Monday, April 29, 2013

Dollar Index Falls To Weekly Low

The Dollar Index, which InterContinental Exchange Inc. uses to track the Dollar as against the currencies of six of the U.S.A.'s trading partners, dropped 0.2% to 82.339 earlier today, near its lowest since April 17th.
 
A government report released on Saturday had shown that the U.S. economy has expanded far less than originally thought. This spurred Treasury yields to extend their monthly decline.

U.S. consumer spending is expected to remain virtually unchanged in March from February. In February spending had risen by 0.7%. Saturday's report showed that U.S. gross domestic product had expanded at a 2.5% annual rate. Most economists had expected a 3% gain.

The Federal Reserve is to start a two-day meeting on Tuesday. Currently the Fed is purchasing $85 billion of bonds a month in an effort to raise downward pressure on borrowing costs. Minutes released after the Fed's last meeting in March, had shown that policy makers had though considered, at that stage, slowing purchases during 2013.

Although the Dollar has strengthened by 2.8% since January, most analysts expect that it will be under pressure, especially while U.S. bond yields stay low, and it's unlikely that the Fed will this week make any changes to policy.

Earlier today the Dollar slid 0.4% to 97.68 Yen and by 0.1% to $1.3046 per Euro. The Euro dropped by 0.3% to 127.41 Yen.

The Yen had fallen recently as expectations remained of raised monetary stimulus by the Bank of Japan (BOJ).

The Yen usually strengthens in times of financial or economic turmoil mainly because Japan's is not reliant on foreign capital in order to fund its deficits.

Today, the Yen rose against its major counterparts following the release of a Chinese report which showed that there had been slowing profit growth in industrial companies. This has supporting demand for haven assets.

Today and Friday, the 3rd May, Japanese markets are closed for holidays. Markets in China too are shut today until Thursday.

In Europe, Enrico Letta was sworn in on Sunday as Italy's prime minister. He forged an alliance with Silvio Berlusconi and so has put an end to two months of political stalemate.
The European Central Bank (ECB) is expected to cut borrowing costs by 25 basis points at its meeting this Thursday. Currently rates are set at an all-time low of 0.75%.

On Saturday the Bundesbank criticized the ECB's bond-buying plan saying "Rising sovereign bond yields cannot be used definitively as an explanation for a disturbance of monetary policy transmission."

The ECB started the plan it calls the Outright Monetary Transactions program last September. Since then Bond yields in Spain and Italy have dropped.

Should the ECB not make any progress to improve "the transmission mechanism and aid the pass through from further stimulus to the periphery" the market could be disappointed, by interpreting that as suggesting that the ECB may be short of options.
 

Economic confidence falls in Europe.

The Cyprus debacle dented optimism among Europeans this month as the European Commission says an index of executive and consumer confidence dipped to 88.6 in April, down 1.5 points from March. The new reading is the lowest in five months and missed economists' expectations of 89.3, Bloomberg said.

Industrial profits slide in China.

 Profits at Chinese industrial firms rose only 5.3% year-over-year in March, down markedly from the 17.2% pace logged in January and February. Overall, industrial profits rose 12.1% during the three month period. The slowdown mirrored that witnessed in Chinese auto sales which grew 11% year-over-year in March after rising 15% in each of the two previous months. Some worry the slower pace of growth could discourage capital spending and hiring. China's official PMI is due Wednesday.

IMF cautiously optimistic on Asian growth.

 Policy makers must "stand ready to respond early and decisively to any prospective risks of overheating," the IMF said in its annual report on Asia. The fund sees heavy capital inflows driving 5.75% regional growth. This is a good thing — until it's not. Record property values in Hong Kong, soaring stock prices in some Southeast Asian markets, and sharply rising local currencies (Philippine peso and Thai baht) are some of the risk factors flagged in the report.

Greece to get new aid.

European officials are set to approve a long-delayed €2.8B tranche of bailout money for Greece after the country's parliament passed a reform law Sunday which calls for the dismissal of 15,000 workers by the end of 2014 and the extension of a property tax assessed through citizens' electric bills. The next obstacle for Greece is winning approval for a €6B disbursement it needs by May 20 in order to repay a maturing bond held by the ECB.

India's oil demand increases

Data source: Mint

 
That oil is one of the largest components of imports for India is not really news. In fact, increasing import of oil is one of the factors behind our fiscal deficit. The deficit for FY13 was burdened even further by higher import of oil. This was to meet the increase in oil demand.

As per a study carried out by Barclays and printed in The Mint, demand for oil increased by 4.7% during FY13. This is one of the highest increases in history. The increase in demand was fuelled by an increase for nearly all of the refined products with the exception of kerosene. The largest surge was in the demand for diesel which increased by 7%. As domestic production did not increase at the same pace, we had to depend on imports to meet the higher demand. As such, net oil imports increased by 8% YoY during the year. In order to curb this, the government needs to focus on boosting domestic oil production. But production has lagged due to lack of investments by domestic companies particularly in terms of technology related investments. Foreign collaborations in the sector have also suffered due to high regulatory risk. These issues need to be sorted at the earliest if India wishes to cut down its reliance on imported oil. Otherwise the burden on our fis cal deficit side from oil will not ease any time soon.

Transfer Pricing: Important principles on “turnover filter” & comparison explained.

Capgemini India Private Limited vs. ACIT (ITAT Mumbai) 

The Tribunal had to consider the following important transfer pricing issues: (i) whether a one-time and extraordinary item of expenditure (ESOP cost) debited to the assessee’s P&L A/c has to be excluded while comparing the margins, (ii) whether for the purpose of comparison of margins, the consolidated results of comparables having profit from different overseas markets can be considered? (iii) whether extreme profit and loss cases should be excluded or in case extreme profit cases are included, the case of losses should also be included? (iv) whether a turnover filter can be adopted to exclude companies with extremely high turnover? (v) whether the assessee can seek to exclude its own comparables? (vi) whether an adjustment for working capital is permissible? (vii) whether if the assessee can show that because the AE is in a high tax jurisdiction and that there is no transfer of profit to a low tax jurisdiction, a transfer pricing adjustment need not be made? HELD by the Tribunal:
 
(i) A comparison of margin between the assessee and the comparables has to be made under identical conditions. As the comparables had not claimed any extraordinary item of expenditure on account of ESOP cost, for the purpose of making proper comparison of the margin, onetime ESOP cost incurred by the assessee has to be excluded. There is nothing in the Rules that prohibits adjustment in the margin of the assessee to remove impact of any extraordinary factors (Skoda 30 SOT 319 (Pune), Demag Cranes 49 SOT 610 (Pune), Transwitch, Toyota Kirloskar Motors followed);
 
(ii) Under Rule 10B(2)(d), the comparability of transactions has to be considered after taking into account the prevailing market conditions including geographical locations, size of market and cost of capital and labour etc. Therefore, consolidated results which include profit from different overseas jurisdictions having different geographical and marketing conditions will not be comparable. Only standalone results should be adopted for the purpose of comparison of margins (American Express followed);
 
(iii) Comparable cases cannot be rejected only on the ground of extremely high profit or loss. In case the companies satisfy the comparability criteria, and do not involve any abnormal business conditions, the same cannot be rejected only on the ground of loss or high profit. The OECD guidelines also provide that loss making uncontrolled transactions should be further investigated and it should be rejected only when the loss does not reflect the normal business conditions;
 
(iva) In certain Tribunal decisions, various reasons have been given for applying the turnover filter for comparison of margins such as economy of scale, greater bargaining power, more skilled employees and higher risk taking capabilities in cases of high turnover companies, which increase the margins with rise in turnover. However, in these decisions, no detailed examination has been made as to how these factors increase the profitability with rising turnover. The concept of economy of scale is relevant to manufacturing concerns, which have high fixed assets and, therefore, with the rise in volume, cost per unit of the product decreases, which is the reason of increase in margin as scale of operations goes up because with the same fixed cost there is more output when the turnover is high. The same is not true in case of service companies, which do not require high fixed assets. In these cases employees are the main assets, who in the case of the assessee are software engineers, who are recruited from project to project depending upon the requirement. The revenue in these cases is directly related to manpower utilized. With rise in volume cost goes up proportionately. Therefore, the concept of economy of scale cannot be applied to service oriented companies. On facts, it is shown by the department that in the case of the comparables selected by the assessee, there is no linear relationship between margin and turnover and that that the margin has come down with the rise in turnover in some cases. Such detailed study was not available before the various Benches of the Tribunal which have applied the turnover filter and consequently those decisions cannot be followed;
 
(ivb) Under Rule 10B(2), comparability of international transactions with uncontrolled transactions has to be judged with reference to functions performed, asset employed and risk assumed. The functions performed by all comparable companies are same as it is because of same functions they have been selected by the assessee as comparables. The asset employed has two dimensions i.e. quantity and quality. More employees would mean more turnover but there is no linear relationship between margin and turnover. As regards quality of employees, this will depend upon the nature of projects and since the comparables are operating in the same field having similar nature of work, and employee cost being more in case of more skilled manpower, it will not have much impact on the margins. As for the bargaining power, the assessee is part of a multinational group and well established in the field and, therefore, it can not be accepted that it has less bargaining power than any of the Indian Companies, however big it may be. Therefore, it would not be appropriate to apply turnover filter for the purpose of comparison of margins. However, for the purpose of comparison, the turnover would be relevant only from the limited purpose to ensure that the comparable selected is an established player capable of executing all types of work relating to software development as the assessee is also an established company in the field (Genesis Integrating System not followed);
 
(v) The assessee had selected Infosys and Wipro as comparables on the basis of its own transfer pricing study after being fully aware of its work profile. The assessee raised no plea either before the TPO or DRP for excluding these comparables though it had added some more comparables. The assessee, therefore, cannot raise any grievance before the Tribunal to exclude these comparables, without giving any cogent and convincing reason. The reasons given by the assessee (turnover filter) are not found convincing and so it cannot be permitted to exclude Infosys and Wipro (Kansai Nerolac Paint followed)
 
(vi) Working capital adjustments are required to be made because these do impact the profitability of the company. Rule 10B(2)(d) also provides that the comparability has to be judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the debt promptly. The average of opening and closing balance in the account receivable/payable for the relevant year may be adopted which may broadly give the representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not effect the comparability as the same method will be applied to all cases. Working capital adjustment can not be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment. Working capital adjustment will improve the comparability.
 
(vii) The argument that no adjustment need be made because the parent company is situated in US where tax rate is high and that there was no reason for the assessee to transfer profit to the parent company is not acceptable. The arm’s length price of an international transaction has to be calculated with respect to similar transaction with an unrelated party as per the method prescribed and the revenue is not required to prove tax avoidance due to transfer of profit to lower tax jurisdiction. Arguments such as that the parent company was incurring loss or had shown lower margin are not relevant (Aztek Software 107 ITD 141 (SB) & 24/7 Customers.com followed)

Sunday, April 28, 2013

The Japanese central bank recently unleashed a massive quantitative easing program. In simple parlance, money printing worth US$ 1.4 trillion! The Japanese Prime Minister believes money printing will end more than a decade of deflation, that is, falling prices. The money pumped will lead to inflation and this in turn would revive investments and spending in the economy. This is his plan to get the Japanese economy going.

This may appeal to some in theory. But we have always been extremely skeptical of such monetary policies. Such financial steroids have adverse long side-effects. The failure of the QE program in the US should have been a lesson.

But it seems such policies do benefit someone. No, it's not the economy. Not consumers. Not savers. Any guesses? The answer is investment banks! An article in Bloomberg notes that investment banks have been the biggest beneficiaries of the stimulus program. With stock and bond markets soaring, these banks are buzzing with activity.

This is not uncommon. The banks that were responsible for creating the 2008 financial crisis have been the biggest beneficiaries of all the bailout and stimulus programs that the US Fed initiated. And now it is Bank of Japan that seems to be following similar footsteps. Whose interests are policymakers really trying to protect? It doesn't seem too difficult a question.     

Do the Chinese own America?

Source: Pragmatic Capitalism
 
With the US and China together controlling 33% of the global economy, investors cannot help but keep a close watch on their interdependence. For a de-growth in either can meaningfully impact the other at least in terms of value of overseas assets. A slowdown in the US for example does not leave China unhurt. This is because the oriental nation is one of the largest holders of US Treasuries. However, as against common perception, China will not be only victim of an American slowdown. As the chart shows, around 12% of the foreign owned assets in the US are held by the Chinese. Thus a major slowdown in the US is expected to have ripple effects across the world, rather than only in China.

China well aware of risks.

China's Politburo Standing Committee has warned that the country needs to "guard against potential risks in the financial sector" but still "cement its domestic economic growth momentum." Concern has increased about rising loans in the shadow-banking industry and the "explosive" expansion in municipal debt. China "isn't going to pursue the old way of stimulus to push up growth at the expense of long-term structural reform,".

Japan remains firmly stuck in deflation.......but BOJ holds off from further easing.

 Japanese consumer prices dropped in March for the fifth consecutive month, with CPI falling by a slightly greater-than-expected 0.5%. Prices for furniture, culture and recreation, and food showed the largest drops As expected, the Bank of Japan held off from adding to its liquidity blitz at a policy meeting today, having announced a plan earlier this month to increase its monetary base by ¥60T ($607B) to ¥70T a year. In its semi-annual economic outlook, the BOJ forecast that inflation won't hit 2% in the next two years, as Governor Haruhiko Kuroda has predicted, but could reach that level by March 2016. At the time of writing, the dollar was -0.6% at ¥98.69.

U.S. economy seen growing 3%.

GDP data for Q1 is due out this morning, with economists expecting that the U.S. expanded by a 3% annual rate after almost coming to a halt at +0.4 percent in Q4. A major factor that is expected to show up in the data is farmers filling up silos following the drought last summer, which badly damaged their crop output. Without farming inventories, growth may well have been just 2%.

Samsung remains world's leading smartphone company.

Samsung (SSNLF.PK) strengthened its lead as the world's top vendor of mobile phones and of smartphones in Q1, IDC estimates. The South Korean giant increased its market share in the latter category to 32.7% from 28.8 a year earlier and shipped more smartphones than the next four providers combined. Apple's (AAPL) share slipped to 17.3% from 23%. The global cellular phone market grew 4% on year to 418.6M devices.

Thursday, April 25, 2013

Pound Advances ahead of Report

Earlier today the pound advanced against most of its major peers. A report was due out which is predicted to show that the U.K's economy has managed to avoid a triple-dip recession.
 
A preliminary report is due out today which is predicted to show that the U.K.'s economy grew by 0.1% in the first quarter of 2013. The previous quarter saw a contraction of 0.3%.
 
As a result, Sterling has gained against the Euro. The advance has been strengthened amid prospects that the European Central Bank (ECB) could cut borrowing costs next week and as Bank of England (BOE) policy makers still remain divided over whether there is a need for more stimulus through so-called quantitative easing.

Any positive growth figure should though dampen any expectations of more easing and the BOE should be less likely to announce any more easing provided that future data doesn't deteriorate significantly.

The European Central Bank (ECB) is expected to cut its key rate, currently at a record low 0.75%, on May 2nd.

On Wednesday ECB Vice President  had said that: "We stand ready to act if economic conditions continue to provide bad news, as unfortunately has been the case in recent data that became available."
 
The Pound rose 0.3% to $1.5315 and 0.1% to 85.18 pence per Euro. The Euro advanced 0.2% to $1.3045 and by 0.1% to 129.60 Yen. The Yen halted a two day decline when it rose 0.2% to 99.34 per Dollar.

In another report due today, Spain's unemployment rate is expected to have reached a record high of 26.5% for the first quarter.

Yesterday the Ifo institute said its index of business confidence in Germany dropped for a second month during April.

The Yen was higher to the Dollar after a report had shown that Japanese investors were net sellers of foreign bonds, to the tune of a total 3.43 trillion Yen ($34 billion) for a sixth-straight week.

The Bank of Japan (BoJ) is set to hold a policy meeting on Friday. It will release its outlook for Japan's economy and inflation and is expected to raise its forecast for price gains for fiscal year 2014.

The Dollar-Yen seems certain to break the 100 barrier soon and many traders expect it to advance to levels between 100 to 125 in the near term.

Spanish unemployment exceeds 6M.

 Spanish unemployment rose to a fresh record of 27.2% in Q1 from 26% in the previous quarter and topped consensus of 26.5%, with 6.2M people out of work. Youth unemployment increased to 57.2%. The figures "highlight the serious situation of the Spanish economy as well as the shocking decoupling between the real and the financial economy,". The Ibex was -1.2% at midday in Europe.

U.K. avoids triple-dip recession.

The U.K.'s GDP recovered to grow a quarterly 0.3% in Q1 compared with a fall of 0.3% in Q4, topping expectations of +0.1% and ensuring that Britain avoided the ignominy of a triple-dip recession. The growth, tepid as it was, could reduce the pressure on the Bank of England to increase its QE program. The pound spiked following the GDP release and was +1.2% vs the dollar at the time of writing.

Verizon makes preparations for $100B wireless bid.

Verizon Communications (VZ) has reportedly hired bank and legal advisers ahead of a possible $100B cash and stock bid to buy Vodafone's (VOD) 45% stake in Verizon Wireless. Verizon Com, which reckons it can raise $50B from banks to help fund the deal, will structure its offer so that Vodafone's tax bill would be $5B rather than a possible $20B. The latter's shares were +3.4% premarket.
We have high regard for opinions of people who are willing to stand out of the herd and make bold decisions. Noted economist Nouriel Roubini is certainly one of them! It is worth noting that he was one of the few experts who saw the 2008 financial crisis coming.

An article in the Economic Times notes that Mr Roubini who is known for his bearish views, is relatively upbeat about India. As per him, India has a strong advantage over China and European economies in the exports of services. And to keep this competitive advantage intact, India must invest in human capital and skilling building.

On the flip side, he raised concerns about India's manufacturing sector. In his view, India should find ways to compete with China. The latter has been flooding India will cheap goods. This has resulted in a massive trade imbalance with China. While he offers a rate cut as a short term solution, he believes India needs to solve structural issues in the manufacturing sector.

We do agree with Mr Roubini on most counts. The interest rate cut, however, will depend on how inflation pans out. If the current trend in commodity prices persists, the RBI might have room to cut rates. But playing with monetary tools is always a short term solution. Much more needs to done on the policy and infrastructure front to sort out long term issues.      
The central banks around the world are printing money like there is no tomorrow. This has led to a flood of cheap money and competitive devaluation of the currencies. This devaluation is expected to make exports cheaper. Therefore all countries are following suit because they don't wish to be caught on the back foot in case their exports become less competitive. The result is that everyone is printing more money. And this has made legendary investor Jim Rogers to question the sanity of such a move. He feels that the competitive devaluation of the currencies by the banks is nothing but a race to insanity.

The process of money printing has increasingly made cheap money flow into all asset classes. This in turn has inflated the prices of all of the assets. Whenever the money printing stops or when the investors lose faith in the process, the bubbles in all asset classes will burst. Though this may not happen in the short term, it will definitely take place one day. And that day all asset classes will come tumbling down.

GDP forecasts for 2013

Data Source: The Economist

 
If one looks at the GDP forecasts made for 2013 by International Monetary Fund (IMF), China and India still top the table. That is not really surprising. But as per the Economist, what is interesting to note is that the IMF has been compelled to lower its growth forecasts for most of the countries over a period of 6 months. As a result, the world economy is expected to grow by 3.3% in 2013. Despite endless money printing measures by the central bankers in the developed world, growth in these countries will remain tepid at best. Plus although relatively speaking, growth in China and India still looks good; both these countries have problems back home to deal with meaning that it would take som e time for growth to revert back to pre-crisis levels. 

Transfer Pricing: If more than one price is determined by the most appropriate method, the ALP has to be the arithmetical mean of such prices

CIT vs. Mentor Graphics (Noida) Pvt. Ltd (Delhi High Court)

 
The assessee was engaged in providing “software development support services” by which it developed software upon the instructions of its parent associated enterprise (IKOS Systems Inc). The entire software developed by the assessee was used by the parent AE captively for integrating the same with other software components developed by it. The assessee adopted the TNMM and claimed that its transactions were at ALP. The TPO rejected the assessee’s comparables on general grounds and selected his own comparables and used figures for a subsequent year. He determined the ALP at a much higher figure and made an adjustment. On appeal by the assessee, the Tribunal held that the criteria adopted by the TPO for searching comparables was not correct. It held that the TPO was wrong in selecting his own comparables without first rejecting the assessee’s comparables. It also held that where one of the prices determined by the most appropriate method is less than the price as indicated by the assessee, that may be selected and there would be no need to adopt the process of taking the arithmetical mean of all the prices arrived at through the employment of the most appropriate method. On appeal by the department to the High Court, HELD:
 
The Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, is lower than the profit level indicator of the taxpayer, then the transaction reported by the taxpayer is at an arm’s length price and there is no need to take the arithmetical mean. The proviso to s. 92C(2) is explicit that where more than one price is determined by most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. The Tribunal was also wrong in the finding that unless and until the comparables drawn by the taxpayer were rejected, a fresh search by the TPO could not be conducted because s. 92C (3) which stipulates four situations where under the AO/ TPO may proceed to determine the ALP in relation to an international transaction. If any one of those four conditions is satisfied, it would be open to the AO/ TPO to proceed to determine the ALP price. Also, the question of applying OECD guidelines does not arise at all because there are specific provisions of Rule 10B (2) & (3) and the first proviso to s. 92C(2) which apply. The Tribunal was also not right in reducing the list of comparables to merely four. Having held that the comparables given by the assessee were to be accepted and those searched by the TPO were to be rejected, the only option then left to the Tribunal was to derive the arithmetical mean of the profit level indicators of the comparables which were accepted by it. It erred in selecting only one profit level indicator out of a set of profit level indicators. However, on facts this make no difference because even if the arithmetical mean of the comparables as accepted by the Tribunal are taken into account, the profit level indicator would be less than 6.99 % which is the profit level indicator of the assessee.
 

S. 271(1)(c): Consistent losses show mistake/ absence of intention to evade taxes

Amruta Organics Pvt. Ltd vs. DCIT (ITAT Pune)

The assessee filed a return declaring a loss of Rs. 16 lakhs in which it had made a wrong claim of depreciation. The AO disallowed the claim and levied 100% penalty which was upheld by the CIT(A). Before the Tribunal, the assessee claimed that its’ Directors were technical persons not knowing the intricate provisions of the Act but were dependent on the advice of professionals for preparing income tax returns. It claimed that it had committed a bona fide mistake and that there was no intention to evade taxes. HELD by the Tribunal upholding the plea:
 
A mere mistake in making of a claim in the return of income would not ipso facto reflect concealment or furnishing of inaccurate particulars of income in terms of s. 271(1)(c). The wrong claim of depreciation cannot be said to be made with an intention to evade taxes in as much as even after the disallowance of depreciation, the resultant income of the assessee remains a loss. The assessee had been incurring losses since the year 2003 due to the market forces. Considering the entirety of circumstances, the claim on account of depreciation was a mistake, and did not invite the provisions of s. 271(1)(c).

German business sentiment falls in April.

Germany's Ifo business climate index fell to 104.4 in April, down from 106.7 in March. It's the 2nd consecutive decline for the index and missed not just consensus estimates of 106.2, but the lowest forecast of the group at 104.4. The Dax was higher midday with the news reinforcing ideas the ECB is set to further ease policy.

Tuesday, April 23, 2013

Euro Region Data Shows Worsening Recession

Earlier today the Euro dropped to a two-week low to the Dollar. Data showed that services and manufacturing output in the Euro area has declined for a 15th month. This is yet another sign of a worsening recession for the region.
 
The Euro dropped as against most of its 16 major peers, after data was released that showed that the Euro-area composite index, based on a survey of purchasing managers in services and manufacturing, held below the level of 50 at 46.5 in April. A reading below 50 signals contraction, as opposed to expansion.
 
The data has now added to speculation that the European Central Bank (ECB) could cut rates in an effort to encourage growth.

With the outlook remaining bleak and a cut in rates a probability, Euro negative sentiment holds fast.

The Euro dropped 0.6% to $1.2985 and by 1.2% to 128.16 Yen. The Yen gained 0.5% to 98.69 to the Dollar.

The Yen and the Dollar had gained ground following a report that showed that Chinese manufacturing had expanded at a slower pace, which meant more demand for safer assets.
 
Gold, Copper and Nickel have all dropped this year. Last week Gold posted its biggest daily drop in 33 years.


 

Contraction in German factory activity deepens.

 Flash German manufacturing PMI unexpectedly fell to 47.9 in April from 49 in March, while the services print dropped to 49.2 vs 50.9. "The latest figures suggest any rebound in GDP" in Q1 "could be rather short-lived," says Markit. Still, French PMI data improved while eurozone-wide readings were mixed, with the overall picture still grim.

China April PMI disappoints.

Chinese flash HSBC PMI dropped to 50.5 in April from 51.6 in March, missing expectations by a full point. "New export orders contracted after a temporary rebound in March, suggesting external demand for China's exporters remains weak," says HSBC. "Weaker overall demand has also started to weigh on employment in the manufacturing sector." The disappointing reading comes not long after Q1 GDP growth slowed to 7.7%, and it helped send Asian stocks lower.

Monday, April 22, 2013

G-20 Stance Encourages Kuroda To Push Stimulus

The Bank of Japan's (BOJ) monetary stimulus policies, having gone unopposed by G-20, has seen the Yen nearing the 100 level for the first time in 4 years.
 
BOJ Governor, Haruhiko Kuroda, has said that he has been "emboldened" to persevere with a campaign that aims to defeat deflation. This saw the Yen slide earlier today against most major counterparts.

Kuroda had said that "Winning international understanding gives me more confidence to conduct monetary policy appropriately. We will continue our qualitative and quantitative easing for the next two years."
 
On Friday the BOJ is expected to deliver its next policy statement.

Earlier today the Yen dropped by 0.2% to 99.70 to the Dollar, having gone as far as 99.90. In all, it has dropped 5.5% since March. The Yen also slid 0.3% to 130.32 per Euro. The Euro, for its part, gained 0.1% to $1.3069.

At this time it seems that there are no real obstacles to the Yen continuing to weaken from here, and at some point it seems likely to break through the 100 level.
A 2009 high near 101.45 Yen could then be the next immediate target.
 

Japan receives backing for aggressive monetary policy.

 Japan's turbo-charged monetary easing received further international acceptance over the weekend, with the country allowed into pan-Pacific free-trade talks. A day earlier, the G-20 continued to buy into Japan's arguments that its monetary policy is designed to lift the economy out of deflation, not to weaken the yen to gain an unfair advantage. Increasing international trade is Prime Minister Shinzo Abe's "third arrow" in his strategy to revive Japan's economy.

Transfer Pricing: Even business advances have to be benchmarked on Libor ALP

Aurionpro Solutions Ltd vs. ACIT (ITAT Mumbai)

 
 The assessee, an Indian company, gave loans of Rs. 15.65 crores to its AEs in USA, Singapore and Bahrain. It claimed that the said loans were “working capital advances” given for commercial consideration to secure business and that no interest was recoverable on it. The TPO applied the CUP method and determined the ALP of the advances at LIBOR plus 3% mark up. The DRP held that only inbound loans (ECBs) taken by the Indian entities from outside India could be benchmarked with LIBOR and that outbound loans had to be benchmarked on the interest rate prevailing in India on corporate bonds. It treated the advance as an unrated bond having very high risk and enhanced the assessment by directing the TPO to adopt 14% as the ALP rate. On appeal by the assessee, HELD reversing the DRP:
 
The assessee’s argument that the non-charging of interest on the working capital advances to AEs from whom the assessee was getting good business was justified by commercial considerations and that no transfer pricing adjustment is warranted is not acceptable because the existence or non-existence of commercial consideration between the assessee and the AEs is not a required condition for applicability of the TP regulations Further, the advance was not the credit period extended to the AEs in respect of business transactions but was a transaction of advancing loans to the AEs which falls under the ambit of “international transaction” u/s 92B. In principle, the DRP is justified in its view that the ALP should be determined on the basis of the interest rate that would have been earned by the assessee by advancing loans to an unrelated third party (in India) such as a Fixed Deposit with the Bank. However, since LIBOR has been accepted by the Tribunal in other cases, the ALP should be determined on the basis of LIBOR + 2% (Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) referred).

Japan previews "third arrow" of economic policy.

 Japanese Prime Minster Shinzo Abe's "third arrow" of a three-part economic policy aimed to boost growth included a promise for more free trade deals. Arrows one and two - super-easy monetary policy and a big boost in government spending - have Japanese markets and Abe riding high. Skepticism about part three runs high though, as few complain about printing money and boosting spending, but opening trade in Japan would require serious reform.

IBM misses estimates by wide margin..

IBM fell as much as 6% premarket after Q1 earnings missed the mark and revenue fell 5.1% Y/Y. Hardware division sales fell 17%, with management blaming execution rather than the economy. Moving quickly, the company promises "substantial actions," including job cuts and the sale of some businesses. The company is reportedly in talks with Lenovo to sell its low-end server division and a published report in France says IBM plans to cut up to 14% of its workforce in that country.

Blackstone drops out of Dell deal.

 Blackstone (BX) ended its pursuit of DELL after its due diligence raised doubts about the future of Dell's PC business, say sources. Also maybe at issue was Blackstone's inability to figure out a way to free up Dell's overseas cash hoard without incurring a massive tax bill. The move puts Silver Lake and Michael Dell in a stronger position to buy the company for $13.65/share.

Thursday, April 18, 2013

S. 195: If DTAA is silent, no obligation to deduct surcharge & education cess

ITO vs. M. Far Hotels Ltd (ITAT Cochin) 

The assessee made a remittance of management fee and interest to a resident of France. The AO held that in deducting TDS thereon u/s 195, the assessee ought to have deducted surcharge and education cess. The assessee claimed that as the India-France DTAA was silent about inclusion of surcharge & education cess, it was under no obligation to do so. HELD by the Tribunal upholding the assessee’s plea:
 
The India-France DTAA does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there is an apparent conflict between the Income-tax Act and the DTAA between the two sovereign countries with regard to deduction of tax at source on surcharge and education cess. U/s 90(2) if the provisions of the DTAA are more beneficial to the taxpayer, the DTAA prevails over the Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer may take advantage of that provision in the DTAA for deduction of tax.
 

Asian Stocks Slide Boosts Yen

Doubt was cast with many investors earlier today on whether Japan's monetary stimulus will persist in weakening the currency after Yen demand was raised on the release of Japanese data. The data showed that domestic investors had sold foreign bonds for a fifth week.
Japan's Ministry of Finance released data which showed that investors had reduced their holdings of foreign debt by 331.9 billion Yen ($3.4 billion) in the week that ended on April 12th, after a net sale of 1.14 trillion Yen the week before. This had been the largest reduction in a year.

Effectively what this means is that it appears that funds are not flowing out of Japan at the moment. This is causing investors to reconsider the effectiveness of the Bank of Japan's (BoJ) policies. A key to more Yen weakness will be Japanese investors' willingness to purchase overseas assets.

Yen buying was also boosted by stock declines which saw investors turn to the Yen as a safe haven. The MSCI Asia Pacific Index of shares earlier had dropped by 1.1%.

The Yen earlier today traded at 98.08 per Dollar and stood at 127.96 per Euro. The Euro advanced by 0.1% to $1.3050.

The Group of 20 (G-20) finance ministers and central bankers are due to meet in Washington today and Friday, ahead of weekend talks at the International Monetary Fund (IMF) and World Bank.

The G-20 are expected to stick to a February pledge in which they agreed to "move more rapidly toward more market-determined exchange rate systems and exchange-rate flexibility."

In February their officials indicated that Japanese policy makers could stimulate the nation's economy, as long as they refrained from publicly advocating a weaker Yen.
 
 

G-20 to again let Japan off the hook over yen plunge.

G-20 finance ministers and central bankers are due to meet in Washington today and tomorrow, when they will reportedly reiterate their commitment to avoiding weakening their currencies in order to gain trading advantages. Japan will again escape criticism despite the yen's rapid fall as a result of the country's aggressive monetary easing policies and rhetoric.

Japan's trade deficit continues.

 Japan racked up its ninth-straight monthly trade deficit in March, although the figure fell to ¥362.4B ($3.70B) from February's ¥779.5B. Exports grew 1.1% on year after shrinking 2.9% the previous month and were roughly in line with estimates. Imports rose 5.5%, largely due to a weaker yen and higher fuel-imports. Shipments to China declined 2.5%, easing off from a 15% plunge the previous month. Exports to the EU dropped 4.7%, but those to the U.S. rose 7%.

Cypriot parliament to vote on bailout.

 Cyprus' €10B bailout is once again in doubt after it emerged that the country's 58-seat parliament will vote on the deal. With the chamber having already overwhelmingly rejected an initial set of measures, it's far from certain that the new rescue package will be authorized. Notwithstanding, Germany's lower house of parliament has approved the deal.

Which MNCs pay the highest royalty?

 
Source: Ace Equity
The fact that MNCs have commanded premium valuations over their Indian counterparts is certainly quite well known. The premium, many investors argue, is simply because of the superior quality of these firms. However, a big hole has been bored across this argument in recent times. Simply because the promoters of a lot of these MNCs have shown characteristics not in the best interest of minority shareholders. Top on the list would be the issue of royalties. Many MNCs have entered into agreements to hike royalties that they remit abroad to their foreign promoters. And while Indian investors continue to see red over this, today's chart highlights those MNCs from the BSE 500 universe that pay the highest royalties to their parents on a % percentage of sales basis. Well, we don't know what the exact number should be but it should certainly not be something that makes MNCs earn supernormal returns on their investments in India at the expense of minority shareholders.

Wednesday, April 17, 2013

S. 80-IA(5): Loss of eligible unit, even if set-off against non-eligible profits, has to be aggregated& carried forward for set-off against future eligible profits

Hercules Hoists Limited vs. ACIT (ITAT Mumbai)

 
The assessee set up two windmills, the income from which was eligible for deduction u/s 80IA. The assessee suffered a loss in the said Wind Mills and claimed a set-off of the same against its other income. The AO and the CIT(A) rejected the claim by relying on Gold Mine Shares 113 ITD 209 (SB) (Ahd) where it was held that in view of s. 80-IA(5), the loss suffered by the eligible unit cannot be set off against the profits of other units / other business in the initial year of assessment or subsequent years of eligible years of assessments. The Tribunal had to consider the following legal issues: (i) what is the “initial assessment year“?, (ii) whether the loss/ depreciation from the eligible unit is entitled to be set-off against the other income?, (iii) whether the said loss/ depreciation of the eligible unit is, after set-off against the other income, still required to be notionally carried forward for set-off against the future profits of the eligible unit? HELD by the Tribunal:
 
(i) The “initial assessment year” is the year in which the eligible unit commences operations. It is not the year in which the assessee chooses to claim deduction. The requirement of s. 80-IA(5) is that the loss and unabsorbed depreciation of the eligible unit should begin to be aggregated from the “initial assessment year” to the last allowable year. The aggregation has to continue for every year irrespective of whether s. 80-IA (1) deduction for that year is eligible or not;
 
(ii) If the eligible unit has no profit, the loss & depreciation of the eligible unit is entitled to be set-off against the other income. However, despite such set-off, the loss and depreciation has to be aggregated and notionally carried forward for set-off against the future profits of the eligible unit.

Gold rout costs central banks $560B.

With holdings of 19% of all gold mined, the plunge in the price of bullion has cost central banks $560B this year, while hedge-fund titan John Paulson has lost at least $1.5B. Paulson began 2013 with $9.5B invested across his hedge funds, with 85% of that in gold share classes. However, Paulson's gold bet is ahead over the long term, while his recent losses have probably been offset by gains in his non-bullion holdings.

Blackstone to raise $4B Asia property fund.

Blackstone (BX) reportedly intends to raise a $4B Asian real-estate fund, double the private-equity firm's initial target. The fund would be the largest of its type devoted to Asia, with Blackstone believing that falling property prices have provided good opportunities. Meanwhile, the company has forecast a net annual return of 18% for its $13.3B global fund, which closed its capital-raising last year.

European car sales continue to plunge.

European car registrations dropped for the 18th consecutive month in March, slumping 10% to 1.35M vehicles. Germany led the way as sales skidded 17%, while Spain, Italy and France all fell, although the U.K. rose 5.9%. GM's (GM) registrations dropped 13%, Ford's (F) 16% and Toyota's (TM) 17%, although Honda's (HMC) rose 17%. "People have stopped buying cars as consumers are much less confident...especially after the latest decision on Cyprus,"

Intel net profit slumps 25%.

Intel's (INTC) Q1 net profit fell 25% to $2.05B as the company continued to be hurt by the slump in the global PC market. Adjusted EPS of $0.40 slightly missed expectations while revenue slipped 2.5% to $12.58B and also undershot forecasts. However, Intel said it should recover in H2 and probably generate "double-digit revenue growth for the year," boosted by the improving economy and sales of its Haswell chips for ultrabook computers. Shares were -0.5% premarket.

Yen Weakens On Speculation On G-20 Criticism

Earlier today the Yen dropped against all of its major counterparts as investors speculated that Japan could escape censure at a Group of 20 meeting set for tomorrow. The G-20 is likely to review monetary policies that Japan has implemented in order to weaken its currency.
 
The Yen dropped for a second day on G-20 speculation and as a gauge of U.S. stock market volatility has fallen by the most this year. This has reduced demand for refuge assets.

Although the weaker Yen likely won't be the main topic at the G-20 meeting, once the market stabilizes, Yen depreciation is likely set to continue.

The G-20 finance ministers and central bankers will meet on Thursday and Friday. Weekend talks are also scheduled by the International Monetary Fund (IMF) and World Bank.

Interestingly IMF Chief Economist, said on Tuesday that Japan's easing policies are "appropriate" and went on to say that the impact on the Yen is "a logical consequence."

Yen weakness also resulted as there was a drop in U.S. stock market volatility.

The VIX (VIX) or The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against losses in stocks, had for instance declined by 19% yesterday.

The Yen earlier had dropped by 0.8% to 98.35 per Dollar and lost 0.8% to 129.54 per Euro. The Euro remained little changed at $1.3174.

Sterling also remained little changed 85.80 Pence per Euro from Tuesday, remaining weak ahead of the release of minutes from April's Bank of England (BoE) meeting.

The BOE is to release minutes of its meeting during which it's "quantitative easing" program of bond purchases was left unchanged at 375 billion Pounds ($576 billion).

  Should it appear that the level of dissention had risen even more in favour of more easing, this could raise speculation about more BOE quantitative easing ahead of a May Inflation report, and this could weigh on Sterling in the short term.
Gold has seen its prices tumbling down in recent times. This has led many investors to turn wary on gold in their portfolios. But the decline in gold prices has posed a serious risk to the banks. The banks that give loan against gold use the value of gold as collateral. The price of gold determines the loan to value (LTV) ratio for the banks. Typically the LTV ratio stands at around 70%. So if gold prices correct by 20% like they have corrected recently, there is not too much of a problem for banks. But as per the Chairman of State Bank of India (SBI), if gold corrects by another 10% there would be a problem. This is because a majority of gold loans would become higher than the value of the collateral. Given that gold is not going to become worthless, the risk that these loans would become NPAs is not too high. But decline in LTV would mean that banks have to record mark to market losses; a major short term risk that banks are facing.

Yen Up On Volatility Ahead of G-20

On Monday, European Central Bank President Mario Draghi announced that "there is no currency war" following a declaration by the U.S. Treasury, to the effect that Japan must refrain from competitive devaluation of the Yen.

The U.S. Treasury had said that Japan must "remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation."

Draghi stated that recent stimulus announced by the Bank of Japan (BoJ) is "determined by domestic policy considerations." The statement comes ahead of Finance ministers and central bankers from the G-20 nations set to gather in the next couple of days in Washington.
 
To date, Japan has been criticised by trading partners who say that moves to weaken the Yen have given Japan's exporters an unfair advantage.

The BoJ announced plans on April 4th to double its holdings of government debt in the next two years. The intention is to bolster its efforts to fight deflation.

Since then, the Yen has continued to weaken, pushed down when Haruhiko Kuroda took over as BOJ governor and when he pledged to do whatever it takes to defeat deflation.

Expect the market to remain choppy as a Yen selling bias seems to have griped investors.

Earlier today the Yen dropped by 0.3% to 126.60 per Euro and by 0.3% to 97.07 per Dollar. The Dollar fell 0.1% to $1.3042 per Euro.

Later today the U.S. Labor Department is expected to announce that inflation, as measured by consumer prices, had stalled in March having climbed by 0.7% in February.

U.K. inflation unchanged from previous month.

 The Office of National Statistics in the U.K. reports inflation for March came in 2.8%, the same as February's mark and in-line with the expectations of analysts. The central bank sees inflation nearing 3% later this year with food price increases and higher energy costs kicking in.

Moody's lowers China outlook.

 Moody's cut its outlook on China's government bonds to stable from positive citing risks tied to local government borrowing. The action by the agency follows a similar measure by Fitch Ratings last week.

Toyota catches ratings upgrade.

S&P revised its outlook on Toyota (TM) to Stable from Negative on its view the automaker will accelerate profitability and keep a strong position. Reduced risk of adverse effects from a strong yen and improving market share in the U.S. are also working in the company's favour, according to the ratings agency.

Tuesday, April 16, 2013

Oil sells off again.

 For the first time in nine months, the price of a barrel of Brent crude oil fell below the $100 level in London trading earlier today. The number of investors holding net long positions now stands at a one-year low. Later this week, data on oil stockpiles in the U.S. could pressure the market even further.
For three long decades, China has grown at a gravity-defying pace. An economic model based on investments and exports coupled with an expanding global economy facilitated China's double-digit growth.

But this can certainly not go on forever. And it is increasingly becoming clear that the days of high-speed growth in China may be over. In the first quarter of this year, China's economy expanded by 7.7% over the previous year's corresponding quarter. Such moderation is part and parcel of economic cycles.

But when an economic giant goes through an economic transformation, it has far-reaching effects on other economies. It is widely known that China has been the biggest consumer of commodities in the previous decade. As such, a slump in Chinese imports is set to adversely affect raw material exporting nations. An article in the Financial Times points out that many commodity exporters have invested heavily to increase supplies of raw materials. They had wrongly assumed that China would grow faster than 9% forever.

Regions such as Australia, Latin America and Africa will be severely affected by declining Chinese imports. Overall, the world is likely to see a declining trend in commodity prices. This is assuming that major developed economies are unlikely to report a robust recovery.  

S. 80-IA(5): Absorbed losses pre “initial assessment year” need not be set off

M/s. Shevie Exports vs. JCIT (ITAT Mumbai) 

The assessee set up a Wind Mill and commenced operations on 29.09.2006 (AY 2007-08). In that year the assessee suffered a loss of Rs. 3.5 crores on account of depreciation and interest which was set-off against the other income. In AY 2008-09, the assessee earned profit of Rs. 7 lakhs from the Wind Mill and claimed 100% deduction u/s 80-IA by treating AY 2008-09 as the “initial assessment year”. The AO allowed the claim. However the CIT, relying on Goldmine Shares 302 ITR (AT) 208 (SB) (Ahd) & Hyderabad Chemical Supplies 137 TTJ 732 (Hyd), revised the order u/s 263 on the ground that as u/s 80-IA(5), the eligible unit was deemed to be the “only source of income”, the earlier years’ losses of the unit had to be set-off against the profits before allowing s. 80-IA deduction. On appeal by the assessee, HELD reversing the CIT:
 
The fiction created by s. 80-IA(5) is that the eligible business is the only source of income and the deduction would be allowed from the initial assessment year or any subsequent assessment year. It nowhere defines as to what is the “initial assessment year”. Prior to 1.4.2000, s. 80-IA(12) defined the “initial assessment year” for various types of eligible assessees. However, after the amendment by the Finance Act, 1999, the definition of “initial assessment year” has been specifically taken away. Now, when the assessee exercises the option of choosing the initial assessment year as culled out in s. 80-IA(2) from which it chooses its’ 10 years of deduction out of 15 years, then only the losses of the years starting from the initial assessment year alone are to be brought forward as stipulated in s. 80IA(5). The loss prior to the initial assessment year which has already been set-off cannot be brought forward and adjusted into the period of ten years from the initial assessment year as contemplated or chosen by the assessee. It is only when the loss have been incurred from the initial assessment year, then the assessee has to adjust loss in the subsequent assessment years and it has to be computed as if the eligible business is the only source of income and then only deduction u/s 80-IA can be determined. This is the true import of s. 80-IA(5) (Velayudhaswamy Spinning Mills 340 ITR 477 (Mad), Emerala Jewel Industry 53 DTR 262 (Mad) followed, Goldmine Shares 302 ITR (AT) 208 (SB) (Ahd), Hyderabad Chemical Supplies 137 TTJ 732 (Hyd) & Pidilite Industries 46 SOT 263 (Mum) distinguished)

Monday, April 15, 2013

French production surprises to the upside.

French industrial production rose more than expected in February, climbing 0.7% vs a drop of 0.8% in January and consensus of +0.4%. Manufacturing was +0.8% vs -1.3% and +0.2%, with output boosted by robust growth in the transport and refining sectors. Despite the increases, though, economists still expect France's economy to have contracted in Q1.

Obama to introduce budget proposal.

 President Obama is due to unveil a FY 2014 budget today that will look to cut the deficit to 2.8% of GDP by 2016 from a projected 5.3% this year. The proposal will include tax increases for the well-off but also spending cuts and an offer to use "chained CPI" to limit the cost-of-living increases on welfare programs. The package has little chance of becoming law as is, but the White House hopes it can kick off fruitful negotiations.

Greece on track to receive €2.8B bailout tranche.

Greece looks poised to receive the next €2.8B tranche of its rescue package after the Troika said in a review that the country is on course to meet its bailout targets, with the recapitalization of the banks nearly complete. The Troika also said that it could provide more help to Greece once it reaches a primary surplus, which the government hopes to achieve this year.

Mining stocks sell off on gold plunge, China.

 Mining stocks have been taking a hiding following China's slowing GDP growth and the sell-off in precious metals. Rio Tinto (RIO) was -4.2% premarket, BHP Billiton (BHP) -4.2%, Barrick Gold (ABX) -4.9%, AngloGold (AU) -7.2%, IAMGold (IAG) -6.8%, Gold Fields (GFI) -7.7% and Goldcorp (GG) -8.2%.

Chinese slowdown hits global risk markets.

 China's Q1 GDP slowed to 7.7% on year from 7.9% in Q4 and missed expectations for growth of 8%. Industrial production data for March also disappointed, coming in at +8.9% vs consensus of +10%, although retail sales beat forecasts with an increase of 12.6%. The decelerating GDP growth helped drag down risk markets around the world, including U.S. stock futures, Asian and European shares, and oil.

Precious metals in vicious sell-off.

 Gold futures (GLD) were -6.05% at $1416.80 an ounce premarket, continuing a sell-off that began late last week and has turned into a full-scale stampede. A number of reasons have been given for gold's free-fall, chief among them the ECB's pressurization of Cyprus' central bank to sell its gold reserves to help pay for the country's bailout. Other precious metals are also suffering, with silver (SLV) -12.15% and platinum -4.05%.

Treasury Lays Out Its Cards For Japan

In a report on exchange rates, the U.S. Treasury Department has stopped short of accusing Japan of manipulating the Yen and has said that it will press Japan to refrain from competitive devaluation.
 
In its semi-annual currency report to Congress, released on Saturday, the Treasury has declared that it will pressure Japan to adhere to international commitments "to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes."
 
The report went further by saying that Japan needs to "take fundamental and thoroughgoing steps to increase the dynamism of the domestic economy, by easing regulations that unduly deter competition in its domestic economy."

It appears that the Treasury's statements concerning the Yen are an attempt to achieve some balance between Japan and China. It is seeking to avoid China otherwise interpreting any lack of action concerning Japan by the U.S. as a green light for China to also pursue exchange-rate devaluation.

The Fed considers the Chinese Yuan to still be significantly undervalued.

The U.S. prefers that the Yen did not weaken significantly further and will be intent on checking that the focus of Japan's policies are on stimulating the domestic Japanese economy and away from its external influences.
On April 4th, the Bank of Japan (BoJ) had surprised markets when it doubled monthly bond purchases to nearly match the Fed's monetary easing. The BoJ also set a two-year target to achieve its goal of 2% inflation and BOJ Governor Haruhiko Kuroda announced on Saturday, that there is "no time limit to the stimulus."

Since April 4th, the Yen has declined against all 16 of its most-traded counterparts. The Yen has since then declined by 2.2% to Dollar, by 3.5% to the Euro and by 2.8% to the Australian Dollar.

Earlier today the Yen was slightly higher by 0.5% to 97.88 per Dollar on weak China data and had gained 0.8% to 127.93 per Euro. The Euro dropped by 0.3% to $1.3077.

G-20 finance ministers are due to meet in Moscow on April 18th and April 19th, ahead of weekend talks of the IMF and World Bank. In February the G-20 had said that Japan could stimulate its economy, with the proviso that, Japanese policy makers would not publicly advocate a weaker Yen.
 
Leading IT company Infosys Ltd declared its fourth quarter and full year results for the financial year 2012-2013. Major brokerages are calling the performance a disaster. Here are a few reasons why? The revenue growth was lower than the guidance. The operating margins were the lowest in history. The company saw an increase in attrition levels. Most importantly it gave growth guidance for next year which is lower than NASSCOM's guidance for the entire industry. Also, it declined to give earnings guidance.

The common word in all these negatives is 'guidance'. The guidance was so important that the stock markets penalized the company's stock. It ended yesterday's trading session down by over 20%. One wonders whether such a decline was necessary.

The investors and brokerages appear to be taking a short term view of Infosys. Let us not forget that a company that derives a large portion of revenues from US and Europe is likely to face a decline. These regions are witnessing tough times which should have an adverse impact on companies that depend on them for earnings. One may argue that Infosys could have done better to manage this. It could have looked at emerging markets or even India for that matter. We agree that it could have done better. But that is not to say it did too bad. Penalising a stock for poor earnings and guidance over a few quarters or even a year for that matter is nothing but taking a myopic view we believe. The fundamentals for the Indian IT industry are strong over the long term. And Infosys is a company that has the necessary cavalry to take advantage of these opportunities. It is necessary to take a long term view of a company when investing in it. If you believe in the long term story then such declines just provide good opportunities to invest more in the stock.

S. 32(1)(ii): Non-Compete Fee not eligible for depreciation or amortisation

Gujarat Glass Private Limited vs. ACIT (ITAT Mumbai) 

The assessee acquired the business of manufacture of glass from Piramal Enterprises Ltd. It also entered into a non-compete agreement with Piramal Enterprises whereby it agreed to pay Rs. 18 crores for the seller agreeing not to carry on a competing business for a period of 18 years. The assessee claimed the said payment as a revenue deduction and in the alternate as a depreciable asset. The AO rejected both claims. The CIT(A) held that though the non-compete fee was not a depreciable asset, the amount paid for it was entitled to be amortized over the period of the agreement. The assessee filed an appeal before the Tribunal challenging the non-grant of depreciation while the department filed an appeal challenging the grant of amortization. In the first round, the Tribunal rejected the assessee’s plea by relying on the Third Member verdict in Paper Products. However, as this verdict was not put to the assessee, the matter was reposted for hearing. In the second round, the assessee relied on Smifs Securities 348 ITR 302 (SC) where goodwill was held to be eligible for depreciation and several other judgements. HELD by the Tribunal rejecting the plea:
 
The expression, “any other business or commercial rights of similar nature” in the definition of “intangible asset” in s. 32 (1)(ii) shows that the initial part, i.e. know how, patents, copyrights, trademarks, license, franchises, has been disjointed by the conjunction ‘or. The use of the disjunction ‘or’ has a very relevant role, because, the legislature accepts the difference and distinction of intangibles and rights. The legislature has used ‘or’ in the provision for explaining the distinction of application of like nature with that of the unlike nature, which is an accepted principle i.e. doctrine of ejusdem generis. Taking note of the word ‘or’, used as a disjunction is essential to carve out a meaningful genus. The argument whether non compete rights constitute is a right in rem or a right in personam is a matter to be decided by an appropriate higher judicial forum. The judgement of the Supreme Court in Smifs Securities 348 ITR 302 (SC) that goodwill is an intangible asset eligible for depreciation is not applicable to a non-compete right. Non-compete fee does not fall within the ambit of any other commercial or business rights. As regards the claim of amortization, since the payment of Rs. 18 crores is a capital expenditure, it cannot be allowed as an expense and also can(not) be amortized (Sharp Business System 254 CTR 233(Del) followed. Real Image Tech 120 TTJ 983)(Che), Medicorp Technologies 30 SOT 506 (Che), Bunge Agribusiness 132 lTD 549 (Mum), Serum Institute 135 ITD 69 (Pune) treated as not good law).

Sunday, April 14, 2013

Eurozone industrial output remains volatile.

 Eurozone industrial production recovered to increase 0.4% on month in February from a slump of 0.6% in January and beat consensus of +0.1%. On year, output was -3.1% vs -2.4% and -2.5%. The growth in production, which has been fairly volatile over the past few months, was driven by a 2.6% rise in energy production and a 1.3% increase in durable consumer goods.

S. 2(22)(e) Deemed Dividend: Share application money is not “loan or advance”

DCIT vs. Vikas Oberoi (ITAT Mumbai)


The assessee was a beneficial shareholder of two companies named Kingston Properties P Ltd. (KPPL), New Dimensions Consultants P Ltd (NDCPL) & R. S. Estate Developers P Ltd (RSEDPL). NDCPL & RESEDPL advanced various sums of money to KPPL towards “share application money”. However, some of the advances were returned by KPPL while some were adjusted towards allotment of shares. The AO held that the transaction was a “colourable device” and a “loan and advance” which fell within the ambit of s. 2(22)(e). The said “loan and advance” was assessed as “deemed dividend” in the hands of the assessee – beneficial shareholder – following Universal Medicare 324 ITR 264 (Bom). The CIT(A) reversed the AO. On appeal by the department to the Tribunal HELD dismissing the appeal:
 
Share application money or share application advance is distinct from ‘loan or advance’. Although share application money is one kind of advance given with the intention to obtain the allotment of shares/equity/preference shares etc, such advances are innately different form the normal loan or advances specified both in section 269SS or 2(22)(e) of the Act. Unless the mala fide is demonstrated by the AO with evidence, the book entries or resolution of the Board of the assessee become relevant and credible, which should not be dismissed without bringing any adverse material to demonstrate the contrary. It is also evident that share application money when partly returned without any allotment of shares, such refunds should not be classified as ‘loan or advance’ merely because share application advance is returned without allotment of share. In the instant case, the refund of the amount was done for commercial reasons and also in the best interest of the prospective share applicant. Further, it is self explanatory that the assessee being a ‘beneficial share holder’, derives no benefit whatsoever, when the impugned ‘share application money/advance’ is finally returned without any allotment of shares for commercial reasons. In this kind of situations, the books entries become really relevant as they show the initial intentions of the parties into the transactions. It is undisputed that the books entries suggest clearly the ‘share application’ nature of the advance and not the ‘loan or advance’. As such the revenue has merely suspected the transactions without containing any material to support the suspicion. Therefore, the share application money may be an advance but they are not advances which are referred to in section 2(22)(e) of the Act. Such advances, when returned without any allotment or part allotment of shares to the applicant/subscriber, will not take a nature of the loan merely because the same is repaid or returned or refunded in the same year or later years after keeping the money for some time with the company. So long as the original intention of payment of share application money is towards the allotment of shares of any kind, the same cannot be deemed as ‘loan or advance’ unless the mala fide intentions are exposed by the AO with evidence.
 
Ever since the 2008 financial crisis and the subsequent big bank bailouts, the future of too-big-to-fail institutions has been of topic of serious debate. Are these large financial institutions detrimental to the well-being of the economy? Should they be downsized into smaller, more manageable units?

Here is some more evidence on why it imperative to simplify these mammoth institutions. The chart of the day shows the numbers of subsidiaries of the six largest banks in the US before 2009 and at present. Together, these six banks had 27,748 subsidiaries. Though the number has fallen since the crisis, it still stands at 22,621. Such
a complex maze of subsidiaries makes it very difficult for the financial authorities to regulate them.

 
 
Data source: Livemint

Advertisement charges paid to Google & Yahoo is not chargeable to tax in India

ITO vs. Right Florists Pvt Ltd (ITAT Kolkata) 

The assessee, a florist, paid a sum of Rs. 30.44 lakhs to Google Ireland Ltd and Yahoo USA for online advertising. The AO held that the assessee ought to have deducted TDS and that as there was a failure, the expenditure was not allowable u/s 40(a)(i). This was deleted by the CIT(A) on the ground that Google and Yahoo did not have a PE in India. On appeal by the department to the Tribunal, HELD dismissing the appeal:
 
U/s 5(2)(b) income accruing or arising in India is chargeable to tax in India. A website does not constitute a ‘permanent establishment’ unless the servers on which websites are hosted are also located in the same jurisdiction. As the servers of Google and Yahoo are not located in India, there is no PE in India. As regards the second limb of s. 5(2)(b) of “income deemed to accrue or arise in India”, on heas to consider s. 9. S. 9(1)(i) does not apply as there is no “business connection” in India nor are the online advertising revenues generated in India serviced by any entity based in India. As regards s. 9(1)(vi), it is held in Yahoo and Pinstorm that the advertising revenues are not assessable as “royalty”. As regards s. 9(1)(vii), the services are not “managerial” or “consultancy” in nature as both these words involve a human element. Applying the rule of noscitur a sociis, even the word “technical” in Explanation 2 to s. 9 (1) (vii) would have to be construed as involving a human element. If there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii). On facts, the service rendered by Google & Yahoo is generation of certain text on the search engine result page. This is a wholly automated process. In the services rendered by the search engines, which provide these advertising opportunities, there is no human touch at all. The results are completely automated. Consequently, the whole process of actual advertising service provided by Google & Yahoo, even if it be a technical service, is not covered by the limited scope of s. 9(1)(vii). Consequently, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Act or the India US and India Ireland tax treaty.

Greek unemployment continues to climb.

Greek unemployment rose to yet another record high of 27.2% in January from 25.7% in December as the country's depression continued unabated. Youth unemployment hit 59.3%, up from 51% a year earlier.

China's forex reserves surge.

China's foreign exchange reserves climbed by $130B to $3.44T in Q1, the largest quarterly rise for almost two years. The inflow helped boost credit growth, with total new financing surging 58% on year to 6.2T ($1T). Bank loans rose 16% but those in the "shadow-banking" system, which have caused much concern, more than doubled.

Obama signs $109B sequester order for 2014.

 President Obama signed a $109B sequester order for FY 2014, with discretionary spending set to drop by $91B to $967B, the lowest amount since 2004. The signing came just hours after Obama introduced a budget that would replace those sequester cuts.

S. 80-IA(4): In Giving Effect, ITAT Reverses Its Own Larger Bench Ruling;S. 80-IA(4): Larger Bench verdict in B. T. Patil vs. ACIT 32 DTR 1 is not good law

B.T. Patil & Sons Belgaum Constructions Pvt. Ltd vs. ACIT (ITAT Pune)

The assessee, a civil contractor, claimed deduction u/s 80-IA (4) in respect of the profits from infrastructure projects executed by it. The lower authorities rejected the claim on the ground that the assessee was a mere contractor and not a developer. Before the Tribunal, the Members of the Division Bench dissented and so the issue was first referred to a Third Member and then to a Larger Bench of three Members. The Larger Bench (32 DTR 1) rejected the assessee’s claim on the ground that in order to be eligible u/s 80IA (4), the assessee had to be directly engaged in developing, maintaining and operating the facility and that there had to be a complete development of the facility and not just a part of it. When the matter came before the Division Bench for giving effect to the Larger Bench’s verdict u/s 255(4) the assessee did not appear and so the Bench dismissed the appeal in limine for non-appearance. The assessee filed a MA before the Tribunal to recall the said order and also filed an appeal before the High Court. The Tribunal recalled its order dismissing the appeals and refixed the matter for hearing. Consequently, the assessee withdrew the appeal filed in the High Court. In the order permitting the withdrawal, the High Court directed the Tribunal to consider the judgement in ABG Heavy Industries 322 ITR 323 (Bom). HELD by the Tribunal:
 
The view of the Larger Bench that the assessee had to be directly engaged in developing, maintaining and operating the facility and that there had to be a complete development of the facility and not just a part of it is contrary to the law laid down in ABG Heavy Industries 322 ITR 323 (Bom). The High Court held that the effect of the amendment by the Finance Act of 1999 is that the benefit of s. 80IA(4) is available to any enterprise carrying on the business of (i) developing, (ii) maintaining & operating, or (iii) developing, maintaining and operating an infrastructure facility. It was also held that the assessee did not have to develop the entire project in order to qualify for deduction u/s 80-IA and that Parliament did not legislate a condition impossible of compliance. The Explanation below 80-IA (13) inserted by FA 2007 & 2009 w.r.e.f 1.4.2000 which provides that s. 80-IA(4) shall not apply to a person executing a “works contract” does not apply to a case where the assessee executes the work by shouldering Investment & technical risk by employing team of technically & administratively qualified persons and it is liable for liquidated damages if failed to fulfill the obligation laid down in the agreement and also securing by Bank guarantee. On facts, the assessee had shouldered the investment & technical risk in respect of the work executed and it was liable for liquidated damages if failed to fulfill the obligation laid down in the agreement. The liability which had been assumed by the assessee were obligations involving the development of an infrastructure facility. Consequently, it is not correct to say that the assessee is merely a contractor & not a developer. The assessee is eligible for benefit u/s 80-1A even if only part of the Infrastructural Project work is executed by it.
Souce: ADB, The Mint
* As % of GDP

 
The Asian Development Bank (ADB) has given its estimates for GDP, inflation and current account balance for India. The picture does not look too rosy. As per ADB's estimates, India should be able to rein in inflation and current account deficit. But its growth would still not reach its full potential. The reasons for this are structural and policy related issues which continue to weigh down investments. Therefore it expects India's growth to increase to 6.5% by FY 15. This is higher than the 5% growth estimate for FY13 but much lower than the 9% levels that we had seen in the past. The reason for slower growth estimates is India's twin deficit problem. To ease this situation, the government has to step up on policy reforms. Though it has taken some steps on this front, but it still has to go a long way. Only when structural hindrances are removed, will there be a revival in investment. Investment will drive consumption which in turn will boost growth. 

Transfer Pricing: RBI approval has no relevance on issue of Arms Length Price

SKOL Breweries Ltd vs. ACIT (ITAT Mumbai) 

The assessee was engaged in the manufacturing and marketing of beer using technical know-how provided by SAB Miller. The assessee paid royalty for the technical know-how and the question arose whether the same was at arms’ length. One of the arguments advanced by the assessee was that as under Press Note no. 9 of 2000 issued by the Ministry of Commerce and Industry in relation to FDI policy, remittance of royalty not exceed 5% of domestic sales and 8% of export sales was permitted, the royalty paid by it which was within those limits should be considered as being at arms’ length for transfer pricing purposes. HELD by the Tribunal rejecting the plea:
 
Press Note no.9 of 2000 issued by the Ministry of Commerce and Industry in respect of FDI policy and prescribing the percentage of royalty to the sales allowed under automatic route cannot substitute as ALP to be determined under the provisions of the Act and Rules. FDI policy permitting certain percentage of payment of royalty is only for remittance of the amount in foreign exchange and therefore, such permission given in an entirely different context and purpose cannot be considered as relevant for determination of the ALP under I. T. Act. The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the I T Act and that is the function of the income tax authorities and, cannot be validly go into such an issue. When a proper mechanism is provided under the provisions of the I. T. Act and Rules for determination of the ALP, then the approval by other than the I. T. Authorities, for the purpose of remittance/outflow of the foreign exchange, does not ipso facto, partake the character of ALP, which has to be determined as per TP regulations (Nestle India Ltd 337

Fed policies prompt rise in company borrowing - survey.

The Fed's easy policies have led to increased corporate borrowing, a survey of 450 CFOs indicates, with 45% of firms taking out loans because of low rates. Half of those companies are using the debt to increase capex and 25% to expand their operations, although only 10% for hiring. "Short-term positive, long-term problematic" is how Moody's describes the situation, especially if firms are borrowing more than they can handle.

German imports unexpectedly drop.

 German imports fell for the third time in four months in February, slumping 3.8% on month vs +3.3% in January and missing consensus of +0.5%. Exports unexpectedly fell as well, while the trade surplus widened to €17.1B from €15.6B. The slide in imports suggests that domestic demand has softened; the hope has been that it will boost German and eurozone growth.

Chinese inflation falls sharply.

 Chinese CPI slowed to +2.1% on year in March from +3.2% in February - when New Year holiday demand affected prices - and came in below consensus of +2.4%. A softening of rises in food costs helped offset an increase in fuel expenses to bring overall inflation lower and give China's central bank more flexibility over monetary policy. The news helped boost equity markets across the globe.
Data Source: The Economist

 
High unemployment continues to plague the Eurozone. According to the Economist, unemployment in the 17 member states stood at 12% in February. This is the highest in the region's history. Indeed, the chart shows that unemployment in Greece, Spain and Portugal was higher in early 2013 than what it was a year ago. Germany, on the other hand, fared much better. The biggest worry for the region is the rise in the number of youth unemployed. This could have serious implications going forward in the form of seething discontent and revolutions if the problem is not addressed sooner. But so far the region has shown no inclination towards this other than printing money to bolster growth.

Transfer Pricing: Automatic RBI approval means transaction is at Arms Length Price

ThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITAT Mumbai)

 
The ITAT had two consider two legal issues in the context of transfer pricing (i) whether if a royalty agreement falls within the ‘automatic approval scheme’ and is approved/ deemed to be approved by the RBI, the royalty can be treated to be at arms’ length just because it is approved/ deemed approved and (ii) what are the parameters to be applied while applying “Internal TNMM”. HELD by the Tribunal:
 
(i) The assessee’s collaboration agreement with its AE for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty falls under the “automatic approval scheme” of the RBI. When the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP;
 
(ii) Rule 10B(1)(e)(i) requires the profit margin realised by the enterprise from an international transaction entered into with an AE to be ascertained for determining as to whether or not it is at arm’s length. The margin with which such margin earned by the assessee is compared with for determining the ALP, can be internally available from comparable transaction(s) or from externally available cases. If the enterprise has entered into similar transactions with third parties as are under consideration with the AE, then the profit realized from such transactions with third parties is a good measure to benchmark the margin from international transaction. Thus, on one hand we need to have profit margin which is to be compared from transactions with the AEs and on the other hand, we need to find out the profit margin from similar transactions with non-AEs with which comparison is to be made. Both these figures should come from separate watertight compartments. No overlapping is permissible in the composition of such compartments. In other words, neither the first compartment of profit margin from AE transactions should include profit margin from the transactions with non-AEs, nor the second compartment should have profit margin from the transactions with the AEs. If such an overlapping takes place, then the entire working is vitiated, thereby obliterating the finer line of distinction of the profit margin to be compared and the profit margin to be compared with. On facts, as the assessee had not maintained segment-wise accounts and as the figures of AE and Non-AE transactions were segregated from the common pool of figures, the margins derived therefrom were not reliable and the claim of internal TNMM was not acceptable.