e). On appeal by the assessee to the Tribunal HELD allowing the appeal:
S. 2(22)(e) refers to ‘loans’ and ‘advances’ and does not refer to a ‘deposit’. The fact that the term ‘deposit’ does not mean a ‘loan’ and that the two terms are two different & distinct terms is evident from the Explanation to S. 269T and S. 269SS of the Act where both the terms are used. Further, the second proviso to S. 269SS recognises the term ‘loan’ taken or ‘deposit’ accepted. Once it is accepted that the terms ‘loan’ and ‘deposit’ are two distinct terms which have distinct meaning then if only the term ‘loan’ is used in a particular section the ‘deposit’ received by an assessee cannot be treated as a ‘loan’ for that section. The Companies Act, 1956 also makes a distinction between a “loan” and a “deposit” in s. 58A, 269 & 370. The distinction between a “loan” and a “deposit” is that in the case of a “loan”, the needy person approaches the lender for obtaining the loan. The loan is lent at the terms stated by the lender. In the case of a “deposit”, the depositor goes to the depositee for investing his money primarily with the intention of earning interest. Also, s. 2(22)(e) enacts a deeming fiction and cannot be given a wider meaning than what it purports to cover. It has to be interpreted strictly. Thus, the view of the AO & CIT(A) that an Inter-corporate deposit is similar to a loan is not correct (Gujarat Gas & Financial Services 115 ITD 218 (Ahd)(SB), Housing & Urban Development Corp 102 TTJ (Del)(SB) 936 & Bombay Oil Industries 28 SOT 383 (Bom) followed)

Fed holdings sail past $4T.

The Federal Reserve's balance sheet has passed $4T for the first time after rising $14.1B this week to $4.01T. The milestone comes as the central bank plans to scale back its bond-buying program to $75B a month from $85B. Prior to this third round of QE in September 2012, the central bank held $2.82T in assets. Its balance sheet has quadrupled since 2008.

BOJ keeps ultra-loose policy unchanged.

As anticipated, the Bank of Japan has left its key interest rate at 0.1%, and maintained its program of expanding the monetary base at an annual rate of ¥60-70T a year. The BOJ expects the annual rate of core CPI to rise "for the time being," while the bank also maintained its view that the economy will continue recovering moderately. However, the BOJ believes that demand will increase before a rise in sales tax in April and then fall after the hike is implemented.

S&P strips EU of AAA rating.

S&P has lowered the EU's long-term credit rating to AA+ from AAA, due to the "overall weaker creditworthiness of the EU's 28 member states" and concerns about budget talks. The downgrade doesn't affect the ratings of individual countries, the agency said, although it does follow cuts for Italy, Spain, Holland and France in recent years. The euro was flat at $1.3657 at the time of writing.

Thursday, December 19, 2013

Transfer Pricing: TNMM under Rule 10B(1)(e) contemplates ALP determination with reference to the relevant factors (cost, assets, sales etc.) of the assessee and not those of the AE or third party. Assessee’s study report cannot be discarded without showing how it is wrong. Finding that assessee is a risk bearing entity should be based on tangible material

Li And Fung India Pvt. Ltd vs. CIT (Delhi High Court)
The assessee, a wholly owned subsidiary in India of Li& Fung (South Asia) Ltd., Mauritius, was set up as a captive offshore sourcing provider. It entered into an agreement with Li & Fung (Trading), Hong Kong, an associated enterprise, for rendering “sourcing support services” for the supply of high volume & time sensitive consumer goods. The assessee was entitled to receive cost plus a mark up of 5% for the services rendered to the AE. The assessee claimed that it was a low risk captive sourcing service provider performing limited functions with minimal risk. It adopted the TNMM and computed the PLI at operating profit margin/total cost. Since the operating profit margin at 5.17% exceeded the weighted average operating margin of 26 other comparable companies, the assessee claimed that its remuneration was at arms’ length. The TPO did not dispute the TNMM or the comparables but held that the assessee ought to have received 5% on the FOB value of the goods sourced through the assessee (i.e. the exports made by the Indian manufacturers to overseas third party customers). He also held that the assessee was a risk bearing entity and an independent entrepreneur and it could not be said that the assessee is a risk-free entity. The DRP upheld the TPO’s order though it reduced the mark up to 3% of FOB value of exports. On appeal by the assessee, the Tribunal (143 TTJ 201) upheld the stand of the TPO. On further appeal by the assessee HELD by the High Court reversing the Tribunal:
(i) The assessee’s compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the assessee’s profit is unjustified. To apply the TNMM, the assessee’s net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee’s net profit margin for application of the TNMM. Rule 10B(1)(e) contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The approach of the TPO in essence imputes notional adjustment/income in the assessee’s hands on the basis of a fixed percentage of the FOB value of export made by unrelated party venders;
(ii) The finding that the assessee assumed substantial risk is not based on any material. The assessee made no investment in the plant, inventory, working capital, etc., nor did it bear the enterprise risk for manufacture and export of garments. It merely rendered support services in relation to the exports which were manufactured independently. Thus, attributing the costs of such third party manufacture when the assessee did not engage in that activity and when those costs were clearly not the assessee’s costs, but those of third parties, is clearly impermissible. A contrary conclusion would amount to treating the assessee as the vendor/ exporters’ partner in their manufacturing business – a completely unwarranted inference;
(iii) Tax authorities should base their conclusions that the assessee bears “significant” risks on specific facts, and not on vague generalities, such as “significant risk”, “functional risk”, “enterprise risk” etc. without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance;
(iv) Also, as the TPO did not discard the exercise conducted by the assessee of comparing its operating profit margin with that of the comparable companies, and it was not shown that the profit margin and cost plus model adopted by the assessee was distorted, he could not have proceeded to his own determination and calculations. The TPO must first reject the assessment carried out by the assessee before making further alterations. Where all elements of a proper TNMM are detailed and disclosed in the assessee’s study reports, care should be taken by the tax administrators and authorities to analyze them in detail and then proceed to record reasons why some or all of them are unacceptable.

Gold, silver tumble following Fed taper news.

Gold futures have dropped below $1,200 an ounce for the first time since June following the Fed's decision to taper its QE program by $10B a month, although bullion was at $1,204.70 at the time of writing, down 2.45%. Prices have dropped around 28% this year and are heading for the first annual decline in 13 years. Silver was -3.7% at $19.32.

China acts to avert credit crunch.

The People's Bank of China has made an emergency injection of liquidity into the country's financial system after money market rates started to spike again due to lack of action by the PBOC earlier and increasing demand for money because banks need it for year-end regulatory requirements. The seven-day repo rate climbed 72 bps to 7.02% after jumping 153 bps yesterday, helping to drag the Shanghai Composite down almost 1%.

Stock euphoria calms after dovish Fed taper.

Asian equities were mixed and European shares were in the green at the time of writing following the Fed's candy coated announcement that it's cutting its bond-buying program by $10B a month to a mere $75B. What's got investors particularly giddy is that the Fed emphasized that it will keep interest rates at minimum levels for a while to come. The Nikkei jumped 1.7% to 15859, its highest close in six years, although Chinese shares fell on rising money market rates. U.S. stock futures were lower after Wall Street soared yesterday.

Wednesday, December 18, 2013

S. 11: Law on taxability of voluntary donations as “anonymous donations” u/s 115BBC or as “cash credit” u/s 68 in hands of charitable trust explained

Sunder Deep Educational Society vs. ACIT (ITAT Delhi)

The assessee, a charitable institution, received donations of Rs. 3.55 crore. It maintained a record indicating the name and address of the donors. It claimed that the said donations had been applied for charitable purposes as per s. 11 and nothing was assessable. The AO conducted a test check by sending letters to the donors. To the extent of donations aggregating Rs. 1.96 crore, the letters came back undelivered or were not replied to. The AO held that as the confirmations were not received, the said donations were “anonymous donations” and assessable to tax u/s 115BBC. He held that alternatively, the said sum was assessable as a “cash credit” u/s 68 as the identity, genuineness and credit worthiness of the alleged donors was not proved. On appeal, the CIT(A) held that the said donations could not be treated as “anonymous” u/s 115BBC though he upheld the AO’s stand that the said sum was assessable as a “cash credit” u/s 68. On further appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) S. 115BBC which assesses “anonymous donations” does not apply because the assessee has maintained a record of the identity indicating the name and address of the person making the contribution;
(ii) S. 68 seeks to assess cash credits as income. However, when the non-corpus voluntary donations are already disclosed as income and applied for charitable purposes, s. 68 has no application. The fact that the complete list of donors was not filed and the donors were not produced does not mean that the assessee was seeking to introduce unaccounted money into the trust;
(iii) U/s 12(1) voluntary donations received without a direction that they shall form part of the corpus are deemed to be income derived from property held for charitable purposes and have to be applied towards the objects of the trust to the extent of 85%. If that is done, the donations are not assessable as income (Keshav Social& Charitable Foundation 278 ITR 152 (Del) followed)

Reserve Bank of India surprisingly leaves interest rates unchanged.

The Reserve Bank of India has held its benchmark repurchase interest rate at 7.75%. With inflation rising last month, economists had expected the RBI to hike the rate by a quarter of a percentage point. However, the bank cited projections that food costs, a main component of inflation, could soften. The RBI could act in the future but it wants more data first, while it also wants to support stuttering growth. Sensex jumped following the lack of action from the RBI.

BOJ officials see room to loosen policy even further.

Bank of Japan policy makers reportedly believe that the BOJ has significant scope to increase the rate of its bond purchases if it needs to in order to meet its 2% inflation target. The officials aren't too worried about the perception that the bank is underwriting fiscal deficits, but they want more time to assess price trends. The BOJ is due to start a two-day policy meeting tomorrow.

Japan's exports rise more than expected.

Japanese exports climbed 18.4% on year in November vs +17.9% expected and +18.6% in October, while imports jumped 21.1% but eased from growth of 26.1%. Interestingly, the volume of merchandise exports rose 6.1% on year - the sharpest increase in a year and a half - indicating that the weak yen isn't just boosting the value figure.

U.K. unemployment falls to lowest in over 4 1/2 years.

U.K. unemployment dropped to its lowest level since April 2009 in the three months to October, falling to 7.4% from 7.6% in July-September. The number of people who were employed was 30.09M, surpassing 30M for the first time ever. However, the growth in average weekly earnings excluding bonuses was just 0.8% on year, well below inflation of 2.1%.

German businesses continue to gain confidence.

The German Ifo institute's business climate index has increased to its highest in 20 months, edging up to 109.5 in December from 109.3 in November and meeting consensus. The expectations print climbed to 107.4 from 106.4 and beat estimates, although the current-situation reading slipped a bit.

Tuesday, December 17, 2013

Eurozone CPI falls on month, rises on year.

As expected, Eurozone inflation increased to 0.9% on year in November from 0.7% in October, thereby edging back up towards the ECB's target of just under 2%. That could still give the bank room to further loosen policy in order to boost the bloc's fragile economy if it wants to.

German investor confidence hits seven-year high.

The German ZEW survey of investor confidence has climbed to its highest since April 2006 in December, surging to 62 from 54.6 in November and topping consensus of 55. The current situation print also increased, as did sentiment for the Eurozone. The ZEW President further clarifies that "Despite rather disappointing economic data released recently, the financial-market experts expect the economic development in Germany and the eurozone to improve further in 2014".

Inflation seen edging up.

While the FOMC members settle in for their two day meeting this morning, U.S. inflation data for November is due to be released. Economists expect that CPI rose 0.1% on month after declining 0.1% in October. On year, inflation is seen increasing to 1.3% from 1%, while core inflation is projected to be unchanged at 1.7%.

Monday, December 16, 2013

Indian WPI increases to 14-month high.

India's wholesale price index, one of the country's main inflation gauges, accelerated to a 14-month high of 7.52% on year in November from 7% in October and topped estimates that were also 7%. The growth adds to CPI of 11% and will strengthen the case of those who argue that the Reserve Bank of India should again increase interest rates when it meets on Wednesday despite stuttering growth. The RBI's key repurchase rate is 7.75%.

Japanese manufacturers becoming more optimistic.

The Japanese Tankan sentiment index for large manufacturers has jumped to a six-year high of 16 in December from 12 in September. The index for small non-manufacturers turned positive for the first time in 21 years with an increase to 4, while the reading for small manufacturers was 1, the first positive number for six years. However, large Japanese companies have scaled back their capex projections, expecting to increase FY 2014 spending by 4.6% vs a forecast of 5.1% three months ago.

Eurozone business activity accelerates, but growth uneven.

Eurozone flash composite PMI increased in December after two successive months of decline, rising to 52.1 from 51.7 in November. However, the upturn was uneven as manufacturing PMI increased to a 31-month high of 52.7 from 51.6 and services slipped to 51 from 51.2. Germany powered ahead, while France, in the words of Markit, "looks increasingly like the new 'sick man of Europe.'" The euro was +0.2% at $1.3774 at the time of writing.

Sunday, December 15, 2013

Steel production is a key indicator of activity in global industry and iron ore, the key steelmaking ingredient, is the second most traded commodity around the world after crude oil. The price of iron ore has held up well despite record-setting exports from Australia and a looming flood of new supply through 2017. According to Financial Times, China's iron ore imports rose by 18% in November from a year ago, explaining why prices have risen despite the sluggish global economy. Iron ore prices have staged a remarkable recovery from a depressed level in July, having gained by 19.2% since then and up by 2.6% from a month ago. It is good news for miners because prices are climbing despite increased supply.

However, this does not bode well for Indian steelmakers because India's largest iron ore producer, NMDC Ltd, almost always benchmarks the price of iron ore with international rates. Which translates into this - if iron ore prices go up worldwide, they will also go up in India. Even though India sits on a pile of iron ore, because of a legal ban that's been in force for about two years, supply has dried up. From being a prominent exporter, India is almost on the verge of becoming an importer of iron ore in the short term. So increased steel capacity or greenfield steel projects next year will have to fully rely on sourcing ore from Australia or Brazil, and higher prices of course means steel producers will have to shell out more. 

India suffers stagflationary trends.

Indian CPI rose 11.2% in November and exceeded consensus of 10%, while industrial production fell 1.8% in October vs expectations of -1.2%. The trends exacerbate the dilemma for the Reserve Bank of India, which is due to meet next week, about how to bring down inflation against a background of weak growth. The data "paint a stagflationary picture of the economy where despite weaker growth, inflation remains elevated due to supply-shocks," says Nomura economist Sonal Varma.

Thursday, December 12, 2013

S.14A & Rule 8D:Expenditure on acquiring shares out of "commercial expediency" & to earn taxable income cannot be disallowed.

CIT vs. Oriental Structural Engineers Pvt Ltd (Delhi High Court)

The assessee borrowed funds and invested Rs 6 crore in shares of subsidiary companies. It claimed that the said subsidiaries were Special Purpose Vehicles (SPVs) formed out of “commercial expediency” in order to obtain contracts from the NHAI and that the SPVs so formed engaged the assessee as contractor to execute the works awarded to them (i.e. SPVs) by the NHAI. It was pointed that the turnover from the execution of the contracts was shown in the P&L A/c. It was claimed that the interest attributable to the investments made by the assessee in the SPVs could not be disallowed u/s 14A read with Rule 8D because it could not be termed as expense /interest incurred for earning exempted income. The CIT(A) and Tribunal (order attached) upheld that assessee’s claim and held that as the investments in the shares were made out of “commercial expediency” the expenditure incurred for that purpose could not be disallowed u/s 14A and Rule 8D. On appeal by the department to the High Court HELD dismissing the appeal:

This is merely a question of fact and does not involve any question of law much less a substantial question of law, as the Tribunal held that the expenses which have been claimed by the assessee were not towards the exempted income

Eurozone industrial output surprisingly falls.

The eurozone's recovery continues to remain shaky, with industrial production dropping 1.1% on month in October after falling 0.2% in September and missing consensus for a rise of 0.3%. On year, output increased 0.2%, as in September, but came in well below forecasts of 1.1%. The euro was -0.1% at $1.3773 at the time of writing.

Indian court lifts freeze on Nokia factory.

An Indian court has agreed to unfreeze a phone-making factory owned by Nokia (NOK) so that it can complete the sale of its handset unit to Microsoft (MSFT). Authorities seized the plant following a tax dispute. Nokia will deposit 22.50B rupees ($367.17M) in an escrow account as a condition for lifting the freeze and transferring the factory to Microsoft.

S&P has cut its estimate for the US economy to 2.6%.

The forecast for US GDP growth for 2014 remains tepid. Indeed, as reported in Moneynews, rating agency Standard & Poor's (S&P) has cut its estimate for the US economy to 2.6%. Expected growth was pegged at 3.1% last quarter. S&P's cut in estimates is based on its expectation that there will be additional spending cuts in 2014. This in turn would lead to another round of political stand-off between the Democrats and the Republicans. Fundamentally speaking, economic fundamentals continue to remain weak in the US despite what the so called 'positive' jobs data suggests. It will be interesting to see what the US Fed chooses to do. If the economy stays weak, the Fed will not really go for QE taper. This means that money will continue to be pumped into the financial system. This will find its way into asset classes, which will see prices rise even when the ground reality is quite different.    

Lower Gold Imports to Improve Trade Balance?

India's trade deficit and current account deficit figures are closely watched by many. This is because they have the tendency to influence the strength of the Indian Rupee. The fact is that India's trade balance is poor when compared to its peers. But from the looks of it, the situation is slowly improving.

India's trade deficit narrowed to US$ 9.2 bn in the month of November 2013 . This was largely led by a 24% YoY contraction in non-oil imports. Oil imports on the other hand fell by about 1%. Overall imports declined by 16.4% to US$ 33.8 bn, while exports grew by about 5.9% during the month. 

A key reason for the decline in non-oil imports were the lower gold and silver imports, which fell by a sharp 81% YoY. The same stood at just over US$ 1 bn. A key reason for this reduction has been the hike in import duties levied on them.

However, we believe this is a temporary phase as we all know the love Indians have for gold. As such the focus should be on either curbing oil imports or increasing exports. Having said that, a growing economy such as India will have to meets its energy requirements, for which it will have to continue importing crude. As such, the focus has to be on propping up exports. The same largely depends on the global economy, which seems shaky at the moment. But for India to be competitive on a global scale, the government has focus on measures to boost exports to have a trade surplus or a minimal deficit.  


Wednesday, December 11, 2013

Volumes across segments in the auto space witnessed a decline.

Passenger car sales over the past 5 months

As has been the case in FY14 till now, there was no respite for the auto industry in the month of November 2013 either. Volumes across segments in the auto space witnessed a decline. Domestic passenger car sales were down by 8% YoY during the month. The performance of commercial vehicles (CVs) was even worse as volumes declined by 29% YoY. Only 2 wheelers managed to record some growth as volumes were up 5.5% YoY. Slowdown in the economy and firm interest rates and fuel prices has been the primary reason for the dismal performance of the industry. There were considerable expectations from the festive season, but the latter turned to be quite average. The rest of the fiscal year is largely expected to remain tepid as well. But there are hopes that FY15 onwards, a recovery in the economy and cons equently the auto industry will take place.

German CPI returns to growth.

As expected, German CPI rose 0.2% on month in November following a drop of 0.3% in October. On year, inflation edged up to 1.3% from 1.2%. As in previous months, the low rate of inflation was mainly due to the falling prices of mineral-oil products, although these contrasted with rising electricity costs. Food inflation was still substantial for some products, but the overall increase in expenses slowed.

EU agrees on plan for dealing with failing banks.

European finance ministers could be creating the conditions for a future run on banks after agreeing on a framework for dealing with failing firms in the sector. Crucially, major depositors will be a first port of call if a bank needs cash to shore up its finances, as happened in such brutal fashion in the bailout of Cyprus earlier this year. Money could then be taken from a country's national resolution fund; eventually, a common Europe-wide fund would be created to rescue banks.

House, Senate leaders agree to budget deal.

 House and Senate negotiators have reached a budget agreement that sets spending levels for the next two years and replaces some of the automatic budget cuts in the sequester. If the full House and Senate back the proposals, which include modest spending reductions, a government shutdown next month will be averted. However, some conservative groups are unhappy with the measures and are urging for them to be rejected.

Americans near to recovery of all lost wealth.

The net worth of U.S. households and non profit organizations increased 2.6% in Q3 to $77.3T, although that's still around 1% below the pre-recession peak, when adjusted for inflation. Rising share prices boosted the figure by $917B and increasing home values by $428B.

Nokia's Indian tax bill could reach $3.4B.

Nokia's (NOK) tax bill in India could hit $3.4B, a government official says, far higher than the $340M that has been at the center of a dispute so far. India has frozen Nokia assets in the country to ensure the company has enough money to pay the smaller bill, although Nokia has gone to court to defend itself. The firm needs access to the assets by Thursday so that it can complete the sale of its handset unit to Microsoft (MSFT), and has set aside $350M for the purpose.

Italy ends two years of contraction.

Italy has technically exited a recession that lasted two years, with GDP having stopped contracting in Q3 and Q2, new data shows. The figures have been revised up from -0.1% and -0.3% respectively. The improvement was helped by an inventory buildup, which is an indicator of growing confidence among businesses. However, a government official cautioned that "it's too early to say that the recession is finished." The FTSE MIB was +0.3% at the time of writing.

Details of Volcker rule set to be unveiled.

A panoply of regulators are today due to disclose the details of the Volcker rule, which will ban banks from proprietary trading. Banks fear that the measures could cost them billions of dollars by making it more difficult to engage in activities that are permitted under the regulation, such as market-making, underwriting and hedging against risks. Expect the lawyers to go through the proposals to see what could be struck down in court.

Consumer prices in India stay high in October 2013.

India continues to find no relief from high consumer prices. The RBI's attempts to tame this have not really been successful simply because the current government refuses to do its bit in addressing supply side shocks. Corruption and hoarding have been rampant as a result of which even a good year of monsoons has not yet eased the pressure. Indeed, when compared to its peers, consumer prices in India are too high. And this does not bode well at a time when economic growth has also slowed down. 

Monday, December 9, 2013

likelihood of corporate bond defaults in the dragon economy.

Too much of anything is bad. So is the case with debt. Too much of debt can be dangerous. China is currently facing such a situation. Consider these facts reported by Bloomberg. A record 2.6 trillion Yuan (US$ 427 billion) of interest and principal on securities issued by non-financial companies would be due in 2014. To give a sense of the magnitude of debt, this is 2 times the economy of Ireland. And 19% higher than the current year!

It is worth noting that there have been no defaults in China's publicly traded domestic debt market since 1997 when the central bank started regulating it. But this trend could soon end as maturing debt reaches a record high next year. What is worse is that interest rates in China are increasing. Against the backdrop of a slowing economy, this seems like a recipe for disaster. Needless to say, this has raised concerns about the likelihood of corporate bond defaults in the dragon economy. If the defaults spiral up, it could destabilise the world's second largest economy. And this in turn could cause turbulence in the world economy as well.

WTO finally agrees to new trade pact after years of talks.

A meeting of ministers at the World Trade Organization has agreed to a "trade facilitation decision" that is designed to cut the cost of trade by 10-15%, which could add $400B-$1T to the global economy and create 21M jobs. Once the deal is adopted, it should "speed up customs procedures, and make trade easier, faster and cheaper." The pact came at the latest round of the Doha talks, which have been going on since 2001, and is much weaker than the original goals of the discussions.

Chinese exports power higher, inflation remains relatively tame.

China's exports climbed a greater-than-expected 12.7% on year in November and helped the country's trade surplus increase 8.7% on year to $33.8B, the highest level since January 2009. Meanwhile, inflation nudged down to 3% on year from 3.2% as a rise in food prices eased. The trade figures indicate that the global economy is beginning to tick along swimmingly, while the softening inflation could give China's central bank room to refrain from further tightening.

Sunday, December 8, 2013

S. 14A & Rule 8D disallowance applies to tax-free securities held as stock-in-trade.

 D. H. Securities Pvt. Ltd vs. DCIT (ITAT Mumbai) (Third Member)
The assessee claimed that as it was engaged in the business of trading in shares, its main object is to earn profit on purchase and sale of shares and not to earn dividend income from such shares. It claimed that the accrual of tax-free dividend on such shares was merely incidental to the holding of shares as stock-in-trade and that no disallowance could be made u/s 14A and Rule 8D. It also claimed that though the assessee had not incurred any direct or indirect expenditure to earn the said dividend, the AO had made the disallowance on a presumptive basis. The Division Bench referred the dispute to a Third Member in view of the difference of opinion between the Benches. Before the Third Member, the assessee relied on CCI Ltd 71 DTR (Kar) 141 , India Advantage Securities, Yatish Trading etc in which the law had been laid down that s. 14A & Rule 8D does not apply to securities held as stock-in-trade. The department reied on Godrej & Boyce Manufaturing Co 328 ITR 81 (Bom) (where it was held that Rule 8D is mandatory) and Daga Capital 117 ITD 169 (Mum) (SB) (where it was held that s. 14A applies to stock-in-trade). HELD by the Third Member:
It is accepted by both parties that the assessee is a dealer in shares and that the shares were held by it as stock-in-trade. The issue under appeal is squarely covered by the principles laid down in Godrej & Boyce, Dhanuka & Sons 339 ITR 319 (Cal), American Express Bank and Damani Estates & Finance in which the issue has been elaborately considered. The argument that the judgement of the Karnataka High Court in CCI Ltd is the solitary High Court judgement on the point and it should be followed is not correct because the issue has also been considered by the Calcutta High Court in Dhanuka & Sons. Also, while CCI Ltd has not considered the jurisdictional High Court judgement in Godrej & Boyce, Dhanuka & Sons has duly considered Godrej & Boyce in taking the view that s. 14A/ Rule 8D applies to shares held as stock-in-trade. Accordingly, disallowance u/s 14A can be made in conformity with law even where dividend income has been earned on shares held as stock-in-trade.
In a world where the value of hard fiat currencies is being called into question on account of reckless money printing by central banks, the virtual currency Bitcoin is finding a lot of takers. So much so that it has become a hot topic of conversation. So far, bitcoins do not come under any regulations. But it now appears that the popular, virtual currency will face its first real test. And this is in none other than China. The enthusiasm for bitcoins in the dragon nation has been greater than elsewhere. So much so that it accounted for a third of the global trading volume. But Chinese regulators have decided to come down hard on the currency. Indeed, as reported on Reuters, regulators have banned the country's banks from trading bitcoin. China is obviously in no mood to let bitcoins co-exist with the Chinese Yuan. It will be interesting to see whether other countries also follow suit. One thing is certain that the rise in bitcoins cannot continue forever and like any asset class or currency is bound to witness corrections.

Bundesbank ups growth forecasts.

Germany's Bundesbank has increased its growth outlook and now expects the country's economy to expand 0.5% this year and 1.7% in 2014. Previously, the central bank had projected growth of 0.3% and 1.5% respectively. The Bundesbank also forecast that GDP will increase 2% in 2015. The bank said growth is being mainly driven by domestic demand, helped by low interest rates and growing incomes.

Thursday, December 5, 2013

OPEC maintains crude output cap at 30M bpd.

As expected, OPEC has agreed to keep its daily oil production limit at 30M barrels, due to uncertainty about the outlook for supply and demand. However, there are factors that could force prices to fall from the relatively stable level of $100 a barrel. Iran plans to increase output as quickly as possible if and when international sanctions are lifted, while U.S. shale supply continues to rise and new oil from Kurdistan could boost Iraqi exports.

Moody's ups outlook on Spain to stable.

Moody's has joined S&P and lifted its outlook on Spain to stable from negative, citing three reasons: indications of a "sustained rebuilding" of the economy and an improved outlook for the medium term; a "material decrease" in risks to Spain's market access and to contagion from other parts of the eurozone; and a significant fall in contingent liabilities in the banking sector. Moody's also affirmed its rating on Spain at Baa3.

China bank ban leads to Bitcoin selloff.

The People's Bank of China has banned banks from trading in Bitcoin (BITCOIN), explaining that the virtual currency doesn't have "real meaning," nor the same legal status as a currency. The move is also probably tied to Beijing's desire to regulate the yuan, although private individuals remain free to trade Bitcoins. The currency was -15.8% at $1,000 at the time of writing.

Japan OKs ¥18.6T stimulus package.

 As flagged, Japan's cabinet has approved an ¥18.6T ($182B) stimulus plan to offset a hike in sales tax that is due to go into effect in April. However, there's a bit of smoke and mirrors in play, as much of the package includes investment that was already scheduled. The cabinet expects the measures to add 1% point to GDP and create around 250,000 jobs.

Wednesday, December 4, 2013

S. 115AD: High Court verdict in Bharat Ruia 337 ITR 452 (Bom) on taxation of derivatives as speculation income/ loss is not applicable to FIIs

Platinum Asset Management Ltd vs. DDIT (No. 2) (ITAT Mumbai)

The assessee, a Foreign Institutional Investor (“FII”), suffered a loss of Rs. 172.18 crore on account of derivative transactions which was claimed as a short-term capital loss. The AO held that the said loss constituted a business/ speculation loss and could not be set-off against the short-term capital gains. Though in the assessee’s own case (Platinum Investment Management Ltd vs. DDIT (ITAT Mumbai)) it had been held that all income arising to a FII, including from dealings in derivatives, has to be assessed as capital gains, the department argued that this view was no longer good law in view of CIT vs. Bharat R. Ruia (HUF) 337 ITR 452 (Bom) where it was held that as transactions in derivatives are entered into and settled without taking any delivery of the shares, the same constitutes a speculative transaction. HELD by the Tribunal rejecting the department’s case:
The judgement of the Bombay High Court in Bharat Ruia is not applicable to assessees which are FIIs duly registered with SEBI. FIIs are allowed to only invest in the Capital Market and the income arising from transfer of security is to be considered as short term capital gain or long term capital gain as per s. 115AD of the Act. FIIs are not allowed to do business in the security market. Also, derivative is a security as per the clause (ia) to sub-section (h) of section 2 of The Securities Contracts (Regulation) Act, 1956 with effect from 22.2.2000. The co-ordinate Bench of the Tribunal has considered this aspect as well in the earlier order dated 5.12.2012 in which the earlier decision in LG Asian Plus Ltd v/s ADIT 46 SOT 159 was also considered
Note: On the issue that a FII cannot have business profits contrary views have been taken in ABC Equity Fund 250 ITR 194, Fidelity Advisor Series VII 271 ITR 1, General Electric Pension Trust 280 ITR 425, Fidelity Northstar Fund 288 ITR 641 and Royal Bank of Canada 323 ITR 380


Growth in China's services sector slows.

China's HSBC services PMI slipped to 52.5 in November from 52.6 in October, although composite output increased to an eight-month high of 52.3 from 51.8. Employment in the services sector expanded for the third consecutive month. "However, the moderation of new business and prices-charged growth implies that the underlying growth momentum started to soften," HSBC says.

Japan prepares $181B stimulus package.

Japan has reportedly been putting together an ¥18.6T ($181B) stimulus package to offset the impact of a rise in sales tax that is due to take place in April. The government will use tax revenue to finance the spending and forgo raising new debt. The package will add to a ¥20T plan that Prime Minister Shinzo Abe unveiled earlier this year, as well as to the Bank of Japan's massive stimulus.

Microsoft closes $8B debt sale.

Microsoft (MSFT) has raised $8B worth of debt, including €3.5B in euro-denominated bonds and $3.25B in dollar-denominated paper. Microsoft didn't say much about what it plans to do with the proceeds, but buybacks are a good bet. In addition to boosting EPS, eliminating shares via repurchases removes the dividend payments attached to them.

Eurozone business activity loses momentum.

Eurozone services PMI slipped to 51.2 in November from 51.6 in October, while composite output fell to 51.7 from 51.9. Activity in Germany, Ireland and Spain grew but contracted in Italy and France. The eurozone recovery "lost some momentum in November," says Markit. "It's clearly a concern that the rate of growth remains so fragile." The survey indicates that the bloc's economy is on course to grow by just 0.2% in Q4.

EU fines banks €1.71B for rate-rigging.

The EU Commission has fined a group of leading multinational banks €1.71B for rigging inter-bank interest rates in what is the largest antitrust penalty that the commission has ever levied. The banks being fined include many of the old favorites: Citigroup (C), Deutsche Bank (DB), Royal Bank of Scotland (RBS), JPMorgan (JPM) and Societe Generale (GM:SCGLF). HSBC (HSBC) and Credit Agricole (OTCPK:CRARF) are facing charges for contesting the EU's accusations, while UBS (UBS) and Barclays (BCS) have avoided hefty penalties for exposing the rate-rigging.

Tuesday, December 3, 2013

Spain unemployment drops for first time in November.

The number of Spaniards filing for jobless benefits unexpectedly dropped for the first time in November on a monthly basis, falling by 2,475 to around 4.81M. The decline provides evidence that Spain's fragile recovery is continuing despite an unexpected drop in manufacturing PMI.

Yuan overtakes euro for trade finance.

The Chinese yuan has passed the euro to become the second-most used currency in global trade finance. The renminbi took an 8.66% share of letters of credit and collections in October vs 6.64% for the euro. The yuan's rise indicates the success of China's attempts to internationalize the currency, such as by loosening forex controls. The government intends to take more steps as part of a major economic reform plan.

GDP growth in the July-September 2013 quarter.

China and India continued to lead the pack as far as GDP growth in the July-September 2013 quarter is concerned. This is despite the economies slowing down in both the countries. For India, the performance was slightly better than the growth it had recorded in the June 2013 quarter. Whether this can be construed as bottoming out with the possibility of recovery in the coming quarters remains to be seen. While the economies of the developed world continued to chug along, the real surprise was Japan, whose GDP growth during the quarter was better than the US and the Eurozone.

If the contract falls u/s 44BB, incidental technical services are not assessable as “fees for technical services” u/s 9(1)(vii). Verdict in Alcatel Lucent (Del) on liability of foreign company to pay s. 234B interest cannot be followed in Mumbai

ADIT vs. Valentine Maritime (Gulf) LLC (ITAT Mumbai)

The Tribunal had to consider two questions of law (i) whether a part of the consideration paid for a project involving installation, assembly or the like in connection with the prospecting for, or extraction or production of, mineral oils can be assessed as “fees for technical services” u/s 9(1)(vii) or the entire consideration has to be assessed only u/s 44BB? and (ii) whether in view of the verdict of the Delhi High Court in Alcatel Lucent a foreign company can be held liable for advance-tax and consequent payment of interest u/s 234B? HELD by the Tribunal:
(i) The contract was a composite one and its main purpose was to install offshore pipelines, etc. To achieve this main purpose, the assessee had undertaken various activities which were listed down in the various articles of the contract. Those activities were incidental to the main job and were an integral part of the contract to ensure that all the pipe lines were successfully installed, commissioned, tested and complied with the standards set out in the contract. The argument of the department that the activity relating to providing technical services should be assessed as “fees for technical services” u/s 9(1)(vii) is not acceptable. When a contract consists of a number of terms and conditions, each condition does not form a separate contract. The contract has to be read as a whole. The entire consideration is assessable only u/s 44BB and no part of it is assessable as fees for technical services u/s 9(1)(vii) (Chaturbuj Vallabhdas AIR 1954 (SC) 236, Mitsui Engg. & Ship Building 259 ITR 248 (Del), Jindal Drilling and Industries 320 ITR 104 (Del) & G&T Resources (Europe) Ltd 139 TTJ 568 followed);
(ii) The argument of the department based on Alcatel Lucent USA (Del) that even a foreign company is liable to pay advance tax and consequential interest u/s 234B is not acceptable in view of the contrary decision of the jurisdictional High Court in NGC Network 313 ITR 187 (Bom). 

Monday, December 2, 2013

East Africa bloc signs deal to form single currency.

The problems of the euro notwithstanding, the leaders of Kenya, Tanzania, Uganda, Rwanda and Burundi have signed a protocol to establish a monetary union within 10 years. The countries, which make up the East African Community (EAC), have already established a common market and a single customs union. With EAC members holding oil and gas reserves, one hope is that the union will help attract the foreign investment needed to develop those resources.

Growth in eurozone factory activity accelerates slightly.

Eurozone manufacturing PMI edged up to 51.6 in November from 51.3 in October, with Germany, Italy, Holland, Austria and Ireland performing well but with France remaining a concern. "The data suggest that output is rising at a quarterly rate of only around 0.6% in the fourth quarter so far," says Markit. After starting the day higher, the euro was -0.3% at $1.3548 at the time of writing.

Chinese manufacturing PMI tops forecasts.

China's official manufacturing PMI, which focuses on larger state-owned enterprises, held steady at an 18-month high of 51.4 in November and topped consensus of 51.1. The HSBC print, which concentrates on smaller, private firms, slipped to 50.8 last month from 50.9 in October. "The momentum we see is state-led and policy-led, and from that perspective, it is a mixed performance," said Conference Board economist Andrew Polk. He was commenting after the official index came out, but the HSBC data seems to back him up.

Sunday, December 1, 2013

S&P lifts outlook on Spain to stable.

S&P has upgraded its outlook on Spain to stable from negative and affirmed the country's sovereign-debt rating at BBB-/A-3. The agency expects that the country's GDP will shrink 1.2% in 2013 but recover to growth of 0.8% next year and 1.2% in 2015, lifted by strong exports. S&P also believes that the government will hit its 2014 budgetary deficit target of 5.8%. The IBEX 35 was +0.4% at the time of writing.

Eurozone unemployment drops for first time in almost three years.

Eurozone unemployment has unexpectedly fallen for the first time since February 2011, dropping to 12.1% in October from 12.2 in September. Austria had the lowest rate (4.8%) and Spain the highest (26.7%). Meanwhile, inflation has risen a preliminary 0.9% in November from 0.7% in October, but it still remains well below the ECB's target of just under 2%.

Holland loses AAA rating.

S&P has stripped the Netherlands of its AAA rating and cut the country's debt to AA+, with the ratings agency explaining that Holland's growth outlook is not as strong as previously thought. "We do not anticipate that real economic output will surpass 2008 levels before 2017, and believe that the strong contribution of net exports to growth has not been enough to offset a weak domestic economy," S&P said. The agency's decision leaves Germany, Luxembourg and Finland as the only nations in the eurozone with a AAA rating. Dutch shares were +0.1% at the time of writing.

Japan continues to make progress in deflation fight.

Japan's "core core" CPI, which excludes energy and fresh food, rose 0.3% on year in October, the first gain for five years and the biggest increase since 1998. Unemployment held steady at 4% in October, while manufacturing PMI rose to 55.1 in November from 54.2 last month. However, October industrial production improved just 0.5% on month and badly missed expectations, while the growth in overall household spending slowed and worker incomes - which are crucial in the battle against deflation - dropped 1.3%.
Rising bad loans is turning out to be a big problem for India's banking sector. What is worrying is that in this, the number of willful defaulters is rising. A defaulter becomes willful when he is able to repay debt but is not doing so. This is because the funds that he has at his disposal are being utilized somewhere else. For banks, recovering such loans has become a challenge for various reasons. One is that the law with respect to defaults is not too strict. There is no stigma associated with defaults, no proper bankruptcy law exists and legal recourse takes a long time because of clogged courts. As reported in Business Standard, bad loans larger than Rs 2.5 m at state banks amounted to
Rs 1.2 trillion at the end of June. These were the ones that were classified as willful by the RBI. This was up 18 times from June 2008. The fact that high profile companies such as Kingfisher Airlines have defaulted on loans has all the more impacted banks. There is no doubt that these problems need to be addressed by the RBI and Indian banks on an urgent basis. It does not make sense to use taxpayer's money and restructure loans for companies which are not serious about the successful running of their businesses.
The hopes of public private partnerships funding India's infrastructure spend have disappeared. Despite the elaborate planning in consecutive 5 year plans very little private sector equity has flown into infra projects. Whatever little did come is stuck up without generating enough returns for the investors. Public sector companies have not been better off either. And with most infrastructure projects stuck due to lack of resources or policy bottle necks, the sector itself has become a no-go area for PSUs and private sector alike. Hence, as per rating agency CRISIL, if debt funding is the way ahead, the bond markets need a new avatar. As published by Mint, CRISIL has estimated that bond markets will have to help Indian banks raise nearly Rs 10.4 trillion over the next five years. Of this, Rs 7 trillion would go towards infra funding and the rest towards meeting the banks' own capital norms. Only then will the banks be able to fund the credit requirements of the infrastructure projects after meeting the Basel III norms. Without enough depth and regulations for the bond markets we wonder how this will be feasible.

Thursday, November 28, 2013

Property prices in some major Indian cities finally seem to be easing. Consider for instance, India's most expensive property market Mumbai. As per Economic Times, in central Mumbai areas such as Parel, Lower Parel and Mahalaxmi, property prices have declined by nearly 10%. In fact, in the premium category, developers are even offering discounts of about 25% for sizeable upfront payments. On the other hand, home prices in Navi Mumbai, Thane and the suburbs of Mumbai have remained steady or reported marginal increases. Is the Mumbai real estate finally becoming a buyer's market? Well, it seems so. Unsold inventory level in the Mumbai Metropolitan Region (MMR) stand at around 45% with 1.3 lakh unsold units. Moreover, about 2.9 lakh residential units are under construction.

Similar is the case with commercial real estate. During the quarter ended September 2013, vacancy rates in Mumbai and New Delhi crossed the 20% mark. What more, out of the 10 office markets with the worst vacancies in Asia, six are from India.

All in all, it seems that the weakness in the overall economy has clearly impacted both residential and commercial real estate markets. Given the high inventory levels, vacancy rates and the fact that India's economy is likely to remain sluggish in the medium term, a revival in the property market seems unlikely in the near future.
India's economic problems are no longer restricted to broader macro issues that do not directly affect the common man. We have been battling poor infrastructure, falling industrial growth, corruption, red tape and fiscal profligacy for a while now. But over the past few months, inflation, unemployment and dramatic slowdown in economic growth have severely impacted our standard of living. The economic slowdown has not just hurt job seekers. The extent of the crisis can be understood from the fact that even the search firms are getting out of business.

Once the holy grail of those wanting to land into meaty profiles, the job search firms' client list has now run dry. As per Hindustan Times, nearly 7,000 job search firms have shut down in the past few months. And many more are on the verge of doing so. We believe that it may be a long while before the economic scenario gets any better. And hence it is in the interest of investors to prepare themselves for the worst.

Transfer Pricing: ALP of royalty for trademark usage and technical know-how fee can be determined as per TNMM. Approval of RBI & Govt. means payment is as at arms length

Cadbury India Ltd v ACIT( ITAT Mumbai)

The assessee entered into an agreement with its parent company, Cadbury Schweppes, pursuant to which it agreed to pay royalty for the use of trademarks and royalty for the use of technical know-how at 1.25% each of the net sales. This was approved by the RBI and the SIA (Government). The assessee adopted the Transaction Net Margin Method (“TNMM”) for computing the ALP of the international transactions by comparing the net margin of the company at entity level with that of companies engaged in food products, beverages and tobacco business. The TPO held that the transactions pertaining to payment of royalty for trademarks and technical know-how fee had to be separately and independently bench-marked using the Comparable Uncontrolled Prices (“CUP”) method. He held that the ALP of royalty and technical know-how fee should be computed at 1% of sales the instead of at 1.25% of the sales. This was reversed by the CIT(A) who held that the royalty and technical know-how fee paid by the assessee were at ALP. On appeal by the department to the Tribunal HELD dismissing the appeal:

The assessee has been paying royalty on technical know-how to its parent AE since 1993. Other group companies across the Globe are also paying the same royalty. Also, the payment is as per the approval given by the RBI and the SIA. Hence there cannot be any scope of doubt that the royalty payment on technical know-how is at arms length. As regards the royalty on trademark usage, the assessee is in fact paying a lesser amount if the payment is compared with the payment towards trademark usage by other group companies using the brand “Cadbury” in other parts of the world. Accordingly, the royalty payment on trademark usage is also within the arms’ length and does not call for any adjustment (Lumax Industries (ITAT Del) (attached) followed). The Department’s request for a remand to the TPO to examine the AMP expenses in the light of Maruti Suzuki 328 ITR 210 (Del) (and L. G. Electronics 140 ITD 41 (Del)(SB)) rejected

Note: In Lumax Industries (ITAT Del) (attached to file) it was held that the “economic benefit test” could not be adopted while evaluating the ALP of royalty payments and that it cannot be examined in isolation of production & sales & on a standalone basis. The overall TNMM method was approved as the correct method for evaluating the ALP of the royalty payment

Amount received by partner on his retirement is not chargeable to tax as capital gains

CIT vs. Riyaz A. Sheikh (Bombay High Court)

The assessee, a partner in a firm, received Rs. 66 lakhs over and above his capital contribution on his retirement from the firm. The assessee claimed that the said sum was a capital receipt not chargeable to tax. However, the AO held that the retirement had resulted in a relinquishment of his pre-existing rights in the partnership firm and, therefore, the same was in the nature of capital gain on transfer of goodwill and liable to tax under s. 45 read with s. 2(47)(i) & (ii) of the Act. The CIT(A) and Tribunal (order not available but operative portion is reproduced in Rajnish M Bhandari, attached) reversed the AO on the ground that when a partner retires from the firm and receives his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain u/s 45 of the Act. It was also held that the decision of the Bombay High Court in Tribhuvandas G Patil 115 ITR 95 followed in N A Mody 162 ITR 420 has been reversed by the Supreme Court in Tribhuvandas G Patel 236 ITR 515 (SC) and that this legal position had been noted in Prashant S Joshi 324 ITR 154 (Bom). On appeal by the department to the High Court HELD dismissing the appeal:

The Tribunal has correctly referred to the fact that N.A. Mody 162 ITR 420 (Bom) followed Tribhuvandas G. Patel 115 ITR 95 and that the same has been reversed by the Apex Court in Tribhuvandas G. Patel 263 ITR 515. This Court in Prashant S. Joshi 324 ITR 154 (Bom) has also referred to the decision of Tribuvandas G. Patel rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in Prashant S. Joshi placed reliance upon the decision of the Supreme Court in CIT v/s. R. Lingamallu Rajkumar 247 ITR 801 wherein it has been held that amounts received on retirement by a partner is not subject to capital gains tax

Top U.S. banks' mortgage payouts could hit $104B.

JPMorgan (JPM) and Bank of America (BAC) are among eight leading U.S. banks that could have to pay a further $56.5-104B to settle mortgage-related claims, S&P calculates. However, the country's largest banks have estimated capital buffers of $155B combined, which would be enough to absorb the losses. S&P doesn't expect the legal liabilities to hurt the banks' ratings.

Tuesday, November 26, 2013

Rise in Chinese bond yields sparks concern.

Chinese government-bond yields have remained high after hitting a nine-year peak last Wednesday, when the rate on 10-year debt reached 4.72%. Today, the yield closed flat at 4.71%. The spike has come as the government tightens monetary policy in order to try to rein in soaring lending, and it has led to higher interest rates in the broader economy. That has sparked concerns that China's rebound could be at risk.

Concern grows within BOJ over inflation goal.

Some members of the Bank of Japan's board believe it will be "difficult" for the BOJ to achieve its 2% inflation goal within two years, as pledged in April. The minutes of the last meeting in October show that three out of nine policy makers voted against a statement which said that the bank expects inflation to hit 1.9% in FY 2015. The skepticism contrasts with the optimism of BOJ Governor Haruhiko Kuroda.

Monday, November 25, 2013

Non-exclusive & non-transferable license to use customized software not taxable as “royalty” under Article 12 of India-USA DTAA

DIT vs. Infrasoft Ltd (Delhi High Court)

The assessee, a USA company, set up a branch office in India for the supply of software called “MX”. The software was customized for the requirements of the customer (not “shrink wrap”). The Indian branch imported the software package in the form of floppy disks or CDs and delivered it to the customer. It also installed the software and trained the customers. The AO & CIT(A) held that the software was a “copyright” and the income from its license was assessable as “royalty” under Article 12 of the India-USA DTAA. On appeal by the assessee, the Tribunal held, following Motorola 270 ITR (AT) (SB) 62, that the income from license of software was not taxable as “royalty”. Before the High Court, the Department argued that in view of CIT vs. Samsung Electronics 345 ITR 494 (Kar), the right to make a copy of the software and storing it amounted to copyright work u/s 14(1) of the Copyright Act and payment made for the grant of a license for the said purpose would constitute royalty. HELD by the High Court dismissing the appeal:

In order to qualify as a royalty payment under Article 12(3) of the India-USA DTAA, it is necessary to establish that there is a transfer of all or any rights (including the granting of any licence) in respect of a copyright of a literary, artistic or scientific work. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by Article 12 because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. Consequently there is no transfer of any right in respect of copyright by the assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA (Ericson AB 343 ITR 370 (Del)& Nokia Networks OY 25 225 followed; Samsung Electronics 345 ITR 494 (Kar) not followed)

Contrast with Reliance Infocom/ Lucent Technologies (ITAT Mum) where it was held that Ericson AB 343 ITR 370 (Del)& Nokia Networks OY 25 225 applied only to cases where the software was embedded in the hardware and not to pure license cases
Not sure how much of this confidence would fructify into real investments. But prima facie at least, E&Y's latest survey on corporate confidence for international investments is worth a thumbs-up. The survey covered 1,600 senior executives from large companies across 70 countries. As per E&Y, India features top on the list of possible destinations for investments by companies the world over. India is followed by Brazil, China, Canada, US and South Africa in the pecking order. The depreciation in the currency and the government's facilitative policy towards FDI has primarily upped investor interest. Also the fact that many Indian corporates are looking to divest stakes in non-core businesses offers opportunities. Now to what extent will this bring in investments into the country is anybody's guess. But at least the government should be careful this time. It cannot afford to once again mire the investments in bureaucratic mess.

BOJ governor confident of reaching inflation target.

The Bank of Japan expects its 2% inflation target "to be reached sometime in late fiscal year 2014 or early fiscal year 2015," Governor Haruhiko Kuroda said today. However, he acknowledged that the goal remained "very ambitious" given Japan's 15 years of deflation. Unlike the ECB, Kuroda downplayed the possibility of using negative interest rates to boost growth, saying they could only be deployed for a short time.

Oil falls, global stocks higher after Iran deal.

Oil was sharply lower and global equities mostly higher at the time of writing following the agreement between Iran and the P5+1 world powers for the Persian nation to limit its nuclear program in return for an easing of sanctions. Although the deal doesn't relax restrictions on Iran's crude oil sales, there are those who hope that the deal will be a precursor to the eventual resumption of exports.

Sunday, November 24, 2013

Growth may have slowed down in China, but that has not stopped large asset management companies from investing in the country. As reported in an article in Bloomberg, one of the reasons for this is the massive US$ 3.66 trillion currency reserves that the dragon nation has amassed. The US Fed's decision to taper its QE program some months back had given global markets the jitters. As a result, there was an exodus of capital from emerging markets including India. For the latter, this posed a problem because it is burdened with a rising current account deficit. But China has no such problem. Some of the other factors that are in favour of investments in China include the country's intention of moving away from an investment and exports based business model. But that does not mean that there are no other problems. For quite some time now, China has been plagued by issues such as shadow banking, unregulated lending and increasing debt burden of local governments. Efforts to bring these under control have led to cash squeezes that helped drive up borrowing costs. Also, China is looking to make the Yuan fully convertible. But this may not be that easy given the opaqueness with which the currency is managed. Thus, investing in China is not without its share of risks.
The proposed US Immigration Bill may have sent jitters to the Indian IT industry but it is still expected to grow at a healthy pace this year. As per industry body, NASSCOM, IT sector in India is expected to grow by 12% to 14% YoY this year. This is higher than the 10.3% YoY growth seen during the previous year. And this is just in US dollar terms. In terms of Indian Rupees, the growth is expected to be much higher. NASSCOM has also stated that it expects IT exports to grow to US$ 86 bn this year.

Growth in exports would be driven by customers moving to new technologies. The question is whether this growth is sustainable or not. We think that in the short term, there maybe hiccups related to protectionist measures adopted in the sector's largest market, US. At the same time the Euro zone too is still struggling. However these are just short term headwinds. The long term growth story for the sector still remains intact.

Thursday, November 21, 2013

Bank of Japan keeps ultra-loose policy unchanged.

As expected, the Bank of Japan has left its key interest rate at 0.1%, and maintained its program of expanding the monetary base at an annual rate of ¥60-70T ($611-713B) a year. "Japan's economy is recovering moderately," the BOJ reiterated, with governor Haruhiko Kuroda saying that it is moving in line with forecasts. "Inflation expectations appear to be rising on the whole," the bank said. Still, Kuroda declared that he won't hesitate to change policy if necessary.

Asian, European stocks lower after FOMC, weak PMIs.

Asian and European equities were mostly lower at the time of writing following weak eurozone and Chinese PMI data, and after the FOMC minutes showed that the Fed could start turning down the money printing presses in the coming months. Japanese shares, though, bucked the trend and jumped 1.9% as tapering means a stronger dollar and a weaker yen. Some at the Fed are "itching" to taper. Janet Yellen "is not persuaded of this view, but it will be hard for the doves if November payrolls are strong."

Eurozone business activity losing momentum.

Eurozone composite output has declined to 51.5 in November from 51.9 and fallen short of forecasts, with a slowing of services growth offsetting an increase in manufacturing PMI to a 29-month high of 51.5. While Germany powered ahead, France slipped back into contraction and the country could be on course for a return to recession. "Deflationary forces may be gathering," says Markit of the eurozone, while growth outside the "big two" of Germany and France "slowed to near-stagnation."

Wednesday, November 20, 2013

Bankrupt Jefferson County raises $1.8B in debt.

Jefferson County in Alabama has become the first municipality to successfully tap the bond markets while still in bankruptcy protection, selling $1.8B in sewer warrants. However, Jefferson will reportedly have to pay up to 6.85% in interest on the debt, which has a maturity as long as 40 years. The county is due to go to court today to seek authorization to exit Chapter 9 by the year-end.

BOE again united in keeping policy on hold.

As expected, the Bank of England's Monetary Policy Committee voted unanimously to keep interest rates at 0.5% and against more quantitative easing at a meeting earlier this month. "There were uncertainties over the durability of the recovery," the MPC said. Given that inflation is under control, "there could be a case for not raising the bank rate immediately when the 7% unemployment threshold is reached."

Japanese export growth accelerates.

Japanese exports rose at their fastest pace in three years, jumping 18.6% on year in October vs 11.5% in September and beating consensus. Exports also grew 4.4% in volume terms, suggesting that Japan is not just relying on the weak yen to boost trade. Imports jumped 26.1% - again driven higher by soaring fuel costs - helping the trade deficit rise to ¥1.09T ($11B) from ¥932.1B a month earlier.

Inflation seen easing.

U.S. inflation data for October is scheduled to be released this morning, with economists expecting that CPI was flat on month after rising 0.2% in September. On year inflation is seen slowing to 1% from 1.2%. The data will be followed later in the day by the minutes of the latest FOMC meeting, which will no doubt be scrutinized for any hints as to when the Fed might finally start scaling back QE. Given Ben Bernanke's comments earlier today, the taper might be a few months away yet.

Bernanke: Tapering depends on further improvement in jobs data.

The Fed's scaling back of its bond-buying program still depends on the jobs market improving further and a rise in inflation towards the central bank's goal of 2%, Ben Bernanke said in a speech last night. Bernanke also said that the Fed is likely to keep interest rates near zero until "perhaps well after" unemployment drops below 6.5%, the bank's threshold for increasing rates, as policy makers want to be assured of the strength of the job market.

Tuesday, November 19, 2013

Just like investors, companies too need to be careful about their acquisitions and investments. Paying too much of an asset could turn out to be a disaster in the long run. And it does not help create shareholder value either. Rather a bad, overpriced acquisition can actually destroy shareholder wealth instead. However, despite all the due diligence that companies conduct, they can still end up over paying for an acquisition. When this happens, the company's management has two choices. The first is the easier one to continue holding the assets as it is on the balance sheets and keep justifying the same.

The second and tougher one is to admit their mistake and write down the assets. This would entail a onetime pain but it is a sign of a more prudent and conscious management. This seems to be the case with the Tata Group companies. As reported by The Mint, the group's Chairman is writing down nearly US$ 15.5 bn of assets. These write downs are related to the acquisitions made by the group companies over the last decade. The move could be inferred as a prudent and ethical corporate practice of the management admitting their mistakes.

Sunday, November 17, 2013

Eurozone inflation falls.

Inflation fell further away from the European Central Bank's target of just under 2% in October, slowing to an expected 0.7% from 1.1% in September. On month, CPI dropped 0.1% after rising 0.5%. The decline in inflation possibly gives the ECB further room to cut interest rates to zero - although the Germans would surely have something to say about that - following the surprise reduction last week to 0.25%.

Moody's cuts senior debt of major banks.

Moody's has lowered the senior debt ratings of Morgan Stanley (MS), Goldman Sachs (GS), JPMorgan (JPM) and BNY Mellon (BK) by one notch, based on its updated views on U.S. government support and standalone bank considerations. The credit ratings of these banks had each benefited from the assumption of government support, Moody's said, and its rating actions reflect strengthened U.S. bank resolution tools that affect its assumptions about such support.
There is a misconception prevalent in the developed world. That low inflation rate is reason enough to resort to large scale quantitative easing. So that in the process jobs will be created. As reported in an article in the Financial Times, the average man is hardly going to complain if the prices are not rising. No doubt economic growth and jobs creation is on the agenda of most governments and policymakers in the developed world. But that cannot be achieved by aiming for a higher inflation rate. Indeed, there is nothing to suggest that low inflation is always a bad thing that signals recession. Unless the fall is too drastic.

Inflation, if anything, has to be looked upon as an unpleasant side effect and not a cure. So, if measures to bolster the economy lead to a higher inflation, then the latter is a by-product that needs to be dealt with. It does not make sense to make high inflation an objective that can lead to higher growth. The wrong notion that most policymakers in the US and Europe have about inflation is dangerous. At the rate they are printing money, the threat of hyperinflation in the future can hardly be ruled out. And one need look no further than Latin America and how hyperinflation wreaked havoc on their economies.

Thursday, November 14, 2013

Italy logs ninth consecutive quarterly contraction.

Italy’s economy shrank by 0.1% in Q3, matching economists’ expectations. The quarterly contraction which the national statistics office describes as "very mild" — is the ninth-straight for the eurozone's third-largest economy. Strength reportedly came from the industrial sector, while services and farming were weak in inflation-adjusted terms. The full-year contraction now sits at 1.9%, meaning the country will have to see economic growth in Q4 if the government's forecast of a 1.8% contraction for the year is to prove accurate.

Yellen leans dovish in prepared remarks.

”We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession,” Janet Yellen will tell the Senate Banking Committee in her confirmation hearing today. In what looks like a bid to support the continuation of accommodative policies, Yellen will also emphasize that the “labor market and economy [are] performing far short of their potential,” while inflation remains below the Fed’s target.

Eurozone GDP misses expectations.

Economic growth in the eurozone came in at just 0.1% for Q3, below expectations and worse than the 0.3% expansion the currency bloc registered in Q2. The euro (FXE) slid against the greenback on the news as investors viewed the weaker-than-expected data as evidence that the ECB will need to maintain an ultra-accommodative policy stance for the time being.

Japan Q3 GDP growth tops estimates.

Economic growth slowed in Japan during the July-September quarter, but at 1.9% (annualized), the economy still expanded faster than economists were expecting. Despite the headline beat, capex growth printed at just 0.2% for Q3, far below consensus estimates. Private consumption rose 0.1% while inventories chipped in 40 bps after pulling the overall figure 10 bps lower in Q2.
Worst is still not behind for the Indian banking sector; as bad loans continue to play spoilsport. And as stated by State Bank of India's (SBI) management, the peak of non-performing loan cycle is yet to come.

The Indian public sector banks are plagued by the challenges emerging from the infrastructure and power sectors. And this is evident in their September quarterly performance. While banking behemoth SBI witnessed a dramatic earnings fall, first of its kind in two years, Punjab National Bank (PNB), the country's third largest bank witnessed a steep 50% decline in profits. Therefore, the stress on Indian banks' books continues to persist. And the red flags have been raised by the SBI's new Chairman too. Ms Bhattacharya admitted to have faced persistent stress, especially from the corporate loan segment.

Indian macro environment still remains challenging. Inflation continues to raise its ugly head. Therefore, the likelihood of interest rate hikes going ahead cannot be ruled out. Not to mention that the ability of banks to pass on the burden of higher costs to the borrowers stands limited. In such a scenario, the pressures on margins tend to intensify. Additionally, operating efficiencies of many lenders have also taken a toll, thanks to the wage hike provisions. Furthermore, many public sector lenders have sought government help with respect to strengthening their capital base to prepare for the new BASEL III norms. All-in-all, we can say that profitability of Indian banks remains vulnerable. 

S. 45(4) does not apply if the retiring partner takes only money towards the value of share and there is no distribution of capital asset amongst the partners.

CIT Vs M/S Dynamic Enterprises(Karnataka High Court-Full Bench)
The assessee partnership firm was constituted on 09.01.1985 with Anurag Jain and Nirmal Kumar Dugar as its partners. On 13.04.1987, Nirmal Kumar Dugar retired from partnership and L.P. Jain entered the partnership and contributed capital for purchase of land to construct a housing complex. The assessee-firm purchased land for a consideration of Rs.2.5 lakhs. Another reconstitution took place on 1.7.1991 by which L.P. Jain retired from the firm and Pushpa Jain and Shree Jain were inducted as partners. Later, on 28.04.1993, five partners belonging to the Khemka Group were inducted. Prior to the induction of the Khemka Group, the assets of the firm were revalued. The three old partners retired through deed of retirement dated 01.04.1994 and received the enhanced value of the property in FY 1994-95. The AO held that the introduction of the Khemka Group and the retirement of the old partners was a device adopted to transfer the immovable property and to evade capital gains tax and stamp duty. He assessed the firm on capital gains. This was upheld by the CIT(A) though reversed the Tribunal. The Tribunal held that as the land continued to remain with the assessee-firm, there was no transfer u/s 2(47) and that the retiring partners had merely withdrawn the amounts standing to their credit in the capital account. On appeal by the department to the High Court, it was felt that there was a conflict between Mangalore Ganesh Beedi Works 265 ITR 658 and Gurunath Talkies 328 ITR 59 and the issue was referred to the Full Bench. HELD by the Full Bench:

(i) S. 45(4) deals with a distribution of capital assets on the dissolution of a firm or other AOP or BOI or otherwise and provides that if in the course of such distribution of capital asset there is a transfer of a capital asset by the firm, the firm shall be chargeable to tax on capital gains. In order to attract s. 45(4), the conditions precedent are (1) there should be a distribution of capital assets of a firm; (2) such distribution should result in transfer of a capital asset by firm in favour of the partner; (3) on account of the transfer there should be a profit or gain derived by the firm and (4) such distribution should be on dissolution of the firm or otherwise. In other words, the capital asset of the firm should be transferred in favour of a partner, resulting in firm ceasing to have any interest in the capital asset transferred and the partners should acquire exclusive interest in the capital asset. On facts, the partnership firm purchased the property and it was not in the name of any partner. No partner brought that capital asset as capital contribution into the firm. Also, there was no dissolution of the firm because the firm continued to exist even after the retirement of some partners. What was given to the retiring partners is cash representing the value of their share in the partnership. No capital asset was transferred on the date of retirement. In the absence of distribution of a capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm and so the question of the firm being assessed u/s 45(4) would not arise;

(ii) The department’s argument that the transaction by which the five incoming partners brought money into the firm and the three erstwhile partners retired by taking money (leaving the capital asset in the firm) is a device adopted to evade payment of profits or gains is not acceptable because it proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm and not to the partners. The partners only had a share in the partnership asset when they retired and took their share in cash, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership.Therefore, there is no transfer of a capital asset and no capital gains or profit arises (Ganesh Beedi Works 265 ITR 658 approved; Gurunath Talkies 328 ITR 59 reversed; Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300, Malbar Fisheries Co 120 ITR 49 (SC), Sunil Siddharthbhai 156 ITR 509 (SC), A.N. Naik Associate 265 ITR 346 (Bom) referred)