kanth and associates sale 14.08.2013, ... revising clause 41 of the listing agreement to align its...

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KANTH AND ASSOCIATESAttorneys and International Legal Consultants

K & ANewsletter

NEWS ALERTS

TAX

Govt. approves setting up of tax administration reform commission

Amendment in double taxation agreement with Sweden

The Union Cabinet approved the proposal for setting up of the Tax Administration Reform Commission. The said Commission will consist of a Chairman, two full time members and four part-time members, of which at least two part-time members will be from the private sector. The Chairman will be an eminent person having wide experience of tax administration and policy making. Full-time members of the Commission will be one member each with a background in revenue service pertaining to Income Tax and Central Excise and Customs respectively. The term of the Commission will be for 18 months.

The Commission will review the application of tax policies and tax laws in India in the context of global best practices and recommend measures to strengthen the capacity of the tax system in India that would reflect best global practices. The Commission will help in removing ambiguity in application of tax policy and tax laws, thereby establishing a stable tax regime and a non-adversarial tax administration. The Commission will facilitate an efficient tax administrative system that would enhance the tax base as well as tax payer base.

The Protocol amending the Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at

thNew Delhi on the 24 day of June, 1997 and signed on

th07 day of February, 2013 at Stockholm shall enter into thforce on the 16 day of August, 2013, being the thirtieth

day after the receipt of the later of the notifications of the completion of the procedures required by the respective laws for the entry into force of the said Protocol.

Thus, the Central Government in view of the aforesaid and in exercise of powers conferred by section 90 of the Income Tax Act, 1961, vide notification dated

CONTENTS

— News AlertsTax 1Corporate, Capital Market, Economy & Foreign Trade 1Legislations / Notifications 4Judgments 5

— Article 5

By Ms. Ashima Gulati, K&ASlump Sale

14.08.2013, has notified that all the provisions of the said Protocol between the Government of the Republic of India and the Government of the kingdom of Sweden shall be given effect to in the Union of India with effect

thfrom 16 day of August, 2013.

India signed a Protocol amending the India – Morocco Double Taxation Avoidance Convention (DTAC) in New Delhi. The Protocol is based on international standards of transparency and exchange of information. It provides for effective exchange of information including banking information between tax authorities of the two countries. It also provides that each treaty partner shall use its information gathering measures to obtain the requested information even though it may not need such information for its own domestic tax purposes.

The Cabinet Committee on Economic Affairs (CCEA) has approved the proposal of the Department of Industrial Policy & Promotion for amendment to the existing definition of 'control' under the FDI policy. Until now, the definition of 'control', in the extant FDI policy was: a company is considered as “controlled” by resident Indian citizens if the resident Indian citizens and Indian

Amendment in double taxation avoidance convention with Morocco

Govt. amends definition of term “control” for calculation of total foreign investment in Indian companies

CORPORATE, CAPITAL MARKET, ECONOMY & FOREIGN TRADE


K & ANewsletter

companies, which are owned and controlled by resident Indian citizens, have the power to appoint a majority of its directors in that company. However, the CCEA has now approved to define 'control' as follows: Control shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

The revised definition of 'control' will expand the definition of `control` to cover 'control' exercisable inter alia through management and policy decisions, shareholding, management rights, shareholder agreements and ensure alignment with the definition as per the Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011 and the definition proposed in the Companies Bill, 2012.

The Telecom Department issued final unified license guidelines which, among others, will allow mobile phone companies to enter into roaming pacts in the same or another service area irrespective of the spectrum band held or technology used. However, companies will not be allowed to acquire any customers where they do not hold requisite licenses since it would amount to spectrum sharing which isn't allowed.

The much-awaited new UL system, which will replace the existing United Access Service License (UASL) regime, allows telecom operators to offer any services under one permit. Under the UASL system, operators needed separate licenses for each service. The UL guidelines, which will be notified within 10 days, also bars cross-holding between mobile phone companies. The government said that no licensee or its promoters can directly or indirectly hold any stake in another licensee company that holds spectrum in the same service area. Present norms allow mobile phone companies to hold up to 10% equity in another operator in the same circle. Companies having arrangements contrary to these guidelines have been given a year to comply.

The licensee will also have to pay a yearly fee that will be 8% of annual gross revenue for the term of the license which is 20 years from the time of migration to the UL regime. The extension would be irrespective of

Telecom department issues final unified license norms

the validity of the existing license period. Companies will be able to move to the UL system even when licenses get renewed.

The Cabinet approved 100% foreign direct investment (FDI) in the telecom sector, bringing applause to foreign-controlled telecom companies which will now be able to buy out their minority Indian partners. There is no clarity on mergers and acquisition guidelines, nor a clear road map on spectrum refarming. According to the new rule, FDI up to 49% will be under automatic route while any equity infusion beyond 49% will need approval from Foreign Investment Promotion Board.

The Securities and Exchange Board of India (SEBI) has brought front-running by individuals and illegal fund-raising activities by unregistered entities under the ambit of fraudulent and unfair trade practices (FUTP) regulations. Front-running is an illegal activity whereby a person uses confidential information to buy or sell shares in a company ahead of a large order so as to benefit from the subsequent price movement. SEBI was forced to review its FUTP regulations after the Securities Appellate Tribunal (SAT) set aside its order penalizing three persons for alleged front-running activities on the grounds that there was no specific provision in the regulations that barred front-running by an individual other than an intermediary. SEBI had alleged that these individuals were guilty of violating regulation 3 of FUTP norms but SAT said since regulation 4(2) prohibits only front-running by intermediaries and not individuals, SEBI can't hold them guilty. Regulation 3 basically prohibits any manipulative fraudulent or unfair trade practices irrespective of who the perpetrator of the fraud is. On the other hand, Regulation 4 is a sub-set of regulation 3, which gives instances of specific activities prohibited. SEBI has clarified that the list under Regulation 4(2) is not exhaustive and the general provisions of Regulation 3 will override.

The Government has made the special economic zones (SEZs) attractive for the investors by notifying relaxations in the minimum area requirements and easing the exit clause for developers. The amendment

Cabinet approved 100% FDI in telecom sector

SEBI revises unfair trade norms

Govt. relaxes norms for SEZs




K & ANewsletter

in SEZ rules will allow SEZ developers to add one product category on each additional 50 hectares of land. There will be no minimum area required for IT SEZs, but only a minimum built-up area of 1 lakh sq. mtr. for the top seven cities, 50,000 sq. mtr. for the next 15 cities and 25,000 sq. mtr. for the rest of the cities. Multi-product SEZs minimum land requirement has been cut to 500 hectares from 1,000 hectares. Single product SEZs minimum land requirement has been cut to 50 hectares from 100 hectares. Multi-services SEZs will be treated at par with single-product SEZs, with the minimum area being slashed to half from 100 hectare. This will allow multi-product SEZ developers with a minimum land requirement of 500 hectares to set up multi-services SEZ on an additional 50 hectares.

SEBI has issued a Circular dated 29.07.2013 for Operational, Prudential and Reporting Norms for Alternative Investment Funds (AIFs). In accordance with the said Circular, all AIFs shall be required to comply reporting norms to SEBI on a quarterly basis (for Category I, II AIFs and for those Category III AIFs which do not employ leverage) or on a monthly basis (for Category III AIFs which employ leverage). The reporting formats and the method of reporting are specified in the said Circular. The Circular further specifies that Category III AIFs shall have to additionally comply with norms pertaining to risk management, compliance, redemption and leverage. The leverage for a Category III AIF shall not exceed 2 times i.e. the gross exposure after offsetting for hedging and portfolio rebalancing transactions shall not exceed 2 times of the NAV of the fund. Further the said Circular also provides for the method of calculation of leverage and conditions pertaining to breach of limit.

The Securities and Exchange Board of India (SEBI) has proposed making it mandatory for listed companies with significant half-yearly variation in profit, revenue and assets to prepare consolidated accounts instead of standalone results. All companies irrespective of the extent of change will also be asked to publish cash flow statements along with balance sheet. SEBI said the half-yearly disclosures will be made mandatory in case of over 20% variation in key parameters when compared with the previous annual audited accounts. SEBI has

Operational, prudential and reporting norms for alternative investment funds

Listed companies consolidated account statements made mandatory



also made it compulsory for listed companies to publish their cash flow statement half yearly together with the six-month financial statement. SEBI further said it was revising Clause 41 of the listing agreement to align its rules to the new Companies Bill and has invited public comments on its discussion paper before September 13. SEBI also said foreign subsidiaries forming part of the consolidated financial statement would have to be audited.

The Government notified the decisions taken to increase foreign direct invest (FDI) caps in several sectors and the easier rules for foreign multi-brand retailers. The Department of Industrial Policy (DIPP) also clearly spelled out the mechanism by which more than 26% FDI could be allowed in certain defence projects. The Government had decided to raise FDI cap to 100% in telecom and more than 26% on a case-to-case basis in defence, and put FDI up to 49% under automatic route in nine sectors including single-brand retail, state-run oil refineries, commodity bourses, power exchanges, stock exchanges and clearing corporations. In the case of defence all proposals involving FDI of over 26% will have to be examined by the Department of Defence Production (DoDP) to see that they bring state of the art technology. Based on the recommendation of the both DoDP and the foreign investment promotion board (FIPB), approval will be sought from Cabinet Committee on Security (CCS). Cases with over Rs.1200 Crores investment but less than 26% FDI will have to be cleared by Cabinet Committee on Economic Affairs (CCEA). However, in cases of FDI of over 26% if a proposal is cleared by CCS, it will not need to go to CCEA even if investment is more than Rs.1,200 Crores. In the case of multi-brand retail, the Government notified its decision to include agri-cooperatives in the 30% sourcing from medium and small industry. The new definition of small industry, investment in plant and machinery of up to $2 million against $1 million earlier, has been included in the policy. The revised policy also gives States the right to allow FDI-funded multi-brand retail stores in any cities of their choice as opposed to only in those with population of more than 1 million in the current policy.

The Reserve Bank of India (RBI), vide its Circular dated 14.08.2013, has decided to reduce the existing limit of

Govt. notifies increase in FDI caps in several sectors

Liberalized remittance scheme for resident individuals


K & ANewsletter



USD 2,00,000 per financial year to USD 75,000 per financial year (April – March) with immediate effect. Accordingly, AD Category – I banks may now allow remittance up to USD 75,000 per financial year, under the scheme, for any permitted current or capital account transaction or a combination of both. Apart from others, the following changes / clarifications in regard to the remittances under Liberalized Remittance Scheme will come into effect immediately - (i) The scheme should no longer be used for acquisition of immovable property, directly or indirectly, outside India. (ii) The scheme should not be used for making remittances for any prohibited or illegal activities such as margin trading, lottery etc. (iii) Resident individuals have now been allowed to set up Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) outside India for bonafide business activities outside India within the limit of USD 75,000 with effect from August 5, 2013 and subject to the terms and conditions stipulated in Notification No. FEMA 263/RB-2013 dated August 5, 2013. Additionally, the limit for gift in Rupees by resident individuals to NRI close relatives and loans in Rupees by resident individuals to NRI close relatives accordingly stand modified to USD 75,000 per financial year.

The Union Cabinet has cleared crucial changes to the Right to Information (RTI) Act to keep the political parties out of its ambit by declaring that they are not public authorities. The Cabinet gave its nod to amend the transparency law nearly two months after the Central Information Commission's order of bringing the six national political parties Congress, BJP, NCP, CPI-M, CPI and BSP under the RTI Act. As per the amendments, the political parties as public authorities under the RTI would 'hamper their smooth internal functioning since it will encourage political rivals to file RTI applications with malicious intentions'. They maintain that the Representation of the People Act and the Income Tax Act provide sufficient transparency regarding financial aspects of political parties. Under Section 2 of the RTI Act, the definition of public authority in the proposed amendment will make it clear that 'it shall not include any political party registered under the Representation of the Peoples Act'. As proposed earlier, political parties may not be added in the list of organizations (Section 8)

LEGISLATIONS / NOTIFICATIONS

Cabinet gives nod to amend RTI Act to keep political parties out

exempted from parting information under the information act.

The Government introduced a bill amending the Registration Act in Parliament. Changes in the Registration Act, 1908, include mandatory registration of power of attorney transfers, lease deeds of immovable properties, registration of property in the state where it is located and allowing inspection of registered documents. The changes in the Registration Act will help bring clarity in determining market value of land, which will help the collector arrive at a more equitable value for the land during the process of acquisition. The amendments are expected to feed in to the proposed Land Acquisition Act, which gives enhanced compensation for land. The formulation to be used for calculating compensation is the current market or registered value of land.

Two of the amendments are focused specifically at reducing loss to the state exchequer. The first is the compulsory registration of Power of Attorney sales or transfer of property. The proposed change will require that Power of Attorney and certificates of sale have to be compulsorily registered. The Registration Act doesn't require for registration of Power of Attorney. The loophole has been used to transfer property without registering and avoiding paying the requisite stamp duty, which is determined by the state, and registration duties which has resulted in enormous loss to the exchequer and given rise to disputes. The second measure is that property will have to be registered in the state in which it is located. At present, people owning property in more than one state can register property in any of the states in which they own property irrespective of the location. This creates a situation of shopping for the lowest stamp duty and causes a loss to the exchequer. The ministry has proposed amending Section 28 of the Act to say that documents related to the transfer can only be registered in states where the property is situated. In an effort to promote transparency, it has been proposed that registered documents will now be available for public inspection. The amended law will give registration officers the right to refuse registration. Electronic registration of documents is also being encouraged.

Govt. introduced bill to amend Registration Act, 1908


K & ANewsletter



Green Ministry streamlines clearance process for hydro projects

Reassessment order cannot be challenged in a Writ Petition: SC

The Environment Ministry has streamlined the clearance process for hydro power projects to avoid duplication and reduce the time required. Hydro power projects require environment and forest clearances, which are recommended by two separate committees, namely, the Expert Appraisal Committee, which looks into environmental parameters, is set up under the Environment Protection Act and the Forest Advisory Committee, which considers the diversion of forest land, is set up under the Forest Conservation Act. There are overlapping issues which need to considered by both the committees while assessing the project for clearance. The Ministry has decided that once an issue has been examined and looked into by one committee, the details and findings could be shared with the other committee to avoid duplication of efforts. The Expert Appraisal Committee has been designated as the principal on the question of environmental flow of a river. However, as far as assessing the impact of a project on biodiversity is concerned, the Ministry is of the view that agencies preparing the environmental impact assessment report and environment management plan are not equipped to address the issue and the same will be undertaken by specialized institutes. This is to entrust the assessment to institutes with the requisite specialized knowledge is a step in that direction, without increasing the time taken for clearances. The Environmental Appraisal Committee is being made responsible for ensuring that a cumulative impact study of the river basin is conducted. The Ministry has asked State Government to make a scientific assessment of the carrying capacity or the optimal number of projects that a river basin can support. This assessment will be crucial while considering all hydro power projects. The Ministry has further asked that these studies be completed in the next two years.

In a case before the Apex Court, the question for consideration was whether the High Court was justified in interfering with the order passed by the assessing authority under Section 148 of the Income Tax Act in exercise of its jurisdiction under Article 226 of the Constitution of India when an equally efficacious

JUDGMENTS

alternate remedy was available to the assessee under the Act. It was decided by the Court that the Income Tax Act provides complete machinery for the assessment/re-assessment of tax, imposition of penalty and for obtaining relief in respect of any improper orders passed by the Revenue Authorities, and the assessee could not be permitted to abandon that machinery and to invoke the jurisdiction of the High Court under Article 226 of the Constitution when he had adequate remedy open to him by an appeal to the Commissioner of Income Tax (Appeals). The remedy under the statute, however, must be effective and not a mere formality without any substantial relief. In this case, neither has the assessee-writ petitioner described the available alternate remedy under the Act as ineffectual and non-efficacious while invoking the writ jurisdiction of the High Court nor has the High Court ascribed cogent and satisfactory reasons to have exercised its jurisdiction in the facts of the case.

The aspect of growth is a key driver and of utmost concern for any business. Understandably, the approach with respect to increase of the size of any business may happen through organic means which may be relatively a gradual process or through inorganic means which is quick but fraught with liabilities. One of the well known means to accelerating the growth of a business by way of inorganic means is that of acquisition of the assets of an undertaking or business thereof as a going concern. The transfer of undertaking as a going concern is referred to as 'slump sale'.

Slump sale is one of the ways of corporate restructuring where the company sells its undertaking and is one of the widely used ways of business acquisition in India. Slump sale is generally undertaken:

o To improve the performance of the business is poor;

o to improve focus and eliminate negative synergy and facilitate strategic investment

o to seek tax and regulatory advantage associated with it.

ARTICLE

By Ms. Ashima Gulati, K&A

SLUMP SALE

The factors to be taken into consideration may either work solely or cumulatively to take a decision regarding slump sale.

The concept of slump sale was incorporated in the Income Tax Act, 1961 (“IT Act”) by way of the Finance Act, 1999 when section 2(42C) was inserted defining slump sale and section 50B was introduced for computation of tax on slump sale which put an end to the doubts prevailing for long about taxability or gains in slump sale of business. Prior to the insertion of section 2(42C), Courts have held that slump sale is a sale of a business on a going concern basis where the lump sum price cannot be attributed to individual assets or liabilities. In CIT V. Artex Manufacturing Co. (227 ITR 260), the Apex Court treated the sale of the business on a going concern for a lumpsum consideration as an itemised sale on the ground that the slump price was determined by the Valuer on the basis of itemised assets whereas in CIT V. Electric Control Gear Mfg. Co. (227 ITR 278) the sale of the business on a going concern was regarded as a slump sale since in that case, there was nothing to show that the slump price is attributable to any asset. Interestingly, the Judges of both the decisions were same.

According to section 2 (42C) of the IT Act, a slump sale is transfer of one or more undertakings as result of the sale for lump sum consideration without values being assigned to the individual asset and liabilities in such sales. Slump sale includes not only transfer of assets but also transfer of liabilities. The provisions of IT Act related to slump sale do not apply where assets of an undertaking are transferred without transfer of liabilities. Thus, main elements of slump sale are:

(a) sale of an undertaking or business activity taken as a whole;

(b) lump sum consideration; and

(c) no separate values assigned to individual assets and liabilities.

The consideration plays an important role in determination of whether such a transaction is slump sale or not since the transfer has to be undertaken only for a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. In case of slump sale of more than one undertaking, the computation should be done separately for each undertaking.


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The IT Act provides for taxation in respect of transfer of businesses for lump sum consideration only if these are implemented by way of 'sale'. The transfer of the property for other than 'money consideration' would be regarded as 'Exchange' and not 'sale' and therefore would be covered in the ambit of slump sale and would not be taxable under the IT Act. Section 50B of the IT Act deals with the mechanism of computation of tax on a slump sale transactions. This section overrides all other provisions of the IT Act since it is a special provision. The profits or gains arising from slump sale become chargeable under 'Capital Gains' and shall be deemed to be the income of the previous year in which transfer took place. The undertaking as a whole or the division transferred shall be a capital asset. The change in the value of asset on account of revaluation shall be ignored. The value of assets should be book value. There is no distinction made between depreciable assets, non- depreciable assets and stock for the purpose of calculating tax. In slump sale the entire income from slump sale is treated as capital gain arising from single transaction. Where the undertaking is held for atleast 36 (Thirty Six) months prior to the transfer of through slump sale shall qualify as long-term capital gain and where the undertaking is held for less than 36 (Thirty Six) months at the time of transfer through slump sale it shall constitute short- term capital gain. The tax on these capital gains will be calculated according to the IT Act and the nature of capital gain. The capital gain as per Section 50B of the Act is computed by reducing the net worth of the undertaking from the consideration. 'Net Worth' is deemed to be the cost of acquisition of the undertaking being transferred for the purposes of Section 48 and 49 so as to enable computation of capital gains. It is the aggregate value of the assets of the undertaking or division as reduced by the value of liabilities of such undertakings. The assessee has to furnish an accountant's report in Form 3CEA along with the return of income indicating the computation of net worth.

The Companies Act, 1956 (the “Companies Act”) does not define a slump sale but has included in its ambit slump sale by way of section 293(1)(a) and provides for the procedure and approval required for selling, leasing or disposing of the whole or substantially whole of the undertaking of the public company. Pursuant to the provision under section 293(1)(a) of the Companies Act the Board of Directors have to obtain the consent of the shareholders through ordinary resolution passed in the General Meeting for this purpose. An 'undertaking' under this section means a business unit or enterprise in


K & ANewsletter



which a company is engaged as gainful occupation. It means a separate and distinct functioning business unit or activity or a project which can be identified as the business unit or division.

Applicability of stamp duty has been another area of concern in cases of slump sale. Under the Indian Stamp Act, 1899 and as amended by different States (“Stamp Act”), stamp duty is payable only in relation to transfer of immovable property. Since individual values cannot be assigned to various assets for the purpose of transaction in slump sale, value of immovable assets which constitute a part of the slump sale have to be considered for purposes of calculation of stamp duty. Further, Explanation 2 to section 2(42C) of the IT Act has specifically stated that the determination of value of assets and liabilities for the purpose of payment of stamp duty or other taxes or fees is not regarded as assignment of values to individual assets and liabilities. Therefore, while no values can be assigned to the individual assets constituting a part of the slump sale transaction, except for the purposes of calculation of stamp duty on the immovable assets. However, the valuation of such assets cannot be construed as the assignment of individual values for such assets. It should also be noted that stamp duty is a state subject and differs from state to state. The Stamp Act does not contain specific provision relating to stamp duty on slump sale. However, considering that slump sale includes sale of immovable assets also therefore the transaction attracts stamp duty. The stamp duty is further applicable as 'conveyance' on the whole transaction.

In relation to slump sale, no sales tax is payable on the transfer of a business as a going concern including transfer of whole unit or division of any business. This is based on the principle that the sale of an entire business is not the same as sale of movable goods i.e. sale of entire 'business' cannot be equated to sale of

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movable goods. However due to introduction of Value Added Tax (“VAT”), the position has changed in various states. In a slump sale where the transferor entity will close down its business by completing the sale, the transaction may attract VAT in some states. VAT on slump sale is applicable only where the state legislation relating to VAT explicitly provides for the same.

Slump sale is a sale where the assessee transfers one or more undertaking as a whole including all the assets and liabilities as a going concern. The consideration is fixed for the whole undertaking and received by the transferor, it is not fixed for each of the asset undertaking as a whole by way of such sale. In case of slump sale numerous assets are transferred, thus computation mechanism becomes important to determine cost of assets. The provision relating to slump sale has been incorporated in the Companies Act in section 293(1)(a) by which the Board of Directors have to take prior sanction of the shareholders before selling, leasing or transferring any business undertaking. The tax on transfer of undertaking through slump sale is calculated under Section 50B of the IT Act. Stamp duty in slump sale is paid only on transfer of immovable assets and no sales tax is payable on transfer of business but however VAT is attracted on such transfers only in few states. Slump sale is an attractive option for a business entity to transfer an undertaking.

1. Income Tax Act, 1961.

2. Companies Act, 1956.

3. www.itatonline.org/articles_new/?dl_id=20 [S. 50B & Capital Gains On Slump Transactions: A Comprehensive

thAnalysis; Ankit B. Agrawal];[Accessed on 28 August, 2013].

4. http://www.smeworld.org/story/features/selling-thproperty-through-slump-sale.php [Accessed on 28 August,

2013].

References:

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