Crude-oil futures fell in Asian trading hours today, due to waning concerns of Iraqi oil supply for the near term. On the New York Mercantile Exchange, light, sweet crude futures for delivery in August traded at $105.45 a barrel at 4:52 GMT, down $0.29 in the Globex electronic session. August Brent crude also fell $0.29 to hit a low of $113.01 a barrel. Brent futures are still up 3.4% in June

A techinical default for Argentina

Argentina will enter a state of technical default today, as the $832M payment given to holders of the country’s restructured bonds was declared illegal this past Friday. The showdown continues as the New York judge presiding over the case insists the holdout creditors must be paid $1.5B before any other payments can be made. Argentina will still have a 30-day grace period until it enters a formal default.

An extension is now being discussed between Argentina and holdout investors, allowing the country to pay other bondholders first if the litigation between the two makes good progress before July 30. Without a suspension on the order or a court stay, Argentina will have to pay the $1.3B it owes to holdout creditors, before making another $900M bond payment next Monday. A 30-day grace period will take place before an actual default can be declared.

The $96B tobacco bond market is declining

The $96B tobacco bond market is continuing its decline, as most Americans have quit smoking at a faster rate than estimated in the previous decade - when most of the bonds were sold. E-cigarettes have been a major factor to the recent decrease, along with prior declines due to public smoking bans and new excise taxes. A forecast last month from Moody's Investors Service estimates 65-80% of tobacco bonds are headed toward default.

Reserve Bank of India(RBI) permits banks to engage in proprietary trading

The RBI once again permitted banks to engage in proprietary trading in the exchange traded currency derivatives segment, overturning a ban that came into effect in July 2013 in the wake of sudden Rupee weakening.    

French manufacturing & services slow down

French manufacturing and services contracted in June, the second consecutive month of decline. The manufacturing PMI fell to 47.8 from 49.6 and services PMI dropped to 48.2 from 49.1.   

US Fed continues its tapering program

The Federal Open Market Committee (FOMC) trimmed its bond buying program by another $10 bn for the fifth straight month, to $35 bn per month.

Siemens & Mitsubishi Improving their offer for Alstom

Siemens (OTCPK:SIEGY) and Mitsubishi (OTCPK:MHVYF) will now pay €8.2B ($11.2B) in cash, in place of their last bid of €7B. This will value Alstom (OTCPK:ALSMY) at €14.6B, which is well above GE's (GE) offer of €12.4B. Siemens has also expressed it is willing from the start to enter a mobility management joint venture with Alstom. Mitsubishi is also willing to purchase a 40% stake in the energy business, raising its cash payment €3.9B from €3.1B.

SEBI's step to revive primary market

The IPO market is on a death bed. Hardly any company is tapping the primary market to raise money. So, in order to revive the same SEBI has decided to introduce a slew of measures. These include having reservation and discount for retail investors in Offer for Sale (OFS) mechanism as well as hiking the minimum public shareholding for PSUs. Reservation for retail investors in OFS will increase their participation, while the increase in PSU float to 25% (from 10% currently) will attract investor interest.

While these measures are likely to give a new life to the dormant primary market, we feel that along with such steps, the market watchdog must also tighten its screws over issues ranging from price rigging to market manipulation.If SEBI tightens its screws on regulatory matters, the confidence of investors in the markets would increase. And this would lead to increased retail participation in equity markets.

Crude futures in Asia climbed higher

Crude futures in Asia climbed higher today, after data was revealed showing a 579k barrel decrease in U.S. weekly oil stockpiles, and a growing crisis in Iraq. Still, U.S. domestic crude production is currently its highest in 28 years. The Obama administration is also signaling that Iraqi Prime Minister should step down, stating he is unable to stabilize the region.

Euro Zone Bond yields returned to historic low

Euro zone bond yields returned to historic lows, after the Fed displayed a dovish outlook on its monetary policy yesterday. Earlier this week, longer-dated euro zone bonds sold off as higher-than-expected U.S. consumer price inflation put forward the possibility the Fed may raise rates. Italian and Spanish 10-year yields fell 7 basis points to 2.78% and 2.69% respectively. Yields on top-rated euro zone bonds were 3-4 bps lower.

Circumstances leading to formation of PE and estimation of profit attributable therto under Rule 10 explained. Even foreign assessees are liable for interest u/s 234B

Nortel Networks India International Inc vs. DDIT (ITAT Delhi)

 

Nortel Networks India Pvt. Ltd, an Indian company, entered into a contract with Reliance Infocom for supply, installation, testing, commissioning of hardware equipment. Immediately thereafter, the Indian company assigned the supply part of the contract to the assessee, a USA company, without any consideration. The Indian company retained the other obligations of the contract. The assessee purchased the equipment from a group company, Nortel Canada, and supplied them to Reliance Infocom. The assessee claimed that it had suffered a loss from the transaction. The AO took the view that the assessee did not have any manufacturing or trading infrastructure or financial or technological capability of its own and that it was only a paper company incorporated for the sole purpose of evading taxes in India. He accordingly held that the Indian company constituted a PE of the assessee and assessed its income under Rule 10 by recasting the global profits to arrive at the percentage of profit likely to have accrued from the Indian operations. He adopted the global gross profit margin percentage as 42.6% and allowed 5% of the turnover as deduction pertaining to other selling general and marketing expenses. The CIT(A) upheld the stand of the AO in principle but held that only 50% of such profits had to be considered to be attributable to the PE. On appeal by the assessee to the Tribunal HELD dismissing the appeal:

 

(i) The contract entered between the assessee and Reliance Infocom is a turnkey contract, indivisible contract for supply, installation, testing, commissioning etc. Nortel India has undertaken the responsibility for negotiating and securing the contracts. The contract for installation and commissioning was also undertaken by Nortel India. These arrangements show that assessee is getting its work executed through Nortel India. The assessee is merely a shadow company of Nortel Group and for all practical purposes, all the facilities and services available to the Nortel Group of Companies are equally available to the assessee. The hardware supplied through it is installed by Nortel India. The contracts were pre-negotiated by Nortel India. Thus, Nortel India is a fixed place of the business and dependent agent PE of the assessee. The Liaison Office of Nortel Canada is rendering all kinds of services to all the group companies including the assessee. The LO building pertaining to Nortel Canada constitutes fixed place PE of the assessee. The assesee’s contention that sales were completed overseas and installation was done under a separate contract is not acceptable. The compensation which has been represented as a sale consideration for the equipment represents the payment for works contract where entire installation and customisation has been carried out in India;

 

(ii) As regards the estimation of profits attributable to the Indian operations, the accounts of the assessee have no sanctity as they are not audited. The gross trading loss incurred from transaction within the group cannot be explained except for the reason that it has been designed as such to avoid taxation in India. The accounts of the Nortel Group would give a true and correct picture of the profit of the assessee. Though in other cases such as Nokia, Rolls Royce, ZTE Corporation & Huawei Technologies, the profit was limited to 20% to 35%, that is on the facts of those cases. In the present case, from the gross profit computed by reference to the rate applicable to the global accounts of the assessee, further substantial deduction has been allowed for selling general and marketing expenses and also R&D expenses. Thereafter, 50% of the resultant figure has been attributed to PE. This meets the ends of justice;

 

(iii) As regards the levy of interest u/s 234B, though the assessee is a non-resident whose income is subject to TDS u/s 195, the assessee had always been holding the position that receipts are not taxable in India and so it cannot be absolved from the liability to pay interest u/s 234B (Jacabs Civil Inc 330 ITR 578 (Del) distinguished; Alcatel Lucent (Del) followed)

 

The European Central Bank has expressed its concerns regarding foreign currency benchmarks, stating that relying on one set of data to compile a benchmark cannot guarantee its reliability. The ECB's concerns are related to an EU proposed law to regulate market benchmarks after banks were fined for fixing the Libor rate. Regulators are also now probing related accusations regarding the currency markets.

S&P lowered Argentina's long term Foreign Currency rating to CCC-

Argentina's long-term foreign currency rating of CCC+ has been lowered by Standard & Poor's to CCC-, due to an increased risk of default on the country's foreign currency debt. However, S&P affirmed the country's short-term foreign currency rating at C, saying that the court ruling was not likely to affect the government's service on local currency debt.

The IMF has reduced its 2014 US economic growth forecast

The International Monetary Fund has reduced its 2014 U.S economic growth forecast to 2% from the 2.8% it predicted in April, due to a weak first quarter, although the fund has maintained its 3% growth outlook for 2015. Markets are predicting the Fed to start raising rates in the middle of next year, although the IMF related that it is not certain about the expected increase. Rates have been near zero since late 2008.

ECB Negative Interest rates policy leads to increase in carry trades in euro

The European Central Bank's cut to its main lending rate and institution of negative interest rates earlier this month has spelled trouble for the euro. After hitting a 2-1/2 year high in early June, the euro has declined over 3%, due to monetary easing and increase in carry trades. Data released last week shows the net short position for the euro/dollar reaching its highest level since late May 2013.

Poor Monsoon will have significant impact on India's GDP.

While the South West monsoons have already made their presence felt in some parts of India abating worries of a delayed rainfall, fears of El Nino have still not subsided completely. Many forecasts continue to claim that El Nino will disrupt India's monsoon this season. It may be noted that El Nino phenomenon has occurred thrice in India since 2004 resulting in below average rainfall in the respective years. Out of these three occasions India faced a drought like situation twice.

Thus, a forecast of El Nino this year sounds a grave concern for India. Particularly because India is an agrarian economy. A below average rainfall can hurt agriculture growth in India and thus put GDP growth under pressure. Further, fall in agricultural growth can also lead to a decline in farm income. This will impact the rural spending as disposable incomes decline. Lastly, poor rainfall may also lead to a spiral in food prices. All these factors indicate how a deficient monsoon could spell a death knell for Indian economy. That is why it is important that the government focuses on ramping up infrastructure in agriculture; particularly by bringing more of the land under irrigation

China has surpassed U.S.as the largest issuer of corporate debt.

As the world’s largest issuer of corporate debt, according to a report released today by S&P. However, S&P approximates that around one-quarter to one-third of China’s corporate debt comes from the country’s shadow banking sector - non-bank lending that caters to borrowers who have difficulty obtaining financing. In turn, this raises red flags of the ability for Chinese companies to make interest payments and repay their bank loans.

Eight years have passed since the subprime crisis surfaced in the US. And by now it is fading from our memories. However, China seems to be preparing to remind us of it. As per an article in Bloomberg, the current trend of 'zero down payment 'in China is a scary reminder of the subprime bubble. The ghost cities in China are a reflection of the frothy property market. However, in a bid to remove the signs of glut in property markets, the housing financers are easing up down payment norms. The authorities defend the decision citing the need to offer easy payment terms to students and fresh graduates. However, loosening down-payment requirements could erode China's financial stability. Banks in the country already have a shoddy track record in sustaining asset quality. In addition by allowing realty companies to flourish, the economy could be skirting with a banking crisis in the years to come. At a time when China is headed towards the weakest growth in 24 years, a subprime crisis-of-sorts could lead the economy to a very hard landing.

Indian IIP grew after two months of contraction

Output as measured by the index of industrial production grew by 3.4% in April after two consecutive months of contraction. Manufacturing which constitutes 75% of the index grew by 2.6%.    

Indian CPI for May at three month low

Consumer price inflation for May came in at a three-month low of 8.28%, lower than the 8.59% in April. Core inflation stood at 7.72%, while food inflation was 9.56%.    

OPEC has kept its output unchanged to 30MBPD

OPEC has announced it has not changed its output target of 30M barrels a day, despite a higher demand forecast of 30.4M barrels for the rest of the year, stating the rest of demand will be covered by growth outside the group. Production is still facing challenges though, with turmoil enveloping Libyan output, Iran sanctions, and political unrest in Iraq.

The CBO forecasts a full year deficit of $492B

The Treasury Department says the total  U.S. government budget deficit for May was $130B. The announcement comes after a big $106.9B surplus in April caused by the inflow of tax revenues. Although the budget for the first eight months is still down from the same period in 2013, the current shortage still totals $436.4B. The Congressional Budget Office forecasts a full year deficit of $492B ending September 30.

If you wish to buy a car, but cannot afford to pay the monthly installment, what's the way out? Extending the loan period seems like one solution. This is what seems to be happening in the US right now. As per Moneynews, a growing number of Americans are looking to extend their loan terms for buying vehicles to as many as 11 to 12 years! As reported by Wall Street Cheat Sheet, one-fourth of new vehicle loans ranged from 73 to 84 months, up 27.6 % from a year earlier. In any way you look at this, it seems like a cause of concern and one that could lead to being a bubble situation. Especially considering that such buyers would end up paying a lot more in the form of interest payment; and could possibly face issues when it comes to trading their vehicles for a new model! Not to mention, this route is mainly being taken by people who don't have the best of credit records.

The new government seems to be taking some baby steps towards some crucial reforms. There is some good news regarding the coal sector. The sector may be opened to private players with conditions attached. The government is considering a proposal to auction mining leases to private bidders. This would include the leases to those areas that Coal India is unable to mine. The Coal ministry is also developing a long term plan to reform Coal India by 2030. This would be in line with the new governments view to reform PSUs instead of privatizing them.

While these steps will certainly help, we believe that if the government were to go in for reforms in any sector, it should be decisive. Coal India is a cash rich PSU that enjoys a monopoly. The government should consider ending its monopoly. Participation of private companies with a proven track record into the coal mining sector should be allowed. This will lead to an increase in the supply of this important commodity in the local market. Indian power companies will then not need to import a commodity that it has in abundance.

Asian stocks hit their highest levels

In nearly three years today, after the Dow Jones and S&P 500 ended at new records this past Friday. The Nikkei stock average is up by over 0.3%, and Hong Kong up 0.7%. The yuan rose after the People's Bank of China unexpectedly fixed its daily midpoint higher against the dollar for the second straight session, leading to an additional rise in other Asian currencies.

RBI has hiked the LRS Limit to US$125000 from the currentUS$75000

As the wave of liquidity around the world has increased, there has been growing interest in investing in foreign listed stocks. Given that the stock markets in the US appear over valued in relation to the economic fundamentals there, investors have been looking at other options. With more money in their hands, the risk appetites for better returns have also risen. For instance, there seems to be a lot of interest of late in Chinese and Russian stocks. And now India too is toying with the idea of letting Indians invest abroad. As per an article in the Business Standard, the RBI has hiked the Liberalised Remittance Scheme (LRS) limit to US$ 125,000 from the current US$ 75,000. But Indians should not get lured by the prospects of foreign stocks just because they seem to be the flavour among global investors. Just like they would do for stocks back home, Indian investors will need to do their homework in terms of understanding the businesses and valuations of these companies before they take the decision of investing in them.

Interest rates in the emerging world stay high

While the interest rates in the West remain low, those in the BRIC nations have been quite firm. while the rich world has been grappling with deflation, for these emerging economies especially India, inflation remains a key concern. In India at least, high inflation has been a problem for quite some time now. And the RBI is in no mood to ease rates unless this comes down within acceptable levels. If the Modi government gets its development agenda rolling and many of the supply side bottlenecks are done away with, then there are very good chances of inflation cooling off. And this will be a good enough signal for the RBI to also start reducing interest rates.

 

Bank of America is in talks to pay at least $12B

To settle mortgage-related probes from the Department of Justice and various states. The DOJ was previously reported to be seeking more than $13B from BofA (BAC) over its mortgage lending - generally over loans tied to Countrywide and Merrill Lynch. The bank has already reached a $9.5B settlement with the Federal Housing Finance Agency.

Bundesbank has raised its growth forecast for Germany

Expecting a growth of 1.9% this year, replacing the December forecast of 1.7%. As the euro zone's largest economy, Germany has been looked to as a source of euro zone recovery, especially given the ECB's cut yesterday to the deposit rate below zero. The Bundesbank growth forecasts for 2015 and 2016 are unchanged at 2% and 1.8% respectively.

Expl to s. 73: Speculation loss on transactions in derivatives can be set off against the gains of delivery shares

CIT vs. Baljeet Securities Pvt. Ltd (Calcutta High Court)

Under the Explanation to s. 73 where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of the section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Therefore, the entire transaction carried out by the assessee was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares.

A transfer of shares under a family arrangement is for a determinable “consideration” & is not “voluntary”. Consequently, the shares are not received under a “gift” & the transferee cannot claim benefit of cost, and holding period, of the transferor

ACIT vs. Bilakhia Holdings P. Ltd (ITAT Ahmedabad)

The members of the Bilakhia family entered into a deed of family arrangement with a view to consolidate and equalize values of the assets held by each of the parties. Pursuance to the said family arrangement, the family members transferred the shares of Nestle India Ltd and Hindustan Lever Ltd held by them as investment to the assessee, an investment company in which the individual members of the family had equal interest. The assessee sold the shares and claimed that as it had acquired the shares vide a “gift”, in computing the capital gain, the cost of acquisition of the shares to, and the period of holding by, the transferors, had to be considered. The AO rejected the claim though the CIT(A) accepted it. On appeal by the department to the Tribunal HELD allowing the appeal:

(i) On the issue as to whether the shares received on family arrangement is pursuant to a “gift”, s. 122 of the Transfer of Property Act 1882 provides that a transfer of moveable or immovable property can be treated as a gift only if the same is made voluntarily and without any consideration. It cannot be said that a family arrangement is “without consideration”. In CWT vs. HH Vijayaba, Dowgner Maharani Saheb of Bhavnagar Palace 117 ITR 784 (SC) it was held that a family settlement or family arrangement which is to buy peace is for good consideration and creates an enforceable agreement between the parties. Consequently it cannot be said that a family arrangement is without consideration and a “gift”;

(ii) On the issue as to whether this consideration can be measured in money or monies worth, the purpose of the family arrangement was to equalize the holdings between the respective families of three brothers. Therefore, it cannot be said that consideration for transfer of shares cannot be measured in terms of money or monies worth. The equalization of wealth has only monetary connotation. To avoid disputes cannot be said to be without monetary consideration as it is common knowledge that family disputes ruin the family financially. The family disputes are being settled in monetary terms by resorting to arbitration and in case such settlements is not done, matter travels to the court and the family suffers heavily not only mentally but also financially. Thus, it cannot be said that the consideration for transfer of shares was not for monetary consideration;

(iii) On the issue as to whether the receipt of shares under the family arrangement was “voluntary” or not, the term “voluntary” is defined to mean “free choice; done with free will; without any compulsion ..”. The family arrangement cannot be said to be voluntary because it was enforceable and binding on the parties and with the purpose of equalization of wealth of the family members, which had monetary connotation.

Gold investors are a concerned lot these days. The price of the yellow metal has been in a down trend recently. In the month of May, the gold price fell by about 10%. The main reason for this correction was the Reserve Bank of India's (RBI) decision to ease gold import norms. However, there is more negative news in store. Keeping in mind the fall in global gold prices too, the Indian government has cut the import tariff value on gold from US$ 424 per 10 grams to US$ 408 per 10 grams. The import tariff value is the base price at which the customs duty on gold is calculated to prevent under-invoicing. Thus expectations are high that the new government will cut the import duty on gold in the upcoming budget. These measures would certainly result in more gold imports into the country.

Also, the months from June to September have traditionally witnessed weak demand for gold. All these factors have led many market participants to conclude that the price could fall another 5-10% over the next one to two months. Should these factors affect investors' allocation to Gold'? We don't think so. Gold should form 10-15% of an investor's portfolio as it is an effective portfolio diversifier and acts as a good hedge against inflation. Gold is a good long term investment and investors should not speculate on the price based on short term factors.

Euro zone flash inflation data for May is due today, with the consensus being a 0.7% rise year-on-year. The numbers are expected to reinforce the case for a heavy monetary stimulus from the European Central Bank. Barclays (BCS), RBS (RBS) and JPMorgan (JPM) predict an annual inflation reading of 0.5%, far below the ECB's target of 2%. A softer reading will also boost the chances of the ECB loosening its policy towards negative deposit rates.

Municipal-bond prices have soared so far in 2014

Bond prices have soared so far in 2014,compared to the same time one year ago. 2013 was the market's worst year in almost two decades, after registering losses nationwide - ranging from Detroit's municipal bankruptcy-protection filing to pension costs in Illinois. The revival of the $3.7T muni-market comes as bond buyers attempt to find higher returns amid dropping U.S. interest rates. Yields on municipal debt fell to 2.325% this past Wednesday - their lowest in almost a year.