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Thursday, May 29, 2014

The energy research group IHS has released a report stating the benefits of U.S. oil exports. Advantages include an added domestic investment of $750 billion, fuel prices lowered by 8 cents a gallon, and an added 394,000 jobs. Congress previously enacted a ban on exports after price shocks from the 1973 Arab oil embargo. With the possibility of Russia cutting its gas and oil supply to Europe, there is a greater focus on available U.S. energy.

Sunday, May 25, 2014

S&P has upgraded Spain's credit rating

For the first time since stripping the country of its AAA grade in 2009, increasing its assessment to BBB from BBB- and saying the outlook is stable. "The upgrade reflects our view of improving economic growth and competitiveness as a result of Spain's structural reform efforts since 2010."


Jwellery Industry gets some respite

The jewellery industry in India has been going through difficult times. Ever since the RBI put restrictions on Gold imports in August last year, the cost of funds for jewellers had increased significantly. Now there seems to be light at the end of the tunnel. The RBI has liberalized its 80:20 rule, under which 20% of the gold imported would have had to be exported. Although the ratio has been maintained, the central bank has now allowed designated export houses to import the commodity. Also, banks are now allowed to make Gold available to jewellers.

This is welcome news for the domestic jewellery industry. The restrictions had led to a sharp fall in Gold imports and this can now be expected to reverse. As per an article in the Business Standard, monthly Gold imports could double to 60 tonnes from 25-30 tonnes currently. This will increase the supply of the yellow metal in the country leading to a minor fall in prices. However the most important impact of this decision could be on Gold imports via illegal channels. With more gold available through legal imports, smuggling of the yellow metal should see a fall in the coming months.

No s. 14A & Rule 8D disallowance if there is no tax-free income

CIT vs. Shivam Motors (P) Ltd (Allahabad High Court)

In AY 2008-09, the assessee claimed that no s. 14A & Rule 8D disallowance could be made on the ground that (i) the assessee had not earned any tax-free income during the year and (ii) the assessee had sufficient surplus fund and borrowed funds were not utilized for making the tax-free investments. The AO rejected the claim and made a disallowance though the CIT(A) and Tribunal (included in file) deleted it on the basis that no s. 14A disallowance could be made in the absence of tax-free income. The Tribunal noted the judgement in Cheminvest 121 ITD 318 (Delhi) (SB) (which holds that s. 14A disallowance has to be made even if there is no tax-free income) but followed Siva Industries (Che). On appeal by the department to the High Court HELD dismissing the appeal:
S. 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what s. 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law.

China's HSBC flash PMI seen improving

HSBC flash PMI reading came in at 49.7 to mark an improvement of 160 basis points from the level recorded in April and beat the median estimate of analysts calling for 48.3. Though the factory activity index is on track to reach a five-month high, it still sits in contraction territory. Analysts think stimulus measures from the government are starting to provide a small lift.

The Bank of Russia moved to limit the volatility of the ruble

By reducing the number of daily currency interventions. Currently, the ruble is trading in a corridor where the central bank can let it float free. The central bank says it will still step in to intervene to maintain financial stability if needed. Next year, the bank is expected to adopt inflation targeting.

Wednesday, May 21, 2014

U.K. retail sales grew at the fastest rate since May 2004

Retail Sales grew in April, jumping 6.9% on year vs 4.8% in March and beating consensus of 5.2. While the U.K. government will probably welcome the figures, the data raises questions about how balanced the U.K.'s economic recovery is.

Japan's trade deficit narrowed to ¥844.62B

Trade Deficit in April from ¥1.63T in March as export growth strengthened to 5.1% from 1.8% and imports slowed to +3.4% from +18.1%. The high increase in March was due to a last-minute shopping spree before the sales tax increased on April 1. Exports have disappointed over the past year or so despite the weak yen, prompting fears for Japan's economic recovery, although governor remains optimistic.

The Bank of Japan has left its key interest rate at 0.1%

And maintained its program of expanding the monetary base by ¥60-70T ($580-680B) a year. In a press conference, Governor Haruhiko Kuroda indicated that he doesn't see much need for further stimulus anytime soon.

Tuesday, May 20, 2014

The European Commission charged 6 banks

The European Commission has charged HSBC (HSBC), JPMorgan (JPM) and Credit Agricole (OTCPK:CRARY) with manipulating benchmark rates linked to the euro. The indictment comes after the EC slapped a record €1.7B ($2.3B) penalty on six banks last December for similar sins, including Deutsche Bank (DB), Royal Bank of Scotland (RBS) and Citigroup (C).

Deutsche Bank Tier 1 paper raised €20B worth of demand.

Deutsche Bank has attracted over €20B worth of demand for its debut Additional Tier 1 paper, which is being sold in three tranches. Deutsche Bank (DB) was planning to raise €3B-equivalent ahead of its annual meeting on Thursday. The debt adds to €8B of equity that the German bank issued over the weekend.

Monday, May 19, 2014

The Chinese property sector cooled further in March

As new-home prices increased in 44 out of 70 Chinese cities on a monthly basis, down from 56 in April and the lowest number since October 2012. The property sector had been fairly torrid until early this year, when government measures to restrict house buying and rein in lending started to have a more notable impact. However, the cooling of the sector comes amid concerns about the slowdown in the broader economy.

Japanese machinery orders have grown at faaster rate

A leading indicator of capital expenditure, have grown at the fastest rate since 1996, surging 19.1% on month in March after slumping 4.6% in February and slaying expectations for a rise of 6%. Companies also expect bookings to grow 0.4% on quarter in Q2. Business investment had long been a weak link in Japan, but "the recovery...remains on track," as explained by economists.The rebound is seen continuing despite an expected fall in demand because of the hike in sales tax last month.

Sunday, May 18, 2014

Narendra Modi's opposition BJP won India's biggest election victory

The election verdict is out. And it is unanimous. First time in history since 1984, India has given a clear mandate to a single party. At the time of writing, the Narendra Modi led NDA was leading in 333 seats out of the possible 543. It needs to win 272 seats to form a single majority. This in all likelihood appears to be quite evident. If it happens, it will be a watershed event in the history of Indian elections. Until now coalition nature of politics was the key hindrance for growth as policy making suffered in such an environment. However, a single party government by its nature would offer more freedom to Narendra Modi, in order to execute his development propaganda, on which he wooed the Indian public at large. With the people of India giving a clear mandate to NDA, the ball would be now in their court. It would be interesting to see how Modi led NDA will manoeuvre the government machinery which has been plagued with rust over the last 10 years.

Portugal is set to exit its international bailout program

Three years after it requested a €78B ($107B) rescue. The development means that Portugal won't have to answer to the Troika, although Prime Minister has pledged to continue with the fiscal responsibility so that the government can "maintain financial stability." He also wants to "boost the reform momentum."

Thursday, May 15, 2014

U.S. inflation data is due out before the bell

With economists expecting that CPI rose 0.3% on month in April after increasing 0.2% in March. On year, inflation is seen accelerating to 2% from 1.5%. Anything more than that could again raise questions about when the Fed might want to start raising interest rates.As per Nomura economists,"We expect higher farm prices and seasonally adjusted gas prices to prop up headline CPI in April."

Eurozone inflation rose to 0.7% on year in April

From 0.5% in March but remains well below the ECB's target of just under 2%, while CPI weakened on a monthly basis. The figures come as the ECB grows increasingly receptive to the idea of further stimulus to battle "slow inflation" and prevent a slide into deflation, with even the Bundesbank reportedly coming round.

Eurozone GDP growth held steady at 0.2% in Q1

Eurozone held steady growth but missed consensus of 0.4% as France returned to neutral with zero growth after rising 0.2% in Q4 and Italy fell back into contraction of 0.1% following an expansion of 0.1%. Still, at least Germany maintained its role as the bloc's engine of growth, with GDP strengthening to 0.8% from 0.4% and topping expectations.

Japanese GDP growth surged to its fastest level

In over two years in Q1, accelerating to an annualized 5.9% from 0.3% in Q4 and breezing past consensus of 4.2%. The economy was boosted by personal consumption soaring 8.5% as shoppers went on a spree prior to sales tax rising to 8% from 5% on April 1. A 4.9% rise in capex also helped. The downside is that the economy is expected to pull back in Q2 now that VAT has gone up.

S. 50B applies only to a “sale” for a “monetary consideration” and not to a case of “exchange” of the undertaking for shares under a s. 391/394 scheme of arrangement

CIT vs. Bharat Bijlee Ltd (Bombay High Court)

The assessee transferred its Lift Division to Tiger Elevators Pvt. Ltd under a scheme of arrangement u/s 391& 394 of the Companies Act, 1956. The transfer of the undertaking took place in exchange of preference shares and bonds issued by Tiger Elevators as per a valuation report. The assessee claimed that the transfer was not liable to tax on capital gains on the basis that there was no “cost of acquisition” of the undertaking. The AO held that the transaction was a “slump sale” as defined in s. 2(42C) and that the gains had to be computed u/s 50B. This was upheld by the CIT (A). On appeal by the assessee to the Tribunal, the Tribunal accepted the claim of the assessee. On appeal by the department to the High Court HELD dismissing the appeal:
The definition of the term “slump sale” in s. 2(42C) means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. In Motors& General Stores (P) Ltd 66 ITR 692 (SC) it was held that a “sale” meant a transfer for a monetary consideration and that an “exchange” would not amount to a “sale”. On facts, scheme of arrangement shows that the transfer of the undertaking took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, does not mean that monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares. In other words, this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment or issue of bonds/preference shares. All the clauses read together and the entire Scheme of Arrangement envisages transfer of the Lift Division not for any monetary consideration. The Scheme does not refer to any monetary consideration for the transfer. The parties were agreed that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was a case of exchange and not a sale. Therefore, s. 2(42C) of the Act was inapplicable. If that was not applicable and was not attracted, then, s. 50B was also inapplicable. The judgement of the Delhi High Court in SRIE Infrastructure Finance Ltd 207 Taxman 74 (Del) is distinguishable on facts. There is no necessity to analyze the circumstances in which s. 50B was inserted in the statute book.

Tuesday, May 13, 2014

China's evidence slowing down.

China has continued to provide further evidence of a slowdown in the country's economy, with industrial-output growth moderating to 8.7% on year in April from 8.8% and retail sales softening to +11.9% from +12.2%. Aggregate financing, the widest measure of new credit, fell to 1.55T yuan ($249B) from 2.07T yuan. The figures reflect Chinese attempts to rein in soaring lending at the expense of higher growth.

India's Bharatiya Janata Party appears to have won the country's general election.

With exit polls showing that the BJP and its allies have racked up anything from 249 to 340 seats out of a total of 545 seats in the lower house of parliament. However, it's worth noting that Indian exit polls can be wildly inaccurate. Still, shares continued to rally at the prospect of a stable business-friendly government led by BJP party leader Narendra Modi.

Monday, May 12, 2014

Japan's current account surplus slumped to ¥116.4B ($1.14B) in March from ¥612.7B in February and badly missed consensus of ¥347.7B, hurt by weak exports and rising imports ahead of a hike in sales tax in April. For the fiscal year, the surplus was ¥789.9B, the lowest on record. There have been fears that Japan's current account could slide into permanent deficit, which could weaken confidence in the country's massive debt.

Indian shares and the rupee have continued to rise

As polling booths close in the world's largest election following weeks of voting. Results are due on Friday, with the business-friendly Bharatiya Janata Party, led by Narendra Modi, expected to win handsomely. Shares could climb further if he gets anywhere near or above the 272 seats required for a majority in parliament.

Sunday, May 11, 2014

India still needs to improve its trade balance.

If one were to look at the trade balance data for the last 12 months, India still continues to languish in the red. Despite placing curbs on gold imports, the trade balance hasn't really improved and the reason for this can be attributed to weaker exports. Indeed, given the global economic slowdown, exports have not really set the pulse racing and this has had its impact on India's overall trade balance as well. Because India still imports a significant portion of oil that it consumes, there will always be the pressure of oil imports on the overall import bill. That is why it is necessary that various steps are taken so that exports become more competitive and ease the pressure on the overall trade balance.

Germany's exports fell 1.8% on month in March

After dropping 1.3% in February and missed forecasts, with the crisis in Ukraine and China's slowdown weighing on the figure. Imports declined 0.9% and the trade surplus slipped to €14.8B from €15.8B. As per ING economist Carsten Brzeski, " With ongoing geopolitical problems and the slowing emerging economies, it looks as if Germany's famous export engine could still be sputtering for a while."

China's inflation slowed to an 18-month low.

 China's inflation falls of 1.8% on year in April from 2.4% in March and came in below consensus of 2%. Factory-gate prices (PPI) dropped for the 26th consecutive month with a decline of 2%. With other data indicating that China's economy is slowing down, economists attributed the fall in CPI to a weakness in demand. Today's data has increased expectations that the government will further ease monetary and fiscal policy.

S. 32: Assessee (Bank) is entitled to depreciation on assets given on lease

ICICI Bank Ltd vs. JCIT (ITAT Mumbai)

In so far as the issue relating to the claim of depreciation on leased transactions is concerned, the Supreme Court in ICDS vs. CIT 350 ITR 527 had the occasion to consider the question “whether the Assessee is entitled to depreciation on vehicles financed by it which is neither owned by the Assessee nor used by the Assessee?” The Supreme Court after perusing the lease agreement and other related factors held that the lessor is the owner of the vehicles. As an owner, it used the assets in the course of its business satisfying both the requirements of S. 32 of the Act and hence is entitled to claim depreciation. A similar view was taken by the Delhi High Court in Cosmos Films 338 ITR 266 wherein the Delhi High Court considered the implications of S. 19 of Sale of Goods Act, 1930. The Tribunal, Mumbai Bench in the case of Development Credit Bank Ltd has followed the decision of the Supreme Court in the case of ICDS and the decision of Delhi High Court in the case of Cosmos Films and allowed the claim of depreciation. The Tribunal, Mumbai bench, in the case of L&T has considered a similar issue and followed the findings of the Supreme Court in the case of ICDS and also of the co-ordinate bench in the case of Development Credit Bank Ltd and allowed the claim of depreciation on sale of lease back assets. Considering all these judicial decisions in the light of the facts, we direct the AO to allow depreciation

Thursday, May 8, 2014

Australia's jobless rate held steady at 5.8%

In April and came in just below consensus of 5.9%. The number of people in work climbed 14,200, although the participation rate slipped to 64.7% from 64.8%. The increased number of jobs comes after the Reserve Bank of Australia left its benchmark interest rate at a record-low 2.5% this week amid slowing inflation and ahead of expected cuts in government spending.

Chinese trade surprisingly grew in April

As imports increased 0.9% on year after falling 6.6% in March and imports rose 0.8% following a drop of 11.3%. The trade surplus more than doubled to $18.45B from $7.71B and topped forecasts of $13.90B. The readings are in contrast to other data which indicate that China's economy has been slowing and come after a 2.8% fall in the yuan vs the dollar this year.

Wednesday, May 7, 2014

Alibaba filed for an IPO

In the U.S. which is expected to be one of the largest in history. Forecasts on valuation range as high as $245B for the company that earns more revenue than Amazon and eBay combined. Last year, Alibaba handled about $248B in transactions. Yahoo (YHOO) has a 22.6% piece of the Alibaba pie, while SoftBank (OTCPK:SFTBF) holds 34.4%. When Alibaba debuts later this year, it will become the largest Chinese corporation to trade in the U.S.

Rs 1 trillion locked in Reality sectors.Is there way out ?

India's real estate market has been faltering for quite some time as the country's economy has remained under stress. But, now hopes are pinned on the new government. Various real estate stakeholders viz., stakeholders builders, investors, financial institutions, and private equity players are now hoping for improvement in this sector. An article in Mint states that, US$ 16 bn of the PE funds have got locked in hundreds of real estate projects. Not only that, the sector needs an infusion of another US$ 1 bn for completion of these projects. As this sector lacks regulations, even banks have shown less interest in investing in realty projects. Thus, large parts of the projects are now financed through PE players who charge phenomenal interest rates which increase the project costs. These instances have impacted the investors' wealth and thus they are now struggling to take an exit.

This sorry state of affairs in the Indian real estate calls for solid regulations in place. For the real estate sector to revive, the government should seek to streamline the processes. Only a structural change can attract serious, long-term capital. Having said that, one should also note that this is not going to be an overnight task. It will take some time for the government to improve the policy and guidelines which are in the best interest of all the real estate stakeholders.

Gold consumption in China is on the rise.

According to data from the China Gold Association. Jewelry purchases increased 30% to 232.53 metric tons in the first quarter. Despite the increase in consumption, demand for bars fell 44% to 67.95 tons as investors lightened up. Gold production rose 7.3% during the period. Analysts forecast 2014 could be the first year since 2002 that demand for gold in China doesn't increase.

Tuesday, May 6, 2014

Portugal plans to follow Ireland

Portugal exit its international bailout program without taking a precautionary credit line from its lenders, the EU and the IMF. Instead, Portugal will rely on international debt markets for financing. While the exit from the assistance program after three years of harsh austerity marks a turnaround in Portugal's fortunes, economic growth remains fragile, and unemployment and debt high.

Chinese HSBC PMI edged up to 48.1 in April

From 48 in March but came in below the flash figure of 48.3. The reading indicates that factory activity contracted for a fourth consecutive month, although the figure contrasts with official data that shows slight growth. While Beijing has recently introduced additional reform aimed at boosting the economy by promoting more private-sector investment, HSBC believes that "bolder actions will be required to ensure the economy regains its momentum."

The European Commission expects eurozone GDP to grow 1.2%

This year and 1.7% in 2015 following two consecutive years of contraction. The commission cut its inflation forecast to 0.8% for 2014 and 1.2% for next year, although it believes that the probability of deflation is low. "Overall, the outlook has improved, but it remains conditional on continued credible action on several fronts at national and EU levels," says the EC's Marco Buti.

Sunday, May 4, 2014

Eurozone manufacturing PMI increased

To 53.4 in April from 53 in March. All the nations covered indicated factory sector growth, which,  "highlights how the recovery is becoming more broad-based." However, eurozone unemployment remained at a high rate of 11.8% in March. The number of unemployed people fell by 22,000 on month to 18.913M.

Thursday, May 1, 2014

U.K. manufacturing PMI rose to 57.3 in April

From 55.8 in March and comfortably topped consensus of 55.4. However, there was another sharp slowdown in the growth of new orders for investment goods, which is a blow to the hopes of re-balancing the economy away from its reliance on consumers. Still, the pound took a leap after the data was released and was +0.2% at $1.6909 at the time of writing.

China's official manufacturing PMI edged up to 50.4 in April

From 50.3 in March but slightly missed consensus of 50.5. The data indicates that manufacturing is just about expanding and adds to HSBC's flash PMI reading which shows that the sector is contracting. As per economist,"The economy is showing slight improvements due to recent policy measures but there is no sign of a bottoming out."

No.S14A Rule 8D disallowance for investment in shares of susidiaries and jointventures.

JM Financial Limited vs. ACIT (ITAT Mumbai)

In AY 2009-10, the assessee has specifically raised a point before the AO that 97.82% of the investment is in subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. The department has not disputed this fact that out of the total investment about 98% of the investments are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In Godrej & Boyce Mfg. Co it was held that s. 14A(2) does not ifso facto empower the AO to apply the method prescribed by Rule 8D straightaway without considering whether the claim made by the assessee is correct. Also, in Garware Wall Ropes it was held that a disallowance u/s 14A cannot be made if the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Similarly, in Oriental Structural Engineers (approved by the Delhi High Court) it has been held that s. 14A disallowance cannot be made for investment in subsidiaries and SPVs out of commercial expediency

PSU banks' NPAs pose a major risk...

The RBI's agony over the deterioration in quality of assets of PSU banks is well understood. Especially when seen in context of the Indian financial sector as a whole. That the government owned banks corner nearly two thirds of the assets in the banking sector is well known. What is not known is the fact that the PSU banks tower over other financial institutions holding public assets and have a larger share of assets than insurance companies, NBFCs and mutual funds put together. In addition they account for 63.2% of the GDP. Thus a systemic NPA crisis in PSU banks threatens to risk the entire financial sector in India. And the RBI should therefore not just curtail asset slippage but also ensure better management of the PSU banks.

Bank of Japan's latest outlook on prices and growth

The central bank stuck with its inflation forecasts of 1.3% for the fiscal year ending March 2015 and 1.9% the following year. Unveiling its 2017 estimate, the bank saw inflation rising to 2.1% - ahead of its 2% target. The higher inflation forecast might dampen some economist expectations for further bank stimulus this year, but the other half of the BOJ report saw the central bank lowering its GDP growth outlook for this year to 1.1% from 1.4% previously. For the fiscal year ending March 2016, the forecast remained at 1.5%. The yen saw sizable gains against the dollar following the report's release, but those have been trimmed, leaving dollar/yen marginally lower at ¥102.50.

U.K. GDP growth strengthened to its fastest rate

In six years in Q1, climbing to +3.1% on year from +2.7% previously but coming in below expectations of +3.2%. On quarter, GDP grew 0.8%, with growth occurring in three out of the four main industrial groupings in the economy. However, GDP is still 0.6% below its peak in Q1 2008. The pound was flat at $1.6806 at the time of writing after being higher before the data was released.

Entire law on formation of AOP & taxability of off-shore supply & services explained

Linde A. G. vs. DDIT (Delhi High Court)

As regards taxability, the principle of apportionment of income on the basis of territorial nexus is now well accepted. Explanation 1(a) to section 9(1)(i) of the Act also specifies that only that part of income which is attributable to operations in India would be deemed to accrue or arise in India. It necessarily follows that in cases where a contract entails only a part of the operations to be carried on in India, the assessee would not be liable for the part of income that arises from operations conducted outside India. In such a case, the income from the venture would have to be appropriately apportioned. Merely because a project is a turnkey project would not necessarily imply that for the purposes of taxability, the entire contract be considered as an integrated one. Where the equipment and material is manufactured and procured outside India, the income attributable to the supply thereof could only be brought to tax if it is found that the said income therefrom arises through or from a business connection in India. It cannot be concluded that the Contract provides a “business connection” in India and accordingly, the Offshore Supplies cannot be brought to tax under the Act (Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC) and Hyundai Heavy Industries 291 ITR 482 (SC) followed)