Insider Selling

Selling of a company's stock by individual directors, executives or other employees. While selling of small amounts of stock is quite common and should not necessarily be a cause for alarm, selling of large amounts of stock is sometimes interpreted by investors as a sign that the insiders know something negative about the company's future. Insider selling which is based on insider information is illegal.

RBI guidelines are for FEMA purposes; it can’t be used for share valuation for computing capital gains

Zeppelin Mobile System GmbH v. ADIT (Delhi - Tribunal)

 RBI Guidelines have been issued for FEMA purposes. No addition to be made for violation of RBI's norms on valuation of shares sold by non-resident to resident

In the instant case, the assessee, a tax resident of Germany has an Indian subsidiary, which was a closely held unlisted company. During the relevant year, the assessee had sold part of the shares held by it in its Indian subsidiary to M/s Sintex Industries Ltd and returned capital gains from such sale on basis of sale price of Rs.390 per share. AO contended that as per RBI’s guidelines, valuation should be Rs.400 per share. DRP made additions @ Rs.10 per share accordingly.

On appeal, the Tribunal held in favour of assessee as under:

• Undoubtedly, the RBI Guidelines was Guidelines for the banks, issued for FEMA purposes. Since the Guidelines have been issued for FEMA purposes, it was for the FEMA authorities to take appropriate action against the assessee on breach of the Guidelines; 
• No objection whatsoever has been raised by the RBI to the rate of 390/- per share, as maintained by the assessee and the RBI has accorded its approval; 
• Had the alleged difference between the rates existed, thereby constituting a violation of the RBI Guidelines by the assessee, such violation would obviously have been taken care of and the approval would not have been accorded; 
• Sintex Industries Ltd., to whom the shares were sold by the assessee, has not denied such rate of Rs 390/- per share. Rather, such rate stands admitted in the Memorandum of Understanding between the assessee and Sintex Industries Ltd. Nothing adverse or detrimental to the assessee’s case has been brought on record. Thus, the assessee’s appeal was allowed - 

Doctrine of form and substance in the context of tax planning

The following are certain principles enunciated by the Courts on the question as to whether it is the form or substance of a transaction, which will prevail in income-tax matters:

• Form of transaction is to be considered in case of genuine transactions- It is well settled that when a transaction is arranged in one form known to law, it will attract tax liability whereas, if it is entered into in another form which is equally lawful, it may not. Therefore, in considering whether a transaction attracts tax or not, the form of the transaction put through is to be considered and not the substance. However, this rule applies only to genuine transactions. [Motor and General Stores (P) Ltd. v. CIT (1967) 66 ITR 692(AP).
• True legal relation is the crucial element for taxability -It is open for the authorities to pierce the corporate veil and look behind the legal facade at the reality of the transaction. The taxing authority is entitled as well as bound to determine the true legal relation resulting from a transaction. The true legal relation arising from a transaction alone determines the taxability of a receipt arising from the transaction [CIT v. B.M. Kharwar (1969) 72 ITR 603 (SC)] 
• Substance (i.e. actual nature of expense) is relevant and not the form –
• In the case of an expenditure, the mere fact that the payment is made under an agreement does not preclude the department from enquiring into the actual nature of the payment [Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 57(SC)].
• In order to determine whether a particular item of expenditure is of revenue or capital nature, the substance and not merely the form should be looked into. [Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC)].

 

Money Laundering

Techniques used to make the acquisition or possession of funds obtained through illegal activities appear legitimate, or to simply hide the source of the funds. Money laundering is considered a crime in most nations due to the use of it in the funding of other criminal activities.

Non-Cyclical Stocks

Stock in a company whose earnings are relatively immune to economic upturns and down turns. Makers of non-durable goods such as paper, cleaning, and office supplies are examples of non-cyclical stocks.

'Too big to fail' banks 'dangerous' :Lagarde

"Too big to fail" banks are "more dangerous than ever" to the U.S. and world economies and must be reined in, the International Monetary Fund chief said.

"The 'oversize banking' model of too-big-to-fail is more dangerous than ever," Managing Director Christine Lagarde told the Economic Club of New York ahead of the IMF's spring meeting in Washington next week.

"We must get to the root of the problem with comprehensive and clear regulation [and] more intensive and intrusive supervision," she told the club, whose membership is dedicated to promoting the study and discussion of social, economic and political questions.

Too-big-to-fail banks are considered so large and interconnected that they must be supported by the government when they face difficulty because their failure would be disastrous to the economy.

Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co. are the U.S. banks considered too big to fail by the Financial Stability Board, a 4-year-old international body that monitors and makes recommendations about the global financial system.

Seventeen other banks the stability board considers too big to fail are based in Europe and four are based in Asia.

Lagarde said regulators need "frameworks for orderly failure and resolution" and she called for these frameworks to cross borders and to be overseen by authorities who are truly empowered to exercise their authority.

Her comments came more than a month after U.S. Attorney General Eric Holder told the Senate Judiciary Committee the Justice Department faced difficulties bringing criminal charges against the financial giants when they're suspected of crimes because of fears the banks' interconnectedness would endanger the national or global economy.

"Some of these institutions have become too large," Holder told lawmakers March 6. "It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate."

Federal Reserve Bank of Dallas President Richard Fisher followed up March 16, telling the Conservative Political Action Conference in Washington the biggest financial institutions' assets should be limited so the banks change from too big to fail to "small enough to save."

"The American people will be grateful to whoever liberates them from a recurrence of taxpayer bailouts," Fisher told the conservative audience.

In her address Wednesday, Lagarde also criticized the U.S. government's $85 billion in cuts, known as sequestration, which she said could cut U.S. output 0.5 percent, risking "throwing away needed growth, especially at a time when too many people are still out of work."

"It is also an extremely blunt instrument, imposing deep cuts in many vital programs -- including those that help the most vulnerable -- while leaving untouched the key drivers of long-term spending," said Lagarde, a former conservative French finance minister.

She said the world was now developing a "three-speed" global economy, which she defined as "those countries that are doing well, those that are on the mend and those that still have some distance to travel."

Emerging markets are doing well, the United States is on the mend and the 17-country eurozone has some distance to travel, she said.

Each of the "speeds" needs to be careful to avoid a recurrence of the global financial crisis. 

In the United States, "it is more important than ever to put in place a credible, medium-term road map to bring down the debt -- a balanced plan made up of savings in entitlement spending plus additional revenues."

Right now, she said: "Adjustment is too aggressive in the short term and too timid in the medium term. This adds to uncertainty and casts a shadow on the recovery.

"We know the future we want. We know the path to get there," Lagarde said. "The task before us now is to act, to make that future a reality, to get ahead -- and stay ahead -- of the crisis."

Source:www.garp.org

Offshore services not taxable under DTAA, despite being covered in Sec. 9(1)(vii) post-amendment

IHI Corporation v. ADIT (Mumbai - Trib.)

Income from offshore activities, even though taxable under Sec. 9(1)(vii) in view of the Explanation substituted by the Finance Act, 2010, cannot be taxed in India if it is not effectively connected with its PE in India.

The assessee, a tax resident of Japan, carried out the offshore and onshore contract of supply of equipments and services. In respect to income from offshore contracts, the assessee did not offer to tax any income therefrom by claiming that it had not accrued or arisen in India. It provided that all activities in connection with the offshore supplies were undertaken outside India and project office in India, set-up for onshore contract, had no role to play in respect of such offshore services. Since the transfer of property in goods as well as the payments were carried on outside India, the income from such transaction was not taxable in India.

The Tribunal held in favour of assessee as follows:

Position under Section 9:

1. Before amendment, the provisions of Section 9(1)(vii) envisaged fulfilment of two conditions for treating the payment as ‘Fees for technical services’, viz., the services which were the source of income must have been utilized in India and such services must have been rendered in India;
2. However, the amendment by the Finance Act, 2010 had diluted these twin conditions. Now the rendering of services even outside India would be a good case for bringing the income of NR from fees for technical services within the purview of Sec. 9(1)(vii), if such services were utilized in India;
3. Thus, the payment for offshore service contract, even though carried outside India, would fall within the domain of Sec. 9(1)(vii).

Position under DTAA:

1. The Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd v. DIT [2007] 158 TAXMAN 259 (SC) has held that Article 7 – Business Profits would be relevant insofar as the income from offshore services were concerned;
2. Since the entire services rendered outside India were not connected with the permanent establishment (‘PE’) in India, there could not be any taxability of this amount in India;
3. Hence, the income arising from the offshore services would not be taxable in India.

Therefore, the income from the offshore supplies, even though chargeable to tax under Section 9(1)(vii), yet was exempt under the DTAA and could not be charged to tax in view of Section 90(2).