Greek stocks and bonds surged yesterday, with Athens' main stock exchange closing almost 10% higher on the day after eurozone financial ministers approved a four-month extension to the country's bailout program. Although the list of proposals were accepted, the ministers warned that the reforms must be expanded in detail before new bailout funding would be released. Athens' ATG stock index +0.1%.

China's factory sector edged up to a four month high in February.

China's factory sector edged up but export orders shrank at their fastest rate in 20 months, painting a gloomy outlook that argues for more policy support. The flash HSBC/Markit PMI crept up to 50.1 (just above contraction) in February, while the new export orders sub-index dropped three points to 47.1, the sharpest rate of contraction since June 2013. Meanwhile, Hong Kong's GDP was reported to have slowed to 2.3% in 2014 and weakened to 0.4% in the fourth quarter as pro-democracy protests froze parts of the city.

Bonds rally after yellen revive market expectations for mid year interest hike

Treasury bonds were boosted on Monday, following the release of somewhat disappointing U.S. housing data.

U.S. equities rose and bond yields fell after U.S. Federal Reserve Chair Janet Yellen said on Tuesday it would be several months before the Fed expects to boost interest rates, while European equity markets gained after Greece locked in a four-month extension of its financial rescue programme.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.070%, compared with 2.136% on Friday. Yields fall as bond prices rise. The greenback jumped initially but paired gains and was down 0.1 percent against a basket of currencies (.DXY).

Yellen is scheduled to testify before the Senate banking committee in her semi-annual report on monetary policy today, and will appear before the House Financial Services Committee on Wednesday.

Japan's Nikkei 225 saw its record close since April 2000

Japan's Nikkei 225 Stock Average extended 15-year highs today after U.S. equity gauges climbed to records following Greece's provisional deal on its bailout program. "The debt deal is giving comfort to the market,"as investors' risk appetite is mainly due to Japanese shares' attractive valuations. The Nikkei added 0.7% to 18,466.92 in Tokyo, its highest close since April 2000.

India's January trade deficit

India's trade deficit for the month of January came in at a 11-month low of $8.3 billion. Exports contracted by 11.3% over the year to $23.8 billion and imports declined by 11.4% to 32.2 billion. The trade deficit in January of 2014 was $9.45 billion.

RBI modifies gold import norms

The Reserve Bank of India (RBI) allowed nominated banks to import gold on a consignment basis. All domestic sale of gold however, will be against upfront payment only. Moreover banks are free to grant gold loans.

 

The central bank also clarified that the 80:20 rule will continue to apply in case of un-utilized gold imported before November 28, 2014.

 

Positive signals from developed markets propped up world markets

The major global stock markets witnessed gains during the week. After various discussions, the Eurozone Finance ministers approved a four-month extension on Greece's bailout on Friday. Though the extension will not be final until Greece government makes some submissions. This deal is expected to eliminate the immediate risk of Greece economy running out of money.

The stock markets in US were up by 0.7% during the week, and ended at record highs on Friday. Lifted by depreciating yen, the Japan markets (up 2.3%) surged to 15-year high levels. After witnessing some rally, the oil prices tumbled during the week on the back of higher supply from US. Back home, the Indian stock markets ended the week on a positive note. While the Indian indices continued to surge during the week, Friday witnessed selling activity, weighed down by oil and gas stocks.

Germany and France reported strong PMI figures

Germany and France picked up momentum in February, boosting eurozone PMI to 53.5 this month, up from January's 52.6. Markit's German composite Purchasing Managers Index rose to its best in seven months, increasing to 54.3 from 53.5, while France also reported strong figures. The country's composite services PMI score rose to 52.2 from 49.3 in January, its strongest gain in three and a half years.

Japanese exports surged in January

Japanese exports surged, providing more evidence that the world's third largest economy is slowly climbing out of recession. Exports rose by 17% on year last month, their biggest jump since late 2013, while imports in January contracted 9% Y/Y. Helped by gains in financial and shipping companies, Tokyo’s Nikkei touched its highest level since May 2000 during the session, climbing 0.6% to 18,307.25.

S. 147: Verdict of Bombay High Court in The Indian Hume Pipe Co Ltd vs. ACIT 348 ITR 439 that “full & true disclosure of material facts” means “specific” disclosure of “each” fact nullified

The Indian Hume Pipe Co Ltd vs. ACIT (Supreme Court)

The assessee entered into an agreement in July 2001 for sale of development rights for Rs.39 crore. The transfer was in December 2003. The assessee computed LTCG of Rs. 23.19 crore. The assessee invested in eligible bonds between Feb & June 2002 (after the agreement to sell but before the transfer) and claimed exemption u/s 54EC. During the assessment proceedings, the AO asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy each of the s. 54EC bonds (which gave the dates of investments) was also furnished. The AO allowed the deduction as claimed. After the expiry of 4 years from the end of the assessment year, the AO issued a notice u/s 148 claiming that as the investments were made prior to the date of transfer (Dec 2003), s. 54EC deduction was not admissible. The assessee filed a Writ Petition to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts. The High Court (348 ITR 439) dismissed the Writ on the ground that (i) “Full and true disclosure of material facts” means that the disclosure should not be garbled or hidden in the crevices of the documentary material which has been filed by the assessee with the AO. The assessee must act with candor. A full disclosure is a disclosure of all material facts which does not contain any hidden material or suppression of fact. It must be truthful in all respects and (ii) On facts, though the AO enquired into the matter and the assessee furnished a copy of the s. 54EC bonds (from which the dates of allotment/ investment were evident), there was no (specific) reference by the assessee to the dates on which the amounts were invested in the s. 54EC bonds. It was also held that it was evident that the AO had not applied his mind to the issue of s. 54EC exemption and that the AO was justified in reopening the assessment. On a SLP filed by the assessee to the Supreme Court HELD by the Supreme Court:

India's Retail Inflation Is Stable At 5% YoY For January 2015;

Consumer inflation continued to be stable at 5.1% in January 2015 (year-on-year), against previous month's inflation of 5% YoY, while core inflation came in at 3.9%. Food inflation inched up, while fuel and housing experienced slower inflation.

Core-inflation (inflation excluding food & fuel) continued to trend downwards - at 3.9% YoY during the month, against 5.2% in Dec'14.

Source: MOSPI

January inflation print should be comfortable news for the inflation-targeted central bank, as it remains well below the target of 8% set for Jan'2015. The new series of CPI data was one of the key data points, the RBI was looking for, as stated in the previous monetary policy statement. The governor had stated that the central bank is comfortable with real policy rates in the range of 1.5%-2%. Hence we believe that, the current month inflation number provides room for the RBI to cut rates. We reiterate our view of 25bps rate policy rate cut in March 2015.

S. 43(5): Transaction of call/put options in foreign currency are "derivatives" and loss suffered therein is not a "speculation" loss

IVF Advisors Private Limited vs. ACIT (ITAT Mumbai)

“Derivatives” include foreign currency call option/ put option. These transactions are of derivative markets and cannot be termed as speculative in nature

Transfer Pricing: Dept is not entitled to challenge the ITAT's decision to determine the interest rate ALP of funds advanced to AE as per Euribor if the earlier ITAT judgements relied upon by ITAT have not been challenged by the Dept

CIT vs. Tata Autocomp Systems Ltd (Bombay High Court)

The assessee advanced funds to its wholly owned subsidiary in Germany on interest-free terms. The TPO held that the transaction was an “international transaction” and held that the assessee ought to have received interest at 10.25% being the lending rate charged by the banks in India (Arms length price). The DRP enhanced the rate of interest to 12%. On appeal, the Tribunal followed its earlier view in VVF Ltd. Vs. DCIT (ITA No.673/Mum/06) and DCIT Vs. Tech Mahindra Ltd (46 SOT 141) and held that as the amount was advanced to an AE in Germany, the ALP rate of the interest had to be determined by adopting the EURIBOR rate of interest i.e. rates prevailing in Europe. The Department challenged the said finding of the Tribunal in the High Court on the basis that the EURIBOR does not govern the monetary markets or interest rates in India, which is the residence country of assessee and EURIBOR rate is not applicable to the loans for which foreign currency has to be purchased by the Lender. HELD by the High Court dismissing the appeal:

Arcelor Mittal warned this morning of lower profits in 2015 but surprised the market by managing to cut its debt to the lowest level since the company was created in 2006. The steelmaker said it expects core profits to drop to between $6.5B-$7B in 2015, from $7.2B in 2014, as dwindling prices of iron ore dent a recovery in steel demand. Despite a 5% decline in Q4 profit, ArcelorMittal (NYSE:MT) posted a $1.1B net loss for 2014, an improvement on a $2.5B net loss a year ago. MT +1.9% premarket.

European stocks are on the decline

Stocks decline after Greek PM Alexis Tsipras vowed to roll back austerity measures yesterday and stressed that his country would not be asking for an extension to its current bailout. The news was enough to bring down Athens' ATG stock index 5.6%, following European markets, which are mostly in the red. S&P cut Greece's sovereign debt rating to B- from B on Friday, while Moody's placed its Caa1 rating on review for downgrade.

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

IFB Agro Industries Ltd vs. JCIT (ITAT Kolkata)

The assessee received an inter-corporate deposit of Rs.11.20 cr from IFB Automotive Pvt. Ltd, a company in which it held 18% of the shares. The AO and CIT(A) held that the said ICD constituted “loans and advances” and was assessable as “deemed dividend” in the assessee’s hands u/s 2(22)(e). On appeal by the assessee to the Tribunal HELD allowing the appeal:

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

Note: In DCIT vs. P.C. Chandra Holdings (Kol) (attached) it was held that the fact that the “deposit” is shown as a “loan” in the books is not relevant

For s. 2(22)(e), firm is “shareholder” though shares held in names of partners

CIT vs. M/s National Travel Services (Delhi High Court)

The assessee was a partnership firm consisting of three partners being Naresh Goyal, Surinder Goyal and Jet Enterprises Pvt. Ltd. The assessee was the “beneficial owner” of 48.18% of the share capital of Jetair Pvt. Ltd which were held in the name of its partners Naresh Goyal and Surinder Goyal. The assessee took a loan of Rs. 28.52 crores from Jetair Pvt. Ltd. The AO held that the said loan was assessable as “deemed dividend” u/s 2(22)(e) in the hands of the assessee which was reversed by the Tribunal. Before the High Court, the assessee argued, relying on Ankitech Pvt. Ltd, Universal Medicare 324 ITR 363 (Bom) and Bhaumik Colour 118 ITD 1 (Mum) (SB), that s. 2(22) could only apply in the hands of the “shareholder” and as the assessee was not a “shareholder” (its partners were), s. 2(22)(e) could not apply. HELD rejecting the assessee’s plea:

The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a shareholder, being a person who is the beneficial owner of shares”. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results. Accordingly, for s. 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”.

China reduced reserve requirement ratio by half a percentage

China's new reserve-requirement ratio has commenced, freeing up more than $100B for its banks to lend after announcing a half a percentage point cut in the measure yesterday. The new move boosts speculation for more measures to pump up the country’s economic growth, which is expected to cool further this year. China's economy slowed to 7.4% in 2014, its lowest annual growth rate in a quarter century

German industrial orders in December surged to their highest level since April2008

The Europe's largest economy will gain steam early this year after narrowly avoiding recession in mid-2014. Beating even the highest forecasts, bookings for goods rose 4.2% in December, compared to a 2.4% contraction the previous month. Germany still slumped into deflation in January with prices falling 0.5%, although much of this can be blamed on the sharp fall in the oil prices.

RBI incentivize small savers with higher rate of interest

 Monetary Policies are made in India keeping the interest of small savers.Fixed deposit schemes in banks were treating big deposits, typically corporate or HNI deposits, differentially. Fixed depositors earn differential rates of interest based on the size of deposit. Deposits above Rs 1 crore earn a higher rate of interest. Additionally deposits up to Rs 1 crore can be withdrawn prematurely, resulting in asset-liability (ALM) mismatch. To correct this anomaly, the RBI has allowed banks to offer deposit schemes up to Rs 1 crore which cannot be broken prematurely. There are so-called non-callable deposits which would attract different (higher) rates of interest. Since the money would remain with the bank for a fixed and longer tenure it would avoid AM mismatches. This opens the prospect of retail depositors, who opt for such deposits, to earn a slightly better rate of interest than on a callable deposit. We believe schemes like this will go a long way in not just incentivizing small savers but also help in financial inclusion.

Oil prices are on the decline

As renewed concerns over global demand brought an end to a rally that pushed up prices by about 19% over the past four sessions. Growth concerns in China have especially prompted renewed concern for demand, after the HSBC China services PMI reported a six-month low of 51.8 in January, compared with 53.4 in December. Crude futures -3.2% to $51.41, as investors ask if oil has really found a bottom.

Change in the eligibility limit for foreign exchange remittances

The RBI decided to enhance the limit under the LRS to USD 250,000 per person per year. Furthermore, in order to ensure ease of transactions, it has also been decided in consultation with the Government that all the facilities for release of exchange/ remittances for current account transactions available to resident individuals under Schedule III to Foreign Exchange Management (Current Account Transactions) Rules 2000, as amended from time to time, shall also be subsumed under this limit.

RBI Monetary Policy statement

The Reserve Bank of India (RBI) kept the benchmark interest rates unchanged at the recently concluded bi-monthly monetary policy meeting on Tuesday. It however, lowered the proportion of funds banks have to deposit with it (SLR) by 50 basis points to 21.5% from an earlier 22%.

The Reserve Bank of Australia has jumped on the easing bandwagon, becoming the latest global central bank to cut interest rates in response to slowing inflation and concerns over economic growth. The RBA lowered its benchmark rate by 25 bps - its first change since August 2013 - to a new record low of 2.25%. The news sent the Australian dollar skidding to a six-year low of $0.7650, while the S&P/ASX 200 Index closed up 1.5% at 5,707.37 - its highest close since May 2008.

Russia’s GDP is expected to shrink by 3% in 2015 with oil prices at $50/bbl and an estimated capital outflow at $115B, said the country's economy minister, over the weekend. Inflation in 2015 is now forecast to stand at 12%, up from the previous estimate of 7.5%, he added. The announcement comes just days after the Russian central bank unexpectedly lowered its key interest rate by two percentage points to 15%, and almost a week after the country's credit rating was cut to "junk status" at Standard & Poor's.

According to figures released by the U.N. Conference on Trade and Development, China became the world’s top destination for foreign direct investment in 2014, edging the U.S. out of that position for the first time in more than a decade. Foreign businesses invested $127.6B in China last year, up from $123.9B in 2013, while their investments in the U.S. fell to $86B from $230.8B. The U.S. also slipped behind Hong Kong, falling into third place among all FDI recipients.