Monday, September 30, 2013

Eurozone inflation edges down.

Eurozone flash CPI has slipped to a 3 1/2 year low of +1.1% on year in September from +1.3% in August and come in below consensus of +1.2%. Food, alcohol and tobacco have experienced the highest rate of inflation, while energy prices have fallen. The CPI reading is well below the ECB's target of just under 2%, possibly giving the bank room to ease monetary policy further to help boost the eurozone's weak economy.

U.S. Italian political turmoil sends shares tumbling.

Equities were lower in most places around the world at the time of writing as the U.S. government headed for a shutdown and Italy's government faced collapse. However, European shares remained near five-year highs and are on course for their best quarter in two years. Gold, often a safe haven in times like these, was lower.

U.S.government shutdown increasingly likely.

The government is heading for a shutdown at midnight tonight after the Republican-led House yesterday voted to tie federal funding to a one-year delay to Obamacare and a repeal of a tax on medical devices. The Democrat-led Senate is due to meet today at 2 pm, when it's expected to reject the House measures. One option may be for Congress to pass legislation that would cover government financing for a few days and give the sides more time to negotiate.

Sunday, September 29, 2013

Japanese core CPI hits five-year high.

 Japan's core CPI, which excludes fresh food, has increased to its highest level since November 2008, edging up to +0.8% on year in August from +0.7 in July. However, most of the increase was due to rising gasoline prices and the weaker yen, and CPI data that excludes energy as well as food remained negative with a drop of 0.1%. Still, prices of consumer-electronic equipment and other durable leisure goods increased for the first time since 1992.

Wednesday, September 25, 2013

Alibaba heads for U.S. IPO after HK negotiations stall

Alibaba reportedly plans to carry out its blockbuster IPO in the U.S. after negotiations with the Hong Kong stock exchange broke down over the e-commerce giant's demand that its "partners" - a group of founders and senior managers - maintain control over board composition. Listing in New York would enable Alibaba to issue shares that provide its partners with more voting power. The IPO could value Alibaba at up to $120B. That would be a boon to Yahoo (YHOO), which owns 24% in the Chinese company.

Leading EU banks need extra €70.4B in core capital.

The EU's top 42 banks need a further €70.4B ($95B) of capital to comply with Basel III core-capital regulations, the European Banking Authority estimates. The rules, which are due to take effect in 2019, require that banks hold a core-capital buffer of at least 7% of their assets on a risk-weighted basis. Banks will also need to maintain a leverage ratio of 3% of their total non risk-weighted assets from 2018. The shortfall for this requirement is €106.6B.

JP Morgan ''global deal" could reach up to $7B.

How badly does JPMorgan (JPM) just want all of this to go away? The bank is reportedly in talks to settle the myriad of investigations into its various dubious practices, with the NYT reporting that the company could pay $3-7B. JPMorgan has apparently offered $3B. Since 2011, the firm has agreed to pay a total of $5.4B in major settlements. The WSJ provides a tally of the significant agreements.

Tuesday, September 24, 2013

The most powerful central bank in the world, the US Federal Reserve has received a lot of brick bats for its ultra-easing monetary policy. The quantitative easing program, which is nothing but a sophisticated term for reckless money printing, has fuelled asset bubbles across the globe. And it seems the US Fed is going to have a tough time to end this money printing binge. The recent Fed move to defer the tapering of the QE was an indicator of how vulnerable the US economy is. If it is taken off the QE dope, it may just collapse.

In fact, even within the US Fed there are officials who are against the QE. Richard Fisher, a top Fed official, is one of them. As per him, the QE is ineffective in reviving the economy. Moreover, it may lead to high inflation in the future. He even urged the Fed to start the tapering September onwards. But as we all know, it didn't happen. And this has certainly hurt the central bank's credibility. 

Business confidence rises in Germany for fifth straight month.

German business confidence rose for the fifth consecutive month in September, as executives became increasingly optimistic about the prospects for the eurozone's largest economy where unemployment is sitting at a twenty-year low. The Ifo institute's business climate index rose to 107.7 this month from 107.6 (revised) in August. Economists were expecting a reading of 108. A read on the current situation fell to 111.4 in September from 112 in August, while a measure of expectations rose to 104.2 from 103.3.

Greece on track to hit primary budget surplus.

Greece may be on course to achieve a primary budget surplus this year, an achievement that would allow it to seek further debt relief from its lenders. Troika officials arrived in the country yesterday amid speculation that the government is reportedly considering issuing bonds backed by state property assets as it looks for ways to avoid a third bailout and more onerous austerity conditions.

Monday, September 23, 2013

Citigroup's trading revenues drop significantly.

Citigroup's (C) trading revenue has reportedly fallen sharply following a greater than-expected slowdown during the summer, with the decline threatening to hurt the bank's overall earnings. The firm's focus is weighted towards interest rates and forex, which are seen as weak, while it also has high exposure to emerging markets, which have recently suffered from capital flight and falling currencies. Shares were -0.2% premarket.

China's HSBC flash PMI hits six month high.

China's HSBC flash PMI climbed to a six-month high of 51.2 in September from 50.1 in August, boosted by improvements in external and domestic demand. The reading adds to a string of data that indicate that China's economy is bouncing back after a slowdown. HSBC expects a more "sustained recovery" that "will create more favorable conditions to push forward reforms." The PMI reading helped strengthen shares in China but not in other parts of Asia.

Merkel wins German election but building coalition could be tricky.

Angela Merkel's Christian Democratic Union (CDU) bloc enjoyed a resounding victory in Germany's elections yesterday, although the CDU fell short of a majority and its preferred coalition partner, the pro-business Free Democrats, was wiped out. That means Merkel will probably have to form a coalition with the left-of-center Social Democrats, which came in second, or the Greens. German shares were flat at the time of writing.
Land is one of the most crucial factors of production in an economy. As such, clear and appropriate land laws are important to ensure smooth and fair land acquisitions. Unfortunately, India has suffered from antiquated and vague laws pertaining to land ownership and acquisition. But last month, the Parliament passed the Land Acquisition Bill.

As per an article in Business Standard, corporates seem very disappointed with this new Bill. What are the reasons? Here are some highlights of the bill. The bill proposes higher compensation for land acquisition. For rural areas, it will be 4 times market value, while for urban areas it will be 2 times market value. Many corporates are of the opinion that such high acquisition costs would either make projects too expensive or simply unviable. In fact, Ajit Gulabchand, the chairman of infrastructure firm Hindustan Construction Company has said that he would not initiate any new project for the next two to three years.

But that's not all. The new Bill requires a new layer of approval by way of social impact assessment. As a result of this, the project life cycle would increase by at least one year. In addition, it could be challenged in the court at every stage. There are several other requirements such as the provision of rehabilitation and settlement for all affected families that will add to the costs. All in all, the new Bill means high acquisition costs, longer project cycles and more litigation.

Empire State Building REIT could raise $1.07B in IPO.

Empire State Realty Trust, which includes the Empire State Building as its centerpiece property, has set an IPO range of $13-15. With Empire State planning to sell at least 71.5M shares on the NYSE, it could raise up to $1.07B, putting it in the top three for REIT debuts. There is also a greenshoe option for 10.725M shares. Empire State Realty Trust plans to set the final price on October 1.

S. 50B: Transfer of assets without monetary consideration is not a “slump sale”

 ITO vs Zinger Investments Pvt Ltd(ITAT Hyderabad)

The assessee transferred its manufacturing division to Novapan Industries Ltd under a scheme of amalgamation pursuant to which Novapan transferred investments worth Rs. 25.24 crore to the assessee and allotted shares worth Rs. 6.81 crore to the assessee’s shareholders. There was no monetary consideration. The AO held that the transfer of the manufacturing division was a “slump sale” and that it attracted s. 50B. He computed capital gains on that basis. The CIT(A) reversed the AO and held that there was no slump sale. On appeal by the department to the Tribunal HELD dismissing the appeal:

S. 2(42C) defines a ‘slump sale’ to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. A plain reading of s. 2(42C) makes it clear that to qualify as a slump sale, two conditions have to be satisfied viz., (i) there must be transfer of one or more undertakings as a result of sale and (ii) the sale should be for a lump sum consideration without values being assigned to the individual assets and liabilities. The presence of money consideration is an essential element to a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale. In the present case, as no monetary consideration was received by the assessee for transfer of the assets and liabilities of the manufacturing division to Novapan Industries Ltd, the transaction is not a “slump sale” and does not attract s. 50B (Motors and General Stores 66 ITR 692 (SC), R.R. Ramakrishna Pillai 66 ITR 725 & Avaya Global Connect 26 SOT 397 (Mum) followed)

Thursday, September 19, 2013

Home builders rise on Fed, upbeat data.

Investors will likely be keeping a close eye on the homebuilders (XHB) after the sector got a big lift Wednesday from the Fed's decision to postpone the dreaded taper and from data which showed single-family housing starts rose 7% M/M to 628K in August. It's now a question of sustainability, as some wonder how well demand for housing will hold up in the face of tepid jobs growth once the FOMC finally takes the plunge and begins to scale back its asset purchases.

Emerging Market rally as Fed forgoes taper.

Emerging market stocks (EEM) posted big gains overseas on the back of the U.S. Federal Reserve's decision to keep the size of its asset purchase program unchanged for the time being. Indonesian shares (IDX, EIDO) jumped as much as 7.4% early before retreating a bit to trade around 4% higher. Stocks likewise rallied sharply in India (EPI), Thailand (THD), the Philippines (EPHE), Malaysia (EWM), and Turkey (TUR).

Wednesday, September 18, 2013

Transfer pricing: Finance Minister Press Release Reg Safe Harbour Rules.

The Ministry of Finance has issued a press release stating that the Safe Harbour Rules have been finalized after considering the comments of various stake holders. The significant aspect is that in case of transactions in the nature of routine ITES and ITS activities the earlier ceiling of Rs 100 crore has been removed. Transactions upto Rs. 500 crore have been provided safe harbour margin of 20% and transaction above Rs.500 crore have been provided safe harbour margin of 22%. Similarly, the ceiling of Rs. 100 crore provided for transactions in the nature of corporate guarantee has been removed. Also, the rules provide for a time bound procedure for determination of the eligibility of the assessee and the international transactions. Any rejection of the option exercised by the assessee shall be by way of a reasoned order passed after hearing the assessee. The assessee shall have a right to file an objection with the Commissioner against adverse finding regarding the eligibility. The Commissioner shall thereafter decide about the validity of the option exercised by the assessee.

BOE united in keeping policy on hold.

The Bank of England's Monetary Policy Committee(MPC) voted unanimously to keep interest rates at 0.5% and against more bond-buying at a meeting earlier this month. With data showing that the U.K.'s recovery is taking hold, "no (MPC) member judged that further stimulus was appropriate at present." That's a change from August, when some in the MPC felt there was a "compelling" case for loosening policy. The pound spiked vs the dollar and was +0.4% at $1.5965 at the time of writing, while the FTSE was +0.15%.

Shares rise ahead of the Fed.

Global equities were mainly higher at the time of writing as markets awaited the word from the FOMC later in the day. The dollar index and 10-year Treasury yields were flat, gold and silver were lower, and crude oil was up.

Tuesday, September 17, 2013

Chinese foreign direct investment stalls.

China's foreign direct investment grew 0.6% on year to $8.38B in August, although the expansion was down sharply from 24.1% in July and 20.1% in June. The data, along with a rise in money market rates, helped Chinese shares slump 2%.

Global stocks fall ahead of FOMC meeting.

Global equities were mostly lower at the time of writing - although U.S. stock futures were only slightly down - prior to the start of the FOMC's two-day meeting today, when the Fed is expected to reduce its bond-buying program by $10B a month to $75B despite a tepid jobs report for August. "Investors are pricing in $10B, but $20B or above could create waves, so people remain cautious ahead of the decision."
The inventory figures in the real estate market are a key to understanding where the market is heading as a whole. A higher inventory figure means sales are not taking place. And declining sales means there is no demand which is predominantly due to higher prices. Thus, higher inventory levels are a sign that price correction is likely. Now, let us see what the inventory position of key cities in India is. Please note that inventory position is stated in months. So, when it is stated that inventory position in Mumbai is 30 months it effectively means that it will take builders approximately 30 months to sell off the entire inventory in the market. Thus, higher the inventory in months, lower is the sales volume. This signals poor market volumes and illiquidity in markets.

As per news reports, inventory levels in Mumbai stand at 48 months. In Delhi, the figure is 23 months. These figures are at an all time high. This signals that prices are unaffordable. With prices being so high the only way where they can head now is downwards. While it is difficult to tell when the correction will happen, we feel it will be sooner than later.  

Monday, September 16, 2013

Indian headline inflation hits six- month high.

India's wholesale price index, the country's main gauge of inflation, climbed to a six month high of 6.1% in August from 5.79% in July and topped consensus of 5.8%. The rise was driven by an 18.2% jump in food inflation and an increase in energy prices. The climb strengthens the case for Raghuram Rajan, the new governor of the Reserve Bank of India, to keep interest rates high at his first policy meeting on Friday. India's Sensex was +0.05% at the time of writing, while the USD-INR was -1% at $62.755.

Eurozone inflation edges up.

As expected, Eurozone CPI rose 0.1% on month in August vs -0.5% in July. On year, inflation slipped to 1.3% from 1.6% and dropped further away from the ECB's target of just under 2%, giving the bank further room to ease if it so wishes.

Stocks up, rates and dollar down on Summers news.

Global equities were mostly higher at the time of writing following Larry Summers' exit from consideration as the next Fed chief, although the dollar index was -0.4% and 10-year Treasury yields were -0.8 bps to 2.81%. "Clearly the dollar doesn't like the idea it could be Yellen at the helm because of the interpretation that QE (stimulus) could be in place for longer," said Rabobank currency strategist Jane Foley. Gold was +0.45%, but oil was -1.3%, possibly hurt by the increasing prospects of a diplomatic solution to the Syrian crisis.

Summers withdraws from consideration for Fed Chief.

Larry Summers has dropped out from the race to become the next Chairman of the Federal Reserve, saying that "any possible confirmation process for me would be acrimonious," and would not serve the interests of the Fed, the government or the economy. The remaining top contenders are Janet Yellen and Don Kohn, both of whom helped shape the Fed's super easy money policy, of which Summers was a critic.

Sunday, September 15, 2013

S. 32: Sale & lease transactions by banks are genuine and eligible for depreciation

UTI Bank Limited vs. ACIT (ITAT Ahmedabad)

The assessee, a Bank, purchased windmills worth Rs. 27 crore in a sale-and-lease-back transaction and claimed depreciation thereon. The AO & CIT(A) rejected the claim and held that the transaction was not one of purchase but was a finance transaction in which the windmills were received as security on the basis that (a) under the Banking Regulation Act, 1949, the assessee was not permitted to engage in any business other than banking, (b) the lease rentals were fixed on the basis of interest on advances and other charges receivable by the assessee as a financier and were not co-related to the projected income on the capacity of each wind energy generator, (c) the assessee was not entitled for surplus income on excess generation of power and was not to suffer any loss owing to lesser production or any other contingencies, (d) the return of the assessee on financing was granted by taking interest-free deposit, (e) the assessee had no responsibility of labour, repairs, taxes etc in running of the project and (f) though the purchase of wind energy generators was in the assessee’s name, the land and power purchase agreements with the Electricity Boards were not in its name. On appeal by the assessee to the Tribunal HELD allowing the appeal:

S. 32 allows depreciation if the asset is “owned, wholly or partly, by the assessee and used for the purposes of the business“. There is no requirement that the asset must be used by the assessee himself. It is sufficient if the asset is utilized for the purpose of business of the assessee. The argument, relying on McDowell 154 ITR 148 (SC), that Sale & Lease Back transactions are a devise for lowering the tax effect cannot be accepted. Sale & Lease Back transactions are genuine and cannot be considered to be sham. By virtue of the judgement in Cosmo Films Ltd 338 ITR 266 (Del), the contrary judgements in MidEast 87 ITD 537 (Mum) (SB) and Induslnd Bank 135 ITD 165 (Mum) (SB) are impliedly reversed (ICDS Ltd 350 ITR 527 (SC) & Development Credit Bank Ltd (ITAT Mum) followed).

Contrast with State Bank of India (ITAT Mum) where it was held that banks are not eligible to carry out operational leasing and that transactions of this sort cannot be regarded as genuine leases. See also Hathway Investments (ITAT Mum) where SLB transactions were held to be non-genuine
 

Indian industrial output provides hope but GDP forecast cut.

Indian industrial output surprisingly rose 2.6% on year in July, rebounding from a fall of 1.8% in June and beating forecasts for a contraction of 0.9%. Meanwhile, consumer inflation edged down to 9.52% in August from 9.64% in July. While the data may have provided some hope that India's slumping economy could be starting to stabilize, the prime minister's economic advisory panel has cut its FY growth estimates to 5.3% from a previous forecast of 6.4%.

Austerity is not working for Spain.

Spain's debt rose to 92.2% of GDP in Q2 from 90.1% in Q1 and came in above the government's year-end target of 91.4%. In monetary terms, debt increased to €943B from €923B. Spain's debt load has almost doubled since 2008, when the country's property bubble burst and triggered a deep recession, while the burden has increased from 73% in Q1 last year. The sharp climb has come despite the government's deep austerity measures that were supposed to ease the debt load.

U.S.stock futures mixed following Summers report,dollar up.

U.S. stock futures were slightly mixed at the time of writing and EU shares were solidly red following the report that Larry Summers is set to be appointed the next Fed chief. Gold was down and continuing a poor run of late that has also been caused by an easing of tensions over Syria and a collapse in Indian demand due to the tumbling rupee. Ten-year Treasury yields were +2 bps to 2.93%, while the U.S. dollar index was +0.1%.

Thursday, September 12, 2013

Michael Dell set to regain control of his baby.

Michael Dell and Silver Lake are finally expected to win their battle to take Dell (DELL) private today, with their buyout proposal of $24.9B set to receive shareholder approval. The vote comes after Carl Icahn gave up on his attempt to gain control of the company earlier this week. Yesterday, Dell set indicative pricing on a $5.5B loan that will help pay for the buyout.

Government shutdown begins to loom as funding bill delayed.

House Republican leaders yesterday postponed a vote that would have approved the financing of the government through December. The delay came because of opposition among conservative Republicans to parts of the legislation related to the funding of Obamacare, which they want to strip out. The government faces a shutdown if legislation isn't approved by September 30. Democrats and Republicans also have until mid-October to agree on measures to lift the debt ceiling.

Eurozone recovery at risk as industrial output falls.

Eurozone industrial production returned to contraction in July, tumbling to -1.5% on month from +0.6% in June and missing consensus of +0.1%. You can't even blame the region's famously long summer holidays, as output fell 2.1% on year vs -0.4% in June. Italian production also slumped. The worse-than-expected figures bring into doubt the sustainability of the eurozone's nascent recovery and are somewhat in contrast to more upbeat PMI data. EU shares were mostly lower at the time of writing, while the euro was -0.2% at $1.3284.

Wednesday, September 11, 2013

Chinese industrial-output growth speeds up.

Chinese data provided yet more evidence that the country's economy is stabilizing and will avoid a hard landing, with industrial-production growth accelerating to 10.4% on year in August from 9.7% in July and beating consensus of 9.9%. August retail sales and year-to-date urban investment also grew strongly and topped forecasts. Following the data, Bank of America said it expects "an impressive recovery" in Q3.

Obama: No U.S. strikes if Syria gives up chemical weapons.

Russia's proposal to work with Syria to put the latter's chemical weapons under international control "could potentially be a significant breakthrough" that could avert U.S. military action, President Obama said yesterday. However, he is skeptical of the plan and wary that Syria could use it as a delaying tactic. Still, Obama's comments buoyed global equities, which also got a lift from better-than-expected Chinese data.

U.K. unemployment edges down to 7.7%.

As in the U.S., the improvement in the U.K. jobless picture continues to be hard-going. The unemployment rate dropped to 7.7% in May-July from 7.8% in February-April, while the number of unemployed fell by 24,000 to around 2.49M. The pound spiked following the data but then dropped back a bit and was +0.2% at $1.5764 at the time of writing.

Fed seen limiting bank's commodities operations.

The Federal Reserve is expected to soon publish guidelines that would restrict banks' involvement in physical-commodities businesses. The new rules, which would be designed to limit banks' risky activities, could accelerate the withdrawal of JPMorgan (JPM)Morgan Stanley (MS) and Goldman Sachs (GS) from sectors such as metals warehousing and power generation, where GS and JPM respectively have been accused of price manipulation.

Auto volumes: The Slowdown continues.

FY14 is proving to be another difficult year for the Indian auto industry. As can be seen from the chart, volume growth in the first 5 months of FY14 has been very poor for most segments in the auto space. And this is likely to continue unless there is a pickup in economic activity. There are hopes that good monsoons and the festive season will help in providing the much needed boost to the beleaguered sector. But growth will really start accelerating once a meaningful recovery in the Indian economy begins to take shape. Whether this will happen anytime soon remains to be seen though.
  
       
                                *Passenger vehicles, **Commercial vehicles
                                                                Data Source: SIAM

S. 32: Lease transactions by Banks are in the nature of loans/ advances. Transaction of sale & lease back of railway assets cannot be treated as genuine

State Bank of India V DCIT [ITAT] Mumbai.

The assessee, a Bank, entered into a sale and lease back transaction with Konkan Railway Corporation pursuant to which it bought assets like railway tracks, rails, sleepers etc for a consideration of Rs. 25 crore and leased it back for a period of 84 months for a monthly lease rental. The AO & CIT(A) disallowed the claim for depreciation on the ground that the sale and lease back transaction was in the nature of a financial transaction and that it was given the shape of a lease transaction only in order to enable the assessee-bank to claim depreciation and reduce its taxable income. On appeal by the assessee to the Tribunal HELD dismissing the appeal:

The real object of the entering into the sale and lease back transaction so far as Konkan Railway is concerned is to raise funds. The transaction of sale of the asset to the assessee bank and its lease back to Konkan Railway cannot be separated. It was not possible for Konkan Railway to sell out the railway system. Thus, the sale transaction was merely on paper and to facilitate the financial arrangement by the assessee to Konkan Railway without involving any real intention of transfer of the assets. The terms of the lease agreement are only to secure the interest of the bank till the recovery of the full amount along with the interest. The assessee cannot exercise the real and actual ownership over the asset keeping in view the facts and circumstances and nature of the asset in question. Further, under the Banking Regulation Act, 1949 read with RBI circular dated 19.2.1994, banking companies can undertake the activities of equipment leasing but these are required to be treated on par with loans and advances. Therefore, the activity of equipment leasing permitted by the RBI is only in the nature of finance lease. The terms and conditions specified by the RBI for income recognition of lease transactions are also on par with the manner in which a loan transaction is treated. In view of the said circular, there is no scope for treating the instant lease agreement as that of an operating lease (IndusInd Bank 135 ITD 165 (Mum) (SB) followed; ICDS 350 ITR 527 (SC) distinguished on the basis that the lease there was not by a Bank but by a NBFC).

Monday, September 9, 2013

Eurozone investor confidence shoots up.

The Eurozone Sentix investor confidence index has turned positive for the first time in over two years, jumping to 6.5 this month from -4.9 in August and slaying consensus of -2.8. Readings for the current situation and expectations surveys also climbed strongly. The figures add to other data indicating that the eurozone is recovering from its deep recession.

Economic data helps boost Chinese shares.

Chinese shares surged 3.4% following better-than-expected export figures that provided further indications that the economy is stabilizing. Sales abroad accelerated to +7.2% on year in August and the trade surplus jumped 61% on month to $28.6B, although imports slowed to +7% on year. Meanwhile, inflation slipped to 2.6% in August from 2.7% in July and PPI deflation eased. Banks (CHIX) were boosted by speculation that they'll be allowed to issue preferred shares in order to firm up their finances.

Consideration for supply of software which is not embedded in equipment is taxable as “royalty”

DDIT vs. Reliance Infocom Ltd/ Lucent Technologies (ITAT Mumbai)

The assessee, Reliance Infocomm Ltd, wanting to establish a wireless telecommunications network in India, entered into a contract with Lucent Technologies for supply of software required for the telecom network. The assessee claimed, relying on Tata Consultancy Services 271 ITR 401 (SC), Ericson AB 343 ITR 370 (Del), Nokia Networks OY 25 taxmann.com 225 & Motorola 270 ITR (AT) (SB) 62, that the amount paid by it to Lucent for acquiring the software was for purchase of a “copyrighted article” and “goods” and that it was not assessable to tax as “royalty” u/s 9(1)(vi) or Article 12(3) of the India-USA DTAA. The claim was upheld by the CIT(A). On appeal by the department to the Tribunal HELD allowing the appeal:
 
There is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. Where the software is an integral part of the supply of equipment, the consideration for that is not assessable as “royalty”. However, in a case where the software is sold separately, the consideration for it is assessable as “royalty”. On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident. The non-resident supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was “for the use of or the right to use copyright” and constituted “royalty” under s. 9(1)(vi) and Article 12(3) of the India-USA DTAA.
 

German exports fall despite eurozone recovery.

German exports fell 1.1% M/M in July, surprising economists who were expecting an increase of 0.7%. The news seems to contradict recent data which shows the eurozone may be pulling itself out of the economic doldrums — the EU is Germany's largest trading partner. Imports rose 0.5% and the Germany's current account surplus narrowed to €14.3B.

Japan offers upbeat economic assessment.

For the first time since May of 2012, Japan's Cabinet Office says its coincident index is "improving," which indicates the government sees "a high likelihood of an economic expansion" based on the composite of 11 key economic indicators. "The indicators that most contributed to the rise were manufacturing-related numbers, such as industrial output and industrial electricity usage," The positive assessment comes on the heels of the Bank of Japan's more sanguine take. On Thursday, the central bank said the economy is "recovering moderately."

Law on non-taxing foreign PE profits no longer good law after insertion of s. 90(3) & Notification dated 28.08.2008 (which has clarificatory effect)

Essar Oil Limited vs. ACIT (ITAT Mumbai)

 The assessee, an Indian company, had a P.E. in Oman and Qatar. The net business profits of the said Oman & Qatar Branch was Rs. 2.30 crore. The assessee also earned long term capital gains on sale of assets of the said P.E. in Oman and Qatar. The assessee claimed that as the said business profits and LTCG were taxed in accordance with the taxation laws of Oman & Qatar, they were not chargeable to tax in India. The assessee relied on the judgement of the Tribunal and High Court in its own case  where the view was taken that as the DTAA provided that the business profits & capital gains of the PE “may be taxed in the other Contracting State”, the Country of residence i.e., India loses its right to tax if the Country of source has taxed the income. This view was based on the verdicts of the Supreme Court in P.V.A.L. Kulandagan Chettiar 267 ITR 654 and that of the High Courts in R.M. Muthaiah 202 ITR 508 (Kar) & S.R.M. Firm 208 ITR 400 (Mad). The department argued that the aforesaid law was no longer good law in view of s. 90 (3) inserted by the Finance Act, 2003, which provides that any term used but not defined in the Act or the DTAA shall have the same meaning as assigned to it in the notification issued by the Central Government. Pursuant thereto, the Central Government has issued a Notification No. 91/2008, dated 28.08.2008, wherein it has been expressly provided that where the tax treaty provides that any income of a resident of India “may be taxed” in other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Act and relief shall be granted in accordance with the method of elimination or avoidance of double taxation provided in the DTAA. HELD by the Tribunal:
The law laid down by the Courts on the interpretation of the expression “may be taxed” that once the tax is payable or paid in the country of source, then the country of residence is denied of the right to levy tax on would no longer apply after the insertion of s. 90 (3) w.e.f. 1.4.2004, i.e. AY 2004-05 pursuant to which Notification dated 28.08.2008 has been issued. The said Notification is clarificatory in nature and hence the interpretation given by the Central Government through the Notification is effective from 1.4.2004. Also, as the phrase “may be taxed” is not appearing in the statute but is appearing in the DTAA, the interpretation as understood and intended by the negotiating parties should be adopted. Here one of the parties i.e., Government of India has clearly specified the intent and the object of this phrase and the meaning assigned by the Government of India for a phrase or term used in the DTAA notification will prevail. The result is that the business income from the P.E. in Oman and Qatar and also the capital gain from sale of assets in these countries will be chargeable to tax in India.
 

Wednesday, September 4, 2013

U.K.services sector completes "glowing picture" of economy.

The U.K. services sector expanded at the fastest rate for over 6 1/2 years in August, with the Business Activity Index edging up to 60.5 from 60.2 in July. New-business growth was the strongest in more than 16 years, while the rise in backlogs was the largest since February 2000. The reading, along with strong manufacturing and construction PMIs, "completes a glowing picture for the U.K. economy," says the Chartered Institute of Purchasing & Supply.

Chinese services activity strengthens.

The China HSBC services PMI rose to 52.8 in August from 51.3 in July in a reading that's largely consistent with the official non-manufacturing PMI print. Stronger demand and promotions lifted new orders, HSBC says, although the employment sub-index contracted for the first time since April. Still, the improvement in the services sector adds to PMI data showing that the manufacturing industry is stabilizing.

Eurozone business activity grows at fastest pace in two years.

The eurozone composite PMI rose to 51.5 in August from 50.5 in July, indicating the fastest rate of expansion since 2011. The services index climbed to 50.7 from 49.8, representing the first increase in activity for a year and a half. "The eurozone recovery is looking increasingly broad-based," says Markit. Spain and Italy have joined Germany in returning to growth, while France's decline is far weaker than earlier in the year.

Tuesday, September 3, 2013

India seems to be making new lows every day. First, it was rupee. Then it was GDP which grew by just 4.4% in April-June quarter. This was the lowest ever figure reported in the last 4 years. And now we have the factory data that has had the lowest ever reading since March 2009. The HSBC purchasing managers index (PMI) sank to 48.5 in August from 50.1 in July. An index level below the 50 figure mark is a sign of worry since it indicates contraction. Declining production and exports due to waning demand led to a decline in the index. With all indicators showing blurry picture of the Indian economy, there is a general consensus that sub 5% growth is the new benchmark for India now.

However, apart from growth concerns, depreciating currency is another headache for the government. With none of the steps to curb the free fall in rupee materializing, India's current account situation has turned precarious. Also, depreciating currency will fuel inflation that may come via importing crude. This can further exacerbate the inflationary scenario in the country.    

However, new governor Dr Raghuram Rajan has certainly taken his office as RBI chief in difficult times. So while the pressure of managing the currency and keeping watch on inflation have not subsided, he needs to do more. As per Economic Times, it is pertinent that Dr Rajan should turn his attention to balance sheets of PSU banks. As we have written earlier, the quality of assets in PSU banks has gone from bad to worse in the past year. And some have yet to see the worse. Without adequate measures, these entities would be in need of massive bailouts. So while the government may want to pass on the buck to RBI, Dr Rajan should take a firm stance. Like his predecessor, he should not lose sight of what holds good for the banking sector.  

Eurozone manufacturing activity hits two-year high.

Eurozone manufacturing PMI rose to a 26-month high of 51.4 in August from 50.3 in July. The upturn was broad-based, with PMIs rising in all countries except France. Manufacturing in Germany, the Netherlands, Austria, Spain and Italy rose at the fastest for at least two years, while Greece's 48.7 represented a 44-month high. A pick up in new-orders growth suggests the "upturn will be sustained into September," although companies remain reluctant to hire.

Citigroup sells over $6B in P-E,hedge fund assets.

Citigroup (C) has reportedly sold more than $6B in private-equity and hedge-fund assets over the past month as it seeks to comply with prospective Volcker rule requirements limiting banks' alternative investments. Citigroup has divested a $4.3B P-E fund called Citi Venture Capital International to Rohatyn Group for an undisclosed amount, and a $1.9B emerging-markets hedge fund to the vehicle's managers. Citigroup is trying to sell another $2.5B private-equity-fund as well.

Verizon to raise $61B bridge for $130B deal.

Verizon Communications (VZ) has reportedly started syndicating a $61B one-year bridge loan that will support the company's $130B acquisition of 45% of Verizon Wireless from Vodafone (VOD), which was announced yesterday. Verizon intends to help pay for the deal with $49B in bonds and $14B in other debt, but might need the bridge loan if it can't issue the bonds by the time the transaction closes. Vodafone plans to use some of the proceeds from the deal to launch Project Spring, a £6B ($9.3B) scheme to invest in 4G infrastructure and fiber-optic cables.

Microsoft buying Nokia's phone unit as part of $7.2B deal.

Microsoft buying Nokia's phone unit as part of $7.2B deal. It's the end of an era: Nokia's (NOK) shares jumped 39% premarket following news that Microsoft (MSFT) has agreed to acquire the Finnish company's mobile handset unit for $5B and license its patents and mapping services for $2.2B. Nokia CEO Stephen Elop and other senior Nokia executives will join Microsoft, as will 32,000 workers. Seeking Alpha authors Charles Fox and Jacob Steinberg aren't particularly happy with the price for the mobile unit, which Fox says "seems like chump change for a...division that once ruled the phone market" and could come back.

Sunday, September 1, 2013

Transfer Pricing: Assignment of contract by AE is an international transaction and should be at arms length price

Tellabs India Private Ltd vs. ACIT (ITAT Bangalore)

 
The assessee’s AE, Tellabs Denmark, was awarded a contract by Power Grid Corporation for the supply, installation and commissioning of telecommunication equipments. The work was to be performed both outside India (manufacture and supply of telecom equipments from Denmark- offshore) and in India (customs clearance in India and installation of the equipments – onshore). The Off-shore and Onshore contracts were independent contracts. Pursuant to a corporate restructuring, Tellabs Denmark assigned a portion of the On-shore contract relating to freight, insurance and installation to the assessee. Power Grid consented to the assignment on the condition that Tellabs Denmark will continue to be liable for due performance of all contracts. The AO & TPO held that as Tellabs Denmark continued to be liable to Power Grid for the onshore contract, the assignment of the said contract by Tellabs Denmark to the assessee constituted a sub-contract (and not an independent contract) and that for the work of customs clearance and installation of equipment performed thereby the assessee ought to have earned an arms length profit margin of PBIT/Sales of 9.49%. On appeal by the assessee to the Tribunal HELD:
The assessee’s claim that the effect of the assignment of the work of customs clearance and installation by Tellabs Denmark to the assessee is that an independent contract came into existence between the assessee and Power Grid and that as both parties were residents, the transfer pricing provisions cannot apply is not acceptable because it is clear from the various agreements that there has been only an assignment of the portion of an onshore contract by Tellabs Denmark to the assessee and not a novation of the portion of the onshore contract between Tellabs Denmark and PGCIL. The consequences in the event of an assignment and novation are different. Since there has only been an assignment and not novation of the contract in the present case, the transaction of assignment between the assessee and Tellabs Denmark cannot be said to be a transaction between two persons either or both of them were not non-residents. It is a very strange situation because if Tellabs Denmark had not assigned the portion of the onshore contract, the transfer pricing provisions would not have been applicable because Tellabs Denmark and PGCIL are not Associated Enterprises. Though the assignment of the portion of the onshore contract has taken place exactly at the same consideration for which Tellabs Denmark agreed to render services to PGCIL, nevertheless, the assignment agreement between Tellabs Denmark and the assessee has all the ingredients of an international transaction within the meaning of s.92 of the Act. However, the ALP will have to be determined afresh because the international transaction is the assignment between Tellabs Denmark and the assessee and not the agreement between the assessee and PGCIL. The TPO should also consider whether as the assignment of the contract had taken place due to business restructuring and on the same terms as agreed between Tellabs Denmark and PGCIL, it could be said that this transaction itself would constitute a comparable uncontrolled transaction (Swarnandhra IJMII Integrated Township (ITAT Hyd) distinguished).

India has third largest current account deficit.

Here's more on India's current account deficit. It must be noted that India's high current account deficit has been one of the chief reasons for the sharp decline of the Indian rupee against the US dollar over the last few months. There has been a reversal of cheap global liquidity from emerging markets after the US Fed's hint of a likely tapering of the QE program. As a result, the rupee has fallen over 20% against the dollar since May 2013.

Today's chart of the day shows that India has the third highest current account deficit in the world in absolute terms. As per IMF data as of April 2013, India's current account deficit stood at US$ 98 bn (-4.9% of GDP). This is significant deterioration since 2007 when India had a deficit of US$ 8 bn and ranked 19 on the list of countries with the highest current account deficit. 
 
              
                             Data source: International Monetary Fund, April 2013

German retail sales surprisingly drop.

German retail sales unexpectedly fell 1.4% on month in July vs -0.8% in June, with sharp rises in food costs possibly being a reason for the fall. "Higher food prices tend to lead to a bit of downward pressure on consumption," said economist Christian Schulz  before the report. "Everything else looks positive. If you look at any business survey, there's acceleration, not deceleration, of growth in Germany."

Eurozone unemployment holds steady.

 Eurozone unemployment held steady at 12.1% in July, with the lowest rates in Austria (4.8%) and Germany (5.3%) and the highest in Greece (27.6% in May) and Spain (26.3%).

Japanese core CPI rises most in five years.

Japan's core CPI rose a greater-than-expected 0.7% in July, the biggest increase since November 2008. However, the majority of the gains came from energy, adding that the "upward pressure on energy prices is likely to start to slow" in the coming months. "Things are basically on track" for the Bank of Japan in its fight against deflation.