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Tuesday, October 28, 2014

Softbank has agreed to buy a $627M stake in Indian online retailer Snapdeal, making it the largest investor in the e-commerce firm. "We believe India is at a turning point in its development and have confidence that India will grow strongly over the next decade," says Softbank (OTCPK:SFTBY) chairman and CEO Masayoshi Son. The deal aims to strengthen the Japanese telecom group's presence in India and leverage synergies with its network of Internet companies around the world.

France promise to cut Budget defecit & keep it close to 4.3% of GDP

Hoping to avoid slowdown in EU,France says it will cut its budget deficit next year by an additional €3.6B, boosting the country’s structural adjustment efforts to above 0.5%. Until recently, France committed to reduce its budget deficit to 3% of GDP by next year, and was supposed to cut its structural deficit target by 0.8 percentage points, as outlined by EU rules. However, Paris said earlier this month that next year’s budget deficit would be closer to 4.3% of GDP, and promised a mere 0.2 point improvement on its structural deficit target.

Thursday, October 23, 2014

The IMF is urging Japan to go ahead with its second tax hike.

Japan needs to go ahead with its second tax hike next year in order to maintain credibility of its fiscal framework. Japan's national sales tax rose to 8% from 5% in April and the government is due to decide by year-end whether to proceed with a second tax increase to 10%. The IMF expects Japan's economy to grow by an annualized 3.4% in July-September, rebounding from its deepest slump since the 2009 global financial crisis last quarter following April's tax hike.

France & Italy Budget plans risk breaching EU rules.

Following the submission of euro zone countries' budgets to Brussels for review last week, France and Italy will likely hear back today that their budget plans risk breaching EU rules, FT reports. France is required to get its deficit back under the EU ceiling of 3% of economic output by next year but its plan ignored that commitment. Italy must modify its structural budget into balance by 2015, as its public debt currently sits at 135% of GDP, far above the EU ceiling of 60%.

Tuesday, October 21, 2014

China's economic growth slowed in the third quarter

China's economic growth slowed in the third quarter to its weakest in more than five years as it battled a slumping real-estate market and weak domestic demand and industrial production. The world's second-largest economy grew 7.3% between July and September from a year earlier, slightly above the 7.2% forecast by analysts but slowing from 7.5% in Q2. The GDP data reinforces expectations that Beijing will need to unleash further stimulus to avert a sharper slowdown.

Monday, October 20, 2014

Fraud in determination of LIBOR/ EURIBOR no reason to discard it as ALP

Vijay Electricals Limited vs. ACIT (ITAT Hyderabad)

The department claimed that in determining the ALP of an international transaction of loan by the assessee to its AE, LIBOR could not be treated as the ALP as there was a “fraud” regarding fixation of ‘LIBOR’ as evidenced by the fact that Barclays Bank & UBS were fined by the United States Department of Justice for attempted manipulation of the LIBOR and Euribor rates and ultimately UBS agreed to pay to regulators. HELD by the Tribunal:
Even though Revenue has raised additional grounds on the reason that LIBOR cannot be considered as a basis as it was fraudulently fixed, we are not in a position to agree with the additional grounds. Whether that was fraudulently fixed or not is not a consideration now, as it was the basis for all international transactions at that point of time as far as borrowing of funds are concerned. In fact, assessee’s A.E. also obtained loan from a local branch at LIBOR plus basis only. Accordingly, assessee has justified the interest on the rate prevalent at that relevant point of time. Even though there may be same fraud involved in fixing the rate of international rates, as it became basis for subsequent international transactions at that point of time, We do not see any reason to differ from the LIBOR plus basis points for T.P. comparison. The Revenue cannot contend that rate of interest prevailing in India has to be adopted as the rates in India cannot be compared while loans are obtained abroad, even though funds are flown from India. What is required to be seen is whether the transaction is at arms length or not. Since, the international loan rates are based on LIBOR, we do not see any reason for differing from the Ld. CIT(A) order, which itself based on Coordinate Bench decisions that LIBOR plus basis points is at arm’s length.

S. 43(5)(a): Loss on foreign currency forward contracts by a manufacturer/ exporter is a “speculation loss” and not a “hedging loss”

Araska Diamond Pvt. Ltd vs. ACIT (ITAT Mumbai)

In order that forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him. In other words raw material in respect of which the assessee has entered into forward transactions must be the same raw material which is used by him in his manufacturing business. We find that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. As the assessee is dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5) of the Act. (Contra view in Intergold (I) Ltd, Bombay Diamond Co. Ltd, Friends and Friends Shipping & Badridas Gauridu distinguished)

Thursday, October 16, 2014

Oil prices fall off again

With more forecasts out indicating weak global demand. The American Petroleum Institute reported a 10.2M barrel increase in the stockpile of U.S. crude oil, while a U.S. Energy Information Administration tally due out later today is expected to show a 2.2M barrel increase.

Wednesday, October 15, 2014

No disallowance u/s 14A & Rule 8D can be made towards exempt income earned on strategic investments

Interglobe Enterprises Ltd vs. DCIT (ITAT Delhi)

The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. Strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The disallowance under Rule 8D(iii) has to be computed by excluding the value of strategic investments. No disallowance under Rule 8D(i) and 8D(ii) is also warranted (REI Agro (ITAT Kol) followed)

Oil prices have continued to slide today

Oil prices slide while Asian shares rose and European stocks have fallen. German 10-year Bunds have benefited from safe-haven status and yields have touched a fresh record low of 0.814%. The U.K.'s FTSE 100 has led the decliners in Europe.

Chinese inflation dropped to an almost five-year low in September

Chinese inflation tumbling to 1.6% on year from 2% in August and coming in below consensus of 1.7%. Factory gate prices (PPI) slumped 1.8% vs -1.2% previously. "You got falling oil prices, falling house prices, excess capacity in the industry and an appreciating currency," "So everything is pointing to deflation getting a whole lot worse before it can get better."

Monday, October 13, 2014

Vodafone Transfer Pricing Verdict: High Court Mocks Dept’s 'Unique' Interpreta​tion Of Law

Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)
Neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act.
The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed that the transfer pricing provisions did not apply as there was no income arising to it. The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s 144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. The High Court directed the DRP to decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. Upon the DRP’s decision, the assessee filed another Writ Petition. HELD by the High Court allowing the Petition:
(1) A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act.
(2) The word income for the purpose of the Act has a well understood meaning as defined in s. 2(24) of the Act. The amounts received on issue of share capital including the premium is undoubtedly on capital account. Share premium have been made taxable by a legal fiction u/s 56(2)(viib) of the Act and the same is enumerated as Income in s. 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);
(3) In case of taxing statutes, in the absence of the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it. It was not open to the DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word ‘Income';
(4) The other basis in the impugned order, namely that as a consequence of under valuation of shares, there is an impact on potential income and that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium.
(5) Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/consideration between AEs. The entire consideration received would not be a subject-matter of taxation;
(6) The department’s method of interpretation indeed is a unique way of reading a provision i.e. to omit words in the Section. This manner of reading a provision by ignoring/rejecting certain words without any finding that in the absence of so rejecting, the provision would become unworkable, is certainly not a permitted mode of interpretation. It would lead to burial of the settled legal position that a provision should be read as a whole, without rejecting and/or adding words thereto. This rejecting of words in a statute to achieve a predetermined objective is not permissible. This would amount to redrafting the legislation which is beyond/outside the jurisdiction of Courts.
(7) In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:- (a) subject of tax; (b) person liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above;
(8) The contention that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place is not acceptable because the entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax.
(9) W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within its scope the provisions of s. 56(2) (vii-b) of the Act. This indicates the intent of the Parliament to tax issue of shares to a resident, when the issue price is above its fair market value. In the instant case, the Revenue’s case is that the issue price of equity share is below the fair market value of the shares issued to a non-resident. Thus Parliament has consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad.
(10) Consequently, the issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case.

Thursday, October 9, 2014

Producer prices in the EU continued to fall in August

With Eurostat displaying new figures of a 0.1% drop from July. Goods leaving the eurozone's factory gates were down 1.4% from August 2013. The fall indicates that the currency area is set to remain mired in a state of very low inflation, weakening the eurozone's fragile economy even further. The producer price figures were released as members of the ECB's governing council meet in Naples, Italy, to decide upon further stimulus measures.

Mario Draghi is set to push the ECB to buy junk rated bonds.

To buy junk-rated Greek and Cypriot bank loans, a move that will likely increase tensions between Germany and the bank. The ECB's executive board will propose that existing requirements on the quality of assets accepted by the central bank be relaxed to allow for the purchase of safer slices of Greek and Cypriot ABS. Despite Germany's opposition, the country may be outvoted if other eurozone members choose to back it.