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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)

Wednesday, November 13, 2013

Eurozone industrial output disappoints.

Just a day ahead of the first read on Q3 GDP, data shows eurozone industrial output fell 0.5% M/M in September. The reading was worse than anticipated, as economists were expecting a decline of just 0.3%. On year, output rose 1.1%.

Japan September core machinery orders underwhelm.

Japan September core machinery orders fell 2.1%, more than the 1.4% economists were expecting (orders rose 5.4% in August). Additionally, a survey showed companies believe orders will fall during the October-December period, snapping two quarters of gains. The weakness in the September print suggests capex is still a concern in Japan despite efforts to revive business investment.

BOE upgrades economic forecast, says 7% unemployment achievable by H2 2014.

In its quarterly inflation report, the Bank of England pulled forward its expectations for when unemployment could hit the 7% threshold at which point a rate hike would be considered. The central bank now says the jobless rate could fall to 7% by H2 2014 versus previous guidance of mid-2016. The BOE also upgraded its outlook for the U.K. economy, saying 2014 growth should come in around 2.8%.
With US dollar's crown of being the world's reserve currency in danger of slipping away, there is a lot of debate around what would take its place. And until recently it was hoped that the Euro seemed the perfect replacement. But not anymore. Increasingly, experts are of the view that the European Union faces a serious risk of implosion. Notable amongst these is George Soros. The hedge fund titan recently commented that his worst fears about the Euro are now confirmed. As per him, instead of showing solidarity, the European Union has actually become every country by itself.

He is totally on the ball we reckon. The problem with the Union is that although it has a common currency, it does not have the ability to issue common debt. And as the New York Times points out, this has created a friction between creditor countries like Germany and debtor countries like Greece. This in turn has led to Germany doing just enough to keep these countries afloat and not taking radical measures that will pull the EU out of its misery. Thus, unless it does that, the risk of a Japan like stagnation, loom really large as per us. 

Tuesday, November 12, 2013

Bank of France forecasts growth in final quarter.

The Bank of France has predicted Q4 GDP growth of 0.4%, and said that its business-climate indicator for industry rose to 99 in October from 97 in September. The services sector indicator held steady at 93. Business leaders are confident that industrial and services activity should continue to expand in November. However, the CAC 40 was -0.4% at the time of writing.

Inflation falls in Germany, Italy and the U.K.

CPI reports from Germany, Italy and the U.K. showed that inflation dropped in October, providing further strength to those who believe that central-bank policy should continue to be accommodative. In Germany, CPI slowed to the lowest rate since August 2010, easing to +1.2% on year from +1.4% previously. Italian inflation edged down to +0.8% from +0.9%. In both countries, CPI shrank on month. In Britain CPI weakened to +2.2% from +2.7% and dropped closer to the Bank Of England's target of 2%.

Monday, November 11, 2013

Chinese inflation edges up.

Chinese shares increased 0.2% following a weekend data dump which showed that inflation rose to an eight-month high of 3.2% on year in October from 3.1% in September, driven up by higher food prices. However, the producer price index dropped for the 20th month in a row, suggesting that deflationary forces remain an issue. The growth in industrial production accelerated to 10.3% from 10.2%, while retail sales again climbed 13.3%. The data comes as Chinese leaders meet to discuss major economic reforms.

Sunday, November 10, 2013

China's trade surplus more than doubles.

China's trade figures came in above consensus as exports grew 5.6% on year and imports 7.6%, while the trade surplus more than doubled on month to $31.1B. "Combined with...better export data in Korea and Taiwan, China's export numbers suggests some — although not yet decisive — improvement in global demand momentum," says RBS economist Louis Kuijs. The import growth reflects "healthy expansion of demand" in China.

German trade surplus jumps 19% to record high.

Germany's trade surplus increased 19% on month to a record high €18.8B in September and exceeded consensus of €15.5B. Export growth accelerated to 1.7% and also topped forecasts, although imports unexpectedly fell 1.9%. The figures will do nothing to assuage those who have criticized Germany for relying too much on exports, especially at the expense of Southern Europe.

S&P downgrades France to "AA."

S&P has reduced France's debt rating by one notch to "AA" from "AA+," citing the country's low economic growth and the "inability to significantly reduce total government spending." The ratings agency believes that tax, labor and other reforms won't raise France's growth prospects, while high unemployment is damaging support for further structural and fiscal measures. The CAC 40 (EWQ) was -0.7% at the time of writing, but French 10-year bond yields were just +3 bps to 2.27%.

India's manufacturing sector continues to slump.

The Indian economy has been witnessing a severe economic slowdown with growth rates falling continuously over last several quarters. One of the worst hit areas is the manufacturing sector. Today's chart of the day shows the manufacturing Purchasing Managers' Index (PMI) for the BRIC economies over the last two months. It must be noted that PMI is an indicator of the economic health of the manufacturing sector. A reading above 50 indicates growth, whereas a reading below 50 indicates contraction. It is evident from the chart that while the other BRIC economies such as Russia, China and Brazil have moved into expansion phase in October, India's manufacturing sector continues to slump. The manufacturing sector in India is facing several structural constraints in the form of poor infrastructure, regulatory hurdles , slow reforms, red tape and corruption. Unless policy makers initiate some tough reforms, India's manufacturing sector may continue to slump.

Spanish industry grows for first time in 2 1/2 years.

Spain continues to experience green shoots of recovery, with industrial output surprisingly rising 1.4% on year in September after falling 2.1% in August and beating consensus for a drop of 1.5%. The increase represents the first time that production has grown since February 2011 and adds to preliminary data showing that the economy emerged from recession in Q3.

Twitter to raise $1.82B at market cap of $14.2B.

Twitter (TWTR) is due to debut on the NYSE today after pricing its IPO at $26, above an already increased range of $23-$25. Twitter will raise $1.82B by selling 70M shares and it will have a market cap of $14.2B despite generating no profits. 

Wednesday, November 6, 2013

Eurozone business activity continues growing but loses momentum.

Eurozone composite PMI dropped to 51.9 in October from 52.2 in September and the services reading also declined, although overall business activity still grew for the fourth consecutive month. The surveys indicate a loss of momentum at the start of Q4, says Markit, raising "concerns that the upturn is faltering" and increasing the pressure on the ECB "to reinvigorate the recovery." Still, the economy is expanding across the board in Germany, France, Italy and Spain.

Tuesday, November 5, 2013

China HSBC services PMI ticks up in October.

The HSBC China services PMI edged up to 52.6 in October from 52.4 in September, which, says HSBC, "should help cement China's growth momentum in the coming months." Although the generally upbeat tone of the report is consistent with the October reading for the country's official non-manufacturing PMI, the two surveys differ over new orders, with HSBC more positive than the government.

U.K.'s services sector roars ahead.

U.K. services PMI leapt to its highest level in 16 years in October, rising to 62.5 from 60.3 in September. The data adds to strong manufacturing and construction surveys, helping to send the all-sector PMI to a record of 61.5 vs 60.2 a month earlier. The latest data is consistent with quarterly GDP growth of 1.3% and private-sector job creation of over 100,000 positions. The pound has taken a jump and was +0.5% at $1.6049 at the time of writing, although the FTSE was -0.6%.

EU cuts growth forecast for eurozone.

The European Commission has lowered its 2014 eurozone GDP forecast to 1.1% from a prediction in May of 1.2%, while it expects unemployment to remain high at 12.2% and inflation to remain low at 1.5%. The EC also estimates that the eurozone's economy will shrink 0.4% this year following a decline of 0.7% in 2012. The EC projects that Germany, Belgium, Estonia and Ireland will gain momentum in 2014, although it warned that Spain, Greece, Italy and Portugal will experience much weaker growth.

Settlements & fines for US mortgage activities.

The repercussions of the subprime crisis in 2008 have continued to haunt banks until today. As today's chart shows, Bank of America has had to dole out the maximum amount in settlements and fines with respect to US mortgage activities in the last 5 years. JP Morgan Chase has recently agreed to pay a hefty settlement of US$ 13 bn to regulators thereby placing it second on the list. There was considerable murkiness in the whole subprime mortgage issue which involved a lot of shady financial products. And therefore it will be hardly be surprising if banks will be required to dole out more of such fines and settlements in the future. 

Monday, November 4, 2013

Loss on foreign exchange forward contracts is incidental to the exports business and not a “speculation loss“. However, if the contract is prematurely cancelled, the assessee has to justify the loss

London Star Diamond Company (I) P. Ltd vs. DCIT (ITAT Mumbai)

The assessee, an exporter of diamonds, entered into forward contracts with Banks to hedge the exchange loss, if any, in respect of the outstanding receivable in foreign currency. The assessee suffered a loss of Rs. 4.69 crore on account of the maturity & premature cancellation of the said forward contracts. The AO & CIT(A) held that the forward contracts constituted a “speculative transaction” u/s 43(5) and that the loss suffered thereon was a “speculation loss” which could not be set-off against the other income. On appeal by the assessee to the Tribunal HELD:
(i) Though a forward contract for purchase or sale of foreign currency falls in the definition of “speculation transaction” u/s 43(5) as it is settled otherwise than by the actual delivery or transfer of the commodity, it cannot be regarded as constituting a “speculation business” under Explanation 2 to s. 28. A forward contract, entered into with banks for hedging losses due to foreign exchange fluctuations on the export proceeds, is in the nature of a “hedging contract” and is integral or incidental to the export activity of the assessee and cannot be considered as an independent business activity. Therefore, the losses or gains constitute business loss or gains and do not arise from speculation activities. The fact that there is a premature cancellation of the forward contract does not alter the nature of the transaction. There is also no requirement in the law that there should be a 1:1 correlation between the forward contracts and the export invoices. So long as the total value of the forward contracts does not exceed the value of the invoices, the loss has to be treated as a business loss (Sooraj Mull Magarmull 129 ITR 169 (Cal), Badridas Gauridu 261 ITR 256 (Bom), Panchamahal Steel 215 Taxman 140 (Guj) and Friends and Friends Shipping (Guj) followed; contrary view in S. Vinodkumar Diamonds (ITAT Mum) referred);
(ii) On facts, the loss arising on cancellation of matured forward contracts is allowable as it is attributable to the genuine failure of the trade debtors to comply with the credit terms and conditions. As regards the loss arising on account of premature cancellation of the forward contracts, the assessee requires to explain the reason for the premature cancellation. The explanation that the maturity of date of some of such premature cancelled forward contracts fell during the week-end and therefore they were cancelled three days prior to the due date is acceptable and the loss is allowable. The explanation that some other forward contracts were prematurely cancelled due to business reasons and to avoid higher loss requires to be examined by the AO. The correspondence with the banks and the RBI guidelines on the issue as well as the accounting treatment by the banks also requires to be examined. The assessee’s alternative argument that the said loss is “damages” payable to the banks for breach of contracts or settlement of the contracts also requires examination by the AO.

Growth in China's services activity accelerates.

China's official non-manufacturing PMI grew at the quickest rate in 13 months in October, rising to 56.3 from 55.4 in September. The increase adds to an improving manufacturing sector and provides further evidence that China's economy has stabilized. At a meeting this coming weekend, China's leaders are expected to unveil reforms to strengthen the services sector and open it up to foreign competition.

Eurozone manufacturing recovery broad-based.

Eurozone manufacturing PMI edged up to 51.3 in October from 51.1 in September. The "modest and fragile recovery continues and remains broad-based, with growth seen in all nations bar France and Greece," says Markit. Increasingly "robust gains" in production in countries such as Spain, Italy and Ireland "suggest that structural reforms to boost competitiveness are starting to pay off." The euro was +0.1% at $1.3508 at the time of writing.

Is the fiscal deficit under control?

In the first half of the last year, India's fiscal deficit had reached about 66% of the full year target. This time around (in FY14), it's at a much higher figure of 76%. While this is definitely an area of concern, the silver lining is that the month on month (MoM) increase has been declining. In other words, the deficit has been increasing at a slower pace. As can be seen from the chart below, the MoM increase in the fiscal deficit number (as a percentage of the estimated budget) has been slowing at a gradual pace. 
India's FM has been seemingly confident on meeting the fiscal deficit target of 4.8% of GDP, with the argument that the revenues are usually back ended. These hopes hinge on the improving tax collections as the economy picks up coupled with revenues from divestments. What must however be kept in mind is that that the fiscal deficit was targeted on expectation of a higher GDP growth rate. With the latter coming down as compared to what was anticipated at the start of the year, it is possible that the actual figure may be higher than anticipated (in percentage terms). Is this why the FM is forced to use his accounting gimmickry skills to make the situation seem better than it is? 

Chinese factory activity edges up.

China's official manufacturing PMI increased to an 18-month high of 51.4 in October from 51.1 in September and surpassed consensus. However, the reading for big companies rose, while that for smaller ones dropped into contraction territory, highlighting the unbalanced nature of China's economy. HSBC's PMI data edged up to 50.9 from 50.2. Readings for South Korea, Indonesia, Vietnam and Taiwan indicated that manufacturing grew in those countries, although India remained in contraction.

AT&T exploring Vodafone acquisition.

AT&T (T) is reportedly preparing the groundwork for a takeover of Vodafone (VOD) next year in a deal that would create a company with a market cap in excess of $250B and over 500M wireless subscribers. Executives at the U.S. carrier are trying to identify which assets it would retain and who would buy businesses that would be spun off. Any deal, of course, would have to wait until Vodafone closes the sale of its Verizon Wireless stake.

BOJ maintains policy as is; ups GDP outlook.

As expected, the Bank of Japan has maintained its program of expanding the monetary base at an annual rate of ¥60-70T ($611-713B) a year. The BOJ said it is making steady progress in achieving its target of 2% inflation, and reiterated that it expects CPI of 1.3% in 2014-15 and 1.9% a year later. The central bank slightly increased its 2014-15 GDP growth outlook to 1.5% from a prior prediction of 1.3% but maintained its 2015-16 forecast at 1.5%.